<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1999.
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
INTERTRUST TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
----------------
Delaware 7371 52-1672106
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
460 Oakmead Parkway, Sunnyvale, CA 94086
(408) 222-6100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Victor Shear
Chief Executive Officer and Chairman of the Board
InterTrust Technologies Corporation
460 Oakmead Parkway, Sunnyvale, CA 94086
(408) 222-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Robert V. Gunderson, Jr., Esq. Laird H. Simons III, Esq.
Bennett L. Yee, Esq. Katherine Tallman Schuda, Esq.
William E. Growney, Jr., Esq. Tyler R. Cozzens, Esq.
Amy S. Cohen, Esq. Pamela A. Sergeeff, Esq.
Margaret E. Paige, Esq. Fenwick & West LLP
Gunderson Dettmer Stough Two Palo Alto Square
Villeneuve Franklin & Hachigian, LLP Palo Alto, California 94306
155 Constitution Drive (650) 494-0600
Menlo Park, California 94025
(650) 321-2400
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum
Securities to be Registered Aggregate Offering Price (1) Amount of Registration Fee
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par
value....................... $85,000,000 $23,630
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 29, 1999
Shares
[LOGO OF INTERTRUST]
InterTrust Technologies Corporation
Common Stock
--------
Prior to this offering, there has been no public market for the common stock.
The initial public offering price is expected to be between $ and $
per share. We have applied to list the common stock on The Nasdaq Stock
Market's National Market under the symbol "ITRU."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Proceeds to
Underwriting InterTrust
Price to Discounts and Technologies
Public Commissions Corporation
------------ ------------- ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
J.P. Morgan & Co.
Salomon Smith Barney
SoundView Technology Group
The date of this prospectus is , 1999.
<PAGE>
Narrative Description of Inside Front Cover
A roughly sketched drawing of a three dimensional box over which appears the
following text and graphics. At the top appears the heading "THE METATRUST
UTILTY." Below, the logos of "Universal Music Group," "PublishOne" and "BMG"
appear next to the caption "Content & Distribution;" the logos of "SAIC",
"Portal," "Harris", "IIS" and "dts" appear next to the caption "Marketing
Alliances;" the logos of "Music Match," "MediaScience," and "Diamond
Multimedia" appear next to the caption "Technology;" and the logos of
"reciprocal," "Nat West," and "Mitsubishi Corporation" appear next to the
caption "Commerce Services." At the bottom of the page, right justified, is
the InterTrust logo above the caption "The MetaTrust Utility; Leading Digital
Rights Management."
<PAGE>
Narrative Description of Gate Fold
Heading Bottom Left Justified InterTrust logo above the caption "The MetaTrust
Utility; Leading Digital Rights Management;" centered heading at the top of the
page of "Digital Rights Management for Global Commerce."
There is a large platform with a waffle-like pattern suspended in space. The
platform is labeled "The MetaTrust Utility." In the center of the platform are
two buildings. The building on the left is marked with the symbol "$" in a
circle. The building on the right is marked with the letter "i" in a circle.
Above the buildings is the caption "Commerce Services Provider" and a bulleted
list that reads: "Processes financial and usage transactions;" "Supports online
and offline transactions;" and "Deploys and manages InterRights Points."
From the building on the left, two arrows marked with the symbol "$" in a circle
point to captions off the bottom of the platform that read "Partners" and
"InterTrust", respectively. To the right of the arrows is the caption
"InterTrust Revenues = % of value of all goods and services sold in system."
Also from the building on the left, an arrow marked with the symbol "$" in a
circle and the letter "i" in a circle points to a human figure next to a
computer monitor showing a three-dimensional cube on its screen. Below is a
sphere with three arrows meeting in its center. Above is the heading
"Publisher" above a bulleted list that reads: "Creates usage rule;" "Associates
rules with content;" and "Packages into DigiBox Container." Below is the
caption "InterRights Point."
Above and to the left is a list under the heading "Target Markets." Below the
heading is the following: the symbol for musical notes in a circle to the left
of the caption "Music;" a drawing of a strip of film inside a circle to the left
of the caption "Videos;" a drawing of a video game joystick to the left of the
caption "Games;" a drawing of an arrow pointing down inside a circle to the left
of the caption "Software;" a drawing of a financial chart inside a circle to the
left of the caption "Business/Financial Information;" a drawing of sheets of
paper inside a circle to the left of the caption "Publishing;" a drawing of a
graduate's cap inside a circle to the left of the caption "Education;" a drawing
of a cross inside a circle to the left of the caption "Healthcare;" and a
drawing of two arrows pointing in two different directions inside a circle to
the left of the caption "Enterprise."
From the computer monitor an arrow points to the right. In the middle of the
arrow is a three dimensional cube. Beneath the cube is the caption "Content and
rules." Above the cube is the heading "DigiBox Container" and a bulleted list
that reads "Protects content" and "Reduces piracy". The arrow points to a
sphere with three arrows meeting in its center. To the right of the sphere is a
web browser labeled "WWW." To the right of the web browser is a compact disk
and a floppy disk. Above the grouping is the heading "Distributor" above a
bulleted list that reads "Adds rules" and "Sells protected content." Below is
the caption "InterRights Point."
From the floppy disk, an arrow points down and to the right. In the middle of
the arrow is a three dimensional cube. Beneath the cube is the caption "Content
and rules." Above the cube is the heading "DigiBox Container" and a bulleted
list that reads "Over Internet" and "On CD and DVD." To the right of the cube
is the caption "User" and a bulleted list that reads "Sees personalized offers;"
"Purchases online and offline;" and "Uses content according to rules." The
arrow points to a sphere with three arrows meeting in its center. To the left
of the sphere is the caption "InterRights Point." To the right of the sphere is
a human figure. An arrow points from the figure to a group of three human
figures. In the middle of the arrow is a three dimensional cube. Beneath the
cube is the caption "Content and rules." Above the cube is the heading "DigiBox
Container." Next to each of the three human figure are spheres with three
arrows meeting in their centers. Below the cube is the caption
"Superdistribution" and a bulleted list that reads "Forwards content and rules;"
"Encourages purchase and redistribution;" and "Transforms copying into sales
channel."
From the human figure, an arrow points downward and to the left. In the middle
of the arrow is a three dimensional cube. Beneath the cube is the caption
"Payment and usage information." Above the cube is the heading "DigiBox
Container". The arrow points to a sphere with three arrows meeting in its
center. Below the sphere is the caption "InterRights Point." To the left of
the sphere is the building marked with the letter "i" in a circle.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 24
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Capitalization........................................................... 26
Dilution................................................................. 27
Selected Consolidated Financial Data..................................... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 40
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 60
Related-Party Transactions................................................. 71
Principal Stockholders..................................................... 73
Description of Capital Stock............................................... 75
Shares Eligible for Future Sale............................................ 78
Underwriting............................................................... 80
Notice to Canadian Residents............................................... 82
Legal Matters.............................................................. 83
Experts.................................................................... 83
Where You Can Find More Information........................................ 83
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
You should rely only on information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
. redesignation of our class A voting common stock to common stock;
. conversion of all outstanding shares of preferred stock and class B non-
voting common stock into shares of common stock upon the closing of this
offering;
. exercise of outstanding warrants to purchase 21,692 shares of our common
stock;
. the filing of our Sixth Amended and Restated Certificate of Incorporation
in the state of Delaware after completion of this offering; and
. no exercise of the underwriters' over-allotment option.
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding InterTrust and the common stock being sold in this
offering in our consolidated financial statements and notes appearing elsewhere
in this prospectus and our risk factors beginning on page 7.
InterTrust Technologies Corporation
We have developed a general-purpose digital rights management (DRM) platform
that serves as a foundation for providers of digital information, technology,
and commerce services to participate in a global e-commerce system. We license
our DRM platform as software and tools to partners to build digital commerce
services and applications. Collectively, these partners will offer commercial
products and services that will form a global commerce system we have branded
the "MetaTrust Utility." We maintain the MetaTrust Utility's foundation and
will receive from our partners a small percentage of the value of goods and
services that run through the system.
DRM technologies protect and manage the rights and interests in digital
information. While the Internet and the music industry have dramatized the need
for protection and management of digital information, DRM is needed by any
industry that distributes information that can be put into digital form. These
types of information include music, videos, software, games, publishing,
business information, and images.
DRM applies to more than content industries. Organizations and individuals
want to protect the vast amount of proprietary and personal information,
including trade secrets, supply chain and product information, and financial
and medical records, that are digitized on computers, sent over networks, and
stored in various locations. DRM is also useful for protecting rights as these
information flows become more automated, in trading, brokering, regulatory
compliance, and other industries.
Our technology enables all these industries, organizations, and individuals,
and each of their constituencies, to protect and manage their rights and
interests in digital information. Holders of these rights and interests can
easily associate usage rules with the digital information. These rules may
represent requirements regarding ownership, access, payment, promotion,
warranty, privacy, and other elements of commerce in information. These rules
can also persistently apply throughout the lifecycle of the information. When
these rights and rules are based on a common foundation, they can form the
basis for a global system for digital commerce.
We believe our DRM platform represents a new computing technology that
addresses a key threat to digital commerce--the threat of a user who has been
authorized to receive and decrypt digital information and then seeks to use it
in an unauthorized way. Our DRM platform enables automation of many aspects
relating to the secure commercial exchange of information and can allow digital
commerce to be conducted more efficiently.
Our platform provides the following benefits:
. Robust Security--Digital information is protected and managed in
accordance with associated rules;
4
<PAGE>
. Persistent Protection and Management--Both the information itself and the
rules regarding its use may be continually protected, whether the user is
online or offline;
. Flexible Business Models--Digital information providers can develop their
own commercial models with fully programmable rules that can be changed
or modified, even after the information is distributed;
. Superdistribution--Users of digital information, if permitted, can
forward that content to others who can use the forwarded information
according to the associated rules;
. Multiple Content and Media Types--Our platform can be used for most
content types and for multiple means of digital distribution;
. Efficient Transaction Processing--Processing partners can take advantage
of significant increases in efficiency, including offline processing,
immediate payment across a value chain, and automated application of
rules;
. New Advertising Models--The ability to operate offline and securely store
and forward collected data enables new cost effective ways to generate
revenue from advertising; and
. Personalized Marketing--Marketing organizations can use many different
aspects of our platform to identify and profile individual consumers, and
match them with content, offers, and ads, subject to their consent and
privacy rights.
Our partners are: BMG Entertainment Storage Media, Computacenter, Diamond
Multimedia Systems, Mediascience, Mitsubishi Corporation, MusicMatch, National
Westminster Bank, PublishOne, Reciprocal, and Universal Music Group. We have
alliances with Digital Theater Systems, Fraunhofer Institut, Harris
Corporation, Portal Software, and SAIC. Some of our partners are in, or are
about to enter, commercial trials, and we expect applications and services to
be commercially available in the MetaTrust Utility in 2000.
Our goal is to empower multiple providers of content, technology, and
commerce services to build a global system for digital commerce based on our
DRM platform. The key elements of our strategy are to: expand our key strategic
partnerships; promote widespread deployment of our technology; leverage our
neutral MetaTrust Utility model; and maintain our technology lead.
----------------
We were incorporated in Delaware in January 1990. Our principal executive
offices are located at 460 Oakmead Parkway, Sunnyvale, California 94086, and
our telephone number is (408) 222-6100.
InterTrust, DigiBox, and our company logo are our registered trademarks.
MetaTrust, MetaTrust Utility, InterRights, Powerchord, RightsWallet, and
TrustMail are our trademarks. This prospectus also contains trademarks of other
companies.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by us................. shares
Common stock to be outstanding after the shares. This is based
offering.................................. on the number of shares
outstanding as of June 30, 1999.
This number excludes 6,741,411
shares of common stock issuable
upon exercise of outstanding
options as of June 30, 1999 at a
weighted average exercise price
of $1.91 per share. This number
also excludes 311,016 shares of
common stock issuable upon the
exercise of a warrant outstanding
as of June 30, 1999.
Over-allotment option...................... shares
Use of proceeds............................ Working capital and general
corporate purposes. See "Use of
Proceeds."
Dividend policy............................ Currently, we do not anticipate
paying cash dividends.
Proposed Nasdaq National Market symbol..... ITRU
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
--------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Total revenues.......... $ 850 $ -- $ 25 $ 1,100 $ 152 $ 50 $ 486
Loss from operations.... (1,549) (3,423) (8,140) (11,938) (19,667) (9,369) (11,613)
Net loss................ (1,588) (3,583) (7,960) (11,709) (19,662) (9,378) (11,411)
Basic and diluted net
loss per share......... $ (0.16) $ (0.35) $ (0.67) $ (0.86) $ (1.41) $ (0.68) $ (0.75)
======= ======= ======= ======== ======== ======= ========
Shares used in computing
basic and diluted net
loss per share......... 9,645 10,223 11,913 13,639 13,966 13,777 15,307
======= ======= ======= ======== ======== ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (0.91) $ (0.43)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 21,688 26,808
======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $15,295 $31,053
Working capital................................... 3,423 20,181
Total assets...................................... 17,220 32,978
Total stockholders' equity........................ 4,645 21,403
</TABLE>
- --------
The pro forma column in the consolidated balance sheet data table above
reflects the completion of the sale of 1,309,700 shares of Series E preferred
stock for approximately $15.7 million in cash and the conversion of a $1.0
million promissory note into 83,333 shares of Series E preferred stock in July
1999, the exercise of warrants to purchase 21,692 shares of common stock and
the conversion of all outstanding shares of preferred stock and class B non-
voting common stock into common stock upon completion of this offering.
The as adjusted column in the consolidated balance sheet data table above
reflects our sale of shares of common stock in this offering, at an
assumed initial public offering price of $ per share, and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by us.
6
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your investment.
Risks Related to Our Business
Our business model is new and unproven, and we may not succeed in generating
sufficient revenue to sustain or grow our business.
Our business model is new and unproven. The success of our business depends
upon our ability to generate transaction fees from our licensees in the form of
a percentage of fees paid by users or charged by our licensees in commercial
transactions and services that use our technology and sales of products
incorporating our technology. For this, we plan to rely exclusively on our
licensees and their customers to use our technology in the distribution of
their products and services. To date, our licensees have not used our
technology in the commercial distribution of their products and we have not
received any transaction fees under this business model. Applications and
services based on our technology might not be commercially released by our
licensees or, if commercially released, the volume of products and services
distributed using our technology may be too small to support or grow our
business. While some companies have licensed our technology, other companies
may wish to use other technology based on different business models, including
the payment of a one-time license fee without sharing in the ongoing revenues
generated by use of the technology. While we expect to generate the majority of
our revenues in the future from transaction fees, we currently derive all of
our revenues from initial license fees and support fees. Our initial license
fees vary depending on the scope of the license and other commitments by our
partners. We may in the future decide to reduce or eliminate some fees.
Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of public market analysts or investors, the
market price of our common stock may decrease significantly.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We believe that period-to-period
comparisons of our operating results are not meaningful and should not be
relied upon as indicators of future performance. Our operating results will
likely fall below the expectations of securities analysts or investors in some
future quarter or quarters. Our failure to meet these expectations would likely
cause the market price of our common stock to decline.
Our quarterly operating results may vary depending on a number of factors,
including:
. demand for digital goods and services;
. demand for our Commerce software product;
. our ability to maintain and establish relationships with leading
providers of content, technology, and commerce services;
. our ability to establish relationships with licensees that generate
sufficient revenue;
7
<PAGE>
. volume and timing of licensing our Commerce software and services;
. reliability and quality of our Commerce software;
. actions taken by our competitors, including new product introductions and
enhancements;
. establishment and compliance with emerging standards for selling and
distributing digital goods and services;
. our ability to develop, introduce, and market new products and
enhancements to our existing products on a timely basis;
. nature and types of our licensing arrangements;
. changes in our pricing policies or those of our competitors;
. market acceptance of our technology;
. ability and timing of our licensees and their customers to commercialize
our technology;
. our ability to expand our sales, product development, marketing, and
corporate development operations, including hiring additional personnel
in these organizations;
. our ability to control costs;
. delays or reductions in spending for, or the implementation of,
application software by our potential customers as companies attempt to
stabilize their computer systems before January 1, 2000 in order to
reduce the risk of computer system problems associated with Year 2000
issues;
. technological changes in our markets;
. deferrals of customer orders in anticipation of product enhancements or
new products;
. customer budget cycles and changes in these budget cycles; and
. general economic factors.
Our future revenues are unpredictable and we expect our quarterly operating
results to fluctuate, which could cause our stock price to decline.
We cannot accurately forecast our revenues in any given period because we
have only recently released our Commerce software for pilot programs, and the
markets in which we compete are emerging. Currently, we rely on initial license
fees and support fees from licensing software for all of our revenues. Our
revenues could fall short of our expectations if we experience delays in
licensing our Commerce software. In the future, we expect to generate the
majority of our revenues from transaction fees. We have not received any
transaction fees to date. As a result of these factors, it is difficult for us
to predict the amount and timing of future revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations."
Our licensees are required to pay amounts due to us at specified periods,
depending on the licensing arrangement. Accordingly, we recognize revenues from
these companies when the amounts due are known, which will generally be in the
quarter subsequent to the transaction. Furthermore, our licensees are not
required to provide us detail on the types of customers and fees that they
receive
8
<PAGE>
from these customers. Therefore, we have limited and delayed insight on
consumer trends and sales which also makes our future revenues unpredictable.
Variations in the volume of sales of digital content and services over the
Internet will cause fluctuations in our operating results, which could cause
our stock price to decline.
Our success depends on receiving transaction fees. These fees will be a
percentage of fees paid by users or charged by our licensees from transactions
and services that use our technology, and sales of products incorporating our
technology. To date, we have not received any transaction fees and do not
expect to generate any transaction fees in 1999, if ever. If we do receive
transaction fees in the future, the amount of these fees in any given quarter
will depend on how quickly our technology is deployed and the volume of digital
commerce transactions that occur using our product. Variations of these factors
could affect our quarterly operating results. As a result, we may be
particularly affected by changes in general economic conditions that would
cause declines in the level of electronic commerce.
Because the timing of deployment and digital commerce using our technology
is outside of our control, it will be difficult for us to make accurate
quarterly revenue projections even if our technology is deployed commercially
by our licensees. If our revenue projections are not accurate for a particular
quarter, our actual operating results for that quarter could fall below the
expectations of analysts and investors. Our failure to meet these expectations
would likely cause the market price of our common stock to decline.
We have a history of losses and we expect our operating expenses and losses to
increase significantly.
Our failure to significantly increase our revenues would seriously harm our
business. We have experienced operating losses in each quarterly and annual
period since inception and we expect to incur significant and increasing losses
in the future. We incurred net losses of $8.0 million in 1996, $11.7 million in
1997, $19.7 million in 1998, and $11.4 million for the six months ending June
30, 1999. As of June 30, 1999, we had an accumulated deficit of $56.9 million.
We expect to significantly increase our research and development, sales and
marketing, and general and administrative expenses. With these additional
expenses, we must significantly increase our revenues in order to become
profitable. As a result, we expect to incur significant losses for the
foreseeable future. To date, we have recognized minimal revenues from the
license of our software and have received no transaction fees. Our expense
levels are relatively fixed and are based, in part, on expectations as to
future revenues. We expect our revenues to vary. If revenue levels fall below
our expectations, our net loss will increase because only a small portion of
our expenses varies with our revenues. We may never achieve profitability, and
if we do, we cannot ensure that we will sustain or increase it. For a more
detailed description of our operating results, please see "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
9
<PAGE>
We depend solely on third parties to deploy our technology and to create a
market for digital commerce.
To be successful, we must establish and maintain relationships with leading
content, technology, and commerce service providers. These relationships are
critical to our success because we rely on them to:
. deploy our technology;
. develop an infrastructure for the sale and delivery of digital goods and
services;
. generate transaction fees from the sale of digital content and services;
. develop and deploy new applications; and
. promote brand preference for InterTrust products and services and the
MetaTrust Utility.
In particular, we have devoted a significant portion of our resources on
developing relationships in the music industry. As a result, we are subject to
substantial risk if we do not succeed in maintaining our existing relationships
and adding new ones in the future.
Our licensees might not be able to expand their technology infrastructure to
meet the complex demands for developing an infrastructure for the sale and
delivery of digital goods and services. Adding this new capacity will be
expensive and our licensees might not be able to do so successfully. In
addition, if our licensees are unable to protect their computer systems from
physical damage, power loss, telecommunications failures, viruses, or other
malicious acts, we could suffer temporary or long-term interruptions in the
delivery and use of our technology by consumers. If our licensees are unable to
maintain or expand their technology infrastructure, the delivery of digital
content using our technology could be interrupted, and our business and
operating results could be harmed.
If our third party relationships are not successful, we may not generate
sufficient revenues to sustain or grow our business.
We have limited experience in establishing and maintaining ongoing
relationships with our current licensees. If we lose any of these relationships
or if these licensees fail to actively pursue additional business relationships
and partnerships, we may not be able to execute our business plan and our
business and operating results would suffer significantly. Use of our platform
and services may not increase even if we establish and maintain these
relationships.
We need to significantly increase the number of companies that license our
technology to sustain and grow our business.
Our success depends on significantly increasing the number of companies that
license our technology and use it for the sale and management of digital
information and services. We have not yet attracted, and may not in the future
be able to attract, a sufficient number of these companies. As of June 30,
1999, only ten companies had licensed our software. Our ability to attract new
licensees will depend on a variety of factors, including the performance,
reliability, security, scalability--in other words, the ability to rapidly
increase deployment size from a limited number of end-users to a
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very large number of end-users--and cost-effectiveness of our software and
services as well as our ability to effectively market our product and services.
Our ability to attract new licensees will also depend on the performance of our
initial licensees and the overall success of the MetaTrust Utility. Many
potential licensees may resist working with us until our, and our licensees',
applications and services have been successfully introduced and have achieved
market acceptance. In addition, our licensees might in the future adopt digital
rights management products of other companies, including products that may
compete with our product. Some of our current and future licensees may also
decide to develop products that compete with our products. Our licensees could
give higher priority to the products of other companies or to their own
products than they give to our products. Moreover, we may not be able to
establish relationships with important potential customers if we have already
established relationships with their competitors.
Some of our current and future licensees may decide to compete with us. In
addition, we may not be able to establish relationships with important
participants in particular industries if we have already established
relationships with their competitors. Therefore, it is important that we are
perceived as independent of any particular customer or licensee. We might not
be perceived as a neutral and trusted technology and service provider. In
addition, to maintain the trusted operation of the MetaTrust Utility, we
require that products and services operating within the MetaTrust Utility
comply with specifications administered by us. Potential licensees may be
unwilling to be subject to the control of these specifications.
We may not be able to attract a critical mass of licensees who will develop
products and establish clearinghouses, and our licensees may not achieve the
widespread deployment of users we believe is necessary for us to become
successful. In the future, if applications based on our product are
commercially deployed, we expect revenue from the license of our products will
decrease as a percentage of revenue. We intend to generate substantially all
our future revenue from transaction-based fees. Consequently, any significant
shortfall in the number of users, clearinghouses or transactions occurring over
our platform would harm our operating results.
The long and complex process of licensing our Commerce software could delay the
deployment of our technology and harm our business.
Licensing our Commerce software is a long and complex process. Before
committing to license our product, our licensees must generally consider a wide
range of issues including product benefits, installation and infrastructure
requirements, ability to work with existing computer systems, ability to
support a large user base, functionality, security, and reliability.
Furthermore, because digital rights management solutions are relatively new,
many companies will be addressing these issues for the first time. As a result,
deploying our technology requires us to educate potential licensees of its uses
and benefits. The process of entering into a licensing agreement with a company
typically involves lengthy negotiations. Entering into a licensing agreement
also involves a significant commitment of resources by our licensees and is
influenced by their budget cycles. In many cases, these companies must change
established business practices and conduct business in new ways. As a result of
our long sales cycle, which in the past has generally ranged from six months to
18 months, it is difficult for us to predict the quarter in which a particular
prospect will sign a license agreement. To the extent that initial license fees
are postponed, our quarterly operating results may be harmed.
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Because our technology must be integrated into the products and services of our
licensees, there will be significant delay between licensing the software and
our licensees' commercial deployment of their products and services.
Because of the platform nature of our software, after our technology is
licensed, our licensees undertake a lengthy process of integration into their
existing systems or a new system. Our success depends upon the deployment of
our technology by a potential licensee in the use and sale of digital content.
None of our licensees have commercially deployed our product and only some of
our licensees who have integrated our Commerce software into their system are
currently using our Commerce software in a pilot program for evaluation before
commercial deployment. The timing of commercial deployment depends upon:
. the complexity of the licensee's intended application and the necessary
development efforts;
. the technical and engineering capabilities of our licensees;
. the relative importance of digital rights management to the licensee's
business;
. the success of licensees in signing up customers;
. ability of our licensees to successfully develop and deploy pilots to
test their desired commercial implementation of our software;
. the business plans and objectives of our licensees in deploying products
based on our technology;
. our licensees' budgetary constraints; and
. the efforts of our partner development and training and support
organizations in providing technical support to our licensees.
Because of the number of factors influencing the integration and deployment
processes, we expect that the period between entering into a licensing
arrangement and the time our licensee commercially deploys applications based
on our Commerce software will vary widely.
Our Commerce software has only recently been used by our licensees in pilot
programs making evaluation of our business and prospects difficult.
We began offering the general availability release of our Commerce software
in December 1998, and released version 1.2 in May 1999. Our licensees'
applications and services based on our Commerce software are in development or
have only been released for evaluation in very limited pilot programs. None of
our licensee applications or services has been deployed commercially. It is
possible that our licensees may uncover serious technical and other problems
resulting in the delay or failure of the commercial deployment of our
licensees' implementation of our Commerce software, including problems relating
to security, scalability, fault tolerance, and interoperability of our software
or the combination of our software with our licensees' software. Accordingly,
evaluation of our business and prospects is difficult. We may not successfully
address any of these challenges and the failure to do so would seriously harm
our business and operating results. In addition, because we have only released
our Commerce software for pre-commercial evaluation, we have limited insight
into trends that may emerge and affect our business.
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Security breaches of our software and our licensees' software could harm our
business.
The secure transmission and trusted management of proprietary or
confidential information over the Internet is essential to establish and
maintain confidence in our Commerce software and the software and services
developed using our software. Therefore, security concerns and security
breaches of our and our licensees' software could harm our business and
operating results. Advances in computer capabilities, new discoveries, or other
developments could result in a compromise or breach of the security technology
that we and our licensees use to protect customer digital content and
transaction data. A party that is able to circumvent our security systems could
steal digital content, customer data or other proprietary information or cause
interruptions in ours and our licensees' operations. Security breaches could
damage our reputation and expose us to a risk of loss or litigation. Our
insurance policies carry low coverage limits, which may not be adequate to
reimburse us for losses caused by security breaches. We cannot guarantee that
our security measures will prevent security breaches.
Cryptography technology is subject to security risks.
Our and our licensees' software and services depend in part on cryptography
technology. The security depends on the integrity of a user's private key and
that it is not stolen or otherwise compromised. Should an easy method for
circumventing or compromising this technology be developed, then the security
of encryption products utilizing this technology would be reduced or
eliminated. Any significant advances in techniques for attacking cryptographic
systems could also render some or all of our and our licensees' software and
services obsolete or unmarketable. Current or future governmental regulation
regarding the use, scope, and strength of cryptography could also limit our and
our licensees' ability to develop and distribute software with encryption
strong enough to maintain the integrity of keys against compromise. In the past
there have been public announcements of the successful decoding of certain
cryptographic messages and of the potential misappropriation of keys. This type
of publicity could also harm public perception of the effectiveness of the
cryptography technology included in our Commerce software and our licensees'
applications and services and could harm our business.
Defects in our software and the software of our licensees could harm our
business.
Complex software products like ours often contain errors or defects,
including errors relating to security, particularly when first introduced or
when new versions or enhancements are released. Commerce 1.2 has only recently
been released for limited pilot programs and is being evaluated by our
licensees. Defects or errors in current or future products could result in
delayed or failed deployment of our technology, lost revenues or a delay in or
failure to achieve market acceptance, any of which would seriously harm our
business and operating results.
Furthermore, our strategy is to have our licensees and other third parties
deploy our technology for use in commercial transactions with their digital
content. If their products and services contain errors or defects, it could
seriously undermine the perceived trust and security needed for a commercial
system and could delay or prevent market acceptance of digital commerce
resulting in serious harm to our business and operating results. Because this
is a system used for commerce, we believe the standards for reliability and
performance will be very high.
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The deployment and use of our products expose us to substantial risks of
product liability claims potentially because our products are expected to be
used in sensitive and valuable digital commerce transactions and potentially
because we require our partners to comply with our specifications. We could be
subject to potential liability claims and third party liability claims related
to the MetaTrust Utility and products and services purchased using our
technology. Although our license agreements typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that these limitations of liability provisions may not be effective as
a result of existing or future laws or unfavorable judicial decisions. A
product liability claim brought against us, even if not successful, would
likely be time consuming and costly to defend and could significantly harm our
business and operating results.
We rely on third-party software and applications.
We integrate third-party software as a component of our software. As a
result, we face a number of challenges in integrating these technologies into
our Commerce software and any future releases of our Commerce software. We
would be seriously harmed if the providers from whom we license software ceased
to deliver and support reliable products, enhance their current products or
respond to emerging industry standards. In addition, the third-party software
may not continue to be available to us on commercially reasonable terms or at
all. The loss of, or inability to maintain or obtain this software, could
result in shipment delays or reductions. Furthermore, we might be forced to
limit the features available in our current or future product offerings. Either
alternative could seriously harm our business and operating results.
Year 2000 issues could harm our business.
We are in the process of assessing any Year 2000 issues with the computer
communications, software, and security systems that we use to deliver and
manage our software and services and to manage our internal operations. If our
systems do not operate properly with date calculations involving the Year 2000
and subsequent dates, we could incur unanticipated expenses to remedy any
problems, which could seriously harm our business and operating results. We may
also experience reduced sales of our software and services as current or
potential customers reduce their budgets for management products due to
increased expenditures on their own Year 2000 compliance efforts. To the extent
our Commerce software is embedded with other companies' products that are not
Year 2000 compliant, our reputation in the marketplace and use of our
technology by our partners could be harmed, both of which would harm our
business and operating results.
Our efforts to address Year 2000 issues are described in more detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of Year 2000."
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The market for digital rights management will be subject to rapid technological
change and new product introductions and enhancement that we may not be able
to address. We need to develop and introduce new products, technologies, and
services.
The market for digital rights management solutions is fragmented and marked
by rapid technological change, frequent new product introductions and
enhancements, uncertain product life cycles, and changes in customer demands.
There is currently no standard for digital rights and digital rights
management. New products based on new technologies or new industry standards
can quickly render existing products obsolete and unmarketable. Any delays in
our ability to develop and release enhanced or new products could seriously
harm our business and operating results. Our technology is complex and new
products and product enhancements can require long development and testing
periods. In the past we have experienced delays in new product releases, and we
may experience similar delays in the future. Our failure to conform to
prevailing standards, anticipate changes in standards or develop and sell new
product releases on a timely basis could harm our business and operating
results. Our future success will depend on our ability to develop and
introduce, in response to customer and market demands, new releases of our
Commerce software which offer features and functionality that we do not
currently provide.
Our markets are rapidly evolving and we may not be able to compete
successfully.
Our markets are new, rapidly evolving, and highly competitive, and we expect
this competition to persist and intensify in the future. Our failure to
maintain and enhance our competitive position could seriously harm our business
and operating results. We encounter current or potential competition from a
number of sources, including:
. providers of secure digital distribution technology like AT&T, IBM,
Microsoft, Liquid Audio, Preview Software, and Xerox;
. providers of hardware-based content metering and copy protection systems,
including the 4C Entity (IBM, Intel, Matsushita, Toshiba), Sony, and Wave
Systems; and
. operating system manufacturers, including Microsoft or Sun Microsystems,
that may develop or license digital rights management solutions for
inclusion in their operating systems.
Potential competitors may bundle their products or incorporate a digital
rights management component into existing products in a manner that discourages
users from purchasing our products. For example, we expect that future releases
of Microsoft's Windows operating system, which manages the programs on a
computer, will include components addressing digital rights management
functions. Furthermore, new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. Our competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements than we can.
Furthermore, in order to be successful in this emerging market, we must be
able to differentiate ourselves from our competitors through our product and
service offerings and the brand name recognition of our software and services,
as well as through our licensees and the MetaTrust Utility. We may not be
successful in differentiating ourselves or achieving widespread market
acceptance of our products and services and our licensees' products and
services. Furthermore, enterprises that have already invested substantial
resources in other methods of deploying and managing their applications
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and services may be reluctant or slow to adopt a new approach that may replace,
limit, or compete with their existing systems. The market for our digital
rights management products will also depend upon the cost and effectiveness of
our products, the development of alternative standards or technologies for the
management of digital rights and the uncertainty in the market place created by
alternative approaches to rights management.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do. Many
of these companies have more extensive customer bases and broader partner
relationships that they could leverage, including relationships with many of
our current and potential partners. These companies also have significantly
more established customer support and professional services organizations than
we do. In addition, these companies may adopt aggressive pricing policies. For
a more detailed description of our competitive position, including some of our
competitors and competitive products, please see "Business--Competition."
We and our licensees may be found to infringe proprietary rights of others.
Digital rights management is an emerging field in which we expect a number
of companies to create, and pursue patent protection for, inventions and
technologies. Other companies, including our competitors, may obtain patents or
other proprietary rights that would prevent, or limit or interfere with our
ability to make, use or sell our products. In the past, we have received
notices alleging potential infringement by us of the proprietary rights of
others. In January 1996, we received a letter from an attorney representing E-
Data Corporation containing an allegation of infringement of a patent E-Data
allegedly owns. We exchanged correspondence with E-Data's attorneys ending in
September 1996. We have not heard from any representative of E-Data since that
time. In November 1997, we received a letter from representatives of TAU
Systems Corporation informing us of two patents held by TAU Systems. In the
letter, the representatives stated their opinion that our Commerce software
contained various elements recited in the two patents and requested that we
discuss licensing the technology of these patents. We responded to the letter
stating that although we had not undertaken a detailed review of the patents,
we were unaware of any of our products having one of the elements required by
the patent claims. We have not received any further correspondence from TAU
Systems. In the future we or our licensees could be found to infringe upon the
patent rights of E-Data, TAU Systems, or other companies. Furthermore,
companies in the software market are increasingly bringing suits alleging
infringement of their proprietary rights, particularly patent rights. We and
our licensees could incur substantial costs to defend or settle any litigation,
and intellectual property litigation could force us to do one or more of the
following:
. cease selling, incorporating, or using products or services that
incorporate the challenged intellectual property;
. obtain a license from the holder of the infringed intellectual property
right; and
. redesign products or services.
Our licensees' products and services may be subject to a claim of patent
infringement independent of any infringement by our software.
We and our licensees might not be able to redesign our products and services
or obtain a license on commercially reasonable terms from the holders of any
potentially infringed intellectual property.
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Any successful claim of infringement against us or our licensees and our or
their failure or inability to license the infringed technology on commercially
reasonable terms would seriously harm our business and operating results. In
addition, we may be required to indemnify our licensees for some third party
claims of infringement.
Protection of our intellectual property is limited.
Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyright, trade secret, and trademark laws, as well as
confidentiality procedures and contractual provisions.
Our patent applications or trademark registrations may not be approved.
Moreover, even if approved, they may not provide us with any competitive
advantage or may be challenged by third parties. If challenged, any of our
patents might not be upheld or their claims could be narrowed. Legal standards
relating to the validity, enforceability, and scope of intellectual property
rights generally, and in Internet-related industries specifically, are
uncertain and still evolving, and the future viability or value of any of our
intellectual property rights is uncertain. Any litigation surrounding our
rights could force us to divert important financial and other resources away
from our business operations. In addition, we sell our products
internationally, and the laws of many countries do not protect our proprietary
rights as well as the laws of the United States. See "Business--Intellectual
Property."
These legal protections afford only limited protection. Any steps we take to
protect our intellectual property may be inadequate, time consuming, and
expensive. Furthermore, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.
Also, our competitors may independently develop similar technology, duplicate
our products, or design around our patents or our other intellectual property.
We must retain and attract key personnel.
Our success depends largely on the skills, experience, and performance of
the members of our senior management and other key personnel, including our
chairman of the board and chief executive officer, Victor Shear. We have
recently hired new managers and key personnel and we intend to continue to hire
these personnel. We might be unable to assimilate our recently hired key
personnel or be unable to locate, hire, and retain additional qualified key
personnel.
None of our senior management or other key personnel is bound to be employed
for any specific time period. If we lose one or more of these key employees,
our business and operating results could be seriously harmed. In addition, our
future success will depend largely on our ability to continue attracting and
retaining highly skilled personnel. Like other companies in the San Francisco
Bay Area, we face intense competition for qualified personnel. For a more
detailed description of our management personnel, please see "Management."
We need to develop and expand our sales and marketing capabilities.
We need to expand our sales and marketing operations in order to increase
market awareness of digital rights management and our Commerce software, in
addition to the products and services of
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our licensees and the MetaTrust Utility. However, competition for qualified
sales and marketing personnel is intense and we may not be able to hire enough
qualified individuals in the future. Our products and services require a
sophisticated sales and marketing effort targeted at senior management of our
prospective licensees. New hires require extensive training and typically take
at least four to six months to achieve full productivity. In addition, we have
limited experience marketing our products broadly to a large number of
potential partners. For additional information regarding our marketing
operations please see "Business--Sales and Partner Development."
We need to expand our partner development, training, and support organizations.
We may not be able to attract, train or retain the number of highly
qualified partner development, and training and support services personnel that
our business needs. We believe that growth in our software licensing depends on
our ability to provide our customers with professional support services. As a
result, we plan to increase the number of our support personnel to meet these
needs. However, competition for qualified services personnel is intense. For
additional information regarding our support services please see "Business--
Training and Support."
We must manage our growth and expansion.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Any failure to manage
growth effectively could seriously harm our business and operating results. We
have grown from 88 employees at December 31, 1997 to 138 employees at June 30,
1999. To be successful, we will need to implement additional management
information systems, improve our operating, administrative, financial and
accounting systems and controls, train new employees, and maintain close
coordination among our executive, engineering, accounting, finance, marketing,
and operations organizations. In addition, our growth has resulted, and any
future growth will result, in increased responsibilities for management
personnel.
Expanding internationally is expensive; we may receive no benefit from our
expansion.
We plan to increase our international sales force and operations. However,
we may not be successful in increasing our international partnering
relationships. In addition, our international business activities are subject
to a variety of risks, including the adoption of laws, currency fluctuations,
actions by third parties, and political and economic conditions that could
restrict or eliminate our ability to do business in foreign jurisdictions. To
date, we have not adopted a hedging program to protect us from risks associated
with foreign currency fluctuations.
Industry Related Risks
We are susceptible to significant risk in the music industry.
We currently devote a significant portion of our time, resources, and
attention pursuing partnerships and business within the music industry. As a
result, we are subject to substantial market risk with respect to the degree of
success of digital music commerce over the Internet. Because of our transaction
fee-based business model, our revenues and success will rely primarily upon the
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volume of electronic commerce transactions that occur using our platform. A
number of factors outside of our control with respect to the music industry
could cause our revenues and stock price to fluctuate. These factors include:
. slow market adoption and growth of sales of digitally downloaded recorded
music through the Internet;
. competition for consumers from traditional retailers of music;
. music content providers' ability to attract significant music artists,
record labels, and recordings to be distributed in their format;
. development and adoption of compression technology to facilitate digital
delivery of music; and
. development and adoption of consumer devices that are able to play
downloaded digital music.
Use of the Internet for commercial distribution of digital content might not be
widely accepted.
Rapid growth in the use of and interest in the Internet for electronic
business has occurred only recently. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently broad base of
consumers may not adopt, and continue to use, the Internet and other online
services as a medium for digital commerce. Demand and market acceptance for
recently introduced digital content and services over the Internet are subject
to a high level of uncertainty, and there are few proven products and services.
We depend on the widespread acceptance of commerce in digital information
over the Internet, through DVD, and other means. These methods for distribution
of digital information may not be commercially accepted for a number of
reasons, including:
. failure to adequately develop the necessary infrastructure for
communication of digital information and for payment processing;
. failure to develop or deploy enabling technologies, including compression
or broadband technology necessary for distribution of particular digital
content over the Internet;
. reduced demand for paid digital content due to the widespread
availability of free content online;
. insufficient speed, access, and server reliability;
. public perception of the security and confidentiality of digital
information and the confidentiality of its providers and users;
. development of competing technologies; and
. delays in the development of new standards and protocols necessary to
handle increased Internet activity.
In addition, consumers generally are concerned with security and privacy on
the Internet and any publicized security problems could inhibit the growth of
the Internet as a means of conducting
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commercial transactions. Our business and operating results would be seriously
harmed if digital content providers become unwilling to sell content over the
Internet or if consumers become unwilling to transmit confidential information
online.
If commerce in digital information is not accepted for any reason, our
business and operating results will be seriously harmed.
The market for digital rights management may not widely develop.
The market for digital rights management has only recently begun to develop
and is rapidly evolving. A viable market for our products may not emerge or be
sustainable. Consumers may not accept protected digital content because, to
date, they have been able to download content for free and use or distribute it
without restriction. In addition, lengthy download time for content and
technical difficulties may discourage consumer acceptance. If the digital
rights management market fails to develop, or develops more slowly than
expected, our business and operating results would be seriously harmed.
If standards for digital rights management are not adopted, confusion among
content providers, distributors, and consumers may depress the level of
electronic commerce.
If standards for digital rights management are not adopted or complied with,
content providers may delay distributing content until they are confident that
the technology by which the content is to be distributed will be commercially
accepted. Standards for the distribution of various digital content might not
develop or might be found to violate antitrust laws or "fair use" policies. In
addition, the failure to develop a standard among device manufacturers may
affect the market for digital goods and services. As a result, consumers may
delay purchasing products and services that include our technology if they are
uncertain of commercial acceptance of the standards with which our technology
complies. Accordingly, if a standard format for the secure delivery of content
on the Internet is not adopted, or if the standards are not compatible with our
digital rights management technology, our business and operating results would
likely be harmed. If a competitor were to establish the dominant industry
standard, our business and operating results would likely be harmed.
We may face increased governmental regulation and legal uncertainties that
could increase our costs and provide a barrier of doing business.
Exports of software products utilizing encryption technology are generally
restricted by the United States and various foreign governments. Although we
have obtained approval to export our Commerce software, the list of products
and countries for which export approval is required could be revised in the
future to include more products and related services that include encryption
technology. If we do not obtain required approvals we may not be able to
license our software in international markets.
To date, communications and commerce on the Internet have not been highly
regulated. However, Congress has held hearings on whether to regulate providers
of services and transactions in the electronic commerce market. It is possible
that Congress or individual states could enact laws regulating Internet
commerce that address issues including user privacy, pricing, and the
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characteristics and quality of products and services. In addition, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these companies. This
could increase the cost of transmitting data over the Internet. Moreover, it
may take years to determine the extent to which existing laws relating to
issues including property ownership, libel, and personal privacy apply to the
Internet. Any new laws or regulations relating to the Internet could harm our
business.
As of October 1998, the European Union has adopted a Privacy Directive that
regulates the collection and use of information that can be associated with
specific individuals. These regulations may inhibit or prohibit the collection
and sharing of personal information in ways that could harm our partners or us.
The globalization of Internet commerce may be harmed by these and similar
regulations since the EU Privacy Directive prohibits transmission of personal
information outside the European Union unless the receiving country has enacted
individual privacy protection laws at least as strong as those enacted by the
EU Privacy Directive. The United States and the European Union have not yet
resolved this matter and they may not do so, if ever, in a manner favorable to
our licensees or us.
Imposition of sales and other taxes on electronic commerce transactions may
hinder electronic commerce.
The taxation of commerce activities in connection with the Internet has not
been established and may change in the future and may vary from jurisdiction to
jurisdiction. One or more states or foreign countries may seek to impose sales
or other charges on foreign companies that engage in or facilitate electronic
commerce. A number of proposals have been made at the local, state, and foreign
level that would impose additional taxes on the sale of products and services
through the Internet. These proposals, if adopted, could substantially impair
the growth of electronic commerce and could significantly harm our business and
operating results. Moreover, if any state our foreign country were to
successfully assert that we should collect sales or other taxes on the exchange
of products and services through the Internet, our business may be harmed.
In 1998, Congress passed the Internet Freedom Act, which imposes a three-
year moratorium on state and local taxes on Internet-based transactions. We
cannot assure you that this moratorium will be extended. Failure to renew this
moratorium would allow various states to impose taxes on electronic commerce,
which may harm our business.
Risks Related to this Offering
Our stock price may be particularly volatile because of the industry we are in.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to
or disproportionate to the operating performance of these companies. These
broad market fluctuations could adversely affect the market price of our common
stock.
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Our securities have no prior market and our stock price may decline after the
offering.
Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. In addition, an active public
market for our common stock may not develop or be sustained after this
offering.
We might be the target of class action litigation due to stock price
volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could harm our business and operating results.
We may need to raise additional funds in the future.
We expect the net proceeds from this offering to be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
After that, we may need to raise additional funds, and additional financing may
not be available on favorable terms, if at all. This could seriously harm our
business and operating results. Furthermore, if we issue additional equity
securities, stockholders may experience dilution, and the new equity securities
could have rights senior to those of existing holders of our common stock. If
we need to raise funds and cannot do so on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities, or
respond to competitive pressures or unanticipated requirements. For a
discussion regarding our use of proceeds from this offering, dilution and our
working capital, please see "Use of Proceeds," "Dilution" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
We are significantly influenced by existing stockholders.
On completion of this offering, executive officers, key employees and
directors, and their affiliates will beneficially own, in the aggregate,
approximately % of our outstanding common stock (assuming no exercise of
the underwriters' over-allotment option). In addition, if two of our existing
stockholders exercise their right to buy in this offering in full, the
percentage will increase to %. As a result, these stockholders will be able
to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, which could have the effect of delaying or preventing a
third party from acquiring control over us. For information regarding the
ownership of our outstanding stock by our executive officers and directors and
their affiliates, please see "Principal Stockholders."
22
<PAGE>
We have implemented anti-takeover provisions that could make it more difficult
to acquire us.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. These provisions
include:
. authorizing the issuance of shares of "blank check" preferred stock;
. prohibiting stockholder action by written consent; and
. limitations on stockholders' ability to call special stockholder
meetings.
For information regarding these and other provisions, please see
"Description of Capital Stock." We are also currently considering other anti-
takeover measures, including a stockholders' rights plan.
Substantial sales of our common stock could depress our stock price.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of June 30, 1999, upon completion of
this offering, we will have outstanding shares of common stock. Other
than the shares of common stock sold in this offering, shares will be eligible
for sale in the public market immediately. Our stockholders will be subject to
agreements with the underwriters or us that restrict their ability to transfer
their stock for 180 days from the date of this prospectus. After these
agreements expire, an additional shares will be eligible for sale in
the public market. For a detailed discussion of the shares eligible for future
sale, please see "Shares Eligible for Future Sale."
As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock. As a result, investors
purchasing common stock in this offering will incur immediate substantial
dilution of $ a share. In addition, we have issued options to acquire
common stock at prices significantly below the initial public offering price.
To the extent outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. We have in the past and may in
the future issue equity securities to our partners. Any issuances to these
partners may cause further dilution to investors in this offering. For a
discussion regarding dilution in this offering, please see "Dilution."
We have broad discretion to use the proceeds from this offering for purposes
that you may not agree, and we may not be successful in investing these
proceeds.
We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion as to how we will spend the
proceeds, and stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this
offering, in our operations or external investments, to yield a favorable
return.
23
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future business or financial performance. In some
cases, you can identify forward-looking statements by terminology; for
instance, may, will, should, expect, plan, anticipate, believe, estimate,
predict, potential, or continue, the negative of these terms, or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the Risk
Factors section. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.
24
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we
are offering are estimated to be $ million, after deducting estimated
underwriting discounts and commissions and offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $ million. We expect to use the net
proceeds for general corporate purposes, including working capital. A portion
of the net proceeds may also be used for the acquisition of businesses,
products and technologies that are complementary to ours. We have no current
agreements or commitments for acquisitions of complementary businesses,
products or technologies. Pending these uses, we will invest the net proceeds
of this offering in investment grade and interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since inception and do not currently
intend to pay any cash dividends.
25
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. our actual capitalization as of June 30, 1999;
. our pro forma capitalization as of June 30, 1999, after giving effect to
the sale of 1,309,700 shares of Series E preferred stock for
approximately $15.7 million in cash and the conversion of a $1.0 million
promissory note into 83,333 shares of Series E preferred stock in July
1999, the exercise of warrants to purchase 21,692 shares of common stock,
and the conversion of all outstanding shares of preferred stock and class
B non-voting common stock into common stock; and
. our pro forma as adjusted capitalization as of June 30, 1999, to reflect
our receipt of the estimated net proceeds from our sale of
shares of common stock in this offering, after deducting the estimated
underwriting discounts and commissions and offering expenses, the filing
of a new certificate of incorporation after the closing of this offering.
This table excludes the following shares:
. 6,741,411 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$1.91 per share;
. 138,124 shares of common stock available for issuance as of June 30, 1999
under our 1995 Stock Plan;
. 311,016 shares of common stock issuable upon the exercise of a warrant
outstanding as of June 30, 1999;
. 1,900,000 shares of common stock available for issuance under our 1999
Equity Incentive Plan;
. 350,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan; and
. 350,000 shares of common stock available for issuance under our 1999 Non-
Employee Directors Option Plan.
See "Management--Employee Benefit Plans" and Notes 4 and 7 of Notes to
Consolidated Financial Statements for a description of our equity plans.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Convertible promissory note................... $ 1,000 $ -- $ --
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $.001 par value,
20,000,000 shares authorized, 12,492,410
shares outstanding actual; 20,000,000 shares
authorized, no shares outstanding pro forma;
10,000,000 shares authorized, no shares
outstanding pro forma as adjusted........... 12 -- --
Class A voting common stock, $.001 par value,
50,000,000 shares authorized, 15,003,082
shares outstanding actual; 50,000,000 shares
authorized, 31,251,085 shares outstanding
pro forma; 120,000,000 shares authorized,
shares outstanding pro forma as
adjusted.................................... 15 31
Class B non-voting common stock, $.001 par
value, 20,000,000 shares authorized,
2,340,868 shares outstanding actual;
20,000,000 shares authorized, no shares
outstanding pro forma; no shares authorized,
no shares outstanding pro forma as
adjusted.................................... 2 -- --
Additional paid-in capital.................... 65,801 82,557
Deferred compensation......................... (4,078) (4,078) (4,078)
Notes receivable from stockholders............ (236) (236) (236)
Accumulated deficit........................... (56,871) (56,871) (56,871)
-------- -------- --------
Total stockholders' equity.................... 4,645 21,403
-------- -------- --------
Total capitalization.......................... $ 5,645 $ 21,403 $
======== ======== ========
</TABLE>
26
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $21.4 million,
or approximately $0.68 per share. Net tangible book value per share represents
the amount of stockholders' equity, less intangible assets, divided by
31,251,085 shares of common stock outstanding after giving effect to the sale
of 1,309,700 shares of Series E preferred stock for approximately $15.7 million
in cash and the conversion of a $1.0 million promissory note into 83,333 shares
of Series E preferred stock in July 1999, the exercise of warrants to purchase
21,692 shares of common stock and the conversion of all outstanding shares of
preferred stock and class B non-voting common stock into shares of common stock
upon completion of this offering.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common
stock immediately after completion of this offering. After giving effect to our
sale of shares of common stock in this offering at an assumed initial
public offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and offering expenses, our net tangible
book value as of June 30, 1999 would have been $ million or $ per
share. This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution in net
tangible book value of $ per share to purchasers of common stock in the
offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share as of June 30,
1999......................................................... $0.68
Increase per share attributable to new investors..............
-----
Pro forma net tangible book value per share after the offering..
----
Dilution per share to new investors............................. $
====
</TABLE>
The following table presents on a pro forma basis as of June 30, 1999, after
giving effect to the sale of 1,309,700 shares of Series E preferred stock for
approximately $15.7 million in cash and the conversion of a $1.0 million
promissory note into 83,333 shares of Series E preferred stock in July 1999,
the exercise of warrants to purchase 21,692 shares of common stock and the
conversion of all outstanding shares of preferred stock and class B non-voting
common stock into common stock upon completion of this offering, the
differences between the existing stockholders and the purchasers of shares in
the offering with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 31,251,085 % $77,960,000 % $2.49
New stockholders............ $
---------- ----- ----------- -----
Totals.................... 100.0% 100.0%
========== ===== =========== =====
</TABLE>
As of June 30, 1999, there were options outstanding to purchase a total of
6,741,411 shares of common stock at a weighted average exercise price of $1.91
per share. In addition, as of June 30, 1999, there was a warrant outstanding to
purchase 311,016 shares of common stock. To the extent these outstanding
options or warrants are exercised, there will be further dilution to new
investors. For a description of our equity plans, please see "Management--
Employee Benefit Plans" and Notes 4 and 7 of Notes to Consolidated Financial
Statements.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The consolidated statement of operations data for the years ended
December 31, 1996, 1997 and 1998, and the consolidated balance sheet data at
December 31, 1997 and 1998 are derived from our consolidated financial
statements which have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this prospectus. The consolidated statement of
operations data for the years ended December 31, 1994 and 1995, and the
consolidated balance sheet data at December 31, 1994, 1995 and 1996 are derived
from our consolidated financial statements not included in this prospectus
which have been audited by Ernst & Young LLP, independent auditors. The
consolidated statement of operations data for the six months ended June 30,
1998 and 1999 and the consolidated balance sheet data at June 30, 1999 are
derived from unaudited consolidated financial statements included elsewhere in
this prospectus and, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, that are necessary for a fair
presentation of the results of operations for these periods. The historical
results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
--------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- ------- --------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Licenses............... $ 850 $ -- $ -- $ 1,000 $ -- $ -- $ 309
Software support
services.............. -- -- 25 100 152 50 177
------- ------- ------- -------- -------- ------- --------
Total revenues.......... 850 -- 25 1,100 152 50 486
Cost of revenues:
Licenses............... -- -- -- -- -- -- 42
Software support
services.............. -- -- 5 102 191 84 208
------- ------- ------- -------- -------- ------- --------
Total cost of revenues.. -- -- 5 102 191 84 250
------- ------- ------- -------- -------- ------- --------
Gross profit (loss)..... 850 -- 20 998 (39) (34) 236
Operating costs and
expenses:
Research and
development........... 1,469 2,620 4,852 8,287 13,041 6,358 7,088
Sales and marketing.... -- -- 1,573 2,717 3,870 1,902 2,449
General and
administrative........ 930 803 1,735 1,932 2,717 1,075 2,117
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 195
------- ------- ------- -------- -------- ------- --------
Total operating costs
and expenses........... 2,399 3,423 8,160 12,936 19,628 9,335 11,849
------- ------- ------- -------- -------- ------- --------
Loss from operations.... (1,549) (3,423) (8,140) (11,938) (19,667) (9,369) (11,613)
Interest income
(expense), net......... (39) (160) 180 229 5 (9) 202
------- ------- ------- -------- -------- ------- --------
Net loss................ $(1,588) $(3,583) $(7,960) $(11,709) $(19,662) $(9,378) $(11,411)
======= ======= ======= ======== ======== ======= ========
Basic and diluted net
loss per share......... $ (0.16) $ (0.35) $ (0.67) $ (0.86) $ (1.41) $ (0.68) $ (0.75)
======= ======= ======= ======== ======== ======= ========
Shares used in computing
basic and diluted net
loss per share......... 9,645 10,223 11,913 13,639 13,966 13,777 15,307
======= ======= ======= ======== ======== ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (0.91) $ (0.43)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 21,688 26,808
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents..... $ 9 $ 386 $8,359 $1,884 $5,575 $15,295
Working capital (deficit)..... (1,319) (4,590) 6,061 (1,893) (3,042) 3,423
Total assets.................. 194 603 9,076 3,111 8,280 17,220
Total stockholders' equity
(deficit).................... (1,148) (4,387) 6,708 (847) (2,014) 4,645
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes appearing elsewhere in this prospectus. The
following discussion contains forward-looking statements. Our actual results
may differ significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, those discussed below and elsewhere in this prospectus, particularly in
"Risk Factors."
Overview
We have developed a general purpose DRM platform that serves as a foundation
for providers of digital information, technology, and commerce services to
participate in a global system for digital commerce. InterTrust was formed and
incorporated in January 1990. From inception through 1998, our efforts were
principally devoted to research and development, raising capital, recruiting
personnel, and establishing licensing relationships. As a result, we were
considered a development stage enterprise during this period. We shipped the
general availability version of our Commerce software at the end of December
1998, and some of our partners are in or are about to enter into pilot programs
using this software.
We license our DRM platform to companies to build digital commerce services
and applications. Our goal is to license to content, technology, and commerce
services partners in order to achieve widespread dissemination of our
technology, an expanding consumer base, and broad participation by digital
information providers. We currently derive all of our revenues from initial
license fees and associated software support services. Our license agreements
also require our partners to pay a transaction fee that is a percentage of
amounts paid by users or charged by our partners in commercial transactions and
services that use our technology, and sales of products incorporating our
technology. Our license agreements relating to uses of our technology within
enterprises for privately managing proprietary data may require a per-user fee.
Over time, we anticipate that our revenues will be derived primarily from
transaction fees and to a significantly lesser extent, from initial license
fees and support fees. However, we do not expect to receive any transaction
fees in 1999, if ever. Future transaction fees are dependent on the success of
our licensees and their customers in commercially deploying services and
applications and we may not recognize significant revenue from this source.
We are targeting relationships that will establish our DRM in several large
markets, including entertainment, business information, and publishing. To
date, a significant part of our licensing efforts has been focused on adoption
of our technology by the music industry as we believe it will be an early
implementer of DRM technology. We believe that if our general purpose platform
is adopted in the music market, we will be positioned to have our platform
adopted in other entertainment markets, including games, audio books, and
video, and other markets, including business information and publishing.
We have three basic types of license agreements: commerce service licenses,
business licenses, and applications licenses. These agreements provide
different rights and technology depending on the commercial plans of our
partners. Initial license fees received from these agreements may vary in
29
<PAGE>
amount depending on partner commitments, scope of the license with respect to
commercial markets, territory, term of agreement and other factors. We have in
the past decided, and may in the future decide to reduce or eliminate initial
license fees based on these factors.
Licenses of our Commerce software generally require the payment of an
initial license fee. Initial license revenue is recognized upon execution of a
license agreement and delivery of our software, only if we have no remaining
obligations with regard to development, upgrades, enhancements, or future
deliverables, and provided that the license fee is fixed or determinable, and
collection of the fee is probable. Our license agreements generally include the
right to upgrades and enhancements for a specified period. Under these
circumstances, the license payments received in advance of revenue recognition
are deferred and recognized on a subscription basis over the period of
obligation. We began recognizing revenue under some license agreements in
January 1999, subsequent to shipping the general availability version of our
Commerce software at the end of December 1998. At June 30, 1999, we had
approximately $7.7 million of deferred license revenue that will be recognized
in future periods.
Our license agreements also require the payment of a transaction fee that is
a percentage of revenues received by our partners from transactions and
services that use our technology and sales of products incorporating our
technology. Transactions involving the use of our technology to conduct the
sale, lease, rental, or licensing of commercial content requires the payment of
a transaction fee based on the amounts paid by users or charged by our partners
for selling or distributing the content. Transactions involving the use of our
technology for commercial services generally require the payment of a
transaction fee based on the amounts paid by users or charged by our partners
for the services. Transactions involving the sale, lease, rental, or licensing
of products incorporating our technology generally require the payment of a
transaction fee based on the amounts paid by users or charged by our partners
for the product. Our partners are required to pay all amounts due for
transaction fees within specified periods, depending on the licensing
arrangement. Our revenue recognition policy with regard to transaction fees is
to recognize the revenue when the amounts due are known, which will generally
be in the quarter subsequent to the transaction. We have received $1.5 million
in prepaid transaction fees which are included in deferred revenue as of June
30, 1999. Prepaid transaction fees may generally be offset against a portion of
transaction fee amounts due in any given quarter. To date, we have not
recognized any transaction fees from commercial transactions or services, or
sales of products.
Support services, which include the right to telephone and online support
and customer training, are generally provided for in the license agreements for
an agreed upon amount generally over a period of two years. Support service
revenue is recognized over the period in which the services are provided. Some
of our partners were utilizing pre-commercial versions of our product in the
development of their own solutions and, as a result, were utilizing our support
services before the shipment of our commercial release.
Through the end of 1998, the Company was in the development stage and had a
limited number of licensees. Mitsubishi, a stockholder, accounted for 91% of
total revenues in 1997 and 40% of total revenues in the six months ended June
30, 1999. Reciprocal, accounted for 100% of total revenues in 1996, 9% in 1997,
66% in 1998, 100% in the six months ended June 30, 1998, and 24% in the six
30
<PAGE>
months ended June 30, 1999. Our success depends on significantly increasing the
number of companies that license our technology and use it for the sale and
management of digital content and services.
In view of the rapidly changing nature of our industry and our new and
unproven business model, we believe that period-to-period comparisons of
revenues and operating results are not necessarily meaningful and should not be
relied upon as indications of future performance. We operate in an intensely
competitive market for highly qualified technical, sales and marketing, and
management personnel and periodically make salary and other compensation
adjustments to retain and hire employees. We anticipate that our operating
expenses will increase substantially in future quarters and, accordingly,
expect to incur additional losses for the foreseeable future. As a result, we
will need to generate significant additional revenue to achieve and maintain
profitability. In addition, we have limited and delayed insight on consumer
trends and sales which makes prediction of our future revenues difficult.
Results of Operations
Six Months Ended June 30, 1998 and 1999
Revenues
Total revenues increased from approximately $50,000 in the six months ended
June 30, 1998 to approximately $486,000 in the six months ended June 30, 1999.
Software support services accounted for 100% of total revenues in the six
months ended June 30, 1998. License fees and software support services
accounted for 64% and 36% of total revenues in the six months ended June 30,
1999.
No license revenue was recognized in the six months ended June 30, 1998, as
the general availability release of our Commerce software was not delivered to
our partners until December 1998. License revenues were approximately $309,000
for the six months ended June 30, 1999, and represent the amortization of
deferred license fees.
Revenue from software support services increased from $50,000 in the six
months ended June 30, 1998 to approximately $177,000 in the six months ended
June 30, 1999. This increase was due to support and training fees from
additional partner licensing agreements.
Cost of Revenues
Cost of licenses consists primarily of the costs incurred to manufacture,
package, and distribute our products and related documentation. Total cost of
revenues was approximately $84,000 in the six months ended June 30, 1998 as
compared to approximately $250,000 in the six months ended June 30, 1999. The
period over period increase resulted from increased costs incurred to support
our new partners.
No costs were incurred for licenses during the six months ended June 30,
1998, as we did not deliver the general availability release of our Commerce
software to our partners until the end of 1998. Costs related to license
revenue were approximately $42,000 during the six months ended June 30, 1999.
Cost of licenses will fluctuate from period to period depending on the number
of new partners, number of software releases, and the amount of software
documentation provided to our partners during the period.
31
<PAGE>
Cost of software support services consists primarily of the cost of
personnel, travel related expenditures, and training materials. These
expenditures are incurred both onsite at our facilities as well as offsite at
partner locations. Cost of support services increased from approximately
$84,000 for the six months ended June 30, 1998 to approximately $208,000 for
the six months ended June 30, 1999. The increase in support costs represents
the increase in support personnel time required to provide technical assistance
and training to a greater number of partners. Support costs are expected to
increase as we license to new partners and may vary significantly from period
to period depending on the support requirements of our partners.
Research and Development
Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees, and the cost of software used in
product development. Research and development expenses are expensed to
operations as incurred. Research and development spending for the six months
ended June 30, 1998 was approximately $6.4 million as compared to approximately
$7.1 million for the six months ended June 30, 1999. The increase was primarily
the result of increased personnel and utilization of consultant services
associated with both product development and future technology requirements,
and the cost of software used in product development. We believe that continued
investment in research and development is critical to attaining our strategic
product objective and we expect these expenses to increase significantly in
absolute dollars in future periods.
Sales and Marketing
Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in direct sales, partner development, marketing and field
service support, consultant fees, advertising, promotional materials, and trade
show exhibit expenses. Sales and marketing expenses increased from
approximately $1.9 million for the six months ended June 30, 1998 to $2.4
million for the six months ended June 30, 1999. This increase reflects the
costs associated with increased selling efforts. These costs include travel
expenses, trade shows, public relations, and other promotional costs. We expect
sales and marketing expenses to increase in absolute dollars due to planned
growth of our sales and partner development organizations, including the
establishment of additional offices in domestic and international locales, and
aggressive implementation of advertising and promotional programs.
General and Administrative
General and administrative expenses consist primarily of salaries and
related expenses for executive, legal, accounting and administrative personnel,
professional services, and general corporate expenses. General and
administrative expenses increased from approximately $1.1 million for the six
months ended June 30, 1998 to $2.1 million for the six months ended June 30,
1999. This increase was primarily the result of increased legal and accounting
personnel, higher payroll expense, and costs associated with patent
prosecution, including the use of outside patent counsel. We anticipate general
and administrative expenses to increase in absolute dollars as we add
personnel, incur additional costs to support continued growth, and implement
additional operating systems necessary to support a public company.
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<PAGE>
Deferred Compensation
We recorded total deferred compensation of approximately $4.3 million in the
six months ended June 30, 1999. This amount represents the difference between
the exercise price of employee stock options and the deemed fair value of our
common stock at the time of the grants. We are amortizing this amount over the
vesting periods of the applicable options using a graded vesting method. We
recognized approximately $195,000 of related compensation expense during the
six months ended June 30, 1999. The total charges to be recognized in future
periods from amortization of deferred stock compensation recorded as of June
30, 1999 are anticipated to be approximately $1,122,000 for the remaining six
months of 1999, $1,601,000 for 2000, $835,000 for 2001, $410,000 for 2002, and
$110,000 for 2003.
Interest Income (Expense), Net
Interest income (expense), net, consists primarily of interest earned on
cash and cash equivalents offset by interest expense incurred on convertible
promissory notes. We recognized no interest income in the six months ended June
30, 1998 as compared to approximately $202,000 for the six months ended June
30, 1999. The increase in interest income results primarily from increases in
the amount of interest bearing investments outstanding during each period. We
recorded $9,000 in interest expense in the six months ended June 30, 1998
related to convertible promissory notes that were subsequently converted to
preferred stock. We did not incur interest expense in the six-month period
ended June 30, 1999.
Years Ended December 31, 1996, 1997 and 1998
Revenues
Total revenues were approximately $25,000 in 1996, $1.1 million in 1997, and
$152,000 in 1998. The increase in total revenues in 1997 was primarily related
to $1.0 million of revenue recognized from a limited term license.
Software support services accounted for 100% of total revenues in the 1996,
9% of total revenues in 1997 and 100% of total revenues in 1998. Support
revenues increased from approximately $25,000 in 1996, to approximately
$100,000 in 1997, and to approximately $152,000 in 1998. The increase from 1996
to 1997 was attributable to the recognition of six months of support and
training fees from one partner in 1996 to a full year of fees in 1997. The
increase from 1997 to 1998 was due to support and training fees from additional
partner licensing agreements.
Cost of Revenues
Total cost of revenues was derived only from software support services in
1996, 1997, and 1998. Total cost of revenues increased from approximately
$5,000 in 1996, to approximately $102,000 in 1997, and to approximately
$191,000 in 1998. The increase in support costs represents the increase in
support personnel time required to provide technical assistance and training to
a greater number of our partners.
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Research and Development
Research and development expenses increased from approximately $4.9 million
in 1996 to approximately $8.3 million in 1997, and increased 57.4% to
approximately $13.0 million in 1998. The increases in 1997 and 1998 were
primarily the result of increased personnel and utilization of consultant
services associated with both product development and future technology
requirements.
Sales and Marketing
Sales and marketing expenses increased from approximately $1.6 million in
1996 to approximately $2.7 million in 1997, and increased 42.4% to
approximately $3.9 million in 1998. Increases in 1997 and 1998 were primarily
associated with the increased personnel in our sales and marketing departments,
consultant fees, advertising, promotional materials, and trade show exhibit
expenses.
General and Administrative
General and administrative expenses increased from approximately $1.7
million in 1996 to approximately $1.9 million in 1997, and increased 40.6% to
approximately $2.7 million in 1998. Increases in 1997 and 1998 were primarily
the result of increased legal and accounting personnel and costs associated
with patent prosecution, including filing and translation fees and the use of
outside patent counsel.
Interest Income (Expense), Net
Interest income (expense), net, was primarily derived from interest earned
on cash and cash equivalents offset by interest expense incurred on convertible
promissory notes. Net interest income increased from approximately $180,000 in
1996, to approximately $229,000 in 1997, and decreased to approximately $5,000
in 1998. Interest income decreased from approximately $261,000 in 1996, to
approximately $229,000 in 1997, and to approximately $42,000 in 1998. The
change in interest income results primarily from changes in the amount and rate
of interest bearing investments outstanding during each period. We recorded
$81,000 of interest expense in 1996 and $37,000 of interest expense in 1998
related to two separate convertible promissory notes.
Net Loss
We have incurred net losses since inception for federal and state tax
purposes and have not recognized any tax provision or benefit. As of December
31, 1998, we had approximately $36.2 million of federal and $4.3 million of
state net operating loss carryforwards to offset against future taxable income.
We also had $1.1 million of federal research and development tax credit
carryforwards. The related deferred tax assets have been fully reserved through
June 30, 1999. The federal net operating loss and tax credit carryforwards
expire in years 2007 through 2018, if not used. The state net operating loss
carryforwards expire in years 1999 through 2003, if not used. Utilization of
net operating losses and credits may be subject to a substantial annual
limitation due to the change in ownership provisions of the Internal Revenue
Code of 1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
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Quarterly Results of Operations
The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations. The data has been derived from
our unaudited consolidated financial statements, and, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. This unaudited information should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses for the foreseeable future.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
Mar. June Sept. Dec. Mar. June
31, 30, 30, 31, 31, 30,
1998 1998 1998 1998 1999 1999
------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses............... $ -- $ -- $ -- $ -- $ 167 $ 142
Software support
services.............. 25 25 25 77 65 112
------- ------- ------- ------- ------- -------
Total revenues....... 25 25 25 77 232 254
Cost of revenues:
Licenses............... -- -- -- -- 32 10
Software support
services.............. 40 44 50 57 87 121
------- ------- ------- ------- ------- -------
Total cost of
revenues............ 40 44 50 57 119 131
------- ------- ------- ------- ------- -------
Gross profit (loss)...... (15) (19) (25) 20 113 123
Operating costs and
expenses:
Research and
development........... 3,215 3,143 3,299 3,384 3,436 3,652
Sales and marketing.... 1,004 898 956 1,012 1,134 1,315
General and
administrative........ 554 521 683 959 759 1,358
Amortization of
deferred
compensation.......... -- -- -- -- 27 168
------- ------- ------- ------- ------- -------
Total operating costs
and expenses........ 4,773 4,562 4,938 5,355 5,356 6,493
------- ------- ------- ------- ------- -------
Loss from operations..... (4,788) (4,581) (4,963) (5,335) (5,243) (6,370)
Interest income
(expense), net.......... -- (9) (2) 16 42 160
------- ------- ------- ------- ------- -------
Net loss................. $(4,788) $(4,590) $(4,965) $(5,319) $(5,201) $(6,210)
======= ======= ======= ======= ======= =======
</TABLE>
We began recognizing deferred revenue under a number of license agreements
in January 1999, subsequent to shipping the general availability version of our
product at the end of December 1998. The increase in support revenue beginning
in the quarter ended December 30, 1998 was the result of training services
associated with new partner agreements. Support revenue in the quarter ended
December 31, 1998 also included a one-time support fee related to a limited
term license. Quarter over quarter increases in the cost of support services
reflect the increased effort of engineering personnel to provide support
services to our partners. During the quarter ended June 30, 1998, we reduced
the amount of employee travel, limited the amount of hiring, and reduced the
number of consultants to InterTrust in order to manage cash flow. As a result
of these efforts, our operational spending was lower in all departments during
the quarter ended June 30, 1998. Overall increases in research and development
spending since the quarter ended March 31, 1998 are primarily attributable to
increased headcount and spending on software tools used in the development of
our products. The
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decrease in sales and marketing spending in the quarter ended June 30, 1998
also reflects a reduction in marketing personnel. Expense increases in sales
and marketing beginning in the quarter ended September 30, 1998 reflect
additional headcount as well as increased expenses for travel, trade shows,
public relations, and other promotional costs. General and administrative
expenses increased quarter over quarter beginning in the quarter ended
September 30, 1998, primarily as a result of increased legal and accounting
personnel and costs associated with patent prosecution including filing and
translation fees and the use of outside patent counsel. The general and
administrative expenses in the quarter ended December 31, 1998 also included
higher than normal charges for executive recruiting commissions, charges
related to the write down of abandoned computer equipment, and higher building
maintenance expenses.
We anticipate research and development, sales and marketing, and general and
administrative expenses to increase in absolute dollars for the foreseeable
future as a result of new hires and related personnel costs. Sales and
marketing spending is expected to increase as a result of our spending on
branding, trade shows, advertising, and promotion. We also expect to incur
significantly higher operational costs as a result of the new facility lease we
entered into in July 1999.
In the future, our operating results may fall below the expectations of
securities analysts and investors. In this event, the trading price of our
common stock would likely decline.
Liquidity and Capital Resources
We have funded our cash requirements primarily through private placements of
equity securities. Through June 30, 1999, we have raised approximately $61.2
million through equity financings. In July 1999, we raised approximately $15.7
million through the sale of preferred stock.
At June 30, 1999, our principal source of liquidity included $15.3 million
in cash and cash equivalents. Net cash used in operating activities totaled
$14.1 million in 1998 and $8.8 million in the six months ended June 30, 1999.
The $14.1 million of cash used in 1998 is primarily attributable to the net
loss of $19.7 million and an increase in accounts receivable of $1.5 million,
offset by an increase of $6.1 million in deferred revenue. The use of cash in
the six months ended June 30, 1999 was primarily attributable to a net loss in
the quarter of $11.4 million offset by a decrease in accounts receivable of
$1.1 million and increases in accounts payable, accrued liabilities and
deferred revenue.
Through June 30, 1999, our investing activities have consisted primarily of
capital expenditures totaling $509,000 in 1998 and $210,000 in the six months
ended June 30, 1999. Capital acquisitions have been principally comprised of
computer hardware and software used to support our product development and
growing employee base. Although to date our requirements for capital
expenditures have been moderate, we anticipate a substantial increase in
capital expenditures and lease commitments consistent with anticipated growth
in operations, infrastructure and personnel.
Net cash provided by financing activities totaled $18.3 million in 1998 and
$18.8 million in the six months ended June 30, 1999. The proceeds in 1998 were
principally generated from the issuance of preferred stock totaling $14.8
million and the issuance of $3.0 million of convertible promissory notes. In
the six months ended June 30, 1999, proceeds from financing activities were
provided by
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the issuance of $14.7 million of preferred stock and approximately $3.1 million
from stock option and warrant exercises. During the six months ended June 30,
1999, we also issued a convertible promissory note in the face amount of $1.0
million which converted into preferred stock in July 1999.
We believe that the net proceeds of this offering, together with cash on
hand, cash equivalents, and credit facilities with our equipment vendors will
be sufficient to meet our working capital needs for at least the next 12
months. Thereafter, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise additional
funds through public or private equity financing or from other sources.
Additional financing may not be available at all or, if available, may not be
obtainable on terms favorable to us. In addition, any additional financing may
be dilutive.
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with these Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
Our software and associated tools were designed to be Year 2000 compliant.
Our Year 2000 plan currently in progress will determine whether or not our
products, internal systems, computer hardware and software, and the products of
our critical vendors and suppliers are Year 2000 compliant. Our assessment plan
consists of:
. quality assurance testing of our internally developed proprietary
software;
. contacting third-party vendors and licensors of material hardware,
software, and services that are directly or indirectly related to the
delivery of our DRM platform to our partners;
. contacting vendors of the third-party systems;
. assessing repair or replacement requirements;
. implementing repair or replacement; and
. creating contingency plans in the event of Year 2000 failures.
Based on product evaluations and quality assurance testing, we believe that
our products are Year 2000 compliant. We have contacted our third party vendors
who supply our core technology infrastructure and obtained statements from them
regarding their compliance with the Year 2000 issue. We have also conducted an
inventory of our information technology hardware and software systems and
anticipate that any Year 2000 non-compliant hardware or software will be
replaced before January 2000. We are currently developing contingency plans and
anticipate these plans to be completed during the third quarter of 1999.
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Costs
To date, we have spent an immaterial amount on Year 2000 compliance issues
but expect to incur an additional $35,000 to $50,000 in connection with
identifying, evaluating and addressing Year 2000 compliance issues. Most of our
expenses have related to, and are expected to continue to relate to, the
operating cost associated with time spent by employees and consultants in the
evaluation process and Year 2000 compliance matters generally. These expenses,
if higher than anticipated, could significantly harm our business and operating
results.
Risks
We are not currently aware of any Year 2000 compliance problems relating to
our systems that would significantly harm our business and operating results,
without taking into account our efforts to avoid or fix these problems. We
might discover Year 2000 compliance problems in our systems that will require
significant upgrading or replacement. In addition, third-party software,
hardware or services incorporated into our material systems might need to be
fixed or replaced, all of which could be time-consuming and expensive. The
failure on our part to fix or replace our proprietary software or third-party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could significantly harm our business and operating
results. Moreover, our failure to adequately address Year 2000 compliance could
result in claims of mismanagement, misrepresentation or breach of contract and
related litigation, which could be costly and time-consuming to defend.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control
might not be Year 2000 compliant. The failure by these entities to be Year 2000
compliant could result in a systemic failure beyond our control, for example, a
prolonged Internet, telecommunications or electrical failure. We believe the
primary business risks, in the event of these failures, would include:
. loss of telecommunication tools to support our partners;
. lost transaction revenues;
. increased operating costs; and
. claims of mismanagement, misrepresentation or breach of contract.
Contingency Plan
As discussed above, we are engaged in an ongoing Year 2000 assessment and we
are currently developing our contingency plans. The results of our Year 2000
testing and the responses received from third-party vendors and service
providers will be taken into account in determining the nature and extent of
any contingency plans.
Recent Accounting Pronouncements
We adopted Statement of Position, or SOP, 97-2, Software Revenue Recognition
and SOP 98-4, Deferral of the Effective Date of a Provision of 97-2, as of
January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue
on software transactions and supersede SOP 98-1. The adoption of SOP 97-2 and
SOP 98-4 did not have a material impact on our operating results.
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In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, Modifications of SOP 97-2, "Software Revenue Recognition",
With Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to extend the
deferral of the application of selected passages provided by SOP 98-4 though
fiscal years beginning on or before March 15, 1999. All of these provisions of
SOP 98-9 are effective for transactions entered into in fiscal years beginning
after March 15, 1999. We believe the adoption of SOP 98-9 will not have a
material effect on our operating results or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. To date, we have not used derivatives, and
management anticipates that the adoption of SFAS 133 will not have a
significant effect on our operating results or financial position.
Qualitative and Quantitative Disclosures about Market Risks
We develop products in the United States and license our products to
partners in North America, Europe, and Asia. As a result, our financial results
could be affected adversely by various factors, including foreign currency
exchange rates or weak economic conditions in foreign markets. Transaction
revenues from our European and Asian partners will be primarily denominated in
foreign currencies and translated generally on a monthly basis to United States
dollars to determine the amount of fees due our company. As a result, we could
be affected adversely by fluctuations in foreign currency exchange rates.
Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are
in short-term instruments. Due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required. At December 31, 1998 and June
30, 1999, our cash and cash equivalents consisted primarily of demand deposits
and money market funds held by a large institution in the United States.
39
<PAGE>
BUSINESS
Overview
We have developed a general purpose digital rights management (DRM) platform
that serves as a foundation for providers of digital information, technology,
and commerce services to participate in a global system for digital commerce.
We provide our DRM platform as software and tools to licensees, which we call
partners. Collectively, these partners will offer digital commerce services and
applications that will form a global commerce system we have branded the
"MetaTrust Utility."
DRM technologies protect and manage the rights and interests in digital
information of artists, authors, producers, publishers, distributors, traders
and brokers, enterprises, governments and other institutions, and consumers.
The Internet and the music industry have dramatized the need for protection and
management of digital information. The very characteristics that make the
Internet ideal for distributing digital information also makes it ideal for
pirating. DRM is needed by any industry that distributes information that can
be put into digital form.
Our DRM platform provides a common foundation for people and organizations
to define rules for using digital information, and building commercial models.
Our technology is designed to protect digital information, apply rules
persistently after information is distributed, and automate many of the
commercial consequences of using the information. It is general purpose and can
manage a broad range of rights across digital information and media types.
Our partners are: BMG Entertainment Storage Media, Computacenter, Diamond
Multimedia Systems, Mediascience, Mitsubishi Corporation, MusicMatch, National
Westminster Bank, PublishOne, Reciprocal and Universal Music Group. We have
alliances with Digital Theater Systems (DTS), Fraunhofer Institut, Harris
Corporation, Portal Software, and SAIC. Some of our partners are in, or are
about to enter, commercial trials, and we expect applications and services to
be commercially available in the MetaTrust Utility in 2000.
Industry Background
The Internet has emerged not only as the fastest growing communications
medium in history, but also as one of the most efficient distribution channels
for commerce. According to IDC, total worldwide Internet commerce spending was
$50.4 billion in 1998 and is estimated to grow to $1.3 trillion in 2003. IDC
further estimates that worldwide Internet commerce spending per online buyer
will grow from $1,635 in 1998 to $7,216 per year by 2003.
While most Internet commerce to date has involved the delivery of physical
goods like books and CDs ordered online, the Internet is poised to become a
leading distribution channel for digital goods as well. Today most content is
in, or can be easily put into, digital form. This content includes music,
video, games, software, published material, business information, and images.
The Internet can be used to disseminate this digital information efficiently to
broad audiences without geographic boundaries, and can eliminate many of the
traditional costs associated with manufacturing, packaging, and distribution.
The use of the Internet for digital goods is being supported both by the
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growing number of households and businesses connected to the Internet, and by
electronic devices beyond the PC, such as set top boxes, portable music
players, mobile phones, and other hand-held devices, all of which are becoming
connected to the Internet. In addition, downloading digital content is becoming
significantly easier with the emergence and adoption of broadband technologies
including Digital Subscriber Lines (DSL) and cable modems, and with enhanced
compression technologies including MP3 for music and MPEG-4 for video. The
Internet will add to the existing channels for distributing digital goods on
physical media like CDs and DVDs.
The characteristics that make the Internet ideal for distributing digital
goods also make it ideal for pirating and misusing them. Digital goods, if not
protected and managed, can be easily copied without any degradation in quality,
altered and defaced, and distributed with the touch of a button to a large
number of recipients. These threats are increased by advances in broadband and
compression technologies, wider uses of portable devices, and wider
availability of re-writeable CD and DVD devices. As the number of users
connected to the Internet and the amount of digital information increases,
these users and information become more vulnerable to parties who wish to
interfere with the integrity of digital information and digital transactions.
Recent events in the music industry provide the most visible example of an
industry facing the problem of protecting and managing its rights related to
digital information. A technology called MP3 that compresses music with near-CD
quality has rapidly become recognized as a major threat to the industry. With
readily available MP3-enabled software, music can be copied from CDs into
computers, compressed to under 10% of its former size, redistributed, played,
and even copied back onto a blank CD for private use or pirated resale. Songs
in the MP3 format can be moved from PCs to new portable consumer devices and
can then be played through headphones or stereo speakers. Every CD published
and distributed is at risk of being copied. Already, many popular titles have
been digitized in MP3 form multiple times across the Internet and a new channel
of direct MP3 distribution is emerging.
Digital rights management is needed across all content industries, including
music, video, games, software, publishing, business information, and images,
and by all of the constituencies in these industries. These constituencies,
including artists, authors, producers, publishers, and distributors, are all
concerned about protecting and managing their rights in digital content. All
parties want to get paid. Artists and authors want to protect the integrity of
their works. Consumers want easy transparent access to good content but are
concerned about protecting their privacy. Producers, publishers, and
distributors want to structure and optimally manage their business models.
DRM applies to more than content industries. The Internet is becoming a
principal means for digital interaction among organizations and individuals. A
vast amount of data about organizations and individuals is digitized on
computers, sent over networks, and stored in electronic form. Much of this
information is confidential and proprietary, including trade secrets, supply
chain, and product information, or personal, including financial and medical
records. This information is gathered, stored, and exchanged among many
entities, including corporations, governments, schools, hospitals, and
individuals. These organizations and individuals need to manage their digital
rights in the flow of proprietary and personal information, so that only the
appropriate people can use the information. DRM is also useful for protecting
rights as these information flows become more automated, in trading, brokering,
regulatory compliance, and other industries.
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Current computing environments and security techniques are not designed to
provide sufficient protection and management of digital rights. Historically,
computers, networks, and operating systems were designed primarily for
creating, processing, and distributing information. Similarly, security
technologies evolved to protect computers and networks from the outside
environment and to protect information during a point-to-point transmission,
not to protect information and rights once information has been received and
properly accessed by a user. In commercial transactions in current computing
environments, information is generally stored and transactions are processed at
remote mainframes or servers, even when it is less efficient, because the
client and other parts of the environment do not provide adequate protection
and security. As a result, these security technologies either do not consider
an authorized user as a potential threat, or fail to provide sufficient
mechanisms to prevent the improper use of information. With digital commerce,
the threat is not only from the outside--a hacker trying to break into the
protected computer or decrypt an encrypted transmission. The threat is also
from the inside--a user who may be authorized to initially access digital
information but performs an unauthorized use, such as making or distributing
copies. Moreover, the requirement for centralized transaction processing and
information storage is less efficient, harder to scale, and more constrained in
use, than systems that distribute secure processing.
Current techniques for DRM that are built on these centralized security
approaches generally only provide secure digital distribution. For example,
these techniques generally lack the ability to persistently manage digital
information, especially when offline, and essentially allow only a limited
number of inflexible business relationships that are predetermined by the
technology provider. These techniques usually require online interaction, which
increases costs, limits consumer convenience, and makes some business models
uneconomical.
A new computing technology is required to address all of these concerns--one
that, when distributed over a vast array of computers and devices, consistently
protects and manages rights related to digital information and processes,
online and offline, wherever such information and processes may occur.
Creators, publishers, distributors, service providers, governments and other
institutions, and users must have the ability both to create and associate
rights and rules that persistently apply to digital information and processes,
and to modify the rights and rules, if permitted, even after the information is
distributed. These rights and rules might represent information regarding
ownership, access, payment, promotion, warranty, privacy, and other elements of
commerce in information. When these rights and rules are based on a common
foundation, they can form a basis for an interoperable global system for
digital commerce.
InterTrust Solution
We have developed a general purpose DRM platform which serves as a
foundation for providers of digital information, technology, and commerce
services to participate in a global system for digital commerce. Protected
information can flow from party to party, as it would in normal commerce, and
be managed throughout its lifecycle in accordance with specified rules. Our
platform consists of:
. DRM Software and Technology--We license platform software and tools to
companies to build products and operate commerce services. Our technology
is designed to operate on the PCs, devices, and servers in this global
system and to provide the capability to package and
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publish protected information with rules for use. These rules are
flexible, and can be applied and changed dynamically, enabling our
partners to program their business models easily. The rules are
persistently enforced wherever the content may travel.
. MetaTrust Utility Services--We maintain and administer the specifications
which are designed to ensure the interoperability, security, and
trustedness of the global digital commerce system being built by our
partners. This utility service enables our DRM platform to offer a
common, neutral basis for publishers, merchants, organizations,
consumers, and other participants to conduct business and exchange
protected information.
Our focus on providing DRM technology and MetaTrust Utility services allows
our partners to develop their own commercial models. They build the
applications and operate the commerce services themselves. A content provider
can establish a relationship with one or more of our partners and have its
content managed consistently as it flows throughout the entire system. As in
traditional commerce, a content provider can select several commerce service
providers and provide users with a choice of payment methods.
Our general purpose DRM platform has broad capabilities and is designed to
address the needs of all parties seeking to distribute and manage digital
goods. Our platform provides the following benefits:
. Robust Security--Our highly sophisticated use of multiple layers of
security and tamper-resistance techniques are designed to provide varying
levels of security depending on the commercial value and nature of
digital information in accordance with rights and interests of all
parties.
. Persistent Protection and Management--Content providers can protect
persistently both the information itself and the rules of use. Persistent
protection means that these rules continue to apply even after the
information arrives, online or offline, each time the information is
accessed, and even when it is sent on to other people.
. Flexible Business Models--Content providers can specify and establish
their own commercial models with fully programmable rules that manage the
use of digital information. Rules can be easily changed, even after
content is distributed, for example to permit promotional offers, to
accommodate changing commercial circumstances, or to automatically
present differing offers under differing circumstances. Rules can also
adjust themselves dynamically to each consumer's unique identity
characteristics and circumstances of access, for example, student or
senior citizen discounts, membership in affinity groups, or employment at
a specific corporation.
. Superdistribution--Content providers can take advantage of
superdistribution: allowing and encouraging consumers to become
redistributors of content in the system. Superdistribution means that
users of content, if permitted by rules, can forward content to others,
with persistent application of rules and protection of content. Providers
get paid and users are free to act naturally by forwarding content they
like to their associates or friends. If these parties are not already
part of the digital commerce system, they have an incentive to join in
order to use the content.
. Multiple Content and Media Types--Content providers can use our platform
for multiple content types. Distributors can employ various means of
digital distribution, including CDs,
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DVDs, Internet, and broadband. Consumers may sign up to use any one
content type, like music, but then can use our client software for other
content or services in the system. Payment processors can use InterTrust
technology for both digital goods transactions, and to process payments
for physical goods sold electronically.
. Efficient Transaction Processing--Processing partners can take advantage
of significant increases in efficiency, including: offline processing,
immediate payment across a value chain, and automated application of
rules. Our technology can securely store usage and payment transactions
that take place offline, accumulate them until a minimum threshold is
met, for example 30 days, or $50, and then automatically forward the
stored transactions for processing. This allows both micropayments and
efficient collection of usage information. In addition, as required by
provider-supplied rules, when processing these transactions, immediate
payment can be made throughout the value chain, eliminating multiple
parties handling payment.
. New Advertising Models--Today, advertising on the Internet is largely
limited to viewing banners and other promotional materials on a web page.
With our technology, advertising can be managed and audited locally on a
user's machine every time the user sees the advertisement, whether the
user is on- or off-line. A rule can be applied to a brief product
placement, for example, the appearance of a car within a music video, so
that the car company promotes its products and pays for the promotion
each time the car is viewed. This feature, combined with our ability to
operate offline and securely store and later forward collected data,
enables new cost-effective ways for companies to generate revenue and
price content.
. Personalized Marketing--Marketing organizations can use many different
aspects of our platform to identify and profile individual consumers and
match content, offers, and ads to specific users or class of users,
subject to user consent and privacy rights. Because our technology can
locally process ads and promotions as easily as digital content, this
automated personalization can occur on the network or on the consumer's
PC, offline.
The MetaTrust Utility
We license our DRM platform as software and tools to partners to build
applications and operate services for electronic commerce. By offering
commercial products and services based on our specifications and MetaTrust
Utility services, the partners can collectively build a global digital commerce
system that we have branded the "MetaTrust Utility." Our DRM platform is
designed to enable creators, publishers, distributors, service providers,
governments and other institutions, and users to persistently associate rights
and rules with digital information.
The user experience with the MetaTrust Utility will typically begin with
activating our client software, called the InterRights Point, which our
partners will either preinstall or distribute through a variety of means,
including digital download and optical disk distribution. The user will
activate the InterRights Point by establishing a relationship with one of our
commerce service partners. Users will provide basic identity and authentication
information in a largely automated process. Once initialized, the InterRights
Point can interact with any of the services and content available in the
system, from any of our partners. The following diagram illustrates the
lifecycle of content commerce in the system.
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Commerce Flow Example
Narrative Description of Graphic on p. 45 of Business Section
Graphic titled "Commerce Flow Example." In the upper right hand corner is a box
titled "Key" in which there are four symbols. The first is a sphere with three
arrows pointing to its center labeled "InterRights Point." The second is a cube
labeled "DigiBox container." The third is the symbol "$" labeled "Payment." The
fourth is the letter "i" inside a circle labeled "Usage data."
In the center is a web browser labeled "WWW." Above and to the right is a
picture of a piece of paper titled "Usage Rules" with an arrow that points to
the web browser. To the right of the web browser are two compact disks and a
floppy disk. Below is the caption "Distributor." From the web browser an arrow
with a cube in the middle points down towards a box. Inside the box is a human
form, a sphere with three arrows meeting in its center, and a picture of a
computer monitor with an image, entitled "Agree to Rules," projecting from the
screen.
From the box an arrow with a cube in the middle points to the right to a
picture of an electronic device entitled "Information Appliance."
From the box an arrow points to the left to a box entitled "Commerce Services
Providers." In the middle of the arrow is a clear cube with the symbol "$" and
the letter "i" inside. Inside the box there are two buildings and a sphere with
three arrows that meet in its center. The building on the left is marked with
the symbol "$" in a circle. The building on the right is marked with the letter
"i" in a circle.
Two arrows, one with the symbol "$" in the middle and one with the letter "i"
in the middle, point to a box titled "Publishers." Inside the box is a human
form, a sphere with three arrows meeting in its center and a computer monitor.
Pointing towards the sphere is a picture of a piece of paper captioned "Usage
Rules" and a sphere with the caption "Digital Information." An arrow with a
cube in the middle points back to the web browser.
. Packaging Content--With an application developed by one of our partners
using our DRM technology, system participants can be both creators and
consumers of digital information. Working from a PC, in this example, a
user creates digital information and, using an InterRights Point,
associates business rules with the information and packages it securely
in a DigiBox container.
. Distributing Content--The information is disseminated in DigiBox
containers over networks, on optical disks, or other means for delivery
of digital information. The information can securely travel through
unsecure networks, because the information in a DigiBox container is
itself protected. Distributors, portals, and websites can, as enabled by
the rules of the publisher, add additional rules for use or modify the
rules; for example, mark up price, make promotional offers, bundle the
content with other content, or establish frequent buyer programs.
Importantly, rules for use can be easily changed, even after content is
distributed.
. Using Content--A user receives content and "double clicks" on the DigiBox
container, setting in motion a secure process. The InterRights Point
compares identity characteristics of the user or machine with the rules
that have been associated with the requested event, for example, listen
or view, and presents the appropriate offers. The event occurs only as
permitted by the rules. If the rules permit, protected content can be
transferred to other devices. Our technology, if present, will continue
to manage the information's use.
. Processing Transactions--The InterRights Point can process transactions
involving both payment and usage information, for example, special
surveys, or information on interaction
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with an advertisement. These transactions could be processed immediately,
much like a credit card event, or deferred, much like running up a tab, or
any combination of immediate and deferred, as specified by the rules. The
InterRights Point forwards the transactions in secure DigiBox containers
to our processing partners who ensure that everyone who is supposed to get
paid gets paid, that usage information is made available to agreed upon
parties, and that the privacy of the individual is protected.
Strategy
Our goal is to empower multiple providers of content, technology, and
commerce services to build a global system for digital commerce based on our
DRM platform. The key elements of our strategy are:
Expand Key Strategic Partnerships
We are focused on bringing into the MetaTrust Utility an optimal
combination of content, technology, and commerce service participants. Through
this focus, we intend to create mutually-reinforcing widespread dissemination
of our technology, an expanding consumer base, and ever-broader participation
by information providers. We are targeting relationships that will establish
our DRM initially in several large markets, including entertainment, business
information, and publishing. We intend to leverage early success in any one
market to help drive adoption and usage in other markets. We encourage
potential participants to enter into relationships with us as well as with our
partners in the following key areas:
Content--We intend to continue entering into direct relationships with
premier and emerging publishers, distributors, and packagers of content. We
have established strategic relationships with Universal Music Group and BMG
Entertainment Storage Media. In addition, we will encourage premier content
providers to participate in the MetaTrust Utility through our partners.
Technology--We will continue to target leading technology and device
companies who can build our technology into the infrastructure of several
industries, including computers, consumer electronics, the Internet, and
communications. We have established a strategic relationship with Diamond
Multimedia Systems to build our technology into portable music devices and
software players.
Commerce Services--We are targeting partners with trusted brands and
operations, including Mitsubishi Corporation and National Westminster Bank.
These partners' reputations, markets, and customer base will facilitate user
acceptance of the MetaTrust Utility.
By having a combination of content, technology, and commerce service
participants in multiple markets in the MetaTrust Utility, we would not depend
on any one partner, any specific commercial model, or any specific vertical
market to succeed.
Promote Widespread InterRights Point Deployment
We have designed our client technology and our licensing structure to
achieve efficient and rapid deployment. Our technology is designed so that it
can be conveniently activated by consumers.
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It is also designed so that it can be flexibly deployed by our partners through
a variety of means, including digital download, optical disk distribution, and
pre-installation. In order to further help achieve our deployment goals, we
will work with our partners to develop business models that promote rapid
deployment, for example, superdistribution which allows users to drive
InterRights Point deployment through redistribution of content.
Leverage the MetaTrust Utility Model
We believe that our neutral utility model is fundamental to achieving
widespread adoption of our DRM platform. World class partners are more likely
to participate in building a global commerce system if they perceive that the
provider of the foundational technology is not likely to engage in commercial
models that directly compete with them. We intend to provide technology and
maintain policies needed for an interoperable, secure, and trusted foundation
for all participants in the MetaTrust Utility. Partners can take advantage of
the global interoperability and general purpose nature of this system to build
on the success of the other partners; as more partners and users participate in
the system, participation in the system becomes more efficient and valuable. In
addition, by structuring our compensation in the form of a small, non-
distortive share of the value of goods and services flowing through the system,
we align our interests with those of our partners. From time to time, we may
provide special assistance to new ventures using our technology and may in
return take limited equity positions if we believe it will not compromise our
neutrality.
Maintain Technology Lead
We believe we are the leader in DRM technology and intend to continue
advancing the state-of-the-art of DRM. We have attracted a group of
internationally renowned computer scientists in both our engineering team and
in STARLab, our electronic commerce research facility, to focus on a broad
range of topics important to advancing DRM. These include commerce language,
streaming media, security, software tamper resistance, secure processing
hardware, and watermarking. We currently have been issued nine United States
patents, and will continue to develop our intellectual property in the field of
digital rights management and electronic commerce.
Strategic Partners and Markets
We license our DRM technology to our partners who currently are building
digital commerce services and applications. In addition, we intend to leverage
our partners' activities as they bring their own partners and customers into
the MetaTrust Utility. While we have received initial license fees from our
partners, over time we anticipate that our revenues will be derived primarily
from transaction fees from our partners' and their customers' commercial
deployment of applications and services.
We currently have four basic types of partnering arrangements: commerce
service licenses, business licenses, applications licenses, and alliance
agreements. A summary of our primary relationships follows.
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Commerce Services
Our Commerce Service partners have broad rights to process and clear
transactions for the MetaTrust Utility, and to create and deploy applications.
They operate data centers, provide various clearinghouse services, and may
distribute applications or host application services. These partners are
actively focused on establishing relationships with multiple digital content,
enterprise, and government customers. Our current commerce service partners
collectively have the ability to provide services both in the United States and
internationally, with bases of operations in the United States, Europe, and
Asia-Pacific.
Mitsubishi--Japan-based Mitsubishi Corporation is one of the largest trading
companies in the world. Mitsubishi's license to the Commerce software allows it
to create financial and usage clearinghouses, develop software applications,
and act as a deployment manager. Mitsubishi is also one of our stockholders.
NatWest--National Westminster Bank Plc is one of the world's largest banks
and a leading processor of credit card transactions and multi-currency credit
card clearing. NatWest recently announced a digital commerce service called
Magex which is based on our Commerce software. NatWest's license allows it to
create financial and usage clearinghouses, develop software applications, and
act as a deployment manager.
Reciprocal--Reciprocal, Inc. is a venture-backed company formed in 1996 by
SOFTBANK Services Group to provide DRM solutions and clearinghouse services.
Reciprocal's license with us allows it to create financial and usage
clearinghouses, develop software applications, and act as a deployment manager.
Reciprocal has recently made public announcements concerning its initiatives
based on our DRM technology in various vertical markets including music,
business information, and education information.
Business
We have licensed Business partners to operate services in one or more
content or application markets. We intend to license additional Business
partners, and also believe that many content companies will participate in the
MetaTrust Utility through our partners.
Bertelsmann--BMG Entertainment Storage Media, a unit of Bertelsmann AG, one
of the world's leading media companies with significant interests in all areas
of media, services BMG Entertainment music labels and other Bertelsmann
companies, including Random House, Inc. BMG Entertainment Storage Media's
license to the Commerce software enables it to develop applications and
services in a wide range of vertical markets including music, business
information, software, and computer games.
PublishOne--PublishOne Inc. was founded in February 1999 to develop digital
publishing applications and services based on our DRM technology. PublishOne's
license to the Commerce software allows it to create a usage clearinghouse and
software applications and services for publishing. PublishOne's initial focus
will be on business information, but it also plans on having future activities
in other content areas including education.
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Reuters--Reuters Limited Plc is one of the largest news service companies in
the world. Reuters has announced trials with our commerce services partners,
NatWest and Reciprocal, for managing the distribution of business information.
Reuters is one of our stockholders.
Universal--Universal Music Group is the largest of the five major music
labels. Universal's license to the Commerce software allows it to create a
financial and usage clearinghouse, to develop software applications, and act as
a deployment manager, for various entertainment markets. Universal is one of
our stockholders.
Applications
Application partners are licensed to develop applications, embed our
technology into software or devices, or perform hosting integration, and other
services for users of our DRM technology.
Computacenter--UK-based Computacenter Plc is one of the largest European
information technology providers. Computacenter's license to the Commerce
software allows it to develop a usage clearinghouse for enterprises and to
develop applications and services for enterprises and commercial customers. We
will also work with Computacenter to establish them as a Center of Excellence
authorized to provide training, support, system integration, and other
services.
Diamond--Diamond Multimedia Systems, Inc. is a multimedia and hardware
device company. It introduced the Rio, the first commercially available
portable player of music files in the MP3 format in November 1988. Diamond has
licensed the Commerce Application Developer's Kit product and additional
InterTrust DRM technology to use with the Diamond Rio player, and to develop
software applications for distributing music in connection with Diamond's
Rioport.com website.
MusicMatch--MusicMatch was the first company to introduce an MP3 jukebox
music player, which is still one of the most popular MP3 players. Its music
portal is among the most popular MP3 music sites. MusicMatch licensed a music
player-related application developer's kit to enable MusicMatch to develop a
software music player with DRM capabilities.
Mediascience--Mediascience developed and distributes the Sonique MP3 player,
which is one of the leading MP3 music players. Mediascience licensed a music
player-related application developer's kit to enable Mediascience to develop a
software music player with DRM capabilities.
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Our Partners and Potential Markets
The following table shows the markets in which our partners have indicated
an interest in pursuing products and services using our DRM technology. This
table is based on our partners' current interest, which may change, and there
is no assurance that there will be any deployments by our partners in any of
these markets.
<TABLE>
<CAPTION>
Regulated
(government,
Market Entertainment Publishing healthcare, Enterprise
(music, video, (business and education and (secure document
audio books, financial information, information, exchange, enterprise
merchandising, traditional media, telecommunications, information portals,
Partner games) images) secure email) trading/brokering)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mitsubishi X X X X
- ---------------------------------------------------------------------------------------------------
NatWest X X X
- ---------------------------------------------------------------------------------------------------
Reciprocal X X X
- ---------------------------------------------------------------------------------------------------
Bertelsmann X X
- ---------------------------------------------------------------------------------------------------
PublishOne X
- ---------------------------------------------------------------------------------------------------
Reuters X
- ---------------------------------------------------------------------------------------------------
Universal X
- ---------------------------------------------------------------------------------------------------
Computacenter X X X X
- ---------------------------------------------------------------------------------------------------
Diamond X
- ---------------------------------------------------------------------------------------------------
MusicMatch X
- ---------------------------------------------------------------------------------------------------
Mediascience X
</TABLE>
Alliances
In order to help gain penetration into various vertical markets, we have
entered into several alliance agreements. The alliance agreements provide for
cooperative activities regarding product development and targeting specific
strategic business opportunities. To date, we have entered into alliance
agreements with Digital Theater Systems Inc. (DTS), Fraunhofer-Institut fur
Integrierte Schaltungen, Harris Corporation, Portal Software, and Science
Application Information Company.
Products and MetaTrust Utility Services
Our general purpose DRM platform is comprised of both proprietary software
and technology, and the utility services needed for security, interoperability,
and trustedness of the MetaTrust Utility.
Products
Our Commerce software is a general purpose DRM platform and includes systems
software, development tools, and applications for building, deploying, and
managing digital commerce applications. We shipped the general availability
version of our Commerce software at the end of December 1998. Digital
information providers and software companies can use the product to integrate
rights management capabilities into applications that securely manage, control
usage of, and fulfill digital information commerce through digital distribution
channels. Payment processing and Internet infrastructure companies can use the
product to provide various commerce services, including payment clearing, usage
reporting, market analysis and user profiling, advertising, regulatory
compliance, affinity marketing, and automated trading systems.
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Our software is designed to be fully scalable and comes in several packages,
depending upon the scope of rights licensed by our partners. The key components
of the Commerce software are:
. InterRights Point--software that processes DigiBox containers, and
manages usage of digital information throughout its lifecycle. It may
function as a client or server, as determined by rules;
. Application Developer's Kit--software and tools for systems integrators,
applications developers, software vendors, and web sites enabling them to
develop end-user applications and services;
. Sample Applications--software and components that assist development of
applications and services;
. RightsWallet Application--client software that manage identities,
memberships, budgets, and transactions;
. Commerce Modeler Application--graphical object oriented environment for
"drag and drop" definition of business models, rights and usage rules,
and usage reporting;
. Transaction Authority Framework--software and databases for handling
communications with InterRights Points and processing transactions; and
. Deployment Manager Application--software for activating and managing
InterRights Points.
We have an Enterprise Edition of our Commerce software designed for
enterprises to manage private information, including supply chain or work flow
information. It provides an information security and policy management system
for the enterprise and selected secure document exchange applications.
We have developed and will develop special technology to assist our partners
to promote the adoption of our DRM platform in various vertical markets. For
example, we created Powerchord technology, comprised of tool kits and full-
featured demonstration applications, to help our partners accelerate the
adoption of our DRM platform for protected digital music distribution.
MetaTrust Utility Services
We will maintain the specifications and administer the interoperability,
security, and trustedness of the MetaTrust Utility. We do this through our
MetaTrust Certification Program which has three essential elements:
. Specifications--Our partners and their products and services must comply
with InterTrust specifications. These specifications establish policies
that address technical, procedural and related matters designed to
promote the security, trustedness, integrity, interoperability, and
performance of products and services in the MetaTrust Utility.
. Certification--We test and certify, or provide the means for testing and
certifying, that products and services of participants in the MetaTrust
Utility comply with our specifications. Certification applies to all
applications interfacing with an InterRights Point as well as partner
sites and operations. We expect to provide various procedures designed to
make certification an easy process, including pre-certification of
components.
. Security--Our system addresses numerous areas of security, including
securing digital information after initial use and providing tamper
resistance in the InterRights Point software.
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We have designed, and will continue to design, countermeasures which we
plan to implement if security is compromised. We also plan on assisting
our partners in cryptographic key management.
Technology
Our DRM platform is based on our proprietary software and technology that
add fundamental new functionality to traditional computing environments. By
using proven security technologies plus this new functionality, we have
created platform software that enables computing environments to perform a
broad range of new operating functions relating to managing, not merely
protecting, rights in digital information.
Our DRM platform is general purpose and enables
digital commerce to operate in accordance with
provider-specified rules through a network of
independent, protected processing environments
which we brand InterRights Points. This technology
is currently implemented as software and includes
tools, components, sample applications,
documentation and training that allows our
partners and their customers to build digital
commerce applications and services and leverage
off of the reusable, common foundation of the
MetaTrust Utility. The accompanying diagram shows
the primary architectural elements of our
platform.
Narrative Description of Graphic on p. 52 of Business Section
Box titled "InterTrust DRM Platform." Below the heading, the caption
"InterRights Point" next to a picture of a sphere with three arrows meeting in
its center; the caption "DigiBox Container" next to a picture of a cube; the
caption "Usage Rules" next to a picture of a piece of paper; and the caption
"Transaction Authority" next to a picture of a building.
. InterRights Point. The core element of our architecture is the
InterRights Point, which operates on PCs and servers in the MetaTrust
Utility. DRM processing occurs at InterRights Points. Each InterRights
Point acts as a secure "virtual machine" that can manage each parties'
digital rights remotely. Each InterRights Point creates a local, secure
database that stores the users' rights, identities, transactions, budgets
and keys. We are currently developing different implementations of the
InterRights Point for use in other electronic devices.
. DigiBox Container. Protected information in our system is encrypted and
stored in a format called a DigiBox container. Once in a DigiBox
container, the information can flow across unsecured networks, and only
an InterRights Point can access the information. Information in a DigiBox
container can remain protected even after a user has accessed it,
providing persistent protection of the information and continuing control
over its use, regardless of where the information travels.
. Usage Rules. Content usage is managed by rules, including price, payment
offer, play, view, print, copy, save, superdistribution, and others. We
offer a variety of tools for allowing providers to create and change
rules, and associate them with digital information. Rules are protected
in the same way content is protected. As with content, they are stored in
DigiBox containers for distribution. Rules can travel with the
information, or separately, allowing our partners the flexibility to
change any rule, including rights or price, after content has been
delivered. InterRights Points ensure that applicable rules are followed
every time an information usage "event" is requested.
. Transaction Authority Framework. InterRights Points connect into our
processing partners' data centers through a communications controller
system called the Transaction Authority Framework. The Transaction
Authority Framework receives transaction records from InterRights Points,
stores the records, and forwards them, as specified by usage rules, for
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further processing including payment fulfillment. The Transaction
Authority Framework also stores messages resulting from this further
processing, like payment confirmation, and when the InterRights Point next
connects to the data center, sends these messages to the InterRights
Points. The Transaction Authority Framework includes administrative
software called the Deployment Manager which activates InterRights Points
and manages them after activation, including fraud detection, revocation,
security updates, and back-up services.
Currently most of our software runs on Windows 95, Windows NT, and Windows 98.
Our Transaction Authority Framework runs on Window NT and Solaris operating
system environments. Our software is currently being modified to run on
additional operating systems.
Sales and Partner Development
Our sales activities are designed to establish the initial relationships
with potential partners and help them understand the services and applications
that can be developed using our technology. Our partner development
organization helps our partners and their potential customers understand both
the business and technical benefits of the products, and assists them in
expanding their businesses with our technology. The sales organization will
generally make the initial contact with a potential partner. The organization
assigns a representative that will serve as our primary contact point for
managing the potential relationship throughout the due diligence and business
discussion process. Our sales organization consisted of nine employees as of
June 30, 1999, five in Sunnyvale, one in Washington D.C., one in London,
England and two in Sydney, Australia. Licensing our Commerce software is
complicated. See "Risk Factors--The long and complex process of licensing our
Commerce software could delay the development of our technology and harm our
business."
Our partner development organization provides a single point of
coordination for all interactions with the customers after they become
partners. These personnel are skilled in both business consulting and systems
design to facilitate the successful deployment of our products. The partner
development organization works with the partners on use of our DRM as well as
on developing cross-partner and new customer relationships. Our partner
development organization consisted of six employees as of June 30, 1999.
Marketing
We market our products worldwide primarily through our partners in
combination with our own efforts. We conduct a variety of marketing programs
worldwide to educate our target market, create awareness and generate leads
for our MetaTrust Utility. To achieve these goals, we have engaged in
marketing activities including joint partner marketing, print and online
advertising campaigns and trade shows. These programs are targeted at key
business unit executives as well information technology officers. In addition,
we conduct comprehensive public relations programs that include establishing
and maintaining relationships with key trade press, business press and
industry analysts. We have established consistent branding guidelines for all
of our partners in order to increase our brand awareness. Our programs are
designed to assist our partners in developing their internal marketing
programs and capabilities. Our marketing organization consisted of eight
individuals as of June 30, 1999.
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Research and Development; Training and Support
Our research and development organization is divided into product
development, training and support, and STARLab. To date, substantially all
software development costs have been expensed as incurred and developed by our
employees. Research and development expenses were $8.3 million in 1997, $13.0
million in 1998, and $7.1 million for the six months ended June 30, 1999.
As of June 30, 1999, our research and development, and training and support
organizations were comprised of 94 employees and nine contractors.
Product Development
The product development organization is responsible for designing,
developing, and supporting commercial implementations of our DRM and developing
future enhancements to our software. There are six engineering groups in the
product development organization: core rights technology, appliance technology,
applications & components, security & tamper resistance, product architecture,
and advanced development. These six engineering groups are supported by quality
assurance, product management, documentation, deployment operations, and
developer support. The quality assurance group implements a process designed to
identify software defects through the entire development cycle, including
operational deployments. Product management is responsible for all functional
and certification specifications, schedules, and overall project coordination.
The documentation group is responsible for end user, administrator and
developer documentation and support for our products. Deployment operations is
responsible for MetaTrust Utility operations and management, including
emergency response, fraud detection, key management, and application
certification. Developer support is responsible for technical support to our
partner's engineering staff.
Training and Support
Our training and support organizations work closely with the partner
development organization to provide partners with the training and support as
contemplated under a partners' license. We believe that customer satisfaction
is essential for our long-term success. In general, our license agreements
provide for a limited period of support and training, including onsite visits,
and email and website support. We plan on providing our partners with a variety
of standard support packages after this initial support period. As our partner
base grows, we intend to increase the size of our support organization.
STARLab
We have attracted a group of internationally renowned computer science
experts for STARLab, our electronic commerce research organization. STARLab
projects cover a broad range of topics necessary for advanced DRM, including
watermarking, commerce language, streaming media, security, and secure
processing hardware. The activities of STARLab are integrated with our
important strategic objectives, including:
. extending our portfolio of intellectual property;
. developing and prototyping new digital rights management technology;
. providing an engineering consulting resource to assist product
development;
. participating in and leading standards efforts; and
. advising governmental, research, and other institutions.
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Competition
The market for DRM solutions is new, intensely competitive, and rapidly
evolving. We expect competition to continue to increase both from existing
competitors and new market entrants. Our primary competition currently comes
from or is anticipated to come from:
. companies offering secure digital distribution systems, including AT&T,
IBM, Liquid Audio, Microsoft, Preview Software, and Xerox; and
. companies offering hardware-based content metering and copy protection
systems, including the 4C Entity (IBM, Intel, Matsushita, Toshiba), Sony,
and Wave Systems.
In addition to these two categories, in the future, operating system
manufacturers like Microsoft or Sun Microsystems may also develop or license
digital rights management solutions for inclusion in their operating systems.
The primary bases of competition for providers of DRM solutions include:
. range of content types and markets, from specific content type to general
purpose, multiple-markets;
. flexibility of pricing and other business options, from narrow, fixed
rules to flexible, dynamic rules;
. price of solution, from as high as 30-40% to a nominal percentage of
transaction value;
. range of usage environments, from PC-based, online-only to multiple
devices, offline and online;
. choice of service providers, from being tied to a single vendor who also
provides DRM technology and processing services, to being able to choose
among multiple, competing service providers; and
. business model of DRM provider, from vertically-integrated technology
provider to neutral utility model.
We believe that we currently compete favorably with our competitors on many
of these bases.
We believe that our ability to compete depends on many other factors both
within and beyond our control, including:
. the ease of use, performance, features, and reliability of our solutions
and our partner's applications and services as compared to those of our
competitors;
. the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our partners and our competitors;
. the quality of our partner development and support organization and
similar organizations of our partners; and
. the effectiveness of our sales and marketing efforts, and of similar
efforts of our partners.
We believe that we currently compete favorably with our competitors in many
of these areas.
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Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have broader customer relationships that could be leveraged,
including relationships with many of our customers. These companies also have
more established customer support and professional services organizations than
we do.
Intellectual Property
Our success will depend in part on our ability to protect our intellectual
property and other proprietary rights in our software and other technology. To
protect our proprietary rights, we rely on a combination of patent, trademark,
copyright, and trade secret law, and confidentiality and license agreements
with our employees, customers, partners and others. Despite these protections,
others might use our intellectual property without our authorization. If this
occurs, a party might copy or otherwise obtain and use our products or
technology to develop similar technology. If we are unable to adequately
protect our intellectual property, it could materially affect our financial
performance. Moreover, potential competitors might be able to develop
technologies or services similar to ours without infringing our patents. In
addition, if our agreements with employees, consultants and others who
participate in product and service development activities are breached, we may
not have adequate remedies, and our trade secrets may become known or
independently developed by competitors.
Patents
We have devoted substantial time, resources, and capital to protecting our
intellectual property. As of June 30, 1999, we hold nine United States patents
and one European patent. We also have filed a number of additional United
States patent applications, as well as counterpart foreign applications in many
instances. We believe that our issued patents and patent applications cover a
broad range of subjects generally relating to protecting electronic rights and
content, enabling secure electronic transactions, and applying DRM technology
in the digital economy.
Any pending or future patent applications may not be granted, existing or
future patents may be challenged, invalidated or circumvented, and the rights
granted under a patent that has issued or any patent that may issue may not
provide competitive advantages to us.
Many of our current and potential competitors dedicate substantial resources
to protection and enforcement of intellectual property rights, especially
patents. If a blocking patent has issued or issues in the future, we would need
either to obtain a license or to design around the patent. We may not be able
to obtain a required license on acceptable terms, if at all, or to design
around the patent.
In part due to the broad range of technologies included in InterTrust
technology, we have not conducted and do not conduct comprehensive patent
searches to determine whether technology that is used in our products infringes
patents held by other third parties. In addition, it is difficult to proceed
with certainty in a rapidly evolving technological environment in which there
may be numerous patent applications pending, many of which are confidential
when filed, with regard to similar technologies. In the past, we have received
notices alleging potential infringements by us of the proprietary rights of
others. In January 1996, we received a letter from an attorney representing
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E-Data Corporation containing an allegation of infringement of a patent E-Data
allegedly owns. We exchanged correspondence with E-Data's attorneys ending in
September 1996. We have not heard from any representative of E-Data since that
time. In November 1997, we received a letter from representatives of TAU
Systems Corporation informing us of two patents held by TAU Systems. In the
letter, the representatives stated their opinion that our Commerce software
contained various elements recited in the two patents and requested that we
discuss licensing the technology of these patents. We responded to the letter
stating that although we had not undertaken a detailed review of the patents,
we were unaware of any of our products having one of the elements required by
the patent claims. We have not received any further correspondence from TAU
Systems. In the future we could be found to infringe upon the patent rights of
E-Data, TAU Systems or other companies. Furthermore, companies in the software
market are increasingly bringing suits alleging infringement of their
proprietary rights, particularly patent rights. If we were to discover that our
products violate third-party proprietary rights, we may not be able to obtain
licenses to continue offering these products without substantial reengineering,
efforts to undertake this reengineering may not be successful, licenses may be
unavailable on commercially reasonable terms, if at all, and litigation may not
be avoided or settled without substantial expense and damage awards.
Other Intellectual Property
We have received United States and selected foreign registrations for our
InterTrust and DigiBox trademarks. We also have pending applications for United
States and foreign registration of several of our trademarks and service marks,
including MetaTrust, the MetaTrust Utility, InterRights, TrustMail, and others.
We do not know if these marks will be approved. In addition, a significant
portion of our marks use the words "Inter," "Trust," "Meta," or "Digi." We are
aware of other companies that use "Inter," "Trust," "Meta," or "Digi" in their
marks alone or in combination with other words, and we do not expect to be able
to prevent all third-party uses of the words "Inter," "Trust," "Meta," or
"Digi." In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark, and trade secret protection may not be
available in these jurisdictions. We license our proprietary rights to third
parties, and these licensees may fail to abide by compliance and quality
control guidelines with respect to our proprietary rights or take actions that
would harm our business.
Our partners may rely in part on "shrinkwrap" and "clickwrap" licenses to
license their products that are not signed by the end user and, therefore, may
be unenforceable under the laws of some jurisdictions. As with other software
products, our products are susceptible to unauthorized copying and uses that
may go undetected. Policing unauthorized use is difficult.
Any claims relating to the infringement of third-party proprietary rights,
even if meritless, could result in the expenditure of significant financial and
managerial resources and could result in injunctions preventing us from
distributing particular products and services. These claims could harm our
business. We also rely on technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products and services to perform key functions. Third-party
technology licenses may not continue to be available to us on commercially
reasonable terms. The loss of any of these technologies could harm our
business. Although we
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generally seek to be indemnified against claims that technology licensed by us
infringes the intellectual property rights of others, we do not receive
indemnification in some cases. In some cases indemnification is not always
available for all types of intellectual property and proprietary rights, and in
other cases the scope of indemnification is limited. Even if we receive broad
indemnification, third-party indemnitors are not always well capitalized and
may not be able to indemnify us in the event of infringement, resulting in
substantial liability to us. Infringement or invalidity claims may arise from
the incorporation of third-party technology, and our customers may make claims
for indemnification. These claims, even if meritless, could result in the
expenditure of significant financial and managerial resources in addition to
potential product or service redevelopment costs and delays, all of which could
harm our business.
Standards
We participate in selected industry groups to promote digital rights
management in computer, consumer electronics, and entertainment markets. With
this aim in mind we have most recently been involved with the following
standards bodies and industry groups: Moving Pictures Expert Group (MPEG),
Secure Digital Music Initiative (SDMI), Open Platform Initiative for Multimedia
Access (OPIMA), The Cross Industry Working Team (XIWT), and Copy Protection
Technical Working Group (DVD CPTWG). We believe our activities in MPEG and SDMI
are of particular importance.
The MPEG-4, the standard for multimedia software and devices, includes an
Intellectual Property Management and Protection (IPMP) architecture that
permits DRM systems to be used in future MPEG-4 systems, including set-top
boxes, DVD players, and game machines. We played a major role in the definition
of the IPMP interface, which is consistent with our technology. MPEG-4 content
developers can use our technology to incorporate IPMP capabilities into their
applications.
SDMI was started by the Recording Industry Association of America, the
International Federation of the Phonographic Industry, and the Recording
Industry Association of Japan shortly after the first release of the Diamond
Rio MP3 music player in an effort to establish a standard for secure digital
delivery and use of recorded music. We have participated in SDMI from the
beginning. We have been active as one of three Vice-Chairs of the first working
group which devised the specifications for SDMI-compliant portable devices.
Following the approval of the SDMI portable devices specification, we believe
our technology will enable the protection and management of digital audio
content on the Internet, PCs, and portable devices. We plan to continue
participating actively and developing our technology to be compliant with
emerging SDMI specifications.
Employees
At June 30, 1999, we had a total of 138 employees. Of the total, 94 were in
research and development and training and support, 23 were engaged in
marketing, sales and partner development, and business development, and 21 were
in administration and finance. None of our employees is subject to a collective
bargaining agreement and we believe that our relations with our employees are
good.
Our future operating results depend in significant part on the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. Our future success also depends on
our continuing ability to attract and retain highly
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qualified technical, sales and senior management personnel. Competition for
these personnel is intense, and we may not be able to retain our key technical,
sales and senior management personnel or attract these personnel in the future.
We have experienced difficulty in recruiting qualified technical, sales and
senior management personnel, and we expect to experience these difficulties in
the future. If we are unable to hire and retain qualified personnel in the
future, this inability could seriously harm our business.
Facilities
Our principal administrative, sales, marketing, and research and development
facility occupies approximately 28,800 square feet in Sunnyvale, California
under two leases which expire in August 1999. We have recently entered into an
agreement to lease a facility occupying approximately 66,000 square feet in
Santa Clara, California which we intend to occupy beginning in September 1999.
The term of the lease is five years beginning September 1, 1999. InterTrust
International, our wholly-owned subsidiary, has an office located in London,
England and is establishing an office in Sydney, Australia.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages as of July 28, 1999,
are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Victor Shear............ 52 Chairman of the Board and Chief Executive Officer
Edmund J. Fish.......... 36 Director, Senior Operating Officer and
Executive Vice President, Corporate Development
Erwin N. Lenowitz....... 49 Vice Chairman of the Board,
Chief Financial Officer and Secretary
David P. Maher.......... 48 Chief Technology Officer
Douglas M. Armati....... 48 Senior Vice President, Strategic Sales
Duncan M. Davidson...... 46 Senior Vice President, Business Development
Richard H. Frank........ 57 Senior Vice President, Portable Device Group
Joseph W. Jennings...... 45 Senior Vice President, Marketing
Richard A. Landsman..... 47 Senior Vice President, Product Development and Support
Robert P. Weber......... 56 Senior Vice President, Business and Technology Strategy
Patrick P. Nguyen....... 32 Vice President, Global Alliances
David M. Van Wie........ 34 Director and Senior Vice President of Research
Bruce Fredrickson....... 56 Director
Satish K. Gupta......... 54 Director
Larry D. McArthur....... 57 Director
</TABLE>
Victor Shear has served as chairman of the board and chief executive officer
of InterTrust since our inception in January 1990. Before founding InterTrust,
Mr. Shear co-founded Personal Library Software, Inc., a text and document
database company, in June 1986. Mr. Shear served as chairman, president and
chief executive officer of Data Scientific Corporation, a software developer of
scientific workstations, from May 1982 to February 1985. Mr. Shear received a
B.A. in Sociology from Brandeis University.
Edmund J. Fish has served as a director and as senior operating officer and
executive vice president, corporate development since June 1999. From September
1995 to June 1999, Mr. Fish served as general counsel and vice president,
corporate development. Before joining InterTrust, Mr. Fish practiced law in the
Silicon Valley, Washington D.C. and New York offices of Weil, Gotshal & Manges,
an international law firm, from August 1989 to August 1995. Mr. Fish received a
B.S. in Biomedical Engineering from Marquette University and a J.D. from Wayne
State University.
Erwin N. Lenowitz has served as vice chairman of the board, chief financial
officer and secretary of InterTrust since January 1993. Before joining
InterTrust, Mr. Lenowitz served as vice president of business development and
planning for Sun Microsystems, Inc., an enterprise networking company, from
August 1989 to January 1992 and as controller from May 1984 to July 1989.
Mr. Lenowitz received a B.S. in Econometrics from the City College of New York
and an M.B.A. from St. Johns University.
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David P. Maher has served as chief technology officer of InterTrust since
June 1999. Before joining InterTrust, Mr. Maher served in various positions at
AT&T from June 1981 to June 1999, including as an AT&T Fellow, a Bell Labs
Fellow and Head of the Secure Systems Research Department. At AT&T, Mr. Maher
developed secure wideband transmission systems, cryptographic key management
systems and secure communications devices. In addition, Mr. Maher was chief
architect for AT&T's STU-III secure device, data, and video products for secure
government communications. Mr. Maher has been a consultant for the National
Science Foundation, National Security Agency, National Institute of Standards
and Technology, and the Congressional Office of Technology Assessment, and has
taught Electrical Engineering, Mathematics and Computer Science at several
institutions. Mr. Maher received B.A., M.S. and Ph.D. degrees in Mathematics
from Lehigh University.
Douglas M. Armati has served as senior vice president, strategic sales for
InterTrust since April 1999. From June 1997 to March 1999, Mr. Armati served as
vice president, strategic sales and managing director of InterTrust
International, our subsidiary. From December 1996 to June 1997, Mr. Armati
served as an independent consultant to InterTrust International, our
subsidiary. From January 1994 to December 1996, Mr. Armati was a principal at
Jackson Brevis Ltd., a British consulting firm, focusing on electronic commerce
and intellectual property rights in digital environments. Mr. Armati received a
B.Comm. from Murdoch University.
Duncan M. Davidson has served as senior vice president, business development
of InterTrust since July 1997. Before joining InterTrust, Mr. Davidson was
managing partner of Gemini McKenna, an alliance between Gemini Consulting and
Regis-McKenna, Inc., and The McKenna Group, from August 1995 to July 1997. Mr.
Davidson also served as vice president of Gemini Consulting, the management
consulting arm of Cap Gemini, a systems integrator, and its predecessor, The
MAC Group, from April 1989 to August 1995. Mr. Davidson is a founder of Covad
Communications, a telecommunications company providing DSL services, and serves
on its board of advisors. Mr. Davidson received a Sc.B. in Physics-Mathematics
from Brown University and a J.D. from the University of Michigan.
Richard H. Frank is senior vice president, portable device group of
InterTrust and has served in various other capacities, including chief
technology officer, since joining InterTrust in February 1997. Before joining
InterTrust, Mr. Frank was a senior consultant to electronic commerce companies,
including Novell Corporation, a computer-networking company. From March 1991 to
September 1992, Mr. Frank served as vice president of development at Software
Publishing, a software development company, and as chief technology officer
from September 1992 to September 1994. From January 1979 to September 1984, Mr.
Frank served as chief executive officer at Sorcim, a personal computer software
company. Mr. Frank received a B.A. in Chemistry from San Francisco State
University.
Joseph W. Jennings has served as senior vice president, marketing of
InterTrust since February 1998. Before joining InterTrust, Mr. Jennings served
as a consultant to the venture capital firms of Sigma Partners, Mohr Davidow
Ventures and InnoCal Ventures from January 1995 to December 1997. From July
1994 to January 1998, Mr. Jennings served as president of GCI Jennings, a
technology marketing communications company. Mr. Jennings received a B.A. in
Political Science from Whitman College and an M.B.A from the University of
Washington.
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Richard A. Landsman is senior vice president, product development and
support of InterTrust and has served in various positions since joining
InterTrust in July 1997. Before joining InterTrust, from October 1992 to July
1997, Mr. Landsman worked for Borland International, Inc., a provider of
programming and data base tools, where he directed Borland's Java development
tools business and managed Borland's C++ class libraries and frameworks team.
Before joining Borland, Mr. Landsman served as a senior manager at Lotus
Development, a productivity applications software company, from January 1983 to
October 1992. Mr. Landsman received a B.S. in Management and Finance from the
University of Massachusetts and an M.S. in Computer Science from Boston
University.
David M. Van Wie has served as senior vice president, research of InterTrust
since January 1996. From September 1992 to January 1996, Mr. Van Wie served as
our chief technology officer and in August 1995, Mr. Van Wie became a member of
our board of directors. From January 1991 to September 1992, Mr. Van Wie was
president and chief executive officer of CD-ROM Solutions, a technology
integrator for the CD-ROM marketplace. From February 1989 to January 1991, Mr.
Van Wie managed the development of a high-speed information retrieval system
for a subsidiary of Maxwell Communications. Mr. Van Wie attended Pomona College
and the University of Wisconsin.
Robert P. Weber has served as senior vice president, business and technology
strategy of InterTrust since January 1996. Before joining InterTrust, Mr. Weber
was a principal at Northeast Consulting Resources, Inc., a firm specializing in
business and information technology planning and strategy, from April 1990 to
December 1995. Mr. Weber has held several technology-related positions at
Harvard University, the last as a strategist for the use of the Internet in
education, research, and medicine. Mr. Weber received a B.A. in Sociology from
American International College and an M.A. and Ph.D. in Sociology from the
University of Connecticut.
Patrick P. Nguyen is vice president, global alliances, and has also served
as vice president, corporate development, since joining InterTrust in July
1998. Before joining InterTrust, Mr. Nguyen was a partner at the Silicon Valley
Office of Weil, Gotshal & Manges, where he headed the Corporate and Technology
Transactions Group. Mr. Nguyen received a B.S. in Computer Science from the
University of California, Irvine and a J.D. from the University of California
at Los Angeles.
Bruce Fredrickson has served as a director of InterTrust since February
1993. Mr. Fredrickson has also served as president of Tactical Marketing
Ventures LLC, a marketing firm for computer hardware, software and Internet
service companies, since September 1991. Before his position with Tactical
Marketing Ventures, Mr. Fredrickson served as vice president of marketing for
Ingram Micro, a computer products distributor, from February 1986 to August
1991. Mr. Fredrickson received a B.S. from St. Olaf College and an M.S. from
the University of Colorado.
Satish K. Gupta has served as a director of InterTrust since February 1993.
Mr. Gupta has been the president and chief executive officer of Cradle
Technologies, a semiconductor company, since July 1998. From May 1994 to June
1998, Mr. Gupta was the vice president of corporate marketing and business
development of Cirrus Logic, a semiconductor company, and from June 1991 to May
1994, he was vice president of strategic marketing and advanced development of
Media Vision, a multi-media peripherals company. Mr. Gupta received a B.E. in
Electrical Engineering from Birla Institute of Technology and Science (India),
an S.M. in Electrical Engineering from Massachusetts Institute of Technology,
and an M.S. in Engineering and Economic Systems from Stanford University.
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Larry D. McArthur has served as a director of InterTrust since March 1995.
From February 1995 to June 1999, Mr. McArthur served as president and chief
executive officer of Ascent Logic Corporation, a systems engineering company.
Mr. McArthur was the president and chief operating officer of The MacNeal-
Schwendler Co., a structural analysis software company, from September 1993 to
September 1994. From January 1984 to September 1993, Mr. McArthur served as
president and chief executive officer of Aries Technology, Inc. a mechanical
analysis software company. Mr. McArthur received a B.S. degree in Engineering
from Western Michigan University.
Board Committees
The board of directors has an audit committee and a compensation committee.
Audit Committee. The audit committee of the board of directors has
responsibility for reviewing and monitoring our corporate financial reporting
and external audits, including our internal control functions, the results and
scope of the annual audit and other services provided by our independent
auditors and our compliance with legal matters that have a significant impact
on our financial reports. The audit committee also consults with management and
our independent auditors before the presentation of financial statements to
stockholders and, as appropriate, initiates inquiries into aspects of our
financial affairs. In addition, the audit committee has the responsibility to
consider and recommend the appointment of, and to review fee arrangements with,
our independent auditors. The current members of the audit committee are
Messrs. Gupta and McArthur.
Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation provided to the executive officers and directors of InterTrust and
our subsidiary including stock compensation and loans. In addition, the
compensation committee reviews and makes recommendations on bonus and stock
compensation arrangements for all of our employees. As part of these
responsibilities the compensation committee also administers or will administer
our 1995 Stock Plan, 1999 Equity Incentive Plan and 1999 Employee Stock
Purchase Plan. The current members of the compensation committee are Messrs.
Fredrickson and McArthur.
Director Compensation
Messrs. Gupta, Fredrickson, and McArthur have each received options for
80,000 shares of common stock at an exercise price of $0.625 per share. Upon
and following this offering, non-employee directors will receive automatic
option grants under our 1999 Non-Employee Directors Option Plan. Please see
"Employee Benefit Plans--1999 Non-Employee Directors Option Plan" for more
details.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors currently consists of
Messrs. Fredrickson and McArthur. No interlocking relationship exists between
any member of our board of directors or our compensation committee and any
member of the board of directors or compensation committee of any other
company, and no interlocking relationship has existed in the past.
Indemnification
Our Sixth Amended and Restated Certificate of Incorporation, to be effective
after the closing of this offering, includes a provision that eliminates the
personal liability of our directors and officers
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for monetary damages for breach of fiduciary duty as a director or officer,
except for liability:
. for any breach of the director's or officer's duty of loyalty to us or
our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director or officer derived an
improper personal benefit.
Our Amended and Restated Bylaws provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
. we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors; and
. we must advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding to the fullest extent permitted by
Delaware law, subject to very limited exceptions.
We have also entered into indemnification agreements with our officers and
directors containing provisions that may require us to indemnify our officers
and directors against liabilities that may arise by reason of their status or
service as directors or officers, other than liabilities arising from willful
misconduct of a culpable nature, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
Executive Compensation
The following table presents information about compensation paid by us in
1998 for services by our chief executive officer and our four other highest-
paid executive officers whose total salary and bonus for the fiscal year
exceeded $100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
------------ Underlying
Name and Principal Position(s) Salary ($) Options (#)
- ------------------------------ ------------ ------------
<S> <C> <C>
Victor Shear......................................... $175,000 --
Chairman of the Board and Chief Executive Officer
Douglas M. Armati.................................... 169,751 --
Senior Vice President, Strategic Sales
Duncan M. Davidson................................... 220,000 --
Senior Vice President, Business Development
Joseph W. Jennings................................... 167,340 320,000
Senior Vice President, Marketing
Erwin N. Lenowitz.................................... 175,000 --
Vice Chairman of the Board, Chief Financial Officer
and Secretary
</TABLE>
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The table below shows each grant of stock options during 1998 to our chief
executive officer and our four other highest-paid executive officers. No stock
appreciation rights were granted to these individuals during 1998.
The percentage of total options granted to employees in the last fiscal year
is based on options to purchase a total of 1,616,000 shares granted to our
employees during 1998.
The exercise price of each option granted is equal to the fair market value
of our common stock as valued by our board of directors on the date of grant.
The exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by lending the optionee sufficient funds to pay the exercise
price for the purchased shares.
The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Annual stock price appreciation of 5% and 10%
is assumed according to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the exercise price on the date of grant appreciates
at the indicated rate for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
--------------------------------------------------- Annual Rates of
Number of Stock Price
Securities Percent of Total Appreciation for
Underlying Options Granted Exercise Option Term
Options To Employees Price Expiration ---------------------
Name Granted(#) In Last Fiscal Year ($/share) Date 5% 10%
- ---- ---------- ------------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Victor Shear............ -- -- -- -- -- --
Douglas M. Armati....... -- -- -- -- -- --
Duncan M. Davidson...... -- -- -- -- -- --
Joseph W. Jennings...... 320,000 19.8% $2.50 6/4/08 $ 503,116 $ 1,274,994
Erwin N. Lenowitz....... -- -- -- -- -- --
</TABLE>
In addition to the options listed in the table, stock options were granted
in 1999 to Mr. Armati under our 1995 Stock Plan for 80,000 shares at an
exercise price of $3.50. The option shares vest in equal monthly installments
over a period of 48 months.
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The table below presents for our chief executive officer and our four other
highest-paid executive officers the number and value of shares underlying
unexercised options that were held by these executive officers as of December
31, 1998. Mr. Davidson exercised options totaling 56,666 shares of common stock
during 1998. No other executive officers listed above exercised stock options
in 1998. No stock appreciation rights were exercised by these executive
officers in 1998, and no stock appreciation rights were outstanding at the end
of that year.
Each of the options listed in the table becomes vested and exercisable as
follows: upon the completion of six months of service, 12.5% of the option
shares become vested and, upon the completion of each of the next 42 months of
service, 1/48th of the option shares become vested. Our board may provide for
the options to become immediately exercisable; in that case, any unvested
shares that are purchased by an optionee may be repurchased by us at the
original exercise price paid per share if the optionee ceases service with us
before vesting in these shares.
The figures in the "value of unexercised in-the-money options at fiscal year
end" column are based on the fair market value of our common stock at the end
of 1998, less the exercise price payable for these shares. The fair market
value for class A voting common stock at the end of 1998 was $3.50 per share.
Mr. Armati and Mr. Jennings have options to purchase class A voting common
stock. The fair market value for class B non-voting common stock at the end of
1998 was $1.75 per share. Mr. Lenowitz has options to purchase class B non-
voting common stock. Mr. Davidson was granted options to purchase 160,000
shares of class A voting common stock and 160,000 shares of class B non-voting
common stock, of which he has exercised and purchased 56,666 shares in 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number Of Value Of
Securities Underlying Unexercised
Unexercised Options In-The-Money Options
Shares At Fiscal Year End (#) At Fiscal Year End ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Victor Shear............ -- -- -- -- -- --
Douglas M. Armati....... -- -- 76,666 83,334 $153,332 $166,668
Duncan M. Davidson...... 56,666 $ 56,666 56,666 206,668 113,332 310,002
Joseph W. Jennings...... -- -- 66,666 253,334 66,666 253,334
Erwin N. Lenowitz....... -- -- 360,000 -- 405,000 --
</TABLE>
Employee Benefit Plans
1992 Stock Plan and 1995 Stock Plan
Our 1992 Stock Plan and 1995 Stock Plan will be terminated immediately
before the closing of this offering, and no additional options will be granted
upon or after the closing of this offering under these plans. However, the
termination of these plans will not affect any outstanding options, which will
remain outstanding until they are exercised, terminate or expire, according to
the terms of their stock option agreements.
1999 Equity Incentive Plan
Our board of directors adopted our 1999 Equity Incentive Plan on July 22,
1999. We will also seek stockholder approval of this plan. We have reserved
1,900,000 shares of our common stock for
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issuance under the 1999 Equity Incentive Plan. As of January 1 of each year,
starting in 2000, the number of shares reserved for issuance under our 1999
Equity Incentive Plan will be increased automatically by 4% of the total number
of shares of common stock then outstanding or, if less, 1,500,000 shares. No
options have yet been granted under the 1999 Equity Incentive Plan.
Under the 1999 Equity Incentive Plan, the persons eligible to receive awards
are:
. employees;
. non-employee members of the board of directors; and
. consultants.
The types of awards that may be made under the 1999 Equity Incentive Plan
are:
. options to purchase shares of common stock;
. stock appreciation rights;
. restricted shares; and
. stock units.
Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for favorable tax
treatment. With limited restrictions, if shares awarded under the 1999 Equity
Incentive Plan are forfeited, those shares will again become available for new
awards under the 1999 Equity Incentive Plan.
The compensation committee of our board of directors will administer the
1999 Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of our 1999 Equity
Incentive Plan. The committee has the discretion to determine which eligible
individuals are to receive any award, and to determine the type, amount,
vesting requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999 Equity
Incentive Plan must be at least 100% of the fair market value of our common
stock on the option grant date. The exercise price for nonstatutory options
granted under the 1999 Equity Incentive Plan must be at least 85% of the fair
market value of our common stock on the option grant date.
Our 1999 Equity Incentive Plan provides that no participant may receive
options or stock appreciation rights covering more than 500,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 1,000,000 shares in the first year of
employment.
The exercise price may be paid with:
. cash;
. outstanding shares of common stock;
. the cashless exercise method through a designated broker;
. a pledge of shares to a broker; or
. a promissory note.
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The purchase price for newly issued restricted shares awarded under the 1999
Equity Incentive Plan may be paid with:
. cash;
. a promissory note; or
. the rendering of past services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.
If a change in control of InterTrust occurs, an option or other award under
the 1999 Equity Incentive Plan will become fully exercisable and fully vested
if the option or award is not assumed by the surviving corporation or its
parent or if the surviving corporation or its parent does not substitute
comparable awards for the awards granted under the 1999 Equity Incentive Plan.
A change in control includes:
. a merger or consolidation of InterTrust after which our then-current
stockholders own less than 50% of the surviving corporation;
. a sale of all or substantially all of our assets;
. a proxy contest that results in replacement of more than one-half of our
directors over a 24-month period; or
. an acquisition of 50% or more of our outstanding stock by a person other
than a person related to InterTrust, including a corporation owned by our
stockholders.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by InterTrust if it is the surviving corporation,
shall have accelerated vesting and then expire early, or shall be cancelled for
a cash payment.
Our board of directors may amend or terminate the 1999 Equity Incentive Plan
at any time. If our board amends the plan, stockholder approval of the
amendment will be sought only if required by applicable law. The 1999 Equity
Incentive Plan will continue in effect indefinitely unless the board terminates
the plan.
1999 Employee Stock Purchase Plan
Our board of directors adopted our 1999 Employee Stock Purchase Plan on July
22, 1999. We will seek stockholder approval of this plan. We have reserved
350,000 shares of our common stock for issuance under our 1999 Employee Stock
Purchase Plan. As of January 1 each year, starting in 2000, the number of
shares reserved for issuance under this plan will be increased automatically by
2% of the total number of shares of common stock then outstanding or, if less,
350,000 shares. Our 1999 Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code.
Eligible employees may begin participating in the 1999 Employee Stock
Purchase Plan at the start of an offering period. Each offering period, other
than the initial offering period, lasts
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24 months. Two overlapping offering periods will start on May 1 and November 1
of each calendar year. However, the first offering period will start on the
effective date of this offering and end on October 31, 2001. Purchases of our
common stock will occur on or about April 30 and October 31 of each calendar
year during an offering period.
Our compensation committee of our board of directors will administer this
plan. Each of our employees is eligible to participate if he is employed by us
for more than 20 hours per week and for more than five months per year.
Our 1999 Employee Stock Purchase Plan permits each eligible employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions may not exceed 15% of cash compensation. The initial period during
which payroll deductions may be contributed will begin on the effective date of
this offering and end on April 30, 2000. Each participant may purchase up to
600 shares on any purchase date.
The price of each share of common stock purchased under our 1999 Employee
Stock Purchase Plan will be 85% of the lower of:
. the fair market value per share of our common stock on the date
immediately before the first date of the applicable offering period; or
. the fair market value per share of our common stock on the purchase date.
In the case of the first offering period, the price per share under the plan
will be 85% of the lower of:
. the price offered to the public in this offering; or
. the fair market value per share of our common stock on the purchase date.
Employees may end their participation in the 1999 Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with InterTrust.
If a change in control of InterTrust occurs, our 1999 Employee Stock
Purchase Plan will end, and shares will be purchased with the payroll
deductions accumulated to date by participating employees, unless this plan is
assumed by the surviving corporation or its parent. Our board of directors may
amend or terminate the 1999 Employee Stock Purchase Plan at any time. If our
board of directors increases the number of shares of common stock reserved for
issuance under this plan, it must seek the approval of our stockholders.
1999 Non-Employee Directors Option Plan
Our board of directors adopted our 1999 Non-Employee Directors Option Plan
on July 22, 1999. We will seek stockholder approval of this plan. Only the non-
employee members of our board of directors will be eligible for automatic
option grants under this plan.
We have reserved 350,000 shares of our common stock for issuance under our
1999 Non-Employee Directors Option Plan. As of January 1 each year, starting in
2000, the number of shares reserved for issuance under our 1999 Non-Employee
Directors Option Plan will be increased automatically to restore the total
number of shares available under this plan to 350,000 shares. No shares have
yet been issued under our 1999 Non-Employee Directors Option Plan.
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<PAGE>
The compensation committee of our board of directors will make any
administrative determinations under our 1999 Non-Employee Directors Option
Plan. No discretionary decisions will be made by the compensation committee
under this plan.
The exercise price for options granted under our 1999 Non-Employee Directors
Option Plan may be paid in cash or in outstanding shares of our common stock.
Options may also be exercised on a cashless basis through the same-day sale of
the purchased shares.
Each individual who is a member of our board of directors as a non-employee
director on the effective date of this offering will receive a fully vested
option for 15,000 shares of our common stock on the effective date of this
offering. The exercise price of this option will be the initial price offered
to the public in this offering.
Each individual who first joins our board of directors as a non-employee
director after the effective date of this offering will receive at that time a
fully vested option for 15,000 shares of our common stock. In addition, at each
of our annual stockholders' meetings, beginning in 2000, each non-employee
director who will continue to be a director after that meeting will
automatically be granted at that meeting a fully vested option for 5,000 shares
of our common stock. However, any non-employee director who receives an option
for 15,000 shares under this plan will first become eligible to receive the
annual option for 5,000 shares at the annual meeting that occurs during the
calendar year following the year in which he received the option for 15,000
shares.
Our board of directors may amend or modify the 1999 Non-Employee Directors
Option Plan at any time. The 1999 Non-Employee Directors Option Plan will
continue in effect indefinitely, unless our board of directors terminates the
plan.
Change of Control Arrangements
Joseph W. Jennings, our senior vice president, marketing, has received
option grants for 320,000 shares that provide that upon a change in control
transaction, the vesting of the option will accelerate and 50% of the then
unvested option shares will become vested. Duncan M. Davidson, our senior vice
president, business development, has received option grants for 320,000 shares
that provide that upon a change in control transaction, the vesting of the
option will accelerate and 100% of the then unvested option shares will become
vested. In addition, certain of our other executive officers who are not among
our four highest-paid executive officers during 1998 were also granted options
that provide that upon a change in control transaction, the vesting of the
options will accelerate and 100% of the then unvested option shares will become
vested.
If a change in control of InterTrust occurs, an option or other award under
the 1999 Equity Incentive Plan will become fully exercisable and fully vested
if the option or award is not assumed by the surviving corporation or its
parent or if the surviving corporation or its parent does not substitute
comparable awards for the awards granted under the 1999 Equity Incentive Plan.
Under our 1995 Stock Plan, upon a merger or asset sale, if the options or
stock purchase rights are not assumed by the surviving corporation or its
parent or subsidiary or if the surviving corporation or its parent or
subsidiary does not substitute comparable awards for the options or stock
purchase rights, then the options and stock purchase rights will terminate.
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RELATED-PARTY TRANSACTIONS
Since January 1996, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or are to be a
party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock, or an
immediate family member of any of the foregoing, had or will have a direct or
indirect interest other than:
. compensation arrangements, which are described where required under
"Management;" and
. the transactions described below.
Series A Preferred Stock Financing. In March 1996, we issued and sold
1,174,168 shares of Series A preferred stock to Kistler Associates, a 5%
stockholder of us, at a per share purchase price of $2.555.
In June 1996, we issued and sold 97,846 shares of Series A preferred stock
to SLF Partners IV, LP at a per share purchase price of $2.555. One of our
executive officers, Patrick P. Nguyen, is a limited partner of SLF Partners IV,
LP.
Series B Preferred Stock Financing. In December 1997, we issued and sold
233,372 shares of Series B preferred stock to Kistler Associates, and in March,
April and December 1998, we issued and sold an aggregate of 466,744 shares of
Series B preferred stock to Kistler Associates, in both cases at a per share
purchase price of $4.285.
In July and December 1998, we issued and sold an aggregate of 878,632 shares
of Series B preferred stock to SLF Partners IV, LP at a per share purchase
price of $4.285.
In December 1998, we issued and sold 186,500 shares of Series B preferred
stock to Ecomm Ventures I, LLC at a per share purchase price of $4.285. One of
our executive officers, Patrick P. Nguyen, is a director of Ecomm Ventures I,
LLC.
Series C Preferred Stock Financing. In March 1999, we issued and sold 29,645
shares of Series C preferred stock to Kistler Associates at a per share
purchase price of $5.89.
Series D Preferred Stock Financing. In April 1999, we issued and sold
235,294 shares of Series D preferred stock to Kistler Associates at a per share
purchase price of $8.50.
In April 1999, we issued and sold 479,412 shares of Series D preferred stock
to SLF Partners IV, LP at a per share purchase price of $8.50.
In April 1999, we issued and sold 25,000 shares of Series D preferred stock
to Tactical Marketing Ventures, LLC at a per share purchase price of $8.50.
Bruce Fredrickson, a director of InterTrust, is the president of Tactical
Marketing Ventures, LLC.
In June 1999, we issued and sold 199,412 shares of Series D preferred stock
to Ecomm Ventures II, LLC at a per share purchase price of $8.50. One of our
executive officers, Patrick P. Nguyen, is a director of Ecomm Ventures II, LLC.
Series E Preferred Stock Financing. In July 1999, we issued and sold 233,333
shares of Series E preferred stock to Kistler Associates at a per share
purchase price of $12.00.
In July 1999, we issued and sold 50,001 shares of Series E preferred stock
to Duncan M. Davidson, one of our executive officers, at a per share purchase
price of $12.00.
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Option to Purchase Class B Non-Voting Common Stock. In October 1993, we
granted an option to purchase 160,000 shares of our class B non-voting common
stock to Electronic Ventures, LLC at an exercise price of $0.625. Erwin N.
Lenowitz, an officer of InterTrust, is a managing director of Electronic
Ventures, LLC.
Loan to Executive Officer. In December 1997 and January 1998, we loaned an
aggregate of $62,290 to Edmund J. Fish, one of our executive officers, secured
by a stock pledge agreement. This note accrues interest at the rate of 7% per
year. The principal balance of this note and accrued interest is due upon
consummation of this offering.
Bonus to Executive Officer. In May 1999, our compensation committee approved
a bonus in the amount of $200,000 to Edmund J. Fish, which was paid in June
1999.
Indemnification. We have entered into an indemnification agreement with each
of our officers and directors. See "Management--Indemnification" for a
description of the indemnification available to our officers and directors
under our Sixth Amended and Restated Certificate of Incorporation, to be
effective after the closing of this offering and our Amended and Restated
Bylaws.
----------------
We believe that the transactions above were made on terms no less favorable
to us than could have been obtained from unaffiliated third parties. All future
transactions, including loans between us and our officers, directors, principal
stockholders and their affiliates, will be approved by a majority of the board
of directors, including a majority of the independent and disinterested outside
directors on the board of directors, and will continue to be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The table on the next page presents selected information regarding
beneficial ownership of our outstanding common stock as of July 28, 1999, and
as adjusted to reflect the sale of the common stock being sold in this offering
for:
. each of our directors, our chief executive officer and our four other
highest-paid executive officers;
. each other person known by us to own beneficially more than 5% of our
common stock and one of our principal stockholders; and
. all of our directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes sole or shared voting or investment power with respect to
securities and includes the shares issuable under stock options or warrants
that are exercisable within 60 days of July 28, 1999. Shares issuable under
stock options exercisable within 60 days are deemed outstanding for computing
the percentage of the person holding the options but are not deemed outstanding
for computing the percentage of any other person. Accordingly, the following
table includes information regarding shares issuable under stock options
exercisable within 60 days for the following persons and in the following
amounts: Edmund J. Fish, options exercisable for 14,167 shares; Erwin N.
Lenowitz, options exercisable for 160,000 shares; Douglas M. Armati, options
exercisable for 5,000 shares; Duncan M. Davidson, options exercisable for 6,666
shares; Joseph W. Jennings, options exercisable for 126,666 shares; David M.
Van Wie, options exercisable for 320,800 shares; Satish K. Gupta, options
exercisable for 80,000 shares; and Larry D. McArthur, options exercisable for
73,333 shares.
Percentage ownership calculations are based on 31,411,500 shares of common
stock outstanding as of July 28, 1999, as adjusted to reflect the conversion of
all outstanding shares of preferred stock and class B non-voting common stock
into common stock, and the exercise of warrants to purchase 21,692 shares of
common stock upon the closing of this offering. The numbers shown in the table
below assume no exercise by the underwriters of their over-allotment option to
purchase up to shares.
Unless otherwise indicated, the address for each listed stockholder is: c/o
InterTrust Technologies Corporation, 460 Oakmead Parkway, Sunnyvale, California
94086. To our knowledge, except as indicated in the footnotes to this table and
under applicable community property laws, the persons or entities identified in
this table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them.
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<PAGE>
<TABLE>
<CAPTION>
Percent of
Shares Outstanding
--------------------
Number of Shares Before the After the
Name of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------ ------------------ ---------- ---------
<S> <C> <C> <C>
Victor Shear.......................... 7,712,000 24.6%
Kistler Associates.................... 2,372,556 7.6
101 West 79th Street, Suite 22C
New York, NY 10024
Entities affiliated with SLF 1,540,779 4.9
Partners(1)..........................
Attn: Steven L. Fingerhood, General
Partner
301 Mission Street, Suite 350
San Francisco, CA 94105
Erwin N. Lenowitz(2).................. 558,206 1.8
David M. Van Wie...................... 344,800 1.1
Duncan M. Davidson(3)................. 296,667 *
Edmund J. Fish(4)..................... 286,886 *
Douglas M. Armati(5).................. 173,333 *
Satish K. Gupta....................... 160,000 *
Bruce Fredrickson(6).................. 137,000 *
Joseph W. Jennings.................... 126,666 *
Larry D. McArthur..................... 73,333 *
Executive officers and directors as a
group (15 persons)(7)(8)(9).......... 10,969,348 33.7
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) Includes 1,455,890 shares held of record by SLF Partners IV, L.P. and
84,889 shares held of record by SLF Partners V, L.P.
(2) Includes an option immediately exercisable for 160,000 shares held by
Electronic Ventures, LLC. Mr. Lenowitz, one of our directors and executive
officers, is a managing director of Electronic Ventures, LLC. Mr. Lenowitz
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in Electronic Ventures, LLC. Also includes 13,218 shares
held as custodian for Jeremy Lenowitz and 13,218 shares held as custodian
for Jessica Lenowitz.
(3) Includes 210,001 shares held by the Davidson Family Revocable Trust of
which 80,000 shares are subject to a right of repurchase by us as of July
28, 1999. Mr. Davidson, one of our executive officers, is the trustee of
the Davidson Family Revocable Trust and exercises voting and investment
power over these shares. In connection with a loan to two employees of the
Company, Mr. Davidson is taking a security interest in 80,624 shares of
common stock.
(4) Includes 834 shares subject to a right of repurchase by us as of July 28,
1999.
(5) Includes 58,333 shares subject to a right of repurchase by us as of July
28, 1999.
(6) Includes 25,000 shares held of record by Tactical Marketing Ventures LLC.
Mr. Fredrickson is the chief executive officer of Tactical Marketing
Ventures LLC and exercises voting and investment control over shares held
by that entity.
(7) Includes 1,123,298 shares subject to options that are exercisable within 60
days of July 28, 1999 and the shares described in Notes 2 through 6.
(8) Includes 243,165 shares held by the Robert P. Weber Trust. One of our
executive officers, Robert P. Weber, is the trustee of the Robert P. Weber
Trust and exercises voting and investment power over these shares.
(9) Includes 18,334 shares held by Patrick P. Nguyen, one of our executive
officers, subject to a right of repurchase by us as of July 28, 1999. Also
includes 186,500 shares held by Ecomm Ventures I, LLC and 199,412 shares
held by Ecomm Ventures II, LLC. Mr. Nguyen is a director of both entities.
Mr. Nguyen disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest arising from his interest in Ecomm
Ventures II, LLC. Also includes approximately 1,800 shares held by SLF
Partners IV, LP. Mr. Nguyen is a limited partner of SLF Partners IV, LP and
exercises voting and investment control over these shares.
Two of our stockholders, Kistler Associates and Amerindo Investment
Advisors, each have the right to purchase shares of common stock in this
offering. If either of them exercises this right in full, they will own
and shares, or % and % of us.
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DESCRIPTION OF CAPITAL STOCK
General
Upon the consummation of this offering, we will be authorized to issue
120,000,000 shares of common stock, and 10,000,000 shares of undesignated
preferred stock. The following is a summary description of our capital stock.
Our Amended and Restated Bylaws and our Sixth Amended and Restated Certificate
of Incorporation, to be effective after the closing of this offering, provide
further information about our capital stock.
Common Stock
As of July 28, 1999, there were 31,411,500 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
preferred stock and class B non-voting common stock into common stock, and the
exercise of warrants to purchase 21,692 shares of common stock, upon the
closing of this offering, that were held of record by approximately 300
stockholders. There will be shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and assuming no
exercise after July 28, 1999 of outstanding options or warrants, after giving
effect to the sale of the shares of common stock to the public offered in this
prospectus.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive dividends, if any, as may be declared from time to time
by the board of directors out of funds legally available. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be issued upon completion of this offering will be fully paid and
nonassessable.
Warrants
Immediately following the closing of this offering, there will be an
outstanding warrant to purchase a total of 311,016 shares of common stock. This
warrant expires on August 19, 2006.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and related restrictions,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of the series. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of us without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. At present, we have no plans to issue any of
our preferred stock.
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Registration Rights
After this offering, the holders of approximately 18,689,401 shares of
common stock will be entitled to rights with respect to the registration of
these shares under the Securities Act. Under the terms of the agreement between
us and the holders of these registrable securities, if we propose to register
any of our securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights, these
holders are entitled to notice of registration and are entitled to include
their shares of common stock in the registration. Holders of 13,885,443 shares
of the registrable securities are also entitled to specified demand
registration rights under which they may require us to file a registration
statement under the Securities Act at our expense with respect to our shares of
common stock, and we are required to use our best efforts to effect this
registration. Further, the holders of these demand rights may require us to
file additional registration statements on Form S-3. All of these registration
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in the
registration and our right not to effect a requested registration within six
months following the initial offering of our securities.
Anti-takeover Effects of Delaware Law, and Provisions of the Sixth Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws
Selected provisions of Delaware Law, and our Sixth Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws, effective upon
the closing of this offering, could make more difficult the acquisition of
InterTrust by means of a tender offer or a proxy contest and the removal of
incumbent officers and directors. These provisions, summarized below, are
expected to discourage particular types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
InterTrust to negotiate first with us. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure InterTrust
outweigh the disadvantages of discouraging these proposals because, among other
things, negotiation of these proposals could result in an improvement of their
terms. However, these provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they might also
inhibit fluctuations in the market price of our shares that could result from
actual or rumored takeover attempts.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. Generally, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
. before the date of the business combination, the transaction is approved
by the board of directors of the corporation;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock; or
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<PAGE>
. on or after the date of the business combination, the business
combination is approved by the board and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by our board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Stockholder Meetings. Under our bylaws, special meetings of the stockholders
can only be called by our board of directors or by the chairman of the board,
the chief executive officer or at the request of stockholders holding at least
20% of our capital stock.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our Amended and Restated Bylaws establish advance notice procedures
with respect to stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the direction of
our board of directors or a related committee.
Elimination of Stockholder Action By Written Consent. Our Sixth Amended and
Restated Certificate of Incorporation eliminates the right of stockholders to
act by written consent without a meeting.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of InterTrust. These and other provisions may have
the effect of deferring hostile takeovers or delaying changes in control or
management of InterTrust.
Amendment of Restated Charter. The amendment of any of the above provisions
would require approval by holders of at least 66 2/3% of our outstanding common
stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Boston EquiServe
L.P.
The Nasdaq National Market Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "ITRU."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common
stock outstanding, assuming no exercise of options after July 28, 1999. Of
these shares, the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares held by persons that directly or indirectly control, or
are controlled by, or are under common control with us, may generally only be
sold in compliance with the limitations of Rule 144 described below.
Sales of Restricted Shares
The remaining shares of common stock are deemed restricted shares
under Rule 144. The number of shares of common stock available for sale in the
public market is limited by restrictions under the Securities Act and lock-up
agreements under which the holders of the shares have agreed not to sell or
dispose of any of their shares for a period of 180 days after the date of this
prospectus without the prior written consent of Credit Suisse First Boston
Corporation. On the date of this prospectus, shares other than the
shares being sold in this offering will be eligible for sale.
Beginning 180 days after the date of this prospectus, or earlier with the
consent of Credit Suisse First Boston Corporation, restricted shares
will become available for sale in the public market subject to the limitations
of Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock,
approximately shares after giving effect to this offering, and the
average weekly trading volume of our common stock on The Nasdaq National Market
during the four calendar weeks preceding this sale. Sales under Rule 144 of the
Securities Act are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is
not our affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, would be entitled to sell
these shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act. However, the transfer agent may require an opinion
of counsel that a proposed sale of shares comes within the terms of Rule 144 of
the Securities Act before effecting a transfer of these shares.
Before this offering, there has been no public market for our common stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
these shares in the public market, or the perception that these sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through an offering of our equity
securities.
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<PAGE>
Options
As of July 28, 1999, options to purchase a total of 6,856,871 shares of
common stock were outstanding and options to purchase 3,149,721 shares of
common stock were exercisable. All of the shares subject to options are subject
to lock-up agreements. An additional 452,249 shares of common stock were
available as of July 28, 1999 for future option grants or direct issuances
under the 1995 Stock Plan. In addition, in July 1998, the board of directors
and a majority of stockholders approved an increase in the 1995 Stock Plan by
an additional 500,000 shares. However, as of the date of this offering, our
1995 Stock Plan will terminate and no future options will be granted under this
plan. In addition, in July 1999, 1,900,000 shares were reserved for issuance
under our 1999 Equity Incentive Plan, 350,000 shares were reserved for issuance
under our 1999 Employee Stock Purchase Plan and 350,000 shares were reserved
for issuance under our 1999 Non-Employee Directors Option Plan. See
"Management--Employee Benefit Plans--1999 Equity Incentive Plan," "--1999
Employee Stock Purchase Plan," "--1999 Non-Employee Directors Option Plan" and
Notes 4 and 7 of Notes to Consolidated Financial Statements.
Rule 701 under the Securities Act provides that shares of common stock
acquired on the exercise of outstanding options may be resold by persons other
than our affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period. We intend to file one
or more registration statements on Form S-8 under the Securities Act to
register all shares of common stock subject to outstanding stock options and
common stock issued or issuable under our 1999 Equity Incentive Plan. We expect
to file the registration statement covering shares offered under the 1999
Equity Incentive Plan and the 1999 employee stock purchase plan and 1999 Non-
Employee Directors Option Plan approximately 30 days after the closing of this
offering. These registration statements are expected to become effective upon
filing. Shares covered by these registration statements will then be eligible
for sale in the public markets, subject to the lock-up agreements, if
applicable.
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UNDERWRITING
Under the terms and subject to conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, J.P. Morgan
Securities, Inc., Salomon Smith Barney Inc. and SoundView Technology Group,
Inc. are acting as representatives, the following respective numbers of shares
of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation............................
J.P. Morgan Securities, Inc. .....................................
Salomon Smith Barney Inc. ........................................
SoundView Technology Group, Inc. .................................
----------
Total...........................................................
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriting discounts and commissions. This option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and substantially all of our stockholders
have agreed that we and they will not offer, sell, contract to sell, announce
our intention to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Securities and Exchange Commission a registration statement
under the Securities Act relating to, any additional shares of our common stock
or securities convertible into or exchangeable or exercisable for any of our
common stock without the
80
<PAGE>
prior consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus, except in our case issuances pursuant
to the exercise of employee options outstanding on the date hereof.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares. In addition, Kistler Associates has the right to purchase
shares in the offering and an affiliate of Amerindo Investment
Advisors has the right to purchase shares in the offering.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
We have made application to list our shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "ITRU."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between the
representatives and us. The principal factors to be considered in determining
the public offering price include: the information set forth in this prospectus
and otherwise available to the underwriters; the history and the prospects for
the industry in which we will compete; the ability of our management; the
prospects for our future earnings; the present state of our development and our
current financial condition; the general condition of the securities markets at
the time of this offering; and the recent market prices of, and the demand for,
publicly traded common stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
In July 1999, an affiliate of Credit Suisse First Boston Corporation
purchased 41,666 shares of our Series E preferred stock for a total purchase
price of $499,992.
81
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of commons tock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws,
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice before any
resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from which the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under those securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as agent
and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser sunder relevant Canadian
legislation.
82
<PAGE>
LEGAL MATTERS
The validity of the common stock being offered will be passed upon for
InterTrust by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California and for the underwriters by Fenwick & West LLP, Palo
Alto, California. As of the date of this prospectus, some members and employees
of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, beneficially
owned an aggregate of 17,916 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
being offered. This prospectus does not contain all of the information
presented in the registration statement and the exhibits to the registration
statement. For further information with respect to InterTrust and our common
stock we are offering, reference is made to the registration statement and the
exhibits filed as a part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
referred to are only summaries of these documents. You should refer to the
exhibits to this registration statement for the complete contents of these
contracts and documents. Each statement is qualified in all respects by
reference to the relevant exhibit. The registration statement, including the
exhibits, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part may be obtained from this office
after payment of fees prescribed by the Commission. The Commission maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants, including us, that file electronically
with the Commission. The address of the site is http://www.sec.gov.
83
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................... F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InterTrust Technologies Corporation
We have audited the accompanying consolidated balance sheets of InterTrust
Technologies Corporation as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of InterTrust
Technologies Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young llp
Palo Alto, California
February 19, 1999,
except for Note 6,
as to which the date is
May 5, 1999
F-2
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- June 30, (Deficit) at
1997 1998 1999 June 30, 1999
-------- ------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,884 $ 5,575 $ 15,295
Accounts receivable............. 25 1,545 399
Other current assets............ 156 132 304
-------- ------- --------
Total current assets.......... 2,065 7,252 15,998
Property and equipment, net....... 967 938 885
Other assets...................... 79 90 337
-------- ------- --------
$ 3,111 $ 8,280 $ 17,220
======== ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable................ $ 654 $ 549 $ 899
Accrued compensation............ 387 560 740
Other accrued liabilities....... 417 610 720
Convertible promissory note..... -- -- 1,000
Deferred revenue................ 2,500 8,575 9,216
-------- ------- --------
Total current liabilities..... 3,958 10,294 12,575
Commitments
Stockholders' equity (deficit):
Convertible preferred stock,
$0.001 par value, issuable in
series; 20,000,000 shares
authorized, 6,300,388,
10,500,387, and 12,492,410
shares issued and outstanding
at December 31, 1997 and 1998
and June 30, 1999,
respectively, and none pro
forma.......................... 6 10 12 $ --
Common stock, $0.001 par value,
issuable in classes; 70,000,000
shares authorized, 13,790,260,
14,670,648, and 17,343,950
shares issued and outstanding
at December 31, 1997 and 1998
and June 30, 1999,
respectively, and 29,919,693
shares issued and outstanding
pro forma...................... 14 15 17 30
Additional paid-in capital...... 24,999 43,697 65,801 66,800
Deferred stock compensation..... -- -- (4,078) (4,078)
Notes receivable from
stockholders................... (68) (276) (236) (236)
Accumulated deficit............. (25,798) (45,460) (56,871) (56,871)
-------- ------- -------- -------
Total stockholders' equity
(deficit).................... (847) (2,014) 4,645 $ 5,645
-------- ------- -------- =======
$ 3,111 $ 8,280 $ 17,220
======== ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses..................... $ -- $ 1,000 $ -- $ -- $ 309
Software support services.... 25 100 152 50 177
------- -------- -------- ------- --------
Total revenues............. 25 1,100 152 50 486
Cost of revenues:
Licenses..................... -- -- -- -- 42
Software support services.... 5 102 191 84 208
------- -------- -------- ------- --------
Total cost of revenues..... 5 102 191 84 250
------- -------- -------- ------- --------
Gross profit (loss)............ 20 998 (39) (34) 236
Operating costs and expenses:
Research and development..... 4,852 8,287 13,041 6,358 7,088
Sales and marketing.......... 1,573 2,717 3,870 1,902 2,449
General and administrative... 1,735 1,932 2,717 1,075 2,117
Amortization of deferred
compensation................ -- -- -- -- 195
------- -------- -------- ------- --------
Total operating costs and
expenses.................. 8,160 12,936 19,628 9,335 11,849
------- -------- -------- ------- --------
Loss from operations........... (8,140) (11,938) (19,667) (9,369) (11,613)
Interest income................ 261 229 42 -- 202
Interest expense............... (81) -- (37) (9) --
------- -------- -------- ------- --------
Net loss....................... $(7,960) $(11,709) $(19,662) $(9,378) $(11,411)
======= ======== ======== ======= ========
Basic and diluted net loss per
share......................... $ (0.67) $ (0.86) $ (1.41) $ (0.68) $ (0.75)
======= ======== ======== ======= ========
Shares used in computing basic
and diluted
net loss per share............ 11,913 13,639 13,966 13,777 15,307
======= ======== ======== ======= ========
Pro forma basic and diluted net
loss per share ............... $ (0.91) $ (0.43)
======== ========
Shares used in computing pro
forma basic and diluted
net loss per share............ 21,688 26,808
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Notes Total
Preferred Stock Common Stock Additional Deferred Receivable Stockholders'
----------------- ------------------ Paid-In Stock From Accumulated Equity
Shares Amount Shares Amount Capital Compensation Stockholders Deficit (Deficit)
---------- ------ ---------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995............ -- $-- 10,454,240 $11 $ 1,732 $ -- $ -- $ (6,129) $(4,386)
Issuance of Series
A preferred stock,
net................ 3,966,666 4 -- -- 9,513 -- -- -- 9,517
Issuance of Series
B preferred stock,
net................ 1,400,234 1 -- -- 5,618 -- -- -- 5,619
Issuance of Class A
common stock upon
exercise of war-
rants.............. -- -- 54,560 -- 41 -- -- -- 41
Conversion of con-
vertible promissory
notes and accrued
interest
into Class A common
stock.............. -- -- 2,781,958 3 3,475 -- -- -- 3,478
Issuance of Class A
common stock upon
exercise of op-
tions.............. -- -- 207,332 -- 136 -- -- -- 136
Issuance of Class B
common stock upon
exercise of op-
tions.............. -- -- 179,700 -- 73 -- -- -- 73
Repurchase of Class
A common stock..... -- -- (84,446) -- (53) -- -- -- (53)
Compensation re-
lated to stock op-
tions granted...... -- -- -- -- 244 -- -- -- 244
Net loss........... -- -- -- -- -- -- (7,960) (7,960)
---------- --- ---------- --- ------- ------- ----- -------- -------
Balance at December
31, 1996............ 5,366,900 5 13,593,344 14 20,779 -- -- (14,089) 6,709
Issuance of Series
B preferred stock.. 933,488 1 -- -- 3,999 -- -- -- 4,000
Issuance of Class A
common stock upon
exercise of war-
rant............... -- -- 16,000 -- 20 -- -- -- 20
Issuance of Class A
common stock upon
exercise of op-
tions.............. -- -- 138,916 -- 115 -- (68) -- 47
Issuance of Class B
common stock upon
exercise of op-
tion............... -- -- 42,000 -- 37 -- -- -- 37
Compensation re-
lated to stock op-
tion granted....... -- -- -- -- 49 -- -- -- 49
Net loss........... -- -- -- -- -- -- -- (11,709) (11,709)
---------- --- ---------- --- ------- ------- ----- -------- -------
Balance at December
31, 1997............ 6,300,388 6 13,790,260 14 24,999 -- (68) (25,798) (847)
Issuance of Series
B preferred stock.. 3,484,144 3 -- -- 14,828 -- -- -- 14,831
Issuance of Series
B preferred stock
upon conversion of
convertible note
payable and accrued
interest........... 715,855 1 -- -- 3,066 -- -- -- 3,067
Issuance of Class A
common stock upon
exercise of op-
tions.............. -- -- 201,568 -- 228 -- (47) -- 181
Issuance of Class B
common stock upon
exercise of op-
tions.............. -- -- 617,332 1 500 -- (319) -- 182
Forgiveness of note
receivable from
stockholder........ -- -- -- -- -- -- 106 -- 106
Issuance of Class A
common stock upon
net exercise of op-
tions
and related compen-
sation............. -- -- 28,631 -- 50 -- -- -- 50
Issuance of Class A
common stock upon
net exercise of
warrant
and related compen-
sation............. -- -- 32,857 -- 26 -- -- -- 26
Payments on notes
receivable from
stockholders....... -- -- -- -- -- -- 52 -- 52
Net loss........... -- -- -- -- -- -- -- (19,662) (19,662)
---------- --- ---------- --- ------- ------- ----- -------- -------
Balance at December
31, 1998............ 10,500,387 10 14,670,648 15 43,697 -- (276) (45,460) (2,014)
Issuance of Series
C preferred stock
(unaudited)........ 850,000 1 -- -- 5,006 -- -- -- 5,007
Issuance of Series
D preferred stock
(unaudited)........ 1,142,023 1 -- -- 9,706 -- -- -- 9,707
Issuance of Class A
common stock upon
exercise
of options (unau-
dited)............. -- -- 1,560,798 1 2,267 -- -- -- 2,268
Issuance of Class B
common stock upon
exercise
of options (unau-
dited)............. -- -- 819,196 1 519 -- -- -- 520
Issuance of Class A
common stock upon
exercise
of warrants (unau-
dited)............. -- -- 293,308 -- 333 -- -- -- 333
Deferred compensa-
tion (unaudited)... -- -- -- -- 4,273 (4,273) -- -- --
Amortization of de-
ferred compensation
(unaudited)........ -- -- -- -- -- 195 -- -- 195
Forgiveness of note
receivable from
stockholders (unau-
dited)............. -- -- -- -- -- -- 40 -- 40
Net loss (unau-
dited)............. -- -- -- -- -- -- -- (11,411) (11,411)
---------- --- ---------- --- ------- ------- ----- -------- -------
Balance at June 30,
1999 (unaudited).... 12,492,410 $12 17,343,950 $17 $65,801 $(4,078) $(236) $(56,871) $ 4,645
========== === ========== === ======= ======= ===== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss....................... $(7,960) $(11,709) $(19,662) $(9,378) $(11,411)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 119 283 538 211 263
Amortization of deferred
stock compensation and other
stock related compensation
charges..................... 264 99 182 -- 275
Issuance of preferred stock
for accrued interest........ -- -- 37 -- --
Changes in operating assets
and liabilities:
Accounts receivable........ (25) -- (1,520) -- 1,146
Other current assets....... (33) (111) 24 (2) (172)
Accounts payable........... 261 187 (105) 229 350
Accrued compensation....... 172 190 173 101 180
Other accrued liabilities.. (326) 214 193 177 110
Deferred revenue........... 1,500 1,000 6,075 2,000 441
------- -------- -------- ------- --------
Net cash used in operating
activities.................... (6,028) (9,847) (14,065) (6,662) (8,818)
Investing activities
Capital expenditures........... (578) (662) (509) (116) (210)
Other noncurrent assets........ 15 (20) (11) 4 (47)
------- -------- -------- ------- --------
Net cash used in investing
activities.................... (563) (682) (520) (112) (257)
Financing activities
Proceeds from issuance of
convertible
promissory notes.............. -- -- 3,030 3,030 1,000
Repayment of convertible
promissory notes.............. (750) -- -- -- --
Proceeds from issuance of
preferred stock, net.......... 15,136 4,000 14,831 3,900 14,714
Proceeds from issuance of
common stock, net............. 178 54 363 115 3,081
Proceeds from repayment of note
receivables from
stockholders.................. -- -- 52 -- --
------- -------- -------- ------- --------
Net cash provided by financing
activities.................... 14,564 4,054 18,276 7,045 18,795
------- -------- -------- ------- --------
Net increase (decrease) in cash
and cash equivalents.......... 7,973 (6,475) 3,691 271 9,720
Cash and cash equivalents at
beginning of period........... 386 8,359 1,884 1,884 5,575
------- -------- -------- ------- --------
Cash and cash equivalents at
end of period................. $ 8,359 $ 1,884 $ 5,575 $ 2,155 $ 15,295
======= ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Years Ended Ended June
December 31, 30,
------------------ ------------
1996 1997 1998 1998 1999
------ ---- ------ ---- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental schedule of cash flow information
Interest paid................................. $ 90 $ -- $ -- $ -- $ --
====== ==== ====== ==== =======
Supplemental schedule of noncash financing
activities
Conversion of convertible promissory notes and
accrued interest
into Series B convertible preferred stock.... $ -- $ -- $3,067 $ -- $ --
====== ==== ====== ==== =======
Conversion of convertible promissory notes and
accrued interest into
Class A common stock......................... $3,477 $ -- $ -- $ -- $ --
====== ==== ====== ==== =======
Increase in deferred compensation............. $ -- $ -- $ -- $ -- $(4,273)
====== ==== ====== ==== =======
Common stock received in exchange for license
agreement.................................... $ -- $ -- $ -- $ -- $ 200
====== ==== ====== ==== =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
InterTrust Technologies Corporation (InterTrust) has developed a general-
purpose digital rights management (DRM) platform that serves as a foundation
for providers of digital information, technology, and commerce services to
participate in a global system for digital commerce. DRM technologies manage
rights and interests in digital information. InterTrust was formed and
incorporated in January 1990. From inception through December 1998,
InterTrust's efforts were principally devoted to research and development,
raising capital, recruiting personnel, and establishing partner relationships.
InterTrust shipped the general availability version of its, Commerce software,
at the end of fiscal 1998, and is therefore no longer in the development stage.
InterTrust has incurred operating losses to date and had an accumulated
deficit of $56.9 million at June 30, 1999. InterTrust's activities have been
primarily financed through private placements of equity securities. InterTrust
may need to raise additional capital through the issuance of debt or equity
securities. Such financing may not be available on terms satisfactory to
InterTrust, if at all.
Principles of Consolidation
The consolidated financial statements include the accounts of InterTrust and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Interim Financial Information
The financial information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited but includes all adjustments, consisting
only of normal recurring adjustments, that InterTrust's management considers
necessary for the fair presentation of its financial position, operating
results and cash flows for the interim date and periods. Results for the six
months ended June 30, 1999 are not necessarily indicative of results to be
expected for the full fiscal year of 1999 or for any future period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
InterTrust recognizes revenue from license fees, transaction fees, and
software support services. License revenue is recognized after execution of a
license agreement and delivery of the product,
F-8
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
provided there are no remaining obligations with regard to development,
upgrades, enhancements, or future deliverables, and provided that the license
fee is fixed or determinable, and collection of the fee is probable.
InterTrust's license agreements generally include the right to upgrades and
enhancements for a specified period. Under these circumstances, the license
payments received in advance of revenue recognition are deferred and recognized
on a subscription basis over the period of obligation. InterTrust began
recognizing deferred revenue under some license agreements in January 1999,
subsequent to shipment of the general availability version of its Commerce
software at the end of fiscal 1998. Under license agreements with two preferred
stockholders, InterTrust had received a total of $4,000,000 from nonrefundable
license payments as of December 31, 1998.
InterTrust's license agreements also require the payment of a percentage
transaction fee based on the fulfillment of a transaction that utilizes its
technology. InterTrust's partners are required to pay all amounts due for
transaction fees within 30 to 90 days after the end of each quarter.
InterTrust's revenue recognition policy with regard to transaction fees is to
recognize the revenue when the amounts due are known, which will generally be
in the quarter subsequent to the transaction. InterTrust had received
$1,000,000 in prepaid transaction fees from a preferred stockholder which are
included in deferred revenue as of December 31, 1998 and June 30, 1999. No
transaction revenue has been recognized from commercial transactions or
services as of June 30, 1999.
Software support services, which include the right to telephone and online
support and customer training, are generally provided for in the license
agreements for an agreed upon amount generally over a period of two years.
Support service revenue is recognized over the period in which the services are
provided. Certain of InterTrust's partners were utilizing pre-commercial
versions of its product in the development of their own solutions and, as a
result, were utilizing InterTrust's support services prior to the shipment of
its commercial release in December 1998.
InterTrust adopted Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), and Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of 97-2" (SOP 98-4), as of January 1, 1998.
SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on software
transactions and supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on InterTrust's operating results.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modifications of SOP 97-2, Software Revenue
Recognition With Respect to Certain Transactions" (SOP 98-9). SOP 98-9 amends
SOP 98-4 to extend the deferral of the application of certain passages provided
by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All
such provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. InterTrust believes the adoption
of SOP 98-9 will not have a material effect on its results of operations or
financial condition.
F-9
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
Cash and Cash Equivalents
InterTrust considers all highly liquid instruments with insignificant
interest rate risk and maturities of three months or less to be cash
equivalents. At December 31, 1998 and June 30, 1999, cash equivalents consist
of money market funds.
Concentration of Credit Risk
Financial instruments that potentially subject InterTrust to a concentration
of credit risk consist of cash, cash equivalents, and accounts receivable. Cash
and cash equivalents are deposited with a high-credit quality financial
institution. InterTrust's accounts receivable are primarily derived from
customers located in North America, Europe, and Asia. InterTrust performs
ongoing credit evaluations of its customers but does not require collateral
from its customers. When required, InterTrust maintains allowances for credit
losses, and to date, such losses have been within management's expectations.
One customer, who is also a preferred stockholder, accounted for 91% of
total revenues in 1997 and 40% of total revenues in the six months ended June
30, 1999. A second customer, also a preferred stockholder, accounted for 100%,
9%, and 66% of total revenues in 1996, 1997, and 1998, respectively, and 100%
and 24% of total revenues in the six months ended June 30, 1998 and 1999,
respectively. Two customers accounted for 13% and 21% of total revenues in
1998. One customer accounted for 13% of total revenue for the six months ended
June 30, 1999. One customer accounted for 98% of accounts receivable at
December 31, 1998. Two customers accounted for 63% and 10% of accounts
receivable at June 30, 1999.
Fair Value of Financial Instruments
The carrying amounts of InterTrust's financial instruments, which include
cash and cash equivalents, accounts receivable, current liabilities, and notes
receivable from stockholders, approximate their fair value.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the straight-
line method over the shorter of the estimated useful lives of the assets or the
terms of the leases.
Stock-Based Compensation
InterTrust accounts for stock-based compensation for awards to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock
F-10
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
Issued to Employees," and has adopted the disclosure only alternative of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123). InterTrust accounts for stock based compensation
awards to non-employees using the fair value method prescribed in FAS 123.
Research and Development
Research and development expenditures are expensed to operations as
incurred. Costs incurred in the development of new software and substantial
enhancements to existing software are expensed as incurred until technological
feasibility of such software has been established, at which time any additional
costs would be capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." To date, InterTrust's software development has
been completed concurrently with the establishment of technological feasibility
and, accordingly, no research and development costs have been capitalized.
Advertising Expense
InterTrust recognizes advertising expense as incurred. Advertising expense
has been immaterial in all periods since inception.
Comprehensive Loss
InterTrust adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130), as of December 31, 1998. Under FAS
130, InterTrust is required to display comprehensive income (loss) and its
components as part of the financial statements. Other comprehensive income
includes certain changes in equity that are excluded from net income (loss).
Specifically, FAS 130 requires unrealized holding gains and losses on
available-for-sale securities to be included in accumulated and other
comprehensive income. InterTrust has no material components of other
comprehensive loss and, accordingly, the comprehensive loss is the same as the
net loss for all periods presented.
Net Loss Per Share, Pro Forma Net Loss per Share, and Pro Forma Stockholders'
Equity
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per share have been computed using the weighted average number of
shares of common stock outstanding during the period, less shares subject to
repurchase.
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of convertible preferred stock not
F-11
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
included above that will automatically convert upon completion of InterTrust's
initial public offering of common stock (using the as-converted method). If the
offering contemplated by this prospectus is consummated, all of the convertible
preferred stock outstanding as of June 30, 1999 and the outstanding convertible
promissory note will automatically be converted into an aggregate of 12,575,743
shares of common stock. The number of shares to be issued upon conversion of
the convertible promissory note was calculated using the price of the Series E
financing completed in July 1999 (see note 7). Pro forma stockholders' equity
at June 30, 1999, as adjusted for the conversion of the convertible preferred
stock and convertible promissory note, is disclosed on the consolidated balance
sheet.
Historical and pro forma basic and diluted net loss per share are as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss...................... $(7,960) $(11,709) $(19,662) $(9,378) $(11,411)
======= ======== ======== ======= ========
Basic and diluted shares:
Weighted average shares of
common stock outstanding.... 11,913 13,681 14,186 13,904 15,609
Less weighted average shares
subject to
repurchase.................. -- (42) (220) (127) (302)
------- -------- -------- ------- --------
Weighted average shares of
common stock outstanding
used in computing basic and
diluted net per loss share.. 11,913 13,639 13,966 13,777 15,307
======= ======== ======== ======= ========
Basic and diluted net loss
per share................... $(0.67) $ (0.86) $ (1.41) $(0.68) $ (0.75)
======= ======== ======== ======= ========
Pro Forma:
Net loss...................... $(19,662) $(11,411)
======== ========
Weighted average shares of
common stock
outstanding used in computing
basic and diluted
net loss per share........... 13,966 15,307
Adjustment to reflect the
assumed conversion of
convertible preferred stock
from the date of issuance.... 7,722 11,501
-------- --------
Weighted average shares used
in computing pro forma basic
and diluted net loss per
share........................ 21,688 26,808
======== ========
Pro forma basic and diluted
net loss per share .......... $ (0.91) $ (0.43)
======== ========
</TABLE>
If InterTrust had reported net income, diluted net income per share would
have included the shares used in the computation of pro forma net loss per
share as well as the treasury stock impact of
F-12
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
approximately 6,172,000, 8,637,000, 9,084,000, 9,225,000, and 7,074,000 shares
purchasable under outstanding options and warrants not included above for the
years ended December 31, 1996, 1997, 1998, and for the six months ended June
30, 1998 and 1999, respectively. The number of common equivalent shares from
options and warrants would be determined on a weighted average basis using the
treasury stock method. The convertible promissory note outstanding at June 30,
1999 was excluded from the common equivalent share calculation, as it would
have been antidilutive. If InterTrust had reported net income, shares used in
computing diluted net income per share at June 30, 1999 would have included an
additional 83,333 shares from the conversion of the convertible promissory
note.
Segments
Effective January 1, 1998, InterTrust adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 changes the way companies report
selected segment information in annual financial statements and requires
companies to report selected segment information in interim financial reports
to stockholders. FAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. InterTrust
operates solely in one segment, and therefore, there is no impact on
InterTrust's financial statements as a result of adopting FAS 131. For the year
ended December 31, 1998, revenue from customers outside the United States was
$52,000 and was derived from customers in Europe. For the six months ended June
30, 1999, customers from Asia and Europe accounted for revenue totaling
approximately $194,000 and $130,000, respectively.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which is required to be adopted in years
beginning after June 15, 2000. To date, InterTrust has not used derivatives,
and management anticipates that the adoption of FAS 133 will not have a
significant effect on InterTrust's results of operations or financial position.
2.PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Computer equipment and software..................... $1,271 $1,465 $ 1,665
Furniture and equipment............................. 119 193 203
Leasehold improvements.............................. 56 56 56
------ ------ -------
1,446 1,714 1,924
Accumulated depreciation and amortization........... (479) (776) (1,039)
------ ------ -------
$ 967 $ 938 $ 885
====== ====== =======
</TABLE>
F-13
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
3.COMMITMENTS
InterTrust leases its facilities under agreements expiring in August 1999
(see note 7). Rent under the agreements is expensed to operations on a
straight-line basis over the terms of the leases. Future minimum rental
commitments under operating leases entered into as of December 31, 1998 are
approximately $355,000 in 1999. Rent expense for all operating leases was
approximately $167,000, $258,000, $490,000, and $320,000 in 1996, 1997, 1998,
and for the six months ended June 30, 1999, respectively.
4.STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
InterTrust is authorized to issue 20,000,000 shares of convertible preferred
stock, designated in series (see Note 7). A summary of convertible preferred
stock is as follows (in thousands, except share amounts):
<TABLE>
<CAPTION>
Issued and Outstanding Shares Liquidation Preference
-------------------------------- -----------------------
December 31,
Shares -------------------- June 30, December 31, June 30,
Designated 1997 1998 1999 1998 1999
---------- --------- ---------- ----------- ------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Series A................ 5,000,000 3,966,666 3,966,666 3,966,666 $10,135 $10,135
Series B................ 6,533,722 2,333,722 6,533,721 6,533,721 27,997 27,997
Series C................ 850,000 -- -- 850,000 -- 5,007
Series D................ 1,294,118 -- -- 1,142,023 -- 9,707
--------- ---------- ---------- ------- -------
6,300,388 10,500,387 12,492,410 $38,132 $52,846
========= ========== ========== ======= =======
</TABLE>
The board of directors has the authority to issue the preferred stock in one
or more series and to fix the rights, preferences, privileges, and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences, and
the number of shares constituting any series or designation of such series. In
accordance with the Series A preferred stock financing, InterTrust is
restricted from authorizing or issuing any other equity securities,
reclassifying any equity securities resulting in preferences or priorities to
those holders of Series A preferred stock, declaring or paying a dividend in
excess of 10% of its net income, amending or appealing the Certificate of
Incorporation in such a manner as to affect the voting rights of the Series A
stockholders, or increasing or decreasing its total number of authorized shares
without the consent of a majority of the holders of Series A preferred stock.
In the event of liquidation, the Series A preferred stock has preference
over the Series B, C, and D preferred stock and common stock in the amount of
$2.555 per share, plus declared but unpaid dividends. Remaining assets would
then be distributed pro rata based on (i) the number of shares of Class A
common stock into which the Series A preferred stock converts, (ii) three times
the number of shares of Class A common stock into which Series B, C, and D
preferred stock converts, and (iii) the then outstanding shares of common
stock. Series A preferred stockholders are to receive distributions
F-14
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
to a maximum aggregate amount of $7.665 per share. Series B, C, and D preferred
stockholders are to receive distributions until their distribution total equals
the aggregate of their original purchase prices of $4.285, $5.89, and $8.50 per
share, respectively.
Each of the Series B, C, and D stockholders shall recommence participation in
the distribution of any remaining assets once the common stockholders receive
distributions equal to the original per share purchase price of the applicable
preferred stock. Participation would be pro rata with the common stock
outstanding on a one-for-one conversion of the preferred stock to Class A
common stock.
Holders of preferred stock are entitled to one vote for each share of common
stock into which such shares are converted. Each share of Series A preferred
stock entitles the holder to receive annual noncumulative dividends in
preference to holders of Series B preferred shares and common shares, when and
if declared by the board of directors. In the event that dividends are declared
on Series A preferred stock, the dividends shall be declared at an annual rate
of $0.23 per share. After payment of any declared annual dividends, the
preferred stockholders will receive dividends, when and if declared by the
board of directors, on an as-if-converted basis in an amount equal to the
dividend paid to any other holders of outstanding stock. As of June 30, 1999,
no dividends had been declared.
Each share of preferred stock is convertible, at the option of the holder,
into Class A common stock, subject to certain adjustments for antidilution. In
addition, the preferred shares will automatically convert into common stock
upon an underwritten public offering of InterTrust's common stock at not less
than $3.75 per share, which results in aggregate proceeds to InterTrust in
excess of $10,000,000. The holders of preferred stock also have certain
registration rights. InterTrust has a right of first refusal should the
preferred stockholder desire to sell or transfer its shares. The repurchase
price must be substantially the same price and under the same terms offered to
the third party. The right of first refusal terminates upon an underwritten
public offering of InterTrust's common stock.
Common Stock
Authorized common stock has been designated as Class A voting common stock
and Class B nonvoting common stock. The rights, preferences, privileges, and
restrictions of Class A voting common stock and Class B nonvoting common stock
are identical in all respects except as to certain voting rights. The Class B
common stock will convert to Class A voting common stock upon the consummation
of a public offering of InterTrust's common stock. A summary of common stock is
as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
---------------------------------
December 31,
Shares --------------------- June 30,
Designated 1997 1998 1999
---------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Class A............................ 50,000,000 12,885,920 13,148,976 15,003,082
Class B............................ 20,000,000 904,340 1,521,672 2,340,868
---------- ---------- ----------
13,790,260 14,670,648 17,343,950
========== ========== ==========
</TABLE>
F-15
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
At December 31, 1998, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock...................................... 10,500,387
Exercise of outstanding stock options.............................. 8,457,989
Shares of common stock available for grant under the 1995 stock op-
tion plan......................................................... 101,846
Exercise of warrants............................................... 626,016
----------
19,686,238
==========
</TABLE>
During 1998, InterTrust received a note receivable in the amount of
approximately $319,000 from one of its officers upon his exercise of an option
to purchase 320,000 shares of common stock. As of December 31, 1998,
approximately 214,000 of these shares were subject to repurchase by InterTrust
at the original exercise price. The repurchase right lapses ratably over the
48-month vesting period of the underlying option. The note bears interest at 8%
per annum and is secured by the related stock and general assets of the
officer. The note and related interest are being forgiven over a period of four
years of employment. InterTrust is recording compensation expense as the note
is forgiven.
1995 Stock Option Plan
In October 1995, the board of directors adopted the 1995 Stock Option Plan
(the 1995 Option Plan) for issuance of Class A common stock to eligible
participants. Incentive stock options granted under the 1995 Option Plan are at
prices not less than the fair value as determined by the board of directors,
while nonstatutory options granted under the plan are at prices not less than
85% of the fair value on the date of the grant. Options expire after ten years.
Options generally vest ratably over a period of no more than five years.
Non Plan Stock Options
InterTrust's board of directors have granted to eligible participants
nonqualified stock options to purchase shares of Class B common stock. The
options generally expire up to six years after the date of grant or earlier if
employment or relationship is terminated. The options generally become
exercisable ratably over a period of no more than four years. The exercisable
options may be exercised in whole or in part but no more frequently than twice
a year and in amounts of no less than 250 shares. There were no options to
purchase shares of Class B common stock available for grant at December 31,
1998.
During 1996 and 1997, InterTrust issued options outside of the 1995 Option
Plan to purchase 160,000 shares of Class A common stock at $1.25 per share and
298,332 shares of Class A common stock at $1.50 per share, respectively.
F-16
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
Information with respect to stock option activity is summarized as follows
(see note 6):
<TABLE>
<CAPTION>
Shares of Common Stock
------------------------------------ Weighted
1995 Option Plan Average
----------------------- Nonplan Exercise
Available Outstanding Outstanding Price
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995... 2,009,600 490,400 3,306,480 $0.51
Shares authorized............. 880,000 -- -- --
Options granted............... (2,326,000) 2,326,000 160,000 $1.16
Options exercised............. -- (207,332) (179,700) $0.54
Unvested shares repurchased... 84,446 -- -- --
Options canceled.............. 32,000 (32,000) (364,852) $0.35
---------- ---------- ----------
Balance at December 31, 1996... 680,046 2,577,068 2,921,928 $0.81
Shares authorized............. 1,600,000 -- -- --
Options granted............... (2,823,300) 2,823,300 882,332 $1.46
Options exercised............. -- (138,916) (92,000) $0.75
Options canceled.............. 720,044 (720,044) (274,016) $1.02
---------- ---------- ----------
Balance at December 31, 1997... 176,790 4,541,408 3,438,244 $1.08
Shares authorized............. 1,200,000 -- -- --
Options granted............... (1,536,000) 1,536,000 80,000 $2.64
Options exercised............. -- (259,275) (617,332) $0.91
Options canceled.............. 261,056 (261,056) -- $1.45
---------- ---------- ----------
Balance at December 31, 1998... 101,846 5,557,077 2,900,912 $1.39
Shares authorized
(unaudited).................. 750,000 -- -- --
Options granted (unaudited)... (933,600) 933,600 22,028 $4.75
Options exercised
(unaudited).................. -- (1,264,548) (1,117,528) $1.17
Options canceled (unaudited).. 219,878 (219,878) (70,252) $2.04
---------- ---------- ----------
Balance at June 30, 1999
(unaudited)................... 138,124 5,006,251 1,735,160 $1.91
========== ========== ==========
Exercisable and vested at
December 31, 1998............. 2,026,979 2,529,244
========== ==========
Exercisable and vested at June
30, 1999 (unaudited).......... 1,527,885 1,675,160
========== ==========
Shares of common stock subject
to repurchase at December 31,
1998.......................... -- 213,334
========== ==========
Shares of common stock subject
to repurchase at
June 30, 1999 (unaudited)..... -- 405,002
========== ==========
</TABLE>
F-17
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
The following table summarizes information about options outstanding under
the 1995 option plan and nonplan options at December 31, 1998:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding ---------------------
---------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
------------- --------- ----------- -------- --------- --------
(In years)
<S> <C> <C> <C> <C> <C>
$0.01 - $0.31 698,160 3.13 $0.17 698,160 $0.17
$0.63 - $0.75 2,106,838 5.67 $0.63 1,834,001 $0.63
$1.25 1,016,168 7.70 $1.25 604,393 $1.25
$1.50 2,681,107 8.03 $1.50 1,093,162 $1.50
$2.00 - $2.50 1,637,216 9.24 $2.37 318,551 $2.29
$3.50 318,500 9.73 $3.50 7,956 $3.50
--------- ---------
$0.01-$3.50 8,457,989 7.30 $1.39 4,556,223 $0.97
========= =========
</TABLE>
In July 1996, InterTrust extended the exercise period of certain fully
vested options to purchase Class B common stock for an additional six-year
period. The difference between the exercise price and the deemed fair value of
such options at that date was approximately $220,000. This amount was recorded
as compensation expense in 1996.
In connection with the acceleration of vesting of certain options at the
time of an employee termination, InterTrust recorded a charge of $49,166 in
1997.
Stock-Based Compensation
In connection with the grant of certain options to employees during the six
months ended June 30, 1999, InterTrust recorded deferred stock compensation of
approximately $4,273,000 for the difference between the exercise prices of
those options at their respective dates of grant and the deemed fair values for
accounting purposes of the shares of common stock subject to such options. Such
amounts are included as a reduction of stockholders' equity and are being
amortized on a graded vesting method. The compensation expense of $195,000
during the six months ended June 30, 1999 relates to options awarded to
employees in all operating expense categories. These amounts have not been
separately allocated between operating expense categories.
Pro forma information regarding net income is required by FAS 123 as if
InterTrust had accounted for its stock-based awards to employees granted
subsequent to December 31, 1994 under the fair value method. The fair value was
estimated at the date of grant using the Black-Scholes option pricing model.
The Black-Scholes model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock volatility. InterTrust is a nonpublic
company and is permitted to use a near-zero volatility factor in its
assumptions when applying the Black-Scholes model. Since InterTrust's stock-
based awards have characteristics significantly different from those of traded
options and since changes in the subjective
F-18
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. The fair value of
InterTrust's stock-based awards to employees was estimated assuming no expected
dividend; a risk-free interest rate of 6%, and expected lives of two years for
nonplan options and five years for options granted under the 1995 Option Plan.
The weighted-average fair value of options granted during 1996, 1997, and
1998 was $0.40, $0.74, and $1.23 per share, respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss................................ $(8,269) $(12,645) $(21,115)
======= ======== ========
Pro forma basic and diluted net loss per share.... $ (0.97)
========
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the above
stock-based awards is amortized to expense over the vesting period of the
award. Because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1999.
Warrants
As of December 31, 1998, warrants to purchase a total of 306,000 shares of
Class A common stock at prices ranging from $0.63 to $2.56 per share were
outstanding. Warrants to purchase 40,000 shares were issued in January 1995 in
connection with convertible notes and were exercised in February 1999. Warrants
to purchase 16,000 shares were issued in May 1995 to a related party in
conjunction with convertible notes of which 13,308 were exercised in May 1999
with the remaining shares exercisable through May 2000. Warrants to purchase
240,000 shares were issued in April 1996 in conjunction with convertible notes
and were exercised in April 1999. Warrants to purchase 10,000 shares were
issued in November 1996 in connection with professional services and are
exercisable through the earlier of the completion of an initial public offering
of InterTrust's common stock or November 2001.
As of December 31, 1998, warrants to purchase a total of 320,016 shares of
Class B common stock were outstanding. A warrant to purchase 311,016 shares of
Class B common stock was issued in August 1996 in conjunction with a license
agreement. This warrant is exercisable beginning in August 2003 through August
2006 but may be exercised at an earlier date upon the occurrence of certain
events. Warrants to purchase 9,000 shares of Class B stock at a weighted
average exercise price of $1.61 per share were issued in 1998 in connection
with professional services and are exercisable through the earlier of the
completion of an initial public offering of InterTrust's common stock or at
various dates through December 2003.
F-19
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
5.INCOME TAXES
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 34% is primarily due to net operating losses not being benefited.
Accordingly, there is no provision for income taxes for the years ended
December 31, 1996, 1997, and 1998.
Significant components of InterTrust's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 8,100 $12,500
Capitalized research and development......................... 1,100 1,800
Research credit carryforwards................................ 800 1,700
Deferred revenue............................................. 400 1,000
Other........................................................ 600 1,500
------- -------
Total deferred tax assets..................................... 11,000 18,500
Valuation allowances.......................................... (11,000) (18,500)
------- -------
Net deferred tax assets....................................... $ -- $ --
======= =======
</TABLE>
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," provides for the recognition
of deferred tax assets if realization of such assets is more likely than not.
Based upon the weight of available evidence, which includes InterTrust's
historical operating performance and the reported cumulative net losses in all
prior years, InterTrust has provided a full valuation allowance against its
gross deferred tax assets.
The valuation allowance increased by approximately $5,100,000 and $7,500,000
during the years ended December 31, 1997 and 1998, respectively. Approximately
$100,000 of the valuation allowance at December 31, 1998 relates to the tax
benefits of stock option deductions that will be credited to additional paid-in
capital when realized.
As of December 31, 1998, InterTrust had federal and state net operating loss
carryforwards of approximately $36,200,000 and $4,300,000, respectively.
InterTrust also had federal research and development tax credit carryforwards
of approximately $1,100,000. The federal net operating loss and tax credit
carryforwards expire in years 2007 through 2018, if not utilized. The state net
operating loss carryforwards expire in years 1999 through 2003, if not
utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the change in ownership
provisions of the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before utilization.
F-20
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
6.SUBSEQUENT EVENTS
In March, April, and May 1999, InterTrust issued 850,000 shares of Series C
preferred stock at a price of $5.89 per share and 1,142,023 shares of Series D
preferred stock at a price of $8.50 per share. The Series C and D preferred
stock have similar rights and preferences as the previously issued Series B
preferred stock.
7.EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
In July 1999, InterTrust received permission from its shareholders to
increase the available shares under the 1995 Option Plan by an additional
500,000 shares.
In April 1999, in connection with executing a licensing arrangement,
InterTrust issued to the licensee, for an aggregate amount of $1,000,000, a
noninterest-bearing convertible promissory note. In July 1999, the note
converted into 83,333 shares of Series E preferred stock of InterTrust at a
price of $12.00 per share.
In July 1999, the board of directors and stockholders approved the issuance
of up to 1,400,000 shares of Series E preferred stock. During July 1999,
InterTrust issued 1,309,700 shares of the Series E preferred stock at a price
of $12.00 per share. The Series E preferred stock has similar rights and
preferences as the previously issued Series B, C and D preferred stock.
In July 1999, InterTrust entered into a lease agreement for office space to
serve as its corporate headquarters and principal operating facility. The lease
period commences September 1, 1999 and extends for a period of 60 months. The
lease requires monthly rental payments of approximately $121,000 plus variable
operating expenses and is subject to increases of 4% per annum.
In July 1999, the board of directors adopted InterTrust's 1999 Equity
Incentive Plan (the 1999 Plan), subject to stockholder approval, to be
effective upon completion of InterTrust's initial public offering of its common
stock. The 1999 Plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock purchase awards, and stock
appreciation rights to eligible participants. A total of 1,900,000 shares of
common stock has been reserved for issuance under the 1999 Plan.
In July 1999, the board of directors adopted InterTrust's 1999 Employee
Stock Purchase Plan (the Purchase Plan), subject to stockholder approval, to be
effective upon completion of InterTrust's initial public offering of its common
stock. A total of 350,000 shares of common stock has been reserved for issuance
under the Purchase Plan. Eligible employees may purchase common stock at 85% of
the lesser of the fair market value of InterTrust's common stock on the first
day of the applicable two-year offering period or the last day of the
applicable six-month purchase period.
In July 1999, the board of directors adopted the 1999 Non-Employee Directors
Option Plan (the Director's Plan), subject to stockholder approval, to be
effective upon completion of InterTrust's initial public offering of its common
stock. The Director's Plan provides for the automatic grant of options to
purchase shares of common stock to non-employee directors of InterTrust. A
total of 350,000 shares of common stock has been reserved for issuance under
the Director's Plan.
F-21
<PAGE>
Narrative Description of Inside Back Cover
In the center of the page is a rough sketch of a cube facing the viewer at an
angle. At the top of the page is a caption reading "Your Content Here" with an
arrow pointing down to the cube. Below the cube, to the right, is the caption
"DIGIBOX CONTAINER" with an arrow pointing up to the cube. At the bottom of the
page, in the center, is the InterTrust logo above the caption "The MetaTrust
Utility; Leading Digital Rights Management."
<PAGE>
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table presents the costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fees, and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration fee............................................. $ 23,630
NASD filing fee.................................................. 9,000
Nasdaq National Market listing fee............................... 90,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 175,000
Road show expenses............................................... 50,000
Blue sky fees and expenses....................................... 5,000
Custodian and transfer agent fees................................ 15,000
Miscellaneous fees and expenses.................................. 82,370
----------
Total.......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit indemnification
under limited circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI, Section 6.1 of our bylaws provides for mandatory
indemnification of our directors, officers and employees to the maximum extent
permitted by the Delaware General Corporation Law. Our Sixth Amended and
Restated Certificate of Incorporation provides that our officers and directors
shall not be liable for monetary damages for breach of the officers' or
directors' fiduciary duty as officers or directors to our stockholders and us.
This provision in the Sixth Amended and Restated Certificate of Incorporation
does not eliminate the officers' or directors' fiduciary duty, and, in
appropriate circumstances, equitable remedies like injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
officer or director will continue to be subject to liability for breach of the
officer's or director's duty of loyalty to us or our stockholders for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
officer or director, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect an officer's or director's responsibilities under any
other law, like the federal securities laws or state or federal environmental
laws. We have entered into indemnification agreements with our officers and
directors, a form of which is attached as Exhibit 10.1 and incorporated by
reference. The indemnification agreements provide our officers and directors
with further indemnification to the maximum extent permitted by the Delaware
General Corporation Law. Reference is made to Section 7 of the underwriting
agreement contained in Exhibit 1.1 to this registration statement, indemnifying
officers and directors of ours against limited liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since January 1, 1996, we have issued and sold the following securities:
1. We granted direct issuances or stock options to purchase 7,840,400 shares
of our common stock at exercise prices ranging from $0.625 to $12.00 per share
to employees, consultants, directors and other service providers under our 1995
Stock Plan. We granted direct issuances or stock options to purchase 1,234,360
shares of our common stock at exercise prices ranging from $0.01 to $7.65 per
share to service providers outside of the 1995 Plan.
2. We issued and sold an aggregate of 1,955,995 shares of our common stock
to employees, consultants, and other service providers for aggregate
consideration of approximately $2,573,811 under direct issuances or exercises
of options granted under our 1995 Stock Plan. We issued and sold an aggregate
of 1,676,200 shares of our common stock to employees, consultants, and other
service providers for aggregate consideration of approximately $1,137,851 under
direct issuances or exercises of options granted under our 1992 Stock Plan. We
issued and sold an aggregate of 320,360 shares of our common stock to
employees, consultants, and other service providers for aggregate consideration
of approximately $449,701 under direct issuances or exercises of options
granted outside of the Plans.
3. On February 29, 1996, we issued a warrant to purchase 16,000 shares of
our class A voting common stock with an exercise price of $1.25 per share to
Alexander Communications in connection with the payment of a convertible
promissory note. The warrant was subsequently exercised and we issued 16,000
shares thereunder.
4. On April 24, 1996, we issued a warrant to purchase 8,000 shares of our
class A voting common stock with an exercise price of $1.25 per share to John
Holmgreen in connection with the payment of a convertible promissory note. The
warrant was subsequently exercised and we issued 8,000 shares thereunder.
5. On April 24, 1996, we issued two warrants to purchase a total of 200,000
shares of our class A voting common stock with an exercise price of $1.25 per
share to Otto Candies, LLC in connection with the payment of two convertible
promissory notes. The warrants were subsequently exercised and we issued
200,000 shares thereunder.
6. On April 27, 1996, we issued a warrant to purchase 32,000 shares of our
class A voting common stock with an exercise price of $1.25 per share to the
Hubbs Family Trust in connection with the payment of a convertible promissory
note. The warrant was subsequently exercised and we issued 32,000 shares
thereunder.
7. In March, April and June 1996, we issued and sold 3,966,666 shares of our
Series A preferred stock for an aggregate purchase price of approximately
$10,135,000 to a group of investors under a stock purchase agreement.
8. In August and October 1996, June and December 1997, and March, April,
July, August, September, November and December 1998, we issued and sold
6,533,721 shares of our Series B preferred stock for an aggregate purchase
price of approximately $27,997,000 to a group of investors under a stock
purchase agreement.
II-2
<PAGE>
9. On August 19, 1996, we issued a warrant to purchase 311,016 shares of our
class B non-voting common stock to Upgrade Corporation of America.
10. On November 1, 1996, we issued a warrant to purchase 10,000 shares of
our class A voting common stock with an exercise price of $2.56 per share to
the Rutherford Bolen Group.
11. On April 28, 1998, we issued a warrant to purchase 2,000 shares of our
class B non-voting common stock with an exercise price of $1.50 per share to
Peter Williams.
12. On June 4, 1998, we issued a warrant to purchase 3,000 shares of our
class B non-voting common stock with an exercise price of $1.50 per share to
Peter Williams.
13. On December 21, 1998, we issued a warrant to purchase 4,000 shares of
our class B non-voting common stock with an exercise price of $1.75 per share
to Bill Horne.
14. In March 1999, we issued and sold 850,000 shares of our Series C
preferred stock for an aggregate purchase price of approximately $5,007,000 to
a group of investors under a stock purchase agreement.
15. In April and May 1999, we issued and sold 1,142,023 shares of our Series
D preferred stock for an aggregate purchase price of approximately $9,707,000
to a group of investors under a stock purchase agreement.
16. In July 1999, we issued and sold 1,393,033 shares of our Series E
preferred stock for an aggregate purchase price of approximately $16,716,000 to
a group of investors under a stock purchase agreement.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions under compensation benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution and appropriate legends were affixed to the share
certificates issued in these transactions. All recipients had adequate access,
through their relationships with us, to information about us.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Sixth Amended and Restated Certificate of Incorporation to be
filed upon the closing of the offering made under this Registration
Statement.
3.3 Bylaws of the Registrant.
3.4 Amended and Restated Bylaws of the Registrant to be effective upon the
closing of the offering made under this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Form of Registrant's Common Stock certificate.
4.3 Form of Registration Rights under select Convertible Promissory Notes.
4.4 Form of Registration Rights under select Class A Common Stock Purchase
Agreements.
4.5 Form of Series A Preferred Stock Registration Rights.
4.6 Form of Series B, C, D and E Preferred Stock Registration Rights.
4.7 Form of Registration Rights found in a Class B Non-Voting Common Stock
Warrant.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP.
10.1 Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2 1999 Equity Incentive Plan and forms of agreements thereunder.
10.3 1999 Employee Stock Purchase Plan.
10.4 1999 Non-Employee Directors Option Plan.
10.5* Warrant for the purchase of Class B Non-Voting Common Stock made by
the Registrant and held by Upgrade Corporation of America, dated
August 19, 1996.
10.6 Lease between California First, Ltd. and the Registrant dated April
28, 1994.
10.7 Amendment No. 1 to Lease between California First, Ltd. and the
Registrant dated August 10, 1994.
10.8 Amendment No. 2 to Lease between California First, Ltd. and the
Registrant dated April 17, 1997.
10.9 Standard Industrial/Commercial Multi-Tenant Lease-Modified Net and
Addendum between Staffield Investments and the Registrant dated March
21, 1997.
10.10 Addendum No. 2 to Standard Industrial/Commercial Multi-Tenant Lease-
Modified Net between Staffield Investments and the Registrant dated
September 10, 1998.
10.11 Lease between Mission West Properties, L.P. and the Registrant dated
July 21, 1999.
10.12* Technology Development, Marketing, and License Agreement by and
between the Registrant and National Westminster Bank PLC dated August
18, 1998.
10.13* Technology Development, Marketing, and License Agreement by and
between the Registrant and Bertelsmann Speichermedien GmbH d/b/a BMG
Entertainment Storage Media dated June 9, 1999.
10.14* Technology Development and License Agreement by and between the
Registrant and Universal Music Group, Inc. dated April 13, 1999.
10.15* Technology Development and License Agreement by and between the
Registrant and Upgrade Corporation of America dated August 7, 1996.
10.16* Technology Development and License Agreement by and between the
Registrant and Mitsubishi Corporation dated October 7, 1996.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see p. II-6).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
II-4
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted because the information required to be
presented in them is not applicable or is shown in the consolidated financial
statements or related notes.
Item 17. Undertakings
We undertake to provide to the underwriters at the closing specified in the
underwriting agreement, certificates in the denominations and registered in the
names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant under the Delaware General Corporation Law, our Sixth Amended and
Restated Certificate of Incorporation or our Amended and Restated Bylaws, the
underwriting agreement, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission this indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against these
liabilities, other than the payment by us of expenses incurred or paid by a
director, officer, or controlling person of ours in the successful defense of
any action, suit or proceeding, is asserted by a director, officer or
controlling person in connection with the securities being registered in this
offering, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether this indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
We undertake that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered,
and the offering of these securities at that time shall be deemed to be the
initial bona fide offering.
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 Sunnyvale, State of
California, on this 29th day of July, 1999.
Intertrust Technologies Corporation
By /s/ Victor Shear
----------------------------------
Victor Shear
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Know all persons by these presents, that each individual whose signature
appears below constitutes and appoints Victor Shear and Edmund J. Fish, and
each of them, his or her true and lawful attorneys-in-fact and agents with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective on filing pursuant to Rule 462(b) promulgated
under the Securities Act of 1933, and all post-effective amendments thereto,
and to file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them, or his or her or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Victor Shear Chairman of the Board and July 29, 1999
- ------------------------------- Chief Executive Officer
Victor Shear (Principal Executive
Officer)
/s/ Erwin N. Lenowitz Vice Chairman of the July 29, 1999
- ------------------------------- Board, Chief Financial
Erwin N. Lenowitz Officer (Principal
Financial and Accounting
Officer) and Secretary
/s/ Edmund J. Fish Director, Senior Operating July 29, 1999
- ------------------------------- Officer and Executive
Edmund J. Fish Vice President, Corporate
Development
II-6
<PAGE>
Signature Title Date
/s/ David Van Wie Senior Vice President of July 29, 1999
- ------------------------------- Research and Director
David Van Wie
/s/ Bruce Frederickson Director July 29, 1999
- -------------------------------
Bruce Fredrickson
/s/ Satish K. Gupta Director July 29, 1999
- -------------------------------
Satish K. Gupta
/s/ Larry D. McArthur Director July 29, 1999
- -------------------------------
Larry D. McArthur
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Sixth Amended and Restated Certificate of Incorporation to be
filed upon the closing of the offering made under this Registration
Statement.
3.3 Bylaws of the Registrant.
3.4 Amended and Restated Bylaws of the Registrant to be effective upon the
closing of the offering made under this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Form of Registrant's Common Stock certificate.
4.3 Form of Registration Rights under select Convertible Promissory Notes.
4.4 Form of Registration Rights under select Class A Common Stock Purchase
Agreements.
4.5 Form of Series A Preferred Stock Registration Rights.
4.6 Form of Series B, C, D and E Preferred Stock Registration Rights.
4.7 Form of Registration Rights found in a Class B Non-Voting Common Stock
Warrant.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP.
10.1 Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2 1999 Equity Incentive Plan and forms of agreements thereunder.
10.3 1999 Employee Stock Purchase Plan.
10.4 1999 Non-Employee Directors Option Plan.
10.5* Warrant for the purchase of Class B Non-Voting Common Stock made by
the Registrant and held by Upgrade Corporation of America, dated
August 19, 1996.
10.6 Lease between California First, Ltd. and the Registrant dated April
28, 1994.
10.7 Amendment No. 1 to Lease between California First, Ltd. and the
Registrant dated August 10, 1994.
10.8 Amendment No. 2 to Lease between California First, Ltd. and the
Registrant dated April 17, 1997.
10.9 Standard Industrial/Commercial Multi-Tenant Lease-Modified Net and
Addendum between Staffield Investments and the Registrant dated March
21, 1997.
10.10 Addendum No. 2 to Standard Industrial/Commercial Multi-Tenant Lease-
Modified Net between Staffield Investments and the Registrant dated
September 10, 1998.
10.11 Lease between Mission West Properties, L.P. and the Registrant dated
July 21, 1999.
10.12* Technology Development, Marketing, and License Agreement by and
between the Registrant and National Westminster Bank PLC dated August
18, 1998.
10.13* Technology Development, Marketing, and License Agreement by and
between the Registrant and Bertelsmann Speichermedien GmbH d/b/a BMG
Entertainment Storage Media dated June 9, 1999.
10.14* Technology Development and License Agreement by and between the
Registrant and Universal Music Group, Inc. dated April 13, 1999.
10.15* Technology Development and License Agreement by and between the
Registrant and Upgrade Corporation of America dated August 7, 1996.
10.16* Technology Development and License Agreement by and between the
Registrant and Mitsubishi Corporation dated October 7, 1996.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see p. II-6).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 3.1
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
INTERTRUST TECHNOLOGIES CORPORATION
InterTrust Technologies Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify as follows:
FIRST: The name of this Corporation is InterTrust Technologies
Corporation.
SECOND: This Corporation's original Certificate of Incorporation was
filed with the Delaware Secretary of State on January 2, 1990, under this
Corporation's original name, "Electronic Publishing Resources, Inc."
THIRD: This Fifth Amended and Restated Certificate of Incorporation
of July 27, 1999 (the "Restated Certificate") restates, integrates and amends
the Fourth Amended and Restated Certificate of Incorporation filed April 9,
1999. In accordance with the provisions of Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware, the Board of Directors and
stockholders of InterTrust Technologies Corporation have duly approved the
restatement, integration and amendment of the Restated Certificate to read in
its entirety as follows:
ARTICLE I
The name of this Corporation is InterTrust Technologies Corporation
("the Corporation").
ARTICLE II
The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE III
The address of this Corporation's registered office in the State of
Delaware is Corporation Service Company, 1013 Centre Road, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is Corporation Service Company.
ARTICLE IV
A. Classes of Stock. This Corporation is authorized to issue two classes
----------------
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which this Corporation is authorized to issue is
Ninety Million (90,000,000) shares, of which Seventy Million (70,000,000) shares
shall be Common Stock and Twenty Million
<PAGE>
(20,000,000) shares shall be Preferred Stock, each with a par value of $0.001
per share. There is hereby authorized a series of Common Stock which shall be
designated as "Class A Voting Common Stock," and a series of Common Stock which
shall be known as "Class B Non-Voting Common Stock." Fifty Million (50,000,000)
of the shares of Common Stock so authorized are designated "Class A Voting
Common Stock," and Twenty Million (20,000,000) of the shares of Common Stock so
authorized are designated "Class B Non-Voting Common Stock" (collectively, the
Class A Voting Common Stock and the Class B Non-Voting Common Stock are referred
to as the "Common Stock"). Upon conversion of all the outstanding Class B Non-
Voting Common Stock to Class A Voting Common Stock pursuant to the terms of this
Fifth Amended and Restated Certificate, the Class B Non-Voting Common Stock
shall cease to be authorized and the Class A Voting Common Stock shall be
designated as "Common Stock". There is hereby authorized a series of Preferred
Stock which shall be designated as "Series A Preferred Stock," which series
shall consist of Five Million (5,000,000) shares, a series of Preferred Stock
which shall be designated as "Series B Preferred Stock," which series shall
consist of Six Million Five Hundred Thirty-Three Thousand Seven Hundred Twenty
Two (6,533,722) shares, a series of Preferred Stock which shall be designated
as "Series C Preferred Stock," which series shall consist of Eight Hundred
Fifty Thousand (850,000) shares, a series of Preferred Stock which shall be
designated as "Series D Preferred Stock," which series shall consist of One
Million Two Hundred Ninety Four Thousand One Hundred Eighteen (1,294,118)
shares and a series of Preferred Stock which shall be designated as "Series E
Preferred Stock," which series shall consist of One Million Four Hundred
Thousand (1,400,000) shares (collectively, the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock and the Series E Preferred Stock are referred to as the "Preferred
Stock").
B. Rights, Preferences and Restrictions of Preferred Stock. The Board of
-------------------------------------------------------
Directors of this Corporation (the "Board of Directors") is expressly authorized
to provide for the issue of all or any of the remaining shares of the Preferred
Stock in one or more series, and to fix the number of shares and to determine or
alter for each such series, such voting powers, full or limited, or no voting
powers, and such designations, preferences, and relative, participating,
optional or other rights and such qualifications, limitations, or restrictions
thereof, as shall be stated and expressed in the resolution or resolutions
adopted by the Board of Directors providing for the issue of such shares and as
may be permitted by the Delaware General Corporation Law. The Board of Directors
is also expressly authorized to increase or decrease (but not below the number
of shares of such series then outstanding) the number of shares of any series,
other than the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock subsequent
to the issue of shares of the series. In case the number of shares of any such
series shall be so decreased, the shares constituting such decrease shall resume
the status that they had prior to the adoption of the resolution originally
fixing the number of shares of such series. The rights, preferences, privileges
and restrictions granted to or imposed upon the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock are as follows:
1. Voting Rights. Except as otherwise expressly provided herein or as
--------------
required by law, the holder of each share of Preferred Stock shall be entitled
to the number of votes equal to the number of shares of Class A Voting Common
Stock into which such share of Preferred Stock could then be converted, and with
respect to such, shall have full voting rights and powers equal to the voting
rights and powers of the holders of Class A Voting Common Stock (except as
otherwise expressly provided herein or as required by law), voting together with
the Class A Voting Common Stock as a single class, and shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of this
Corporation. Fractional votes shall
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not, however, be permitted and any fractional voting rights resulting from the
above formula (after aggregating all shares into which shares of Preferred Stock
held by each holder could be converted) shall be rounded to the nearest whole
number (with one-half being rounded upward).
2. Dividends.
---------
(a) Subject to the rights of series of Preferred Stock that may
from time to time come into existence, the holders of outstanding Series A
Preferred Stock shall be entitled to receive in any fiscal year, when, as and if
declared by the Board of Directors, out of funds legally available therefor,
dividends in cash at the annual rate of nine percent (9%) of the Original
Purchase Price (as hereinafter defined), in preference and priority to any
payment of any dividend on shares of Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and shares
of Common Stock. Such dividend or distribution may be payable annually or
otherwise when, as and if the Board of Directors may from time to time
determine. Dividends shall not be cumulative and no right shall accrue to
holders of Series A Preferred Stock by reason of the fact that dividends on such
shares are not declared in any prior year, nor shall any undeclared or unpaid
dividend bear or accrue interest.
(b) Subject to the rights of Series A Preferred Stock of this
Corporation, and any other series of Preferred Stock of this Corporation that
may from time to time come into existence, the holders of outstanding Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall be entitled to receive the same per share dividend as
declared or paid on shares of Common Stock (other than dividends on Common Stock
payable solely in shares of Common Stock). Such dividends will be in the amount
determined by the Board of Directors of this Corporation and shall be payable,
when, as and if declared by the Board of Directors out of funds legally
available therefor. Dividends shall not be cumulative and no right shall accrue
to holders of Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock by reason of the fact that dividends
on such shares are not declared in any prior year, nor shall any undeclared or
unpaid dividend bear or accrue interest.
(c) Subject to the rights of series of Preferred Stock that may
from time to time come into existence, dividends or distributions (other than
dividends payable solely in shares of Common Stock) may be declared and paid
upon shares of a series of Preferred Stock other than Series A Preferred Stock
or Common Stock in any fiscal year of this Corporation only if dividends shall
have been paid on or declared and set apart upon all shares of Series A
Preferred Stock as provided in Section 2(a) of this Article IV.
(d) In the event this Corporation shall declare a distribution to
the holders of Common Stock (other than distributions payable solely in shares
of Common Stock) payable in cash, securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets or options or
rights to purchase any such securities or evidences of indebtedness, then, in
each such case the holders of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock shall be entitled to a proportionate share of any such distribution as
though the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
were the holders of the number of shares of Class A Voting
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Common Stock of this Corporation into which their respective shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of this
Corporation entitled to receive such distribution.
3. Liquidation Preference.
----------------------
(a) For purposes hereof, the original purchase price of the
Series A Preferred Stock (the "Original Series A Purchase Price") is $2.555 per
share of Series A Preferred Stock, the original purchase price of the Series B
Preferred Stock (the "Original Series B Purchase Price") is $4.285 per share of
Series B Preferred Stock, the original purchase price of the Series C Preferred
Stock ("Original Series C Purchase Price") is $5.89 per share of Series C
Preferred Stock, the original purchase price of the Series D Preferred Stock
(the "Original Series D Purchase Price") is $8.50 per share of Series D
Preferred Stock and the original purchase price of the Series E Preferred Stock
(the "Original Series E Purchase Price") is $12.00 per share of Series E
Preferred Stock.
(b) In the event of the liquidation, dissolution or winding up of
this Corporation, either voluntary or involuntary (other than (i) an acquisition
of this Corporation by means of merger, consolidation or other form of corporate
reorganization, or (ii) a sale, lease or other transfer of all or substantially
all of the assets of this Corporation (unless such sale, lease or other transfer
of all or substantially all of the assets of this Corporation is in connection
with a plan of liquidation, dissolution or winding up of this Corporation) as
set forth below in subsection (c)):
(i) Subject to the rights of series of Preferred Stock that
may from time to time come into existence, the holders of the Series A Preferred
Stock will be entitled to receive out of the assets of this Corporation, prior
and in preference to any distribution of any of the assets or surplus funds of
this Corporation to the holders of Series B Preferred Stock, Series C Preferred
Stock, the Series D Preferred Stock, the Series E Preferred Stock or Common
Stock by reason of their ownership thereof, an amount per share equal to the
Original Series A Purchase Price, as appropriately adjusted for stock splits and
combinations, plus all declared and unpaid dividends with respect thereto. If
upon the occurrence of such event the assets and funds thus distributed among
the holders of the Series A Preferred Stock are insufficient to permit the
payment to such holders of the full amount of the first preference, then,
subject to the rights of series of Preferred Stock that may from time to time
come into existence, the entire assets and funds of this Corporation legally
available for distribution will be distributed ratably among the holders of the
Series A Preferred Stock (so that each holder receives for each share of Series
A Preferred Stock the same percentage of the applicable amount of the first
preference).
(ii) Upon completion of the first preference, distributions
required by subsection 3(b)(i) and any other distribution that may be required
with respect to any series of Preferred Stock that may from time to time come
into existence, the remaining assets of this Corporation available for
distribution to stockholders shall be distributed: (A) among the holders of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Common Stock pro rata
based on (1) in the case of
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the Series A Preferred Stock, the number of shares (the "Series A Conversion
Shares") of Class A Voting Common Stock into which the then outstanding shares
of Series A Preferred Stock may be converted, assuming conversion into Class A
Voting Common Stock of all such Series A Preferred Stock at the then effective
Conversion Price for the Series A Preferred Stock, (2) in the case of the Series
B Preferred Stock, three times the number of shares (the "Series B Conversion
Shares") of Class A Voting Common Stock into which the then outstanding shares
of Series B Preferred Stock may be converted, assuming conversion into Class A
Voting Common Stock of all such Series B Preferred Stock at the then effective
Conversion Price for the Series B Preferred Stock, (3) in the case of the Series
C Preferred Stock, three times the number of shares (the "Series C Conversion
Shares") of Class A Voting Common Stock into which the then outstanding shares
of Series C Preferred Stock may be converted, assuming conversion into Class A
Voting Common Stock of all such Series C Preferred Stock at the then effective
Conversion Price for the Series C Preferred Stock, (4) in the case of the Series
D Preferred Stock, three times the number of shares (the "Series D Conversion
Shares") of Class A Voting Common Stock into which the then outstanding shares
of Series D Preferred Stock may be converted, assuming conversion into Class A
Voting Common Stock of all such Series D Preferred Stock at the then effective
Conversion Price for the Series D Preferred Stock, (5) in the case of the Series
E Preferred Stock, three times the number of shares (the "Series E Conversion
Shares") of Class A Voting Common Stock into which the then outstanding shares
of Series E Preferred Stock may be converted, assuming conversion into Class A
Voting Common Stock of all such Series E Preferred Stock at the then effective
Conversion Price for the Series E Preferred Stock and (6) in the case of the
Common Stock, the number of the then outstanding shares of Common Stock;
provided, however, that (a) with respect to the holders of Series B Preferred
- -------- -------
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock, such holders shall stop participating under subsection (A) when they have
received an aggregate amount per share equal to the Original Series B Purchase
Price, Original Series C Purchase Price, the Original Series D Purchase Price
and the Original Series E Purchase Price, respectively (all of the foregoing as
adjusted for any subdivisions or combinations), and (b) the holders of the
Series A Preferred Stock shall not be entitled to any further distribution of
the remaining assets of this Corporation available for distribution to
stockholders upon such holders receipt of an aggregate of $7.665 per share
(including any other amounts paid pursuant to subsection 3(b)(i)); and,
thereafter (B) (1) the holders of the Series A Preferred Stock and Common Stock
shall participate in the same manner as set forth in subsection (A) above, and
(2) (a) the holders of Series B Preferred Stock shall recommence participation,
pro rata based on the number of Series B Conversion Shares, when the holders of
Common Stock have received an aggregate amount per share equal to the Original
Series B Purchase Price (as adjusted for any subdivisions or combinations), (b)
the holders of Series C Preferred Stock shall recommence participation, pro rata
based on the number of Series C Conversion Shares, when the holders of Common
Stock have received an aggregate amount per share equal to the Original Series C
Purchase Price (as adjusted for any subdivisions or combinations), (c) the
holders of Series D Preferred Stock shall recommence participation, pro rata
based on the number of Series D Conversion Shares, when the holders of Common
Stock have received an aggregate amount per share equal to the Original Series D
Purchase Price (as adjusted for any subdivisions or combinations), and (d) the
holders of Series E Preferred Stock shall recommence participation, pro rata
based on the number of Series E Conversion Shares, when the holders of Common
Stock have received an aggregate
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<PAGE>
amount per share equal to the Original Series E Purchase Price (as adjusted for
any subdivisions or combinations).
(iii) Upon completion of such second preference distributions
required by subsection 3(b)(ii) and subject to the rights of series of Preferred
Stock that may from time to time come into existence, if any assets or funds
remain in this Corporation, all such remaining assets or funds shall be
distributed as a third preference among the holders of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Common Stock pro rata based on (1) the number of
Series A Conversion Shares, (2) the number of Series B Conversion Shares, (3)
the number of Series C Conversion Shares, (4) the number of Series D Conversion
Shares, (5) the number of Series E Conversion Shares and (6) the number of the
then outstanding shares of Common Stock; provided, however, that the holders of
-------- -------
Series A Preferred Stock shall not be entitled to any further distribution of
the remaining assets of this Corporation available for distribution to
stockholders upon such holders of Series A Preferred Stock receipt of an
aggregate of $7.665 per share (including any other amounts paid pursuant to
subsections 3(b)(i) and 3(b)(ii)).
(c) In the event of (i) an acquisition of this Corporation by means
of merger, consolidation or other form of corporate reorganization, or (ii) a
sale, lease or other transfer of all or substantially all of the assets of this
Corporation (a "Sale of this Corporation"):
(i) subject to the rights of series of Preferred Stock that may
from time to time come into existence, the holders of the Series A Preferred
Stock will be entitled to receive out of the assets of this Corporation, prior
and in preference to any distribution of any of the assets or surplus funds of
this Corporation to the holders of Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Common Stock by
reason of their ownership thereof, an amount per share equal to the Original
Series A Purchase Price (as appropriately adjusted for stock splits and
combinations) plus all declared and unpaid dividends with respect thereto. If
upon the occurrence of such event the assets and funds thus distributed among
the holders of the Series A Preferred Stock are insufficient to permit the
payment to such holders of the full preferential amount, then, subject to the
rights of series of Preferred Stock that may from time to time come into
existence, the entire assets and funds of this Corporation legally available for
distribution will be distributed ratably among the holders of the Series A
Preferred Stock (so that each holder receives for each share of Series A
Preferred Stock the same percentage of the applicable preferential amount);
(ii) Upon completion of such distributions provided in subsection
(c)(i) immediately above in connection with the Sale of this Corporation and any
other distribution that may be required with respect to any series of Preferred
Stock that may from time to time come into existence, the remaining assets of
this Corporation available for distribution to stockholders shall be distributed
among the holders of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Common
Stock pro rata based on the number of shares of Common Stock held by each
(assuming conversion into Common Stock of all such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock at the then effective Conversion Prices) until the
holder of Series A Preferred Stock shall have received an aggregate of $7.665
per share (including any other amounts paid pursuant to this
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<PAGE>
subsection (c)(i) of this Section 3); thereafter, if any assets or funds remain
in this Corporation, the holders of the Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Common
Stock shall receive all such remaining assets or funds pro rata based on the
number of share of Common Stock held by each (assuming conversion into Common
Stock of all such Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Conversion Stock at its then effective Conversion
Price).
(d) Any securities to be delivered to the holders of the
Preferred Stock and/or Common Stock pursuant to this Section 3 of Part B shall
be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on a securities exchange or The Nasdaq
National Market or its successor or equivalent, the value shall be deemed to be
the average of the closing prices of the securities on such exchange over the
30-day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) days prior to the closing; and
(C) If there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors of this Corporation.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in
subparagraph (d)(i) to reflect the approximately fair market value thereof, as
determined in good faith by the Board of Directors of this Corporation.
4. Conversion Rights.
-----------------
(a) Right to Convert.
----------------
(i) Optional Conversion. Each share of Preferred Stock will
be convertible, at the option of the holder thereof, at the office of this
Corporation or any transfer agent for the Preferred Stock, into Class A Voting
Common Stock. The number of shares of Class A Voting Common Stock into which
each share of Preferred Stock will be converted will be equal to the Original
Purchase Price of such Preferred Stock divided by the Conversion Price (as
hereafter defined) then in effect for such Preferred Stock, such conversion
ratio being referred to as the "Conversion Rate" for such Preferred Stock. The
initial Conversion Price for the Series A Preferred Stock will be the Original
Series A Purchase Price of such Preferred Stock. The initial Conversion Price
for the Series B Preferred Stock will be the Original Series B Purchase Price of
such Preferred Stock. The initial Conversion Price for the Series C Preferred
Stock will be the Original Series C Purchase Price of such Preferred Stock. The
initial Conversion Price for the Series D Preferred Stock will be the Original
Series D Purchase Price of such Preferred Stock. The initial Conversion Price
for the Series E Preferred Stock will be the
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Original Series E Purchase Price of such Preferred Stock. The initial Conversion
Price for the Preferred Stock will be subject to adjustment as provided herein,
and the term "Conversion Price" shall mean, as of any date, the initial
Conversion Price as the same has been adjusted from time to time pursuant to the
provisions of Sections 4(c) and 4(d).
(ii) Automatic Conversion of Preferred Stock. Each share of
---------------------------------------
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock, as the case may be, will
be converted automatically into shares of Class A Voting Common Stock at the
then effective Conversion Rate for such Preferred Stock (A) upon the written
approval of a majority of the holders of the shares of such series of Preferred
Stock then outstanding, each such series voting as a separate class or (B)
immediately prior to the closing of a public offering pursuant to a registration
statement (other than a registration statement relating either to the sale of
securities to employees of this Corporation pursuant to a stock option, stock
purchase or similar plan or a transaction pursuant to Rule 145 under the
Securities Act of 1933, as amended (the "Act")) under the Act covering the
Common Stock with a price per share in excess of $3.75 (as adjusted for stock
dividends, stock splits or recapitalizations) and aggregate proceeds to this
Corporation, net of underwriting discounts and commissions, in excess of
$10,000,000 (the "Initial Public Offering").
(iii) Fractional Shares upon Conversion. No fractional
---------------------------------
shares of Class A Voting Common Stock will be issued upon conversion of the
Preferred Stock and any fractional share which otherwise would result from
conversion by a holder of all of his or her shares of Preferred Stock (with all
the shares of a series taken together as a group) will be redeemed by payment in
an amount equal to the fair market value thereof as determined by this
Corporation's Board of Directors for such series as promptly as funds are
legally available therefor. If more than one share of Preferred Stock is
surrendered for conversion at any one time by the same holder, the number of
full shares of Class A Voting Common Stock to be issued upon conversion shall be
computed on the basis of the aggregate number of shares of Preferred Stock so
surrendered.
(b) Mechanics of Conversion. Before any holder of Preferred
Stock will be entitled to convert the same into shares of Class A Voting Common
Stock, such holder will surrender the certificate or certificates therefor, duly
endorsed, at the office of this Corporation or of any transfer agent for the
Preferred Stock, and such holder will give written notice to this Corporation
stating the name or names in which the certificate or certificates for shares of
Class A Voting Common Stock are to be issued. This Corporation, as soon as
reasonably practicable thereafter, will issue and deliver at such office to such
holder or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Class A Voting Common Stock to which
such holder will be entitled as aforesaid. Such conversion will be deemed to
have been made immediately prior to the close of business on the date of notice
of conversion provided by the holder to this Corporation, and the person or
persons entitled to receive the shares of Class A Voting Common Stock issuable
upon conversion will be treated for all purposes as the record holder or holders
of such shares of Class A Voting Common Stock on such date. If the conversion is
in connection with the Initial Public Offering, the conversion will be
conditioned upon the closing with the underwriter of the sale of securities
pursuant to such offering in which event the persons entitled to receive the
Class A Voting Common Stock issuable upon such conversion of the Preferred Stock
shall not be deemed
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to have converted such Preferred Stock until immediately prior to the closing of
such sale of securities.
(c) Conversion Price Adjustments for Certain Dilutive Issuances.
------------------------------------------------------------
The Conversion Price of the Series A Preferred Stock shall be subject to
adjustment from time to time as follows:
(i) (A) If this Corporation shall issue, after the date
upon which any shares of Series A Preferred Stock were first issued (the "Series
A Purchase Date"), any Additional Stock (as defined below) without consideration
or for a consideration per share less than the Conversion Price for the Series A
Preferred Stock in effect immediately prior to the issuance of such Additional
Stock (a "Dilutive Issuance"), the Conversion Price for the Series A Preferred
Stock in effect immediately prior to each such issuance shall, subject to the
provisions of this subsection 4(c)(i), be adjusted to a price determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate
consideration received by this Corporation for such issuance would purchase at
such Conversion Price, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance plus the
number of shares of such Additional Stock; provided that, for the purposes of
this subsection 4(c)(i), all shares of Common Stock issuable upon conversion of
any outstanding Preferred Stock, options, warrants or convertible securities
shall be deemed to be outstanding.
(B) If during the eighteen month period following a
Dilutive Issuance there shall occur another transaction which would be a
Dilutive Issuance, then the first such transaction shall be referred to for
purposes of subsections 4(c)(i)(A) and (B) hereof as the "Initial Dilutive
Issuance," and the next such transaction, as well as any subsequent such
transaction falling within such eighteen (18) month period (the "Provisional
Period"), shall be referred to as a "Subsequent Dilutive Issuance." An Initial
Dilutive Issuance, together with any and all Subsequent Dilutive Issuances
occurring during the same Provisional Period, are herein collectively referred
to as "Tied Issuances." The occurrence of a Subsequent Dilutive Issuance shall
not commence a new Provisional Period. A new Provisional Period can only be
commenced by a new Dilutive Issuance occurring at a time when no Provisional
Period is then in effect. No adjustment of the Conversion Price effected
pursuant to subsection 4(c)(i)(A) hereof in respect of any Tied Issuances shall
be given effect for purposes of Part B, Section 1 of this Article IV or for
purposes of subsection 4(d) hereof unless and until the Provisional Period
relating to those Tied Issuances shall have elapsed without there having
occurred a Curative Transaction (as defined below, in subsections 4(c)(i)(B)(i)
through (iv)); provided, however that in the case of adjustments for purposes of
subsection 4(d) hereof, such adjustments, once given effect, shall, for purposes
of computing the Conversion Price, be given effect retroactively (carried back)
to the time of the subsection 4(d) event in question. In addition, any
adjustment of the Conversion Price effected pursuant to subsection 4(c)(i)(A)
hereof shall be undone in the event of a Curative Transaction, but only as to
prospective applications in the case of any transaction specified in (i) through
(iii) below, or prospective or concurrent transactions in the case of a
transaction specified in (iv) below, with such undoing to be effected as of the
moment in time immediately preceding a Curative Transaction. The term "Curative
Transaction" means
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the first transaction or event, if any, occurring during the Provisional Period
relating to an initial Dilutive Issuance which falls into one of the following
categories:
(i) The consummation of an arms' length transaction
involving the sale by this Corporation, to one or more non-affiliates for an
aggregate purchase price of not less than $100,000, of (a) shares of Common
Stock, where the purchase price per share is greater than or equal to the
Conversion Price which was in effect immediately prior to the Initial Dilutive
Issuance which triggered the Provisional Period in question (the "Base Price"),
or (b) shares of convertible Preferred Stock, where the conversion price of such
shares is greater than or equal to the Base Price;
(ii) The consummation of a transaction described in
subsection 3(c) hereof pursuant to which the holders of Common Stock of this
Corporation receive per share consideration greater than or equal to the Base
Price;
(iii) The failure of the holders of the Series A
Preferred Stock to approve a transaction described in subsection 5(a)(2) hereof,
where such transaction is duly presented to them for a vote and where such
transaction contemplates the issuance of an aggregate of not less than $100,000
of convertible Preferred Stock to one or more non-affiliates in an arms' length
transaction, where the conversion price of such shares is greater than or equal
to the Base Price; or
(iv) Conversion pursuant to subsections 4(a)(i) or
4(a)(ii) hereof, except that in such event the adjustment shall be undone only
as to the actual shares converted.
(C) No adjustment of the Conversion Price for the Series A
Preferred Stock shall be made in an amount less than one cent per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be either taken into account in
any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. Except to the limited extent provided for in
subsections 4(c)(i)(F)(3) and (4), no adjustment of such Conversion Price
pursuant to this subsection 4(c)(i) shall have the effect of increasing the
Conversion Price above the Conversion Price in effect immediately prior to such
adjustment.
(D) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(E) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors in good faith irrespective of any accounting treatment.
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(F) In the case of the issuance (whether before, on or
after the Purchase Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 4(c)(i) and subsection 4(c)(ii):
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time such
options or rights were issued and for a consideration equal to the consideration
(determined in the manner provided in subsections 4(c)(i)(D) and (E)), if any,
received by this Corporation upon the issuance of such options or rights plus
the minimum exercise price provided in such options or rights for the Common
Stock covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by this Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by this Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in subsections 4(c)(i)(D) and 4(c)(i)(E)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
Corporation upon exercise of such options or rights, upon conversion of or in
exchange for such convertible or exchangeable securities or upon exercise of
options or rights related to such securities, including, but not limited to, a
change resulting from the antidilution provisions thereof, the Conversion Price
of the Series A Preferred Stock, to the extent in any way affected by or
computed using such options, rights, securities or related options or rights,
shall be recomputed to reflect such change, but no further adjustment shall be
made for the actual issuance of Common Stock or any payment of such
consideration upon the exercise of any such options or rights, the conversion or
exchange of such securities or the exercise of options or rights related to such
securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A Preferred Stock, to the extent
in any way affected by or computed using such options, rights or securities or
options or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
11
<PAGE>
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to subsections
4(c)(i)(F)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either subsection
4(c)(i)(F)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 4(c)(i)(F))
by this Corporation after the Purchase Date other than:
(A) Shares of Common Stock issued or deemed to have
been issued pursuant to a transaction described in subsections 4(d) and 4(e),
(B) Securities issued or deemed to have been issued
to employees, consultants, or directors of this Corporation directly or pursuant
to a stock option plan or stock purchase plan or other incentive stock
arrangement which has been or may hereafter be approved by the Board of
Directors of this Corporation, the number of which shares, exclusive of options
and securities issued or deemed to have been issued prior to the Purchase Date,
shall not exceed 6,790,000 under any such plan or plans or arrangement or
arrangements in the aggregate (such shares shall not be deemed issued when
issuing securities pursuant to subsection 4(c)(ii)(F)),
(C) Securities issued or deemed to have been issued
in connection with bona fide equipment lease or bank financings, or similar
transactions,
(D) Securities issued or deemed to have been issued
in exchange for the acquisition of assets, another business entity or business
segment of any such entity by this Corporation by merger, purchase of assets or
other reorganization, the terms of which are approved by the Board of Directors
of this Corporation, and
(E) Shares of Class A Voting Common Stock issued or
deemed issued upon conversion of Preferred Stock.
(d) Adjustment for Subdivisions or Combinations of Common
-----------------------------------------------------
Stock. In the event this Corporation at any time or from time to time after
- -----
the effective date of the initial sale of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock as applicable (in each case, the "Original Issue Date" for such
series), effects a subdivision or combination of its outstanding Common Stock
into a greater or lesser number of shares without a proportionate and
corresponding subdivision or combination of its outstanding shares of such
series of Preferred Stock, then the existing Conversion Price for such series of
Preferred Stock will be decreased or increased proportionately.
(e) Adjustment for Dividends, Distributions and Common Stock
--------------------------------------------------------
Equivalents. In the event this Corporation at any time or from time to time
- -----------
after the Original Issue Date for the Preferred Stock, as applicable, makes or
issues, or fixes a record date for the determination of holders of Common Stock
(but not holders of such Preferred Stock) entitled to receive a dividend or
other distribution payable in additional shares of Common Stock or other
securities or rights (hereinafter referred to as "Common Stock Equivalents")
convertible into or
12
<PAGE>
entitling the holder thereof to receive additional shares of Common Stock
without payment of any consideration by such holder for such Common Stock
Equivalents or the additional shares of Common Stock, for the purpose of
protecting the holders of Preferred Stock from any dilution in connection
therewith, then and in each such event the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable in payment of such dividend or distribution or upon conversion or
exercise of such Common Stock Equivalents will be deemed to be issued and
outstanding as of the time of such issuance or, in the event such a record date
has been fixed, as of the close of business on such record date. In each such
event the then existing Conversion Rate for Preferred Stock will be increased as
of the time of such issuance or, in the event such a record date has been fixed,
as of the close of business on such record date, by multiplying the Conversion
Rate for such Preferred Stock by a fraction,
(1) the numerator of which will be the total number of
shares of Common Stock and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution or upon
conversion or exercise of such Common Stock Equivalents; and
(2) the denominator of which will be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date; provided, however,
(i) if such record date has been fixed and such dividend is not fully paid or if
such distribution is not fully made on the date fixed therefor, the Conversion
Rate for the Preferred Stock will be recomputed accordingly as of the close of
business on such record date and thereafter the Conversion Rate for the
Preferred Stock will be adjusted pursuant to this Section as of the time of
actual payment of such dividends or distribution; (ii) if such Common Stock
Equivalents provide, with the passage of time or otherwise, for any decrease in
the number of shares of Common Stock issuable upon conversion or exercise
thereof, the Conversion Rate for the Preferred Stock shall, upon any such
decrease becoming effective, be recomputed to reflect such decrease insofar as
it affects the rights of conversion or exercise of the Common Stock Equivalents
then outstanding, and (iii) upon the expiration of any conversion rights or
exercise under any unexercised Common Stock Equivalents, the Conversion Rate for
the Preferred Stock computed upon the original issue thereof shall, upon such
expiration, be recomputed as if the only additional shares of Common Stock
issued were the shares of such stock, if any, actually issued upon the
conversion or exercise of such Common Stock Equivalents.
(f) No Impairment. This Corporation, whether by amendment of
--------------
its Certificate of Incorporation or through any reorganization, transfer of
assets, merger, dissolution, issue or sale of securities or any other voluntary
action, will not avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by this Corporation, but at all
times in good faith will assist in the carrying out of all of such action as may
be necessary or appropriate in order to protect the conversion rights pursuant
to this subsection 4(f) of Part B of the holders of the Preferred Stock against
impairment.
(g) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Rate for the Preferred Stock
pursuant to this
13
<PAGE>
Section 4, this Corporation at its expense promptly will compute such adjustment
or readjustment in accordance with the terms hereof and prepare and furnish to
each holder of such Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This Corporation, upon the written request at any time of
any holder of Preferred Stock, will furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Rate for the Preferred Stock at the time in effect, and
(iii) the number of shares of Class A Voting Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of the Preferred Stock held by such holder.
(h) Notices of Record Date. In the event of any taking by this
----------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any Common Stock
Equivalents or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, this Corporation will mail to each holder of Preferred Stock at
least ten (10) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or rights, and the amount and character of such dividend,
distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. This
---------------------------------------------
Corporation at all times will reserve and keep available out of its authorized
but unissued shares of Class A Voting Common Stock solely for the purpose of
effecting the conversion of the shares of Preferred Stock such number of its
shares of Class A Voting Common Stock as from time to time will be sufficient to
effect the conversion of all then outstanding shares of Preferred Stock; and if
at any time the number of authorized but unissued shares of Class A Voting
Common Stock is not sufficient to effect the conversion of all then outstanding
shares of Preferred Stock, in addition to such other remedies as may be
available to the holders of Preferred Stock for such failure, this Corporation
will take such corporate action as, in the opinion of its counsel, may be
necessary to increase its authorized but unissued shares of Class A Voting
Common Stock to such number of shares as will be sufficient for such purpose.
(j) Notices. Any notices required by the provisions of this
-------
Section 4 to Part B to be given to the holders of shares of Preferred Stock
shall be given in writing and shall be conclusively deemed effectively given to
persons located in the United States five (5) days after deposit in the United
States mail, by registered or certified mail postage prepaid, or upon actual
receipt if given by any other method or to persons located outside of the United
States, addressed to such holder at his address appearing on the books of this
Corporation. To persons located outside of the United States, such notice will
be sent by telex or facsimile in cases where this Corporation has notice of a
telex or facsimile number for such person.
(k) Recapitalizations. If at any time or from time to time
-----------------
there shall be a recapitalization of the Common Stock (other than a subdivision
or combination provided for in subsection 4(d)), provision shall be made so that
the holders of the Preferred Stock shall thereafter be entitled to receive upon
conversion of such shares of such Preferred Stock the number of shares of stock
or other securities or property of this Corporation or otherwise, to
14
<PAGE>
which a holder of Common Stock deliverable upon conversion of such Preferred
Stock would have been entitled on such recapitalization.
5. Protective Provisions.
---------------------
(a) So long as any shares of Series A Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of a majority of the
then outstanding shares of Series A Preferred Stock:
(1) take any action that reclassifies any outstanding
shares of this Corporation's capital stock into shares of capital stock having
preferences or priority as to dividends or assets senior to or in parity with
the preferences and priority of the Series A Preferred Stock;
(2) authorize or issue, or obligate itself to issue, any
equity security, including any other security convertible into or exercisable
for any equity security, having a preference or priority as to dividends or
assets senior to or in parity with the preferences and priorities of the Series
A Preferred Stock, or obligate itself to issue Series A Preferred Stock other
than as contemplated in the Series A Preferred Stock Purchase Agreement dated
March 15, 1996;
(3) make any declaration or payment of any dividend with
respect to the Common Stock or the Preferred Stock which, when aggregated with
any other dividends declared or paid within the twelve (12) month period
preceding such declaration or payment, exceeds ten percent (10%) of this
Corporation's net after taxes income for the twelve (12) month period preceding
such declaration or payment;
(4) amend or repeal this Corporation's Certificate of
Incorporation in any manner adversely affecting the voting rights granted to the
Series A Preferred Stock in Section 1 of Part B of this Article IV;
(5) increase or decrease, other than by redemption or
conversion, the total number of authorized number of shares of Common Stock or
Preferred Stock; or
(6) amend this Section 5(a).
(b) So long as any shares of Series B Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of a majority of the
then outstanding shares of Series B Preferred Stock:
(1) take any action that reclassifies any outstanding
shares of this Corporation's capital stock into shares of capital stock having
preferences or priority as to assets senior to the preferences and priority of
the Series B Preferred Stock;
15
<PAGE>
(2) authorize or issue, or obligate itself to issue, any
equity security other than Series B Preferred Stock, including any other
security convertible into or exercisable for any equity security, having a
preference or priority as to assets senior to the preferences and priorities of
the Series B Preferred Stock;
(3) amend or repeal this Corporation's Certificate of
Incorporation in any manner adversely affecting the voting rights granted to the
Series B Preferred Stock in Section 1 of Part B of this Article IV; or
(4) amend this Section 5(b).
(c) So long as any shares of Series C Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of a majority of the
then outstanding shares of Series C Preferred Stock:
(1) take any action that reclassifies any outstanding
shares of this Corporation's capital stock into shares of capital stock having
preferences or priority as to assets senior to the preferences and priority of
the Series C Preferred Stock;
(2) authorize or issue, or obligate itself to issue, any
equity security other than Series C Preferred Stock, including any other
security convertible into or exercisable for any equity security, having a
preference or priority as to assets senior to the preferences and priorities of
the Series C Preferred Stock;
(3) amend or repeal this Corporation's Certificate of
Incorporation in any manner adversely affecting the voting rights granted to the
Series C Preferred Stock in Section 1 of Part B of this Article IV; or
(4) amend this Section 5(c).
(d) So long as any shares of Series D Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of a majority of the
then outstanding shares of Series D Preferred Stock:
(1) take any action that reclassifies any outstanding
shares of this Corporation's capital stock into shares of capital stock having
preferences or priority as to assets senior to the preferences and priority of
the Series D Preferred Stock;
(2) authorize or issue, or obligate itself to issue, any
equity security other than Series D Preferred Stock, including any other
security convertible into or exercisable for any equity security, having a
preference or priority as to assets senior to the preferences and priorities of
the Series D Preferred Stock;
(3) amend or repeal this Corporation's Certificate of
Incorporation in any manner adversely affecting the voting rights granted to the
Series D Preferred Stock in Section 1 of Part B of this Article IV; or
16
<PAGE>
(4) amend this Section 5(d).
(e) So long as any shares of Series E Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of a majority of the
then outstanding shares of Series E Preferred Stock:
(1) take any action that reclassifies any outstanding
shares of this Corporation's capital stock into shares of capital stock having
preferences or priority as to assets senior to the preferences and priority of
the Series E Preferred Stock;
(2) authorize or issue, or obligate itself to issue, any
equity security other than Series E Preferred Stock, including any other
security convertible into or exercisable for any equity security, having a
preference or priority as to assets senior to the preferences and priorities of
the Series E Preferred Stock;
(3) amend or repeal this Corporation's Certificate of
Incorporation in any manner adversely affecting the voting rights granted to the
Series E Preferred Stock in Section 1 of Part B of this Article IV; or
(4) amend this Section 5(e).
6. Covenants. In addition to any other rights provided by law, so
---------
long as any Preferred Stock is outstanding, this Corporation, without first
obtaining the affirmative vote or written consent of the holders of not less
than a majority of the outstanding shares of Preferred Stock (with all series
voting together as a single class), will not alter or change the rights,
preferences or privileges of the shares of Preferred Stock so as to affect such
shares materially and adversely.
C. Common Stock. The rights, preferences, privileges, and restrictions of
------------
Class A Voting Common Stock and Class B Non-Voting Common Stock shall be
identical in all respects, except with regard to voting, as set forth in Section
3 to Part C below.
1. Dividend Rights. Subject to the prior rights of holders of all
---------------
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of any assets of this Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or
------------------
winding up of this Corporation, the assets of this Corporation shall be
distributed as provided under Section 3 to Part B of Article IV.
3. Voting Rights. The holders of Class A Voting Common Stock shall
-------------
have one vote for each share of Class A Voting Common Stock on all matters
submitted to a vote of the holders of this Corporation's Common Stock; and
except as otherwise required by law, the holders of Class B Non-Voting Common
Stock shall not be entitled to notice of any
17
<PAGE>
stockholders' meetings, to vote upon the election of directors, or to vote on
any other matters submitted to a vote of the holders of this Corporation's
Common Stock.
4. Automatic Conversion. Each share of Class B Non-Voting Common
--------------------
Stock shall be converted automatically into one share of Class A Voting Common
Stock (as appropriately adjusted for subdivisions or combinations) upon the
closing of an Initial Public Offering or at the discretion of the Company.
ARTICLE V
A. A director of this Corporation shall not be personally liable to
this Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to this Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law is amended
after approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of this Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
B. To the fullest extent permitted by applicable law, this
Corporation is also authorized to provide indemnification of (and advancement of
expenses to) its agents (including its officers and any other persons to which
Delaware law permits this Corporation to provide indemnification) through bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to this
Corporation, its stockholders, and others.
C. Any repeal or modification of this Article V shall be
prospective and shall not affect the rights under this Article V in effect at
the time of the alleged occurrence of any act or omission to act giving rise to
liability or indemnification.
ARTICLE VI
Subject to the provisions of this Restated Certificate, this
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Restated Certificate in the manner now or hereafter prescribed
by the Delaware General Corporation Law, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE VII
Subject to the provisions of this Restated Certificate, the Board of
Directors may from time to time make, amend, supplement or repeal the Bylaws;
provided, however, that the stockholders may change or repeal any Bylaw adopted
by the Board of Directors; and provided, further, that no amendment or
supplement to the Bylaws adopted by the Board of Directors shall vary or
conflict with any amendment or supplement adopted by the stockholders.
18
<PAGE>
IN WITNESS WHEREOF, InterTrust Technologies Corporation has caused this Fifth
Amended and Restated Certificate of Incorporation to be signed by Victor Shear,
its Chief Executive Officer and attested by Erwin N. Lenowitz, its Secretary,
this 27 day of July, 1999.
INTERTRUST TECHNOLOGIES CORPORATION
By: /s/ Victor Shear
--------------------------------------------------
Victor Shear, Chairman and Chief Executive Officer
By: /s/ Erwin N. Lenowitz
--------------------------------------------------
Erwin N. Lenowitz, Secretary
19
<PAGE>
EXHIBIT 3.2
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
INTERTRUST TECHNOLOGIES CORPORATION
(originally incorporated on January 2, 1990 under the name
"Electronic Publishing Resources, Inc.")
ARTICLE I
The name of the corporation is InterTrust Technologies Corporation
(the "Corporation").
ARTICLE II
The address of the registered office of this corporation in the State
of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is Corporation Services
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of shares of Common Stock authorized to be issued is One-
Hundred-Twenty Million (120,000,000), par value $.001 per share, and the number
of shares of Preferred Stock authorized to be issued is Ten Million
(10,000,000), par value $.001 per share.
The board of directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware (such certificate being hereinafter referred to as a "Preferred
Stock Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restrictions thereof. Subject to compliance with the General Corporation Law
of the State of Delaware pertaining to amendments to this Certificate of
Incorporation, the number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the terms of
any Preferred Stock Designation.
<PAGE>
ARTICLE V
The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the board of directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Amended and
Restated Certificate of Incorporation or the Bylaws of the Corporation, the
directors are hereby empowered to exercise all such powers and do all such acts
and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called
only by the Chairman of the Board or the President or Chief Executive Officer or
by the board of directors acting pursuant to a resolution adopted by a majority
of the Whole Board or at the request in writing of stockholders owning at least
twenty percent (20%) in amount of the entire capital stock of the corporation
issued and outstanding and entitled to vote. For purposes of this Amended and
Restated Certificate of Incorporation, the term "Whole Board" shall mean the
total number of authorized directors whether or not there exist any vacancies in
previously authorized directorships.
ARTICLE VI
A. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, the number of
directors shall be fixed from time to time by the board of directors pursuant to
a resolution adopted by a majority of the Whole Board.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the board of directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall, unless otherwise provided by law or by resolution
of the board of directors, be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at
<PAGE>
the annual meeting of stockholders. No decrease in the authorized number of
directors shall shorten the term of any incumbent director.
C. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
D. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire board of directors, may be
removed from office at any time, but only for cause and only by the affirmative
vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of
the voting power of all of the then-outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
ARTICLE VII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article
by the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of, or increase
the liability of any director of this Corporation with respect to any acts or
omissions of such director occurring prior to, such repeal or modification.
ARTICLE XIII
The board of directors is expressly empowered to adopt, amend or
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the board of directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Amended and Restated Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
adopt, amend or repeal any provision of the Bylaws of the Corporation.
<PAGE>
ARTICLE IX
In addition to any vote of the holders of any class or series of the
stock of this Corporation required by law or by this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of a majority
of the voting power of all of the then outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal the provisions
of Article I, Article II, and Article III of this Amended and Restated
Certificate of Incorporation. Notwithstanding any other provision of this
Amended and Restated Certificate of Incorporation or any provision of law which
might otherwise permit a lesser vote or no vote, but in addition to any vote of
the holders of any class or series of the stock of this Corporation required by
law or by this Amended and Restated Certificate of Incorporation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to amend or
repeal any provision of this Amended and Restated Certificate of Incorporation
not specified in the preceding sentence.
* * * *
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation, which restates and integrates and further amends the provisions
of the Corporation's Amended and Restated Certificate of Incorporation, and
which has been duly adopted in accordance with Sections 242 and 245 of the
Delaware General Corporation Law, has been executed by a duly authorized officer
of the Corporation this _____ day of ____________, 1999.
____________________________________________
Victor Shear
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
ELECTRONIC PUBLISHING RESOURCES, INC.
ARTICLE I
OFFICES
Section 1. Business Offices. The principal office of the corporation shall
----------------
be located in Bethesda, Maryland. The location of the principal office may be
changed and the corporation may also have offices at such other places both
within and without the State of Delaware and Maryland in each case as the board
of directors may from time to time determine or as the business of the
corporation may require.
Section 2. Registered Office. The registered price of the corporation
-----------------
shall be in the City of Wilmington, County of New Castle, State of Delaware. The
registered office may be changed from time to time by the board of directors.
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meeting. An annual meeting of the shareholders shall be
--------------
held on the first Monday in the month of October in each year, or on such other
date as may be determined by the board of directors, beginning with the year
1990, for the purpose of electing directors and for the transaction of such
other business as properly may come before the meeting. If the day fixed for the
annual meeting shall be a legal holiday, such meeting shall be held on the next
succeeding business day. If the election of directors shall not be held on the
day designated for any annual meeting of the shareholders, or at any adjournment
thereof, the board of directors shall cause the election to be held at a special
meeting of the shareholder's as soon thereafter as is convenient. Failure to
hold an annual meeting as required by these bylaws shall not invalidate any
action taken by the board of directors or officers of the corporation.
Section 2. Special Meetings. Special meetings of the shareholders, for any
----------------
purpose or purposes, unless otherwise prescribed by statute, may be called by
the chairman of the board of directors or by the board of directors, and shall
be called by the president at the request of the holders of not less than 10% of
all the outstanding shares of the corporation entitled to vote at such meetings.
Such request shall state the purpose or purposes of the proposed meeting.
Section 3. Places of Meeting. Each meeting of the shareholders shall be
-----------------
held at such place either within or outside Delaware or Maryland, as may be
designated in the notice of meeting, or, if no place is designated in the
notice, at the principal office of the corporation.
Section 4. Fixing Date for Determination of Shareholders of Record. For
-------------------------------------------------------
the purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for
<PAGE>
any other lawful action, the board of directors may fix, in advance, a date u
the record date for any such determination of shareholders, which date shall not
be more than 60 nor less than 10 days before the date of such meeting, nor more
than 60 days prior to any other action, If no record date is fixed then the
record date shall be: (a) for determining shareholders entitled to notice of or
to vote at a meeting of shareholders the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, the close
of business on the day next preceding the day on which the meeting is held; (b)
for determining shareholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the board of directors is
necessary, the day on which the first written consent is expressed; and (c) for
determining shareholders for any other purpose the close of business on the day
on which the board of directors adopts the resolution relating thereto, A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting; prodded,
however, that the board of directors may ix a new record date for the adjourned
meeting.
Section 5. Notice of Meeting. Written notice stating the place, day and
-----------------
hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given not less than 10 nor
more than 60 days before the date of the meets, unless otherwise required by
applicable law, either personally or by mail, to each shareholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail, postage prepaid, directed to the
shareholder at his address as it appears on the records of the corporation. When
a meeting is adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting
at which the adjournment is taken. At the adjourned meeting the corporation
may transact any business which might have been transacted at the original
meeting. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
Section 6. Voting Lists. The officer who has charge of the stock books of
------------
the corporation shall prepare and make, at least 10 days before every meeting of
shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
shareholder and the number of shares registered in the name of each shareholder.
Such list shall be open to the examination of any shareholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any shareholder who is
present.
Section 7. Proxies. Each shareholder entitled to vote at a meeting of
-------
shareholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy. Every proxy must be signed by the shareholder granting the proxy or by
his attorney-in-fact. No proxy shall be voted or acted upon after eleven months
from its date, unless the proxy provides for a longer period.
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Section 8. Quorum. Except as otherwise provided by applicable law or by
------
the certificate of incorporation, a majority of the outstanding shares of the
corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of the
outstanding shares are represented at a meeting a majority of the shares so
represented may adjourn the meeting from time to time in accordance with Section
5 of this Article, until a quorum shall be present or represented.
Section 9. Voting of Shares. Unless otherwise provided in the certificate
----------------
of incorporation and subject to the provision of Section 4 of this Article, each
shareholder shall be entitled to one vote for each share of capital stock held
by such shareholder. In the election of directors each record holder of stock
entitled to vote at such election shall have the right to vote the number of
shares owned by him for as many persons as there are directors to be elected,
and for whose election he has the right to vote.
The affirmative vote of a majority of the shares represented at a meeting
at which a quorum is present and entitled to vote on the matter shall be the act
of the shareholders, unless the matter is one upon which, by express provision
of law, of the certificate of incorporation or of these bylaws, a different vote
is required, in which case such express provision shall govern and control
voting on the matter.
Section 10. Voting of Shares by Certain Holders. Persons holding stock
-----------------------------------
in a fiduciary capacity shall be entitled to vote the shares so held. Persons
whose stock is pledged shall be entitled to vote, unless in the transfer by
the pledgor on the books of the corporation he has expressly empowered the
pledgee to vote thereon, in which case only the pledgee or his proxy may
represent such shares and vote thereon. If shares stand of record in the names
of two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or if two or
more persons have the same fiduciary relationship respecting the same shares,
unless the secretary of the corporation is given written notice to the
contrary and is finished with a copy of the instrument or order appointing
them or creating the relationship wherein it is so provided, their acts with
respect to voting shall be as sat forth in the General Corporation Law of the
State of Delaware.
Section 11. Action Without a Meeting. Unless otherwise provided in the
------------------------
certificate of incorporation any action required or permitted to be taken at any
meeting of the shareholders may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
(which consent may be signed in counterparts). Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those shareholders who have not consented in writing. In the
event that the action which is consented to is such as would have required the
filing of a certificate or other document with any governmental body, if such
action had been voted on by shareholders at a meeting thereof, the certificate
filed shall state, in lieu of any statement required under law concerning any
vote of shareholders, that written consent has been given in accordance with the
provisions of law and that written notice has been given as provided by law.
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<PAGE>
Section 12. Conduct of Meeting. Meetings of shareholders shall be presided
------------------
over by the chairman of the board or, if the chairman is not present by the
chief executive officer or if the chief executive officer is not present by the
president. If none of the foregoing is present, shareholder meetings shall be
presided over by a chairman to be chosen by the shareholders entitled to vote
who are present in person or by proxy at the meeting. The secretary of the
corporation shall act as secretary of every meeting, but if the secretary is not
present, the presiding officer of the meeting shall appoint a person present to
act as secretary of the meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the corporation
--------------
shall be managed by or under the direction of its board of directors, except as
otherwise provided under applicable law or in the certificate of incorporation.
Section 2. Number, Tenure and Qualifications. The number of directors of
---------------------------------
the corporation shall be three. The number of directors may be increased or
decreased from three to seven from time to time by resolution of the board of
directors or by the shareholders. Directors shall be elected at each annual
meeting of shareholders except as provided in Section 3 of this Article. Each
director shall hold office until his successor shall have been elected and
qualified or until his earlier death, resignation or removal. Directors need not
be residents of Delaware, citizens of the United States or shareholders of the
corporation. Directors shall be removable, either with or without cause, in the
manner provided by applicable law.
Section 3. Vacancies. Any director may resign at any time by giving
---------
written notice to the corporation. A director's resignation shall take effect at
the time specified therein, and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. Any
vacancy or any newly created directorship resulting from any increase in the
authorized number of directors may be filled by a majority of directors then in
office, although less than a quorum, or by the affirmative vote of two directors
if there are only two directors remaining, or by a sole remaining director or by
the shareholders if there are no directors remaining, and a director so chosen
shall hold office until the next annual selection and until his successor is
duly elected and qualified, unless sooner displaced.
If the holders of any class or classes of stock or series thereof are
entitled to elect one or more directors by the provisions of the certificate of
incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series then in office, or by the affirmative vote of two
such directors if there are only two directors remaining of such class or
classes or series, or by a sole remaining director so elected, or by the
shareholders of such class or classes or series if there are no such directors
remaining, and a director so chosen shall hold office until the next election of
the class for which such director shall have been chosen and until his successor
is duly elected and qualified, unless sooner displaced.
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<PAGE>
When one or more directors shall resign from the board, effective at a
future date, a majority of the directors then in office including those who have
so resigned, shall have the power to fill the vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
Section for the filling of other vacancies.
Section 4. Regular Meetings. A regular meeting of the board of directors
----------------
shall be held immediately after and at the same place as the annual meeting of
shareholders, or as soon as practicable thereafter at the time and place, either
within or without Delaware or Maryland, determined by the board, for the purpose
of electing officers and for the transaction of such other business as may come
before the meeting. The board of directors may provide by resolution the time
and place, either within or outside Delaware or Maryland, for the holding of
additional regular meetings.
Section 5. Special Meetings. Special meetings of the board of directors
----------------
may be called by or at the request of the chairman or any two directors. The
person authorized to call special meetings of the board of directors may fix any
place, either within or outside Delaware or Maryland, as the place for holding
any special meeting of the board of directors called by him.
Section 6. Notice. Notice of each meeting of the board of directors
------
stating the place, day and hour of the meeting shall be given to each director
at least five days prior thereto by the mailing of written notice by first
class, certified or registered mail, or at least two days prior thereto by
personal delivery of written notice or by telephonic or telegraphic notice,
exert that in the case of a meeting to be held pursuant to Section 11 of this
Article telephonic notice may be given one day prior thereto. (The method of
notice need not be the same to each director) Notice shall be deemed to be
given, if mailed, when deposited in the United States mail, with postage thereon
prepaid, addressed to the director at his business or residence address; if
personally delivered, when delivered to the director; if telegraphed, when the
telegram is delivered to the telegraph company; if telephoned, when communicated
to the director. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the board of directors need be specified in
the notice or waiver of notice of such meeting.
Section 7. Quorum and Voting. If the number of directors of the
-----------------
corporation is less than three, a quorum for the transaction of any business
at a meeting of the board of directors shall consist of the total number of
directors fixed under Section 2 of this Article, present in person, and the vote
of all of such directors shall be required to be the act of the board of
directors. If the number of directors is three or more, a majority of the number
of directors fixed under Section 2 of this Article, present in person, shall
constitute a quorum for the transaction of business at any meeting of the board
of directors, and the vote of a majority of the directors present at a meeting
at which a quorum is present shall be the act of the board of directors. If less
than a quorum is present at a meeting, the directors present may adjourn the
meeting from time to time without further notice other than announcement at the
meeting, until a quorum shall be present. No director may vote or act by proxy
or power of attorney at any meeting of the board of directors.
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<PAGE>
Section 8. Committees. The board of directors may, by one or more
----------
resolutions, designate one or more committees, each committee to consist of
one or more of the directors of the corporation and such other persons as the
board may designate. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of
a member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors
but subject to the limitations of applicable law, shall have and may exercise
all the powers and authority of the board of directors in the management of
the business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the shareholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets,
recommending to the shareholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of
stock. Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
Section 9. Executive Committee. The corporation shall have an executive
-------------------
committee responsible for evaluating and periodically reporting to the board of
directors about the strategic activities and directions of the company. The
executive committee will be comprised of the chairman of the board (who will
chair the committee and be responsible for calling meetings), the chief
executive officer (at the option of the chief executive officer), senior staff
executives of the corporation selected by the chairman (other than executives
having line operational responsibilities), any members of the board of directors
(as requested by the chairman), and such persons other than employees of the
corporation or board members approved by the board of directors or the chairman
and the chief executive officer. The committee will hear reports from employees
of the company and others, as requested by the chairman of the committee, and
will prepare confidential reports for transmission to the members of the
committee and the board of directors.
Section 10. Compensation. Unless otherwise restricted by the certificate
------------
of incorporation or these bylaws, the board of directors shall have the
authority to fix the compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the board of directors and
may be paid a fixed sum for attendance at each meeting of the board of directors
or a stated salary as director. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor. Members of any committee of the board may be allowed like compensation
for attending committee meetings.
Section 11. Action Without a Meeting. Any action required or permitted to
------------------------
be taken at any meeting of the board of directors or any committee thereof may
be taken without a meeting if
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<PAGE>
all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of the
proceedings of the board or committee.
Section 12. Meetings by Telephone. Unless otherwise restricted by the
---------------------
certificate of incorporation, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
such board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting in such manner
shall constitute presence in person at the meeting.
Section 13. Conduct of Meeting. Meetings of the board of directors shall
------------------
be presided over by the chairman of the board or, if there is none, by a
chairman chosen by the directors entitled to vote who are present in person at
the meeting. The secretary of the corporation shall act as secretary at all
meetings of the board of directors When present and, in his or her absence, the
presiding officer may appoint a person to act as secretary.
ARTICLE IV
OFFICERS AND AGENTS
Section 1. Number and Qualifications. The officers of the corporation
-------------------------
shall be at least a president and a secretary. The board of directors may also
elect or appoint such other officers, assistant officers, and agents, including
a chairman of the board, a vice-chairman or vice-chairman of the board, a chief
executive officer, a chief operating officer, one or more vice-presidents, a
treasurer, a controller, assistant secretaries and assistant treasurers, as they
may consider necessary. Any number of offices may be held by the same person.
Section 2. Election and Term of Office. The officers of the corporation
---------------------------
shall be elected by the board of directors annually at the first meeting of the
board held after each annual meeting of the shareholders. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as is convenient to the board of directors. Each officer shall hold
office until his successor shall have been duly elected and qualified or until
his earlier death, resignation or removal.
Section 3. Salaries. The salaries of the officers shall be as fixed from
--------
time to time by the board of directors and no other shall be prevented from
receiving a salary by reason of the fact that he is also a director of the
corporation.
Section 4. Removal. Any officer or agent elected or appointed by the board
-------
of directors may be removed at any time by the board whenever in its judgment
the best interests of the corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment of an officer or agent shall not in itself
create contract rights.
Section 5. Vacancies. Any of officer may resign at any time, subject to
---------
any rights or obligations under any existing contracts between the officer and
the corporation, by giving written notice to the corporation. An officer's
resignation shall take effect at the time stated therein; and
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<PAGE>
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective. Any vacancy occurring in any office by death,
resignation, removal or otherwise, shall be filled by the board of directors for
the unexpired portion of the term.
Section 6. Authority and Duties of Officers. The officers of the
--------------------------------
corporation shall have the authority and shall exercise the powers and perform
the duties specified below, and as may be additionally specified by the board of
directors or by these bylaws, except that in any event each officer shall
exercise such powers and perform such duties as may be required by law.
(a) Chairman of the Board. The chairman of the board (i) may be the
---------------------
chief executive officer and/or president of the corporation and shall have
primary general and active control of its affairs, business and property and
general supervision of its officers, agents and employees; (ii) shall chair the
executive committee of the corporation and preside at all meetings of the
shareholders and the board of directors; (iii) shall have the responsibility of
guiding the board of directors in effectively discharging its responsibilities,
including, but not limited to, providing for the execution of the corporation's
objectives; safeguarding and furthering shareholders' interests; and appraising
the adequacy of overall results as reported by the chief executive officer and
(iv) shall see that all orders and resolutions of the board of directors are
carried into effect and shall from time to time report to the board of directors
on matters within his or her knowledge which the interests of the corporation
may require to be brought to the attention of the board of directors.
(b) Chief Executive Officer. The chief executive officer, may be the
-----------------------
president of the corporation, and, subject to the direction and supervision of
the board of directors, shall: (i) have general and active control of the
corporation's affairs, business and property and general supervision of its
officers, agents and employees, except as reserved for the chairman of the
board; (ii) in the absence of the chairman, and unless otherwise delegated in
writing by the chairman to a vice chairman, preside at all meetings of the
shareholders and the board of directors; and (iii) be a member of the executive
committee; and (iv) have the general powers and duties of management vested in
the office of chief executive officer by these bylaws and the board of
directors.
(c) President. The president, subject to the direction and supervision
---------
of the board of directors and the chief executive officer, shall perform all
duties normally incident to the office of president of a corporation as from
time to time may be assigned to him by these bylaws, the board of directors or
the chief executive officer.
(d) Vice-President. The vice-president, if any, (or if there is more
--------------
than one then each vice-president) shall assist the chairman, chief executive
officer and president and shall perform such duties as may be assigned to him by
the chief executive officer, president or by the board of directors. The vice-
president, if there is one (or if there is more than one then the vice-president
designated by the board of directors or if there be no such designation, then
the vice. presidents in order of their election) shall, at the request of the
chief executive officer or president, or in their absence or inability or refuse
to act, perform the duties of the president and when so acting shall have all
the powers of and be subject to all the restrictions upon the president.
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<PAGE>
(e) Secretary. The secretary shall: (i) record or cause to be recorded
---------
the proceedings of the meetings of the shareholders, the board of directors and
any committees of the board of directors in a book to be kept for that purpose;
(ii) see that all notices are duly given in accordance with the provisions of
these bylaws or as required by law; (iii) be custodian of the corporate records
and of the seal of the corporation; (iv) keep at the corporation's registered
office or principal place of business a record containing the names and
addresses of all shareholders and the number and class of shares held by each,
unless such a record shall be kept at the office of the corporation's transfer
agent or registrar; (v) have general charge of the stock books of the
corporation, unless the corporation has a transfer agent; and (vi) in general
perform all other duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the chief executive
officer, president or by the board of directors. Assistant secretaries, if any,
shall have the same duties and powers, subject to supervision by the secretary.
(f) Treasurer. The treasurer shall (i) be the principal financial
---------
officer of the corporation and have the care and custody of all funds,
securities, evidences of indebtedness and other personal property of the
corporation and deposit the same in accordance with the instructions of the
board of directors; (ii) receive and give receipts and acquaintances moneys paid
in on account of the corporation, and pay out of the funds on hand all bills,
payrolls and other just debts of the corporation of whatever nature upon
maturity; (iii) unless there is a controller, be the principal accounting
officer of the corporation and as such prescribe and maintain the methods and
systems of accounting to be followed, keep complete books and records of
account, prepare and file all local, state and federal tax returns, prescribe
and maintain an adequate system of internal audit and prepare and furnish to the
chief executive officer president and the board of directors statements of
account showing the financial position of the corporation and the results of its
operations; (iv) upon request of the board, make such reports to it as may be
required at any time; and (v) perform all other duties incident to the office of
treasurer and such other duties as from time to time may be assigned to him by
the board of directors, chief executive officer, or the president. Assistant
treasurers, if any, shall have the same powers and duties, subject to the
supervision of the treasurer. If there is no treasurer, these duties shall be
performed by the secretary, chief executive officer president, chairman, or
other person appointed by the board of directors.
Section 7. Surety Bonds. The board of directors may require any officer or
------------
agent of the corporation to execute to the corporation a bond in such sums and
with such sureties as shall be satisfactory to the board, conditioned upon the
faithful performance of his duties and for the restoration to the corporation of
all books, papers, vouchers, money and other property of whatever kind in his
possession or under his control belonging to the corporation.
ARTICLE V
STOCK
Section 1. Issuance of Shares. The issuance or sale by the corporation of
------------------
any shares of its authorized capital stock of any class, including treasury
shares, shall be made only upon authorization by the board of directors, except
as otherwise may be provided by applicable law.
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<PAGE>
Section 2. Certificates. Every holder of stock in the corporation shall be
------------
entitled to have a certificate signed by, or in the name of the corporation by,
the chairman or a vice-chairman of the board of directors, or the chief
executive officer, president or a vice-president, and by the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation, certifying the number of shares owned by him in the corporation.
Any of or all the signatures on the certificate may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect, as if he were such officers transfer
agent or registrar at the date of issue. Certificates of stock shall be
consecutively numbered and shall be in such form consistent with law as shall be
prescribed by the board of directors.
Section 3. Payment for Shares. Shares shall be issued for such
------------------
consideration (but not less than the par value thereof) as shall be determined
from time to time by the board of directors. Treasury shares shall be disposed
of for such consideration as may be determined from time to time by the board.
Such consideration shall be paid in such form and in such manner as the
directors shall determine. In the absence of actual fraud in the transaction the
judgment of the directors as to the value of such consideration shall be
conclusive. The capital stock issued by the corporation shall be doomed to be
fully paid and non-assessable stock if: (a) the entire amount of the
consideration has been received by the corporation in the form of cash, services
rendered, personal property, leases of real property or a combination thereof or
(b) not less than the amount of the consideration determined to be capital
pursuant to statute has been received by the corporation in such form and the
corporation has received a binding obligation of the subscriber or purchaser to
pay the balance of the subscription or purchase price; provided, however,
nothing contained herein shall prevent the board of directors from issuing
partly paid shares pursuant to applicable law.
Section 4. Lost Certificates. In case of the alleged loss, destruction or
-----------------
mutilation of a certificate of stock the board of directors my direct the
issuance of a new certificate in lieu thereof upon such terms and conditions in
conformity with law as it may prescribe. The board of directors may in its
discretion require a bond in such form and amount and with such surety as it may
determine before issuing a new certificate.
Section 5. Transfer of Shares. Upon surrender to the corporation or to a
------------------
transfer agent of the corporation of a certificate of stock duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction in the stock books.
Section 6. Registered Shareholders. The corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by applicable law.
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Section 7. Transfer Agents, Registrars, and Paying Agents. The board of
----------------------------------------------
directors may at its discretion appoint one or more transfer agents, registrars
and agents for making payment upon any class of stock, bond, debenture or other
security of the corporation. Such agents and registrars may be located within or
outside Delaware or Maryland. They shall have such rights and duties and shall
be entitled to such compensation as may be agreed.
ARTICLE VI
INDEMNIFICATION
Section 1. Definitions. For purposes of this Article, the following terms
-----------
shall have the meanings set forth below:
(a) "Action" means any threatened, pending or completed action, suit
------
or proceeding, whether civil, criminal, administrative, arbitrative or
investigative;
(b) "Derivative Action" means any Action by or in the right of the
-----------------
corporation to procure a judgement in its favor;
(c) "Third Party Action" means any Action other than a Derivative
------------------
Action;
(d) "Indemnified Party" means any person who is or was a party or is
-----------------
threatened to be made a party to any Action by reason of the fact that he is or
was a director, officer, employee, fiduciary or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee, fiduciary or agent of another corporation, partnership, joint venture,
trust or other enterprise, including without limitation any employee benefit
plan of the corporation for which any such person is or was serving as trustee,
plan administrator or other fiduciary; and
(e) "Corporation" means in addition to the corporation and any
-----------
resulting corporation, each constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, fiduciaries or agents, so that any person who is
or was a director, officer, employees, fiduciary or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, fiduciary or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
Section 2. Third Party Actions. The corporation shall indemnify any
-------------------
Indemnified Party against expenses (including attorneys' fees) judgments,
fines, excise taxes and amounts paid in settlement actually and reasonably
incurred by him in connection with any Third Party Action if, as determined
pursuant to Section 5 of this Article, he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal Action, had no reasonable cause to
believe his conduct was unlawful. The termination of any Third Party Action by
judgment, order, settlement, conviction or upon a plea
-11-
<PAGE>
of nolo contendere or its equivalent, shall not of itself create either a
presumption that the indemnified Party did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the beat interests of
the corporation or, with respect to any criminal Action a presumption that the
Indemnified Party had reasonable cause to believe that his conduct was unlawful.
Section 3. Derivative Actions. The corporation shall indemnify any
------------------
Indemnified Party against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of any
Derivative Action if, as determined pursuant to Section 5 of this Article, he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
is or has been adjudged to be liable to the corporation unless and only to the
extent that the court of Chancery or court in which such Action was brought
determines upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such Indemnified Party is fairly and
reasonably entitled to indemnification for such expenses which the Court of
Chancery or such other court deems proper. If any claim that may be made by or
in the right of the corporation against any person who may seek indemnification
under this Article is joined with any claim by any other party agent such person
in a single Action, the claim by or in the right of the corporation (and all
expenses related thereto) shall nevertheless be deemed the subject of a separate
and distinct Derivative Action for purposes of this Article.
Section 4. Success on Merits or Otherwise. If and to the extent that
------------------------------
any Indemnified Party has been successful on the merits or otherwise in defense
of any Action referred to in Section 2 or 3 of this Article, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith without the necessity of any determination that he has met
the applicable standards of conduct set forth in Section 2 or 3 of this Article.
Section 5. Determination. Except as provided in Section 4 of this Article,
-------------
any indemnification under Section 2 or 3 of this Article (unless ordered by a
court) shall be made by the corporation only upon a determination that
indemnification of the Indemnified Party is proper in the circumstances because
he has met the applicable standards of conduct set forth in said Section 2 or 3.
Any indemnification under Section 4 of this Article (unless ordered by a court)
shell be made by the corporation only upon a determination by the corporation of
the extent to which the Indemnified Party has been or would have been successful
on the Merits or otherwise. Any such determination shall be made (a) by a
majority vote of a quorum of the whole board of directors consisting of
directors who are not or were not parties to the subject Action or (b) upon the
request of a majority of the directors who are not or were not parties to such
Action, or if there be none, upon the request of a majority of a quorum of the
whole board of directors, by independent legal counsel (which counsel shall not
be the counsel generally employed by the corporation in connection with its
corporate affairs) in a written opinion, or (c) by the shareholders of the
corporation at a meeting called for such purpose.
Section 6. Payment in Advance. Expenses (including attorneys' fees) or
------------------
some part thereof incurred by an Indemnified Party in defending any Action,
shall be paid by the corporation
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<PAGE>
in advance of the final disposition of such Action if a determination to make
such payment is made on behalf of the corporation as provided in Section 5 of
this Article; provided that no such payment may be made unless the corporation
shall have first received a written undertaking by or on behalf of the
Indemnified Party to repay such amount if it shall be ultimately determined that
he is not entitled to be indemnified by the corporation as authorized in this
Article.
Section 7. Other Indemnification. The indemnification and advancement of
---------------------
expenses provided by, or granted pursuant to, the other subsections, of this
Article shall not be deemed exclusive of any other rights to which any
Indemnified Party or other person seeking any agreement, bylaw (including
without limitation any other or further Section or provision of this Article),
vote of the shareholders or disinterested directors or otherwise, and any
procedure provided for by any of the foregoing, both as to action in his
official capacity and as to action in another capacity while holding such
office.
Section 8. Period of Indemnification. Any indemnification pursuant to this
-------------------------
Article shall be applicable to acts or omissions that occurred prior to the
adoption of this Article, shall continue as to any Indemnified Party who has
ceased to be a director, officer, employee, fiduciary or agent of the
corporation or, at the request of the corporation, was serving as and has since
ceased to be a director, officer, employee, fiduciary or agent of another
corporation, partnership, joint venture, trust or other enterprise including,
without limitation, any employee benefit plan of the corporation for which any
such person served as trustee, plan administrator or other fiduciary, and shall
inure to the benefit of the heirs and personal representatives of such
indemnified Party. The repeal or amendment of this Article shall not, solely by
reason of such repeal or amendment, eliminate, restrict or otherwise affect the
right or power, of the corporation to indemnify any person, or affect any right
of indemnification of such person, with respect to any acts or omissions which
occurred prior to such repeal or amendment.
Section 9. Insurance. By action of the board of directors, notwithstanding
---------
any interest of the directors in such action, the corporation may purchase and
maintain insurance, in such amounts as the board may deem appropriate, on behalf
of any Indemnified Party against any liability asserted against him and incurred
by him in his capacity of or arising out of his status as an Indemnified party,
whether or not the corporation would have the power to indemnify against such
liability under applicable provisions of law.
Section 10. Right to Impose Conditions to Indemnification. The corporation
---------------------------------------------
shall have the right to impose, as conditions to any indemnification provided or
permitted in this Article, such reasonable requirements and conditions as to the
board of directors or shareholders may appear appropriate in each specific case
and circumstances, including but not limited to any one or more of the
following: (a) that any counsel representing the person to be indemnified in
connection with the defense or settlement of any Action shall be counsel
mutually agreeable to the person to be indemnified and to the corporation; (b)
that the corporation shall have the right, at its option, to assume and control
the defense or settlement of any claim or proceeding made, initiated or
threatened against the person to be indemnified; and (c) that the corporation
shall be
-13-
<PAGE>
subrogated, to the extent of any payments made by way of indemnification, to all
of the indemnified person's right of recovery, and that the person to be
indemnified shall execute all writings and do everything necessary to assure
such rights of subrogation to the corporation.
ARTICLE VII
MISCELLANEOUS
Section 1. Waivers of Notice. Whenever notice is required to be given by
-----------------
law, by the certificate of incorporation or by these bylaws, a written waiver
thereof signed by the person entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting or (in the case of a shareholder) by proxy shall constitute
a waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the shareholders, directors or members of a
committee of directors need be specified in any written waiver of notice unless
so required by the certificate of incorporation or these bylaws.
Section 2. Presumption of Assent. A director or shareholder of the
---------------------
corporation who is present at a meeting of the board of directors or
shareholders at which action of any corporate matter is taken shall be presumed
to have assented to the action taken unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
secretary of the corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director or shareholder who voted in
favor of such action.
Section 3. Voting of Securities by the Corporation. Unless otherwise
---------------------------------------
provided by resolution of the board of directors, on behalf of the corporation
the president or any vice-president shall attend in person or by substitute
appointed by him, or shall execute written instruments appointing a proxy or
proxies to representing the corporation at, all meetings of the shareholders of
any other corporation, association or other entity in which the corporation
holds any stock or other securities, and may execute written waivers of notice
with respect to any such meetings. At all such meetings and otherwise, the
president or any vice-president, in person or by substitute or proxy as
aforesaid, may vote the stock or other securities so held by the corporation and
may execute written consents and any other instruments with respect to such
stock or securities and may exercise any and all rights and powers incident to
the ownership of said stock or securities, subject, however, to the
instructions, if any, of the board of directors.
Section 4. Contracts. The board of director may authorize one or more
---------
officers, agents or attorneys-in-fact in the name and on behalf of the
corporation, to enter into or execute and deliver any and all deeds, bonds,
mortgages, contracts, agreements and other obligations or instruments of any
nature and such authority may be general or confined to specific instances.
-14-
<PAGE>
Section 5. The corporate seal of the corporation shall be circular in form
and shall contain the name of the corporation, the year of its organization and
the words "Seal, Delaware".
Section 6. Fiscal Year. The fiscal year of the corporation shall be as
-----------
established by the board of directors.
Section 7. Applicable Law. If these bylaws are inconsistent with
--------------
applicable law, that law shall control and govern.
Section 8. Amendments. Except as limited by applicable law, these bylaws
----------
may be amended or repealed and new bylaws adopted only by the shareholders
entitled to vote.
-15-
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BYLAWS OF
INTERTRUST TECHNOLOGIES CORPORATION,
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I OFFICE AND RECORDS............................................. 1
Section 1.1 Delaware Office......................................... 1
Section 1.2 Other Offices........................................... 1
Section 1.3 Books and Records....................................... 1
ARTICLE II STOCKHOLDERS.................................................. 1
Section 2.1 Annual Meeting.......................................... 1
Section 2.2 Special Meeting......................................... 1
Section 2.3 Place of Meeting........................................ 1
Section 2.4 Notice of Meeting....................................... 1
Section 2.5 Quorum and Adjournment.................................. 2
Section 2.6 Proxies................................................. 2
Section 2.7 Notice of Stockholder Business and Nominations.......... 2
Section 2.8 Procedure for Election of Directors..................... 4
Section 2.9 Inspectors of Elections; Opening and Closing the Polls.. 4
Section 2.10 Consent of Stockholders in Lieu of Meeting............. 5
ARTICLE III BOARD OF DIRECTORS........................................... 5
Section 3.1 General Powers.......................................... 5
Section 3.2 Number, Tenure and Qualifications....................... 5
Section 3.3 Regular Meetings........................................ 5
Section 3.4 Special Meetings........................................ 5
Section 3.5 Notice.................................................. 5
Section 3.6 Conference Telephone Meetings........................... 6
Section 3.7 Quorum.................................................. 6
Section 3.8 Vacancies............................................... 6
Section 3.9 Committee............................................... 6
Section 3.10 Removal................................................ 7
ARTICLE IV OFFICERS...................................................... 7
Section 4.1 Elected Officers........................................ 7
Section 4.2 Election and Term of Office............................. 7
Section 4.3 Chairman of the Board................................... 7
Section 4.4 President and Chief Executive Officer................... 7
Section 4.5 Secretary............................................... 8
Section 4.6 Treasurer............................................... 8
Section 4.7 Removal................................................. 8
Section 4.8 Vacancies............................................... 8
ARTICLE V STOCK CERTIFICATES AND TRANSFERS............................... 9
Section 5.1 Stock Certificates and Transfers........................ 9
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI INDEMNIFICATION............................................... 9
ARTICLE VII MISCELLANEOUS PROVISIONS..................................... 11
Section 7.1 Fiscal Year............................................. 11
Section 7.2 Dividends............................................... 11
Section 7.3 Seal.................................................... 11
Section 7.4 Waiver of Notice........................................ 11
Section 7.5 Audits.................................................. 11
Section 7.6 Resignations............................................ 11
Section 7.7 Contracts............................................... 12
Section 7.8 Proxies................................................. 12
ARTICLE VIII AMENDMENTS.................................................. 12
Section 8.1 Amendments.............................................. 12
</TABLE>
<PAGE>
ARTICLE I
OFFICES AND RECORDS
Section 1.1 Delaware Office. The registered office of the Corporation in
---------------
the State of Delaware shall be located in the City of Wilmington, County of New
Castle.
Section 1.2 Other Offices. The Corporation may have such other offices,
-------------
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.
Section 1.3 Books and Records. The books and records of the Corporation
-----------------
may be kept at the Corporation's principal offices or at such other locations
outside the State of Delaware as may from time to time be designated by the
Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 2.1 Annual Meeting. The annual meeting of the stockholders of the
--------------
Corporation shall be held at such date, place and/or time as may be fixed by
resolution of the Board of Directors.
Section 2.2 Special Meeting. Special meetings of stockholders of the
---------------
Corporation may be called only by the Chairman of the Board or the President or
by the Board of Directors acting pursuant to a resolution adopted by a majority
of the Whole Board or at the request in writing of stockholders owning at least
twenty percent (20%) in amount of the entire capital stock of the corporation
issued and outstanding and entitled to vote. For purposes of these Amended and
Restated Bylaws, the term "Whole Board" shall mean the total number of
authorized directors whether or not there exist any vacancies in previously
authorized directorships.
Section 2.3 Place of Meeting. The Board of Directors may designate the
----------------
place of meeting for any meeting of the stockholders. If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation.
Section 2.4 Notice of Meeting. Except as otherwise required by law,
-----------------
written or printed notice or notice otherwise allowed by Delaware General
Corporation Law, stating the place, day and hour of the meeting and the purposes
for which the meeting is called, shall be prepared and delivered by the
Corporation not less than ten days nor more than sixty days before the date of
the meeting, either personally, or by mail, to each stockholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail with postage thereon prepaid,
addressed to the stockholder at his address as it appears on the stock transfer
books of the Corporation. Such further notice shall be given as may be required
by law. Meetings may be held without notice if all stockholders entitled to vote
are present (except as otherwise provided by law), or if notice is waived by
those not present. Any previously scheduled meeting of the stockholders may be
postponed and (unless the
<PAGE>
Corporations's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") otherwise provides) any special meeting of the
stockholders may be cancelled, by resolution of the Board of Directors upon
public notice given prior to the time previously scheduled for such meeting of
stockholders.
Section 2.5 Quorum and Adjournment. Except as otherwise provided by law
----------------------
or by the Certificate of Incorporation, the holders of a majority of the voting
power of the outstanding shares of the Corporation entitled to vote generally in
the election of directors (the "Voting Stock"), represented in person or by
proxy, shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series voting separately as a
class or series, the holders of a majority of the voting power of the shares of
such class or series shall constitute a quorum for the transaction of such
business. The chairman of the meeting or a majority of the shares of Voting
Stock so represented may adjourn the meeting from time to time, whether or not
there is such a quorum (or, in the case of specified business to be voted on by
a class or series, the chairman or a majority of the shares of such class or
series so represented may adjourn the meeting with respect to such specified
business). No notice of the time and place of adjourned meetings need be given
except as required by law. The stockholders present at a duly organized meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 2.6 Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder or as may be permitted by
law, or by his duly authorized attorney-in-fact. Such proxy must be filed with
the Secretary of the Corporation or his representative at or before the time of
the meeting.
Section 2.7 Notice of Stockholder Business and Nominations.
----------------------------------------------
A. Nominations of persons for election to the Board of Directors
and the proposal of business to be transacted by the stockholders may be made at
an annual meeting of stockholders (1) pursuant to the Corporation's notice with
respect to such meeting, (2) by or at the direction of the Board of Directors or
(3) by any stockholder of record of the Corporation who was a stockholder of
record at the time of the giving of the notice provided for in the following
paragraph, who is entitled to vote at the meeting and who has complied with the
notice procedures set forth in this Section 2.7.
B. For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to paragraph (A)(3) of this
Section 2.7, (1) the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and (2) such business must be a
proper matter for stockholder action under the Delaware General Corporation Law.
To be timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not less than 45 or more than 75
days prior to the first anniversary (the "Anniversary") of the date on which the
Corporation first mailed its proxy materials for the preceding year's annual
meeting of stockholders; provided, however, that if no proxy materials were
mailed by the Corporation in connection with the preceding year's annual
meeting, or if the date of the annual meeting is advanced more than 30
2
<PAGE>
days prior to or delayed by more than 30 days after the anniversary of the
preceding year's annual meeting, notice by the stockholder to be timely must be
so delivered not later than the close of business on the later of (x) the 90th
day prior to such annual meeting or (y) the 10th day following the day on which
public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person as would be required to be disclosed in solicitations of
proxies for the election of such nominees as directors pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and such person's written consent to serve as a director if elected; (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of such business, the reasons for conducting such business at
the meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation that are owned
beneficially and of record by such stockholder and such beneficial owner.
C. Notwithstanding anything in the second sentence of paragraph (B)
of this Section 2.7 to the contrary, in the event that the number of directors
to be elected to the Board of Directors is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased Board made by the Corporation at least 55 days prior to the
Anniversary, a stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the 10th day following the day on which such public announcement is
first made by the Corporation.
D. Only persons nominated in accordance with the procedures set forth
in this Section 2.7 shall be eligible to serve as directors and only such
business shall be conducted at an annual meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Section 2.7. The chair of the meeting shall have the power and the duty to
determine whether a nomination or any business proposed to be brought before the
meeting has been made in accordance with the procedures set forth in these
Bylaws and, if any proposed nomination or business is not in compliance with
these Bylaws, to declare that such defective proposed business or nomination
shall not be presented for stockholder action at the meeting and shall be
disregarded.
E. Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (1)
by or at the direction of the Board of Directors or (2) by any stockholder of
record of the Corporation who is a stockholder of record at the time of giving
of notice provided for in this paragraph, who shall be entitled to vote at the
meeting and who complies
3
<PAGE>
with the notice procedures set forth in this Section 2.7. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholders if the stockholder's notice required by
paragraph (B) of this Section 2.7 shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the later of the 90th day prior to such special meeting or the 10th
day following the day on which public announcement is first made of the date of
the special meeting and of the nominees proposed by the Board to be elected at
such meeting.
F. For purposes of this Section 2.7, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
G. Notwithstanding the foregoing provisions of this Section 2.7,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Section 2.7. Nothing in this Section 2.7 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2.8 Procedure for Election of Directors. Election of directors at
-----------------------------------
all meetings of the stockholders at which directors are to be elected shall be
by written ballot or other means allowed by Delaware General Corporation Law,
and, except as otherwise set forth in the Certificate of Incorporation with
respect to the right of the holders of any series of Preferred Stock or any
other series or class of stock to elect additional directors under specified
circumstances, a plurality of the votes cast thereat shall elect directors.
Except as otherwise provided by law, the Certificate of Incorporation or these
Bylaws, all matters other than the election of directors submitted to the
stockholders at any meeting shall be decided by the affirmative vote of a
majority of the voting power of the outstanding Voting Stock present in person
or represented by proxy at the meeting and entitled to vote thereon.
Section 2.9 Inspectors of Elections; Opening and Closing the Polls.
------------------------------------------------------
A. The Board of Directors by resolution shall appoint one or
more inspectors, which inspector or inspectors may include individuals who serve
the Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate has been appointed to act, or if all inspectors or alternates who
have been appointed are unable to act, at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by the Delaware General Corporation Law.
4
<PAGE>
B. The chairman of the meeting shall fix and announce at the
meeting the date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting.
Section 2.10 Consent of Stockholders in Lieu of Meeting. Any action
------------------------------------------
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in writing by such
stockholders.
ARTICLE III
BOARD OF DIRECTORS
Section 3.1 General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of the Board of Directors. In
addition to the powers and authority expressly conferred upon them by statute or
by the Certificate of Incorporation or by these Bylaws, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
Section 3.2 Number, Tenure and Qualifications. Subject to the rights of
---------------------------------
the holders of any series of Preferred Stock to elect additional directors under
specified circumstances, the number of directors shall be fixed from time to
time exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Whole Board. The directors, other than those who may be elected
by the holders of any series of Preferred Stock under specified circumstances,
shall be divided into three classes pursuant to the Certificate of
Incorporation. At each annual meeting of stockholders, directors elected to
succeed those directors whose terms expire shall be elected for a term of office
to expire at the third succeeding annual meeting of stockholders after their
election.
Section 3.3 Regular Meetings. A regular meeting of the Board of Directors
----------------
shall be held without notice other than this Bylaw immediately after, and at the
same place as, each annual meeting of stockholders. The Board of Directors may,
by resolution, provide the time and place for the holding of additional regular
meetings without notice other than such resolution.
Section 3.4 Special Meetings. Special meetings of the Board of Directors
----------------
shall be called at the request of the Chairman of the Board, the President or a
majority of the Board of Directors. The person or persons authorized to call
special meetings of the Board of Directors may fix the place and time of the
meetings.
Section 3.5 Notice. Notice of any special meeting shall be given to each
------
director at his business or residence in writing or by telegram, facsimile
transmission or telephone communication. If mailed, such notice shall be deemed
adequately delivered when deposited in the United States mails so addressed,
with postage thereon prepaid, at least five days before such meeting. If by
telegram, such notice shall be deemed adequately delivered when the
5
<PAGE>
telegram is delivered to the telegraph company at least twenty-four hours before
such meeting. If by facsimile transmission, such notice shall be transmitted at
least twenty-four hours before such meeting. If by telephone, the notice shall
be given at least twelve hours prior to the time set for the meeting. Neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the Board of Directors need be specified in the notice of such
meeting, except for amendments to these Bylaws as provided under Section 8.1 of
Article VIII hereof. A meeting may be held at any time without notice if all the
directors are present (except as otherwise provided by law) or if those not
present waive notice of the meeting in writing, either before or after such
meeting.
Section 3.6 Conference Telephone Meetings. Members of the Board of
-----------------------------
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section 3.7 Quorum. A whole number of directors equal to at least a
------
majority of the Whole Board shall constitute a quorum for the transaction of
business, but if at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of the directors present may adjourn the
meeting from time to time without further notice. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 3.8 Vacancies. Subject to the rights of the holders of any series
---------
of Preferred Stock then outstanding, newly created directorships resulting from
any increase in the authorized number of directors or any vacancies in the Board
of Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause shall, unless otherwise provided by law or by
resolution of the Board of Directors, be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been chosen expires. No
decrease in the authorized number of directors shall shorten the term of any
incumbent director.
Section 3.9 Committees.
----------
A. The Board of Directors may designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of the
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the
6
<PAGE>
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it.
B. Unless the Board of Directors otherwise provides, each
committee designated by the Board of Directors may make, alter and repeal rules
for the conduct of its business. In the absence of such rules each committee
shall conduct its business in the same manner as the Board of Directors conducts
its business pursuant to these Bylaws.
Section 3.10 Removal. Subject to the rights of the holders of any series
-------
of Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of all of the then-outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
ARTICLE IV
OFFICERS
Section 4.1 Elected Officers. The elected officers of the Corporation
----------------
shall be a a Secretary and a Treasurer, and may be a Chairman of the Board, a
President and a Chief Executive Officer, and such other officers as the Board of
Directors from time to time may deem proper. The Chairman of the Board, if any,
shall be chosen from the directors. All officers chosen by the Board of
Directors shall each have such powers and duties as generally pertain to their
respective offices, subject to the specific provisions of this Article IV. Such
officers shall also have powers and duties as from time to time may be conferred
by the Board of Directors or by any committee thereof.
Section 4.2 Election and Term of Office. The elected officers of the
---------------------------
Corporation shall be elected annually by the Board of Directors at the regular
meeting of the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to
Section 4.7 of these Bylaws, each officer shall hold office until his successor
shall have been duly elected and shall have qualified or until his death or
until he shall resign.
Section 4.3 Chairman of the Board. The Chairman of the Board, if any,
---------------------
shall preside at all meetings of the Board.
Section 4.4 President and Chief Executive Officer. The Chief Executive
-------------------------------------
Officer, or if there is no Chief Executive Officer, the President, shall be the
general manager of the Corporation, subject to the control of the Board of
Directors, and as such shall preside at all meetings of shareholders, shall have
general supervision of the affairs of the Corporation, shall sign or countersign
or authorize another officer to sign all certificates, contracts, and other
instruments of the Corporation as authorized by the Board of Directors, shall
make reports to the Board of Directors and shareholders, and shall perform all
such other duties as are incident to
7
<PAGE>
such office or are properly required by the Board of Directors. If the Board of
Directors creates the office of the President as a separate office from the
Chief Executive Officer, the President shall have such duties as are determined
by, and shall be subject to the general supervision, direction, and control of,
the Chief Executive Officer unless the Board of Directors provides otherwise.
Section 4.5 Secretary. The Secretary shall give, or cause to be given,
---------
notice of all meetings of stockholders and directors and all other notices
required by law or by these Bylaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman of the Board, the Chief Executive Officer or the President, or
by the Board of Directors, upon whose request the meeting is called as provided
in these Bylaws. He shall record all the proceedings of the meetings of the
Board of Directors, any committees thereof and the stockholders of the
Corporation in a book to be kept for that purpose, and shall perform such other
duties as may be assigned to him by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer or the President. He shall have custody of
the seal of the Corporation and shall affix the same to all instruments
requiring it, when authorized by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer or the President, and attest to the same.
Section 4.6 Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate receipts and
disbursements in books belonging to the Corporation. The Treasurer shall deposit
all moneys and other valuables in the name and to the credit of the Corporation
in such depositaries as may be designated by the Board of Directors. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board of Directors, the Chairman of the Board, the Chief Executive Officer or
the President, taking proper vouchers for such disbursements. The Treasurer
shall render to the Chairman of the Board, the President, the Chief Executive
Officer and the Board of Directors, whenever requested, an account of all his
transactions as Treasurer and of the financial condition of the Corporation. If
required by the Board of Directors, the Treasurer shall give the Corporation a
bond for the faithful discharge of his duties in such amount and with such
surety as the Board of Directors shall prescribe.
Section 4.7 Removal. Any officer elected by the Board of Directors may be
-------
removed by the Board of Directors whenever, in their judgment, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of his successor, his death,
his resignation or his removal, whichever event shall first occur, except as
otherwise provided in an employment contract or an employee plan.
Section 4.8 Vacancies. A newly created office and a vacancy in any office
---------
because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the term.
8
<PAGE>
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
Section 5.1 Stock Certificates and Transfers.
--------------------------------
A. The interest of each stockholder of the Corporation shall be
evidenced by certificates for shares of stock in such form as the appropriate
officers of the Corporation may from time to time prescribe. The shares of the
stock of the Corporation shall be transferred on the books of the Corporation by
the holder thereof in person or by his attorney, upon surrender for cancellation
of certificates for the same number of shares, with an assignment and power of
transfer endorsed thereon or attached thereto, duly executed, and with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require.
B. The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may permit all or any of the signatures on such certificates to
be in facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Right to Indemnification. Each person who was or is made a
------------------------
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue as to
an indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in Section 6.3
-------- -------
hereof with respect to proceedings to enforce rights to
9
<PAGE>
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
Section 6.2 Right to Advancement of Expenses. The right to
--------------------------------
indemnification conferred in Section 6.1 shall include the right to be paid by
the Corporation the expenses incurred in defending any proceeding for which such
right to indemnification is applicable in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
-------- -------
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise.
Section 6.3 Right of Indemnitee to Bring Suit. The rights to
---------------------------------
indemnification and to the advancement of expenses conferred in Section 6.1 and
Section 6.2, respectively, shall be contract rights. If a claim under Section
6.1 or Section 6.2 is not paid in full by the Corporation within sixty days
after a written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (A) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (B) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
any applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section or otherwise shall be on the
Corporation.
10
<PAGE>
Section 6.4 Non-Exclusivity of Rights. The rights to indemnification and
-------------------------
to the advancement of expenses conferred in this Section shall not be exclusive
of any other right which any person may have or hereafter acquire under the
Certificate of Incorporation, these Amended and Restated Bylaws, or any statute,
agreement, vote of stockholders or disinterested directors or otherwise.
Section 6.5 Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Fiscal Year. The fiscal year of the Corporation shall begin
-----------
on the first day of January and end on the thirty-first day of December of each
year.
Section 7.2 Dividends. The Board of Directors may from time to time
---------
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its Certificate of
Incorporation.
Section 7.3 Seal. The corporate seal shall have inscribed the name of the
----
Corporation thereon and shall be in such form as may be approved from time to
time by the Board of Directors.
Section 7.4 Waiver of Notice. Whenever any notice is required to be given
----------------
to any stockholder or director of the Corporation under the provisions of the
Delaware General Corporation Law, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice. Neither
the business to be transacted at, nor the purpose of, any annual or special
meeting of the stockholders of the Board of Directors need be specified in any
waiver of notice of such meeting.
Section 7.5 Audits. The accounts, books and records of the Corporation
------
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the Board of Directors, and it shall be
the duty of the Board of Directors to cause such audit to be made annually.
Section 7.6 Resignations. Any director or any officer, whether elected or
------------
appointed, may resign at any time by serving written notice of such resignation
on the Chairman of the Board, the President, the Chief Executive Officer or the
Secretary, and such resignation shall be deemed to be effective as of the close
of business on the date said notice is received by the Chairman of the Board,
the President, the Chief Executive Officer or the Secretary or at such
11
<PAGE>
later date as is stated therein. No formal action shall be required of the Board
of Directors or the stockholders to make any such resignation effective.
Section 7.7 Contracts. Except as otherwise required by law, the
---------
Certificate of Incorporation or these Bylaws, any contracts or other instruments
may be executed and delivered in the name and on the behalf of the Corporation
by such officer or officers of the Corporation as the Board of Directors may
from time to time direct. Such authority may be general or confined to specific
instances as the Board may determine. The Chairman of the Board, the President,
the Chief Executive Officer or any Vice President may execute bonds, contracts,
deeds, leases and other instruments to be made or executed for or on behalf of
the Corporation. Subject to any restrictions imposed by the Board of Directors
or the Chairman of the Board, the President, the Chief Executive Officer or any
Vice President of the Corporation may delegate contractual powers to others
under his jurisdiction, it being understood, however, that any such delegation
of power shall not relieve such officer of responsibility with respect to the
exercise of such delegated power.
Section 7.8 Proxies. Unless otherwise provided by resolution adopted by
-------
the Board of Directors, the Chairman of the Board, the Chief Executive Officer,
the President or any Vice President may from time to time appoint any attorney
or attorneys or agent or agents of the Corporation, in the name and on behalf of
the Corporation, to cast the votes which the Corporation may be entitled to cast
as the holder of stock or other securities in any other corporation or other
entity, any of whose stock or other securities may be held by the Corporation,
at meetings of the holders of the stock and other securities of such other
corporation or other entity, or to consent in writing, in the name of the
Corporation as such holder, to any action by such other corporation or other
entity, and may instruct the person or persons so appointed as to the manner of
casting such votes or giving such consent, and may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal or otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises.
ARTICLE VIII
AMENDMENTS
Section 8.1 Amendments. Subject to the provisions of the Certificate of
----------
Incorporation, these Bylaws may be amended, altered, added to, rescinded or
repealed at any meeting of the Board of Directors or by the affirmative vote of
at least sixty-six and two-thirds percent (66 2/3%) of the stockholders,
provided notice of the proposed change was given in the notice of the meeting
and, in the case of a meeting of the Board of Directors, in a notice given no
less than twenty-four hours prior to the meeting.
12
<PAGE>
CERTIFICATE OF SECRETARY OF
INTERTRUST TECHNOLOGIES CORPORATION
The undersigned, Erwin N. Lenowitz, hereby certifies that he is the
duly elected and acting Secretary of InterTrust Technologies Corporation, a
Delaware corporation (the "Corporation"), and that the Bylaws attached hereto
constitute the Bylaws of said Corporation as duly adopted by the Directors on
____________, 1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of __________, 1999.
_____________________________________
Erwin N. Lenowitz
Secretary
13
<PAGE>
EXHIBIT 4.3
FORM OF REGISTRATION RIGHTS UNDER
SELECT CONVERTIBLE PROMISSORY NOTES
Registration Rights.
-------------------
(a) As used in this Section 9, "Shares" means the shares of Common
Stock of the Company which may be acquired by the Payee upon (i) a conversion of
this Note in accordance with Section 3(b) hereof or (ii) an exercise of the
Warrant.
(b) Payee will have a Piggyback Registration right for the Shares. If
the Company does a registration of the Company's stock, the Company will include
a percentage of the Shares, said included Shares being a percentage of the
Payees' Shares equivalent to the percentage of the Company's outstanding Class A
Common Shares (other than the Payees' Shares) being registered, so long as said
registration of the Shares is acceptable to the Company's underwriter(s), and so
long as such registration does not violate any U.S. federal or state legal
statutes or regulations.
(c) In the event that either (i) a 5% shareholder and/or (ii) a
shareholder under the terms of the Securities Act of 1933, as amended, chooses
to register any or all outstanding shares of the Common Stock of the Company,
Payee has the right to Piggyback the Shares so long as the expenses directly
related to this Section 9 are directly assumed by the Payee.
(d) Other than registration rights granted to the Payee hereunder and
registration rights granted to Electronic Ventures, L.C., under the terms of a
Stock Purchase/Subscription Agreement dated December 20, 1992, the Company is
not under any obligation to register, within the meaning of the Securities Act
of 1933 as amended, any of its securities. The rights of the Payee under this
Section 9 shall survive the payment or conversion of this Note.
<PAGE>
Exhibit 4.4
FORM OF REGISTRATION RIGHTS
UNDER SELECT CLASS A COMMON STOCK PURCHASE AGREEMENTS
Piggyback Registration. If the Company proposes to register any of the
----------------------
Common Stock in an underwritten public offering under the Securities Act (except
equity securities pursuant to a registration statement filed on Forms S-4 or S-8
or such other forms as shall be prescribed under the Securities Act for the same
purposes) at any time or times when the Purchaser owns all of the Shares, it
will at each such time given written notice to the Purchaser of its intention to
do so and upon the written request of the Purchaser given within twenty (20)
days after receipt of such notice, the Company will use its best efforts to
effect the registration of the Shares which it shall have been so requested to
register (the "Piggyback Securities") by including such Piggyback Securities in
such registration statement. In the event that any registration pursuant to this
Section 6.6 shall be, in whole or in part, in connection with an underwritten
offering of securities of the Company, and such Piggyback Securities shall be
included in the underwriting on the same terms and conditions as the shares of
the Common Stock, if any, otherwise being sold through underwriters under such
registration statement; provided, however, that if the managing underwriter
-------- -------
determines and advises in writing that the inclusion in the registration
statement of all Piggyback Securities proposed to be included and any other
shares of Common Stock sought to be registered by any other stockholder of the
Company (the "Other Common Stock") would interfere with the successful marketing
of the securities proposed to be registered by the Company, then the number of
Piggyback Securities and other Common Stock to be included in the underwriting
shall be reduced pro rata among all holders of Piggyback Securities and Other
Common Stock requesting such registration.
In connection with such registration, the Purchaser will provide customary
indemnification's to the Company, the Company's directors and officers who sign
the registration statement and the underwriters, if any, against any losses,
claims, damages or liabilities which arise out of or are based upon any untrue
or alleged untrue statement of a material fact contained in such registration
statement, preliminary prospectus, final prospectus or amendments or supplements
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading; in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement was made
in the Company's registration statement, preliminary prospectus, final
prospectus or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished by the Purchaser. The expenses of
registration under this Section 6.6 (including without limitation all
registration and filing fees, blue sky fees and expenses, printing expenses,
fees and expenses of counsel to the Company and the Company's independent
accountants) shall be paid by the Company, provided that all underwriting
discounts and selling commissions applicable to the sale of the Piggyback
Securities and all fees and expenses of counsel or other experts, if any,
retained by the Purchaser in connection with the registration described in this
Section 6.6 shall be paid by the Purchaser. Notwithstanding anything to the
contrary contained in this Section 6.6, in the event that the Company has an
underwritten primary offering of its securities and the Purchaser does not sell
his Shares to the underwriter of the Company's securities in connection with
such offering, the Purchaser shall refrain from selling, making any short sale
of, loaning, granting any option for
<PAGE>
the purchase of, or otherwise disposing of any of the Shares registered pursuant
to this Section 6.6 during the period of distribution of the Company's
securities by such underwriter in the primary offering and the period in which
the underwriter participates in the after market; provided, however, that the
Purchaser shall, subject to the terms of this Agreement, be entitled to sell his
Shares commencing on the 90/th/ day after the effective date of such
registration statement or such earlier time as the managing underwriter shall
consent to in writing.
<PAGE>
EXHIBIT 4.5
FORM OF SERIES A PREFERRED STOCK REGISTRATION RIGHTS
1. Registration Rights.
-------------------
(a) Definitions. The following terms shall have the following
-----------
respective meanings:
(i) "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(ii) "Holder" or "Holders" means any holder of
outstanding Registrable Securities.
(iii) "Initiating Holders" means ATGF II, or any Holders
who in the aggregate hold not less than 50% of the Registrable Securities.
(iv) "Initial Public Offering" means the Company's sale
of its Common Stock in a bona fide underwriting pursuant to a registration
statement under the Securities Act, the public offering price of which is not
less than $7.50 per share (as adjusted for stock dividends, stock splits or
recapitalizations) and for an aggregate offering price, net of underwriters'
discounts and commissions, of more than $10,000,000.
(v) "Lead Investor" means ATGF II, its affiliates, or
its transferees pursuant to section 4.1(i) hereof.
(vi) "register", "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Act, and the declaration or ordering of the effectiveness of
such registration statement.
(vii) "Registrable Securities" means (i) the shares of
Class A Common Stock of the Company issuable or issued upon conversion of the
outstanding Series A Preferred Stock of the Company (the "Stock") and (ii) any
other shares of the Company's Common Stock issued as (or issuable upon
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to or exchange for or
replacement of, the Stock, excluding in all cases, however, any Registrable
Securities sold by a person in a transaction in which a Holder's rights under
this Agreement are not assigned; provided, however, that Registrable Securities
-------- -------
shall only be treated as Registrable Securities if, and so long as, they have
not been (A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) thereof so that all transfer restrictions and
restrictive legends with respect thereto may legally be removed upon the
consummation of such sale.
<PAGE>
(b) Demand Registration.
-------------------
(i) Request for Registration. In case the Company shall
------------------------
receive from Initiating Holders a written request (the "Request") that the
Company effect any registration, qualification or compliance with respect to not
less than 200,000 shares of the Registrable Securities, or any lesser number of
shares if the anticipated aggregate offering price, net of underwriters'
discounts and commissions, would exceed $1,000,000, the Company will
(1) promptly given written notice of the proposed
registration, qualification or compliance to all other Holders in accordance
with Section 8.6; and
(2) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of Registrable Securities as are specified in the Request,
together with all or such portion of such Registrable Securities of any Holder
or Holders joining in the Request as are specified in a written notice received
by the Company within twenty (20) days after such Holder's receipt of written
notice provided by the Company pursuant to Section 4.1(b)(i)(1); provided,
however, that the Company shall not be obligated to take any action to effect
any such registration, qualification or compliance pursuant to this Section
4.1(b):
A. In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Act;
B. Prior to 270 days following the effective
date of the Initial Public offering;
C. During the period starting with the date of
filing of, and ending on the date 180 days immediately following the effective
date of, any general form of registration statement pertaining to sale by the
Company of Common Stock or securities which are immediately convertible at the
option of the holder or convertible within twelve (12) months from the date of
issuance into Common Stock of the Company, provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective;
D. After the Company has effected one (1) such
registration pursuant to this Section 4.1(b); or
E. If the Company shall furnish to such
Initiating Holders a certificate signed by the Chief Executive Officer of the
Company stating that in the good faith judgment of the Company's Board of
Directors it would be seriously detrimental to the Company or its stockholders
for a registration statement to be filed at the date filing would be required,
in which case the Company's obligation to use its best efforts to register,
qualify or comply under this Section 4.1(b) shall be deferred for a period not
to exceed
2
<PAGE>
120 days from the date of receipt of the Request, provided that the Company may
not exercise this deferral right more than once during any twelve (12) month
period.
Subject to the foregoing clauses (A) through (E), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the Request.
(ii) Underwriting. If any registration pursuant to Section
------------
4.1(b) shall be underwritten, the right of any Holder to registration pursuant
to Section 4.1(b) shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in such
underwriting as prescribed herein (unless otherwise mutually agreed by a
majority in interest of the Initiating Holders and each such Holder). The
Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected by a majority in interest
of the Initiating Holders for such underwriting (the "Managing Underwriter"),
which Managing Underwriter shall be reasonably acceptable to the Company without
regard to (A) whether or not the Company has any prior or current relationship
with such underwriter or underwriters, or (B) the Company's prior or current
relationship with any other underwriter or underwriters. Notwithstanding any
other provision of this Section 4.1(b), if the Managing Underwriter advises the
Initiating Holders or the Company in writing that the number of Registrable
Securities proposed to be registered by such Initiating Holder or Holders
exceeds the maximum number of such shares which the Managing Underwriter
considers, in good faith, to be appropriate based upon market conditions and
other relevant factors (the "Maximum Number"), then (1) the Company shall so
advise all Holders, (2) the Lead Investor shall be entitled to include
Registrable Securities in such underwriting up to the Maximum Number, and (3) if
the Lead Investor elects to include in such underwriting a number of its
Registrable Securities which is less than the Maximum Number (the "Portion"),
the Initiating Holders (if different than the Lead Investor) and those Holders
(other than the Lead Investor) joining in the Request shall be entitled to
include in such underwriting their pro-rata share of Registrable Securities up
to that number of shares equal to the difference between the Maximum Number and
the Portion. For purposes of the preceding sentence, a Holder's "pro-rata share"
shall mean the quotient obtained by dividing the number of Registrable
Securities held by such Holder by the sum of all of the Registrable Securities
held by the Initiating Holders (if different than the Lead Investor) and those
Holders (other than the Lead Investor) joining in the Request. No Registrable
Securities excluded from the underwriting by reason of the Managing
Underwriter's marketing limitation shall be included in such underwriting. To
facilitate the allocation of shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares. If any Holder disapproves of the terms of the
underwriting, such Holder may elect to withdraw therefrom by written notice to
the Company, the Managing Underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to 180 days after the effective date
of such registration, or such other shorter period of time as the underwriters
may require. If the underwriter has not limited the number of Registrable
Securities to be underwritten, or if Holders have elected to include less than
the Maximum Number in such underwriting, the Company may include securities for
its own account (or for the account of other stockholders) in such registration
if the Managing Underwriter so agrees and
3
<PAGE>
if the number of Registrable Securities that would otherwise have been included
in such registration and underwriting will not thereby be limited.
(c) Company Registration.
--------------------
(i) Notice of Registration. If (but without any
----------------------
obligation to do so) at any time after the Initial Public Offering the Company
proposes to register any of its Common Stock or other securities under the Act
in connection with the public offering of such securities solely for cash (other
than a registration relating either to the sale of securities to participants in
a Company stock option, stock purchase or similar plan or to an SEC Rule 145
transaction, or a registration on any form which does not include substantially
similar information as would be required to be included in a registration
statement covering the sale of the Registrable Securities), the Company shall,
at such time, promptly give each Holder written notice of such registration.
Upon the written request of any Holder given within fifteen (15) days from
receipt of such notice by the Company in accordance with Section 8.6, the
Company shall, subject to the provisions of Section 4.1(c)(ii) and 4.1(d), cause
to be registered under the Act all of the Registrable Securities that each such
Holder has requested to be registered.
(ii) Underwriting Requirements. In connection with any
-------------------------
offering pursuant to this Section 4.1(c), the Company shall not be required to
include any of the Holders' securities in such underwriting unless they accept
the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, and then only in such quantity as will not, in the
opinion of the underwriters, adversely affect the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested by stockholders to be included in such offering exceeds the amount of
securities sold other than by the Company that the underwriters reasonably
believe would not adversely affect the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters believe
will not adversely affect the success of the offering (the securities so
included to the apportioned first to the Company, then pro rata among the
selling Holders according to the total amount of Registrable Securities owned by
each selling Holder and then to all other selling stockholders, or in such other
proportions as shall mutually be agreed to by all such parties), it being
understood that all Registrable Securities may be excluded from the registration
on this basis. For any selling stockholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and stockholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling stockholder," and
any pro rata reduction with respect to such "selling stockholder" shall be based
upon the aggregate amount of Registrable Securities owned by all entities and
individuals included in such "selling stockholder," as defined in this sentence.
(d) Furnish Information. It shall be a condition precedent to
-------------------
the obligations of the Company to take any action pursuant to this Section 4.1
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
4
<PAGE>
(e) Expense of Registration. All expenses other than
-----------------------
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to this Section 4.1, including
(without limitation), all registration, filing and qualification fees, printers
and accounting fees, printers and accounting fees, fees and disbursements of
counsel for the Company including fees and disbursements of counsel for the
Company in its capacity as counsel to the selling Holders hereunder; if Company
counsel does not make itself available for this purpose, the Company will pay
the reasonable fees and disbursements of one counsel for the selling Holders.
(f) No Delay of Registration. No Holder shall have any right to
------------------------
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 4.1
(g) Indemnification. In the event any Registrable Securities
---------------
are included in a registration statement under this Section 4.1:
(i) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Securities Exchange Act of 1934, as amended
(the "1934 Act"), against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) that arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Act, the 1934
Act, any state securities law or any rule or regulation promulgated under the
Act, the 1934 Act or any state securities law; and the Company will pay, as
incurred, to each such Holder, underwriter or controlling person, to the extent
(and only to the extent) that such losses, claims, damages, or liabilities arise
out of a Violation, any legal or other expenses reasonably incurred by any
person intended to be indemnified pursuant to this Section 4.1(g) in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnify agreement contained in this
Section 4.1(g) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Company, nor shall the Company be liable in any such case for any
such loss, claim, damage, liability, or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
(ii) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such
5
<PAGE>
registration statement and any controlling person of any such underwriter or
other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will pay, as incurred, any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this Section 4.1(g)(ii), in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 4.1(g)(ii) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder. Nothing
contained in this Section 4.1(g)(ii) is intended to preclude the underwriters in
any offering from requiring broader indemnities from the Holders participating
in such offering.
(iii) Promptly after receipt by an indemnified party
under this Section 4.1 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 4.1,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain separate counsel of its own, with the reasonable fees
and expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding; provided further that the indemnifying party shall not be
responsible for the fees and expenses of more than one separate counsel for all
indemnified parties. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
4.1 (to the extent of such prejudicial effect), but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise that under this Section 4.1
(iv) No indemnifying party, in the defense of any claim
arising out of a Violation shall, except with the consent of each indemnified
party, consent of entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation and, in the event the terms of such judgment or
settlement include any term other than the payment by the indemnifying party of
money damages, the indemnifying party shall not so consent or enter into such a
settlement without the consent of each indemnified party (which will not be
unreasonably withheld) whether or not the terms thereof include such a release.
6
<PAGE>
(v) The obligations of the Company and Holders under
this Section 4.1 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 4.1, and otherwise.
(h) Form S-3 Registration. In case the Company shall receive
---------------------
from any Holder or Holders a written request that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
(i) Promptly given written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(ii) As soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within fifteen (15) days after receipt of such written notice from the
Company in accordance with Section 8.6; provided, however, that the Company
shall not be obligated to effect any such registration, qualification or
compliance, pursuant to this Section 4.1(h):
(1) If Form S-3 is not available for such
offering by the Holders;
(2) Unless the Holders, together with the holders
of any other securities of the Company entitled to inclusion in such
registration, propose to sell either (x) Registrable Securities having an
aggregate price to the public (net of any underwriters' discounts and
commissions) of at least $1,000,000; or (y) more than 200,000 shares of
Registrable Securities;
(3) If the Company shall furnish to the Holders a
certificate signed by the Chief Executive Officer of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company for such Form S-3 Registration to be
effected at such time, in which event the Company shall have the right to defer
the filing of the Form S-3 registration statement for a period of not more than
120 days after receipt of the request of the Holder or Holders under this
Section 4.1(h); provided, however, that the Company shall not utilize this right
more than once in any twelve (12) month period;
(4) If the Company has completed its Initial
Public Offering within 180 days of the Company's receipt of the request for the
Form S-3 registration; or
(5) In any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
7
<PAGE>
(iii) Notwithstanding anything to the contrary herein,
the Company shall not be obligated to effect more than two (2) registrations
pursuant to this Section 4.1(h), and no more than one (1) such registration in
any twelve (12) month period.
(iv) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to this Section 4.1(h), including (without
limitation) all registration, filing, qualification, printer's and accounting
fees and the reasonable fees and disbursements of one counsel for the selling
Holder or Holders and counsel for the Company, shall be borne by the Company.
Registrations effected pursuant to this Section 4.1(h) shall not be counted as
registrations effected pursuant to Sections 4.1(b) or (c).
(i) Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 4.1 may only
be assigned by a Holder to a transferee who acquires at least 150,000 shares of
Registrable Securities (subject to appropriate adjustment for any stock split,
reverse stock split, stock dividend, recapitalization or similar transaction) or
all of such Holder's shares, if less, provided the Company is, within a
reasonable time after such transfer, furnished with written notice of the name
and address of such transferee; and provided, further, that such assignment
shall be effective only if immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted under
the Act. The foregoing 150,000 share limitation shall not apply, however, to
transfers by a Purchaser to constituent affiliates, or constituent partners
(including any constituent of a constituent) of the Purchaser (including spouses
and ancestors, lineal descendants and siblings of such partners or spouses who
acquire Registrable Securities by gift, will or intestate succession) or to the
shareholders of a Purchaser which is a nonpublic investment entity organized as
a corporation if all such transferees or assignees agree in writing to be bound
by the terms of this Agreement and appoint a single representative as their
attorney in fact for the purpose of receiving any notices and exercising their
rights under this Section 4.1
(j) "Market Stand-Off" Agreement. Each Purchaser hereby agrees
---------------------------
that during the 180 day period following the effective date of a registration
statement of the Company filed under the Act in connection with the Initial
Public Offering, it shall not sell, offer to sell, or otherwise transfer or
dispose of any capital stock of the Company held by it at any time during such
period except to the extent such Purchaser participates as a selling stockholder
in such registration; provided that the foregoing obligation shall be
conditioned upon all of the Company's then-current officers and directors
agreeing to the same restrictions. To enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of the Purchaser (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such period. Each Holder
agrees to execute the form of such market stand-off agreement as may be
reasonably requested by the underwriters.
(k) Termination or Amendment of Registration Rights. The
-----------------------------------------------
registration rights granted under this Section 4.1 may be terminated, waived or
amended with the written consent of the Company and the Holders of 66% of the
Registrable Securities then outstanding, except for Sections 4(b)(i) and 4.1(l)
hereof, which shall only be terminated, waived or amended with the written
consent of the Company and the Holders of 66% of the Registrable
8
<PAGE>
Securities, which consent must include the Lead Investor to be effective. In
addition, no Holder shall be entitled to exercise any right provided for in this
Agreement (a) after four (4) years following the closing of the Initial Public
Offering or (b) at such time following the Initial Public Offering and for so
long as such Holder may sell all of such Holder's Registrable Securities in any
ninety (90) day period pursuant to Rule 144 (or such successor rule as may be
adopted).
(l) Subsequent Registration Rights. If at any time (or from time
------------------------------
to time) while this Agreement is in effect the Company shall grant any person or
entity any registration rights with respect to any securities of the Company
that differ from the rights granted under Section 4.1, the Company shall
promptly provide each Holder hereunder a copy of such other registration rights.
At any time prior to the expiration of twenty (20) days after the Company's
delivery of such copy, the Holders acting together may elect, by written consent
of the Holders of 66% of the Registrable Securities and the Lead Investor, to
substitute such other registration rights in their entirety for the registration
rights provided in Section 4.1. The failure of the Holders to so elect with
respect to any such other registration rights shall not adversely affect the
Holders' rights with respect to any other registration rights thereafter granted
by the Company.
9
<PAGE>
EXHIBIT 4.6
FORM OF SERIES B, C, D AND E
PREFERRED STOCK REGISTRATION RIGHTS
1. Registration Rights.
-------------------
(a) Definitions. The following terms shall have the following
-----------
respective meanings:
(i) "Expenses of Registration" shall have the meaning
specified in Section 4.1(e).
(ii) "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(iii) "Holder" or "Holders" means any holder of
outstanding Registrable Securities.
(iv) "Holder or Holders of Series A Registrable
Securities" means any holder of outstanding Series A Registrable Securities.
(v) "Holder or Holders of Series B Registrable
Securities" means any holder of outstanding Series B Registrable Securities.
(vi) "Holder or Holders of Series C Registrable
Securities" means any holder of outstanding Series C Registrable Securities.
(vii) "Holder or Holders of Series D Registrable
Securities" means any holder of outstanding Series D Registrable Securities.
(viii) "Initiating Holders" means any Holder or Holders
who individually or in the aggregate hold not less than 25% of the Registrable
Securities.
(ix) "Initial Public Offering" means the Company's sale
of its Common Stock in a bona fide underwriting pursuant to a registration
statement under the Act, the public offering price of which is not less than
$3.75 per share (as adjusted for stock dividends, stock splits or
recapitalizations) and for an aggregate offering price, net of underwriters'
discounts and commissions, of more than $10,000,000.
(x) "Lead Series A Investor" means ATGF II, a fund
organized under the laws of Panama, its affiliates, or its transferees permitted
under Section 4.1(i) of the Series A Preferred Stock Agreement.
(xi) "register", "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Act, and the declaration or ordering of the effectiveness of
such registration statement.
<PAGE>
(xii) "Other Series Registrable Securities" means the
Registrable Securities described in clauses (ii), (iii), and (iv) of the
definition of Registrable Securities in Section 4.1(a)(xii).
(xiii) "Registrable Securities" means (i) the shares of
Class A Voting Common Stock issuable or issued upon conversion of the
outstanding Series A Preferred Stock and any other shares of the Common Stock
issued as (or issuable upon conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to or exchange for or replacement of, the outstanding Series A Preferred Stock,
(ii) the shares of Class A Voting Common Stock issuable or issued upon
conversion of the outstanding Series B Preferred Stock and any other share of
the Common Stock issued as (or issuable upon conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to or exchange for or replacement of the outstanding
Series B Preferred Stock, (iii) the shares of Class A Voting Common Stock
issuable or issued upon conversion of the outstanding Series C Preferred Stock
and any other share of the Common Stock issued as (or issuable upon conversion
or exercise of any warrant, right or other security which is issued as) a
dividend or other distribution with respect to or exchange for or replacement of
the outstanding Series C Preferred Stock, (iv) the shares of Class A Voting
Common Stock issuable or issued upon conversion of the outstanding Series D
Preferred Stock and any other shares of the Common Stock issued as (or issuable
upon conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to or exchange for or
replacement of the outstanding Series D Preferred Stock, or (v) the shares of
the Common Stock issuable or issued upon conversion of any series of Preferred
Stock that may from time to time come into existence as to which the Company may
grant rights to have such shares of the Common Stock registered and any other
shares of the Common Stock issued as (or issuable upon conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to or exchange for or replacement of such series of
Preferred Stock, excluding in all cases, however, any Registrable Securities
sold by a person in a transaction in which a Holder's rights under this
Agreement, under the Series A Preferred Stock Agreement or under the
agreement(s) pursuant to which any series of Preferred Stock that may from time
to time come into existence may be purchased are not assigned; provided,
--------
however, that Registrable Securities shall only be treated as Registrable
- -------
Securities if, and so long as, they have not been (A) sold to or through a
broker or dealer or underwriter in a public distribution or a public securities
transaction, or (B) sold in a transaction exempt from the registration and
prospectus delivery requirements of the Act under Section 4(1) thereof so that
all transfer restrictions and restrictive legends with respect thereto may
legally be removed upon the consummation of such sale.
(xiv) "Series A Preferred Stock Agreement" means that
certain Series A Preferred Stock Purchase Agreement dated March 15, 1996 between
the Company and the purchasers of Series A Preferred Stock of the Company listed
on Schedule A thereto and all amendments and supplements thereto.
(xv) "Series A Registrable Securities" means the
Registrable Securities described in clause (i) of the definition of Registrable
Securities in Section 4.1(a)(xiii) hereof.
2
<PAGE>
(xvi) "Series B Preferred Stock Agreement" means those
certain Series B Preferred Stock Purchase Agreements between the Company and the
purchasers of Series B Preferred Stock of the Company and all amendments and
supplements thereto.
(xvii) "Series B Registrable Securities" means the
Registrable Securities described in clause (ii) of the definition of Registrable
Securities in Section 4.1(a)(xiii) hereof.
(xviii) "Series C Preferred Stock Agreement" means that
certain Series C Stock Purchase Agreement dated March ___, 1999 between the
Company and the purchasers of Series C Preferred Stock of the Company listed on
Schedule A thereto and all amendments and supplements thereto.
(xix) "Series C Registrable Securities" means the
Registrable Securities described in clause (iii) of the definition of
Registrable Securities in Section 4.1(a)(xiii) hereof.
(xx) "Series D Registrable Securities" means the
Registrable Securities described in clause (iv) of the definition of Registrable
Securities in Section 4.1(a)(xiii) hereof.
(b) Demand Registration.
-------------------
(i) Request for Registration. In case the Company
------------------------
shall receive from Initiating Holders a written request (the "Request") that the
Company effect any registration with respect to not less than 25% of the
Registrable Securities then outstanding, or any lesser percentage of Registrable
Securities if the anticipated aggregate offering price, net of underwriters'
discounts and commissions, would exceed $3,000,000, the Company will:
(1) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders in accordance
with Section 8.6; and
(2) as soon as practicable, use its reasonable
efforts to effect such registration (including, without limitation, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Act and any
other governmental requirements or regulations) as may be so requested and as
would permit or facilitate the sale and distribution of all or such portion of
such Registrable Securities as are specified in the Request, together with all
or such portion of the Registrable Securities of any Holder or Holders joining
in the Request as are specified in a written notice received by the Company
within twenty (20) days after such Holder's receipt of written notice provided
by the Company pursuant to Section 4.1(b)(i)(1); provided, however, that the
-----------------
Company shall not be obligated to take any action to effect any such
registration pursuant to this Section 4.1(b):
A. In any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration unless the Company is already subject to service
in such jurisdiction and except as may be required by the Act;
3
<PAGE>
B. Prior to 270 days following the
effective date of the Initial Public Offering;
C. During the period starting with the date
of filing of, and ending on the date 180 days immediately following the
effective date of, any general form of registration statement pertaining to sale
by the Company of Common Stock or securities which are immediately convertible
at the option of the holder or convertible within twelve (12) months from the
date of issuance into Common Stock, provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective;
D. After the Company has effected one (1)
such registration pursuant to this Section 4.1(b); provided that, if the first
-------------
registration pursuant to this Section 4.1(b) shall be underwritten and if less
than 50% of the Series D Registrable Securities then outstanding held by the
Initiating Holder and all Holders who join in the Request in the manner, and at
the time, specified in Section 4.1(b)(i)(2) shall be, or shall have been,
included in such underwriting and in any underwriting described in Section
4.1(c)(ii) which has been consummated prior to the date of such underwriting,
then the Company shall be obligated to effect an additional registration
pursuant to this Section 4.1(b); or
E. If the Company shall furnish to such
Initiating Holders a certificate signed by the Chief Executive Officer of the
Company stating that in the good faith judgment of the Company's Board of
Directors it would be seriously detrimental to the Company or its stockholders
for a registration statement to be filed at the date filing would be required,
in which case the Company's obligation to use its reasonable efforts to register
under this Section 4.1(b) shall be deferred for a period not to exceed 120 days
from the date of receipt of the Request, provided that the Company may not
exercise this deferral right more than once during any twelve (12) month period.
(ii) Underwriting. If any registration pursuant to
------------
Section 4.1(b) shall be underwritten, the right of any Holder to registration
pursuant to Section 4.1(b) shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable Securities
in such underwriting as prescribed herein (unless otherwise mutually agreed by a
majority in interest of the Initiating Holders and each such Holder). The
Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected by the Company for such
underwriting (the "Managing Underwriter"). Notwithstanding any other provision
of this Section 4.1(b), if the Managing Underwriter advises the Initiating
Holders or the Company in writing that the number of Registrable Securities
proposed to be registered by such Initiating Holder or Holders exceeds the
maximum number of such shares which the Managing Underwriter considers, in good
faith, to be appropriate based upon market conditions and other relevant factors
(the "Maximum Number"), then (1) the Company shall so advise all Holders, (2)
the Lead Series A Investor shall be entitled to include Registrable Securities
in such underwriting up to the Maximum Number, (3) if the Lead Series A Investor
elects to include in such underwriting a number of its Registrable Securities
which is less than the Maximum Number (the "Series A Portion"), the Initiating
Holders of Series A Registrable Securities (if different than the Lead Series A
Investor) and those Holders of
4
<PAGE>
Series A Registrable Securities (other than the Lead Series A Investor) joining
in the Request shall be entitled to include in such underwriting their pro rata
share of Series A Registrable Securities up to that number of shares equal to
the difference between the Maximum Number and the Series A Portion and (4) if
the Holders of Series A Registrable Securities (including the Lead Series A
Investor) elect to include in such underwriting a number of their Registrable
Securities which is less than the Maximum Number, the Holders of Other Series
Registrable Securities joining in the Request shall be entitled to include in
such underwriting their pro rata share of Other Series Registrable Securities up
to that number of shares equal to the difference between the Maximum Number and
the total number of shares that the Holders of Series A Registrable Securities
(including the Lead Series A Investor) elect to include in such underwriting.
For purposes of the preceding sentence, (x) a Holder's "pro rata share of Series
A Registrable Securities" shall mean the quotient obtained by dividing the
number of Series A Registrable Securities held by such Holder by the sum of all
of the Series A Registrable Securities held by the Initiating Holders (if
different than the Lead Series A Investor) and those Holders of Series A
Registrable Securities (other than the Lead Series A Investor) joining in the
Request and (y) a Holder's "pro rata share of the Other Series Registrable
Securities" shall mean the quotient obtained by dividing the number of Other
Series Registrable Securities held by such Holder by the sum of all of the Other
Series Registrable Securities held by the Initiating Holders and those Holders
of Other Series Registrable Securities joining in the Request. No Registrable
Securities excluded from the underwriting by reason of the Managing
Underwriter's marketing limitation shall be included in such underwriting. To
facilitate the allocation of shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares. If any Holder declines to participate upon
review of the terms of the underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company, the Managing Underwriter and the
Initiating Holders. The Registrable Securities and/or other securities so
withdrawn shall also be withdrawn from registration, and such Registrable
Securities shall not be transferred in a public distribution prior to 180 days
after the effective date of such registration, or such other shorter period of
time as the underwriters may require. If the underwriter has not limited the
number of Registrable Securities to be underwritten, or if Holders have elected
to include less than the Maximum Number in such underwriting, the Company may
include securities for its own account (or for the account of other
stockholders) in such registration if the Managing Underwriter so agrees and if
the number of Registrable Securities that would otherwise have been included in
such registration and underwriting will not thereby be limited.
(iii) The Company shall pay the Expenses of Registration
for one (1) registration requested pursuant to this Section 4.1(b).
Notwithstanding the immediately preceding sentence, in the event that the
Company is obligated to effect an additional registration pursuant to the
proviso to Section 4.1(b)(2)(D), then the Company shall pay the Expenses of
Registration for two (2) registrations requested pursuant to this Section
4.1(b).
(c) Company Registration.
--------------------
(i) Notice of Registration. If (but without any
----------------------
obligation to do so) at any time after the Initial Public Offering the Company
proposes to register any of its Common Stock or other securities under the Act
in connection with the public offering of such securities solely for cash (other
than a registration relating either to the sale of securities to
5
<PAGE>
participants in a Company stock option, stock purchase or similar plan or to an
SEC Rule 145 transaction, or a registration on Form S-8, Form S-4 or any
successors to such forms), the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of any
Holder given within twenty (20) days from receipt of such notice by the Company
in accordance with Section 8.6, the Company shall, subject to the provisions of
Section 4.1(c)(ii) and 4.1(d), cause to be registered under the Act all of the
Registrable Securities that each such Holder has requested to be registered.
(ii) Underwriting Requirements. In connection with any
-------------------------
offering pursuant to this Section 4.1(c), the Company shall not be required to
include any of the Holders' securities in such underwriting unless they accept
the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it, and then only in such quantity as will not, in the
opinion of the underwriters, adversely affect the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested by stockholders to be included in such offering exceeds the amount of
securities sold other than by the Company that the underwriters reasonably
believe would not adversely affect the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters believe
will not adversely affect the success of the offering (the securities so
included to be apportioned first to the Company, then second pro rata among the
selling Holders of Series A Registrable Securities according to the total amount
of Series A Registrable Securities owned by each selling Holder, then third pro
rata among the selling Holders of Other Series Registrable Securities according
to the total amount of Other Series Registrable Securities owned by each selling
Holder and then fourth to all other selling stockholders, or in such other
proportions as shall mutually be agreed to by all such parties), it being
understood that all Registrable Securities may be excluded from the registration
on this basis. For any selling stockholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and stockholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling stockholder," and
any pro rata reduction with respect to such "selling stockholder" shall be based
upon the aggregate amount of Registrable Securities owned by all entities and
individuals included in such "selling stockholder," as defined in this sentence.
(iii) The Company shall pay the Expenses of Registration
for two (2) registrations requested pursuant to this Section 4.1(c).
(d) Furnish Information. It shall be a condition precedent to
-------------------
the obligations of the Company to take any action pursuant to this Section 4.1
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
(e) Expenses of Registration. The term "Expenses of
------------------------
Registration" means all expenses other than underwriting discounts and
commissions incurred in connection with registrations, filings or qualifications
pursuant to this Section 4.1, including (without limitation), all registration,
filing and qualification fees, printers and accounting fees, fees and
6
<PAGE>
disbursements of counsel for the Company. Expenses of Registration does not
include the fees and disbursements of counsel for the selling Holders.
(f) No Delay of Registration No Holder shall have any right to
------------------------
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 4.1.
(g) Indemnification In the event any Registrable Securities are
---------------
included in a registration statement under this Section 4.1:
(i) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder of Series D Registrable Securities, any
underwriter (as defined in the Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Act, or any federal or state laws, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) that
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Act, the 1934 Act, any state securities laws or any rule or
regulation promulgated under the Act, the 1934 Act or any state securities laws;
and the Company will pay, as incurred, to each such Holder, underwriter or
controlling person, to the extent (and only to the extent) that such losses,
claims, damages, or liabilities arise out of a Violation, any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this Section 4.1(g) in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the indemnity
-----------------
agreement contained in this Section 4.1(g) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(ii) To the extent permitted by law, each selling
Holder of Series D Registrable Securities will indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls the Company within the
meaning of the Act, any underwriter or any other Holder selling securities in
such registration statement and any controlling person of any such underwriter
or other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, the 1934 Act or other federal or state laws, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
information furnished by such Holder
7
<PAGE>
expressly for use in connection with such registration; and each such Holder
will pay, as incurred, any legal or other expenses reasonably incurred by any
person intended to be indemnified pursuant to this Section 4.1(g)(ii), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 4.1(g)(ii) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder. Nothing contained in this Section 4.1(g)(ii)
is intended to preclude the underwriters in any offering from requiring broader
indemnities from the Holders participating in such offering.
(iii) Promptly after receipt by an indemnified party
under this Section 4.1 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 4.1,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided however, that an indemnified party shall
----------------
have the right to retain separate counsel of its own, with the reasonable fees
and expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding; provided further that the indemnifying party shall not be
responsible for the fees and expenses of more than one separate counsel for all
indemnified parties. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
4.1 (to the extent of such prejudicial effect), but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 4.1.
(iv) No indemnifying party, in the defense of any claim
arising out of a Violation shall, except with the consent of each indemnified
party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation and, in the event the terms of such judgment or
settlement include any term other than the payment by the indemnifying party of
money damages, the indemnifying party shall not so consent or enter into such a
settlement without the consent of each indemnified party (which will not be
unreasonably withheld) whether or not the terms thereof include such a release.
(v) The obligations of the Company and Holders under
this Section 4.1 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 4.1, and otherwise.
(h) Form S-3 Registration. In case the Company shall receive
---------------------
from any Holder or Holders a written request that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
8
<PAGE>
(i) Promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(ii) As soon as practicable, use reasonable efforts to
effect such registration and all such qualifications and compliances as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Holder's or Holders' Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any other Holder or Holders joining in such request as are
specified in a written request given within twenty (20) days after receipt of
such written notice from the Company in accordance with Section 8.6; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 4.1(h):
(1) If Form S-3 is not available for such
offering by the Holders;
(2) Unless the Holders, together with the holders
of any other securities of the Company entitled to inclusion in such
registration, propose to sell either (x) Registrable Securities having an
aggregate price to the public (net of any underwriters' discounts and
commissions) in excess of $2,000,000; or (y) not less than 15% of the
Registrable Securities then outstanding;
(3) If the Company shall furnish to the Holders a
certificate signed by the Chief Executive Officer of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company for such Form S-3 registration to be
effected at such time, in which event the Company shall have the right to defer
the filing of the Form S-3 registration statement for a period of not more than
120 days after receipt of the request of the Holder or Holders under this
Section 4.1(h); provided, however, that the Company shall not utilize this right
more than once in any twelve (12) month period;
(4) If the Company has completed its Initial
Public Offering within 180 days of the Company's receipt of the request for the
Form S-3 registration; or
(5) In any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(iii) Notwithstanding anything to the contrary herein,
the Company shall not be obligated to effect more than two (2) registrations
pursuant to this Section 4.1(h), and no more than one (1) such registration in
any twelve (12) month period.
(iv) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. The Company shall pay the Expenses of
Registration for two (2) registrations requested pursuant to this
9
<PAGE>
Section 4.1(h). Registrations effected pursuant to this Section 4.1(h) shall not
be counted as registrations effected pursuant to Sections 4.1 (b) or (c).
(i) Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 4.1 may only
be assigned by a Holder to a transferee who acquires all of such Holder's
shares, provided the Company is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee; and
provided, further, that such assignment shall be effective only if immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Act.
(j) "Market Stand-Off" Agreement. Each Purchaser hereby agrees
---------------------------
that during the 180 day period following the effective date of each of (i) a
registration statement of the Company filed under the Act in connection with the
Initial Public Offering and (ii) the registration statement filed under the Act
with respect to an underwritten offering of Common Stock (or securities which
are immediately convertible at the option of the holder or convertible within
twelve (12) months from the date of issuance into Common Stock) after the
Initial Public Offering, it shall not sell, offer to sell, or otherwise transfer
or dispose of any capital stock of the Company held by it at any time during
such period except to the extent such Purchaser participates as a selling
stockholder in such registrations. To enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of the Purchaser (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such period. Each Holder
agrees to execute the form of such market stand-off agreement as may be
reasonably requested by the underwriters.
(k) Termination or Amendment of Registration Rights. The
-----------------------------------------------
registration rights granted under this Section 4.1 may be terminated, waived or
amended with the written consent of the Company and the Holders of 66% of the
Series D Registrable Securities then outstanding. In addition, no Holder of
Series D Registrable Securities shall be entitled to exercise any right provided
for in this Agreement (a) after four (4) years following the closing of the
Initial Public Offering or (b) at such time following the Initial Public
Offering and for so long as such Holder may sell all of such Holder's Series D
Registrable Securities in any ninety (90) day period without registration in
compliance with Rule 144 of the Act (or such successor rule as may be adopted).
(l) Registration Rights of Holders of Series A Registrable
------------------------------------------------------
Securities. The rights granted to the Holders of Series D Registrable Securities
- ----------
in Sections 4.1(b), 4.1(c) and 4.1(h) of this Agreement to have Series D
Registrable Securities owned by them registered shall be subject to (i) the
rights granted to the Holders of Series A Registrable Securities in Sections
4.1(b), 4.1(c) and 4.1(h) of the Series A Preferred Stock Agreement to have
Series A Registrable Securities owned by them registered; (ii) the rights
granted to the Holders of the Series B Registrable Securities in Sections
4.1(b), 4.1(c) and 4.1(h) of the Series B Stock Purchase Agreement to have
Series B Registrable Securities owned by them registered; and (iii) the rights
granted to the Holders of the Series C Registrable Securities in Sections
4.1(b), 4.1(c) and 4.1(h) of the Series C Stock Purchase Agreement to have
Series C Registrable Securities owned by them registered.
10
<PAGE>
EXHIBIT 4.7
FORM OF REGISTRATION RIGHTS
FOUND IN A CLASS B NON-VOTING COMMON STOCK WARRANT
Registration Rights. The Company agrees that the Shares issued or
-------------------
issuable upon exercise of this Warrant shall be deemed "Registrable Securities"
as such term is defined in the Company's Series B Preferred Stock Purchase
Agreement of even date herewith (the "Series B Agreement") solely for purposes
of granting "piggyback" registration rights under subSection 4.1(c) of the
Series B Agreement and the right to participate, but not demand registration,
under Section 4.1(b) of the Series B Agreement; provided, however, that in the
event of any cutback of securities requested by the underwriters, the Shares
shall be subject to cutback prior to any cutbacks on any holders of Common stock
issued or issuable upon conversion of the Company's Preferred Stock and then
only on a pro rata basis with other holders of Common Stock.
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of
___________, 1999, between InterTrust Technologies Corporation, a Delaware
corporation ("the Company"), and _____________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company has adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers and directors of the
Company to the maximum extent authorized by Section 145 of the Delaware General
Corporation Law, as amended ("Law"); and
WHEREAS, the Bylaws and the Law, by their nonexclusive nature, permit
contracts between the Company and the officers or directors of the Company with
respect to indemnification of such officers or directors; and
WHEREAS, in accordance with the authorization as provided by the Law,
the Company may purchase and maintain a policy or policies of directors' and
officers' liability insurance ("D & O Insurance"), covering certain liabilities
which may be incurred by its officers or directors in the performance of their
obligations to the Company; and
WHEREAS, in order to induce Indemnitee to continue to serve as an
officer or director of the Company, the Company has determined and agreed to
enter into this contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's service as an officer
or director after the date hereof, the parties hereto agree as follows:
1. Indemnity of Indemnitee. The Company hereby agrees to hold
-----------------------
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the Law, as such may be amended from time to time, and Article
VI, Section 7 of the Bylaws, as such may be amended. In furtherance of the
foregoing indemnification, and without limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the Right of the
------------------------------------------------------------
Company. Indemnitee shall be entitled to the rights of indemnification provided
- -------
in this Section l(a) if, by reason of his Corporate Status (as hereinafter
defined), he is, or is threatened to be made, a party to or participant in any
Proceeding (as hereinafter defined) other than a Proceeding by or in the right
of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified
against all Expenses (as hereinafter defined), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such Proceeding or any claim, issue or matter therein,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the
<PAGE>
Company and, with respect to any criminal Proceeding, had no reasonable cause to
believe his conduct was unlawful.
(b) Proceedings by or in the Right of the Company. Indemnitee
---------------------------------------------
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; provided, however, that, if applicable law so provides, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Company unless and to the extent that the Court of
Chancery of the State of Delaware shall determine that such indemnification may
be made.
(c) Indemnification for Expenses of a Party Who is Wholly or
--------------------------------------------------------
Partly Successful. Notwithstanding any other provision of this Agreement, to
- -----------------
the extent that Indemnitee is, by reason of his Corporate Status, a party to and
is successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.
2. Additional Indemnity. In addition to, and without regard to any
--------------------
limitations on, the indemnification provided for in Section 1, the Company shall
and hereby does indemnify and hold harmless Indemnitee against all Expenses,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the Company),
including, without limitation, all liability arising out of the negligence or
active or passive wrongdoing of Indemnitee. The only limitation that shall
exist upon the Company's obligations pursuant to this Agreement shall be that
the Company shall not be obligated to make any payment to Indemnitee that is
finally determined (under the procedures, and subject to the presumptions, set
forth in Sections 6 and 7 hereof) to be unlawful under Delaware law.
3. Contribution in the Event of Joint Liability.
--------------------------------------------
(a) Whether or not the indemnification provided in Sections 1 and
2 hereof is available, in respect of any threatened, pending or completed
action, suit or proceeding in which Company is jointly liable with Indemnitee
(or would be if joined in such action, suit or proceeding), Company shall pay,
in the first instance, the entire amount of any judgment or settlement of such
action, suit or proceeding without requiring Indemnitee to contribute to such
2
<PAGE>
payment and Company hereby waives and relinquishes any right of contribution it
may have against Indemnitee. Company shall not enter into any settlement of any
action, suit or proceeding in which Company is jointly liable with Indemnitee
(or would be if joined in such action, suit or proceeding) unless such
settlement provides for a full and final release of all claims asserted against
Indemnitee.
(b) Without diminishing or impairing the obligations of the
Company set forth in the preceding subparagraph, if, for any reason, Indemnitee
shall elect or be required to pay all or any portion of any judgment or
settlement in any threatened, pending or completed action, suit or proceeding in
which Company is jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding), Company shall contribute to the amount of expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred and paid or payable by Indemnitee in proportion
to the relative benefits received by the Company and all officers, directors or
employees of the Company other than Indemnitee who are jointly liable with
Indemnitee (or would be if joined in such action, suit or proceeding), on the
one hand, and Indemnitee, on the other hand, from the transaction from which
such action, suit or proceeding arose; provided, however, that the proportion
determined on the basis of relative benefit may, to the extent necessary to
conform to law, be further adjusted by reference to the relative fault of
Company and all officers, directors or employees of the Company other than
Indemnitee who are jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding), on the one hand, and Indemnitee, on the other hand,
in connection with the events that resulted in such expenses, judgments, fines
or settlement amounts, as well as any other equitable considerations which the
law may require to be considered. The relative fault of Company and all
officers, directors or employees of the Company other than Indemnitee who are
jointly liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, shall be
determined by reference to, among other things, the degree to which their
actions were motivated by intent to gain personal profit or advantage, the
degree to which their liability is primary or secondary, and the degree to which
their conduct is active or passive.
(c) Company hereby agrees to fully indemnify and hold Indemnitee
harmless from any claims of contribution which may be brought by officers,
directors or employees of the Company other than Indemnitee who may be jointly
liable with Indemnitee.
4. Indemnification for Expenses of a Witness. Notwithstanding any
-----------------------------------------
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
5. Advancement of Expenses. Notwithstanding any other provision of
-----------------------
this Agreement, the Company shall advance all Expenses incurred by or on behalf
of Indemnitee in connection with any Proceeding by reason of Indemnitee's
Corporate Status within ten (10) days after the receipt by the Company of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that
3
<PAGE>
Indemnitee is not entitled to be indemnified against such Expenses. Any advances
and undertakings to repay pursuant to this Section 5 shall be unsecured and
interest free. Notwithstanding the foregoing, the obligation of the Company to
advance Expenses pursuant to this Section 5 shall be subject to the condition
that, if, when and to the extent that the Company determines that Indemnitee
would not be permitted to be indemnified under applicable law, the Company shall
be entitled to be reimbursed, within thirty (30) days of such determination, by
Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid; provided, however, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, any determination made by the Company that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any advance of
Expenses until a final judicial determination is made with respect thereto (as
to which all rights of appeal therefrom have been exhausted or lapsed).
6. Procedures and Presumptions for Determination of Entitlement to
---------------------------------------------------------------
Indemnification. It is the intent of this Agreement to secure for Indemnitee
- ---------------
rights of indemnity that are as favorable as may be permitted under the law and
public policy of the State of Delaware. Accordingly, the parties agree that the
following procedures and presumptions shall apply in the event of any question
as to whether Indemnitee is entitled to indemnification under this Agreement:
(a) To obtain indemnification (including, but not limited to, the
advancement of Expenses and contribution by the Company) under this Agreement,
Indemnitee shall submit to the Company a written request, including therein or
therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Company shall,
promptly upon receipt of such a request for indemnification, advise the Board of
Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case by one of the following three methods, which
shall be at the election of Indemnitee: (1) by a majority vote of the
disinterested directors, even though less than a quorum, or (2) by independent
legal counsel in a written opinion, or (3) by the stockholders.
(c) If the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent
Counsel shall be selected as provided in this Section 6(c). The Independent
Counsel shall be selected by Indemnitee (unless Indemnitee shall request that
such selection be made by the Board of Directors). Indemnitee or the Company, as
the case may be, may, within 10 days after such written notice of selection
shall have been given, deliver to the Company or to Indemnitee, as the case may
be, a written objection to such selection; provided, however, that such
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of "Independent Counsel" as defined in
Section 13 of this Agreement, and the
4
<PAGE>
objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall
act as Independent Counsel. If a written objection is made and substantiated,
the Independent Counsel selected may not serve as Independent Counsel unless and
until such objection is withdrawn or a court has determined that such objection
is without merit. If, within 20 days after submission by Indemnitee of a written
request for indemnification pursuant to Section 6(a) hereof, no Independent
Counsel shall have been selected and not objected to, either the Company or
Indemnitee may petition the Court of Chancery of the State of Delaware or other
court of competent jurisdiction for resolution of any objection which shall have
been made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the court or by such other person as the court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 6(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting pursuant
to Section 6(b) hereof, and the Company shall pay all reasonable fees and
expenses incident to the procedures of this Section 6(c), regardless of the
manner in which such Independent Counsel was selected or appointed.
(d) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good faith if
Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties, or
on the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. Whether or not the foregoing provisions of this Section 6(e) are
satisfied, it shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
(f) If the person, persons or entity empowered or selected under
Section 6 to determine whether Indemnitee is entitled to indemnification shall
not have made a determination within thirty (30) days after receipt by the
Company of the request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification, absent (i) a misstatement by Indemnitee of a
material fact, or an omission of a material fact necessary to make Indemnitee's
statement not materially misleading, in connection with the request for
indemnification, or (ii) a prohibition of such indemnification under applicable
law; provided, however, that such 30 day period may be
5
<PAGE>
extended for a reasonable time, not to exceed an additional fifteen (15) days,
if the person, persons or entity making the determination with respect to
entitlement to indemnification in good faith requires such additional time for
the obtaining or evaluating documentation and/or information relating thereto;
and provided, further, that the foregoing provisions of this Section 6(g) shall
not apply if the determination of entitlement to indemnification is to be made
by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat.
(g) Indemnitee shall cooperate with the person, persons or entity
making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination under
the Agreement of the Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred by Indemnitee in
so cooperating with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Company hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.
(h) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party to
avoid expense, delay, distraction, disruption and uncertainty. In the event that
any action, claim or proceeding to which Indemnitee is a party is resolved in
any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without
payment of money or other consideration) it shall be presumed that Indemnitee
has been successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall have the burden of
proof and the burden of persuasion, by clear and convincing evidence.
7. Remedies of Indemnitee.
----------------------
(a) In the event that (i) a determination is made pursuant to
Section 6 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 5 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to this Agreement within
ten (10) days after receipt by the Company of a written request therefor, or (v)
payment of indemnification is not made within ten (10) days after a
determination has been made that Indemnitee is entitled to
6
<PAGE>
indemnification or such determination is deemed to have been made pursuant to
Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in
an appropriate court of the State of Delaware, or in any other court of
competent jurisdiction, of his entitlement to such indemnification. Indemnitee
shall commence such proceeding seeking an adjudication within 180 days following
the date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 7(a). The Company shall not oppose Indemnitee's right
to seek any such adjudication.
(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a de novo trial, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination under
Section 6(b).
(c) If a determination shall have been made pursuant to Section
6(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 7, absent a prohibition of such
indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section 7,
seeks a judicial adjudication of his rights under, or to recover damages for
breach of, this Agreement, or to recover under any directors' and officers'
liability insurance policies maintained by the Company the Company shall pay on
his behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 13 of this Agreement) actually and reasonably
incurred by him in such judicial adjudication, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, advancement of
expenses or insurance recovery.
(e) The Company shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 7 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all the provisions of
this Agreement.
8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
-----------------------------------------------------------
(a) The rights of indemnification as provided by this Agreement
shall not be deemed exclusive of any other rights to which Indemnitee may at any
time be entitled under applicable law, the certificate of incorporation of the
Company, the Bylaws, any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of this Agreement or
of any provision hereof shall limit or restrict any right of Indemnitee under
this Agreement in respect of any action taken or omitted by such Indemnitee in
his Corporate Status prior to such amendment, alteration or repeal. To the
extent that a change in the Law, whether by statute or judicial decision,
permits greater indemnification than would be afforded currently under the
Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and every other right and remedy shall be cumulative
and in addition to every other right and remedy
7
<PAGE>
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other right or
remedy.
(b) To the extent that the Company maintains an insurance policy
or policies providing liability insurance for directors, officers, employees, or
agents or fiduciaries of the Company or of any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise which such
person serves at the request of the Company, Indemnitee shall be covered by such
policy or policies in accordance with its or their terms to the maximum extent
of the coverage available for any such director, officer, employee or agent
under such policy or policies.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extent
that Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
9. Exception to Right of Indemnification. Notwithstanding any other
-------------------------------------
provision of this Agreement, Indemnitee shall not be entitled to indemnification
under this Agreement with respect to any Proceeding brought by Indemnitee, or
any claim therein, unless (a) the bringing of such Proceeding or making of such
claim shall have been approved by the Board of Directors of the Company or (b)
such Proceeding is being brought by the Indemnitee to assert, interpret or
enforce his rights under this Agreement.
10. Duration of Agreement. All agreements and obligations of the
---------------------
Company contained herein shall continue during the period Indemnitee is an
officer or director of the Company (or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 7 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or any
other Enterprise at the Company's request.
11. Security. To the extent requested by the Indemnitee and approved
--------
by the Board of Directors of the Company, the Company may at any time and from
time to time provide
8
<PAGE>
security to the Indemnitee for the Company's obligations hereunder through an
irrevocable bank line of credit, funded trust or other collateral. Any such
security, once provided to the Indemnitee, may not be revoked or released
without the prior written consent of the Indemnitee.
12. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on it hereby in order to
induce Indemnitee to serve as an officer or director of the Company, and the
Company acknowledges that Indemnitee is relying upon this Agreement in serving
as an officer or director of the Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
13. Definitions. For purposes of this Agreement:
-----------
(a) "Corporate Status" describes the status of a person who is or
was a director, officer, employee or agent or fiduciary of the Company or of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person is or was serving at the express written
request of the Company.
(b) "Disinterested Director" means a director of the Company who
is not and was not a party to the Proceeding in respect of which indemnification
is sought by Indemnitee.
(c) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.
(d) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.
(e) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the Company
or Indemnitee in any matter material to either such party (other than with
respect to matters concerning the Indemnitee under this Agreement, or of other
indemnitees under similar indemnification agreements), or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in
9
<PAGE>
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement. The Company agrees to pay the
reasonable fees of the Independent Counsel referred to above and to fully
indemnify such counsel against any and all Expenses, claims, liabilities and
damages arising out of or relating to this Agreement or its engagement pursuant
hereto.
(f) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director of the Company, by reason of any
action taken by him or of any inaction on his part while acting as an officer or
director of the Company, or by reason of the fact that he is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other Enterprise; in each case
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement; including one pending on or before the date of this Agreement;
and excluding one initiated by an Indemnitee pursuant to Section 7 of this
Agreement to enforce his rights under this Agreement.
14. Severability. If any provision or provisions of this Agreement
------------
shall be held by a court of competent jurisdiction to be invalid, void, illegal
or otherwise unenforceable for any reason whatsoever: (a) the validity, legality
and enforceability of the remaining provisions of this Agreement (including
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby and shall remain enforceable to the fullest extent permitted by law; and
(b) to the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested thereby.
15. Modification and Waiver. No supplement, modification,
-----------------------
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
16. Notice By Indemnitee. Indemnitee agrees promptly to notify the
--------------------
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise unless and only
to the extent that such failure or delay materially prejudices the Company.
10
<PAGE>
17. Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:
(a) If to Indemnitee, to the address set forth below Indemnitee
signature hereto.
(b) If to the Company, to:
________________________________
________________________________
________________________________
Attention:______________________
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
18. Identical Counterparts. This Agreement may be executed in one or
----------------------
more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
19. Headings. The headings of the paragraphs of this Agreement are
--------
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
20. Governing Law. The parties agree that this Agreement shall be
-------------
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.
21. Gender. Use of the masculine pronoun shall be deemed to include
------
usage of the feminine pronoun where appropriate.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
INTERTRUST TECHNOLOGIES
CORPORATION
By:____________________________________
Name:_____________________________
Title:____________________________
Address:
_______________________________________
_______________________________________
_______________________________________
_______________________________________
INDEMNITEE
_______________________________________
Address:
_______________________________________
_______________________________________
_______________________________________
_______________________________________
12
<PAGE>
Exhibit 10.2
InterTrust Technologies Corporation
1999 Equity Incentive Plan
(As Adopted July 22, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. INTRODUCTION........................................... 1
ARTICLE 2. ADMINISTRATION......................................... 1
2.1 Committee Composition.................................... 1
2.2 Committee Responsibilities............................... 1
2.3 Committee for Non-Officer Grants......................... 1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS............................ 2
3.1 Basic Limitation......................................... 2
3.2 Annual Increase in Shares................................ 2
3.3 Additional Shares........................................ 2
3.4 Dividend Equivalents..................................... 2
ARTICLE 4. ELIGIBILITY............................................ 2
4.1 Incentive Stock Options.................................. 2
4.2 Other Grants............................................. 3
ARTICLE 5. OPTIONS................................................ 3
5.1 Stock Option Agreement................................... 3
5.2 Number of Shares......................................... 3
5.3 Exercise Price........................................... 3
5.4 Exercisability and Term.................................. 3
5.5 Modification or Assumption of Options.................... 3
5.6 Buyout Provisions........................................ 4
ARTICLE 6. PAYMENT FOR OPTION SHARES.............................. 4
6.1 General Rule............................................. 4
6.2 Surrender of Stock....................................... 4
6.3 Exercise/Sale............................................ 4
6.4 Exercise/Pledge.......................................... 4
6.5 Promissory Note.......................................... 4
6.6 Other Forms of Payment................................... 4
ARTICLE 7. STOCK APPRECIATION RIGHTS.............................. 5
7.1 SAR Agreement............................................ 5
7.2 Number of Shares......................................... 5
7.3 Exercise Price........................................... 5
7.4 Exercisability and Term.................................. 5
7.5 Exercise of SARs......................................... 5
7.6 Modification or Assumption of SARs....................... 5
</TABLE>
i
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<TABLE>
<S> <C>
ARTICLE 8. RESTRICTED SHARES........................................... 6
8.1 Restricted Stock Agreement.................................... 6
8.2 Payment for Awards............................................ 6
8.3 Vesting Conditions............................................ 6
8.4 Voting and Dividend Rights.................................... 6
ARTICLE 9. STOCK UNITS................................................. 6
9.1 Stock Unit Agreement.......................................... 6
9.2 Payment for Awards............................................ 6
9.3 Vesting Conditions............................................ 6
9.4 Voting and Dividend Rights.................................... 7
9.5 Form and Time of Settlement of Stock Units.................... 7
9.6 Death of Recipient............................................ 7
9.7 Creditors' Rights............................................. 7
ARTICLE 10. PROTECTION AGAINST DILUTION................................ 7
10.1 Adjustments.................................................. 7
10.2 Dissolution or Liquidation................................... 8
10.3 Reorganizations.............................................. 8
ARTICLE 11. CHANGE IN CONTROL.......................................... 8
ARTICLE 12. DEFERRAL OF AWARDS......................................... 9
ARTICLE 13. AWARDS UNDER OTHER PLANS................................... 9
ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES................... 10
14.1 Effective Date............................................... 10
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units.. 10
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units... 10
ARTICLE 15. LIMITATION ON RIGHTS....................................... 10
15.1 Retention Rights............................................. 10
15.2 Stockholders' Rights......................................... 10
15.3 Regulatory Requirements...................................... 10
ARTICLE 16. WITHHOLDING TAXES.......................................... 10
16.1 General...................................................... 10
16.2 Share Withholding............................................ 11
ARTICLE 17. FUTURE OF THE PLAN......................................... 11
17.1 Term of the Plan............................................. 11
17.2 Amendment or Termination..................................... 11
ARTICLE 18. LIMITATION ON PAYMENTS..................................... 11
18.1 Scope of Limitation.......................................... 11
18.2 Basic Rule................................................... 11
18.3 Reduction of Payments........................................ 12
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
18.4 Overpayments and Underpayments............................... 12
18.5 Related Corporations......................................... 12
ARTICLE 19. DEFINITIONS................................................ 13
19.1 Affiliate.................................................... 13
19.2 Award........................................................ 13
19.3 Board........................................................ 13
19.4 Change in Control............................................ 13
19.5 Code......................................................... 14
19.6 Committe..................................................... 14
19.7 Common Share................................................. 14
19.8 Company...................................................... 14
19.9 Consultant................................................... 14
19.10 Employee.................................................... 14
19.11 Related Corporations........................................ 14
19.12 Exercise Price.............................................. 14
19.13 Fair Market Value........................................... 14
19.14 ISO......................................................... 14
19.15 NSO......................................................... 14
19.16 Option...................................................... 14
19.17 Optionee.................................................... 14
19.18 Outside Director............................................ 14
19.19 Parent...................................................... 14
19.20 Participant................................................. 15
19.21 Plan........................................................ 15
19.22 Restricted Share............................................ 15
19.23 Restricted Stock Agreement.................................. 15
19.24 SAR......................................................... 15
19.25 SAR Agreement............................................... 15
19.26 Stock Option Agreement...................................... 15
19.27 Stock Unit.................................................. 15
19.28 Stock Unit Agreement........................................ 15
19.29 Subsidiary.................................................. 15
</TABLE>
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InterTrust Technologies Corporation
1999 Equity Incentive Plan
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board to be effective on the effective
date of the Company's initial public offering of its Common Shares. The purpose
of the Plan is to promote the long-term success of the Company and the creation
of stockholder value by (a) encouraging Employees, Outside Directors and
Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, Outside Directors and Consultants with
exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange Commission
may establish for administrators acting under plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to qualify for
exemption under section 162(m)(4)(C) of the Code.
2.2 Committee Responsibilities. The Committee shall (a) select the
Employees, Outside Directors and Consultants who are to receive Awards under the
Plan, (b) determine the type, number, vesting requirements and other features
and conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
2.3 Committee for Non-Officer Grants. The Board may also appoint a
secondary committee of the Board, which shall be composed of one or more
directors of the Company who
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need not satisfy the requirements of Section 2.1. Such secondary committee may
administer the Plan with respect to Employees and Consultants who are not
considered officers or directors of the Company under section 16 of the Exchange
Act, may grant Awards under the Plan to such Employees and Consultants and may
determine all features and conditions of such Awards. Within the limitations of
this Section 2.3, any reference in the Plan to the Committee shall include such
secondary committee.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall
not exceed (a) 1,900,000 plus (b) the additional Common Shares described in
Sections 3.2 and 3.3. The limitations of this Section 3.1 and Section 3.2 shall
be subject to adjustment pursuant to Article 10.
3.2 Annual Increase in Shares. As of January 1 of each year, commencing
with the year 2000, the aggregate number of Options, SARs, Stock Units and
Restricted Shares that may be awarded under the Plan shall automatically
increase by a number equal to the lesser of (a) 4% of the total number of Common
Shares then outstanding or (b) 1,500,000.
3.3 Additional Shares. If Restricted Shares or Common Shares issued upon
the exercise of Options are forfeited, then such Common Shares shall again
become available for Awards under the Plan. If Stock Units, Options or SARs are
forfeited or terminate for any other reason before being exercised, then the
corresponding Common Shares shall again become available for Awards under the
Plan. If Stock Units are settled, then only the number of Common Shares (if
any) actually issued in settlement of such Stock Units shall reduce the number
available under Section 3.1 and the balance shall again become available for
Awards under the Plan. If SARs are exercised, then only the number of Common
Shares (if any) actually issued in settlement of such SARs shall reduce the
number available under Section 3.1 and the balance shall again become available
for Awards under the Plan. The foregoing notwithstanding, the aggregate number
of Common Shares that may be issued under the Plan upon the exercise of ISOs
shall not be increased when Restricted Shares or other Common Shares are
forfeited.
3.4 Dividend Equivalents. Any dividend equivalents paid or credited under
the Plan shall not be applied against the number of Restricted Shares, Stock
Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 Incentive Stock Options. Only Employees who are common-law employees
of the Company, a Parent or a Subsidiary shall be eligible for the grant of
ISOs. In addition, an Employee who owns more than 10% of the total combined
voting power of all classes of outstanding stock of the Company or any of its
Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(6) of the Code are satisfied.
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4.2 Other Grants. Only Employees, Outside Directors and Consultants shall
be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The Stock
Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a reduction
in the Optionee's other compensation. A Stock Option Agreement may provide that
a new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
5.2 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Options granted to any
Optionee in a single fiscal year of the Company shall not cover more than
500,000 Common Shares, except that Options granted to a new Employee in the
fiscal year of the Company in which his or her service as an Employee first
commences shall not cover more than 1,000,000 Common Shares. The limitations
set forth in the preceding sentence shall be subject to adjustment in accordance
with Article 10.
5.3 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than 85% of
the Fair Market Value of a Common Share on the date of grant. In the case of an
NSO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.
5.4 Exercisability and Term. Each Stock Option Agreement shall specify
the date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed 10 years from
the date of grant. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination of the Optionee's service. Options may be awarded in
combination with SARs, and such an Award may provide that the Options will not
be exercisable unless the related SARs are forfeited.
5.5 Modification or Assumption of Options. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
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5.6 Buyout Provisions. The Committee may at any time (a) offer to buy out
for a payment in cash or cash equivalents an Option previously granted or (b)
authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the time
when such Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall
be made only pursuant to the express provisions of the applicable Stock
Option Agreement. The Stock Option Agreement may specify that payment may
be made in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Common Shares that are already owned by the
Optionee. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan. The Optionee
shall not surrender, or attest to the ownership of, Common Shares in payment of
the Exercise Price if such action would cause the Company to recognize
compensation expense (or additional compensation expense) with respect to the
Option for financial reporting purposes.
6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable, all
or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common
Shares being purchased under the Plan and to deliver all or part of the sales
proceeds to the Company.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to
pledge all or part of the Common Shares being purchased under the Plan to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.
6.5 Promissory Note. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) a full-recourse promissory
note. However, the par value of the Common Shares being purchased under the
Plan, if newly issued, shall be paid in cash or cash equivalents.
6.6 Other Forms of Payment. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
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ARTICLE 7. STOCK APPRECIATION RIGHTS.
7.1 SAR Agreement. Each grant of an SAR under the Plan shall be evidenced
by an SAR Agreement between the Optionee and the Company. Such SAR shall be
subject to all applicable terms of the Plan and may be subject to any other
terms that are not inconsistent with the Plan. The provisions of the various
SAR Agreements entered into under the Plan need not be identical. SARs may be
granted in consideration of a reduction in the Optionee's other compensation.
7.2 Number of Shares. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 10. SARs granted to any Optionee in a
single fiscal year shall in no event pertain to more than 500,000 Common Shares,
except that SARs granted to a new Employee in the fiscal year of the Company in
which his or her service as an Employee first commences shall not pertain to
more than 1,000,000 Common Shares. The limitations set forth in the preceding
sentence shall be subject to adjustment in accordance with Article 10.
7.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price.
An SAR Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the SAR is outstanding.
7.4 Exercisability and Term. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may be
awarded in combination with Options, and such an Award may provide that the SARs
will not be exercisable unless the related Options are forfeited. An SAR may be
included in an ISO only at the time of grant but may be included in an NSO at
the time of grant or thereafter. An SAR granted under the Plan may provide that
it will be exercisable only in the event of a Change in Control.
7.5 Exercise of SARs. Upon exercise of an SAR, the Optionee (or any
person having the right to exercise the SAR after his or her death) shall
receive from the Company (a) Common Shares, (b) cash or (c) a combination of
Common Shares and cash, as the Committee shall determine. The amount of cash
and/or the Fair Market Value of Common Shares received upon exercise of SARs
shall, in the aggregate, be equal to the amount by which the Fair Market Value
(on the date of surrender) of the Common Shares subject to the SARs exceeds the
Exercise Price. If, on the date when an SAR expires, the Exercise Price under
such SAR is less than the Fair Market Value on such date but any portion of such
SAR has not been exercised or surrendered, then such SAR shall automatically be
deemed to be exercised as of such date with respect to such portion.
7.6 Modification or Assumption of SARs. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise
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price. The foregoing notwithstanding, no modification of an SAR shall, without
the consent of the Optionee, alter or impair his or her rights or obligations
under such SAR.
ARTICLE 8. RESTRICTED SHARES.
8.1 Restricted Stock Agreement. Each grant of Restricted Shares under the
Plan shall be evidenced by a Restricted Stock Agreement between the recipient
and the Company. Such Restricted Shares shall be subject to all applicable
terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.
8.2 Payment for Awards. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future services. To the
extent that an Award consists of newly issued Restricted Shares, the
consideration shall consist exclusively of cash, cash equivalents or past
services rendered to the Company (or a Parent or Subsidiary) or, for the amount
in excess of the par value of such newly issued Restricted Shares, full-recourse
promissory notes, as the Committee may determine.
8.3 Vesting Conditions. Each Award of Restricted Shares may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events.
8.4 Voting and Dividend Rights. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Restricted Stock Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends received
in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.
ARTICLE 9. STOCK UNITS.
9.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall
be evidenced by a Stock Unit Agreement between the recipient and the Company.
Such Stock Units shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The
provisions of the various Stock Unit Agreements entered into under the Plan need
not be identical. Stock Units may be granted in consideration of a reduction in
the recipient's other compensation.
9.2 Payment for Awards. To the extent that an Award is granted in the
form of Stock Units, no cash consideration shall be required of the Award
recipients.
9.3 Vesting Conditions. Each Award of Stock Units may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events.
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9.4 Voting and Dividend Rights. The holders of Stock Units shall have no
voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under
the Plan may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Common Shares, or in a combination of both. Prior to distribution, any
dividend equivalents which are not paid shall be subject to the same conditions
and restrictions as the Stock Units to which they attach.
9.5 Form and Time of Settlement of Stock Units. Settlement of vested
Stock Units may be made in the form of (d) cash, (e) Common Shares or (f) any
combination of both, as determined by the Committee. The actual number of Stock
Units eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based
on the average Fair Market Value of Common Shares over a series of trading days.
Vested Stock Units may be settled in a lump sum or in installments. The
distribution may occur or commence when all vesting conditions applicable to the
Stock Units have been satisfied or have lapsed, or it may be deferred to any
later date. The amount of a deferred distribution may be increased by an
interest factor or by dividend equivalents. Until an Award of Stock Units is
settled, the number of such Stock Units shall be subject to adjustment pursuant
to Article 10.
9.6 Death of Recipient. Any Stock Units Award that becomes payable after
the recipient's death shall be distributed to the recipient's beneficiary or
beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
9.7 Creditors' Rights. A holder of Stock Units shall have no rights other
than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Unit Agreement.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 Adjustments. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares in an amount that has a
material effect on the price of Common Shares, a combination or consolidation of
the outstanding Common Shares (by reclassification or otherwise) into a lesser
number of Common Shares, a recapitalization, a spin-off or a similar occurrence,
the Committee shall make such adjustments as it, in its sole discretion, deems
appropriate in one or more of:
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(a) The number of Options, SARs, Restricted Shares and Stock
Units available for future Awards under Article 3;
(b) The limitations set forth in Sections 5.2 and 7.2;
(c) The number of Common Shares covered by each outstanding
Option and SAR;
(d) The Exercise Price under each outstanding Option and SAR; or
(e) The number of Stock Units included in any prior Award which
has not yet been settled.
Except as provided in this Article 10, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.
10.2 Dissolution or Liquidation. To the extent not previously exercised or
settled, Options, SARs and Stock Units shall terminate immediately prior to the
dissolution or liquidation of the Company.
10.3 Reorganizations. In the event that the Company is a party to a merger
or other reorganization, outstanding Awards shall be subject to the agreement of
merger or reorganization. Such agreement shall provide for (a) the continuation
of the outstanding Awards by the Company, if the Company is a surviving
corporation, (b) the assumption of the outstanding Awards by the surviving
corporation or its parent or subsidiary, (c) the substitution by the surviving
corporation or its parent or subsidiary of its own awards for the outstanding
Awards, (d) full exercisability or vesting and accelerated expiration of the
outstanding Awards or (e) settlement of the full value of the outstanding Awards
in cash or cash equivalents followed by cancellation of such Awards.
ARTICLE 11. CHANGE IN CONTROL.
Unless the applicable agreement evidencing the Award provides
otherwise, in the event of any Change in Control, the vesting and exercisability
of each outstanding Award shall automatically accelerate so that each such Award
shall, immediately prior to the effective date of the Change in Control, become
fully exercisable for all of the Common Shares at the time subject to such Award
and may be exercised for any or all of those shares as fully-vested Common
Shares. However, the vesting and exercisability of an outstanding Award shall
not so accelerate if and to the extent such Award, in connection with the Change
in Control, remains outstanding, or is assumed by the surviving corporation (or
parent thereof) or substituted with an award with substantially the same terms
by the surviving corporation (or parent thereof). The determination of whether a
substituted award has substantially the same terms as an Award shall be made by
the Committee, and its determination shall be final, binding and conclusive.
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If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of vesting and exercisability shall not occur
to the extent that the Company's independent accountants and such other party's
independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.
ARTICLE 12. DEFERRAL OF AWARDS.
The Committee (in its sole discretion) may permit or require a
Participant to:
(a) Have cash that otherwise would be paid to such Participant
as a result of the exercise of an SAR or the settlement of Stock Units
credited to a deferred compensation account established for such
Participant by the Committee as an entry on the Company's books;
(b) Have Common Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR converted into
an equal number of Stock Units; or
(c) Have Common Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR or the
settlement of Stock Units converted into amounts credited to a deferred
compensation account established for such Participant by the Committee as
an entry on the Company's books. Such amounts shall be determined by
reference to the Fair Market Value of such Common Shares as of the date
when they otherwise would have been delivered to such Participant.
A deferred compensation account established under this Article 12 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Article 12.
ARTICLE 13. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this Plan. Such
Common Shares shall be treated for all purposes under the Plan like Common
Shares issued in settlement of Stock Units and shall, when issued, reduce the
number of Common Shares available under Article 3.
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ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
14.1 Effective Date. No provision of this Article 14 shall be effective
unless and until the Board has determined to implement such provision.
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units. An
Outside Director may elect to receive his or her annual retainer payments and/or
meeting fees from the Company in the form of cash, NSOs, Restricted Shares or
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Article 14 shall be filed with the Company on the prescribed form.
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units. The
number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash shall be calculated in a manner determined by the Board. The terms
of such NSOs, Restricted Shares or Stock Units shall also be determined by the
Board.
ARTICLE 15. LIMITATION ON RIGHTS.
15.1 Retention Rights. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an Employee,
Outside Director or Consultant. The Company and its Parents, Subsidiaries and
Affiliates reserve the right to terminate the service of any Employee, Outside
Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
15.2 Stockholders' Rights. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the time when a stock certificate for such
Common Shares is issued or, if applicable, the time when he or she becomes
entitled to receive such Common Shares by filing any required notice of exercise
and paying any required Exercise Price. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to such time,
except as expressly provided in the Plan.
15.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 16. WITHHOLDING TAXES.
16.1 General. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The
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Company shall not be required to issue any Common Shares or make any cash
payment under the Plan until such obligations are satisfied.
16.2 Share Withholding. The Committee may permit a Participant to satisfy
all or part of his or her withholding or income tax obligations by having the
Company withhold all or a portion of any Common Shares that otherwise would be
issued to him or her or by surrendering all or a portion of any Common Shares
that he or she previously acquired. Such Common Shares shall be valued at their
Fair Market Value on the date when they are withheld or surrendered.
ARTICLE 17. FUTURE OF THE PLAN.
17.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on the effective date of the Company's initial public offering of its
Common Shares. The Plan shall remain in effect until it is terminated under
Section 17.2, except that no ISOs shall be granted on or after the 10/th/
anniversary of the later of (a) the date when the Board adopted the Plan or (b)
the date when the Board adopted the most recent increase in the number of Common
Shares available under Article 3 which was approved by the Company's
stockholders.
17.2 Amendment or Termination. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 18. LIMITATION ON PAYMENTS.
18.1 Scope of Limitation. This Article 18 shall apply to an Award only if:
(a) The independent auditors most recently selected by the Board
(the "Auditors") determine that the after-tax value of such Award to the
Participant, taking into account the effect of all federal, state and local
income taxes, employment taxes and excise taxes applicable to the
Participant (including the excise tax under section 4999 of the Code), will
be greater after the application of this Article 18 than it was before the
application of this Article 18; or
(b) The Committee, at the time of making an Award under the Plan
or at any time thereafter, specifies in writing that such Award shall be
subject to this Article 18 (regardless of the after-tax value of such Award
to the Participant).
If this Article 18 applies to an Award, it shall supersede any contrary
provision of the Plan or of any Award granted under the Plan.
18.2 Basic Rule. In the event that the Auditors determine that any payment
or transfer by the Company under the Plan to or for the benefit of a Participant
(a "Payment") would be nondeductible by the Company for federal income tax
purposes because of the provisions concerning "excess parachute payments" in
section 280G of the Code, then the aggregate present
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value of all Payments shall be reduced (but not below zero) to the Reduced
Amount. For purposes of this Article 18, the "Reduced Amount" shall be the
amount, expressed as a present value, which maximizes the aggregate present
value of the Payments without causing any Payment to be nondeductible by the
Company because of section 280G of the Code.
18.3 Reduction of Payments. If the Auditors determine that any Payment
would be nondeductible by the Company because of section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no such election is made by the Participant within such 10-day
period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 18, present
value shall be determined in accordance with section 280G(d)(4) of the Code.
All determinations made by the Auditors under this Article 18 shall be binding
upon the Company and the Participant and shall be made within 60 days of the
date when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts as are then
due to him or her under the Plan and shall promptly pay or transfer to or for
the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.
18.4 Overpayments and Underpayments. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code.
18.5 Related Corporations. For purposes of this Article 18, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
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ARTICLE 19. DEFINITIONS.
19.1 "Affiliate" means any entity other than a Subsidiary, if the Company
and/or one or more Subsidiaries own not less than 50% of such entity.
19.2 "Award" means any award of an Option, an SAR, a Restricted Share or a
Stock Unit under the Plan.
19.3 "Board" means the Company's Board of Directors, as constituted from
time to time.
19.4 "Change in Control" shall mean:
(a) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if
persons who were not stockholders of the Company immediately prior to such
merger, consolidation or other reorganization own immediately after such
merger, consolidation or other reorganization 50% or more of the voting
power of the outstanding securities of each of (i) the continuing or
surviving entity and (ii) any direct or indirect parent corporation of such
continuing or surviving entity;
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(c) A change in the composition of the Board, as a result of
which fewer than 50% of the incumbent directors are directors who either
(i) had been directors of the Company on the date 24 months prior to the
date of the event that may constitute a Change in Control (the "original
directors") or (ii) were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the aggregate of the
original directors who were still in office at the time of the election or
nomination and the directors whose election or nomination was previously so
approved; or
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing at least
50% of the total voting power represented by the Company's then outstanding
voting securities. For purposes of this Paragraph (d), the term "person"
shall have the same meaning as when used in sections 13(d) and 14(d) of the
Exchange Act but shall exclude (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of a Parent or
Subsidiary and (ii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
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19.5 "Code" means the Internal Revenue Code of 1986, as amended.
19.6 "Committee" means a committee of the Board, as described in Article
2.
19.7 "Common Share" means one share of the common stock of the Company.
19.8 "Company" means InterTrust Technologies Corporation, a Delaware
corporation.
19.9 "Consultant" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.1.
19.10 "Employee" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.
19.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
19.12 "Exercise Price," in the case of an Option, means the amount for
which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
19.13 "Fair Market Value" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal. Such determination
-----------------------
shall be conclusive and binding on all persons.
19.14 "ISO" means an incentive stock option described in section 422(b) of
the Code.
19.15 "NSO" means a stock option not described in sections 422 or 423 of
the Code.
19.16 "Option" means an ISO or NSO granted under the Plan and entitling
the holder to purchase Common Shares.
19.17 "Optionee" means an individual or estate who holds an Option or SAR.
19.18 "Outside Director" shall mean a member of the Board who is not an
Employee. Service as an Outside Director shall be considered employment for all
purposes of the Plan, except as provided in Section 4.1.
19.19 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent
on a date after the adoption of the Plan shall be considered a Parent commencing
as of such date.
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19.20 "Participant" means an individual or estate who holds an Award.
19.21 "Plan" means this InterTrust Technologies Corporation 1999 Equity
Incentive Plan, as amended from time to time.
19.22 "Restricted Share" means a Common Share awarded under the Plan.
19.23 "Restricted Stock Agreement" means the agreement between the Company
and the recipient of a Restricted Share which contains the terms, conditions and
restrictions pertaining to such Restricted Share.
19.24 "SAR" means a stock appreciation right granted under the Plan.
19.25 "SAR Agreement" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.
19.26 "Stock Option Agreement" means the agreement between the Company and
an Optionee that contains the terms, conditions and restrictions pertaining to
his or her Option.
19.27 "Stock Unit" means a bookkeeping entry representing the equivalent
of one Common Share, as awarded under the Plan.
19.28 "Stock Unit Agreement" means the agreement between the Company and
the recipient of a Stock Unit which contains the terms, conditions and
restrictions pertaining to such Stock Unit.
19.29 "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
15
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EXHIBIT 10.3
InterTrust Technologies Corporation
1999 Employee Stock Purchase Plan
(As Adopted July 22, 1999)
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 1. PURPOSE OF THE PLAN.................................................................... 1
SECTION 2. ADMINISTRATION OF THE PLAN............................................................. 1
(a) Committee Composition.................................................................... 1
(b) Committee Responsibilities............................................................... 1
SECTION 3. ENROLLMENT AND PARTICIPATION........................................................... 1
(a) Offering Periods......................................................................... 1
(b) Accumulation Periods..................................................................... 1
(c) Enrollment............................................................................... 1
(d) Duration of Participation................................................................ 1
(e) Applicable Offering Period............................................................... 2
SECTION 4. EMPLOYEE CONTRIBUTIONS................................................................. 2
(a) Frequency of Payroll Deductions.......................................................... 2
(b) Amount of Payroll Deductions............................................................. 2
(c) Changing Withholding Rate................................................................ 2
(d) Discontinuing Payroll Deductions......................................................... 3
(e) Limit on Number of Elections............................................................. 3
SECTION 5. WITHDRAWAL FROM THE PLAN............................................................... 3
(a) Withdrawal............................................................................... 3
(b) Re-Enrollment After Withdrawal........................................................... 3
SECTION 6. CHANGE IN EMPLOYMENT STATUS............................................................ 3
(a) Termination of Employment................................................................ 3
(b) Leave of Absence......................................................................... 3
(c) Death.................................................................................... 3
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES................................................... 4
(a) Plan Accounts............................................................................ 4
(b) Purchase Price........................................................................... 4
(c) Number of Shares Purchased............................................................... 4
(d) Available Shares Insufficient............................................................ 4
(e) Issuance of Stock........................................................................ 4
(f) Unused Cash Balances..................................................................... 5
(g) Stockholder Approval..................................................................... 5
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP......................................................... 5
(a) Five Percent Limit....................................................................... 5
(b) Dollar Limit............................................................................. 5
</TABLE>
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<TABLE>
<S> <C>
SECTION 9. RIGHTS NOT TRANSFERABLE............................................................... 6
SECTION 10. NO RIGHTS AS AN EMPLOYEE.............................................................. 6
SECTION 11. NO RIGHTS AS A STOCKHOLDER............................................................ 6
SECTION 12. SECURITIES LAW REQUIREMENTS........................................................... 6
SECTION 13. STOCK OFFERED UNDER THE PLAN.......................................................... 7
(a) Authorized Shares........................................................................ 7
(b) Anti-Dilution Adjustments................................................................ 7
(c) Reorganizations.......................................................................... 7
SECTION 14. AMENDMENT OR DISCONTINUANCE........................................................... 7
SECTION 15. DEFINITIONS........................................................................... 7
(a) Accumulation Period...................................................................... 7
(b) Board.................................................................................... 7
(c) Code..................................................................................... 7
(d) Committee................................................................................ 7
(e) Company.................................................................................. 7
(f) Compensation............................................................................. 8
(g) Corporate Reorganization................................................................. 8
(h) Eligible Employee........................................................................ 8
(i) Exchange Act............................................................................. 8
(j) Fair Market Value........................................................................ 8
(k) IPO...................................................................................... 8
(l) Offering Period.......................................................................... 9
(m) Participant.............................................................................. 9
(n) Participating Company.................................................................... 9
(o) Plan..................................................................................... 9
(p) Plan Account............................................................................. 9
(q) Purchase Price........................................................................... 9
(r) Stock.................................................................................... 9
(s) Subsidiary............................................................................... 9
</TABLE>
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InterTrust Technologies Corporation
1999 Employee Stock Purchase Plan
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Board effective as of the date of the IPO. The
purpose of the Plan is to provide Eligible Employees with an opportunity to
increase their proprietary interest in the success of the Company by purchasing
Stock from the Company on favorable terms and to pay for such purchases through
payroll deductions. The Plan is intended to qualify under section 423 of the
Code.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Company, who shall be appointed by the Board.
(b) Committee Responsibilities. The Committee shall interpret the Plan
and make all other policy decisions relating to the operation of the Plan. The
Committee may adopt such rules, guidelines and forms as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) Offering Periods. While the Plan is in effect, two overlapping
Offering Periods shall commence in each calendar year. The Offering Periods
shall consist of the 24-month periods commencing on each May 1 and November 1,
except that the first Offering Period shall commence on the date of the IPO and
end on October 31, 2001.
(b) Accumulation Periods. While the Plan is in effect, two Accumulation
Periods shall commence in each calendar year. The Accumulation Periods shall
consist of the six-month periods commencing on each May 1 and November 1, except
that the first Accumulation Period shall commence on the date of the IPO and end
on April 30, 2000.
(c) Enrollment. Any individual who, on the day preceding the first day of
an Offering Period, qualifies as an Eligible Employee may elect to become a
Participant in the Plan for such Offering Period by executing the enrollment
form prescribed for this purpose by the Committee. The enrollment form shall be
filed with the Company at the prescribed location not later than 10 days prior
to the commencement of such Offering Period.
(d) Duration of Participation. Once enrolled in the Plan, a Participant
shall continue to participate in the Plan until he or she ceases to be an
Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end
of the Accumulation Period in which his or her employee contributions were
discontinued under Section 4(d) or 8(b). A Participant who
<PAGE>
discontinued employee contributions under Section 4(d) or withdrew from the Plan
under Section 5(a) may again become a Participant, if he or she then is an
Eligible Employee, by following the procedure described in Subsection (c) above.
A Participant whose employee contributions were discontinued automatically under
Section 8(b) shall automatically resume participation at the beginning of the
earliest Accumulation Period ending in the next calendar year, if he or she then
is an Eligible Employee.
(e) Applicable Offering Period. For purposes of calculating the Purchase
Price under Section 7(b), the applicable Offering Period shall be determined as
follows:
(i) Once a Participant is enrolled in the Plan for an Offering
Period, such Offering Period shall continue to apply to him or her until
the earliest of (A) the end of such Offering Period, (B) the end of his or
her participation under Subsection (d) above or (C) re-enrollment for a
subsequent Offering Period under Paragraph (ii) or (iii) below.
(ii) In the event that the Fair Market Value of Stock on the last
trading day before the commencement of the Offering Period for which the
Participant is enrolled is higher than on the last trading day before the
commencement of any subsequent Offering Period, the Participant shall
automatically be re-enrolled for such subsequent Offering Period.
(iii) Any other provision of the Plan notwithstanding, the Company
(at its sole discretion) may determine prior to the commencement of any new
Offering Period that all Participants shall be re-enrolled for such new
Offering Period.
(iv) When a Participant reaches the end of an Offering Period but
his or her participation is to continue, then such Participant shall
automatically be re-enrolled for the Offering Period that commences
immediately after the end of the prior Offering Period.
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) Frequency of Payroll Deductions. A Participant may purchase shares of
Stock under the Plan solely by means of payroll deductions. Payroll deductions,
as designated by the Participant pursuant to Subsection (b) below, shall occur
on each payday during participation in the Plan.
(b) Amount of Payroll Deductions. An Eligible Employee shall designate on
the enrollment form the portion of his or her Compensation that he or she elects
to have withheld for the purchase of Stock. Such portion shall be a whole
percentage of the Eligible Employee's Compensation, but not less than 1% nor
more than 15%.
(c) Changing Withholding Rate. If a Participant wishes to change the rate
of payroll withholding, he or she may do so by filing a new enrollment form with
the Company at the prescribed location at any time. The new withholding rate
shall be effective as soon as
2
<PAGE>
reasonably practicable after such form has been received by the Company. The new
withholding rate shall be a whole percentage of the Eligible Employee's
Compensation, but not less than 1% nor more than 15%.
(d) Discontinuing Payroll Deductions. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a new
enrollment form with the Company at the prescribed location at any time.
Payroll withholding shall cease as soon as reasonably practicable after such
form has been received by the Company. (In addition, employee contributions may
be discontinued automatically pursuant to Section 8(b).) A Participant who has
discontinued employee contributions may resume such contributions by filing a
new enrollment form with the Company at the prescribed location. Payroll
withholding shall resume as soon as reasonably practicable after such form has
been received by the Company.
(e) Limit on Number of Elections. No Participant shall make more than two
elections under Subsection (c) or (d) above during any Accumulation Period.
SECTION 5. WITHDRAWAL FROM THE PLAN.
(a) Withdrawal. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at the prescribed location at any
time before the last day of an Accumulation Period. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
credited to the Participant's Plan Account shall be refunded to him or her in
cash, without interest. No partial withdrawals shall be permitted.
(b) Re-Enrollment After Withdrawal. A former Participant who has
withdrawn from the Plan shall not be a Participant until he or she re-enrolls in
the Plan under Section 3(c). Re-enrollment may be effective only at the
commencement of an Offering Period.
SECTION 6. CHANGE IN EMPLOYMENT STATUS.
(a) Termination of Employment. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 5(a). (A transfer from one Participating
Company to another shall not be treated as a termination of employment.)
(b) Leave of Absence. For purposes of the Plan, employment shall not be
deemed to terminate when the Participant goes on a military leave, a sick leave
or another bona fide leave of absence, if the leave was approved by the Company
in writing. Employment, however, shall be deemed to terminate 90 days after the
Participant goes on a leave, unless a contract or statute guarantees his or her
right to return to work. Employment shall be deemed to terminate in any event
when the approved leave ends, unless the Participant immediately returns to
work.
(c) Death. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him or
her for this purpose on the prescribed form or, if none, to the Participant's
estate. Such form shall be valid only if it was filed with the Company at the
prescribed location before the Participant's death.
3
<PAGE>
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) Plan Accounts. The Company shall maintain a Plan Account on its books
in the name of each Participant. Whenever an amount is deducted from the
Participant's Compensation under the Plan, such amount shall be credited to the
Participant's Plan Account. Amounts credited to Plan Accounts shall not be
trust funds and may be commingled with the Company's general assets and applied
to general corporate purposes. No interest shall be credited to Plan Accounts.
(b) Purchase Price. The Purchase Price for each share of Stock purchased
at the close of an Accumulation Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last trading
day in such Accumulation Period; or
(ii) 85% of the Fair Market Value of such share on the last trading
day before the commencement of the applicable Offering Period (as
determined under Section 3(e)) or, in the case of the first Offering Period
under the Plan, 85% of the price at which one share of Stock is offered to
the public in the IPO.
(c) Number of Shares Purchased. As of the last day of each Accumulation
Period, each Participant shall be deemed to have elected to purchase the number
of shares of Stock calculated in accordance with this Subsection (c), unless the
Participant has previously elected to withdraw from the Plan in accordance with
Section 5(a). The amount then in the Participant's Plan Account shall be
divided by the Purchase Price, and the number of shares that results shall be
purchased from the Company with the funds in the Participant's Plan Account.
The foregoing notwithstanding, no Participant shall purchase more than 600
shares of Stock with respect to any Accumulation Period nor more than the
amounts of Stock set forth in Sections 8(b) and 13(a). The Committee may
determine with respect to all Participants that any fractional share, as
calculated under this Subsection (c), shall be (i) rounded down to the next
lower whole share or (ii) credited as a fractional share.
(d) Available Shares Insufficient. In the event that the aggregate number
of shares that all Participants elect to purchase during an Accumulation Period
exceeds the maximum number of shares remaining available for issuance under
Section 13(a), then the number of shares to which each Participant is entitled
shall be determined by multiplying the number of shares available for issuance
by a fraction, the numerator of which is the number of shares that such
Participant has elected to purchase and the denominator of which is the number
of shares that all Participants have elected to purchase.
(e) Issuance of Stock. Certificates representing the shares of Stock
purchased by a Participant under the Plan shall be issued to him or her as soon
as reasonably practicable after the close of the applicable Accumulation Period,
except that the Committee may determine that such shares shall be held for each
Participant's benefit by a broker designated by the Committee (unless the
Participant has elected that certificates be issued to him or her). Shares may
be registered in the name of the Participant or jointly in the name of the
Participant and his or her spouse as joint tenants with right of survivorship or
as community property.
4
<PAGE>
(f) Unused Cash Balances. An amount remaining in the Participant's Plan
Account that represents the Purchase Price for any fractional share shall be
carried over in the Participant's Plan Account to the next Accumulation Period.
Any amount remaining in the Participant's Plan Account that represents the
Purchase Price for whole shares that could not be purchased by reason of
Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded to the
Participant in cash, without interest.
(g) Stockholder Approval. Any other provision of the Plan
notwithstanding, no shares of Stock shall be purchased under the Plan unless and
until the Company's stockholders have approved the adoption of the Plan.
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.
(a) Five Percent Limit. Any other provision of the Plan notwithstanding,
no Participant shall be granted a right to purchase Stock under the Plan if such
Participant, immediately after his or her election to purchase such Stock, would
own stock possessing more than 5% of the total combined voting power or value of
all classes of stock of the Company or any parent or Subsidiary of the Company.
For purposes of this Subsection (a), the following rules shall apply:
(i) Ownership of stock shall be determined after applying the
attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that he or
she has a right or option to purchase under this or any other plan; and
(iii) Each Participant shall be deemed to have the right to purchase
600 shares of Stock under this Plan with respect to each Accumulation
Period.
(b) Dollar Limit. Any other provision of the Plan notwithstanding, no
Participant shall purchase Stock with a Fair Market Value in excess of the
following limit:
(i) In the case of Stock purchased during an Offering Period that
commenced in the current calendar year, the limit shall be equal to (A)
$25,000 minus (B) the Fair Market Value of the Stock that the Participant
previously purchased in the current calendar year (under this Plan and all
other employee stock purchase plans of the Company or any parent or
Subsidiary of the Company).
(ii) In the case of Stock purchased during an Offering Period that
commenced in the immediately preceding calendar year, the limit shall be
equal to (A) $50,000 minus (B) the Fair Market Value of the Stock that the
Participant previously purchased (under this Plan and all other employee
stock purchase plans of the Company or any parent or Subsidiary of the
Company) in the current calendar year and in the immediately preceding
calendar year.
5
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(iii) In the case of Stock purchased during an Offering Period that
commenced in the second preceding calendar year, the limit shall be equal
to (A) $75,000 minus (B) the Fair Market Value of the Stock that the
Participant previously purchased (under this Plan and all other employee
stock purchase plans of the Company or any parent or Subsidiary of the
Company) in the current calendar year and in the two preceding calendar
years.
For purposes of this Subsection (b), the Fair Market Value of Stock shall be
determined in each case as of the beginning of the Offering Period in which such
Stock is purchased. Employee stock purchase plans not described in section 423
of the Code shall be disregarded. If a Participant is precluded by this
Subsection (b) from purchasing additional Stock under the Plan, then his or her
employee contributions shall automatically be discontinued and shall resume at
the beginning of the earliest Accumulation Period ending in the next calendar
year (if he or she then is an Eligible Employee).
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any Participant's interest
in any Stock or moneys to which he or she may be entitled under the Plan, shall
not be transferable by voluntary or involuntary assignment or by operation of
law, or in any other manner other than by beneficiary designation or the laws of
descent and distribution. If a Participant in any manner attempts to transfer,
assign or otherwise encumber his or her rights or interest under the Plan, other
than by beneficiary designation or the laws of descent and distribution, then
such act shall be treated as an election by the Participant to withdraw from the
Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan or in any right granted under the Plan shall confer
upon the Participant any right to continue in the employ of a Participating
Company for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Participating Companies or of the
Participant, which rights are hereby expressly reserved by each, to terminate
his or her employment at any time and for any reason, with or without cause.
SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to any
shares of Stock that he or she may have a right to purchase under the Plan until
such shares have been purchased on the last day of the applicable Accumulation
Period.
SECTION 12. SECURITIES LAW REQUIREMENTS.
Shares of Stock shall not be issued under the Plan unless the issuance and
delivery of such shares comply with (or are exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange or other
securities market on which the Company's securities may then be traded.
6
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SECTION 13. STOCK OFFERED UNDER THE PLAN.
(a) Authorized Shares. The number of shares of Stock available for
purchase under the Plan shall be 350,000 (subject to adjustment pursuant to this
Section 13). On January 1 of each year, commencing with January 1, 2000 the
aggregate number of shares of Stock available for purchase during the life of
the Plan shall automatically be increased by the number of shares equal to the
lesser of (a) 2% of the number of shares of Stock then outstanding or (b)
350,000 shares of Stock (subject to adjustment pursuant to this Section 13).
(b) Anti-Dilution Adjustments. The aggregate number of shares of Stock
offered under the Plan, the 600-share limitation described in Section 7(c) and
the price of shares that any Participant has elected to purchase shall be
adjusted proportionately by the Committee for any increase or decrease in the
number of outstanding shares of Stock resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, any other increase
or decrease in such shares effected without receipt or payment of consideration
by the Company, the distribution of the shares of a Subsidiary to the Company's
stockholders or a similar event.
(c) Reorganizations. Any other provision of the Plan notwithstanding,
immediately prior to the effective time of a Corporate Reorganization, the
Offering Period and Accumulation Period then in progress shall terminate and
shares shall be purchased pursuant to Section 7, unless the Plan is continued or
assumed by the surviving corporation or its parent corporation. The Plan shall
in no event be construed to restrict in any way the Company's right to undertake
a dissolution, liquidation, merger, consolidation or other reorganization.
SECTION 14. AMENDMENT OR DISCONTINUANCE.
The Board shall have the right to amend, suspend or terminate the Plan at
any time and without notice. Except as provided in Section 13, any increase in
the aggregate number of shares of Stock to be issued under the Plan shall be
subject to approval by a vote of the stockholders of the Company. In addition,
any other amendment of the Plan shall be subject to approval by a vote of the
stockholders of the Company to the extent required by an applicable law or
regulation.
SECTION 15. DEFINITIONS.
(a) "Accumulation Period" means a six-month period during which
contributions may be made toward the purchase of Stock under the Plan, as
determined pursuant to Section 3(b).
(b) "Board" means the Board of Directors of the Company, as constituted
from time to time.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a committee of the Board, as described in Section 2.
(e) "Company" means InterTrust Technologies Corporation, a Delaware
corporation.
7
<PAGE>
(f) "Compensation" means (i) the total compensation paid in cash to a
Participant by a Participating Company, including salaries, wages, bonuses,
incentive compensation, commissions, overtime pay and shift premiums, plus (ii)
any pre-tax contributions made by the Participant under section 401(k) or 125 of
the Code. "Compensation" shall exclude all non-cash items, moving or relocation
allowances, cost-of-living equalization payments, car allowances, tuition
reimbursements, imputed income attributable to cars or life insurance, severance
pay, fringe benefits, contributions or benefits received under employee benefit
plans, income attributable to the exercise of stock options, and similar items.
The Committee shall determine whether a particular item is included in
Compensation.
(g) "Corporate Reorganization" means:
(i) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization; or
(ii) The sale, transfer or other disposition of all or substantially
all of the Company's assets or the complete liquidation or dissolution of
the Company.
(h) "Eligible Employee" means any employee of a Participating Company who
meets the following requirement: his or her customary employment is for more
than five months per calendar year and for more than 20 hours per week. The
foregoing notwithstanding, an individual shall not be considered an Eligible
Employee if his or her participation in the Plan is prohibited by the law of any
country which has jurisdiction over him or her or if he or she is subject to a
collective bargaining agreement that does not provide for participation in the
Plan.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Fair Market Value" means the market price of Stock, determined by the
Committee as follows:
(i) If the Stock was traded on The Nasdaq National Market on the
date in question, then the Fair Market Value shall be equal to the last-
transaction price quoted for such date by The Nasdaq National Market;
(ii) If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date; or
(iii) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal or as reported
-----------------------
directly to the Company by Nasdaq or a stock exchange. Such determination shall
be conclusive and binding on all persons.
(k) "IPO" means the initial offering of Stock to the public pursuant to a
registration statement filed by the Company with the Securities and Exchange
Commission.
8
<PAGE>
(l) "Offering Period" means a 24-month period with respect to which the
right to purchase Stock may be granted under the Plan, as determined pursuant to
Section 3(a).
(m) "Participant" means an Eligible Employee who elects to participate in
the Plan, as provided in Section 3(c).
(n) "Participating Company" means (i) the Company and (ii) each present or
future Subsidiary designated by the Committee as a Participating Company.
(o) "Plan" means this InterTrust Technologies Corporation 1999 Employee
Stock Purchase Plan, as it may be amended from time to time.
(p) "Plan Account" means the account established for each Participant
pursuant to Section 7(a).
(q) "Purchase Price" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 7(b).
(r) "Stock" means the common stock of the Company.
(s) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
9
<PAGE>
EXHIBIT 10.4
InterTrust Technologies Corporation
1999 Non-Employee Directors Option Plan
(As Adopted July 22, 1999)
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
1999 NON-EMPLOYEE DIRECTORS OPTION PLAN
ARTICLE 1. PURPOSE OF THE PLAN
The Plan is intended to promote the interests of the Company by
providing the non-employee members of the Board with the opportunity to acquire
a proprietary interest, or otherwise increase their proprietary interest, in the
Company as an incentive for them to remain in the service of the Company.
ARTICLE 2. ADMINISTRATION
The terms and conditions of each automatic option grant (including the
timing and pricing of the option grant) shall be determined by the express terms
and conditions of the Plan, and neither the Board nor any committee of the Board
shall exercise any discretionary functions with respect to option grants made
pursuant to the Plan.
ARTICLE 3. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for issuance under the
Plan and shall be drawn from either the Company's authorized but unissued shares
of Common Stock or from reacquired shares of Common Stock, including shares
repurchased by the Company on the open market. The number of shares of Common
Stock reserved for issuance over the term of the Plan shall be fixed at 350,000
shares. As of January 1 of each year, starting in 2000, the aggregate number of
shares of Common Stock available for purchase during the life of the Plan shall
automatically be increased by the number of shares necessary to cause the number
of shares then available for purchase to be restored to 350,000.
B. Should one or more outstanding options under this Plan expire or
terminate for any reason prior to exercise in full, then the shares subject to
the portion of each option not so exercised shall be available for subsequent
option grant under the Plan. In addition, should the exercise price of an
outstanding option under the Plan be paid with shares of Common Stock, then the
number of shares of Common Stock available for issuance under the Plan shall be
reduced by the net number of shares of Common Stock actually issued to the
holder of such option.
C. Should any change be made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Company's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which automatic option grants are to be subsequently made to each Eligible
Director under the Plan, and (iii) the number and/or class of securities and
price per share in effect under each option outstanding under the Plan. The
adjustments to the outstanding options shall be made by the Board in a manner
which shall preclude the enlargement or dilution of rights and benefits under
such options and shall be final, binding and conclusive.
<PAGE>
ARTICLE 4. ELIGIBILITY
The individuals eligible to receive automatic option grants pursuant
to the provisions of this Plan shall be limited to (i) those individuals serving
as non-employee Board members on the effective date of the IPO and (ii) those
individuals who are first elected or appointed as non-employee Board members
after the effective date of the IPO, whether through appointment by the Board or
election by the Company's stockholders. A non-employee Board member shall not be
eligible to receive the initial automatic option grant described in Section
5.A.2 if such individual has previously been in the employ of the Company (or
any parent or subsidiary). However, a non-employee Board member shall be
eligible to receive one or more annual option grants described in Section 5.A.3,
whether or not he or she has previously been in the employ of the Company (or
any parent or subsidiary). Each non-employee Board member eligible to
participate in the Plan pursuant to the foregoing criteria is hereby designated
an Eligible Director.
ARTICLE 5. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Date. Option grants shall be made on the dates
----------
specified below:
1. Each individual who is an Eligible Director on the
effective date of the IPO shall automatically be granted, on the
effective date of the IPO, a fully vested non-statutory option to
purchase 15,000 shares of Common Stock.
2. Each individual who first becomes an Eligible
Director after the effective date of the IPO, whether through
election by the Company's stockholders or appointment by the
Board, shall automatically be granted, at the time of such
initial election or appointment, a fully vested non-statutory
option to purchase 15,000 shares of Common Stock.
3. On the date of each Annual Meeting, beginning with
the 2000 Annual Meeting, each Eligible Director who serves on the
Board at the time of that Annual Meeting, whether or not standing
for re-election, shall automatically be granted a fully vested
non-statutory option to purchase 5,000 shares of Common Stock. An
Eligible Director who resigns effective at an Annual Meeting
shall not be eligible to be granted a non-statutory option at
that time. There shall be no limit on the number of such annual
5,000-share option grants any one Eligible Director may receive
over his or her period of continued Board service.
4. However, each Eligible Director who in a calendar
year received a non-statutory option to purchase 15,000 shares of
Common Stock under this Plan (as described in Section 5.A.2)
shall first be eligible to be granted a non-statutory option to
purchase 5,000 shares of Common Stock under this Plan (as
described in Section 5.A.3) at the Annual Meeting occurring at
any time in the year that is following the year in which the
Eligible Director received the non-statutory option to purchase
15,000 shares under this Plan (as described in Section 5.A.2).
For example, if an Eligible Director received a non-statutory
option to
2
<PAGE>
purchase 15,000 shares of Common Stock (as described in Section
5.A.2) in 1999, this Eligible Director will first become eligible
to receive a non-statutory option to purchase 5,000 shares of
Common Stock (as described in Section 5.A.3) at the Annual
Meeting occurring in 2000.
B. Exercise Price. The exercise price per share of Common Stock
--------------
subject to each automatic option grant shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the automatic grant
date, except that the exercise price per share of Common Stock subject to the
automatic grant described in Section 5.A.1 above will be the initial price
offered to the public on the effective date of the IPO.
C. Payment.
-------
The exercise price shall become immediately due upon
exercise of the option and shall be payable in one of the alternative
forms specified below:
(i) all or part of the exercise price may be paid in
cash or check made payable to the Company's order; or
(ii) all or part of the exercise price may be paid by
surrendering, or attesting to the ownership of, shares of Common Stock
that are already owned by the Optionee. Such shares of Common Stock
shall be valued at their Fair Market Value on the date when the new
shares of Common Stock are purchased under the Plan. The Optionee
shall not surrender, or attest to the ownership of, shares of Common
Stock in payment of the exercise price if such action would cause the
Company to recognize compensation expense (or additional compensation
expense) with respect to the option for financial reporting purposes;
or
(iii) all or part of the exercise price may be paid by
delivering (on a form prescribed by the Company) an irrevocable
direction to a securities broker approved by the Company to sell all
or part of the shares of Common Stock being purchased under the Plan
and to deliver all or part of the sales proceeds to the Company; or
(iv) all or part of the exercise price may be paid by
delivering (on a form prescribed by the Company) an irrevocable
direction to pledge all or part of the shares of Common Stock being
purchased under the Plan to a securities broker or lender approved by
the Company, as security for a loan, and to deliver all or part of the
loan proceeds to the Company.
D. Exercisability/Vesting. Each automatic option grant shall be
----------------------
fully vested on the date of option grant.
E. Option Term. Each automatic option grant under the Plan shall
-----------
have a maximum term of ten (10) years measured from the automatic grant date.
F. Non-Transferability. During the lifetime of the Optionee, each
-------------------
automatic option grant shall be exercisable only by the Optionee and shall not
be assignable or transferable
3
<PAGE>
by the Optionee other than a transfer of the option effected by will or by the
laws of descent and distribution following Optionee's death.
G. Effect of Termination of Board Service.
--------------------------------------
1. Should the Optionee cease to serve as a Board member for any
reason (including Disability or death) while holding one or more automatic
option grants under the Plan, then such individual shall have a twelve-month
period following the date of such cessation of Board service in which to
exercise each such option for any or all of the option shares for which the
option is exercisable at the time of his or her cessation of Board service.
2. Should the Optionee die while serving as a Board member,
then any automatic option grant held by the Optionee at the time of death may
subsequently be exercised, for the option shares for which the option is
exercisable at the time of his or her cessation of Board service (less any
option shares purchased by the Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution. The right to exercise each such option shall
lapse upon the expiration of the twelve-month period measured from the date of
the Optionee's cessation of service.
3. In no event shall any automatic option grant under this Plan
remain exercisable after the expiration date of the maximum ten-year option
term. Upon the expiration of the applicable post-service exercise period under
subparagraphs 1 through 2 above or (if earlier) upon the expiration of the
maximum ten-year option term, the unexercised automatic option grant shall
terminate and cease to be outstanding.
H. Stockholder Rights. The holder of an automatic option grant shall
------------------
have none of the rights of a stockholder with respect to any shares subject to
such option until such individual shall have exercised the option and paid the
exercise price for the purchased shares.
I. Remaining Terms. The remaining terms and conditions of each
---------------
automatic option grant shall be as set forth in the form Stock Option Agreement
approved for use under the Plan.
J. Affiliates of Eligible Directors. The Board may provide that the
--------------------------------
non-statutory options that otherwise would be granted to an Eligible Director
under this Article 5 shall instead be granted to an affiliate of such Eligible
Director. Such affiliate shall then be deemed to be an Eligible Director for
purposes of the Plan, provided that the service-related termination provisions
pertaining to the non-statutory options shall be applied with regard to the
service of the Eligible Director.
ARTICLE 6. AMENDMENT OF THE PLAN AND AWARDS
The Board has complete and exclusive power and authority to amend or
modify the Plan (or any component thereof) in any or all respects whatsoever.
However, no such amendment or modification shall adversely affect rights and
obligations with respect to options at the time outstanding under the Plan,
unless the affected Optionees consent to such amendment. Stockholder approval
shall be obtained to the extent required by applicable law.
4
<PAGE>
ARTICLE 7. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective on the effective date of the IPO.
One or more automatic option grants may be made under the Plan at any time on or
after the effective date of the IPO.
B. The Board may, at any time and for any reason, amend or terminate
the Plan. An amendment of the Plan shall be subject to the approval of the
Company's stockholders only to the extent required by applicable laws,
regulations or rules. No options shall be granted under the Plan after the
termination thereof. The termination of the Plan, or any amendment thereof,
shall not affect any option previously granted under the Plan.
ARTICLE 8. USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares
pursuant to option grants under the Plan shall be used for general corporate
purposes.
ARTICLE 9. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option under
the Plan and the issuance of Common Stock upon the exercise of the option grants
made hereunder shall be subject to the Company's procurement of all approvals
and permits required by regulatory authorities having jurisdiction over the
Plan, the options granted under it, and the Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under this Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of the Nasdaq National Market or any stock exchange on which the Common Stock is
then listed for trading.
ARTICLE 10. NO IMPAIRMENT OF RIGHTS
Neither the action of the Company in establishing the Plan nor any
provision of the Plan shall be construed or interpreted so as to affect
adversely or otherwise impair the right of the Company or the stockholders to
remove any individual from the Board at any time in accordance with the
provisions of applicable law.
ARTICLE 11. MISCELLANEOUS PROVISIONS
A. The right to acquire Common Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any Optionee.
B. The provisions of the Plan relating to the exercise of options
shall be governed by the laws of the State of Delaware, as such laws are applied
to contracts entered into and performed in such State, except for their choice-
of-law provisions.
5
<PAGE>
C. The provisions of the Plan shall inure to the benefit of, and be
binding upon, the Company and its successors or assigns, whether by a change in
control or otherwise, and the Optionees, the legal representatives of their
respective estates, their respective heirs or legatees and their permitted
assignees.
ARTICLE 12. DEFINITIONS
Annual Meeting: the annual meeting of the Company's stockholders.
Board: the Company's Board of Directors.
Code: the Internal Revenue Code of 1986, as amended.
Common Stock: shares of the Company's common stock.
Company: InterTrust Technologies Corporation, a Delaware corporation.
Disability: the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment.
Eligible Director: a member of the Board who is described in Section 4
of the Plan.
Fair Market Value: the market price of shares of Common Stock,
determined by the Board in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Board shall be
based on the prices reported in The Wall Street Journal. Such determination
-----------------------
shall be conclusive and binding on all persons.
IPO: the initial offering of Common Stock to the public pursuant to a
registration statement filed by the Company with the Securities and Exchange
Commission.
1934 Act: the Securities Exchange Act of 1934, as amended.
Optionee: any person to whom an option is granted under the Plan.
Plan: this InterTrust Technologies Corporation 1999 Non-Employee
Directors Option Plan.
6
<PAGE>
EXHIBIT 10.6
CALIFORNIA FIRST, LTD.
AND
ELECTRONIC PUBLISHING RESOURCES, INC.
LEASE
<PAGE>
SUMMARY OF LEASE
CALIFORNIA FIRST, LTD.
1. DATE OF LEASE:
2. LANDLORD: California First, Ltd.
3945 Freedom Circle, Suite 640
Santa Clara, California 95054
3. TENANT: Electronic Publishing Resources,
Inc.
4. PREMISES: 460 Oakmead Parkway
Sunnyvale, California
5. SQUARE FEET: 9,159 square feet
6. PERMITTED USE: General office use and research and
development uses
7. TERM: Three years
(a) SCHEDULED COMMENCEMENT DATE: May 13, 1994
(b) SCHEDULED EXPIRATION DATE: May 12, 1997
8. RENT:
(a) BASIC RENT: $ 6,640.28 per month
(b) ADJUSTMENTS TO BASIC RENT: None
(c) TENANT'S ESTIMATED SHARE OF $ 1,108.24 per month
COMMON AREA CHARGES:
9. SECURITY DEPOSIT: $ 6,640.28
10. PARKING SPACES PROVIDED: Thirty-six (36)
11. OTHER IMPORTANT PROVISIONS: Option to Extend Term
Right to First Refusal on
Expansion Space
First Right to Lease RFR Space
Option to Terminate
Reduced Rent
THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN OR PROVISIONS IN THE
ATTACHED LEASE, IN THE EVENT OF ANY CONFLICT OR INCONSISTENCY BETWEEN THE
PROVISIONS OF THIS SUMMARY AND THE LEASE, THE PROVISIONS OF THE LEASE SHALL
GOVERN.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- -----------------------------------------------------------------------
1. USE
2. TERM
3. POSSESSION
4. MONTHLY RENT
5. ADJUSTMENT OF BASIC RENT
6. RESTRICTION ON USE
7. COMPLIANCE WITH LAWS
8. ALTERATIONS
9. REPAIR AND MAINTENANCE
10. LIENS
11. INSURANCE
12. UTILITIES AND SERVICE
13. TAXES AND OTHER CHARGES
14. ENTRY BY LANDLORD
15. COMMON AREA; PARKING
16. COMMON AREA CHARGES
17. DAMAGE BY FIRE; CASUALTY
18. INDEMNIFICATION
19. ASSIGNMENT AND SUBLETTING
20. DEFAULT
21. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
22. EMINENT DOMAIN
23. NOTICE AND COVENANT TO SURRENDER
24. TENANT'S QUITCLAIM
25. HOLDING OVER
26. SUBORDINATION
27. CERTIFICATE OF ESTOPPEL
28. SALE BY LANDLORD
29. ATTORNMENT TO LENDER OR THIRD PARTY
30. DEFAULT BY LANDLORD
31. CONSTRUCTION CHANGES
32. MEASUREMENT OF PREMISES
33. ATTORNEY FEES
34. SURRENDER
35. WAIVER
36. EASEMENTS; AIRSPACE RIGHTS
37. RULES AND REGULATIONS
38. NOTICES
39. NAME
40. GOVERNING LAW; SEVERABILITY
41. DEFINITIONS
42. TIME
43. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
<PAGE>
44. ENTIRE AGREEMENT
45. CORPORATE AUTHORITY
46. RECORDING
47. REAL ESTATE BROKERS
48. EXHIBITS AND ATTACHMENTS
49. ENVIRONMENTAL MATTERS
50. SIGNAGE
51. SUBMISSION OF LEASE
52. TENANT IMPROVEMENTS
53. ADDITIONAL RENT
54. LANDLORD'S OPTION TO RELOCATE PREMISES
55. OPTION TO EXTEND TERM
56. RIGHT OF FIRST REFUSAL ON EXPANSION SPACE
57. FIRST RIGHT TO LEASE RFR SPACE
58. OPTION TO TERMINATE
59. REDUCED RENT
8
<PAGE>
LEASE
-----
THIS LEASE is made this 28th day of April, 1994, by and between CALIFORNIA
FIRST, LTD., a Florida limited partnership ("Landlord"), and ELECTRONIC
PUBLISHING RESOURCES, INC., a Delaware corporation ("Tenant").
W I T N E S S E T H :
Landlord leases to Tenant and Tenant leases from Landlord those certain
premises outlined in red on Exhibit A (the "Premises") commonly known as 460
Oakmead Parkway, Sunnyvale, California, which Landlord and Tenant hereby agree
consists of approximately nine thousand one hundred fifty-nine (9,159) square
feet in California First, Ltd. (the "Project"). As used herein the term Project
shall mean and include all of the land described in Exhibit B and all the
buildings, improvements, fixtures and equipment now or hereafter situated on
said land.
Tenant covenants, as a material part of the consideration of this lease, to
perform and observe each and all of the terms, covenants and conditions set
forth below, and this lease is made upon the condition of such performance and
observance.
1. USE
Subject to the restrictions contained in paragraph 6 hereof, Tenant
shall use the Premises for general office use and shall not use or permit the
Premises to be used for any other purpose.
2. TERM
(a) The term shall be for three (3) years (unless sooner terminated
as hereinafter provided) and, subject to paragraphs 2(b) and 3, shall commence
on May 13, 1994 and end on May 12, 1997.
(b) Possession of the Premises shall not be deemed tendered and the
term shall not commence until the first to occur of the following (on or after
May 13, 1994):
(1) One day after a final building permit acknowledging
completion and permitting occupancy is granted by the proper governmental
agency;
(2) Upon the occupancy of the Premises by any of Tenant's
operating personnel; or
(3) Upon substantial completion of all work to be done by
Landlord pursuant to Exhibit C to this lease, exclusive of telephones or other
communication systems and punchlist items, or, if Landlord is prevented from or
delayed in completing its work under
1
<PAGE>
Exhibit C to this lease due to the acts or omissions of Tenant, then upon the
date by which such work would have been substantially completed but for such
acts or omissions by Tenant.
3. POSSESSION
(a) If Landlord for any reason cannot deliver possession of the
Premises to Tenant by the date of commencement set forth in paragraph 2(a), this
lease shall not be void or voidable, Landlord shall not be liable to Tenant for
any loss or damage on account thereof and, unless Landlord's failure to deliver
possession of the Premises to Tenant by the scheduled commencement date set
forth in paragraph 2(a) is caused by Tenant caused delays as defined in Exhibit
C to this lease, Tenant shall not be liable for rent until the commencement of
the term is determined in accordance with paragraph 2(b). If the term commences
on a date other than the date specified in paragraph 2(a) above, then the
parties shall immediately execute an amendment to this lease stating the actual
date of commencement and the revised expiration date. The expiration date of the
term shall be extended by the same number of days that Tenant's possession of
the Premises was delayed from that set forth in paragraph 2(a).
Notwithstanding the above, if Landlord is unable to deliver possession
of the Premises by June 15, 1994 (plus the number of days of delay caused by
Tenant or by strikes or other causes beyond Landlord's reasonable control), then
Tenant may, at its option (exercisable only within ten (10) days following such
date) and as its sole remedy terminate this lease; provided, however, if Tenant
fails to timely exercise such right within such ten (10) days period, Tenant's
right to terminate shall lapse. If Tenant elects to terminate this lease as
provided in this paragraph, all amounts deposited with Landlord by Tenant shall
be returned to Tenant and Landlord shall not be liable to Tenant for any loss,
damage or expense resulting from Landlord's failure to deliver possession.
(b) Tenant's inability or failure to take possession of the Premises
when delivery is tendered by Landlord (with the improvements to be done pursuant
to Exhibit C to this lease substantially completed) shall not delay the
commencement of the term of this lease or Tenant's obligation to pay rent.
Tenant acknowledges that Landlord shall incur significant expenses upon the
execution of this lease, even if Tenant never takes possession of the Premises,
including without limitation brokerage commissions and fees, legal and other
professional fees, the costs of space planning and the costs of construction of
improvements in the Premises. Tenant acknowledges that all of said expenses
shall be included in measuring Landlord's damages should Tenant breach the terms
of this lease.
4. MONTHLY RENT
(a) Basic Rent. Tenant shall pay to Landlord as basic rent for the
----------
Premises, in advance and subject to adjustment as provided in paragraph 5, the
sum of Six Thousand Six Hundred Forty and 28/100 Dollars ($6,640.28) on or
before the first day of the first full calendar month of the term and on or
before the first day of each and every successive calendar month. Basic rent
for any partial month shall be payable in advance and shall be prorated at the
rate of 1/30th of the monthly basic rent per day.
2
<PAGE>
(b) Common Area Charges. In addition to the above basic rent and as
-------------------
additional rent, Tenant shall pay to Landlord, subject to adjustments and
reconciliation as provided in paragraph 16 of this lease, the sum of One
Thousand One Hundred Eight and 24/100 Dollars ($1,108.24) on or before the first
day of the first full calendar month of the term and on the first day of each
and every successive calendar month, said sum representing Tenant's estimated
payment of its percentage share of common area charges as provided for in
paragraph 16 of this lease. Payment of common area charges for any partial
month shall be payable in advance and shall be prorated at the rate of 1/30th of
the monthly payment of common area charges per day.
(c) Manner and Place of Payment. All payments of basic rent and
---------------------------
common area charges shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America, at the office of Landlord at 3945
Freedom Circle, Suite 640, Santa Clara, California 95054, or to such other
person or place as Landlord may from time to time designate in writing.
(d) Third Month's Rent. Concurrently with Tenant's execution of this
------------------
lease, Tenant shall deposit with Landlord the sum of Seven Thousand Seven
Hundred Forty-Eight and 52/100 Dollars ($7,748.52) to be applied against the
basic rent and common area charges for the third lease month of the term.
(e) Security Deposit. Concurrently with Tenant's execution of this
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lease, Tenant shall deposit with Landlord the sum of Six Thousand Six Hundred
Forty and 28/100 Dollars ($6,640.28), which sum shall be held by Landlord as a
security deposit for the faithful performance by Tenant of all of the terms,
covenants and conditions of this lease to be kept and performed by Tenant. If
Tenant defaults with respect to any provision of this lease, including but not
limited to, the provisions relating to the payment of basic rent and common area
charges, Landlord may (but shall not be required to) use, apply, or retain all
or any part of this security deposit for the payment of any amount which
Landlord may spend by reason of Tenant's default or to compensate Landlord for
any other loss or damage which Landlord may suffer by reason of default. If any
portion of said deposit is so used, Tenant shall, within ten (10) days after
written demand therefor, deposit cash with Landlord in the amount sufficient to
restore the security deposit to its original amount; Tenant's failure to do so
shall be a material breach of this lease. Landlord shall not be required to keep
this security deposit separate from its general funds and Tenant shall not be
entitled to interest on such deposit. If Tenant is not in default at the
expiration or termination of this lease, the security deposit or any balance
thereof shall be returned to Tenant within thirty (30) days after Tenant has
vacated the Premises. In the event of transfer of Landlord's interest in this
lease, Landlord shall transfer said deposit to Landlord's successor in interest,
and Tenant agrees that Landlord shall thereupon be released from liability for
the return of such deposit or any accounting therefor.
5. ADJUSTMENT OF BASIC RENT
Except as set forth in paragraph 59 below, there shall be no
adjustments to basic rent during the initial term of this lease.
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6. RESTRICTION ON USE
Tenant shall not do or permit to be done in or about the Premises or
the Project, nor bring or keep or permit to be brought or kept in or about the
Premises or Project, anything which is prohibited by or will in any way increase
the existing rate of, or otherwise affect, fire or any other insurance covering
the Project or any part thereof, or any of its contents, or will cause a
cancellation of any insurance covering the Project or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in or about
the Premises or the Project which will constitute waste or which will in any way
obstruct or unreasonably interfere with the rights of other tenants or occupants
of the Project or injure or unreasonably annoy them, or use or allow the
Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain
or permit any nuisance in or about the Premises or the Project. No loudspeaker
or other device, system or apparatus which can be heard outside the Premises
shall be used in or at the Premises without the prior written consent of
Landlord. Tenant shall not use the Premises in any manner that will cause or
emit any objectionable odor, noise or light into the adjoining premises or
Common Area. Tenant shall not do anything on the Premises that will cause
damage to the Project and Tenant shall not overload the floor capacity of the
Premises or the Project. No machinery, apparatus or other appliance shall be
used or operated in or on the Premises that will in any manner injure, vibrate
or shake the Premises. Landlord shall be the sole judge, of whether such odor,
noise, light or vibration is such as to violate the provisions of this
paragraph. No waste materials or refuse shall be dumped upon or permitted to
remain upon any part of the Premises or the Project except in trash containers
placed inside exterior enclosures designated for that purpose by Landlord, or
where otherwise designated by Landlord; and no toxic or hazardous materials
shall be disposed of through the plumbing or sewage system. No materials,
supplies, equipment, finished products or semi-finished products, raw materials
or articles of any nature shall be stored or permitted to remain outside of the
building proper. No retail sales shall be made on the Premises. Tenant shall
comply with any covenant, condition or restriction ("C.C. & R.s") affecting the
Premises.
7. COMPLIANCE WITH LAWS
Tenant shall, in connection with its use and occupation of the
Premises, at its sole cost and expense, promptly observe and comply with (i) all
laws, statutes, ordinances and governmental rules, regulations and requirements
of federal, state, county, municipal and other governmental authorities, now or
hereafter in effect, which shall impose any duty upon Landlord or Tenant with
respect to the use, occupancy or alteration to the Premises, (ii) with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted and (iii) with any direction or occupancy certificate
issued pursuant to law by any public authority; provided, however, that no such
failure shall be deemed a breach of these provisions if Tenant, immediately upon
notification, commences to remedy or rectify said failure. The judgment of any
court of competent jurisdiction or the admission of Tenant in any action against
Tenant (whether or not Landlord is a party thereto) that Tenant has violated any
such law, statute, ordinance or governmental rule, regulation, requirement,
direction or provision, shall be conclusive of that fact as between Landlord and
Tenant. This lease shall remain in full force and effect notwithstanding any
loss of use or other effect on Tenant's enjoyment of the Premises by reason of
any governmental laws, statutes, ordinances, rules, regulations and requirements
now or hereafter in effect.
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8. ALTERATIONS
Tenant shall not make or suffer to be made any alteration, addition or
improvement to or of the Premises or any part thereof (collectively referred to
herein as alterations") without (i) the prior written consent of Landlord, which
shall not be unreasonably withheld, (ii) a valid building permit issued by the
appropriate governmental authority and (iii) otherwise complying with all
applicable laws, regulations and requirements of governmental agencies having
jurisdiction and with the rules, regulations and requirements of any board of
fire underwriters or similar body; provided, however, that alterations costing
Five Thousand Dollars ($5,000) or less per lease year in the aggregate shall not
require Landlord's prior consent, provided that such alterations comply with the
terms of items (ii) and (iii) above, and Tenant informs Landlord prior to
commencement of the alterations of (a) the nature of the alterations, (b) the
cost thereof, and (c) the contractor performing the work. Landlord's consent to
any requested alteration shall not create on the part of Landlord or cause
Landlord to incur any responsibility or liability for such alteration's
compliance with all laws, rules and regulations of federal, state, county,
municipal and other governmental authorities. Any alteration made by Tenant
(excluding moveable furniture and trade fixtures not attached to the Premises)
shall at once become a part of the Premises and belong to Landlord. Without
limiting the foregoing, all heating, lighting, electrical (including all wiring,
conduit, outlets, drops, buss ducts, main and subpanels), air conditioning,
partitioning, drapery and carpet installations made by Tenant, regardless of how
attached to the Premises, together with all other alterations that have become
an integral part of the Project in which the Premises are a part, shall be and
become part of the Premises and belong to Landlord upon installation and shall
not be deemed trade fixtures, and shall remain upon and be surrendered with the
Premises at the termination of the lease.
Any alteration made by Tenant shall be made by Tenant at its sole
risk, cost and expense and only after Landlord's written approval of any
contractor or person selected by Tenant for that purpose, and the same shall be
made at such time and in such manner as Landlord may from time to time
designate. Upon Tenant's prior written request, at the time Landlord consents
to such alterations, Landlord shall inform Tenant as to whether Tenant will be
required to remove such alterations at the termination of this lease. Tenant
shall, if required by Landlord, secure at Tenant's cost a completion and lien
indemnity bond for such work. Upon the expiration or sooner termination of the
term, Landlord may, at its sole option, require Tenant, at Tenant's sole cost
and expense, to promptly remove any such alteration made by Tenant and
designated by Landlord to be removed, repair any damage to the Premises caused
by such removal and restore the Premises to its condition existing prior to such
alteration. Any moveable furniture and equipment or trade fixtures remaining on
the Premises at the expiration or other termination of the term shall become the
property of the Landlord unless promptly removed by Tenant.
If during the term any alteration, addition or change of the Premises
is required by law, regulation, ordinance or order of any public authority,
Tenant, at its sole cost and expense, shall promptly make the same. If during
the term any alterations, additions or changes to the Common Area or to the
Project in which the Premises is located is required by law, regulation,
ordinance or order of any public or quasi-public authority, and it is
impractical in Landlord's judgment for the affected tenants to individually make
such alterations, additions or changes, Landlord shall make such alterations,
additions or changes and the cost thereof shall be a
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common area charge and Tenant shall pay its percentage share of such cost to
Landlord as provided in paragraph 16.
9. REPAIR AND MAINTENANCE
By entry hereunder, Tenant accepts the Premises as being in good and
sanitary order, condition and repair (excepting only the roof which Landlord
covenants to replace with a new roof as set forth on Exhibit C hereto and
"punchlist items"). Landlord represents that as of the commencement date, the
heating, ventilating and air conditioning system, plumbing and electrical
systems shall be in good working order and repair and Landlord hereby warrants
that the same will remain in good working order and repair for a period of one
hundred twenty (120) days following commencement of the term of this lease.
Except as expressly provided below, Tenant shall at its sole cost keep and
maintain the entire Premises and every part thereof including, without
limitation, the windows, window frames, plate glass, glazing, elevators within
the Premises, truck doors, doors and all door hardware, the interior walls and
partitions, lighting and the electrical, mechanical, and plumbing systems.
Tenant shall also repair and maintain the heating and air conditioning systems
(unless Landlord has elected to keep and maintain the heating and air
conditioning systems as provided below) which shall include, without limitation,
a periodic maintenance agreement with a reputable and licensed heating and air
conditioning service company. If Tenants use of the heating and air
conditioning systems is limited to normal business hours (8:00 a.m. to 6:00
p.m.), such agreement shall provide for service at least as often as every 60
days; if Tenant's use of the heating or air conditioning systems extends beyond
such normal business hours this service shall be as often as may be reasonably
required by Landlord and in any event such service shall meet all warranty
enforcement requirements of such equipment and comply with all manufacturer
recommended maintenance, provided Landlord has furnished Tenant with such
requirements and recommendations. Tenant shall notify Landlord of excess use of
the HVAC systems beyond normal business hours that might require extra service.
Landlord may elect, at its option, to keep and maintain the heating and air
conditioning systems of the Premises and in such event, Tenant shall pay to
Landlord upon demand the full cost of such maintenance.
Subject to the provisions of paragraph 17, Landlord shall keep and
maintain the roof, structural elements, and exterior walls of the buildings
constituting the Project and Common Area in good order and repair. Tenant
waives all rights under and benefits of California Civil Code Sections 1932(1),
1941, and 1942 and under any similar law, statute or ordinance now or hereafter
in effect. The cost of the repairs and maintenance which are the obligation of
Landlord hereunder, including without limitation, maintenance contracts and
supplies, materials, equipment and tools used in such repairs and maintenance
shall be a common area charge and Tenant shall pay its percentage share of such
costs to Landlord as provided in paragraph 16; provided, however, that if any
repairs or maintenance is required because of an act or omission of Tenant, or
its agents, employees or invitees, Tenant shall pay to Landlord upon demand the
full cost of such repairs or maintenance.
Notwithstanding the above, Tenant shall not be responsible for (i) any
maintenance or repair costs associated with the roof for a period of one (1)
year after completion of the roof work required by paragraph 8 of Exhibit C, or
(ii) any maintenance or repair costs
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associated with any structural elements (excluding the roof) or exterior walls
of the buildings constituting the Project.
10. LIENS
Tenant shall keep the Premises and the Project free from any liens
arising out of any work performed, materials furnished or obligations incurred
by Tenant, its agents, employees or contractors. Upon Tenant's receipt of a
preliminary twenty (20) day notice filed by a claimant pursuant to California
Civil Code Section 3097, Tenant shall immediately provide Landlord with a copy
of such notice. Should Tenant have notice of any lien recorded against the
Project, Tenant shall give immediate notice of such lien to Landlord. In the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses (including attorneys' fees)
incurred by it in connection therewith, shall be payable to Landlord by Tenant
on demand with interest at the rate of twelve percent (12%) per annum or the
maximum rate permitted by law, whichever is less. Landlord shall have the right
at all times to post and keep posted on the Premises any notices permitted or
required by law, or which Landlord shall deem proper for the protection of
Landlord, the Premises and the Project and any other party having an interest
therein, from mechanics' and materialmen's liens and like liens. Tenant shall
give Landlord at least fifteen (15) days prior notice of the date of
commencement of any construction on the Premises in order to permit the posting
of such notices. In the event Tenant is required to post an improvement bond
with a public agency in connection with any work performed by Tenant on or to
the Premises, Tenant shall include Landlord as an additional obligee.
11. INSURANCE
Tenant, at its sole cost and expense, shall keep in force during the
term (i) commercial general liability and property damage insurance with a
combined single limit of at least $2,000,000 per occurrence insuring against
personal or bodily injury to or death of persons occurring in, on or about the
Premises or Project and any and all liability of the insureds with respect to
the Premises or arising out of Tenant's maintenance, use or occupancy of the
Premises and all areas appurtenant thereto, (ii) direct physical loss-special
insurance covering the leasehold improvements in the Premises and all of
Tenant's equipment, trade fixtures, appliances, furniture, furnishings, and
personal property from time to time located in, on or about the Premises, with
coverage in the amount of the full replacement cost thereof, and (iii) Worker's
Compensation Insurance as required by law, together with employer's liability
coverage with a limit of not less than $1,000,000 for bodily injury for each
accident and for bodily injury by disease for each employee. Tenant's
commercial general liability and property damage insurance and Tenant's Workers
Compensation Insurance shall be endorsed to provide that said insurance shall
not be cancelled or reduced except upon at least thirty (30) days prior written
notice to Landlord. Further, Tenant's commercial general liability and property
damage insurance shall be primary and shall be endorsed to provide that Landlord
and McCandless Management Corporation, and their respective partners, officers,
directors and employees and such other persons or entities as directed from time
to time by Landlord shall be named as
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additional insureds for all liability using ISO Bureau Form CG20111185 (or a
successor form) or such other endorsement form reasonably acceptable to
Landlord; shall contain a severability of interest clause and a cross-liability
endorsement; shall be endorsed to provide that the limits and aggregates apply
per location using ISO Bureau Form CG25041185 (or a successor form) or such
other endorsement form reasonably acceptable to Landlord; and shall be issued by
an insurance company admitted to transact business in the State of California
and rated A+VIII or better in Best's Insurance Reports (or successor report).
The deductibles for all insurance required to be maintained by Tenant hereunder
shall be satisfactory to Landlord. The commercial general liability insurance
carried by Tenant shall specifically insure the performance by Tenant of the
indemnification provisions set forth in paragraph 18 of this lease provided,
however, nothing contained in this paragraph 11 shall be construed to limit the
liability of Tenant under the indemnification provisions set forth in said
paragraph 18. If Landlord or any of the additional insureds named on any of
Tenant's insurance, have other insurance which is applicable to the covered loss
on a contributing, excess or contingent basis, the amount of the Tenant's
insurance company's liability under the policy of insurance maintained by Tenant
shall not be reduced by the existence of such other insurance. Any insurance
carried by Landlord or any of the additional insureds named on Tenant's
insurance policies shall be excess and non-contributing with the insurance so
provided by Tenant.
Tenant shall, prior to the commencement of the term and at least
thirty (30) days prior to any renewal date of any insurance policy required to
be maintained by Tenant pursuant to this paragraph, provide Landlord with a
completed Certificate of Insurance, using a form acceptable in Landlord's
reasonable judgement, attaching thereto copies of all endorsements required to
be provided by Tenant under this lease. Tenant agrees to increase the coverage
or otherwise comply with changes in connection with said commercial general
liability, property damage, direct physical loss and Worker's Compensation
Insurance as Landlord's lender may from time to time reasonably require.
Landlord shall obtain and keep in force a policy or policies of
insurance covering loss or damage to the Premises and Project, in the amount of
the full replacement value thereof, providing protection against those perils
included within the classification of "all risk" insurance, with increased cost
of reconstruction and contingent liability (including demolition), plus a policy
of rental income insurance in the amount of one hundred percent (100%) of twelve
(12) months' rent (including sums paid as additional rent) and such other
insurance as Landlord or Landlord's lender may from time to time require.
Landlord may, but shall not be obligated to unless required by law, obtain flood
and/or earthquake insurance. Landlord shall have no liability to Tenant if
Landlord elects not to obtain flood and/or earthquake insurance unless such
insurance is required by law. The cost of all such insurance purchased by
Landlord, plus any charges for deferred payment of premiums and the amount of
any deductible incurred upon any covered loss within the Project, shall be
common area charges and Tenant shall pay to Landlord its percentage share of
such costs as provided in paragraph 16. If the cost of insurance is increased
due to Tenant's use of the Premises, then Tenant shall pay to Landlord upon
demand the full cost of such increase.
Landlord and Tenant hereby mutually waive any and all rights of
recovery against one another for real or personal property loss or damage
occurring to the Premises or the Project, or any part thereof, or to any
personal property therein, from perils insured against under fire and
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extended insurance and any other property insurance policies existing for the
benefit of the respective parties so long as such insurance permits waiver of
liability and contains a waiver of subrogation without additional premiums.
If Tenant does not take out and maintain insurance as required
pursuant to this paragraph 11, Landlord may, but shall not be obligated to,
after ten (10) days written notice to Tenant, or in the event that such
insurance has lapsed, expired or been cancelled, take out the necessary
insurance and pay the premium therefor, and Tenant shall repay to Landlord
promptly on demand, as additional rent, the amount so paid. In addition,
Landlord may recover from Tenant and Tenant agrees to pay, as additional rent,
any and all reasonable expenses (including attorney fees) and damages which
Landlord may sustain by reason of the failure of Tenant to obtain and maintain
such insurance, it being expressly declared that the expenses and damages of
Landlord shall not be limited to the amount of the premiums thereon.
12. UTILITIES AND SERVICE
Tenant shall pay for all water, gas, light, heat, power, electricity,
telephone, trash pickup, sewer charges and all other services supplied to or
consumed on the Premises. In the event that any service is not separately
metered or billed to the Premises, the cost of such utility service or other
service shall be a common area charge and Tenant shall pay its percentage share
of such cost to Landlord as provided in paragraph 16. In addition, the cost of
all utilities and services furnished by Landlord to the Common Area shall be a
common area charge and Tenant shall pay its percentage share of such cost to
Landlord as provided in paragraph 16.
If Tenant's use of any such utility or service is materially in excess
of the average furnished to the other tenants of the Project, and such utility
or service is not separately metered, then Tenant shall pay to Landlord upon
demand, as additional rent, the full cost of such excess use, or Landlord may
cause such utility or service to be separately metered, in which case Tenant
shall pay the full cost of such utility or service and reimburse Landlord upon
demand for the cost of installing the separate meter.
Landlord shall not be liable for, and Tenant shall not be entitled to
any abatement or reduction of rent by reason of, the failure of any person or
entity to furnish any of the foregoing services when such failure is caused by
accident, breakage, repairs, strikes, lockouts or other labor disturbances or
labor disputes of any character, governmental moratoriums, regulations or other
governmental actions, or by any other cause, similar or dissimilar, beyond the
reasonable control of Landlord. In addition, Tenant shall not be relieved from
the performance of any covenant or agreement in this lease because of any such
failure, and no eviction of Tenant shall result from such failure.
13. TAXES AND OTHER CHARGES
All real estate taxes and assessments and other taxes, fees and
charges of every kind or nature, foreseen or unforeseen, which are levied,
assessed or imposed upon Landlord and/or against the Premises, building, Common
Area or Project, or any part thereof by any federal, state, county, regional,
municipal or other governmental or quasi-public authority, together with any
increases therein for any reason, shall be a common area charge and Tenant
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shall pay its percentage share of such costs to Landlord as provided in
paragraph 16. By way of illustration and not limitation, "other taxes, fees and
charges" as used herein include any and all taxes payable by Landlord (other
than state and federal personal or corporate income taxes measured by the net
income of Landlord from all sources, and premium taxes), whether or not now
customary or within the contemplation of the parties hereto, (i) upon, allocable
to, or measured by the rent payable hereunder, including, without limitation,
any gross income or excise tax levied by the local, state or federal government
with respect to the receipt of such rent, (ii) upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any part thereof, (iii) upon or
measured by the value of Tenant's personal property or leasehold improvements
located in the Premises, (iv) upon this transaction or any document to which
Tenant is a party creating or transferring an interest or estate in the
Premises, (v) upon or with respect to vehicles, parking or the number of persons
employed in or about the Project, and (vi) any tax, license, franchise fee or
other imposition upon Landlord which is otherwise measured by or based in whole
or in part upon the Project or any portion thereof. If Landlord contests any
such tax, fee or charge, the cost and expense incurred by Landlord thereby
(including, but not limited to, costs of attorneys and experts) shall also be
common area charges and Tenant shall pay its percentage share of such costs to
Landlord as provided in paragraph 16. In the event the Premises and any
improvements installed therein by Tenant or Landlord are valued by the assessor
disproportionately higher than those of other tenants in the building or Project
or in the event alterations or improvements are made to the Premises, Tenant's
percentage share of such taxes, assessments, fees and/or charges shall be
readjusted upward accordingly and Tenant agrees to pay such readjusted share.
Such determination shall be made by Landlord from the respective valuations
assigned in the assessor's work sheet or such other information as may be
reasonably available and Landlord's determination thereof shall be conclusive.
Tenant agrees to pay, before delinquency, any and all taxes levied or
assessed during the term hereof upon Tenant's equipment, furniture, fixtures and
other personal property located in the Premises, including carpeting and other
property installed by Tenant notwithstanding that such carpeting or other
property has become a part of the Premises. If any of Tenant's personal
property shall be assessed with the Project, Tenant shall pay to Landlord, as
additional rent, the amount attributable to Tenant's personal property within
ten (10) days after receipt of a written statement from Landlord setting forth
the amount of such taxes, assessments and public charges attributable to
Tenant's personal property.
14. ENTRY BY LANDLORD
Landlord reserves, and shall at all reasonable times have, the right
to enter the Premises (i) to inspect the Premises, (ii) to supply services to be
provided by Landlord hereunder, (iii) to show the Premises to prospective
purchasers, lenders or tenants and to put 'for sale' or 'for lease' signs
thereon, (iv) to post notices required or allowed by this lease or by law, (v)
to alter, improve or repair the Premises and any portion of the Project, and
(vi) to erect scaffolding and other necessary structures in or through the
Premises or the Project where reasonably required by the character of the work
to be performed. Absent Landlord's gross negligence or willful misconduct,
Landlord shall not be liable in any manner for any inconvenience, disturbance,
loss of business, nuisance or other damage arising from Landlord's entry and
acts pursuant to this paragraph and Tenant shall not be entitled to an abatement
or
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reduction of rent if Landlord exercises any rights reserved in this paragraph.
For each of the foregoing purposes, Landlord shall at all times have and retain
a key with which to unlock all of the doors in, on and about the Premises
(excluding Tenant's vaults, safes and similar areas designated in writing by
Tenant in advance), and Landlord shall have the right to use any and all means
which Landlord may deem proper to open said doors in an emergency in order to
obtain entry to the Premises. Any entry by Landlord to the Premises pursuant to
this paragraph shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
Notwithstanding the foregoing, and except in the case of emergency
(such as fire or other similarly dangerous condition), Landlord shall give
Tenant at least twenty-four (24) hours prior notice of its intent to enter the
Premises, and such entry shall be subject to the reasonable security
requirements of Tenant (including that, Landlord must at all times be
accompanied by a Designated Representative (hereafter defined) of Tenant and, if
reasonably possible, during business hours. A Designated Representative shall
be a person on a list provided by Tenant to Landlord, and signed by the CEO of
Tenant. Said list shall be delivered to Landlord by the date Tenant takes
possession of the premises. This list may be modified from time to time in
writing by the CEO of the Tenant and such list shall provide no fewer than three
(3) names of Designated Representatives.
15. COMMON AREA; PARKING
Subject to the terms and conditions of this lease and such rules and
regulations as Landlord may from time to time prescribe, Tenant and Tenant's
employees and invitees shall, in common with other occupants of the Project, and
their respective employees and invitees and others entitled to the use thereof,
have the nonexclusive right to use the access roads, parking areas and
facilities within the Project provided and designated by Landlord for the
general use and convenience of the occupants of the Project which areas and
facilities shall include, but not be limited to, sidewalks, parking, refuse,
landscape and plaza areas, roofs and building exteriors, which areas and
facilities are referred to herein as "Common Area". This right shall terminate
upon the termination of this lease.
Landlord reserves the right from time to time to make changes in the
shape, size, location, amount and extent of the Common Area. Landlord shall
also have the right at any time to change the name, number or designation by
which the Project is commonly known. Landlord further reserves the right to
promulgate such rules and regulations relating to the use of the Common Area,
and any part thereof, as Landlord may deem appropriate for the best interests of
the occupants of the Project. The rules and regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant and Tenant shall abide by them
and cooperate in their observance. Such rules and regulations may be amended by
Landlord from time to time, with or without advance notice.
Tenant shall have the nonexclusive use of thirty-six (36) parking
spaces in the Common Area as designated from time to time by Landlord, six (6)
of which shall be labeled "Visitor," in a location mutually acceptable to both
Landlord and Tenant. Landlord reserves the right at its sole option to assign
and label parking spaces, but it is specifically agreed that
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Landlord is not responsible for policing any such parking spaces. Tenant shall
not at any time park or permit the parking of Tenant's trucks or other vehicles,
or the trucks or other vehicles of others, adjacent to loading areas so as to
interfere in any way with the use of such areas; nor shall Tenant at any time
park or permit the parking of Tenant's vehicles or trucks, or the vehicles or
trucks of Tenant's suppliers or others, in any portion of the Common Area not
designated by Landlord for such use by Tenant. Tenant shall not park or permit
any inoperative vehicle or equipment to be parked on any portion of the Common
Area.
Landlord shall operate, manage and maintain the Common Area. The
manner in which the Common Area shall be operated, managed and maintained and
the expenditures for such operation, management and maintenance shall be at the
sole discretion of Landlord. The cost of such maintenance, operation and
management of the Common Area, including but not limited to landscaping, repair
of paving, parking lots and sidewalks, security and exterminator services and
salaries and employee benefits (including union benefits) of on-site and
accounting personnel engaged in such maintenance and operations management,
shall be a common area charge and Tenant shall pay to Landlord its percentage
share of such costs as provided in paragraph 16.
16. COMMON AREA CHARGES
Tenant shall pay to Landlord, as additional rent, an amount equal to
31.19% of the total common area charges as defined below. Tenant's percentage
share of common area charges shall be paid as follows:
Tenant's estimated monthly payment of common area charges payable by
Tenant during the calendar year in which the term commences is set forth in
paragraph 4(b) of this lease. Prior to the commencement of each succeeding
calendar year of the term (or as soon as practicable thereafter), Landlord shall
deliver to Tenant a written estimate of Tenant's monthly payment of common area
charges. Tenant shall pay, as additional rent, on the first day of each month
during the term in accordance with paragraph 4(b) of the lease, its monthly
share of common area charges as estimated by Landlord. Within one hundred
twenty (120) days of the end of each calendar year and of the termination of
this lease (or as soon as practicable thereafter), Landlord shall deliver to
Tenant a statement of actual common area charges incurred for the preceding
year. If such statement shows that Tenant has paid less than its actual
percentage then Tenant shall on demand pay to Landlord the amount of such
deficiency. If Tenant fails to pay such deficiency due within ten (10) days
after demand, Tenant shall pay an additional five percent (5%) of the amount due
as a penalty. If such statement shows that Tenant has paid more than its actual
percentage share then Landlord shall, at its option, promptly refund such excess
to Tenant or credit the amount thereof to the rent next becoming due from
Tenant. Landlord reserves the right to revise any estimate of common area
charges if actual or projected common area charges show an increase or decrease
in excess of 10% from any earlier estimate for the same period. In such event,
Landlord shall deliver the revised estimate to Tenant, together with an
explanation of the reasons therefor, and Tenant shall revise its payments
accordingly. Landlord's and Tenant's obligation with respect to adjustments at
the end of the term or earlier expiration of this lease shall survive such
termination or expiration.
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As used in this lease, "common area charges" shall include, but not be
limited to, (i) all items identified in paragraphs 8, 9, 11, 12, 13 and 15 as
being common area charges; (ii) amortization of such capital improvements having
a useful life greater than one year as Landlord may have installed for the
purpose of reducing operating costs and/or except as set forth herein, to comply
with all laws, rules and regulations of federal, state, county, municipal and
other governmental authorities now or hereinafter in effect (Tenant's share of
any such capital improvement shall equal Tenant's proportionate share of the
fraction of the cost of such capital improvement equal to the remaining term of
the lease over the useful life of such capital improvement); (iii) salaries and
employee benefits (including union benefits) of personnel engaged in the
operation and maintenance of the Project (or the building in which the Premises
are located) and payroll taxes applicable thereto; (iv) supplies, materials,
equipment and tools used or required in connection with the operation and
maintenance of the Project; (v) licenses, permits and inspection fees; (vi) a
reasonable reserve for repairs and replacement of equipment used in the
maintenance and operation of the Project; (vii) all other operating costs
incurred by Landlord in maintaining and operating the Project; and (viii) an
amount equal to five percent (5%) of the actual expenditures for the aggregate
of all other common area charges as compensation for Landlord's accounting and
processing services (so long as the salaries of the persons performing such
services are not included as a specific common area charge).
Notwithstanding the above, Tenant's proportionate share of common area
charges shall not exceed the following:
1994 $ .059 per square foot per month
1995 $ .061 per square foot per month
1996 $ .063 per square foot per month
1997 $ .066 per square foot per month
Tenant's proportionate share of real estate taxes shall not exceed the
following:
1994 $ .062 per square foot per month
1995 $ .063 per square foot per month
1996 $ .065 per square foot per month
1997 $ .066 per square foot per month
17. DAMAGE BY FIRE; CASUALTY
In the event the Premises are damaged by any casualty which is covered
under an insurance policy required to be maintained by Landlord pursuant to
paragraph 11, Landlord shall be entitled to the use of all insurance proceeds
and shall repair such damage as soon as reasonably possible and this lease shall
continue in full force and effect.
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In the event the Premises are damaged by any casualty not covered
under an insurance policy required to be maintained pursuant to paragraph 11,
Landlord may, at Landlord's option, either (i) repair such damage, at Landlord's
expense, as soon as reasonably possible, in which event this lease shall
continue in full force and effect, or (ii) give written notice to Tenant within
thirty (30) days after the date of the occurrence of such damages of Landlord's
intention to cancel and terminate this lease as of the date of the occurrence of
the damages; provided, however, that if such damage is caused by an act or
omission of Tenant or its agent, servants or employees, then Tenant shall repair
such damage promptly at its sole cost and expense. In the event Landlord elects
to terminate this lease pursuant hereto, Tenant shall have the right within ten
(10) days after receipt of the required notice to notify Landlord in writing of
Tenant's intention to repair such damage at Tenant's expense, without
reimbursement from Landlord, in which event this lease shall continue in full
force and effect and Tenant shall proceed to make such repairs as soon as
reasonably possible. If Tenant does not give such notice within the ten (10)
day period, this lease shall be cancelled and terminated as of the date of the
occurrence of such damage. Under no circumstances shall Landlord be required to
repair any injury or damage to (by fire or other cause), or to make any
restoration or replacement of, any of Tenant's personal property, trade fixtures
or property leased from third parties, whether or not the same is attached to
the Premises.
If the Premises are totally destroyed during the term from any cause
(including any destruction required by any authorized public authority), whether
or not covered by the insurance required under paragraph 11, this lease shall
automatically terminate as of the date of such destruction, unless the parties
agree otherwise.
If the Premises are partially or totally destroyed or damaged and
Landlord or Tenant repair them pursuant to this lease, the rent payable
hereunder for the period during which such damage and repair continues shall be
abated only in proportion to the square footage of the Premises rendered
untenantable to Tenant by such damage or destruction. Tenant shall have no
claim against Landlord for any damage, loss or expense suffered by reason of any
such damage, destruction, repair or restoration. The parties waive the
provisions of California Civil Code sections 1932(2) and 1933(4) (which
provisions permit the termination of a lease upon destruction of the leased
premises), and hereby agree that the provisions of this paragraph 17 shall
govern in the event of such destruction.
18. INDEMNIFICATION
Landlord shall not be liable to Tenant and Tenant hereby waives all
claims against Landlord for any injury to or death of any person or damage to or
destruction of property in or about the Premises or the Project by or from any
cause whatsoever except the failure of Landlord to perform its obligations under
this lease where such failure has persisted for an unreasonable period of time
after notice of such failure and except Landlord's gross negligence or willful
misconduct. Without limiting the foregoing, Landlord shall not be liable to
Tenant for any injury to or death of any person or damages to or destruction of
property by reason of, or arising from, any latent defect in the Premises or
Project or the act or negligence of any other tenant of the Project. Tenant
shall immediately notify Landlord of any defect in the Premises or Project.
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Except as to injury to persons or damage to property the principal
cause of which is the failure by Landlord to observe any of the terms and
conditions of this lease or Landlord's gross negligence or willful misconduct,
Tenant shall hold Landlord harmless from and defend Landlord against any claim,
liability, loss, damage or reasonable expense (including attorney fees) arising
out of any injury to or death of any person or damage to or destruction of
property occurring in, on or about the Premises from any cause whatsoever or on
account of the use, condition, occupational safety or occupancy of the Premises.
Tenant shall further hold Landlord harmless from and defend Landlord against any
claim, liability, loss, damage or expense (including attorney fees) arising (i)
from Tenant's use of the Premises or from the conduct of its business or from
any activity or work done, permitted or suffered by Tenant or its agents or
employees in or about the Premises or Project, (ii) out of the failure of Tenant
to observe or comply with Tenant's obligation to observe and comply with laws or
other requirements as set forth in paragraph 7, (iii) by reason of Tenant's use,
handling, storage, or disposal of toxic or hazardous materials or waste, (iv) by
reason of any labor or service performed for, or materials used by or furnished
to, Tenant or any contractor engaged by Tenant with respect to the Premises, or
(v) from any other act, neglect, fault or omission of Tenant or its agents or
employees.
The provisions of this paragraph 18 shall survive the expiration or
earlier termination of this lease.
19. ASSIGNMENT AND SUBLETTING
Tenant shall not voluntarily assign, encumber or otherwise transfer
its interest in this lease or in the Premises, or sublease all or any part of
the Premises, or allow any other person or entity to occupy or use all or any
part of the Premises, without first obtaining Landlord's written consent, which
shall not be unreasonably withheld, and otherwise complying with the
requirements of this paragraph 19. Any assignment, encumbrance or sublease
without Landlord's consent, shall constitute a default.
If Tenant desires to sublet or assign all or any portion of the
Premises, Tenant shall give Landlord written notice thereof, specifying the
projected commencement date of the proposed sublet or assignment (which date
shall be not less than fifteen (15) days or more than one hundred twenty (120)
days after the date of Landlord's receipt of such notice), the portions of the
Premises proposed to be sublet or assigned, the terms and conditions of the
proposed assignment or sublease (including the rent to be paid by the proposed
assignee or subtenant) and the name, address and telephone number of the
proposed assignee or subtenant. Tenant shall further provide Landlord with such
other information concerning the proposed assignee or subtenant as requested by
Landlord.
If Landlord consents in writing to the proposed assignment or sublet,
Tenant shall be free to assign or sublet all or a portion of the Premises
subject to the following conditions: (i) any sublease shall be on the same terms
set forth in the notice given to Landlord; (ii) no sublease shall be valid and
no subtenant shall take possession of the sublet premises until an executed
counterpart of such sublease has been delivered to Landlord; (iii) no subtenant
shall have a further right to sublet; (iv) fifty percent (50%) of any sums or
other economic consideration received by Tenant as a result of such assignment
or sublet (except rental or other
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payments received which are attributable to the amortization over the term of
this lease of the cost of leasehold improvements constructed for such assignees
or subtenant), whether denominated rentals or otherwise, less brokerage fees,
which exceed, in the aggregate, the total sums which Tenant is obligated to pay
Landlord under this lease (prorated to reflect obligations allocable to that
portion of the Premises subject to such sublease), shall be payable to Landlord
as additional rent under this lease without affecting or reducing any other
obligation of Tenant hereunder; (v) no sublet or assignment shall release Tenant
of Tenant's obligation or alter the primary liability of Tenant to pay the rent
and to perform all other obligations to be performed by Tenant hereunder; and
(vi) any assignee or subtenant must expressly agree to assume and perform all of
the covenants and conditions of Tenant under this lease. Tenant shall pay to
Landlord promptly upon demand as additional rent, Landlord's actual attorneys'
fees and other reasonable costs incurred for reviewing, processing or
documenting any requested assignment or sublease, whether or not Landlord's
consent is granted. Tenant shall not be entitled to assign this lease or
sublease all or any part of the Premises (and any attempt to do so shall be
voidable by Landlord) during any period in which Tenant is in default under this
lease.
If Tenant is a partnership, a withdrawal or change, voluntary or
involuntary or by operation of law, of any general partner or the dissolution of
the partnership shall be deemed an assignment of this lease subject to all the
conditions of this paragraph 19. If Tenant is a corporation any dissolution,
merger, consolidation or other reorganization of Tenant or the sale or other
transfer of a controlling percentage of the capital stock of Tenant or the sale
of more than fifty percent (50%) of the value of Tenant's assets shall be an
assignment of this lease subject to all the conditions of this paragraph 19.
The term "controlling percentage" means the ownership of, and the right to vote,
stock possessing more than 50% of the total combined voting power of all classes
of Tenant's capital stock issued, outstanding and entitled to vote. This
paragraph shall not apply if Tenant is a corporation the stock of which is
traded through an exchange.
The acceptance of rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provision hereof. Consent to one
assignment or sublet shall not be deemed consent to any subsequent assignment or
sublet. In the event of default by any assignee of Tenant or any successor of
Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
such assignee or successor. Landlord may consent to subsequent assignments or
sublets of this lease or amendments or modifications to this lease with
assignees of Tenant, with notice to Tenant, or any successor of Tenant, and
obtaining Tenant's consent thereto and such action shall not relieve Tenant of
liability under this lease.
No interest of Tenant in this lease shall be assignable by operation
of law (including, without limitation, the transfer of this lease by testacy or
intestacy). Each of the following acts shall be considered an involuntary
assignment: (i) if Tenant is or becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors or institutes a proceeding under the
Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a partnership
or consists of more than one person or entity, if any partner of the partnership
or other person or entity is or becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors; (ii) if a writ of attachment or
execution is levied on this lease; or (iii) if, in any proceeding or action to
which Tenant is a party, a receiver is appointed with authority to take
possession of the
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Premises. An involuntary assignment shall constitute a default by Tenant and
Landlord shall have the right to elect to terminate this lease, in which case
this lease shall not be treated as an asset of Tenant.
Tenant immediately and irrevocably assigns to Landlord, as security
for Tenant's obligations under this lease, all rent from any subletting of all
or a part of the Premises as permitted by this lease, and Landlord, as assignee
and as attorney-in-fact for Tenant, or a receiver of Tenant appointed on
Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this lease; except that, until the occurrence of an act or
default by Tenant, Tenant shall have the right to collect such rent, subject to
promptly forwarding to Landlord any portion thereof to which Landlord is
entitled pursuant to this paragraph 19.
Notwithstanding the above requirement that Tenant obtain the consent
of Landlord prior to any assignment or sublet, Tenant may, without obtaining the
prior consent of Landlord, assign or sublease the whole or any part of the
Premises, or sell or transfer a controlling percentage of the capital stock of
Tenant or sell more than fifty percent (50%) of the value of Tenant's assets, to
any corporation or other entity which is wholly owned by Tenant or of which
Tenant is a wholly owned subsidiary, or which is wholly-owned by either of the
foregoing, provided that (i) Tenant shall give written notice thereof to
Landlord in the manner required for other assignments or subleases by this
paragraph 19; (ii) Tenant shall continue to be fully obligated under this lease;
(iii) any such assignee or sublessee shall expressly assume and agree to perform
all the terms and conditions of this lease to be performed by Tenant; and (iv)
any such assignment or sublet shall be subject to all other terms and conditions
of this paragraph 19 pertaining to assignments and/or sublets (excepting only
the requirement concerning prior written consent of Landlord).
20. DEFAULT
The occurrence of any of the following shall constitute a default by
Tenant: (i) failure of Tenant to pay any rent or other sum payable hereunder
within five (5) days of when due (provided, however, once per lease year, Tenant
shall be entitled to written notice from Landlord of Tenant's failure to make
the foregoing payments and Tenant shall not be in default until five (5) days
after the date that Landlord gives Tenant such notice); (ii) abandonment of the
Premises (Tenant's failure to occupy and conduct business in the Premises for
fourteen (14) consecutive days shall be deemed an abandonment) and Tenant has
defaulted under (i) above; or (iii) failure of Tenant to perform any other term,
covenant or condition of this lease if the failure to perform is not cured
within thirty (30) days after notice thereof has been given to Tenant (provided
that if such default cannot reasonably be cured within thirty (30) days, Tenant
shall not be in default if Tenant commences to cure such failure to perform
within the thirty (30) day period and diligently and in good faith continues to
cure the failure to perform). Notwithstanding the above, prior to Landlord
instituting an unlawful detainer action, Landlord shall give Tenant the
requisite three days' notice, in writing, as required by California Code of
Civil Procedures Section 1161. The notice referred to in clause (iii) above
shall specify the failure to perform and the applicable lease provision and
shall demand that Tenant perform the provisions of this lease within the
applicable period of time. No notice shall be deemed a forfeiture or
termination of this lease unless Landlord so elects in the notice. No notice
shall be required in the event of abandonment or vacation of the Premises.
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In addition to the above, the occurrence of any of the following
events shall also constitute a default by Tenant: (i) Tenant fails generally to
pay its debts as they become due or admits in writing its inability to pay its
debts, or makes a general assignment for the benefit of creditors (for purposes
of determining whether Tenant is not paying its debts as they become due, a debt
shall be deemed overdue upon the earliest to occur of the following: ninety (90)
days from the date a statement therefor has been rendered; the date on which any
action or proceeding therefor is commenced; or the date on which a formal notice
of default or demand has been sent); (ii) Tenant fails to furnish to Landlord a
schedule of Tenant's aged accounts payable within thirty (30) days after
Landlord's written request; (iii) any financial statements given to Landlord by
Tenant, any assignee of Tenant, subtenant of Tenant, any guarantor of Tenant, or
successor in interest of Tenant (including, without limitation, any schedule of
Tenant's aged accounts payable) are materially false; or (iv) any financial
statement or other financial information furnished by Tenant pursuant to the
provisions of this lease or at the request of Landlord evidences that either
Tenant's net worth or its net assets are at least twenty-five percent (25%) less
than the net worth or net assets shown in either the immediately prior financial
statement or the financial statement of Tenant furnished at the time of
execution of this lease, and Tenant fails to furnish promptly to Landlord, after
notice from Landlord to Tenant, an additional security deposit in cash
equivalent to the aggregate of the basic rent and common area charges (without
regard to any rent abatement) payable hereunder for the twelve (12) full
calendar months immediately preceding such notice. At any time during the term
of this lease, but no more than once per calendar year, Landlord, at Landlord's
option, shall have the right to receive from Tenant, upon Landlord's request, a
current annual balance sheet for Landlord's review. If the balance sheet shows
a negative net worth, Landlord may terminate this lease by giving Tenant sixty
(60) days prior written notice.
In the event of a default by Tenant, then Landlord, in addition to any
other rights and remedies of Landlord at law or in equity, shall have the right
either to terminate Tenant's right to possession of the Premises (and thereby
terminate this lease) or, from time to time and without termination of this
lease, to relet the Premises or any part thereof for the account and in the name
of Tenant for such term and on such terms and conditions as Landlord in its sole
discretion may deem advisable, with the right to make alterations and repairs to
the Premises.
Should Landlord elect to keep this lease in full force and effect,
Landlord shall have the right to enforce all of Landlord's rights and remedies
under this lease, including but not limited to the right to recover and to relet
the Premises and such other rights and remedies as Landlord may have under
California Civil Code Section 1951.4 (or successor Code section) or any other
California statute. If Landlord relets the Premises, then Tenant shall pay to
Landlord, as soon as ascertained, the costs and expenses incurred by Landlord in
such reletting and in making alterations and repairs. Rentals received by
Landlord from such reletting shall be applied (i) to the payment of any
indebtedness due hereunder, other than basic rent and common area charges, from
Tenant to Landlord; (ii) to the payment of the cost of any repairs necessary to
return the Premises to good condition normal wear and tear excepted, including
the cost of alterations and the cost of storing any of Tenant's property left on
the Premises at the time of reletting; and (iii) to the payment of basic rent or
common area charges due and unpaid hereunder. The residue, if any, shall be
held by Landlord and applied in payment of future rent or damages in the event
of termination as the same may become due and payable hereunder and the balance,
if any at the end of the term of this lease, shall be paid to Tenant. Should
the basic
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rent and common area charges received from time to time from such reletting
during any month be less than that agreed to be paid during that month by Tenant
hereunder, Tenant shall pay such deficiency to Landlord. Such deficiency shall
be calculated and paid monthly. No such reletting of the Premises by Landlord
shall be construed as an election on its part to terminate this lease unless a
notice of such intention is given to Tenant or unless the termination hereof is
decreed by a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Landlord may at any time thereafter elect to terminate this
lease for such previous breach, provided it has not been cured.
Should Landlord at any time terminate this lease for any breach, in
addition to any other remedy it may have, it shall have the immediate right of
entry and may remove all persons and property from the Premises and shall have
all the rights and remedies of a landlord provided by California Civil Code
Section 1951.2 or any successor code section. Upon such termination, in
addition to all its other rights and remedies, Landlord shall be entitled to
recover from Tenant all damages it may incur by reason of such breach, including
the cost of recovering the Premises and including (i) the worth at the time of
award of the unpaid rent which had been earned at the time of termination; (ii)
the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
lease or which in the ordinary course of events would be likely to result
therefrom. The "worth at the time of award" of the amounts referred to in (i)
and (ii) above is computed by allowing interest at the rate of twelve percent
(12%) per annum. The "worth at the time of award" of the amount referred to in
(iii) above shall be computed by discounting such amount at the discount rate of
the federal reserve bank of San Francisco at the time of award plus one percent
(1%). Tenant waives the provisions of Section 1179 of the California Code of
Civil Procedure (which Section allows Tenant to petition of court of competent
jurisdiction for relief against forfeiture of this lease). Property removed
from the Premises may be stored in a public or private warehouse or elsewhere at
the sole cost and expense of Tenant. In the event that Tenant shall not
immediately pay the cost of storage of such property after the same has been
stored for a period of thirty (30) days or more, Landlord may sell any or all
thereof at a public or private sale in such manner and at such times and places
that Landlord, in its sole discretion, may deem proper, after notice to Tenant.
21. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
Landlord, at any time after Tenant commits a default, may, but shall
not be obligated to, cure the default at Tenant's cost. If Landlord at any
time, by reason of Tenant's default, pays any sum or does any act that requires
the payment of any sum, the sum paid by Landlord shall be due immediately from
Tenant to Landlord and shall bear interest at the rate of twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less, from the date
the sum is paid by Landlord until Landlord is reimbursed by Tenant. Amounts due
Landlord hereunder shall be additional rent.
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22. EMINENT DOMAIN
If all or any part of the Premises shall be taken by any public or
quasi-public authority under the power of eminent domain or conveyance in lieu
thereof, this lease shall terminate as to any portion of the Premises so taken
or conveyed, and any portion rendered untenantable as a result of such taking or
conveyance on the date when title vests in the condemnor, and Landlord shall be
entitled to any and all payments, income, rent, award or any interest therein
whatsoever which may be paid or made in connection with such taking or
conveyance. Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this lease. Notwithstanding the foregoing,
Tenant shall be entitled to any compensation for depreciation to and cost of
removal of Tenant's compensation for its relocation expenses necessitated by
such taking, but in each case only to the extent the condemning authority makes
a separate award therefor or specifically identifies a portion of the award as
being therefor. Each party waives the provisions of Section 1265.130 of the
California Code of Civil Procedure (which section allows either party to
petition the Superior Court to terminate this lease in the event of a partial
taking of the Premises).
If any action or proceeding is commenced for such taking of the
Premises or any portion thereof or of any other space in the Project, or if
Landlord is advised in writing by any entity or body having the right or power
of condemnation of its intention to condemn the Premises or any portion thereof
or of any other space in the Project, and Landlord shall decide to discontinue
the use and operation of the Project or decide to demolish, alter or rebuild the
Project, then Landlord shall have the right to terminate this lease by giving
Tenant written notice thereof within sixty (60) days of the earlier of the date
of Landlord's receipt of such notice of intention to condemn or the commencement
of said action or proceeding. Such termination shall be effective as of the
last day of the calendar month next following the month in which such notice is
given or the date on which title shall vest in the condemnor, whichever occurs
first.
In the event of a partial taking, or conveyance in lieu thereof, of
the Premises and fifty percent (50%) or more of the number of square feet in the
Premises are taken, or rendered untenantable, then Tenant may terminate this
lease. Any election by Tenant to so terminate shall be by written notice given
to Landlord within sixty (60) days from the date of such taking or conveyance
and shall be effective on the last day of the calendar month next following the
month in which such notice is given or the date on which title shall vest in the
condemnor, whichever occurs first.
If a portion of the Premises is taken by power of eminent domain or
conveyance in lieu thereof and neither Landlord nor Tenant terminates this lease
as provided above, then this lease shall continue in full force and effect as to
the part of the Premises not so taken or conveyed and all payments of rent shall
be apportioned as of the date of such taking or conveyance so that thereafter
the amounts to be paid by Tenant shall be in the ratio that the area of the
portion of the Premises not so taken bears to the total area of the Premises
prior to such taking.
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23. NOTICE AND COVENANT TO SURRENDER
On the last day of the term or on the effective date of any earlier
termination, Tenant shall surrender to Landlord the Premises in its condition
existing as of the commencement of the term and, except as otherwise provided by
Landlord pursuant to the terms of paragraph 8 of this lease, all of the
improvements and alterations made to the Premises in their condition existing as
of the date of completion of construction and/or installation (normal wear and
tear excepted). On or prior to the last day of the term or the effective date
of any earlier termination, Tenant shall remove all of Tenant's personal
property and trade fixtures, together with improvements or alterations that
Tenant is obligated to remove pursuant to the provisions of paragraph 8 of this
lease, from the Premises, and all such property not removed shall be deemed
abandoned. In addition, on or prior to the expiration or earlier termination of
this lease, Tenant shall remove, at Tenant's sole cost and expense, all
telephone, other communication, computer and any other cabling and wiring of any
sort installed in the space above the suspended ceiling of Premises or anywhere
else in the Premises and shall promptly repair any damage to the suspended
ceiling, lights, light fixtures, walls and any other part of the Premises
resulting from such removal.
If the Premises are not surrendered as required in this paragraph,
Tenant shall indemnify Landlord against all loss, liability and reasonable
expense (including but not limited to, attorney fees) resulting from the failure
by Tenant in so surrendering the Premises, including, without limitation, any
claims made by any succeeding tenants. It is agreed between Landlord and Tenant
that the provisions of this paragraph shall survive termination of this lease.
24. TENANT'S QUITCLAIM
At the expiration or earlier termination of this lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days after written
demand from Landlord to Tenant, any quitclaim deed or other document required to
remove the cloud or encumbrance created by this lease from the real property of
which the Premises are a part. This obligation shall survive said expiration or
termination.
25. HOLDING OVER
Any holding over after the expiration or termination of this lease
with the written consent of Landlord shall be construed to be a tenancy from
month to month at the monthly rent in effect on the date of such expiration or
termination. All provisions of this lease, except those pertaining to the term
and any option to extend, shall apply to the month to month tenancy. The
provisions of this paragraph are in addition to, and do not affect, Landlord's
right of reentry or other rights hereunder or provided by law.
If Tenant shall retain possession of the Premises or any part thereof
without Landlord's consent following the expiration or sooner termination of
this lease for any reason, then Tenant shall pay to Landlord for each day of
such retention one hundred fifty percent (150%) of the amount of the daily
rental in effect during the last month prior to the date of such expiration or
termination. Tenant shall also indemnify and hold Landlord harmless from any
loss, liability and reasonable expense (including, but not limited to, attorneys
fees) resulting from
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delay by Tenant in surrendering the Premises, including without limitation any
claims made by any succeeding tenant founded on such delay. Acceptance of rent
by Landlord following expiration or termination shall not constitute a renewal
of this lease, and nothing contained in this paragraph shall waive Landlord's
right of re-entry or any other right. Tenant shall be only a Tenant at
sufferance, whether or not Landlord accepts any rent from Tenant, while Tenant
is holding over without Landlord's written consent.
26. SUBORDINATION
In the event Landlord's title or leasehold interest is now or
hereafter encumbered in order to secure a loan to Landlord, Tenant shall, at the
request of Landlord or the lender, execute in writing an agreement subordinating
its rights under this lease to the lien of such encumbrance, or, if so
requested, agreeing that the lien of lender's encumbrance shall be or remain
subject and subordinate to the rights of Tenant under this lease.
Notwithstanding any such subordination, Tenant's possession under this lease
shall not be disturbed if Tenant is not in default and so long as Tenant shall
pay all amounts due hereunder and otherwise observe and perform all provisions
of this lease. In addition, if in connection with any such loan the lender
shall request reasonable modifications of this lease as a condition to such
financing, Tenant will not unreasonably withhold, delay or defer its consent
thereof, provided that such modifications do not increase the obligations of
Tenant hereunder or materially adversely affect the leasehold interest hereby
created or Tenant's rights hereunder.
27. CERTIFICATE OF ESTOPPEL
Each party shall, within five (5) calendar days after request
therefor, execute and deliver to the other party, in recordable form, a
certificate stating that the lease is unmodified and in full force and effect,
or in full force and effect as modified and stating the modifications. The
certificate shall also state the amount of the monthly rent, the date to which
monthly rent has been paid in advance, the amount of the security deposit and/or
prepaid monthly rent, and shall include such other items as Landlord or
Landlord's lender or Tenant or Tenant's lender, as the case may be, may
reasonably request. Failure to deliver such certificate within such time shall
constitute a conclusive acknowledgment by the party failing to deliver the
certificate that the lease is in full force and effect and has not been modified
except as may be represented by the party requesting the certificate. Any such
certificate requested by Landlord may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises or Project. Further,
within five (5) calendar days following written request made by Landlord in
connection with any request by any lender, prospective lender or prospective
purchaser or encumbrancer of the Premises or the Project, Tenant shall furnish
to Landlord current financial statements of Tenant provided that such statements
are and will be held by such parties as strictly confidential and shall not be
disclosed to any other third party.
28. SALE BY LANDLORD
In the event the original Landlord hereunder, or any successor owner
of the Project or Premises, shall sell or convey the Project or Premises, all
liabilities and obligations on the part of the original Landlord, or such
successor owner, under this lease accruing thereafter shall terminate, and
thereupon all such liabilities and obligations shall be binding upon the new
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owner. Tenant agrees to attorn to such new owner and to look solely to such new
owner for performance of any and all such liabilities and obligations.
29. ATTORNMENT TO LENDER OR THIRD PARTY
In the event the interest of Landlord in the land and buildings in
which the Premises are located (whether such interest of Landlord is a fee title
interest or a leasehold interest) is encumbered by deed of trust, and such
interest is acquired by a lender or any other third party through judicial
foreclosure or by exercise of a power of sale at private trustee's foreclosure
sale, Tenant hereby agrees to release Landlord of any obligation arising on or
after any such foreclosure sale and to attorn to the purchaser at any such
foreclosure sale and to recognize such purchaser as the Landlord under this
lease.
30. DEFAULT BY LANDLORD
Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within a reasonable time, but in no event
earlier than thirty (30) days after written notice by Tenant to Landlord
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
If Landlord is in default of this lease, Tenant's sole remedy shall be
to institute suit against Landlord in a court of competent jurisdiction, and
Tenant shall have no right to offset any sums expended by Tenant as a result of
Landlord's default against future rent and other sums due and payable pursuant
to this lease. If Landlord is in default of this lease, and as a consequence
Tenant recovers a money judgment against Landlord, the judgment shall be
satisfied only out of the proceeds of sale received on execution of the judgment
and levy against the right, title and interest of Landlord in the Project of
which the Premises are a part, and out of rent or other income from such real
property receivable by Landlord or out of the consideration received by Landlord
from the sale or other disposition of all or any part of Landlord's right, title
and interest in the Project of which the Premises are a part. Neither Landlord
nor any of the partners comprising the partnership designated as Landlord shall
be personally liable for any deficiency.
31. CONSTRUCTION CHANGES
It is understood that the description of the Premises and the location
of ductwork, plumbing and other facilities therein are subject to such changes
as Landlord or Landlord's architect determines to be desirable in the course of
construction of the Premises and/or the improvements constructed or being
constructed therein, and no such changes or any changes in plans for any other
portions of the Project, shall affect this lease or entitle Tenant to any
reduction of rent hereunder or result in any liability of Landlord to Tenant,
provided that such change shall not materially reduce the square footage of the
Premises or the suitability of the Premises for Tenant's use.
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32. MEASUREMENT OF PREMISES
Tenant understands and agrees that any reference to square footage of
the Premises is approximate only and includes all interior partitions and
columns, one-half of exterior walls, and one-half of the partitions separating
the Premises from the rest of the Project, Tenant's proportionate share of the
Common Area and, if applicable, covered areas immediately outside the entry
doors or loading docks. Tenant waives any claim against Landlord regarding the
accuracy of any such measurement and agrees that there shall not be any
adjustment in basic rent or common area charges or other amounts payable
hereunder by reason of inaccuracies in such measurement.
33. ATTORNEY FEES
If either party commences an action against the other party arising
out of or in connection with this lease, the prevailing party shall be entitled
to have and recover from the losing party all expenses of litigation, including,
without limitation, travel expenses, attorney fees, expert witness fees, trial
and appellate court costs, and deposition and transcript expenses. If either
party becomes a party to any litigation concerning this lease, or concerning the
Premises or the Project, by reason of any act or omission of the other party or
its authorized representatives, the party that causes the other party to become
involved in the litigation shall be liable to the other party for all expenses
of litigation, including, without limitation, travel expenses, attorney fees,
expert witness fees, trial and appellate court costs, and deposition and
transcript expenses.
34. SURRENDER
The voluntary or other surrender of this lease or the Premises by
Tenant, or a mutual cancellation of this lease, shall not work a merger, and at
the option of Landlord shall either terminate all or any existing subleases or
subtenancies or operate as an assignment to Landlord of all or any such
subleases or subtenancies.
35. WAIVER
No delay or omission in the exercise of any right or remedy of
Landlord on any default by Tenant shall impair such right or remedy or be
construed as a waiver. The receipt and acceptance by Landlord of delinquent
rent or other payments shall not constitute a waiver of any other default and
acceptance of partial payments shall not be construed as a waiver of the balance
of such payment due. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute an
acceptance of the surrender of the Premises by Tenant before the expiration of
the term. Only a written notice from Landlord to Tenant shall constitute
acceptance of the surrender of the Premises and accomplish a termination of this
lease. Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of this
lease.
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36. EASEMENTS; AIRSPACE RIGHTS
Landlord reserves the right to alter the boundaries of the Project and
grant easements and dedicate for public use portions of the Project without
Tenant's consent, provided that no such grant or dedication shall interfere with
Tenant's use of the Premises or otherwise cause Tenant to incur cost or expense.
From time to time, and upon Landlord's demand, Tenant shall execute, acknowledge
and deliver to Landlord, in accordance with Landlord's instructions, any and all
documents, instruments, maps or plats necessary to effectuate Tenant's covenants
hereunder.
This lease confers no rights either with regard to the subsurface of
or airspace above the land on which the Project is located or with regard to
airspace above the building of which the Premises are a part. Tenant agrees
that no diminution or shutting off of light or view by a structure which is or
may be erected (whether or not by Landlord) on property adjacent to the building
of which the Premises are a part or to property adjacent thereto, shall in any
way affect this lease, or entitle Tenant to any reduction of rent, or result in
any liability of Landlord to Tenant.
37. RULES AND REGULATIONS
Landlord shall have the right from time to time to promulgate rules
and regulations for the safety, care and cleanliness of the Premises, the
Project and the Common Area, or for the preservation of good order. On delivery
of a copy of such rules and regulations to Tenant, Tenant shall comply with the
rules and regulations, and a violation of any of them shall constitute a default
by Tenant under this lease. If there is a conflict between the rules and
regulations and any of the provisions of this lease, the provisions of this
lease shall prevail. Such rules and regulations may be amended by Landlord from
time to time with or without advance notice.
38. NOTICES
All notices, demands, requests, consents and other communications
which may be given or are required to be given by either party to the other
shall be in writing and shall be sufficiently made and delivered if personally
served or if sent by United States first class mail, postage prepaid. Prior to
the commencement date, all such communications from Landlord to Tenant shall be
served or addressed to Tenant at 10690 Castine Avenue, Cupertino, California
95014; on or after the commencement date all such communications from Landlord
to Tenant shall be addressed to Tenant at the Premises. All such communications
by Tenant to Landlord shall be sent to Landlord at its offices at 3945 Freedom
Circle, Suite 640, Santa Clara, California 95054. Either party may change its
address by notifying the other of such change. Each such communication shall be
deemed received on the date of the personal service or mailing thereof in the
manner herein provided, as the case may be.
39. NAME
Tenant shall not use the name of the Project for any purpose, other
than as the address of the business conducted by Tenant in the Premises, without
the prior written consent of Landlord.
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40. GOVERNING LAW; SEVERABILITY
This lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of this
lease shall be held or rendered invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full force
and effect.
41. DEFINITIONS
As used in this lease, the following words and phrases shall have the
following meanings:
Authorized representative: any officer, agent, employee or
-------------------------
independent contractor retained or employed by either party, acting within
authority given him by that party.
Encumbrance: any deed of trust, mortgage or other written security
-----------
device or agreement affecting the Premises or the Project that constitutes
security for the payment of a debt or performance of an obligation, and the note
or obligation secured by such deed of trust, mortgage or other written security
device or agreement.
Lease month: the period of time determined by reference to the day of
-----------
the month in which the term commences and continuing to one day short of the
same numbered day in the next succeeding month; e.g., the tenth day Of one month
to and including the ninth day in the next succeeding month.
Lender: the beneficiary, mortgagee or other holder of an encumbrance,
------
as defined above.
Lien: a charge imposed on the Premises by someone other than Landlord,
----
by which the Premises are made security for the performance of an act. Most of
the liens referred to in this lease are mechanic's liens.
Maintenance: repairs, replacement, repainting and cleaning.
-----------
Monthly Rent: the sum of the monthly payments of basic rent and
------------
common area charges.
Person: one or more human beings, or legal entities or other
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artificial persons, including, without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human being and legal
entities.
Provision: any term, agreement, covenant, condition, clause,
---------
qualification, restriction, reservation or other stipulation in the lease that
defines or otherwise controls, establishes or limits the performance required or
permitted by either party.
Rent: basic rent, common area charges, additional rent, and all other
----
amounts payable by Tenant to Landlord required by this lease or arising by
subsequent actions of the parties made pursuant to this lease.
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Words used in any gender include other genders. If there be more than
one Tenant, the obligations of Tenant hereunder are joint and several. All
provisions whether covenants or conditions, on the part of Tenant shall be
deemed to be both covenants and conditions. The paragraph headings are for
convenience of reference only and shall have no effect upon the construction or
interpretation of any provision hereof.
42. TIME
Time is of the essence of this lease and of each and all of its
provisions.
43. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
Any amount due from Tenant to Landlord hereunder which is not paid
within five (5) days of when due shall bear interest at the rate of ten percent
(10%) per annum from when due until paid, unless otherwise specifically provided
herein, but the payment of such interest shall not excuse or cure any default by
Tenant under this lease. In addition, Tenant acknowledges that late payment by
Tenant to Landlord of basic rent or common area charges or of any other amount
due Landlord from Tenant, will cause Landlord to incur costs not contemplated by
this lease, the exact amount of such costs being extremely difficult and
impractical to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord, e.g., by
the terms of any encumbrance and note secured by any encumbrance covering the
Premises. Therefore, if any such payment due from Tenant is not received by
Landlord within five (5) days of when due, Tenant shall pay to Landlord an
additional sum of five percent (5%) of the overdue payment as a late charge.
The parties agree that this late charge represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's
default with respect to the overdue amount, nor prevent Landlord from exercising
any of the other rights and remedies available to Landlord. No notice to Tenant
of failure to pay shall be required prior to the imposition of such interest
and/or late charge, and any notice period provided for in paragraph 20 shall not
affect the imposition of such interest and/or late charge. Any interest and
late charge imposed pursuant to this paragraph shall be and constitute
additional rent payable by Tenant to Landlord.
44. ENTIRE AGREEMENT
This lease, including any exhibits and attachments, constitutes the
entire agreement between Landlord and Tenant relative to the Premises and this
lease and the exhibits and attachments may be altered, amended or revoked only
by an instrument in writing signed by both Landlord and Tenant. Landlord and
Tenant agree hereby that all prior or contemporaneous oral agreements between
and among themselves or their agents or representatives relative to the leasing
of the Premises are merged in or revoked by this lease.
45. CORPORATE AUTHORITY
If Tenant is a corporation, each individual executing this lease on
behalf of the corporation represents and warrants that he is duly authorized to
execute and deliver this lease on behalf of the corporation in accordance with a
duly adopted resolution of the Board of Directors of said corporation and that
this lease is binding upon said corporation in accordance with its
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terms. If Tenant is a corporation, Tenant shall deliver to Landlord, within ten
(10) days of the execution of this lease, a copy of the resolution of the Board
of Directors of Tenant authorizing the execution of this lease and naming the
officers that are authorized to execute this lease on behalf of Tenant, which
copy shall be certified by Tenant's president or secretary as correct and in
full force and effect.
46. RECORDING
Neither Landlord nor Tenant shall record this lease or a short form
memorandum hereof without the consent of the other.
47. REAL ESTATE BROKERS
Each party represents and warrants to the other party that it has not
had dealings in any manner with any real estate broker, finder or other person
with respect to the Premises and the negotiation and execution of this lease
except Wayne Mascia Associates. Except as to commissions and fees to be paid as
provided in this paragraph, each party shall indemnify and hold harmless the
other party from all damage, loss, liability and expense (including attorneys'
fees and related costs) arising out of or resulting from any claims for
commissions or fees that may or have been asserted against the other party by
any broker, finder or other person with whom Tenant or Landlord has or
purportedly has dealt with in connection with the Premises and the negotiation
and execution of this lease. To the extent agreed to between Landlord and Wayne
Mascia Associates, Landlord shall pay all broker leasing commissions to Wayne
Mascia Associates incurred in connection with the Premises and the negotiation
and execution of this lease; Landlord and Tenant agree that Landlord shall not
be obligated to pay any broker leasing commissions, consulting fees, finder fees
or any other fees or commissions arising out of or relating to any extended term
of this lease or to any expansion or relocation of the Premises at any time.
48. EXHIBITS AND ATTACHMENTS
All exhibits and attachments to this lease are a part hereof
49. ENVIRONMENTAL MATTERS
A. Tenant's Covenants Regarding Hazardous Materials.
------------------------------------------------
(1) Hazardous Materials Handling. Tenant, its agents, invitees,
----------------------------
employees, contractors, sublessees, assigns and/or successors shall not use,
store, dispose, release or otherwise cause to be present or permit the use,
storage, disposal, release or presence of Hazardous Materials (as defined below)
on or about the Premises or Project. As used herein "Hazardous Materials" shall
mean any petroleum or petroleum byproducts, flammable explosives, asbestos, urea
formaldehyde, radioactive materials or waste and any "hazardous substance",
"hazardous waste", "hazardous materials", "toxic substance" or "toxic waste" as
those terms are defined under the provisions of the California Health and Safety
Code and/or the provisions of the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), as amended by
the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. Section 9601
et seq.), or any other hazardous or toxic
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substance, material or waste which is or becomes regulated by any local
governmental authority, the State of California or any agency thereof, or the
United States Government or any agency thereof.
(2) Notices. Tenant shall immediately notify Landlord in
-------
writing of: (i) any enforcement, cleanup, removal or other governmental or
regulatory action instituted, completed or threatened pursuant to any law,
regulation or ordinance relating to the industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, presence,
disposal or transportation of any Hazardous Materials (collectively "Hazardous
Materials Laws"); (ii) any claim made or threatened by any person against
Tenant, the Premises, Project or buildings within the Project relating to
damage, contribution, cost recovery, compensation, loss or injury resulting from
or claimed to result from any Hazardous Materials; and (iii) any reports made to
any environmental agency arising out of or in connection with any Hazardous
Materials in, on or removed from the Premises, Project or buildings within the
Project, including any complaints, notices, warnings, reports or asserted
violations in connection therewith. Tenant shall also supply to Landlord as
promptly as possible, and in any event within five (5) business days after
Tenant first receives or sends the same, with copies of all claims, reports,
complaints, notices, warnings or asserted violations relating in any way to the
Premises, Project or buildings within the Project or Tenant's use thereof.
Tenant shall promptly deliver to Landlord copies of hazardous waste manifests
reflecting the legal and proper disposal of all Hazardous Materials removed from
the Premises.
B. Indemnification of Landlord. Tenant shall indemnify, defend (by
---------------------------
counsel acceptable to Landlord), protect, and hold Landlord, and each of
Landlord's partners, employees, agents, attorneys, successors and assigns, free
and harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees) for death of or
injury to any person or damage to any property whatsoever (including water
tables and atmosphere), arising from or caused in whole or in part, directly or
indirectly, by (i) the presence in, on, under or about the Premises, Project or
buildings within the Project or discharge in or from the Premises, Project or
buildings within the Project of any Hazardous Materials or Tenant's use,
analysis, storage, transportation, disposal, release, threatened release,
discharge or generation of Hazardous Materials to, in, on, under, about or from
the Premises, Project or buildings within the Project, or (ii) Tenant's failure
to comply with any Hazardous Materials Laws whether knowingly, unknowingly,
intentionally or unintentionally. Tenant's obligations hereunder shall include,
without limitation, and whether foreseeable or unforeseeable, all costs of any
required or necessary repair, cleanup or detoxification or decontamination of
the Premises, Project or buildings within the Project, and the preparation and
implementation of any closure remedial action or other required plans in
connection therewith. In addition, Tenant shall reimburse Landlord for (i)
losses in or reductions to rental income resulting from Tenant's use, storage or
disposal of Hazardous Materials, (ii) all costs of refitting or other
alterations to the Premises, Project or buildings within the Project required as
a result of Tenant's use, storage, or disposal of Hazardous Materials including,
without limitation, alterations required to accommodate an alternate use of the
Premises, Project or buildings within the Project, and (iii) any diminution in
the fair market value of the Premises, Project or buildings within the Project
caused by Tenant's use, storage, or disposal of Hazardous Materials. For
purposes of this paragraph 49, any acts or omissions of Tenant, or by employees,
agents, assignees, contractors or
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subcontractors of Tenant or others acting for or on behalf of Tenant (whether or
not they are negligent, intentional, willful or unlawful) shall be strictly
attributable to Tenant.
C. Survival. The provisions of this paragraph 49 shall survive the
--------
expiration or earlier termination of the term of this lease.
50. SIGNAGE
Tenant shall not, without obtaining the prior written consent of
Landlord, install or attach any sign or advertising material on any part of the
outside of the Premises, or on any part of the inside of the Premises which is
visible from the outside of the Premises, or in the halls, lobbies, windows or
elevators of the building in which the Premises are located or on or about any
other portion of the Common Area or Project. If Landlord consents to the
installation of any sign or other advertising material, the location, size,
design, color and other physical aspects thereof shall be subject to Landlord's
prior written approval and shall be in accordance with any sign program
applicable to the Project. Subject to the terms of this paragraph 50, Tenant
shall be permitted to use the existing monument sign base for Tenant's signage.
In addition to any other requirements of this paragraph 50, the installation of
any sign or other advertising material by or for Tenant must comply with all
applicable laws, statutes, requirements, rules, ordinances and any C.C. & R.'s
or other similar requirements. With respect to any permitted sign installed by
or for Tenant, Tenant shall maintain such sign or other advertising material in
good condition and repair and shall remove such sign or other advertising
material on the expiration or earlier termination of the term of this lease.
The cost of any permitted sign or advertising material and all costs associated
with the installation, maintenance and removal thereof shall be paid for solely
by Tenant. If Tenant fails to properly maintain or remove any permitted sign or
other advertising material, Landlord may do so at Tenant's expense. Any cost
incurred by Landlord in connection with such maintenance or removal shall be
deemed additional rent and shall be paid by Tenant to Landlord within ten (10)
days following notice from Landlord. Landlord may remove any unpermitted sign
or advertising material without notice to Tenant and the cost of such removal
shall be additional rent and shall be paid by Tenant within ten (10) days
following notice from Landlord. Landlord shall not be liable to Tenant for any
damage, loss or expense resulting from Landlord's removal of any sign or
advertising material in accordance with this paragraph 50. The provisions of
this paragraph 50 shall survive the expiration or earlier termination of this
lease.
51. SUBMISSION OF LEASE
The submission of this lease to Tenant for examination or signature by
Tenant is not an offer to lease the Premises to Tenant, nor an agreement by
Landlord to reserve the Premises for Tenant. Landlord will not be bound to
Tenant until this lease has been duly executed and delivered by both Landlord
and Tenant.
52. TENANT IMPROVEMENTS
Improvements to the Premises shall be constructed and installed in
accordance with the plans and specifications, and other terms and conditions,
set forth in Exhibit C to this lease, the contents of which is incorporated
herein and made a part hereof by this reference. The
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improvements shall be constructed and installed at the expense of Landlord
and/or Tenant as set forth in Exhibit C to this lease and in each case shall be
performed in a diligent and workmanlike manner.
53. ADDITIONAL RENT
All costs, charges, fees, penalties, interest and any other payments
(including Tenant's reimbursement to Landlord of costs incurred by Landlord)
which Tenant is required to make to Landlord pursuant to the terms and
conditions of this lease and any amendments to this lease shall be and
constitute additional rent payable by Tenant to Landlord when due as specified
in this lease and any amendments to this lease.
54. LANDLORD'S OPTION TO RELOCATE PREMISES
[INTENTIONALLY OMITTED.]
55. OPTION TO EXTEND TERM
Landlord grants to Tenant the option to extend the term for one period
of two (2) years (the "Extended Term") following the expiration of the initial
term set forth in paragraph 2 ("Initial Term") under all the provisions of this
lease except for the amount of the basic rent. The basic rent for the Extended
Term shall be adjusted to ninety-five percent (95%) of the then market rate (as
defined in paragraph (c) below); provided that in no event shall the basic rent
for the Extended Term be less than the basic rent in effect at the expiration of
the Initial Term. This option is further subject to the following terms and
conditions:
(a) Tenant must deliver its irrevocable written notice of Tenant's
exercise of this option to Landlord not less than six (6) lease months, nor more
than twelve (12) lease months, prior to the expiration of the Initial Term. Time
is of the essence with respect to the time period during which Tenant must
deliver to Landlord its written notice of exercise and, therefore, if Tenant
fails to give Landlord its irrevocable written notice of its exercise of this
option within the time period provided above then this option shall expire and
be of no further force or effect.
(b) The parties shall have thirty (30) days from the date Landlord
received Tenant's notice of exercise in which to agree on the amount
constituting the market rate. If Landlord and Tenant agree on the amount of the
market rate, they shall immediately execute an amendment to this lease setting
forth the expiration date of the Extended Term and the amount of the basic rent
to be paid by Tenant during the Extended Term. If Landlord and Tenant are unable
to agree on the amount of the market rate within such time period, then, at the
request of either party, the market rate shall be determined in the following
manner: (i) within thirty (30) days of the request of either party, Landlord and
Tenant shall each select a licensed real estate broker with not less than five
(5) years experience in the business of commercial leasing of property of the
same type and use and in the same geographic area, as the Premises; (ii) within
fifteen (15) days of their appointment, such two real estate brokers shall
select a third broker who is similarly qualified; (iii) within thirty (30) days
from the appointment of the third broker, the three brokers so selected shall,
acting as a board of arbitrators, then determine the amount of the market rate,
basing their determination on standard procedures and tests normally employed in
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determining market rates and applying the factors included within the definition
of market rate set forth in subparagraph (c) below. The decision of the
majority of said brokers shall be final and binding upon the parties hereto. If
a majority of the brokers are unable to agree on the market rate within the
stipulated period of time, the three opinions of the market rate shall be added
together and their total divided by three; the resulting quotient shall be the
market rate. If, however, the low opinion and/or the high opinion are/is more
than 15% lower and/or higher than the middle opinion, the low opinion and/or the
high opinion, as the case may be, shall be disregarded. If only one opinion is
disregarded, the remaining two opinions shall be added together and their total
divided by two and the resulting quotient shall be the market rate. If both the
low opinion and the high opinion are disregarded as stated in this paragraph,
the middle opinion shall be the market rate. If a party does not appoint a
qualified broker within the required time period, the broker appointed by the
other party shall be the sole broker and shall determine the market rate. If
the two brokers appointed by the parties are unable to agree on the third
broker, either of the parties to the lease, by giving ten (10) days' notice to
the other party, can apply to the then president of the county real estate board
of the county in which the Premises are located, or to the presiding judge of
the superior court of that county, for the selection of a third broker who meets
the qualifications stated in this paragraph. Each party shall pay the expenses
and charges of the broker appointed by it and the parties shall pay the expenses
and charges of the third broker in equal shares. When the market rate has been
so determined, Landlord and Tenant shall immediately execute an amendment to
this lease stating the basic rent for the Extended Term.
(c) As used herein, the "market rate" shall be the monthly rent
(triple net) then obtained for two (2) year fixed rate leases of comparable
terms for premises in the Project and in buildings and/or projects within the
same geographical area of similar types and identity, quality and location as
the Project.
(d) Common area charges shall continue to be determined and payable
as provided in paragraph 16 of this lease.
(e) Tenant shall not assign or otherwise transfer this option or any
interest therein and any attempt to do so shall render this option null and
void. Tenant shall have no right to extend the term beyond the Extended Term.
If Tenant is in default under this lease at the date of delivery of Tenant's
notice of exercise to Landlord, then such notice shall be of no effect and this
lease shall expire at the end of the Initial Term; if Tenant is in default under
this lease on the last day of the Initial Term, then Landlord may in its sole
discretion elect to have Tenant's exercise of this option be of no effect, in
which case this lease shall expire at the end of the Initial Term.
56. RIGHT OF FIRST REFUSAL ON EXPANSION SPACE
Landlord hereby grants to Tenant a right of first refusal on that
certain space located at 462 Oakmead Parkway, Sunnyvale, California consisting
of approximately six thousand two hundred fifty (6,250) square feet, as outlined
in blue on Exhibit D (the "Expansion Space"), subject to the following terms and
conditions:
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<PAGE>
(a) This first right of refusal shall only be effective during the
Initial Term of this lease to Tenant. Upon Landlord's receipt of any lease
proposal/offer to lease the Expansion Space from any third party ("Third Party
Offer") which is acceptable to Landlord, Landlord, prior to entering into a
lease with such third party, shall provide Tenant with written notice
("Landlord's Notice") of the terms and conditions of the Third Party Offer (the
"Offer").
(b) Tenant shall have five (5) business days from receipt of
Landlord's Notice to deliver to Landlord its written unconditional and
irrevocable acceptance of the Offer. If Tenant accepts the Offer, an amendment
to this lease or a new lease covering the Expansion Space and incorporating said
terms and conditions shall promptly be executed. If a new lease is executed with
Tenant covering the Expansion Space such new lease shall provide that any
default under this lease will also constitute a default under such new lease and
Tenant agrees that any default by it under such new lease will also constitute a
default under this lease. In the event Tenant rejects the Offer, or does not
answer within the specified time, or fails for any reason (unless such failure
is due to the fault or delay of Landlord) to execute such amendment or new lease
within thirty (30) days of Tenant's acceptance of the Offer, Landlord shall
thereafter be released from any further obligation with respect to the Offer and
be free to negotiate with said third party making the Third Party Offer and to
lease to such third party (without further obligation to Tenant) the Expansion
Space or any portion thereof upon any terms and conditions substantially similar
to those contained in the Offer.
(c) This first right to lease shall be subordinate to any existing
rights of refusal, rights of expansion, options to extend or renew, and other
rights contained in leases (or amendments to leases) executed prior to the date
of this lease. In addition, this first right to lease shall not apply and Tenant
shall have no rights hereunder in the event any tenant (or its successors or
assigns) that now or hereafter occupies all or any portion of the Expansion
Space desires to extend, renew or otherwise modify its lease or desires to
expand its premises to include any portion of the Expansion Space, and Landlord
shall be free to extend, renew or modify such lease or amend such lease to add
any portion of the Expansion Space without notice to Tenant.
(d) This first right to lease shall be void and of no force and
effect and shall confer no rights on Tenant during any period in which Tenant is
in default under this lease.
(e) Notwithstanding anything in this paragraph to the contrary,
Tenant's exercise of this first right to lease shall be subject to Landlord's
review and approval of Tenant's financial condition (including, without
limitation, Tenant's net worth, current ratio and working capital reserves) at
the time Tenant exercises this first right to lease and notwithstanding Tenant's
rights hereunder Landlord shall have no obligation to lease the Expansion Space
to Tenant unless Tenant's financial condition at the time of acceptance of the
Offer is equal to or better than as shown on the financial statements dated
December 31, 1993, previously provided to Landlord by Tenant. Landlord agrees
that all information regarding Tenant's financial condition, provided pursuant
to this paragraph 56(e) and paragraph 57(e), shall be held by Landlord as
strictly confidential, and shall not be disclosed by Landlord to any third party
for any purpose whatsoever.
(f) All rights granted to Tenant pursuant to this paragraph are
personal to Tenant and may not be transferred or assigned. If Landlord transfers
its ownership interest in the
33
<PAGE>
Premises or Project, this first right to lease shall be binding on the
transferee of Landlord's interest.
57. FIRST RIGHT TO LEASE RFR SPACE
Landlord hereby grants to Tenant the first right to lease that certain
space located at 464 Oakmead Parkway, Sunnyvale, California consisting of
approximately thirteen thousand nine hundred fifty-nine (13,959) square feet, as
outlined in blue on Exhibit E (the "RFR Space"), subject to the following terms
and conditions:
(a) This first right to lease shall only be effective during the
Initial Term of this lease to Tenant. Upon notice from Landlord that the RFR
Space will be available for lease within six '(6) months from the date of such
notice, Landlord shall notify Tenant in writing of such availability and such
notice shall set forth the terms and conditions, including, but not limited to,
basic rent, under which Landlord will lease the RFR Space to Tenant ("Offer").
(b) Tenant shall have five (5) business days from receipt of the
notice to deliver to Landlord its written unconditional and irrevocable
acceptance of the Offer. If Tenant accepts the Offer, an amendment to this lease
or a new lease covering the RFR Space and incorporating said terms and
conditions shall promptly be executed. If a new lease is executed with Tenant
covering the RFR Space such new lease shall provide that any default under this
lease will also constitute a default under such new lease and Tenant agrees that
any default by it under such new lease will also constitute a default under this
lease. In the event Tenant rejects the Offer, or does not answer within the
specified time, or fails for any reason (unless such failure is due to the fault
or delay of Landlord) to execute such amendment or new lease within thirty (30)
days of Tenant's acceptance of the Offer, Landlord shall thereafter be released
from any further obligation with respect to the Offer and be free to negotiate
with any number of third parties and to lease (without further obligation to
Tenant) the RFR Space or any portion thereof upon any terms and conditions.
(c) This second right to lease shall be subordinate to any existing
rights of refusal, rights of expansion, options to extend or renew, and other
rights contained in leases (or amendments to leases) executed prior to the date
of this lease. In addition, this second right to lease shall not apply and
Tenant shall have no rights hereunder in the event any tenant (or its successors
or assigns) that now or hereafter occupies all or any portion of the RFR Space
desires to extend, renew or otherwise modify its lease or desires to expand its
premises to include any portion of the RFR Space, and Landlord shall be free to
extend, renew or modify such lease or amend such lease to add any portion of the
RFR Space without notice to Tenant.
(d) This second right to lease shall be void and of no force and
effect and shall confer no rights on Tenant during any period in which Tenant is
in default under this lease.
(e) Notwithstanding anything in this paragraph to the contrary,
Tenant's exercise of this second right to lease shall be subject to Landlord's
review and approval of Tenant's financial condition (including, without
limitation, Tenant's net worth, current ratio and working capital reserves) at
the time Tenant exercises this second right to lease and notwithstanding
Tenant's rights hereunder Landlord shall have no obligation to lease the RFR
34
<PAGE>
Space to Tenant unless Tenant's financial condition at the time of acceptance of
the Offer is equal to or better than as shown on the financial statements dated
December 31, 1993, previously provided to Landlord by Tenant.
(f) All rights granted to Tenant pursuant to this paragraph are
personal to Tenant and may not be transferred or assigned. If Landlord transfers
its ownership interest in the Premises or Project, this second right to lease
shall be binding on the transferee of Landlord's interest.
58. OPTION TO TERMINATE
Tenant shall have the option to cancel and terminate this lease
effective on the last day of the twenty-fourth (24th) lease month of the initial
three (3) year lease term ("Termination Date") subject to the following terms
and conditions:
(a) Tenant must give Landlord its irrevocable written notice of
Tenant's election to terminate no later than by the last day of the twenty-first
(21st) lease month of the initial three (3) year lease term;
(b) Concurrently with delivery of Tenant's notice of election to
terminate, Tenant shall pay to Landlord, the sum of Eleven Thousand Four Hundred
Twenty-One and 00/100 Dollars ($11,421.00).
(c) If Tenant fails to strictly comply with the terms of paragraph
58(a) and (b) above, this option to terminate shall automatically expire and be
of no further force or effect.
59. REDUCED RENT
As consideration for Tenant's performance of all obligations to be
performed by Tenant under this lease and notwithstanding the provisions of
paragraph 4(a) of this lease, Landlord hereby conditionally excuses Tenant from
the payment of basic rent for the first two (2) lease months of the term of this
lease; provided, however, Tenant does not commit a default hereunder at any time
during the term of this lease, which default continues beyond the expiration of
any applicable cure period. Should Tenant at any time during the term be in
default hereunder beyond the expiration of any applicable cure periods, then the
total sum of such basic rent so conditionally excused shall become immediately
due and payable by Tenant to Landlord. If at the expiration of the term of this
lease Tenant has not committed a default hereunder, which has continued beyond
the expiration of any applicable cure periods, Landlord shall waive any payment
of basic rent so conditionally excused. Landlord and Tenant agree that no
portion of the basic rent paid by Tenant during the portion of the term of this
lease occurring after the expiration of any period during which such rent was
abated shall be allocated, for income tax purposes, by Landlord or Tenant to
such rent abatement period, nor is such rent intended by the parties to be
allocable, for income tax purposes, to any abatement period.
35
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
lease on the date first above written.
Landlord: Tenant:
- -------- ------
CALIFORNIA FIRST, LTD., ELECTRONICS PUBLISHING
a Florida limited partnership RESOURCES, INC.,
a Delaware corporation
By: McCandless Partnership, a By:___________________________________
California general partnership, (Signature)
a General Partner
___________________________________
(Printed Name)
By: _______________________________
Birk S. McCandless, as ___________________________________
Trustee under the Birk S. (Title)
McCandless and Mary McCandless
Inter Vivos Trust Agreement ___________________________________
dated February 17, 1982, a (Date)
General Partner
36
<PAGE>
EXHIBIT A
Exhibit A is a map of the property located at 460 Oakmead Parkway, Sunnyvale,
California, which graphically depicts the floorplan of the Registrant's leased
space. The floorplan consists of sixty two rooms. Fourteen of the rooms are
labeled as follows: "Open Office," "Stor.," "Lunch Room," "Comp. Room," "File
Room," "Stor," "Phone Room," "Storage," "Conference Room," "Conference Room,"
"Copy Room," "Conference Room," "Lobby" and "Lunch Room."
<PAGE>
EXHIBIT B
Exhibit B is an architectural plan for 460-464 Oakmead Parkway, Sunnyvale,
California.
<PAGE>
WORK LETTER AGREEMENT
EXISTING SPACE - TURNKEY
CONSTRUCTION EXHIBIT C
- --------------------------------------------------------------------------------
THIS WORK LETTER AGREEMENT (hereinafter "Exhibit C") is attached to
and forms a part of that certain lease ("Lease") by and between CALIFORNIA
FIRST, LTD., a Florida limited partnership ("Landlord"), and ELECTRONIC
PUBLISHING RESOURCES, INC., a Delaware corporation ("Tenant"), pursuant to which
Landlord leases to Tenant those certain premises located at 460 Oakmead Parkway,
Sunnyvale, California and consisting of approximately nine thousand one hundred
fifty-nine (9,159) square feet ("Premises"). All capitalized terms used herein
shall have the meaning ascribed to them in the Lease unless otherwise defined
below. The Premises shall be improved in accordance with the following:
1. Existing Improvements:
---------------------
Tenant accepts the Premises in their existing condition and the
improvements constructed therewith, and Tenant hereby approves the same as
installed, subject only to such changes as may subsequently be agreed upon by
Landlord and Tenant. Such improvements are hereafter called "Existing
Improvements".
2. Tenant Improvements:
-------------------
As used herein, "Tenant Improvements" shall include those items and
specifications shown on the Final Construction Drawings prepared in accordance
with paragraph 3 below, including those specifications (as appropriate) set
forth and described in Exhibit C-1, attached hereto, exclusive of Existing
Improvements. Landlord shall construct Tenant Improvements in accordance with
the Final Construction Drawings, Exhibit C-1 and the provisions of this Exhibit
C. Unless otherwise specifically agreed to by Landlord in writing, the
installation, wiring, maintenance and removal of furniture partition systems,
telephone and other communication systems, data cabling, alarm and/or security
systems and any other systems not specifically set forth on the Final
Construction Drawings, and all cost and expense associated therewith, shall be
the sole responsibility of Tenant, and Tenant shall be entitled to enter the
Premises prior to the commencement of the lease term only for the purpose of
installing said systems; provided that Tenant cooperates with and coordinates
its work with Landlord's General Contractor and Tenant's work shall not
interfere with construction of the Tenant Improvements by Landlord's General
Contractor. In connection with the construction and installation of the Tenant
Improvements, Landlord or Landlord's general contractor shall have no obligation
to move any of Tenant's property located in or about the Premises including, but
not limited to, furniture, inventory and trade fixtures, at the time of such
construction and installation. If at the time of construction and installation
of the Tenant Improvements Tenant has property located in or about the Premises
that inhibits or prevents in any way the construction and installation of the
Tenant Improvements, Tenant shall immediately, upon receipt of notification
therefore from Landlord or Landlord's general contractor, at Tenant's sole cost
and expense, move such property to another location within the Premises or, upon
receipt of Landlord's prior approval, to another location within the Project
designated by Landlord in Landlord's sole discretion;
1
<PAGE>
Tenant's failure to immediately move such property upon receipt of notification
therefore from Landlord or Landlord's general contractor shall be deemed a
Tenant caused delay subject to the provisions of paragraph 6 of this Exhibit C.
If at the time of construction and installation of the Tenant Improvements
Tenant has property located in or about the Premises, Landlord and Landlord's
general contractor shall incur no liability to Tenant or any other party in the
event such property is damaged, destroyed or stolen during the construction and
installation of the Tenant Improvements.
3. Tenant Improvement Design Schedule:
----------------------------------
The plans and specifications for the Tenant Improvements and any other
improvements shall be completed in accordance with the following:
(a) Tenant shall approve preliminary floor plan layouts ("Preliminary
Floor Plans") prepared by Landlord by Completed. The Preliminary Floor Plans
shall show all walls, doors, and other Tenant Improvements as desired by Tenant
in sufficient detail for Landlord's architect to prepare architectural
construction drawings and related documents "Architectural Construction
Documents").
(b) Between Completed and Completed, Landlord's architect and
Tenant's representative shall meet as needed to review and complete the final
details related to the Preliminary Floor Plans, so that on Completed, 1994 the
Architectural Construction Documents are subject only to minor changes.
(c) No later than Completed, Tenant shall have made the decisions
required and supplied to Landlord the information necessary for Landlord's
architect to complete the Architectural Construction Documents in enough detail
for Landlord's general contractor to bid the work, select subcontractors and to
proceed toward the design of electrical, mechanical and any other requirements
not included on the Architectural Construction Documents. Upon Landlord's
general contractor's selection of subcontractors, Landlord's general contractor
and subcontractors shall prepare design specifications outlining in reasonable
detail electrical, mechanical and any other requirements not included on the
Architectural Construction Documents ("Electrical and Mechanical Drawings").
(d) Upon completion of the Architectural Construction Documents,
Tenant shall approve the same subject to changes, deletions or additions as
provided in paragraphs 4 and 5 of this Exhibit C.
(e) Upon completion of the Electrical and Mechanical Drawings,
Landlord or Landlord's general contractor shall submit the Architectural
Construction Documents and Electrical and Mechanical Drawings (collectively the
"City Ready Plans") to the City to obtain a building permit.
(f) Tenant shall have decided upon color and material specifications
by April 7, 1994.
2
<PAGE>
(g) As used herein, "Final Construction Drawings" shall include the
City Ready Plans, as approved by the City, and any subsequent additions,
deletions or changes to the Tenant Improvements permitted or required pursuant
to paragraphs 4 and 5 of this Exhibit C.
4. Changes by Tenant:
-----------------
Tenant may request changes, deletions or additions to the Tenant
Improvements; provided, however, that the effectiveness of any such requested
change, deletion or addition shall be subject to written approval by an
authorized representative of Landlord and to obtaining any required governmental
permits or other approvals. If any such change, deletion or addition increases
the cost of construction and installation of the Tenant Improvements, Tenant
shall immediately pay to Landlord the full amount of such increase in the cost
of construction and installation of the Tenant Improvements. In no event shall
work on any change, deletion or addition requested pursuant to this paragraph 4
commence prior to (i) Landlord and Tenant approving, in writing, such change,
deletion or addition, and (ii) Landlord's receipt from Tenant of payment of the
full amount of the increase in the cost of construction and installation of the
Tenant Improvements.
5. Changes by Authority:
--------------------
Landlord agrees that if any change, deletion or addition to any of the
improvements proposed to be constructed or installed is required by any
governmental authority in connection with obtaining any governmental permit or
approval, or otherwise, then such change, deletion or addition shall promptly be
made at Landlord's expense.
6. Delays Caused by Tenant:
-----------------------
If the commencement of the term is delayed due in any respect to
Tenant's failure to meet the schedule set forth in paragraph 3 above, or due to
construction delays related to any changes required by Tenant, or due to any
other failures by Tenant to perform its obligations under this Exhibit C or
otherwise under the Lease, then any such delays shall be deemed Tenant caused
delays for purposes of determining the commencement date of the Lease pursuant
to paragraph 2(b) of the Lease.
7. Punch List:
----------
Within ten (10) business days after commencement of the term, Tenant
shall deliver to Landlord a list of items ("Punch List") that Tenant believes
Landlord should complete or correct in order for the Premises to be acceptable.
Landlord shall commence to complete or correct the items as soon as possible,
except those items that Landlord reasonably contends are not justified. If
Tenant does not deliver the Punch List to Landlord within the ten (10) day
period, Tenant shall be deemed to have accepted the Premises and approved the
construction. Nothing in this paragraph 7 shall delay the commencement of the
term or Tenant's obligation to pay rent or to make other payments due Landlord
under the Lease.
3
<PAGE>
8. Landlord's Responsibility:
-------------------------
Landlord, at Landlord's sole cost and expense, shall, prior to
September 30, 1994, install a new roof on the building in which the Premises is
located and strip, repair and seal the parking lot. Landlord hereby warrants
that the new roof on the building in which the Premises are located shall be
free from defects for a period of twelve (12) months following completion
thereof. Landlord, at Landlord's cost, shall be responsible for any required
code upgrades (including seismic reinforcements) to the Premises which are
required to be made by governmental authority, and all alterations required
pursuant to the Americans With Disabilities Act or CFR Title 24, which are not
caused by or the result of Tenant's specific use or alteration of the Premises.
9. Attachments:
-----------
All references in the Lease to Exhibit C shall be deemed to also
include Exhibits C-1 and C-________.
4
<PAGE>
EXHIBIT D
Exhibit D is a graphical depiction of the space located at 462 Oakmead Parkway,
Sunnyvale, California consisting of approximately six thousand two hundred and
fifty square feet. The depiction consists of three connected areas, labeled
"#460," "#462" and "#464." The area labeled "#462" is captioned "Expansion
Space."
<PAGE>
EXHIBIT E
Exhibit E is a graphical depiction of the space located at 464 Oakmead Parkway,
Sunnyvale, California consisting of approximately thirteen thousand nine hundred
fifty-nine square feet. The depiction consists of three areas labeled "#460,"
"#462," and "#464." The area labeled "#464" is captioned "RFR SPACE."
<PAGE>
EXHIBIT 10.7
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (this "Amendment") is made this 10th day of
August, 1994 by and between CALIFORNIA FIRST, LTD., a Florida a limited
partnership ("Landlord") and ELECTRONIC PUBLISHING RESOURCES, INC., a Delaware
corporation ("Tenant").
R E C I T A L S
A. Tenant currently leases from Landlord that certain premises
commonly known as 460 Oakmead Parkway, Sunnyvale, California (the "Current
Premises") consisting of approximately nine thousand one hundred fifty-nine
(9,159) square feet pursuant to that certain Lease dated April 28, 1994 (the
"Lease"). The Current Premises is outlined in red on Exhibit A attached hereto.
B. Tenant desires to expand the Current Premises by adding that
certain space adjoining the Current Premises commonly known as 462 Oakmead
Parkway, Sunnyvale, California, consisting of approximately six thousand two
hundred fifty (6,250) square feet (the "Expansion Space"). The Expansion Space
is outlined in blue on Exhibit A attached hereto.
C. The Lease provides for an expiration date of May 13, 1997.
Tenant desires to extend the term of the Lease to and including August 31, 1997.
D. Landlord is willing to expand the Current Premises and
extend the term of the Lease on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the above premises and the
mutual covenants and conditions contained herein, the parties hereto agree as
follows:
1. Term. The term of the Lease is hereby extended such that the
----
termination date ("Termination Date") shall be the date which is three (3) years
after the Effective Date, as defined in paragraph 2 below. The period
commencing on the Effective Date through the Termination Date is referred to
herein as the "Modified Term". Whenever the term "Initial Term" is used in the
Lease, it shall mean and refer to the original term of the Lease as extended
through the Termination Date by this Amendment and shall include the Modified
Term.
2. Effective Date. As used herein, the "Effective Date" shall be the
--------------
date upon which the earliest of the following occurs:
(a) Substantial completion of all work to be done by Landlord to the
Expansion Space (exclusive of communication systems and punchlist items)
pursuant to the Work Letter Agreement attached hereto as Exhibit B (the "Work
Letter Agreement");
(b) Occupancy of the Expansion Space by any of Tenant's operating
personnel; or
1
<PAGE>
(c) If Landlord is prevented from or delayed in completing its work
under Exhibit B due to the acts or omissions of Tenant, its agents, employees or
contractors, including but not 1imited to Tenant's failure to comply with the
schedule set forth in Exhibit B, then upon the date by which such work would
have been substantially completed but for such acts or omissions. The scheduled
date for substantial completion of the Tenant Improvements is September 1, 1994.
3. Premises. As of the Effective Date, as defined in paragraph 2
--------
above, the Expansion Space shall be added to the Current Premises and the total
area leased by Tenant shall be increased to approximately fifteen thousand four
hundred nine (15,409) square feet. From and after the Effective Date, the
"Premises" as used and referred to in the Lease shall include the combined
Current Premises and the Expansion Space.
4. Basic Rent. Commencing on the Effective Date and continuing through
----------
the Termination Date, the basic rent payable by Tenant shall be increased to
Eleven Thousand One Hundred Seventy-One and 53/100 Dollars ($11,171.53).
5. Direct Expenses. Commencing on the Effective Date, Tenant's
---------------
proportionate share of common area charges, as specified in paragraph 16 of the
Lease, shall be increased from thirty-one and nineteen one hundredths percent
(31.19%) to fifty-two and, forty-seven one hundredths percent (52.47%).
Commencing on the Effective Date, Tenants payment of its estimated share of
direct expenses shall be increased to One Thousand Eight Hundred Sixty-Four and
49/100 Dollars ($1,864.49) per month and such payments shall be reconciled and
adjusted in accordance with paragraph 16 of the Lease. The limitations on
Tenant's proportionate share of common area charges set forth in paragraph 16 of
the Lease shall continue to apply on a per square foot basis per month as
specified therein.
6. Parking. Commencing on the Effective Date, the number of non-
-------
exclusive parking spaces to which Tenant is entitled under the Lease shall be
increased to sixty-one (61) parking spaces.
7. Reduced Rent. As consideration for Tenant's performance of all
------------
obligations to be performed by Tenant under the Lease as modified by this
Amendment, and notwithstanding the provisions of paragraph 4(a) of the Lease and
paragraph 4 of this Amendment, Landlord hereby conditionally excuses Tenant from
the payment of a portion of the basic rent allocable to the Expansion Space in
the amount of Four Thousand Five Hundred Thirty-One and 25/100 Dollars
($4,531.25) per month for the first two lease months commencing on the Effective
Date (total for the two month period equals $9,062.50); provided, that Tenant
does not commit a default under the Lease or this Amendment at any time during
the term thereof. Should Tenant at any time during the term be in default than
the total sum of such basic rent so conditionally excused shall become
immediately due and payable by Tenant to Landlord. If at the expiration of the
term of the Lease Tenant has not committed a default under the Lease or this
Amendment, Landlord shall waive any payment of basic rent so conditionally
excused. Landlord and Tenant agree that no portion of the basic rent paid by
Tenant during the portion of the term of the Lease occurring after the
expiration of any period during which such basic rent was abated shall be
allocated for income tax purposes, by Landlord or Tenant to such abatement, nor
is such basic rent intended by the parties to be allocable, for income tax
purposes to any abatement.
2
<PAGE>
8. Repair and Maintenance. Landlord represents that as of the
----------------------
Effective Date, the heating, ventilating and air conditioning system, plumbing
and electrical systems for the Expansion Space shall be in good working order
and repair and subject to Tenant's reasonable use and maintenance thereof,
Landlord hereby warrants that the same will remain in good working order and
repair for a period of one hundred twenty (120) days following the Effective
Date.
9. Security Deposit. Upon execution of this Amendment by Tenant,
----------------
Tenant shall deposit with Landlord the sum of Four Thousand and 00/100 Dollars
($4,000.00), to be held by Landlord as additional security deposit, thereby
increasing the total amount of the security deposit held by Landlord to Ten
Thousand Six Hundred Forty and 28/100 Dollars ($10,640.28).
10. Tenant Improvements. Tenant Improvements ("Tenant Improvements"
-------------------
shall be constructed in the Expansion Space in accordance with the terms and
conditions specified in the Work Letter Agreement attached hereto as Exhibit B,
and the terms of the Work Letter Agreement are incorporated herein by this
reference.
11. Option to Extend Term. The option to extend the term of the Lease,
---------------------
granted to Tenant pursuant to paragraph 55 of the Lease, shall apply to the
entire Premises as modified by this Amendment.
12. Right of First Refusal on Expansion Space. Tenant's right of first
-----------------------------------------
refusal granted pursuant to paragraph 56 of the Lease is hereby deemed exercised
and Tenant shall have no further rights thereunder with respect to the future
leases of the Expansion Space.
13. Cancellation of First Right to Lease RFR Space. The first right to
----------------------------------------------
lease granted to Tenant pursuant to paragraph 57 of the Lease is hereby
cancelled and of no further force or effect.
14. Option to Terminate. Paragraph 58 of the Lease regarding Tenant's
-------------------
option to cancel and terminate the Lease is hereby modified by increasing the
amount to be paid by Tenant concurrently with Tenant's notice from Eleven
Thousand Four Hundred Twenty One and 00/100 Dollars ($11,421.00) to Fifteen
Thousand and 00/100 Dollars ($15,000.00).
15. New Right of First Refusal on RFR Space. Landlord hereby grants to
---------------------------------------
tenant a right of first refusal on all or any portion of that certain space
located at 464 Oakmead Parkway, Sunnyvale, California consisting of
approximately thirteen thousand nine hundred fifty-nine (13,959) square feet, as
outlined in blue on Exhibit C attached hereto (the "RFR Space"), subject to the
following terms and conditions:
(a) This first right of refusal shall only be effective during the
Modified Term of this lease to Tenant. Upon Landlord's receipt of any lease
proposal/offer to lease all or any portion of the RFR Space from any third party
("Third Party Offer") which is acceptable to Landlord, Landlord, prior to
entering into a lease with such third party, shall provide Tenant with written
notice ("Landlord's Notice") of the terms and conditions of the Third Party
Offer (the "Offer").
3
<PAGE>
(b) Tenant shall have five (5) business days from receipt of
Landlord's Notice to deliver to Landlord its written unconditional and
irrevocable acceptance of the Offer. If Tenant accepts the Offer, an amendment
to this lease or a new lease covering the RFR Space (or applicable portion
thereof) and incorporating said terms and conditions shall promptly be executed.
If a new lease is executed with Tenant covering the RFR Space (or applicable
portion thereof) such new lease shall provide that any default under this lease
will also constitute a default under such new lease and Tenant agrees that any
default by it under such new lease will also constitute a default under this
lease. In the event Tenant rejects the Offer, or does not answer within the
specified time, or fails for any reason (unless such failure is due to the fault
or delay of Landlord) to execute such amendment or new lease within thirty (30)
days of Tenant's acceptance of the Offer, Landlord shall thereafter be released
from any further obligation with respect to the Offer and be free to negotiate
with said third party making the Third Party Offer and to lease to such third
party (without further obligation to Tenant) the RFR Space (or applicable
portion thereof) upon any terms and conditions substantially similar to those
contained in the Offer. If Landlord is unable to enter into a lease with such
Third Party then this right of first refusal shall again apply to any other
offers relative to the RFR Space.
(c) This first right to lease shall be subordinate to any existing
rights of refusal, rights of expansion, options to extend or renew, and other
rights contained in leases (or amendments to leases) executed prior to the date
of this lease. In addition, this first right to lease shall not apply and Tenant
shall have no rights hereunder in the event any tenant (or its successors or
assigns) that now or hereafter occupies all or any portion of the RFR Space
desires to extend, renew or otherwise modify its lease or desires to expand its
premises to include any portion of the RFR Space, and Landlord shall be free to
extend, renew or modify such lease or amend such lease to add any portion of the
RFR Space without notice to Tenant.
(d) This first right to lease shall be void and of no force and
effect and shall confer no rights on Tenant during any period in which Tenant is
in default under this lease.
(e) Notwithstanding anything in this paragraph to the contrary,
Tenant's exercise of this first right to lease shall be subject to Landlord's
review and approval of Tenant's financial condition (including, without
limitation, Tenants net worth, current ratio and working capital reserves) at
the time Tenant exercises this first right to lease and notwithstanding Tenant's
rights hereunder Landlord shall have no obligation to lease the RFR Space to
Tenant unless Tenant's financial condition at the time of acceptance of the
Offer is equal to or better than as shown on the financial statements dated
December 31, 1993, previously provided to Landlord by Tenant. Landlord agrees
that all information regarding Tenant's financial condition provided pursuant to
this subparagraph 14(e), shall be held by Landlord as strictly confidential, and
shall not be disclosed by Landlord to any third party for any purpose
whatsoever.
(f) All rights granted to Tenant pursuant to this paragraph are
personal to Tenant and may not be transferred or assigned. If Landlord transfers
its ownership interest in the Premises or Project, this first right to lease
shall be binding on the transferee of Landlord's interest.
17. Restatement of Other Lease Terms. Except as specifically modified
--------------------------------
herein, all terms, covenants and conditions of the Lease shall remain in full
force and effect.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
Landlord: Tenant:
- -------- ------
CALIFORNIA FIRST, LTD., ELECTRONICS PUBLISHING
a Florida limited partnership RESOURCES, INC.,
a Delaware corporation
By: McCandless Partnership, a By: ______________________
California general partnership, (Signature)
a General Partner
__________________________
(Printed Name)
By: _________________________
Birk S. McCandless, as __________________________
Trustee under the Birk S. (Title)
McCandless and Mary
McCandless Inter Vivos __________________________
Trust Agreement dated (Date)
February 17, 1982, a
General Partner
_________________________
(Date)
5
<PAGE>
EXHIBIT A
Exhibit A is a map of the property located at 460 Oakmead Parkway, Sunnyvale,
California, which graphically depicts the floorplan of the Registrant's leased
space. The floorplan consists of sixty two rooms. Fourteen of the rooms are
labeled as follows: "Open Office," "Stor.," "Lunch Room," "Comp. Room," "File
Room," "Stor," "Phone Room," "Storage," "Conference Room," "Conference Room,"
"Copy Room," "Conference Room," "Lobby" and "Lunch Room."
6
<PAGE>
EXPANSION SPACE
WORK LETTER AGREEMENT
EXISTING SPACE - TURNKEY
CONSTRUCTION EXHIBIT B
- -------------------------------------------------------------------------------
THIS WORK LETTER AGREEMENT (hereinafter "Exhibit B") is attached to and
forms a part of that certain First Amendment to Lease ("Amendment') amending
that certain lease ("Lease") by and between CALIFORNIA FIRST, LTD., a Florida
limited partnership ("Landlord"), and ELECTRONIC PUBLISHING RESOURCES, a
Delaware corporation ("Tenant"), pursuant to which Landlord leases to Tenant
those certain premises located at 460 Oakmead Parkway, Sunnyvale, California and
consisting of approximately nine thousand one hundred fifty-nine (9,159) square
feet ("Premises"). The Amendment provides for, among other things, the expansion
of the Premises by adding thereto approximately six thousand two hundred fifty
(6,250) square feet ("Expansion Space"). All capitalized terms used herein shall
have the meaning ascribed to them in the Amendment to which this Exhibit B is
made a part thereof unless otherwise defined herein. The Expansion Space shall
be improved in accordance with the following:
1. Existing Improvements:
---------------------
Tenant accepts the Expansion Space in its existing condition and the
improvements constructed therewith, and Tenant hereby approves the same as
installed, subject only to such changes as may subsequently be agreed upon by
Landlord and Tenant. Such improvements are hereafter called "Existing
Improvements".
2. Tenant Improvements:
-------------------
As used herein, "Tenant Improvements" shall include those items and
specifications shown on the Final Construction Drawings prepared in accordance
with paragraph 3 below, including those specifications (as appropriate) set
forth and described in Exhibit B-1, attached hereto, exclusive of Existing
Improvements. Landlord shall construct Tenant Improvements in accordance with
said Final Construction Drawings, Exhibit B-1 and the provisions of this Exhibit
B. Unless otherwise specifically agreed to by Landlord in writing, the
installation, wiring, maintenance and removal of furniture partition systems,
telephone and other communication systems, data cabling, alarm and/or security
systems and any other systems not specifically set forth on the Final
Construction Drawings, and all cost and expense associated therewith, shall be
the side responsibility of Tenant. In connection with the construction and
installation of the Tenant Improvements, Landlord or Landlord's general
contractor shall have no obligation to move any of Tenant's property located in
or about the Premises or Expansion Space including, but not limited to,
furniture, inventory and trade fixtures, at the time of such construction and
installation. If at the time of construction and installation of the Tenant
Improvements Tenant has property located in or about the Premises or Expansion
Space that inhibits or prevents in any way the construction and installation of
the Tenant Improvements, Tenant shall immediately, upon receipt of notification
therefore from Landlord or Landlord's general contractor, at Tenant's sole cost
and expense, move such property to another location
1
<PAGE>
within the Premises or Expansion Space or, upon receipt of Landlord's prior
approval, to another location within the Project designated by Landlord in
Landlord's sole discretion; Tenant's failure to immediately move such property
upon receipt of notification therefore from Landlord or Landlord's general
contractor shall be deemed a Tenant caused delay subject to the provisions of
paragraph 6 of this Exhibit B. If at the time of construction and installation
of the Tenant Improvements Tenant has property located in or about the Premises
or Expansion Space, Landlord and Landlord's general contractor shall incur no
liability to Tenant or any other party in the event such property is damaged,
destroyed or stolen during the construction and installation of the Tenant
Improvements.
3. Tenant Improvement Design Schedule:
----------------------------------
The plans and specifications for the Tenant Improvements and any other
improvements shall be completed in accordance with the following:-
(a) Tenant shall approve preliminary floor plan layouts ("Preliminary
Floor Plans") prepared by Landlord by completed. The Preliminary Floor Plans
shall show all walls, doors, and other Tenant Improvements as desired by Tenant
in sufficient detail for Landlord's architect to prepare architectural
construction drawings and related documents ("Architectural Construction
Documents").
(b) Between completed and completed, Landlord's architect and
Tenant's representative shall meet as needed to review and complete the final
details related to the Preliminary Floor Plans, so that on completed, 1994 the
Architectural Construction Documents are subject only to minor changes.
(c) No later than completed, Tenant shall have made the decisions
required and provided to Landlord the information necessary for Landlord's
architect to complete the Architectural Construction Documents in enough detail
for Landlords general contractor to bid the work, select subcontractors and to
proceed toward the design of electrical, mechanical and any other requirements
not included on the Architectural Construction Documents. Upon Landlord's
general contractor's selection of subcontractors, Landlord's general contractor
and subcontractors shall prepare design specifications outlining in reasonable
detail electrical, mechanical and any other requirements not included on the
Architectural Construction Documents "Electrical and Mechanical Drawings").
(d) Upon completion of the Architectural Construction Documents,
Tenant shall approve the same subject to changes, deletions or additions as
provided in paragraphs 4 and 5 of this Exhibit B.
(e) Upon completion of the Electrical and Mechanical Drawings,
Landlord or Landlord's general contractor shall submit the Architectural
Construction Documents and Electrical and Mechanical Drawings (collectively the
"City Ready Plans") to the City to obtain a building permit.
(f) Tenant shall have decided upon carpet selection and all other
color and material specifications by completed, 1994.
2
<PAGE>
(g) As used herein, "Final Construction Drawings" shall include the
City Ready Plans, as approved by the City, and any subsequent additions,
deletions or changes to the Tenant Improvements permitted or required pursuant
to paragraphs 4 and 5 of this Exhibit B.
4. Changes by Tenant:
-----------------
Tenant may request changes, deletions or additions to the Tenant
Improvements; provided, however, that the effectiveness of any such requested
change, deletion or addition shall be subject to written approval by an
authorized representative of Landlord and to obtaining any required governmental
permits or other approvals. If any such change, deletion or addition increases
the cost of construction and installation of the Tenant Improvements, Tenant
shall immediately pay to Landlord the full amount of such increase in the cost
of construction and installation of the Tenant Improvements. In no event shall
work on any change, deletion or addition requested pursuant to this paragraph 4
commence prior to (i) Landlord and Tenant approving, in writing, such change,
deletion or addition, and (ii) Landlords receipt from Tenant of payment of the
full amount of the increase in the cost of construction and installation of the
Tenant Improvements.
5. Changes By Authority:
--------------------
Tenant agrees that if any change, deletion or addition to any of the
improvements proposed to be constructed or installed is required by any
governmental authority in connection with obtaining any governmental permit or
approval, or otherwise, then such change, deletion or addition shall promptly be
made at Tenant's expense and Tenant shall, immediately upon receipt of
Landlord's demand therefor, pay such expense to Landlord. Failure to obtain any
required governmental approval or permit for the Tenant Improvements desired by
Tenant shall in no way be cause for Tenant to terminate the Lease or any
amendment to the Lease.
6. Delays Caused by Tenant:
-----------------------
If the Effective Date is delayed due in any respect to Tenant's
failure to meet the schedule set forth in paragraph 3 of this Exhibit B, or due
to construction delays related to any changes required by Tenant, or due to any
other failures by Tenant to perform its obligations under this Exhibit B or
otherwise under the Lease or the Amendment, then any such delays shall be deemed
Tenant caused delays for purposes of determining the Effective Date pursuant to
paragraph 2 of the Amendment.
7. Punch List:
------------
Within ten (10) business days after the Effective Date, Tenant shall
deliver to Landlord a list of items ("Punch List") that Tenant believes Landlord
should complete or correct in order for the Expansion Space to be acceptable.
Landlord shall commence to complete or correct the items as soon as possible,
except those items that Landlord contends are not justified. If Tenant does not
deliver the Punch List to Landlord within the ten (10) day period, Tenant shall
be deemed to have accepted the Expansion Space and approved the construction.
Nothing in this paragraph 7 shall delay the Effective Date or Tenant's
obligation to pay rent or to make other payments due Landlord under the Lease or
the Amendment.
3
<PAGE>
8. Access to Premises:
------------------
Tenant shall permit Landlord ant Landlord's contractor access to the
Premises during normal business hours for construction of the Tenant
Improvements. Tenant acknowledges that some disruption of its business
operations may occur and that such disruption shall not be a basis for denying
Landlord's contractor access to the Premises or otherwise interfering with
construction of the Tenant Improvements. In the event Tenant elects to have
construction of the Tenant Improvements, or any portion thereof, performed at
times other than during normal business hours, Landlord shall provide Tenant
with an estimate of overtime charges before commencement of such work. Tenant
shall be responsible for all actual overtime charges and shall pay to Landlord
as additional rent within ten (10) days of completion of construction of the
Tenant Improvements all such actual overtime charges.
9. Attachments:
-----------
All references in the Amendment to Exhibit B shall be deemed to also
include Exhibit B-1.
4
<PAGE>
EXHIBIT 10.8
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE (this "Amendment") is made this 17th
day of April, 1997, by and between CALIFORNIA FIRST, LTD., a Florida limited
partnership ("Landlord") and INTERTRUST TECHNOLOGIES CORPORATION, a Delaware
corporation, formerly known as Electronic Publishing Resources, Inc.,
("Tenant").
RECITALS
A. Tenant currently leases from Landlord that certain premises
commonly known as 460 Oakmead Parkway, Sunnyvale, California (the "Current
Premises") consisting of approximately fifteen thousand four hundred nine
(15,409) square feet pursuant to that certain Lease dated April 28, 1994, as
amended by that certain First Amendment to Lease dated August 10, 1994
(together, the "lease").
B. Tenant desires to extend the term of the Lease for an additional
two (2) years on the terms and conditions set forth herein.
C. Landlord is willing to extend the term of the Lease on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants and agreements contained herein, the parties hereto agree to amend the
Lease as follows:
1. Term. the term of the Lease is hereby extended for two (2) years
----
so that the termination date of the Lease shall be August 31, 1999. The period
commencing on September 2, 1997 and ending on September 1, 1999 is referred to
herein as the "Extended Term".
2. Basic Rent. Paragraphs 4(a) and 5(a) of the Lease are hereby
----------
modified and amended to provide as follows:
"The monthly basic rent during the Extended Term shall be Nineteen Thousand
Six Hundred One Dollars ($19,601.00) per month."
3. Common Area Charges. During the Extended Term, Tenant shall
-------------------
continue to pay to Landlord its proportionate share (52.47%) of common area
charges as provided in paragraph 16 of the Lease, as amended by paragraph 5 of
the First Amendment to Lease, except that from and after January 1, 1998 there
shall be no limit on Tenant's proportionate share of common area charges and any
and all caps or limitations thereon shall be deemed terminated and of no further
force or effect from and after January 1, 1998.
4. Cancellation of Option to Extend Term. The option to extend the
-------------------------------------
term of the Lease granted to Tenant pursuant to paragraph 55 of the Lease and
reaffirmed in paragraph 11 of the First Amendment to Lease is hereby cancelled
and shall be of no further
<PAGE>
force or effect. Tenant shall have no right to extend the term of the Lease
beyond August 31, 1999.
5. Cancellation of Option to Terminate. The option to terminate the
-----------------------------------
Lease granted to Tenant pursuant to paragraph 58 of the Lease is hereby
cancelled and shall be of no further force or effect.
6. Continuation of Right of First Refusal. The right of first
--------------------------------------
refusal granted to Tenant pursuant to paragraph 15 of the First Amendment to
Lease shall continue in full force and effect.
7. Brokers. Each party represents that it has not had dealings with
-------
any real estate broker, finder or other person with respect to this Amendment or
expanding the Premises, except for Colliers Parrish. Except for the broker
commissions to be paid by Landlord pursuant to a separate written agreement
between Landlord and Colliers Parrish, there are no leasing commissions to be
paid by Landlord or Tenant in connection with this transaction. Each party
hereto shall hold harmless the other party from all damages, loss or liability
resulting from any claims that may be asserted against the other party by any
broker, finder or other person with whom such party has dealt, or purportedly
has dealt, in connection with this transaction.
8. Restatement of Other Lease Terms. Except as specifically
--------------------------------
modified herein, all terms, covenants and conditions of the Lease shall remain
in full force and effect.
[Signatures on Next Page]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this Amendment as of
the date first set forth above.
Landlord: Tenant:
- -------- ------
CALIFORNIA FIRST, LTD., INTERTRUST TECHNOLOGIES
a Florida limited partnership CORPORATION
a Delaware corporation
By: McCandless Partnership, (formerly Electronic
a California general Publishing Resource, Inc.)
partnership, a General
Partner
By:__________________________________
By:________________________________ Name:________________________________
Birk S. McCandless, as Trustee
under the Birk S. McCandless Title: President
-------------------------------
and Mary McCandless Inter Vivos
Trust Agreement dated February Date:________________________________
17, 1982, a General Partner
Date:______________________________ By:__________________________________
Name:________________________________
Title: Chief Financial Officer
-------------------------------
Date:________________________________
<PAGE>
EXHIBIT 10.9
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
March 21, 1997, is made by and between STAFFIELD INVESTMENTS, a General
Partnership ("Lessor") and INTERTRUST, a Delaware Corporation ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2 (a) Premises: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 440 Oakmead Parkway, located in the City
of Sunnyvale, County of Santa Clara, State of California, with zip code 94086,
as outlined on Exhibit A attached hereto ("Premises"). The "Building" is that
certain building containing the Premises and generally described as (describe
briefly the nature of the Building): approximately 6,031 square feet of a
larger 27,300 square foot, single story, concrete tilt-up building as outlined
in red on Exhibit "A". In addition to Lessee's rights to use and occupy the
Premises as hereinafter specified, Lessee shall have non-exclusive rights to the
Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but
shall not have any rights to the roof, exterior walls or utility raceways of the
Building or to any other buildings in the Industrial Center. The Premises, the
Building, the Common Areas, the land upon which they are located, along with all
other buildings and improvements thereon, are herein collectively referred to as
the "Industrial Center." (Also see Paragraph 2).
(b) Parking: 24 unreserved vehicle parking spaces ("Unreserved
Parking Spaces"); and no reserved vehicle parking spaces ("Reserved Parking
Spaces"). (Also see Paragraph 2.6.)
1.3 Term: two (2) years and one-half (1/2) months ("Original Term")
commencing August 15, 1997 ("Commencement Date"), and ending August 31, 1999
("Expiration Date"). (Also see Paragraph 3.)
1.4 Early Possession: None ("Early Possession Date"). (Also see Paragraphs
3.2 and 3.3.)
1.5 Base Rent: $9,650.00 per month ("Base Rent"), payable on the first
(1st) day of each month commencing August 15, 1997. (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum Par. 50 attached hereto.
1.6 (a) Base Rent Paid Upon Execution: $9,650.00 as Base Rent for the
period August 15, 1997 through September 14, 1997.
(b) Lessee's Share of Common Area Operating Expenses: Twenty-Two
Point One percent (22.1%) ("Lessee's Share") as determined by [X] pro rata
square footage of the Premises as compared to the total square footage of the
Building or [___] other criteria as described in Addendum ___.
1.7 Security Deposit: $9,952.00 ("Security Deposit"). (Also see Paragraph
5.)
1.8 Permitted Use: Research and development, light assembly, storage and
any other legal related uses. ("Permitted Use") (Also see Paragraph 6).
1.9 Insuring Party: Lessor is the "Insuring Party". (Also see Paragraph
8.)
1.10 (a) Real Estate Brokers: The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[_] _______________________________ represents Lessor exclusively ("Lessor's
Broker");
[X] Colliers Parrish / Jim Abarta represents Lessee exclusively ("Lessee's
Broker"); or
-------------------------------
[_] _______________________________ represents both Lessor and Lessee ("Dual
Agency"). (Also see Paragraph 15.)
(b) Payment to Brokers. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $(per
agreement) for brokerage services rendered by said Broker(s) in connection with
this transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by none ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 63, and Exhibits A through A, all of which
constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses, is
an approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements (other than those constructed by Lessee
or at Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
<PAGE>
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than full-
size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 Common Areas - Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general non-
exclusive use of Lessor, Lessee and other lessees of the Industrial Center and
their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 Common Areas - Rules and Regulations. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent and any common area expenses shall be abated for the period of such
early occupancy. All other terms of this Lease, however, (including but not
limited to the obligations to pay Lessee's Share of Common Area Operating
Expenses and to carry the insurance required by Paragraph 8) shall be in effect
during such period. Any such early possession shall not affect nor advance the
Expiration Date of the Original Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing (Certified mail) to Lessor within ten
(10) days after the end of said thirty (30) day period, cancel this Lease, in
which event the parties shall be discharged from all obligations hereunder;
provided, however, that if such written notice by Lessee is not received by
Lessor within said ten (10) day period, Lessee's right to cancel this Lease
shall terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the
same may be adjusted from time to time, to Lessor in lawful money of the United
States, without offset or deduction, on or before the day on which it is due
under the terms of this Lease. Base Rent and all other rent and charges for any
period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
A. The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sideways, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof.
B. Exterior signs and any tenant directories.
C. Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2) to be
paid by Lessor for the Building and the Common Areas under Paragraph 10 hereof.
(vi) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
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(vii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such
overpayment against Lessee's Share of Common Area Operating Expenses next
becoming due or renewed 10 days after the lease expiration date and after
receipt of all common area expenses. If Lessee's payments under this Paragraph
4.2(d) during said preceding year were less than Lessee's Share as indicated on
said statement, Lessee shall pay to Lessor the amount of the deficiency within
ten (10) days after delivery by Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee within 15 days (or, at
Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. Unless
otherwise expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other increment for
its use, or to be prepayment for any moneys to be paid by Lessee under this
Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products, by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without (Refer
to Paragraph 62 below) the express prior written consent of Lessor and
compliance in a timely manner (at Lessee's sole cost and expense) with all
Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall
mean (i) the installation or use of any above or below ground storage tank, (ii)
the generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority, and (iii) the presence in, or on about the Premises of a
Hazardous Substance with respect to which any Applicable Laws require that a
notice be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but upon notice to Lessor and in compliance with all Applicable
Requirements, use any ordinary and customary materials reasonably required to be
used by Lessee in the normal course of the Permitted Use, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk of contamination or damage or expose Lessor to any
liability therefor. In addition, Lessor may (but without any obligation to do
so) condition its consent to any Reasonable Use of any Hazardous Substance by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its
reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefor, including but not limited to the installation (and, at
Lessor's option, removal on or before lease expiration or earlier termination)
of reasonably necessary protective modifications to the Premises (such as
concrete encasements) and/or the deposit of an additional Security Deposit under
paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give written notice thereof, together with a
copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, any Hazardous Substance including but not
limited to all such documents as may be involved in any Reportable Uses
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
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6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and to employ experts and/or
consultants in connection therewith and/or to advise Lessor with respect to
Lessee's activities including but not limited to the installation, operation,
use, monitoring, maintenance, or removal of any Hazardous Substance on or from
the Premises. The costs and expenses of any such inspections shall be paid by
the party requesting same, unless a Default or Breach of this Lease by Lessee or
a violation of Applicable Requirements, or a contamination, caused or materially
contributed to by Lessee, is found to exist or be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In any such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may
be, for the costs and expenses of such inspections.
7. Maintenance; Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraph 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, roofs, floors, windows, doors, plate glass, skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants Restrictions and Building Code), 4.2
(Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage
or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant
to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural conditional of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any state now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility Installations"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communication systems, lighting
fixtures, heating, ventilating, and air conditioning equipment, plumbing, and
fencing in, on or about the Premises. The term "Trade Fixtures" shall mean
Lessee's machinery and equipment that can be removed without doing material
damage to the Premises. The term "Alterations" shall mean any modification of
the improvements on the Premises from that which are provided by Lessor under
the terms of this Lease, other than Utility Installations or Trade Fixtures.
"Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations or Utility Installations made by Lessee that are not yet owned by
Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made
any Alterations or Utility Installations in, on, under or about the Premises
without Lessor's prior written consent. Lessee may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof),
without Lessor's consent but upon notice to Lessor, so long as they are not
visible from the outside of the Premises, do not involve puncturing, relocating
or removing the roof or any existing walls, or changing or interfering with the
fire sprinkler or fire detection systems and the cumulative cost thereof during
the term of this Lease as extended does not exceed $5,000.00
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and be in compliance with all
Applicable Requirements. Lessee shall promptly upon completion thereof furnish
Lessor with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $5,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, content the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one half
times the amount of such contested lien claim or demand indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations, and Utility
Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal of all or any part of any Alterations or Utility Installations made
without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination clean and free
of debris and in good operating order, condition and state of repair, ordinary
wear and tear excepted. Ordinary wear and tear shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified herein, the Premises, as surrendered, shall include the
Alterations and Utility Installations. The obligation of Lessee shall include
the repair of any damage occasioned by the installation, maintenance or removal
of Lessee's Trade Fixtures, furnishings, equipment, and Lessee Owned Alterations
and Utility Installations, as well as the removal of any storage tank installed
by or for Lessee, and the removal, replacement, or remediation of any soil,
material or ground water contaminated by Lessee, all as may then be required by
Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee subject to its
obligation to repair and restore the Premises per this Lease.
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8. Insurance; Indemnity.
8.1 Payment of Premiums. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or Expiration
Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or
fumes from a hostile fire. The policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease as an "Insured contract" for the
performance of Lessee's indemnity obligations under this Lease. The limits of
said insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a), above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against loss or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
or any undamaged sections of the Building required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu of
any co-insurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers to the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and Lender(s), insuring the loss of the full rental and other
charges payable by all lessees of the Building to Lessor for one year (including
all Real Property Taxes, insurance costs, all Common Area Operating Expenses and
any scheduled rental increases). Said insurance may provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of repairs
or replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any co-insurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any, otherwise
payable, for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of such Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property Trade Fixtures and Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible of not to exceed
$1,000 per occurrence. The proceeds from any such insurance shall be used by
Lessee for the replacement of personal property or the restoration of Trade
Fixtures and Lessee Owned Alterations and Utility Installations. Upon request
from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide." Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss of or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment. In
case any action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any such
claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors or invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the Building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other Lessee of Lessor nor from the failure by Lessor to enforce the
provisions of any other lease in the Industrial Center. Notwithstanding
Lessor's negligence or breach of this Lease, Lessor shall under no circumstances
be liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than fifty
percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of
the Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
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(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage or
destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction if fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a), irrespective of any deductible amounts or
coverage limits Involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Premises Partial Damage-Insured Loss. If Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. In the event, however, that there is a shortage of
insurance proceeds and such is due to the fact that, by reason of the unique
nature of the improvements in the Premises, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefore. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, shall complete them as soon as reasonably possible and this Lease shall
remain in full force and effect. If Lessor does not receive such funds or
assurance within said period, Lessor may nevertheless elect by written notice to
Lessee within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within such ten (10) day period, and if Lessor
does not so elect to restore and repair, then this Lease shall terminate sixty
(60) days following the occurrence of the damage or destruction. Unless
otherwise agreed, Lessee shall in no event have any right to reimbursement from
Lessor for any funds contributed by Lessee to repair any such damage or
destruction. Premises Partial Damage due to flood or earthquake shall be subject
to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 Partial Damage-Uninsured Loss. If Premises Partial Damage that is not
an Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect), Lessor may at Lessor's option, either:
(i) repair such damage as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate this
Lease, Lessee shall have the right within ten (10) days after the receipt of
such notice to give written notice to Lessor of Lessee's commitment to pay for
the repair of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or satisfactory
assurance thereof within thirty (30) days following such commitment from Lessee.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such repairs as soon as reasonably possible and the
required funds are available. If Lessee does not give such notice and provide
the funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
negligence or willful misconduct of Lessee. In the event, however, that the
damage or destruction was caused Lessee, Lessor shall have the right to recover
Lessor's damages from Lessee except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, (a) exercising such option and (b) providing Lessor with any shortage
in insurance proceeds for adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during said Exercise Period and provides Lessor with funds
(or adequate assurance thereof) to cover any shortage in insurance proceeds,
Lessor shall, at Lessor's expense repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If Lessee fails
to exercise such option and provide such funds or assurance during such period,
then this Lease shall terminate as of the date set forth in the first sentence
of this Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses, and other charges,
if any, as aforesaid, all other obligations of Lessee hereunder shall be
performed by Lessee, and Lessee shall have no claim against Lessor for any
damage repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "Commence" as used in this Paragraph 9.6
shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
first occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option
either (i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to investigate and remediate such condition exceeds twelve (12) times the
then monthly Base Rent or $100,000, whichever is greater, give written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition of Lessor's desire to terminate
this Lease as of the date sixty (60) days following the giving of such notice.
In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess cost of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible and the required funds are available.
It Lessee does not give such notice and provide the required funds or assurance
thereof within the times specified above, this Lease shall terminate as of the
date specified In Lessor's notice of termination.
9.8 Termination--Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9. Lessor shall return to Lessee any advance payment made by
Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is
not then required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent inconsistent
herewith.
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10. Real Property Taxes.
10.1 Payment of Taxes. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the provisions
of Paragraph 4.2
10.2 Real Property Tax Definition. As used herein, the term "Real Property
Taxes" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed upon the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein imposed by reason of events occurring, or
changes in applicable law taking effect, during the term of this Lease,
including but not limited to a change in ownership of the Industrial Center or
in the improvements thereon the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated by the Parties.
In calculating Real Property Taxes for any calendar year, the Real Property
Taxes for any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days which such
calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored with the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Operation and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said personal property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay for all utilities and services supplied to the
Premises leased by Lessee, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor or all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
period set forth in Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) Deleted.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market rental value,
if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior to the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any. Lessee agrees to provide Lessor
with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) Deleted.
(h) Deleted.
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12.3 Additional Terms and Conditions Applicable to Subletting. The following
terms and conditions shall apply to any subletting by Lessee of all or any part
of the Premises and shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest
in all rentals less expenses including, T.I.'s and Broker commissions and income
arising from any sublease of all or a portion of the Premises heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a Breach (as defined in Paragraph 13.1) shall occur in the performance of
Lessee's obligations under this Lease, Lessee may, except as otherwise provided
in this Lease, receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of the foregoing provisions or any other
assignment of such sublease to Lessor, nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter of thing requiring the consent of the sublessor under the
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further assign
or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted
by Lessor in connection with a Lessee Default or Breach (as hereinafter
defined), $350.00 is a reasonable minimum sum per such occurrence for legal
services and costs in the preparation and service of a notice of Default, and
that Lessor may include the cost of such services and costs in said notice as
rent due and payable to cure said Default. A "Default" by Lessee is defined as a
failure by Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
by Lessee is defined as the occurrence of any one or more of the following
Defaults, and, where a grace period for cure after notice is specified herein,
the failure by Lessee to cure such Default prior to the expiration of the
applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises excluding subleasing without the
intention to reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating
Expenses or any other monetary payment required to be made by Lessee hereunder,
whether to Lessor or to a third party as and when due, the failure by Lessee to
provide Lessor with reasonable evidence of insurance or surety bond required
under this Lease, or the failure of Lessee to fulfill any obligation under this
Lease which endangers or threatens life or property, where such failure
continues for a period of three (3) days following receipt or written notice
thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with applicable law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information, which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
Lessee of any general arrangement or assignment for the benefit of creditors:
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within thirty (30) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within sixty (60) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not within thirty (30) days; provided; however, in the event that any
provision of this Subparagraph 13.1(e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or of
any Guarantor, given to Lessor by Lessee's or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination:
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys' fees, and that portion of the leasing
commission paid by Lessor in connection with this lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco or the Federal Reserve Bank District in which the premises
are located at the time of award plus one percent (1%). Efforts by Lessor to
mitigate damages caused by Lessee's Default or Breach of this Lease shall not
waive Lessor's right to recover damages under this Paragraph 13.2. If
termination of this Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such proceeding the unpaid
rent and damages as are recoverable therein, or Lessor may reserve therein the
right to recover all or any part thereof in a separate suit for such rent and/or
damages. If a notice and grace period required under Subparagraphs 13.1(b), (c)
or (d) was not previously given, a notice to pay rent or quit, or to perform or
quit, as the case may be, given to Lessee under any statute authorizing the
forfeiture of leases for unlawful detainer shall also constitute the applicable
notice for grace period purposes required by Subparagraphs 13.1(b), (c) or (d).
In such case, the applicable grace period under the
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unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as It becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessee and Lessor agree that the
limitations on assignment and subletting in this lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by any Lender(s) whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as of the date the condemning authority takes such
possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided however that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. Brokers Fee.
15.1 Procuring Cause. The Brokers named in Paragraph 1.10 are the procuring
causes of this Lease.
15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed in
writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) granted under this Lease or any Option subsequently granted, or
(b) if Lessee acquires any rights to the premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
15.3 Assumption of Obligations. Any buyer or transferee of lessor's interest
in this Lease, whether such transfer is by agreement or by operation of law,
shall be deemed to have assumed Lessor's obligation under this Paragraph 15.
Each Broker shall be an intended third party beneficiary of the provisions of
Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 Representations and Warranties. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend, and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, attorneys' fees
reasonably incurred with respect thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including but not limited to Lessee's financial
statements for the past three (3) years. Refer to Paragraph 63 below. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
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18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of an
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state of which
the Premises are located plus two percent (2%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Broker that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to the Lease and as to
the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail with postage prepaid, or by facsimile transmission
during normal business hours, , and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery of
the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be deemed
served or delivered upon telephone confirmation of receipt of the transmission
thereof, provided a copy is also delivered via delivery or mail. If notice is
received on a Saturday or a Sunday or legal holiday, it shall be deemed received
on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any Default or Breach by
Lessee of any provision hereof. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased One Hundred Twenty-Five
percent (125%) of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination. Nothing contained herein
shall be construed as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessee under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address has been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provision of Paragraph 30.3,
Lessee agrees to attorn to a Lender or any other party who acquires ownership of
the Premises by reason of a foreclosure of a Security Device, and that in the
event of such foreclosure, such new owner shall not: (i) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership, (ii) be subject to any offsets or defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any option to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender or Lessee in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
Broker(s) shall be intended third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of
emergency, and otherwise at reasonable times by giving Lessee prior verbal
notice at least 24 hours for the purpose of showing the same to prospective
purchasers, lenders, or lessees, and making such alterations, repairs,
improvements or additions to the Premises or to the Building, as Lessor may
reasonably deem necessary. Lessor may at any time place on or about the Premises
or Building any ordinary "For Sale" signs and Lessor may at any time during the
last one hundred twenty (120) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs. All such activities of Lessor shall be
without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
reasonableness in determining whether to grant such consent.
PAGE 10
<PAGE>
34. Signs. Lessee shall not place any sign upon the Premises or the Building,
except that Lessee may, with Lessor's prior written consent, install (but not on
the roof) such signs as are reasonably required to advertise Lessee's own
business so long as such signs are in a location designated by Lessor and comply
with Applicable Requirements and the signage criteria established for the
Industrial Center by Lessor. The installation of any sign on the Premises by or
for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance,
Repairs, Utility Installations, Trade Fixtures and Alterations). Unless
otherwise expressly agreed herein, Lessor reserves all rights to the use of the
roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease for the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall by paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e). Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will in cur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessor
under this lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease the word "Option" has the following
meanings: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later option cannot be exercised unless the
prior Options to extend or review this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps, and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to
sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
PAGE 11
<PAGE>
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessee or Lessor's agent or
Lessee's aent and submission of same to Lessee shall not be deemed an offer to
lease. This Lease is not intended to be binding until executed by all Parties
hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILED IN, IT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER,
EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE
PROPERTY AS TO FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER(S) OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO
THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA,
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED
SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Terrence J. Rose, Inc. Executed at:_______________________
on March 31, 1997 on:________________________________
By LESSOR: By LESSEE:
STAFFIELD INVESTMENTS INTERTRUST
- --------------------------------------- -----------------------------------
_______________________________________ ___________________________________
By:____________________________________ By:________________________________
Name Printed: Terrence J. Rose Name Printed: Erwin Lenowitz
-------------------------- ----------------------
Title: Partner Title: Vice-Chairman, CFO
--------------------------------- ------------------------
By:____________________________________ By:________________________________
Name Printed:__________________________ Name Printed:______________________
Title:_________________________________ Title:_____________________________
Address: 3375 Scott Blvd., Suite 308 Address: 460 Oakmead Parkway
------------------------------- ---------------------------
Santa Clara, CA 95054 Sunnyvale, CA 94086
- --------------------------------------- -----------------------------------
Telephone: (408) 496-1234 Telephone: (408) 222-6100
----------------------------- -------------------------
Facsimile: (408) 988-4768 Facsimile: (408) 222-6144
----------------------------- -------------------------
BROKER: BROKER:
Executed at:___________________________ Executed at:_______________________
on:____________________________________ on:________________________________
By:____________________________________ By:________________________________
Name Printed:__________________________ Name Printed:______________________
Title:_________________________________ Title:_____________________________
Address:_______________________________ Address:___________________________
_______________________________________ ___________________________________
Telephone:_____________________________ Telephone:_________________________
Facsimile:_____________________________ Facsimile:_________________________
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345
So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777.
PAGE 12
<PAGE>
EXHIBIT A
Exhibit A is a map of the property located at 440 Oakmead Parkway, Sunnyvale,
California, which graphically depicts an aerial perspective of the Site
Development Plan.
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET
PARTIES: STAFFIELD INVESTMENTS (LESSOR), INTERTRUST (LESSEE)
DATED: MARCH 21, 1997
49. Improvements. Prior to Lessee's possession of the Premises, Lessor, at
------------
Lessor's cost and expense, shall repaint all interior walls and return
ducts, clean and shampoo carpets, replace damaged or stained ceiling
tiles, replace all burnt out lights and ballasts, strip and wax all vct
floors and replace any damaged tiles. Lessee shall have access to the
Premises one (1) week prior to the commencement date to install their
cabling, telephone systems, furniture partitions, etc. provided Lessee
does not interfere in Lessor's contractors.
50. Rent Increase. Commencing September 1, 1998 and continuing through the
-------------
remainder of the Original Term, the monthly Base Rent shall be $9,952.00
51. Late Charges. In reference to paragraph 13.4 above, the ten (10) day time
------------
period for performance shall end at 4:00 PM Pacific Time on the tenth
(10th) calendar day. If the ten (10) day time period for performance ends
on a Saturday, Sunday, or federal, state, city or legal holiday, then such
date for performance shall be accelerated to 4:00 PM Pacific Time on the
preceding day which is not a Saturday, Sunday or federal, state, city or
legal holiday.
52. Pets. Lessee shall not keep or permit to be kept any pets within the
----
Premises, Common Areas, or Industrial Center at any time.
53. Financial Statements. Lessee shall provide Lessor with financial
--------------------
statements and credit references as Lessor may require prior to the
execution of this Lease.
54. Confidentiality. Lessee and Brokers agree to keep every part of this Lease
---------------
confidential and not to disclose nor advertise any of the terms and
conditions of this Lease without the Lessor's prior written consent.
58. Option to Extend. Subject to the provisions contained in Paragraph 39
----------------
above, Lessee shall have the right, at its option, to extend the term of
this lease for a period of two (2) years commencing September 1, 1999 (the
"Extension Term"). If Lessee elects to extend this Lease pursuant to this
Paragraph 58, Lessee shall give unequivocal written notice ("Exercise
Notice") of its exercise to Lessor not less than one hundred twenty (120)
days prior to the expiration Date of the Original Term. Lessee's failure
to give the Exercise Notice in a timely manner shall be deemed a waiver of
Lessee's right to extend. The terms, covenants and conditions applicable
to the Extension Term shall be the same terms, covenants and conditions of
this Lease except that (1) Lessee shall not be entitled to any further
option to extend for any period after the Extension Term, and (2) the Base
Rent for the Premises shall be increased as provided in this Paragraph 58.
Determination of Base Rent during the Extension Term:
- -----------------------------------------------------
(i) Agreement on Rent. Lessor and Lessee shall have sixty (60) days after
-----------------
Lessor receives the Exercise Notice in which to agree in good faith on the
Base Rent during the Extension Term, which shall be the fair market rental
value of the Premises during the Extension Term. In determining the fair
market rental value of the Premises during the Extension Term,
consideration shall be given to the uses of the Premises permitted under
this Lease, the quality, size, design and location of the Premises, and
the rental value of comparable space located in the Santa Clara-Oakmead
Village area with similar quality improvements in existence on the date of
the extension. In no event shall the Base Rent for the Extension Term be
less than the Base Rent last payable under this Lease during the Original
Term. If Lessor and Lessee agree on the Base Rent for the Extension Term
during the sixty (60) day period, they shall immediately execute an
amendment to this Lease stating the Base Rent.
(ii) Selection of Appraisers. If Lessor and Lessee are unable to agree on the
-----------------------
Base Rent for the Extension Term within the sixty (60) day period, then
within ten (10) days after the expiration of the sixty (60) day period,
Lessor and Lessee each, at its cost and by giving notice to the other
party, shall appoint a competent and disinterested real estate appraiser
with at least five (5) years' full-time commercial appraisal experience in
the geographical area of the Building to appraise and set the Base Rent
during the Extension Term. If either Lessor or Lessee does not appoint an
appraiser within ten (10) days after the other party has given notice of
the name of its appraiser, the single appraiser appointed shall be the
sole appraiser and shall set the Base Rent during the Extension Term. If
two (2) appraisers are appointed by Lessor and Lessee as stated in this
paragraph, they shall meet promptly and attempt to set the Base Rent
during the Extension Term. If two (2) appraisers are unable to agree
within thirty (30) days after the second appraiser has been appointed,
they shall attempt to select a third appraiser meeting the qualifications
stated in this paragraph within ten (10) days after the last day the two
(2) appraisers are given to set the Base Rent. If they are unable to agree
on the third appraiser, either Lessor or Lessee, by giving ten (10) days'
notice to the other party, can apply to the then president of the real
estate board of the county in which the Building is located, or to the
Presiding Judge of the Superior Court of the county in which the Building
is located, for the selection of a third appraiser who meets the
qualifications stated in this paragraph. Lessor and Lessee each shall bear
one-half (1/2) of the cost of appointing the third appraiser and of paying
the third appraiser's fee. The third appraiser, however selected, shall be
a person who has not previously acted in any capacity for either Lessor or
Lessee.
(iii) Value Determined by Three (3) Appraisers. Within thirty (30) days after
----------------------------------------
the selection of a third appraiser, a majority of the appraisers shall set
the Base Rent for the Extension Term. If a majority of the Appraisers is
unable to set the Base Rent within the stipulated period of time, Lessor's
appraiser shall arrange for a
<PAGE>
simultaneous exchange of written appraisals from each of the appraisers
and the three (3) appraisals shall be added together and their total
divided by three (3); the resulting quotient shall be the Base Rent for
the Premises during the Extension Term. If, however, the low appraisal
and/or high appraisal and/is more than ten percent (10%) lower and/or
higher than the middle appraisal, the lower appraisal and/or higher
appraisal shall be disregarded. If only one (1) appraisal is disregarded,
the remaining two (2) appraisals shall be added together and their total
divided by two (2); the resulting quotient shall be the Base Rent for the
Premises during the Extension Term. If both the low appraisal and the high
appraisal are disregarded as stated this paragraph, the middle appraisal
shall be the Base Rent for the Premises during the Extension Term.
(iv) Notice to Lessor and Lessee. After the Base Rent for the Extension Term
---------------------------
has been set, the appraisers shall immediately notify Lessor and Lessee,
and Lessor and Lessee shall immediately execute an amendment to this Lease
stating the Base Rent.
59. "Hazardous Materials" shall mean any substance or material which has been
-------------------
or is hereafter designated hazardous or toxic by any relevant federal,
state, county, municipal or other governmental authority (collectively
"Governmental Authority") or determined by such Governmental Authority to
be capable of endangering or posing a risk of injury to, or having an
adverse effect on, the health or safety of persons, the environment or
property. Refer also to Paragraph 62 below.
Lessee and Lessee's employees and agents shall not store, use, generate,
release, or dispose of (collectively "Release"), or allow the Release, of
any Hazardous Materials in, on, under, or adjacent to the Premises or the
Industrial Center. Lessee and Lessee's employees and agents shall strictly
comply with all laws, ordinances, regulations, rules, orders and policies
of any Governmental Authority in effect from time to time, (Collectively
"Environmental Laws"), including without limitation any obligation to
notify Lessor with respect to Hazardous Materials. Lessee shall
immediately notify Lessor of any inquiry, test, investigation or
enforcement proceeding by or against Lessee or the Premises concerning
Hazardous Materials. Lessee acknowledges that Lessor shall have the right,
but not the obligation, in Lessor's own name, to negotiate, contest,
defend, and approve, at Lessee's expense, any action taken or threatened
or order issued by a Governmental Authority with regard to Lessee's
failure to comply with the provisions contained herein. Lessee shall,
within five (5) days after receipt by Lessee, submit to Lessor copies of
all inquiries, tests, investigations, and enforcement proceedings
described above and copies of all reports and responses thereto prepared
by or on behalf of Lessee. In connection with the transporting of any
Hazardous Materials to or from the Premises, Lessee shall list itself as
the transporter and generator. Any breach by Lessee of the foregoing
obligations shall constitute a default under the Lease, which is not cured
within the time period specified for curing a default under the Lease,
shall entitle the Lessor to exercise any rights or remedies available to
Lessor under the Lease or at law or in equity, including the right to
terminate the Lease.
Lessee shall indemnify, defend and hold Lessor and Lessor's partners,
employees and agents harmless from and against any and all claims,
actions, suits, proceedings, orders, judgments, losses, costs, damages,
liabilities or expenses (including without limitation attorney's fees and
costs of remediation and/or cleanup) arising in connection with any
Hazardous Materials released in, on, under or adjacent to the Premises of
any portion of the Industrial Center, or any Hazardous Materials shipped
thereto or therefrom, by Lessee or Lessee's agents, employee, contractors,
invitees, assigns or subtenants (collectively, "Lessee's Agents"),
including, without limitation, (i) any cost, damage or liability incurred
or sustained by Lessor in connection with an order or requirement of an
governmental agency to remediate, remove or clean up such Hazardous
Materials, (ii) any third party claim resulting from death, personal
injury or property damage arising out of the Release of such Hazardous
Materials, and (iii) any consequential damages incurred by Lessor as a
result of such Release of Hazardous Material including, loss of profits,
reduction in value, and inability to sell, lease, or finance. If Lessee or
Lessee's Agents cause or allow any Hazardous Materials to be Released in,
on under or adjacent to any portion of the Premises, and any portion of
the Premises or adjacent areas becomes contaminated by such Hazardous
Materials, Lessee shall promptly, at its sole cost, take all actions
necessary to clean up and remove such contamination, and restore the
Premises and adjacent areas to the condition existing prior to the
appearance of such Hazardous Material. Lessee shall Surrender the Premises
to Lessor upon expiration or earlier termination of the Lease free of all
Hazardous Materials Released by Lessee or Lessee's Agents, and in a
condition which complies with all Environmental Laws, recommendations of
consultants hired by Lessor, and such other requirements as may be
reasonably imposed by Lessor. Lessee's obligations herein shall survive
the termination of this Lease.
60. First Right to Negotiate. During the term hereof and prior to entering
------------------------
into negotiations to lease Arrowstaff's space commonly known as 444
Oakmead Parkway to another party, other than Arrowstaff, except as
indicated below, Lessor shall notify Lessee of the availability of such
space for letting. Lessee shall have three (3) days from receipt of such
notice to give Lessor written notice of its desire to lease such space for
its own use. If Lessee fails to respond to Lessor's notice within said
three (3) day period, or, after giving written notice of its desire to
lease such space, Lessor and Lessee do not execute a written lease for
such space within a fifteen (15) day period from Lessor's initial notice
to Lessee, then Lessee's right under this paragraph shall be deemed to
have been waived, and Lessor shall be free (without any further obligation
to Lessee) to lease the space to any other party upon the same or other
terms, without any further notice to Lessee, whether or not the terms of
such lease are more or less favorable than those offered to Lessee.
Lessee's right to negotiate, as aforesaid, is subordinate, however, to any
expansion or renewal options already granted to other tenants in the
Building. The first right to negotiate for additional space shall be
terminated during any period in which Lessee is in default under any
provisions of this Lease. The period of time within which this right to
negotiate may be exercised shall not be extended or enlarged by reason of
Lessee's inability to exercise such right because of the foregoing
provision. Time is of the essence. If Lessee fails to
PAGE 14
<PAGE>
exercise its first right to negotiate in any instance when such right may
arise, in writing, prior to the expiration of the applicable time period
for the exercise of such right, then Lessee's right in the instance in
question shall thereafter be deemed null and void and of no further force
or effect.
Second Right to Negotiate. In the event neither Foxlink nor Arrowstaff
-------------------------
commits to lease the present Foxlink space beyond the existing lease term,
and prior to entering into negotiations to lease Foxlink's space commonly
known as 456 Oakmead Parkway to another party, except as indicated below,
Lessor shall notify Lessee of the availability of such space for letting.
Lessee shall have three (3) days from receipt of such notice to give Lessor
written notice of its desire to lease such space for its own use. If Lessee
fails to respond to Lessor's notice within said three (3) day period, or,
after giving written notice of its desire to lease such space, Lessor and
Lessee do not execute a written lease for such space within a fifteen (15)
day period from Lessor's initial notice to Lessee, then Lessee's right
under this paragraph shall be deemed to have been waived, and Lessor shall
be free (without any further obligation to Lessee) to lease the space to
any other party upon the same or other terms, without any further notice to
Lessee, whether or not the terms of such lease are more or less favorable
than those offered to Lessee.
Lessee's right to negotiate, as aforesaid, is subordinate, however, to any
expansion or renewal options granted to other tenants in the Building. The
first right to negotiate for additional space shall be terminated during
any period in which Lessee is in default under any provisions of this
Lease. The period of time within which this right to negotiate may be
exercised shall not be extended or enlarged by reason of Lessee's inability
to exercise such right because of the foregoing provision. Time is of the
essence. If Lessee fails to exercise its first right to negotiate in any
instance when such right may arise, in writing, prior to the expiration of
the applicable time period for the exercise of such right, then Lessee's
right in the instance in question shall thereafter be deemed null and void
and of no further force or effect.
61. Warranty. Lessor shall deliver the Premises clean and free to debris, and
--------
with all building systems, (mechanical, HVAC, electrical, plumbing and
roof) is in good condition and repair. Lessor shall warrant such systems to
remain in good operating condition and repair for a period of 90 days after
the commencement date.
62. Notwithstanding, the above, (Hazardous Substance) shall not include any
products, substances, chemical material or waste commonly used in the
office environment, so long as the quantity and the use thereof is not in
violation of applicable laws.
63. Provided that such lender and or purchaser as applicable agrees to execute
a Non-Disclosure Agreement with Lessee appropriate under the circumstances.
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PAGE 15
<PAGE>
EXHIBIT 10.10
ADDENDUM #2 TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT
LEASE-MODIFIED NET
The Undersigned, being Lessor and Lessee under that certain Lease and Addendum
dated March 21, 1997 (collectively, the "Lease"), for the Premises known as 440
Oakmead Parkway, Sunnyvale, CA, with a net rentable area of approximately 6,031
square feet, do hereby agree to extend and modify the provisions of said Lease
as follows:
1. Expansion: Commencing September 15, 1998, the Existing Premises shall
---------
be increased in size by approximately 7,400 square feet of net
rentable area, as outlined on attached Exhibit A (the "Expansion
Space"). The address of said Expansion Space is 444 Oakmead Parkway,
Sunnyvale, CA. The Existing Premises plus the Expansion Space
(collectively, the "Premises") shall consist of approximately 13,431
square feet of net rentable area.
2. Term: The Lease Term for the Expansion Space shall commerce upon the
----
earlier to occur of (i) when Lessor makes the Expansion Space
available to Lessee, or (ii) September 15, 1998 and shall terminate on
August 31, 1999. In the event that the current tenant does not vacate
the Expansion Space by September 15, 1998, the commencement date of
the Lease with respect to the Expansion Space and Tenant's obligation
to pay Rent on the Expansion Space shall be delayed until the day
following their departure.
3. Base Rent & Lessee's Share: Commencing the earlier to occur of (i)
--------------------------
when Lessor makes the Expansion Space available to Lessee, or (ii)
September 15, 1998, the monthly Base Rent for the Expansion Space
shall be Fourteen Thousand Eight Hundred and no/100 Dollars
($14,800.00) ($2.00 per square foot), and Lessee's Share (as defined
in (P)1.6(b) of the Lease) shall be increased proportionate to the
increase in the leased premises.
4. Security Deposit: An additional Security Deposit in the amount of
----------------
Fourteen Thousand Eight Hundred and no/100 Dollars ($14,800.00) shall
be due and payable to Landlord upon execution of this Addendum.
5. Option to Extend: Lessor grants to Lessee an option to extend the
----------------
Lease for the Expansion Space for a period of three (3) years at the
then current market rent as determined by (P)58 of the Lease. This
option to extend must be exercised, if at all, by notice in writing
("Option Notice") given to Lessor by May 4, 1999; PROVIDED HOWEVER,
that if Lessee is in default on the date of giving the Option Notice,
the Option Notice shall be totally ineffective; or if Lessee is in
default on the date the extended term is to commerce, the extended
term shall not commence, and the lease as to the Expansion Space shall
expire at the end of the term.
6. Tenant Improvement: Lessor shall install store front glass in the
------------------
existing roll up truck door, recarpet floors that are currently
covered with VCT and install blinds
<PAGE>
in the conference room, as shown on the attached Exhibit A. Upon
Lessor's completion of the above described work, Lessee shall pay to
Lessor $6,025.00, which represents an estimated 50% of the cost of
said improvements. In the event Lessee fails to exercise its option to
extend (Paragraph 5, above) Lessee shall, not later than May 4, 1999,
pay to Lessor an additional $6,025.00 (the "Remaining Amount"). The
Remaining Amount shall be due and payable should Lessee at any time be
in default of the Lease. In addition, Lessor shall on or about
September 15, 1998, at its sole expense, cause all the existing
interior walls to be repainted and the existing carpets cleaned.
7. All other terms, covenants and conditions of said Lease shall remain
in full force and effect.
Approved and accepted this 10th day of September, 1998.
LANDLORD: TENANT:
STAFFIELD INVESTMENTS INTERTRUST
By:_____________________________ By:_____________________________
Don Pearlman, Partner Erwin Lenowitz, Vice Chairman
<PAGE>
Exhibit 10.11
- --------------------------------------------------------------------------------
STANDARD FORM LEASE
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Parties: This Lease, executed in duplicate at Cupertino, California, on July
21st, 1999, by and between Mission West Properties, L.P., a Delaware limited
partnership, and InterTrust Technologies Corporation, a Delaware corporation,
hereinafter called respectively Lessor and Lessee, without regard to number or
gender.
Use: Witnesseth: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, for the purpose of conducting therein office, research and development,
light manufacturing, and warehouse activities, and any other legal activity; and
for no other purpose without obtaining the prior written consent of Lessor.
Premises: The real property with appurtenances as shown on Exhibit A (the
"Premises") situated in the City of Santa Clara, County of Santa Clara, State of
California, and more particularly described as follows:
The Premises includes 65,780 square feet of building, including
all improvements thereto, as shown on Exhibit A.1 including the
right to use 240 parking spaces at the Premises. The address for
the Premises is 4750 Patrick Henry Drive, Santa Clara,
California. Lessee's pro-rata share of the Premises is 100%.
Term: The term shall be for sixty (60) months unless extended pursuant to
Section 35 of this Lease (the "Lease Term"), commencing on the Commencement Data
as defined in Section 1 and ending sixty (60) months thereafter.
Rent: Base rent shall be payable in monthly installments as follows:
Base rent Estimated CAC* Total
--------- -------------- -----
Months 1 through 12 $121,693 $14,472* $136,165
Monthly base rent to increase by 4% on the annual anniversary of the
Commencement Date each year during the Lease Term over the prior year's rent.
* CAC charges to be adjusted per Common Area Charges Section below.
Base rent and CAC as scheduled above shall be payable in advance on or below the
first day of each calendar month during the Lease Term. The term "Rent," as used
herein, shall be deemed to be and to mean the base monthly rent and all other
sums required to be paid by Lessee pursuant to the terms of this Lease. Rent
shall be paid in lawful money of the United States of America, without offset or
deduction, and shall be paid to Lessor at such place or places as may be
designated from time to time by Lessor. Rent for any period less than a calendar
month shall be a pro rata portion of the monthly installment. Upon execution of
this Lease, Lessee shall deposit with Lessor the first month's rent.
Security Deposit: Lessee shall deposit with Lessor the sum of Three Hundred
Sixty-Five Thousand Dollars ($365,000) (the "Security Deposit"). The Security
Deposit shall be held by Lessor as security for the faithful performance by
Lessee of all of the terms, covenants, and conditions of this Lease applicable
to Lessee. If Lessee commits a default as provided for herein, including but not
limited to a default with respect to the provisions contained herein relating to
the condition of the Premises, Lessor may (but shall not be required to) use,
apply or retain all or any part of the Security Deposit for the payment of any
amount which Lessor may spend by reason of default by Lessee. If any portion of
the Security Deposit is so used or applied, Lessee shall, within ten days after
written demand therefor, deposit cash with Lessor in an amount sufficient to
restore the Security Deposit to its original amount. Lessee's failure to do so
shall be a default by Lessee. Any attempt by Lessee to transfer or encumber its
interest in the Security Deposit shall be null and void. Upon execution of this
Lease, Lessee shall deposit with Lessor the Security Deposit. Notwithstanding
the above, Lessor agrees to waive the required Security Deposit provided
Lessee's shareholder's equity exceeds $25 million. If at any time during this
Lease Term, Lessee's shareholder's equity is less than $25 million, within ten
days after the issuance of Lessee's financial statements indicating the
reduction in shareholder's equity below $25 million, Lessee shall be obligated
to provide Lessor a Security Deposit in the applicable amount: (i) if Lessee's
shareholder's equity is more than $15 million,
<PAGE>
Lessee shall deposit with Lessor a Security Deposit in the amount of $121,000,
(ii) if Lessee's shareholder's equity is less than $15 million but more than
$7.5 million, Lessee shall deposit with Lessor a Security Deposit in the amount
of $242,000, or (iii) if Lessee's shareholder's equity is less than $7.5
million, Lessee shall deposit with Lessor a Security Deposit in the amount of
$365,000. If Lessee fails to make the Security Deposit as required, Lessee shall
be deemed to be in default per Section 14.1 (a) of this Lease.
Common Area Charges: Lessee shall pay to Lessor, as additional Rent, an amount
equal to Lessee's pro-rate share of the total common area charges of the
Premises as defined below (the common area charges for the Premises is referred
to herein as ("CAC")). Lessee shall pay to Lessor as Rent, on or before the
first day of each calendar month during the Lease Term, subject to adjustment
and reconciliation as provided herein below, the sum of Fourteen Thousand Four
Hundred Seventy-Two Dollars ($14,472), said sum representing Lessee's estimated
monthly payment of Lessee's percentage share of CAC. It is understood and agreed
that Lessee's obligation under this paragraph shall be prorated to reflect the
Commencement Date and the end of the Lease Term. Upon execution of this Lease,
Lessee shall deposit with Lessor the first month's estimated CAC.
Lessee's estimated monthly payment of CAC payable by Lessee during the calendar
year in which the Lease commences is set forth above. At or prior to the
commencement of each succeeding calendar year term (or as soon as practical
thereafter), Lessor shall provide Lessee with Lessee's estimated monthly payment
for CAC which Lessee shall pay to Lessor as Rent. Within 120 days of the end of
the calendar year and the end of the Lease Term, Lessor shall provide Lessee a
statement of actual CAC incurred including capital reserved for the preceding
year or other applicable period in the case of a termination year. If such
statement shows that Lessee has paid less than its actual percentage, then
Lessee shall within thirty (30) days after demand pay to Lessor the amount of
such deficiency. If such statement shows that Lessee has paid more than its
actual percentage, then Lessor shall, at its option, promptly refund such excess
to Lessee or credit the amount thereof to the Rent next becoming due from
Lessee. Lessor reserves the right to revise any estimate of CAC if the actual or
projected CAC show an increase or decrease in excess of 10% from an earlier
estimate for the same period. In such event, Lessor shall provide a revised
estimate to Lessee, together with an explanation of the reasons therefor, and
Lessee shall revise its monthly payments accordingly. Lessor's and Lessee's
obligation with respect to adjustments at the end of the Lease Term or earlier
expiration of this Lease shall survive the Lease Term or earlier expiration.
As used in this Lease, CAC shall include but is not limited to: (i) items as
specified in Sections 5(b), 6, 16 and 31; (ii) all costs and expenses including
but not limited to supplies, materials, equipment and tools used or required in
connection with the operation and maintenance of the Premises; (iii) licenses,
permits and inspection fees; (iv) all other costs incurred by Lessor in
maintaining and operating the Premises; (v) all reserves for Capital
Replacements ("Capital Replacements" are defined as capital replacements for
HVAC, parking lot, roof membrane, and exterior painting); and (vi) an amount
equal to five percent (5%) of the aggregate of all CAC, as compensation for
Lessor's accounting and processing services. Lessee shall have the right to
review and audit the basis and computation analysis used to derive the CAC
applicable to this Lease annually. CAC shall not include (i) rent paid to any
ground lessor, (ii) repairs covered by proceeds of insurance; (iii) damage and
repairs necessitated by the gross negligence or willful misconduct of Lessor,
Lessor's employees, contractors, or agents; (iv) executive salaries or salaries
of service personnel to the extent that such personnel perform services not in
connection with the management, operation, repair, or maintenance of the
Building; (v) Lessor's general overhead expenses not related to the Building;
(vi) costs of any service for which Lessor is reimbursed; (vii) repairs,
alterations, additions, improvements or replacements needed to correct defects
in any work paid for by Lessee; (viii) "Capital Expenditures" (capital amounts
over $5,000), except (a) those required as a result of government regulations
imposed on the Premises, (b) those required as a result of alterations of the
Premises by Lessee or (c) those required to create operating efficiencies and
savings at the Premises. (a), (b), and (c) above shall be amortized over their
useful life at Wells Fargo's prime rate plus 1% and the monthly amortization
shall be added to Lessee's CAC.
Late Charges: Lessee hereby acknowledges that a late payment made by Lessee to
Lessor of Rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges, which may be imposed on Lessor
according to the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of Rent or any other sum due from Lessee is not
received by Lessor or Lessor's designee within five (5) days after such amount
is due, Lessee shall pay to Lessor a late charge equal to five (5%) percent of
such overdue amount. The parties hereby agree that such late charge represents a
fair and
2
<PAGE>
reasonable estimate of the costs Lessor will incur by reason of late payments
made by Lessee. Acceptance of such late charges by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such overdue amount, nor
shall it prevent Lessor from exercising any of the other rights and remedies
granted hereunder.
Quiet Enjoyment: Lessor covenants and agrees with Lessee that upon Lessee paying
Rent and performing its covenants and conditions under this Lease, Lessee shall
and may peaceably and quietly have, hold and enjoy the Premises for the Lease
Term, subject, however, to the rights reserved by Lessor hereunder.
It is Further Mutually Agreed Between The Parties As Follows:
1. Possession: Possession shall be deemed tendered and the term shall commence
upon the first to occur of the following, but in no event earlier than September
1, 1999 (the "Commencement Date"): (i) the Premises are Substantially Complete
or (ii) Lessee occupies the Premises or (iii) if Lessor is prevented from or
delayed in completing its work under this Lease due to Lessee Delays, such work
will be deemed Substantially Complete as of the date on which it would have been
Substantially Complete had it not been for such Lessee Delays or (iv) the
Premises are available for occupancy by Lessee and the Premises meet all
requirements for occupancy. It is the intention of Lessee and Lessor that
September 1, 1999 shall be the Commencement Date.
"Substantially Complete" shall mean that: (i) Lessor has tendered possession of
Premises to Lessee, (ii) Lessor has met all requirements for occupancy, (iii)
The lessee interior improvements are materially complete per the approved plans,
exclusive of telephone or other communication systems, punchlist items and there
remains no incomplete or defective items of work which would materially
adversely affect Lessee's intended use of the Premises, and (iv) said interior
of the building is in a "broom clean" condition and carpets shampooed, any
damaged or stained ceiling tiles replaced and touch up paint where needed.
1.1 Commencement Data Memorandum: When the actual Commencement Date is
determined, the parties shall execute a Commencement Date Memorandum setting
forth the Commencement Date, the expiration date of the Lease Term and the
actual square footage if any portion of the walkway connector is included in the
Premises and any required adjustments to base rent and CAC, but failure to do so
shall not affect the continuing validity and enforceability of this Lease, which
shall remain in full force and effect.
2. Lessee's Improvements: Lessor shall cause the improvements specified on
Exhibit B attached hereto to be made to the Premises at the sole cost and
expense of Lessor. Notwithstanding the foregoing, Lessor's obligation to cause
the improvements to be made shall be limited to those specified on Exhibit B.
Additional improvements (those improvements not specified on Exhibit B), if any,
may be made by Lessor, upon written request by Lessee. In no event shall
Lessee's request for additional improvements delay the Commencement Date. If
Lessee requests additional improvements prior to the Commencement Date, the
monthly base rent under the Lease shall be increased by $21.25 per month for
every $1,000 dollars of additional improvements up to a maximum of $131,560. Any
approved cost over the $131,560 coverage shall be paid for by Lessee in cash
within fifteen (15) days after Lessor has provided Lessee with evidence that the
work approved is complete. All costs incurred shall be documented and subject to
verification by Lessee.
Notwithstanding the provisions of Section 1 above, Lessee may occupy and enter
the Premises prior to September 1, 1999 provided the occupancy and entry of
Lessee do not delay or interfere with Lessor's completion of the improvements
provided for in this Lease and subject to Lessee complying with all terms of the
Lease except the obligation to pay Rent.
2.1 Acceptance Of Premises And Covenants To Surrender: Lessee accepts the
Premises in an "AS IS" condition and "AS IS" state of repair, subject to
Lessor's representations: (i) that the Premises and the building operating
systems are in good order and repair, and comply with all requirements for
occupancy including ADA as of the Commencement Date, and (ii) Lessor has
completed the improvements shown on the attached Exhibit B. Lessee agrees on the
last day of the Lease Term, or on the sooner termination of this Lease, to
surrender the Premises to Lessor in Good Condition and Repair. "Good Condition
and Repair" shall generally mean that the Premises are in the condition that one
would expect the Premises to be in, if throughout the Lease Term Lessee (i) uses
and maintains the Premises in a commercially reasonable manner and in an
accordance with the
3
<PAGE>
requirements of this Lease and destruction under paragraph 19 excepted (ii)
makes all Required Replacements. "Required Replacements" are the replacements to
worn-out equipment, fixtures, and improvements that a commercially reasonable
owner-user would make. All of the following shall be in Good Condition and
Repair: (i) the interior walls and floors of all offices and other interior
areas, (ii) all suspended ceilings and any carpeting shall be clean and in good
condition, (iii) all windows, doors and door closures and glazing and plate
glass if not covered by insurance, and (iv) all electrical systems, including
light fixtures and ballasts, plumbing, and temperature control systems. Lessee,
on or before the end of the Lease Term or sooner termination of this Lease,
shall remove all its personal property and trade fixtures from the Premises, and
all such property not so removed shall be deemed to be abandoned by Lessee.
Lessee shall reimburse Lessor for all disposition costs incurred by Lessor
relative to Lessee's abandoned property. If the Premises are not surrendered at
the end of the Lease Term or earlier termination of this Lease, Lessee shall
indemnify Lessor against loss or liability resulting from any delay caused by
Lessee in surrendering the Premises including, without limitation, any claims
made by any succeeding Lessee founded on such delay. Notwithstanding the
provisions of the preceding sentence, Lessor shall provide Lessee with 30 days
prior written notice of any damages that will be due Lessor as a result of
Lessee's delay in surrendering the Premises and Lessee shall have no obligation
for these damages if Lessee surrenders the Premises within the subject 30 days.
3. Uses Prohibited: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the buildings in
which the subject Premises are located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any improper, immoral, unlawful
or objectionable purpose, or place any loads upon the floor, walls, or ceiling
which may endanger the structure, or use any machinery or apparatus which will
in any manner vibrate or shake the Premises or the building of which it is a
part, or place any harmful liquids in the drainage system of the building. No
waste materials or refuse shall be dumped upon or permitted to remain upon any
part of the Premises outside of the building proper. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain on any
portion of the Premises outside of the building structure, unless approved by
the local, state federal or other applicable governing authority. Lessor
consents to Lessee's use of materials which are incidental to the normal, day-
to-day operations of any office user, such as copier fluids, cleaning materials,
etc., but this does not relieve Lessee of any of its obligations not to
contaminate the Premises and related real property or violate any Hazardous
Materials Laws.
4. Alterations And Additions: Lessee shall not make, or suffer to be made, any
alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor which consent shall not be
unreasonably withheld or delayed; any addition or alteration to said Premises,
except movable furniture and trade fixtures, shall become at once a part of the
realty and belong to Lessor to the end of the Lease Term or earlier termination
of this Lease. Alterations and additions which are not deemed as trade fixtures
shall include HVAC systems, lighting systems, electrical systems, hard wall
partitioning, carpeting, or any other installation which has become an integral
part of the Premises. Lessee agrees that it will not proceed to make such
alterations or additions until all required government permits have been
obtained and after having obtained consent from Lessor to do so, until five (5)
days from the receipt of such consent, so that Lessor may post appropriate
notices to avoid any liability to contractors or material suppliers for payment
for Lessee's improvements. Lessee shall at all times permit such notices to be
posted and to remain posted until the completion of work. At the end of the
Lease Term or earlier termination of this Lease, Lessee shall remove and shall
be required to remove its special tenant improvements, all related equipment,
and any additions or alterations installed by Lessee at or during the Lease Term
and Lessee shall return the Premises to the condition that existed before the
installation of the tenant improvements. Notwithstanding the above, Lessor
agrees to allow any reasonable alterations and improvements and will notify
Lessee at the time of approval if such improvements or alterations are to be
removed at the end of the Lease Term or earlier termination of this Lease. The
initial tenant improvements shall not be required by Lessor to be removed.
Notwithstanding the above, Lessee shall have the right to make non-structural
alterations costing less than Ten Thousand Dollars ($10,000.00) without Lessors
consent but only after five (5) days prior notice to Lessor.
5. Maintenance Of Premises:
(a) Lessee shall at its sole cost and expense keep, repair, and maintain
the interior of the Premises in Good Condition and Repair, including, but
not limited to, the interior walls and floors of all offices and other
interior areas, doors and door closures, all lighting systems, temperature
control systems, kitchen fixtures and
4
<PAGE>
equipment, and plumbing systems, including any Required Replacements.
Lessee shall provide interior and exterior window washing as needed.
(b) Lessor shall, at Lessee's expenses, keep, repair, and maintain in Good
Condition and Repair including replacements (based on a pro-rata share of
(i) costs based on square footage or (ii) costs directly related to
Lessee's use of the Premises) the following, which shall be included in the
monthly CAC:
1. The exterior of the building, any appurtenances and every part
thereof, including but not limited to, glazing, sidewalks, parking
areas, electrical systems, and painting of exterior walls. The parking
lot to receive a finish coat every five years.
2. The HVAC by a service contract with a licensed air conditioning
and heating contractor which contract shall provide for a minimum of
quarterly maintenance of all air conditioning and heating equipment at
the Premises including HVAC repairs or replacements which are either
excluded from such service contract or any existing equipment
warranties.
3. The landscaping by a landscape contractor to water, maintain,
trim and replace, when necessary, any shrubbery, irrigation parts, and
landscaping at the Premises.
4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of semi-
annual maintenance, cleaning of storm gutters, drains, removing of
debris, and trimming overhanging trees, repair of the roof and
application of a finish coat every five years to the building at the
Premises.
5. Exterior pest control.
6. Fire monitoring services.
7. Parking lot sweeping.
(c) Lessee hereby waives any and all rights to make repairs at the expense
of Lessor as provided in Section 1942 of the Civil Code of the State of
California, and all rights provided for by Section 1941 of said Civil Code.
However, in an emergency, Lessee may make any repairs required of Lessor
only to the extent necessary to alleviate the emergency condition which
Lessor has not made, and Lessor will reimburse Lessee all reasonable costs
incurred within thirty (30) days of invoice.
(d) Lessor shall be responsible at its sole expense for the repair of any
structural defects in the Premises including the roof structure (not
membrane), exterior walls and foundation during the Least Term.
5.1 Lessor's Repairs: Notwithstanding the provisions of Section 5 above: (a)
Lessor agrees that for the six month period ending on February 28, 2000, Lessor
will pay the cost to repair any single item in the HVAC, plumbing or electrical
systems that: (i) the failure to repair is not caused by the negligence, or
misconduct of Lessee or Lessor's agents. (b) The intent of this Section 5.1 is
to limit the exposure of the Lessee for any single item failure during the first
six months of the Lease Term, such as compressor, transformers and the like. In
addition, Lessor agrees that for the six month period ending February 28, 2000,
Lessor will pay any roof repair costs if not caused or related to the actions of
Lessee. Notwithstanding the provisions of this Section 5.1, Lessee shall be
responsible to pay for all regular maintenance contracts related to all
operating systems at the Premises.
6. Insurance:
A) Hazard Insurance: Lessee shall not use, or permit said Premises, or
any part thereof, to be used, for any purpose other than that for which the
Premises are hereby leased; and no use shall be made or permitted to be
made of the Premises, nor acts done, which may cause a cancellation of any
insurance policy covering the Premises, or any party thereof, nor shall
Lessee sell or permit to be kept, used or sold, in or about said Premises,
any article which may be prohibited by a fire and extended coverage
insurance policy. Lessee shall
5
<PAGE>
comply with any and all requirements, pertaining to said Premises, of any
insurance organization or company, necessary for the maintenance of
reasonable fire and extended coverage insurance, covering the Premises.
Lessor shall, at Lessee's sole cost and expense, purchase and keep in force
fire and extended covering insurance, covering loss or damage to the
Premises in an amount equal to the full replacement cost of the Premises,
as determined by Lessor, with proceeds payable to Lessor. In the event of a
loss per the insurance provisions of this paragraph, Lessee shall be
responsible for deductibles up to a maximum of $5,000 per occurrence.
Lessee acknowledges that the insurance referenced in this paragraph does
not include coverage for Lessee's personal property.
B) Loss of Rents Insurance: Lessor shall, at Lessee's sole cost and
expense, purchase and maintain in full force and effect, a policy of rental
loss insurance, in an amount equal to the amount of Rent payable by Lessee
commencing on the date of loss if reasonably available for the next ensuing
one (1) year, as reasonably determined by Lessor with proceeds payable top
Lessor ("Loss of Rents Insurance").
C) Liability and Property Damage Insurance: Lessee, as a material part of
the consideration to be rendered to Lessor, hereby waives all claims
against Lessor and Lessor's Agents for damages to goods, wares and
merchandise, and all other personal property in, upon, or about the
Premises, and for injuries to persons in, upon, or about the Premises, from
any cause arising at any time, and Lessee will hold Lessee and Lessor's
Agents exempt and harmless from any damage or injury to any person, or to
the goods, wares, and merchandise and all other personal property of any
person, arising from the use or occupancy of the Premises by Lessee, or
from the failure of Lessee to keep the Premises in Good Condition and
Repair, as herein provided. Lessee shall, at Lessee's sole cost and
expense, purchase and keep in force a standard policy of commercial general
liability insurance and property damage policy covering the Premises and
all related areas insuring the Lessee having a combined single limit for
both bodily injury, death and property damage in an amount not less than
three million dollars ($3,000,000.00) and Lessee's insurance shall be
primary. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder. Lessee shall, at its sole cost and expense,
comply with all of the insurance requirements of all local, municipal,
state and federal authorities now in force, or which may hereafter be in
force, pertaining to Lessee's use and occupancy of said Premises.
D) Personal Property Insurance: Lessee shall obtain, at Lessee's sole
cost and expense, a policy of fire and extended coverage insurance
including coverage for direct physical loss special form, and a sprinkler
leakage endorsement insuring the personal property of Lessee. The proceeds
from any personal property damage policy shall be payable to Lessee.
All insurance policies required in 6 C) and 6 D) above shall: (i) provide for a
certificate of insurance evidencing the insurance required herein, being
deposited with Lessor ten (10) days prior to the Commencement Date, and upon
each renewal, such certificates shall be provided 15 days prior to the
expiration date of such coverage, (ii) be in a form reasonably satisfactory to
Lessor and shall provide the coverage required by Lessee in this Lease, (iii) be
carried with companies with the a Best Rating of A minimum, (iv) specifically
provide that such policies shall not be subject to cancellation or reduction of
coverage, except after 30 days prior written notice to Lessor, (v) name Lessor,
Lessor's lender, and any other party with an insurable interest in the Premises
as additional insureds by endorsement to policy, and (vi) shall be primary.
Lessee agrees to pay to Lessor, as additional Rent, on demand, the full cost of
the insurance policies referenced in 6 A) and 6 B) above as evidenced as
insurance billings to Lessor which shall be included in the CAC. If Lessee does
not occupy the entire Premises, the insurance premiums shall be allocated to the
portion of the Premises occupied by Lessee on a pro-rata square footage or other
equitable basis, as determined by Lessor. It is agreed that Lessee's obligation
under this paragraph shall be prorated to the reflect the Commencement Date and
the end of the Lease Term.
Lessor and Lessee hereby waive any rights each may have against the other
related to any loss or damage caused to Lessor or Lessee as the case may be, or
to the Premises or its contents, and which may arise from any risk covered by
fire and extended coverage insurance and those risks required to be covered
under Lessee's personal property insurance. The parties shall provide that their
respective insurance policies insuring the property or the personal
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property include a waiver of any right of subrogation which said insurance
company may have against Lessor or Lessee, as the case may be.
7. Abandonment: Lessee shall not abandon the Premises at any time during the
Lease Term; and if Lessee shall abandon, or surrender said Premises, or be
dispossessed by process of law, or otherwise, any personal property belonging to
Lessee and left on the Premises shall be deemed to be abandoned, at the option
of Lessor. Notwithstanding the above, the Premises shall not be considered
abandoned if Lessee maintains the Premises in Good Condition and Repair,
provides security and is not in default.
8. Free From Liens: Lessee shall keep the subject Premises and the property in
which the subject Premises are situated, free from any and all liens including
but not limited to liens arising out of any work performed, materials furnished,
or obligations incurred by Lessee. However, the Lessor shall allow Lessee to
contest a lien claim, so long as the claim is discharged prior to any
foreclosure proceeding being initiated against the property and provided Lessee
provides Lessor a bond if the lien exceeds $5,000. Notwithstanding the above, no
bond is required if the lien is discharged within 30 days of filing.
9. Compliance With Governmental Regulations: Lessee shall, at its sole cost
and expense, comply with all of the requirements of all local, municipal, state
and federal authorities now in force, or which may hereafter be in force,
pertaining to the Premises, and shall faithfully observe in the use and
occupancy of the Premises all local and municipal ordinances and state and
federal statutes now in force or which may hereafter be in force.
10. Intentionally Omitted.
11. Advertisements And Signs: Lessee shall not place or permit to be placed,
in, upon or about the Premises any unusual or extraordinary signs, or any signs
not approved by the city, local, state, federal or other applicable governing
authority. Lessee shall not place, or permit to be placed upon the Premises, any
signs, advertisements or notices without the written consent of the Lessor, and
such consent shall not be unreasonably withheld. A sign so placed on the
Premises shall be so placed upon the understanding and agreement that Lessee
will remove same at the end of the Lease Term or earlier termination of this
Lease and repair any damage or injury to the Premises caused thereby, and if not
so removed by Lessee, then Lessor may have the same removed at Lessee's expense.
12. Utilities: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Premises. Any charges for sewer
usage, PG&E and telephone site service or related fees shall be the obligation
of Lessee and paid for by Lessee. If any such services are not separately
metered to Lessee, Lessee shall pay a reasonable proportion of all charges which
are jointly metered, the determination to be made by Lessor acting reasonably
and on any equitable basis. Lessor and Lessee agree that Lessor shall not be
liable to Lessee for any disruption in any of the utility services to the
Premises except for Lessor's gross negligence or willful misconduct.
13. Attorney's Fees: In case suit should be brought for the possession of the
Premises, for the recovery of any sum due hereunder, because of the breach of
any other covenant herein, or to enforce, protect, or establish any term,
conditions, or covenant of this Lease or the right of either party hereunder,
the losing party shall pay to the Prevailing Party reasonable attorney's fees
which shall be deemed to have accrued on the commencement of such action and
shall be enforceable whether or not such action is prosecuted to judgment. The
term "Prevailing Party" shall mean the party that received substantially the
relief requested, whether by settlement, dismissal, summary judgment, judgment,
or otherwise.
14.1 Default: The occurrence of any of the following shall constitute a default
and breach of this Lease by Lessee: a) Any failure by Lessee to pay Rent or to
make any other payment required to be made by Lessee hereunder when due if not
cured within ten (10) days after written notice thereof by Lessor to Lessee; b)
The abandonment of the Premises by Lessee except as provided in Section 7; c) A
failure by Lessee to observe and perform any other provision of this Lease to be
observed or performed by Lessee, where such failure continues for thirty days
after written notice thereof by Lessor to Lessee; provided, however, that if the
nature of such default is such that the same cannot be reasonably cured within
such thirty (30) day period, Lessee shall not be deemed to be in default if
Lessee shall, within such period, commence such cure and thereafter diligently
prosecute the same to completion; d) The making by Lessee of any general
assignment for the benefit of creditors; the filing by or against Lessee of a
petition to have Lessee adjudged a bankrupt or of a petition for reorganization
or arrangement under any
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law relating to bankruptcy; e) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets or Lessee's interest in this
Lease, or the attachment, execution or other judicial seizure of substantially
all of Lessee's assets located at the Premises or of Lessee's interest in this
Lease.
14.2 Surrender Of Lease: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity, Lessor
shall have the immediate option to terminate this Lease before the end of the
Lease Term and all rights of Lessee hereunder, by giving written notice of such
intention to terminate. In the event that the Lessor terminates this Lease due
to a default of Lessee, then Lessor may recover from Lessee: a) the worth at the
time of award of any unpaid Rent which had been earned at the time of such
termination; plus b) the worth at the time of award of unpaid Rent which would
have been earned after termination until the time of award exceeding the amount
of such rental loss that the Lessee proves could have been reasonably avoided;
plus c) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided; plus
d) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform his obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom; and e) at Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
California law. As used in (a) and (b) above, the "worth at the time of award"
is computed by allowing interest at the lesser of the rate of Wells Fargo's
prime rate plus two percent (2%) per annum or the maximum rate allowed by law.
As used in (c) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%).
14.3 Right of Entry and Removal: In the event of any such default by Lessee,
Lessor shall also have the right, with or without terminating this Lease, to re-
enter the Premises and remove all persons and property from the Premises; such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Lessee.
14.4 Abandonment: In the event of the abandonment, except as provided in
Section 7, of the Premises by Lessee or in the event that Lessor shall elect to
re-enter as provided in paragraph 14.3 above or shall take possession of the
Premises pursuant to legal proceeding or pursuant to any notice provided by law,
and Lessor does not elect to terminate this Lease as provided in Section 14.2
above, then Lessor may from time to time, without terminating this Lease, either
recover all Rent as it becomes due or relet the Premises or any part thereof for
such term or terms and at such rental rates and upon such other terms and
conditions as Lessor, in its sole discretion, may deem advisable with the right
to make alterations and repairs to the Premises. In the event that Lessor elects
to relet the Premises, then Rent received by Lessor from such reletting shall be
applied; first, to the payment of any indebtedness other than Rent due hereunder
from Lessee to Lessor; second, to the payment of any cost of such reletting;
third, to the payment of the cost of any alterations and repairs to the
Premises; fourth, to the payment of Rent due and unpaid hereunder; and the
residue, if any, shall be held by Lessor and applied to the payment of future
Rent as the same may become due and payable hereunder. Should that portion of
such Rent received from such reletting during any month, which is applied by the
payment of Rent hereunder according to the application procedure outlined above,
be less than the Rent payable during that month by Lessee hereunder, then Lessee
shall pay such deficiency to Lessor immediately upon demand therefor by Lessor.
Such deficiency shall be calculated and paid monthly. Lessee shall also pay to
Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in
such reletting or in making such alternations and repairs not covered by the
rentals received from such reletting.
14.5 No Implied Termination: No re-entry or taking possession of the Premises
by Lessor pursuant to Section 14.3 or Section 14.4 of this Lease shall be
construed as an election to terminate this Lease unless a written notice of such
intention is given to Lessee or unless the termination thereof is decreed by a
court of competent jurisdiction. Notwithstanding any reletting without
termination by Lessor because of any default by Lessee, Lessor may at any time
after such reletting elect to terminate this Lease for any such default.
15. Surrender Of Lease: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Lessor, terminate all or any existing subleases or sub tenancies,
or may, at the option of Lessor, operate as an assignment to him of any or all
such subleases or sub tenancies.
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16. Taxes: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, all real estate taxes, personal property
taxes, taxes based on vehicles utilizing parking areas in the Premises, taxes
computed or based on rental income (other than federal, state and municipal net
income taxes), environmental surcharges, privilege taxes, excise taxes, business
and occupation taxes, school fees or surcharges, gross receipts taxes, sales
and/or use taxes, employee taxes, occupational license taxes, water and sewer
taxes, assessments (including but not limited to, assessments for public
improvements or benefit), assessments for local improvements and maintenance
districts, and all other governmental impositions and charges of every kind and
nature whatsoever, regardless of whether now customary or within the
contemplation of the parties hereto and regardless of whether resulting from
increased rate and/or valuation, or whether extraordinary or ordinary, general
or special, unforeseen or foreseen, or similar or dissimilar to any of the
foregoing (all of the foregoing being hereinafter collectively called "Tax" or
"Taxes") which, at any time during the Lease Term, shall be applicable or
against the Premises, or shall become due and payable and a lien or charge upon
the Premises under or by virtue of any present or future laws, statutes,
ordinances, regulations, or other requirements of any governmental authority
whatsoever. The term "Environmental Surcharge" shall include any and all
expenses, taxes, charges or penalties imposed by the Federal Department of
Energy, Federal Environment Protection Agency, the Federal Clean Air Act, or any
regulations promulgated thereunder, or any other local, state or federal
governmental agency or entity now or hereafter vested with the power to impose
taxes, assessments or other types of surcharges as a means of controlling or
abating environmental pollution or the use of energy in regard to the use,
operation or occupancy of the Premises. The term "Tax" shall include, without
limitation, all taxes, assessments, levies, fees, impositions or charges levied,
imposed, assessed, measured, or based in any manner whatsoever (i) in whole or
in part on the Rent payable by Lessee under this Lease, (ii) upon or with
respect to the use, possession, occupancy, leasing, operation or management of
the Premises, (iii) upon this transaction or any document to which Lessee is a
party creating or transferring an interest or an estate in the Premises, (iv)
upon Lessee's business operations conducted at the Premises, (v) upon, measured
by or reasonably attributable to the cost or value of Lessee's equipment,
furniture, fixtures and other personal property located on the Premises or the
cost or value of any leasehold improvements made in or to the Premises by or for
Lessee, regardless of whether title to such improvements shall be in Lessor or
Lessee, or (vi) in lieu of or equivalent to any Tax set forth in this Section
16. In the event any such Taxes are payable by Lessor and it shall not be lawful
for Lessee to reimburse Lessor for such Taxes, then the Rent payable thereunder
shall be increased to net Lessor the same net rent after imposition of any such
Tax upon Lessor as would have been payable to Lessor prior to the imposition of
any such Tax. It is the intention of the parties that Lessor shall be free from
all such Taxes and all other governmental impositions and charges of every kind
and nature whatsoever. However, nothing contained in this Section 16 shall
require Lessee to pay any Federal or State income, franchise, estate,
inheritance, succession, transfer or excess profits tax imposed upon Lessor. If
any general or special assessment is levied and assessed against the Premises,
Lessor agrees to use its best reasonable efforts to cause the assessments to
become a lien on the Premises securing repayment of a bond sold to finance the
improvements to which the assessment relates which is payable in installments of
principal and interest over the maximum term allowed by law. It is understood
and agreed that Lessee's obligation under this paragraph will be prorated to
reflect the Commencement Date and the end of the Lease Term. It is further
understood that if Taxes cover the Premises and Lessee does not occupy the
entire Premises, the Taxes will be allocated to the portion of the Premises
occupied by Lessee based on a pro-rata square footage or other equitable basis,
as determined by Lessor. Taxes billed by Lessor to Lessee shall be included in
the monthly CAC.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall have
the right to contest or review the amount or validity of any Tax by appropriate
legal proceedings but which is not to be deemed or construed in any way as
relieving, modifying or extending Lessee's covenant to pay such Tax at the time
and in the manner as provided in this Section 16. However, as a condition of
Lessee's right to contest, if such contested Tax is not paid before such contest
and if the legal proceedings shall not operate to prevent or stay the collection
of the Tax so contested, Lessee shall, before instituting any such proceeding,
protect the Premises and the interest of Lessor and of the beneficiary of a deed
of trust or the mortgagee of a mortgage affecting the Premises against any lien
upon the Premises by a surety bond, issued by an insurance company acceptable to
Lessor and in an amount equal to one and one-half (1 1/2) times the amount
contested or, at Lessor's option, the amount of the contested Tax and the
interest and penalties in connection therewith. Any contest as to the validity
or amount of any Tax, whether before or after payment, shall be made by Lessee
in Lessee's own name, or if required by law, in the name of Lessor or both
Lessor and Lessee. Lessee shall defend, indemnify and hold harmless Lessor from
and against any and all such costs or expenses, including attorneys' fees, in
connection with any such proceedings brought by Lessee, whether in its own name
or not. Lessee
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shall be entitled to retain any refund of any such contested Tax and penalties
or interest thereon which have been paid by Lessee. Nothing contained herein
shall be construed as affecting or limiting Lessor's right to contest any Tax at
Lessor's expense.
17. Notices: Unless otherwise provided for in this Lease, any and all written
notices or other communications (the "Communication") to be given in connection
with this Lease shall be given in writing and shall be given by personal
delivery, facsimile transmission or by mailing by registered or certified mail
with postage thereon or recognized overnight courier, fully prepaid, in a sealed
envelope addressed to the intended recipient as follows:
<TABLE>
<S> <C> <C> <C>
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax No.: (408) 725-1626
(b) to the Lessee at: 4750 Patrick Drive Before commencement: 460 Oakmead Parkway
Santa Clara, California Sunnyvale, CA 94086
Attention: Erwin Lenowitz
Fax No.: (408) 222-6144
</TABLE>
or such other addresses, facsimile number or individual as may be designated by
a Communication given by a party to the other parties as aforesaid. Any
Communication given by personal delivery shall be conclusively deemed to have
been given and received on a date it is so delivered at such address provided
that such date is a business day, otherwise on the first business day following
its receipt, and if given by registered or certified mail, on the day on which
delivery is made or refused or if given by recognized overnight courier, on the
first business day following deposit with such overnight courier and if given by
facsimile transmission, on the day on which it was transmitted provided such day
is a business day, failing which, on the next business day thereafter.
18. Entry By Lessor: Lessee shall permit Lessor and its agents to enter into
and upon said Premises at all reasonable times (with at least twenty-four (24)
hours prior notice except if an emergency) using the minimum amount of
interference and inconvenience to Lessee and Lessee's business, subject to any
security regulations of Lessee, for the purpose of inspecting the same or for
the purpose of maintaining the building in which said Premises are situated, or
for the purpose of making repairs, alterations or additions to any other portion
of said building, including the erection and maintenance of such scaffolding,
canopies, fences and props as may be required, without any rebate of Rent and
without any liability to Lessee for any loss of occupation or quiet enjoyment of
the Premises; and shall permit Lessor and his agents, at any time within ninety
(90) days prior to the end of the Lease Term, to place upon said Premises any
usual or ordinary "For Sale" or "For Lease" signs and exhibit the Premises to
prospective tenants at reasonable hours.
19. Destruction Of Premises: In the event of a partial destruction of the said
Premises during the Lease Term from any cause which is covered by Lessor's
property insurance, Lessor shall forthwith repair the same, provided such
repairs can be made within one hundred eight (180) days after receipt of
building permit under the laws and regulations of State, Federal, County, or
Municipal authorities, but such partial destruction shall in no way annul or
void this Lease, except that Lease shall be entitled to a proportionate
reduction of Rent while such repairs are being made. With respect to any partial
destruction which Lessor is obligated to repair or may elect to repair under the
terms of this paragraph, the provision of Section 1932, Subdivision 2, and of
Section 1933, Subdivision 4, of the Civil Code of the State of California are
waived by Lessee. In the event that the building in which the subject Premises
may be situated is destroyed to an extent greater than thirty-three and one-
third percent (33 1/3%) of the replacement cost thereof, Lessor may, at its sole
option, elect to terminate this Lease, whether the subject Premises is insured
or not. A total destruction of the building in which the subject Premises are
situated shall terminate this Lease. Notwithstanding the above, Lessor is only
obligated to repair or rebuild to the extent of available insurance proceeds
including any deductible amount paid by Lessee. Should Lessor determine that
insufficient or no insurance proceeds are available for repair or reconstruction
of Premises, Lessor, at its sole option, may terminate the Lease. Lessee shall
have the option of continuing this Lease by agreeing to pay all repair costs to
the subject Premises. If the destruction is within the last twelve (12) months
of the lease term, then Lessee shall have the right to terminate this lease upon
thirty (30) days prior notice to Lessor.
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20. Assignment And Subletting: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Premises or any part thereof, or
any right or privilege appurtenant thereto, or cause any other person or entity
(a bona fide subsidiary or affiliate of Lease excepted) to occupy or use the
Premises, or any portion thereof, without the advance written consent of Lessor
which consent shall not be unreasonably withheld or delayed. Any such
assignment or subletting without such consent shall be void, and shall, at the
option of the Lessor, terminate this Lease. This Lease shall not, or shall any
interest therein, be assignable, as to the interest of the Lessee, by operation
of law, without the written consent of Lessor which consent shall not be
unreasonably withheld or delayed. Notwithstanding Lessor's obligations to
provide reasonable approval, Lessor reserves the right to withhold its consent
for any proposed sublessee or assignee of Lessee if the proposed sublessee or
assignee is a user or generator of Hazardous Materials. If Lessee desires to
assign its rights under this Lease or to sublet for the remaining term of the
Lease, all of the subject Premises to a party other than a bona fide subsidiary
or affiliate of Lessee, the Lessor shall have the right to recapture and take
back the Premises in which event Lessee shall be relieved of its obligations
hereunder to the extent of the recapture. Notwithstanding the forgoing, Lessee
may assign this Lease to a successor in interest, whether by merger or
acquisition, provided there is no substantial reduction in the net worth of the
resulting entity and the resulting entity is not a user or generator of
Hazardous Materials. Whether or not Lessor's consent to a sublease or
assignment is required, in the event of any sublease or assignment, Lessee shall
remain primarily liable for the performance of all conditions, covenants, and
obligations of Lessee hereunder and, in the event of a default by an assignee or
sublessee, Lessor may proceed directly against the original Lessee hereunder
and/or any other predecessor of such assignee or sublessee without the necessity
of exhausting remedies against said assignee or sublessee. If Lessor fails to
exercise its right of recapture or the sublease term is less than the remaining
term of the Lease, Lessee and Lessor agree to split 50/50 any bonus rent after
sublease expenses.
21. Condemnation: If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and a part thereof remains which in Lessee's
reasonable opinion is susceptible of occupation hereunder for Lessee's intended
purpose, this Lease shall as to the part so taken, terminate as of the date
title vests in the condemnor or purchaser, and the Rent payable hereunder shall
be adjusted so that the Lessee shall be required to pay for the remainder of the
Lease Term only that portion of Rent as the value of the part remaining. The
rental adjustment resulting will be computed at the same Rental rate for the
remaining part not taken; however, Lessor shall have the option to terminate
this Lease as of the date when title to the part so taken vests in the condemnor
or purchaser. If all of the Premises, or such part thereof be taken so that
there does not remain a portion susceptible for occupation hereunder, this Lease
shall thereupon terminate. If a part or all of the Premises be taken, all
compensation awarded upon such taking shall be payable to the Lessor. Lessee
may file a separate claim and be entitled to any award granted to Lessee.
22. Effects Of Conveyance: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and building constituting the Premises,
so that, in the event of any sale of said land or building, or in the event of a
Lease of said building, Lessor shall be and hereby is entirely freed and
relieved of all covenants and obligations of Lessor hereunder and it shall be
deemed and construed, without further agreement between the parties and the
purchaser of any such sale, or the Lessor of the building, that the purchaser or
lessor of the building has assumed and agreed to carry out any and all covenants
and obligations of the Lessor hereunder. If any security is given by Lessee to
secure the faithful performance of all or any of the covenants of this Lease on
the part of Lessee, Lessor will transfer and deliver the security, as such, to
the purchaser at any such sale of the building, and thereupon the Lessor shall
be discharged from any further liability.
23. Subordination: This Lease, in the event Lessor notifies Lessee in writing,
shall be subordinate to any ground lease, deed of trust, or other hypothecation
for security now or hereafter placed upon the real property at which the
Premises are a part and to any and all advances made on the security thereof and
to renewals, modifications, replacements and extensions thereof. Lessee agrees
to promptly execute any documents which may be required to effectuate such
subordination. Notwithstanding such subordination, if Lessee is not in default
and so long as Lessee shall pay the Rent and observe and perform all of the
provisions and covenants required under this Lease, Lessee's right to quiet
possession of the Premises shall not be disturbed or effected by any
subordination.
24. Waiver: The waver by Lessor or Lessee of any breach of any term, covenant
or condition, herein contained shall not be construed to be waiver of such term,
covenant or condition or any subsequent breach of the same or any
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other term, covenant or condition therein contained. The subsequent acceptance
of Rent hereunder by Lessor shall not be deemed to be a waiver of Lessee's
breach of any term, covenant, or condition of the Lease.
25. Holding Over: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which,
notwithstanding any other provisions of this Lease, Lessor may withhold. Such
holding over shall be construed to be a tenancy at sufferance from month to
month. Lessee shall pay to Lessor monthly base rent equal to one and one-half
(1.5) times the monthly base rent installment due in the last month of the Lease
Term and all other additional rent and all other terms and conditions of the
Lease shall apply, so far as applicable. Holding over by Lessee without written
approval of Lessor shall subject Lessee to the liabilities and obligations
provided for in this Lease and by law, including, but not limited to those in
Section 2.1 of this Lease. Lessee shall indemnify and hold Lessor harmless
against any loss or liability resulting from any delay caused by Lessee in
surrendering the Premises, including without limitation, any claims made or
penalties incurred by any succeeding lessee or by Lessor provided Lessor has
given Lessee 30 days prior written notice that such holdover will result in a
damage claim against Lessee. No holding over shall be deemed or construed to
exercise any option to extend or renew this Lease in lieu of full and timely
exercise of any such option as required hereunder.
26. Lessor's Liability: If Lessee should recover a money judgment against
Lessor arising in connection with this Lease, the judgment shall be satisfied
only out of the Lessor's interest in the Premises except to the extent of the
security deposit and neither Lessor or any of its partners shall be liable
personally for any deficiency.
27. Estoppel Certificates: Lessee shall at any time during the Lease Term,
upon not less than fifteen (15) days prior written notice from Lessor, execute
and deliver to Lessor a statement in writing certifying that, this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification) and the dates to which the Rent and other charges have been
paid in advance, if any, and acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder or specifying
such defaults if they are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Lessee's failure to deliver such a statement within such time shall be
conclusive upon the Lessee that (a) this Lease is in full force and effect,
without modification except as may be represented by Lessor; (b) there are no
uncured defaults in Lessor's performance.
28. Time: Time is of the essence of the Lease.
29. Captions: The headings on titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by agreement in writing signed by
all of the parties hereto or their respective successor in interest.
30. Party Names: Landlord and Tenant may be used in various places in this
Lease as a substitute for Lessor and Lessee respectively.
31. Earthquake Insurance: As a condition of Lessor agreeing to waive the
replacement for earthquake insurance, Lessee agrees that it will pay, as
additional Rent, which shall be included in the monthly CAC, for any earthquake
insurance purchased by Lessor, an amount not to exceed Twenty-Six Thousand Three
Hundred Dollars ($26,300) per year for earthquake insurance if Lessor desires to
obtain some form of earthquake insurance in the future, if and when available,
on terms acceptable to Lessor as determined in the sole and absolute discretion
of Lessor.
32. Habitual Default: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have defaulted
in the payment of Rent for more than two times during any twelve month period
during the Lease Term, then such conduct shall, at the option of the Lessor,
represent a separate event of default which cannot be cured by Lessee. Lessee
acknowledges that the purpose of this provision is to prevent repetitive
defaults by the Lessee under the Lease, which constitute a hardship to the
Lessor and deprive the Lessor of the timely performance by the Lessee hereunder.
12
<PAGE>
33. Hazardous Materials
33.1 Definitions: As used in this Lease, the following shall have the
following meaning:
a. The term "Hazardous Materials" shall mean (i) polychlorinated
biphenyls; (ii) radioactive materials and (iii) any chemical, material or
substance now or hereafter defined as or included in the definitions of
"hazardous substance" "hazardous water", "hazardous material", "extremely
hazardous waste", "restricted hazardous waste" under Section 25115, 25117
or 15122.7, or listed pursuant to Section 25140 of the California Health
and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law),
(ii) defined as "hazardous substance" under Section 25316 of the
California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-
Presely-Tanner Hazardous Substances Account Act), (iii) defined as
"hazardous material", "hazardous substance", or "hazardous waste" under
Section 25501 of the California Health and Safety Code, Division 20,
Chapter 6.95 (Hazardous Materials Release, Response, Plans and
Inventory), (iv) defined as "hazardous substance" under Section 25181 of
the California Health and Safety Code, Division 201, Chapter 6.7
(Underground Storage of Hazardous Substances), (v) petroleum, (vi)
asbestos, (vii) listed under Article 9 or defined as "hazardous" or
"extremely hazardous" pursuant to Article II of Title 22 of the
California Administrative Code, Division 4, Chapter 20, (viii) defined as
"hazardous substance" pursuant to Section 311 of the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to
Section 1004 of the Federal Water Pollution Control Act (33 U.S.C. 1317),
(ix) defined as "hazardous waste", pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq.,
(x) defined a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Responsibility Compensations, and Liability
Act, 42 U.S.C. 9601 et seq., or (xi) regulated under the Toxic Substances
Control Act, 156 U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation, release,
discharge, storage or disposal of Hazardous Material.
c. The term "Lessor's Agents" shall mean Lessor's agents,
representatives, employees, contractors, subcontractors, directors,
officers and partners.
d. The term "Lessee's Agents" shall mean Lessee's agents,
representatives, employees, contractors, subcontractors, directors,
officers, partners, invitees or any other person in or about the
Premises.
33.2 Intentionally Omitted.
33.3 Lessor's Representations: Lessor hereby represents and warrants to the
best of Lessor's knowledge that the Premises are, as of the date of this Lease,
in compliance with all Hazardous Material Laws.
33.4 Lessee's Obligation to Indemnify: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all costs or expenses, including those described under
subparagraphs i, ii and iii herein below set forth, arising from or caused in
whole or in part, directly or indirectly by:
a. Lessee's or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of
Hazardous Material to, in, on, under, about or from the Premises; or
b. Lessee's or Lessee's Agents failure to comply with Hazardous Material
laws; or
c. Any release of Hazardous Material to, in, on, under, about, from or
onto the Premises caused by or occurring as a result of acts or omissions
of Lessee or Lessee's Agents or occurring during the Lease Term, except
ground water contamination from other parcels where the source is from
off the Premises not arising from or caused by Lessee or Lessee's Agents.
The cost and expenses indemnified against include, but are not limited to the
following:
13
<PAGE>
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive
damages, cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury
(including sickness, disease or death), tangible or intangible property
damage, compensation for lost wages, business income, profits or other
economic loss, damage to the natural resources of the environment,
nuisance, pollution, contamination, leaks, spills, release or other
adverse effects on the environment;
iii. The cost of any repair, clean-up, treatment or detoxification of
the Premises necessary to bring the Premises into compliance with all
Hazardous Material Laws, including the preparation and implementation of
any closure, disposal, remedial action, or other actions with regard to
the Premises, and expenses (including, without limitation, reasonable
attorney's fees and consultants fees, investigation and laboratory fees,
court costs and litigation expenses).
33.5 Lessee's Obligations to Remediate Contamination: Lessee shall, at its
sole cost and expense, promptly take any and all action necessary to remediate
contamination of the Premises by Hazardous Materials during the Lease Term as a
result of acts or omissions of Lessee or Lessee's Agents.
33.6 Obligation to Notify: Lessor and Lessee shall each give written notice to
the other as soon as reasonably practical of (i) any communication received from
any governmental authority concerning Hazardous Material which related to the
Premises and (ii) any contamination of the Premises by Hazardous Materials which
constitutes a violation of any Hazardous Material Laws.
33.7 Survival: The obligations of Lessee under this Section 33 shall survive
the Lease Term or earlier termination of this Lease.
33.8 Certification and Closure: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or
federal law, Lessee is required, at the explanation of the Lease Term, to submit
a closure plan for the Premises to a local, state or federal agency, then Lessee
shall comply at its sole cost and expense with the requirements of the closure
plan and furnish to Lessor a copy of such plan.
33.9 Prior Hazardous Materials: Lessee shall have no obligation to clean up or
to hold Lessor harmless with respect to any Hazardous Material or wastes
discovered on the Premises, except as a result of Environmental Surcharges,
which were not introduced into, in, on, about, from or under the Premises during
the Lease Term or ground water contamination from other parcels where the source
is from off the Premises not arising from or caused by Lessee or Lessee's
Agents.
34. Brokers: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease other than
Colliers International ("CI") and Lessee agrees to indemnify and hold Lessor
harmless against any claim, cost, liability or cause of action asserted by any
broker or finder claiming through Lessee other than CI. Lessor shall at its
sole cost and expense pay the brokerage commission per Lessor's standard
commission schedule to CI in connection with this transaction. Lessor
represents and warrants that it has not utilized or contacted a real estate
broker or finder with respect to this Lease other than CI and Lessor agrees to
indemnify and hold Lessee harmless against any claim, cost, liability or cause
of action asserted by any broker or finder claiming through Lessor.
35. Option to Extend
A. Option: Lessor hereby grants to Lessee one (1) option to extend the Lease
------
Term, with the extended term to be for a period of five (5) years, on the
following terms and conditions:
(i) Lessee shall give Lessor written notice of its exercise of its
option to extend no earlier than twelve (12), nor later than six (6)
calendar months before the Lease Term would end but for said exercise. If
Lessee
14
<PAGE>
and Lessor have not agreed to rental terms in writing, Lessee may withdraw
its notice of exercise of an extension option prior to six (6) months
before the Lease Term would end but for said exercise. Lessor shall
provide Lessee with Lessor's proposed base monthly rent for the option
period within twenty (20) days of Lessee's written request. However, once
Lessee delivers a notice of exercise of an option to extend the Lease Term
it may not be withdrawn except as provided for herein and subject to the
provisions of this Section 35, such notice shall operate to extend the
Lease Term. Upon any extension of the Lease Term pursuant to this Section
35, the term "Lease Term" as used in this Lease shall thereafter include
the then extended term. Time is of the essence.
(ii) Lessee may not extend the Lease Term pursuant to any option granted
by this Section 35 if Lessee is in default as of the date of the exercise
of its option. If Lessee has committed a default by Lessee as defined in
Section 14 or 32 that has not been cured or waived by Lessor in writing by
the date that any extended term is to commence, then Lessor may elect not
to allow the Lease Term to be extended, notwithstanding any notice given
by Lessee of an exercise of this option to extend.
(iii) All terms and conditions of this Lease shall apply during the
extended term, except that base rent and rental increases for each
extended term shall be determined as provided in Section 35 (B) below.
(iv) The option rights of InterTrust Technologies Corporation granted
under this Section 35 are granted for InterTrust Technologies
Corporation's or a related entity personal benefit and may not be assigned
or transferred by InterTrust Technologies Corporation except as a related
entity or exercised if InterTrust Technologies Corporation or a related
entity is not occupying the Premises at the time of exercise.
B. Extended Term Rent - Option Period: The monthly Rent for the Premises
----------------------------------
during the extended term shall equal the fair market monthly Rent for the
Premises as of the commencement date of the extended term, but in no case, less
than the Rent during the last month of the prior Lease term. Promptly upon
Lessee's exercise of the option to extend, Lessee and Lessor shall meet and
attempt to agree on the fair market monthly Rent for the Premises as of the
commencement date of the extended term. In the event the parties fail to agree
upon the amount of the monthly Rent for the extended term prior to commencement
thereof, the monthly Rent for the extended term shall be determined by appraisal
in the manner hereafter set forth; provided, however, that in no event shall the
monthly Rent for the extended term be less than the immediate preceding period.
Annual base rent increases during the extended term shall be 4% per year. In the
event it becomes necessary under this paragraph to determine the fair market
monthly Rent of the Premises by appraisal, Lessor and Lessee each shall appoint
a real estate appraiser who shall be a member of the American Institute of Real
Estate Appraiser ("AIREA") and such appraisers shall each determine the fair
market monthly Rent for the Premises taking into account the value of the
Premises and the amenities provided by the outside areas, the common areas, and
the Building, and prevailing comparable Rentals in the area and for same use as
in Lease. Such appraisers shall, within twenty (20) business days after their
appointment, complete their appraisals and submit their appraisal reports to
Lessor and Lessee. If the fair market monthly Rent of the Premises established
in the two (2) appraisals varies by five percent (5%) or less of the higher
Rent, the average of the two shall be controlling. If said fair market monthly
Rent varies by more than five percent (5%) of the higher Rental, said
appraisers, within ten (10) days after submission of the last appraisal, shall
appoint a third appraiser who shall be a member of the AIREA and who shall also
be experienced in the appraisal of Rent values and adjustment practices for
commercial properties in the vicinity of the Premises. Such third appraiser
shall, within twenty (20) business days after his appointment, determine by
appraisal the fair market monthly Rent of the Premises taking into account the
same factors referred to above, and submit his appraisal to Lessor and Lessee.
The fair market monthly Rent determined by the third appraiser for the Premises
shall be controlling, unless it is less than set forth in the lower appraisal
previously obtained, in which case the value set forth in said lower appraisal
shall be controlling, or unless it is greater than that set forth in the higher
appraisal previously obtained in which case the Rent set forth in said higher
appraisal shall be controlling. If either Lessor or Lessee fails to appoint an
appraiser, or if an appraiser appointed by either of them fails, after his
appointment to submit his appraisal within the required period in accordance
with the foregoing, the appraisal submitted by the appraiser properly appointed
and timely submitting his appraisal shall be controlling. If the two appraisers
appointed by Lessor and Lessee are unable to agree upon a third appraiser within
the required period in accordance with the foregoing, application shall be made
within twenty (20) days thereafter by either Lessor or Lessee to AIREA, which
shall appoint a member of said institute willing to serve as an appraiser. The
cost of all appraisals under this subparagraph shall be borne equally by Lessor
and Lessee.
15
<PAGE>
36. Approvals: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that the Lessor or Lessee does not respond to a request
for any consents which may be required of it in this Lease within ten business
days of the request of such consent in writing by the Lessee or Lessor, such
consent shall be deemed to have been given by the Lessor or Lessee.
37. Authority: Each party executing this Lease represents and warrants that he
or she is duly authorized to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the by-
laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and that
the Lease is binding upon said individual, corporation (or partnership) as the
case may be in accordance with its terms.
38. Indemnification of Lessor: Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's Agents, Lessee shall
defend, indemnify and hold Lessor harmless from and against any and all
obligations, losses, costs, expenses, claims, demands, attorney's fees,
investigation costs or liabilities on account of, or arising out of the use,
condition or occupancy of the Premises or any act or omission to act of Lessee
or Lessee's Agents or any occurrence in, upon, about or at the Premises,
including, without limitation, any of the foregoing provisions arising out of
the use, generation, manufacture, installation, release, discharge, storage,
disposal of Hazardous Materials by Lessee or Lessee's Agents. It is understood
that Lessee is and shall be in control and possession of the Premises and that
Lessor shall in no event be responsible or liable for any injury or damage or
injury to any person whatsoever, happening on, in, about, or in connection with
the Premises, or for any injury or damage to the Premises or any part thereof.
This Lease is entered into on the express condition that Lessor shall not be
liable for, or suffer loss by reason of injury to person or property, from
whatever cause, which in any way may be connected with the use, condition or
occupancy of the Premises or personal property located herein. The provisions
of this Lease permitting Lessor to enter and inspect the Premises are for the
purpose of enabling Lessor to become informed as to whether Lessee is complying
with the terms of this Lease and Lessor shall be under no duty to enter, inspect
or to perform any of Lessee's covenants set forth in this Lease. Lessee shall
further indemnify, defend and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any obligation
to Lessee's part to be performed under the terms of this Lease. The provisions
of Section 38 shall survive the Lease Term or earlier termination of this Lease
with respect to any damage, injury or death occurring during the Lease Term.
39. Successors and Assigns: The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
40. Miscellaneous Provisions: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law and are in addition to all
other rights or remedies in law and in equity.
41. Choice of Law: This lease shall be construed and enforced in accordance
with the substantive laws of the State of California. The language of all parts
of this lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Lessor or Lessee.
42. Entire Agreement: This Lease is the entire agreement between the parties,
and there are no agreements or representations between the parties except as
expressed herein. Except as otherwise provided for herein, no subsequent change
or addition to this Lease shall be binding unless in writing and signed by the
parties hereto.
16
<PAGE>
In Witness Whereof, Lessor and Lessee have executed this Lease, the day and year
first above written.
Lessor Lessee
Mission West Properties, L.P. InterTrust Technologies Corporation
By: Mission West Properties, Inc.
By:___________________________________ By:___________________________________
signature of authorized representative signature of authorized representative
Carl E. Berg Edmund J. Fish
- -------------------------------------- --------------------------------------
printed name printed name
President EVP
- -------------------------------------- --------------------------------------
Title Title
7/21/99
- -------------------------------------- ______________________________________
date date
<PAGE>
Exhibit A
Exhibit A is a map of the property located at 4750 Patrick Henry Drive, Santa
Clara, California, which graphically depicts the floor plan of the Registrant's
leased space. The floor plan consists of eighty one rooms and open office areas.
<PAGE>
Exhibit B
Lessor and Lessee hereby agree that the following improvements are the
obligation of Lessor to complete, at Lessor's cost and expense, at the Premises
prior to the Commencement Date.
1. Lessor shall add the following as shown on Exhibit B-1:
(a) Lobby with 2 offices
(b) 5 large conference rooms
(c) Corridor from lobby to restroom
(d) Remove walls in area at left front corner near lobby
2. Installation of four exterior windows and supporting structural
changes per attached Exhibit B-1.
3. Lessor shall mark 10 visitor parking spaces as directed by Lessee.
4. Install a demising wall in the concourse between the exterior of the
building at the property line, subject to approval of the City of Santa Clara
and Lessee agreeing to pay Rent on the additional square feet if allowed by the
City.
5. Install levelor blinds on all exterior windows.
6. Add a monument sign (if not already there) on the berm area that is
consistent with the other signage in the Park for Lessee's use.
19
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 19,
1999, except for Note 6, as to which the date is May 5, 1999, with respect to
InterTrust Technologies Corporation in the Registration Statement (Form S-1)
and related Prospectus of InterTrust Technologies Corporation for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
July 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERTRUST
TECHNOLOGIES CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 15,295 5,575
<SECURITIES> 0 0
<RECEIVABLES> 399 1,545
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,998 7,252
<PP&E> 1,924 1,714
<DEPRECIATION> (1,039) (776)
<TOTAL-ASSETS> 17,220 8,280
<CURRENT-LIABILITIES> 12,575 10,294
<BONDS> 0 0
0 0
12 10
<COMMON> 17 15
<OTHER-SE> 4,616 (2,039)
<TOTAL-LIABILITY-AND-EQUITY> 17,220 8,280
<SALES> 486 152
<TOTAL-REVENUES> 486 152
<CGS> 250 191
<TOTAL-COSTS> 250 191
<OTHER-EXPENSES> 11,849 19,628
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (202) (5)
<INCOME-PRETAX> (11,411) (19,662)
<INCOME-TAX> 0 0
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<NET-INCOME> (11,411) (19,662)
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