<PAGE>
As filed with the Securities and Exchange Commission on September 28, 1999.
Registration No. 333-84033
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 3
TO
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)
4750 Patrick Henry Blvd., Santa Clara, CA 95054
(408) 855-0100
(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
4750 Patrick Henry Blvd., Santa Clara, CA 95054
(408) 855-0100
(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 CHART
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value per share....... 7,475,000 $14.00 $104,650,000 $29,093
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes shares that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
(3) $23,630 of the Registration Fee was paid in connection with the original
filing on July 29, 1999.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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- --------------------------------------------------------------------------------
<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 SEPTEMBER 28, 1999
6,500,000 Shares
[LOGO OF INTERTRUST]
Common Stock
--------
Before this offering, there has been no public market for the common stock.
The initial public offering price is expected to be between $12.00 and $14.00
per share. We have applied to list the common stock on The Nasdaq Stock
Market's National Market under the symbol ITRU.
Of the 6,500,000 shares for sale in this offering, the underwriters have
reserved, at our request, up to 1,300,000 shares for sale at the initial public
offering price to current and potential customers, others with whom we do
business, existing stockholders, employees, and friends of InterTrust. In
addition, the underwriters have an option to purchase a maximum of 975,000
additional shares to cover over-allotments of shares. See "Underwriting."
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," "BMG" and "PublishOne"
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," "Diamond Multimedia"
and "Computacenter" appear next to the caption "Technology;" and the logos of
"Samsung," "reciprocal," "magex," 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 Centered 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 "$" in a
circle. The building on the right is marked with the letter "i" in a circle.
Above the buildings is the caption "Commerce Services Provider" and text that
reads: "Providers process financial and usage transactions, support online and
offline transactions, and deploy and manage InterRights Points."
From the building on the left, two arrows marked with the symbol "$" in a circle
point to a caption off the bottom of the platform that read "Partners" and to
the InterTrust logo, respectively. To the right of the arrows are the captions
"Payment" and "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 up to a web browser. An identical
arrow 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 text that reads: "The
publisher selects the content, creates usage rules and associates the rules with
the content, and packages both in a secure DigiBox Container." Below is the
caption "InterRights Point." Next to the arrow is the caption "Payment and Usage
Information" above the text "Everyone who is supposed to get paid, gets paid,
and usage information is made available to agreed upon parties."
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 a computer disk 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. Above the cube is the heading "DigiBox
Container" and text that reads "The DigiBox container protects the 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 text that reads "Distributors can add rules and
sell content via the DigiBox."
From the floppy disk, an arrow points down and to the right. In the middle of
the arrow is a three dimensional cube. Above the cube is the heading "DigiBox
Container" and text that reads "Content is disseminated over the Internet on CDs
and DVDs." To the right of the cube is the caption "User" and text that reads
"Users see personalized offers, purchase online and offline, and use content
according to the 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 figures are spheres
with three arrows meeting in their centers. Below the cube is the caption
"Superdistribution" and text that reads "Users can forward the content and
rules, and encourage purchase and redistribution. In essense, copying becomes a
sales channels."
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
"DigiBox Container" and text that reads "Contains payment and usage
information." The arrow points to a sphere with three arrows meeting in its
center. Above 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........................ 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 33
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 53
Related-Party Transactions................................................. 65
Principal Stockholders..................................................... 67
Description of Capital Stock............................................... 69
Shares Eligible for Future Sale............................................ 72
Underwriting............................................................... 74
Notice to Canadian Residents............................................... 77
Legal Matters.............................................................. 78
Experts.................................................................... 78
Where You Can Find More Information........................................ 78
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
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, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce system
for digital commerce. We license our DRM platform to partners to build digital
commerce services and applications. These partners intend to offer digital
commerce services and applications that collectively will form a global
commerce system, which we have branded as the MetaTrust Utility. We maintain
the MetaTrust Utility's foundation and will receive as a fee from our partners
a small percentage of the value of goods and services that run through the
system.
DRM technologies protect and manage rights and interests in 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, publications, business information, and images. DRM also
applies to organizations and individuals who want to protect the vast amount of
proprietary and personal information that has been computerized.
Our technology is designed to enable 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 and
persistently apply these rules 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 of
the secure commercial exchange of digital information and is designed to allow
digital commerce to be conducted more efficiently.
We believe our platform provides the following benefits:
. robust security; . multiple content and media types;
. persistent protection and . efficient transaction processing;
management;
. flexible business models; . new advertising models; and
. superdistribution; . personalized marketing.
4
<PAGE>
Our current partners include BMG Entertainment Storage Media, Computacenter,
Diamond Multimedia Systems, Mediascience, Mitsubishi Corporation, MusicMatch,
National Westminster Bank, PublishOne, Reciprocal, Samsung SDS, and Universal
Music Group. We also have alliances with Digital Theater Systems, Fraunhofer-
Institut, Harris Corporation, Portal Software, and Science Application
Information Company. Some of our partners are conducting, or are planning to
conduct, commercial trials, and have announced that their applications and
services will 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 4750 Patrick Henry Blvd., Santa Clara, California 95054,
and our telephone number is (408) 855-0100.
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.
----------------
Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
. redesignation of our class A voting common stock as common stock upon the
closing of this offering;
. 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 warrants to purchase 6,692 shares of our common stock
outstanding as of August 31, 1999;
. 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.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by us................. 6,500,000 shares
Common stock to be outstanding after the 37,751,085 shares. This number is
offering.................................. based on the number of shares
outstanding as of June 30, 1999.
It excludes 6,741,411 shares of
common stock issuable upon the
exercise of options outstanding
as of June 30, 1999 at a weighted
average exercise price of $1.91
per share. It also excludes
325,000 shares of common stock
issuable upon the exercise of a
warrant with an exercise price of
$14.00 per share.
Over-allotment option...................... 975,000 shares
Use of proceeds............................ General corporate purposes,
including working capital. For
more information about our use of
proceeds, please see the use of
proceeds section on page 18.
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
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $15,295 $31,053 $108,488
Working capital................................... 11,870 28,628 106,063
Total assets...................................... 17,220 32,978 110,413
Total stockholders' equity........................ 4,645 21,403 98,838
</TABLE>
- --------
The pro forma column in the consolidated balance sheet data table above
reflects the sale of 1,309,700 shares of series E preferred stock for
approximately $15.7 million in cash and the issuance of 83,333 shares of Series
E preferred stock on the conversion of a $1.0 million promissory note in
July 1999, the exercise of warrants to purchase 21,692 shares of common stock
for an aggregate exercise price of $42,000 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.
The pro forma as adjusted column in the consolidated balance sheet data
table above reflects our sale of 6,500,000 shares of common stock in this
offering, at an assumed initial public offering price of $13.00 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 might 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 and may not generate sufficient
revenue for us to be successful. The success of our business depends upon our
ability to generate transaction fees in the form of a percentage of fees
charged by our licensees in commercial transactions. However, our licensees
have not yet used our technology in the commercial distribution of their
products and we have not earned any transaction fees under this business model.
If our technology is 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 ongoing revenues. If
we are unable to generate revenues from transaction fees, our current revenues,
consisting of initial license fees and support fees, will be insufficient to
sustain our business.
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 operating results have varied from period to period and, in some future
quarter or quarters, will likely fall below the expectations of securities
analysts or investors, causing the market price of our common stock to decline.
Our quarterly operating results may fail to meet these expectations for a
number of reasons, including:
. a quarterly decline in the overall demand for digital goods and services;
. a quarterly decline in the demand for our Commerce software product;
. our failure to quickly reduce costs in the event of unanticipated
declines in revenues in a given period;
. delays in the timing of licensing our Commerce software and services;
. the nature and types of our licensing arrangements;
. the inability of our licensees and their customers to commercialize our
technology, or delays or deferrals in this commercialization; and
. customer budget cycles and changes in these budget cycles.
7
<PAGE>
We have a history of losses, and we expect our operating expenses and losses to
increase significantly.
Our failure to increase our revenues significantly 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. As a
result of these additional expenses, we must significantly increase our
revenues to become profitable. We expect to incur significant losses for at
least the next several years.
If third parties do not deploy our technology and create a market for digital
commerce, our business will be harmed.
Relationships with leading content, technology, and commerce service
providers are critical to our success. Our business and operating results would
be harmed to the extent our licensees fail, in whole or in part, 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.
We need to significantly increase the number of companies that license our
technology to sustain and grow our business.
We will not generate sufficient revenue to grow our business unless we
maintain relationships with existing licensees and significantly increase 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. To date, only 12 companies have licensed our software for commercial
use. Our ability to attract new licensees will depend on a variety of factors,
including the following:
. the performance, reliability and security of our products and services;
. the scalability of our products and services--the ability to rapidly
increase deployment size from a limited number of end-users to a very
large number of end-users;
. the cost-effectiveness of our products and services; and
. our ability to market our products and services effectively.
8
<PAGE>
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 into the market and
have achieved market acceptance. We may not be able to attract a critical mass
of licensees that will develop products and establish clearinghouses and other
commerce services, and our licensees may not achieve the widespread deployment
of users we believe is necessary for us to become successful.
In addition, we may not be able to establish relationships with important
potential customers if we have already established relationships with their
competitors. Therefore, it is important that we are perceived as a neutral and
trusted technology and service provider. In addition, 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.
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. If initial
license fees are delayed or reduced as a result of this process, our future
revenue and operating results could be impaired. 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. The process of entering into a
licensing agreement with a company typically involves lengthy negotiations. 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 might sign a license agreement.
Because our technology must be integrated into the products and services of our
licensees, there will be significant delay between our licensing the software
and our licensees' commercial deployment of their products and services, which
will delay our receipt of transaction fee revenue.
Our success depends upon the deployment of our technology by a potential
licensee in the use and sale of digital content. Our licensees undertake a
lengthy process of integrating our technology into their existing systems or a
new system. Until a licensee deploys our technology, we do not receive
transaction fees from that licensee.
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 be lengthy and will vary, which makes it difficult for us to
predict when revenue will be recognized.
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
9
<PAGE>
pilot programs. Our licensees have not yet commercially deployed their
applications or services. It is possible that we or 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, the ability to support a
large user base, and interoperability of our software or the combination of our
software with our licensees' software. We may not successfully address any of
these problems and the failure to do so would seriously harm our business and
operating results.
Security breaches of our software and our licensees' software could result in
decreased demand for our technology by our licensees or their customers or in
litigation.
The secure transmission and trusted management of proprietary or
confidential information over the Internet are essential to establishing and
maintaining confidence in our Commerce software and the software and services
developed using our software. Without this confidence, potential or current
licensees may not use our technology and their customers may not trust and use
our licensees' products. 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, including
cryptography technology, that we and our licensees use to protect customer
digital content and transaction data. Security breaches could damage our
reputation and expose us to a risk of loss or litigation. Our insurance
policies have low coverage limits that may not be adequate to reimburse us for
losses caused by security breaches. We cannot guarantee that our security
measures will prevent security breaches.
Defects in our software and the software of our licensees could delay
deployment of our technology and reduce our revenues.
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 could seriously harm our business and
operating results. 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. Because this is a
system used for commerce, we believe the standards for reliability and
performance may be very high.
If our licensees' products and services contain errors or defects not
discovered in the process of development and pilot programs, 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.
The deployment and use of our products expose us to substantial risks of
product liability claims because our products are expected to be used in
sensitive and valuable digital commerce transactions and because we require our
partners to comply with our specifications. Although our license agreements
typically contain provisions designed to limit our exposure to 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.
10
<PAGE>
If we are unable to continue obtaining third-party software and applications,
we could be forced to change our product offering or find alternative
suppliers, which could delay shipment of our product.
We integrate third-party software with our software. We would be seriously
harmed if the providers from which 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, or could force us 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 force us to incur significant costs or cause our
customers to delay licensing of our products.
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 enterprise software 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.
The market for digital rights management will be subject to rapid technological
change and new product introductions and enhancements 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.
To succeed, we must develop and introduce, in response to customer and market
demands, new releases of our Commerce software that offer features and
functionality that we do not currently provide. Any delays in our ability to
develop and release enhanced or new products could seriously harm our business
and operating results. In the past we have experienced delays in new product
releases, and we may experience similar delays in the future.
Our markets are highly competitive and we may not be able to compete
successfully against current or potential competitors, reducing our market
share and revenue growth.
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 reduce our market share and
cause our revenues to grow more slowly than anticipated or not at all. 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 Systems, and Xerox;
. providers of hardware-based content metering and copy protection systems,
including Sony, Wave Systems, and the 4C Entity, comprised of IBM, Intel,
Matsushita, and Toshiba; and
11
<PAGE>
. 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 do.
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,
resulting in litigation, redesign expenses, or costly licenses.
Digital rights management is an emerging field in which our competitors, may
obtain patents or other proprietary rights that would prevent, or limit or
interfere with, our, or our licensees', ability to make, use, or sell products.
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 infringed intellectual property;
. obtain a license from the holder of the infringed intellectual property
right; or
. redesign products or services to avoid infringement.
Our licensees' products and services may be subject to a claim of patent
infringement independent of any infringement by our software.
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 May 1999,
12
<PAGE>
we received a letter from representatives of TechSearch LLC offering us a
license to a patent held by TechSearch. We have reviewed the patent and do not
believe that we need to obtain a license to this patent. In the future,
however, we or our licensees could be found to infringe upon the patent rights
of E-Data, TAU Systems, TechSearch, or other companies.
Protection of our intellectual property is limited and efforts to protect our
intellectual property may be inadequate, time consuming, and expensive.
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. These legal protections
afford only limited protection and may be 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, but not infringing, technology,
duplicate our products, or design around our patents or our other intellectual
property.
Our patent applications or trademark registrations may not be approved.
Moreover, even if approved, the resulting patents or trademarks may not provide
us with any competitive advantage or may be challenged by third parties. If
challenged, our patents might not be upheld or their claims could be narrowed.
Any litigation surrounding our rights could force us to divert important
financial and other resources away from our business operations. In addition,
we license our products internationally, and the laws of many countries do not
protect our proprietary rights as well as the laws of the United States.
To successfully license our product and grow our business, we must retain and
attract key personnel; competition for these personnel is intense.
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. None of our
senior management or other key personnel must remain employed for any specific
time period. If we lose one or more of these key employees, our business and
operating results could be significantly harmed. In addition, our future
success will depend largely on our ability to continue attracting and retaining
highly skilled personnel. For example, competition for qualified sales and
marketing personnel is intense, and we may not be able to hire enough qualified
individuals in the future. New employees require extensive training and
typically take at least four to six months to achieve full productivity.
Failure to appropriately manage our growth and expansion could seriously harm
our business and operating results.
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 144 employees at August
31, 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.
13
<PAGE>
Industry-Related Risks
Our revenues may not grow and our stock price may decline if digital music
commerce over the Internet does not develop.
We currently devote a significant portion of our time, resources, and
attention pursuing partnerships and business within the music industry. As a
result, if digital music commerce over the Internet does not develop, our
business and operating results will be significantly harmed. A number of
factors could delay or prevent the development of digital music commerce. These
factors include:
. music content providers' inability to attract significant music artists,
record labels, and recordings to be distributed in their format;
. lack of development and adoption of compression technology to facilitate
digital delivery of music or related information like music videos; and
. lack of development and adoption of consumer devices that are able to
play downloaded digital music.
We may not receive sufficient revenues to be successful and our stock price
will decline if use of the Internet for commercial distribution of digital
content is not widely accepted.
Acceptance and use of the Internet for commercial distribution of digital
content may not continue to develop at recent 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. Because our transaction fees
are derived from digital commerce transactions, if digital commerce is not
accepted for any reason, our revenues would not grow sufficiently and our
business and operating results would be significantly harmed.
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 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 and the ability to use and distribute
this content without restriction; and
. insufficient speed, access, and server reliability, as well as lengthy
download time for content.
If standards for digital rights management are not adopted, confusion among
content providers, distributors, and consumers may depress the level of digital
commerce, which would reduce our revenues.
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 of copyright
policies. In
14
<PAGE>
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. Consequently, 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.
We may face increased governmental regulation and legal uncertainties that
could increase our costs and provide a barrier to 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, changes in export laws
and regulations may impose restrictions that affect our ability to distribute
products and services internationally, limiting our ability to gain revenue and
grow our business.
It is also possible that Congress or individual states could enact laws
regulating or taxing Internet commerce. 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. Access fees, sales taxes
or any other taxes or fees could increase the cost of transmitting data over
the Internet and reduce the number or amount of transactions from which we get
our transaction fees.
Risks Related to this Offering
Our stock price may be particularly volatile and could decline substantially
because of the industry in which we compete.
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 or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our common
stock. In addition, these fluctuations could lead to costly class action
litigation which could significantly harm our business and operating results.
Existing stockholders significantly influence us and could delay or prevent an
acquisition by a third party.
On completion of this offering, our executive officers, directors, their
affiliates, and other 5% stockholders will beneficially own, in the aggregate,
approximately 37.7% of our outstanding common stock, assuming no exercise of
the underwriters' over-allotment option and assuming that one of our existing
stockholders exercises in full its right to buy in this offering. We have
requested that the underwriters reserve up to 1,300,000 shares for sale at the
initial public offering price to current and potential customers, others with
whom we do business, existing stockholders, employees, and friends of
InterTrust. If our executive officers, directors, their affiliates, and other
5% stockholders purchase any of these shares in this offering from the
underwriters, their aggregate percentage ownership will
15
<PAGE>
increase. As a result, these stockholders will be able to significantly
influence 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."
We have implemented anti-takeover provisions that could make it more difficult
to acquire us.
Our sixth amended and restated certificate of incorporation, our amended and
restated bylaws and Delaware law contain provisions that could make it more
difficult for a third party to acquire us, even if its doing so would be
beneficial to our stockholders. These provisions include:
. authorizing the issuance of shares of undesignated preferred stock
without a vote of stockholders;
. prohibiting stockholder action by written consent; and
. limitations on stockholders' ability to call special stockholder
meetings.
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 August 31, 1999, upon completion
of this offering, we will have outstanding 37,961,011 shares of common stock.
The 6,500,000 shares of common stock sold in this offering will be eligible for
sale in the public market immediately, unless purchased by our "affiliates" or
by some participants in our directed share program who enter into lock up
agreements. In addition 663,091 shares will also be immediately eligible for
sale in the public market. Substantially all of 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.
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 $10.38 per share. A warrant for up to 311,016 shares of our common
stock can no longer be exercised, and will be terminated, upon the initial
public offering of our common stock. If the exercisability of this warrant is
challenged and the warrant is found to be exercisable, there could be further
dilution to investors in this offering if the warrant is ultimately exercised.
In addition, we have issued options and a warrant to acquire common stock at
prices significantly below the initial public offering price. To the extent
outstanding options or the warrant 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. 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.
16
<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.
17
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 6,500,000 shares of common stock we
are offering are estimated to be $77.4 million, at an assumed initial public
offering price of $13.00 per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $89.2 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.
18
<PAGE>
CAPITALIZATION
The following table presents 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 issuance of 83,333 shares of
series E preferred stock on the conversion of a $1.0 million promissory
note 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;
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 6,500,000
shares of common stock in this offering, at an assumed initial public
offering price of $13.00 per share and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by
us, and the filing of a new certificate of incorporation after the
closing of this offering.
The number of shares outstanding excludes the following shares:
. 6,741,411 shares of common stock issuable upon the 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;
. 325,000 shares of common stock issuable upon the exercise of a warrant
outstanding as of September 9, 1999 at an exercise price of $14.00 per
share;
. 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.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Convertible promissory note.................... $ 1,000 $ -- $ --
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, 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, 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, 37,751,085
shares outstanding pro forma as adjusted..... 15 31 38
Class B non-voting common stock, 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 82,557 159,985
Deferred stock 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 98,838
-------- -------- --------
Total capitalization......................... $ 5,645 $ 21,403 $ 98,838
======== ======== ========
</TABLE>
19
<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
following transactions:
. the sale of 1,309,700 shares of series E preferred stock for
approximately $15.7 million in cash and the issuance of 83,333 shares of
series E preferred stock on the conversion of a $1.0 million promissory
note 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 initial public offering price and the net tangible book
value per share immediately after completion of this offering. Our net tangible
book value as of June 30, 1999 would have been $98.8 million or $2.62 per share
after giving effect to the sale of shares of our common stock in this offering
less estimated discounts, commissions and expenses. This amount represents an
immediate increase in net tangible book value to existing stockholders and an
immediate dilution in net tangible book value 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.................. $13.00
Pro forma net tangible book value per share as of June 30,
1999.......................................................... $ 0.68
Increase per share attributable to new investors............... 1.94
------
Pro forma net tangible book value per share after the offering... 2.62
------
Dilution per share to new investors.............................. $10.38
======
</TABLE>
The following table presents as of June 30, 1999, on the pro forma basis
described above, the differences between the existing stockholders and the
purchasers of common stock in this offering relating to the number of shares
purchased from us, the total consideration paid to us and the average price per
share paid to us:
<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 82.8% $77,960,000 48.0% $2.49
New investors ................. 6,500,000 17.2 84,500,000 52.0 $13.00
---------- ----- ----------- -----
Totals....................... 37,751,085 100.0% 162,460,000 100.0%
========== ===== =========== =====
</TABLE>
As of June 30, 1999, there were outstanding options 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 September 9, 1999, there was an outstanding
warrant to purchase 325,000 shares of common stock at an exercise price of
$14.00 per share. To the extent these outstanding options or this warrant are
exercised, there will be further dilution to new investors.
20
<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 statements 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 statements 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 statements 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 and
training services..... -- -- 25 100 152 50 177
------- ------- ------- -------- -------- ------- --------
Total revenues....... 850 -- 25 1,100 152 50 486
Cost of revenues:
Licenses............... -- -- -- -- -- -- 42
Software support and
training 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 stock
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
------ ------ ------ ------ ------ --------
Consolidated Balance Sheet
Data: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents..... $ 9 $ 386 $8,359 $1,884 $5,575 $15,295
Working capital (deficit)..... (1,319) (4,590) 7,561 607 4,939 11,870
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>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce system.
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 conducting or are about to
conduct 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 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 and training services. Our license agreements
also generally 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 for 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. Within the next several years, we anticipate that our
revenues will be derived primarily from transaction fees and, to a
significantly lesser extent, from initial license fees and software support and
training services fees. However, we do not expect to receive any transaction
fees in 1999. Any future transaction fees are dependent on the success of our
licensees and their customers in commercially deploying services and
applications.
We are targeting relationships that will establish our DRM platform 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 additional entertainment markets, including games,
audio books, and video, and other markets, including business information and
publications.
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
amount depending on factors such as partner commitments, scope of the license
as it relates to commercial markets, territory, and term of agreement. We have
in the past decided, and may in the future decide, to reduce or eliminate
initial license fees based on these factors. In connection with our strategy to
promote widespread deployment of our software, we have on one occasion received
an initial license fee for our Commerce software in the form of a minority
equity position in the
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licensee. The value of the license fee was determined based on the estimated
fair value of the underlying equity securities received. In the future, we may
enter into other equity payment arrangements.
Licenses of our Commerce software generally require the payment of an initial
license fee. Initial license revenue, net of any discounts granted, is
recognized upon execution of a license agreement and delivery of our software
if we have no remaining obligations relating to development, upgrades, new
releases, or other future deliverables, if the license fee is fixed or
determinable, and if collection of the fee is probable. Our license agreements
generally include the right to obtain access to upgrades and new releases for a
specified period. Under these circumstances, the license payments received, net
of any discounts granted, in advance of revenue recognition, including license
fees received in the form of a minority equity position, are deferred and
recognized on a subscription basis over the period of obligation beginning upon
delivery of the licensed product. In addition, under license agreements where
we are obligated to provide a specified upgrade and do not have vendor specific
objective evidence of fair value of the specified upgrade, all of the license
revenue is deferred until the specified upgrade has been delivered. Upon
delivery of the specified upgrade, license revenue is recognized using the
subscription method. We began recognizing revenue under some license agreements
in January 1999, after 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.
For contracts entered into before 1998, we recognize revenue as the amounts
are earned under the related agreements, provided no significant obligations
exist and the related receivable is determined to be collectible, consistent
with Statement of Position 91-1, Software Revenue Recognition. Our license
revenues in 1994 and 1997 were derived from licenses of pre-commercial versions
of our software.
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 require 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 relating to transaction fees is to
recognize the revenue when the amounts due are known, which will generally be
in the quarter after the transaction. Prepaid transaction fees are recorded as
deferred revenue and will be recognized when the related transactions occur. 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.
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Software support and training services, which typically include the right to
telephone and online support and customer training, are generally provided for
in the license agreements for an agreed-upon amount. Software support and
training service revenue is recognized over the period in which the services
are provided, generally two years. 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 software support and training services
before the shipment of the general availability version of our software.
Through the end of 1998, we were 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 months
ended June 30, 1999. Bertelsmann accounted for 21% of total revenues in 1998.
Computacenter accounted for 13% of total revenues in the six 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. In addition, our business
model is new and unproven and has not succeeded in generating sufficient
revenue to sustain or grow our business. We also 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 in future quarters. We expect to incur additional losses
for at least the next several years. 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 and training services accounted for 100% of total revenues in
the six months ended June 30, 1998. License fees and software support and
training 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 and training 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.
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Cost of Revenues
Cost of license revenue consists primarily of the costs incurred to
manufacture, package, and distribute our products and related documentation.
Cost of software support and training 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. Total cost of revenues was approximately $84,000 in the six
months ended June 30, 1998 and 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 December 1998. Cost of license revenue was
approximately $42,000 during the six months ended June 30, 1999. Cost of
license revenue will fluctuate from period to period depending on the number of
new partners, the number of software releases, and the amount of software
documentation provided to our partners during the period.
Cost of software support and training services revenue 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 cost of
software support and training services revenue represents the increase in
support personnel time required to provide technical assistance and training to
a greater number of partners. Software support and training services 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 was approximately
$6.4 million for the six months ended June 30, 1998 and approximately
$7.1 million for the six months ended June 30, 1999. This increase was
primarily attributable to a $742,000 increase in personnel costs and consultant
services associated with both product research and development. This increase
was partially offset by a $213,000 decrease in the cost of software used in
product development. Cost of purchased software used in product development
includes the amortization of purchased software as well as the cost of software
expensed to research and development when the software is determined to have no
alternative future use. 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, field
service support, consultant fees and advertising, promotional material, 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. The
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increase in these costs is comprised primarily of $285,000 in increased
personnel costs, $121,000 in increased public relations and other promotional
costs, and $75,000 in increased travel 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 service fees 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 attributable to a $631,000 increase in
personnel costs, as a result of increased legal and accounting personnel, and a
$103,000 increase in costs associated with the filing of patent applications,
including the use of outside patent counsel. We expect 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.
Deferred Stock Compensation
We recorded total deferred stock compensation of approximately $4.3 million
in the six months ended June 30, 1999. This amount represents the difference
between the exercise prices of employee stock options and what were considered
to be the fair values of our common stock on the dates 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
$1.1 million for the remaining six months of 1999, $1.6 million 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 and approximately $202,000 of interest income in the six months ended
June 30, 1999. The increase in interest income results primarily from increases
in the amount of interest-bearing investments outstanding. 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 months 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.
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Software support and training services accounted for 100% of total revenues
in the 1996, 9% of total revenues in 1997 and 100% of total revenues in 1998.
Software support and training services 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 only 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 related entirely to software support and training
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 the cost of software support
and training services revenue represents the increase in support personnel time
required to provide technical assistance and training to a greater number of
our partners.
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. These increases were primarily
attributable to increases in personnel costs and consultant services associated
with product research and development of $2.9 million in 1997 and $3.7 million
in 1998.
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. The increase in 1997 was primarily
attributable to an $898,000 increase in personnel costs and consultant services
associated with increased selling efforts. The increase in 1998 was primarily
attributable to a $408,000 increase in personnel costs and consultant services
associated with increased selling efforts, and a $176,000 increase in public
relations costs and other promotional 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. These increases were primarily attributable
to increases in legal and accounting personnel that resulted in increases in
personnel costs of $53,000 in 1997 and $371,000 in 1998.
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.
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Income Taxes
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.
Quarterly Results of Operations
The following table contains, 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 through at least the next several years.
<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 and
training services..... 25 25 25 77 65 112
------- ------- ------- ------- ------- -------
Total revenues....... 25 25 25 77 232 254
Cost of revenues:
Licenses............... -- -- -- -- 32 10
Software support and
training 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 stock
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>
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We began recognizing revenue on a subscription basis under a number of
license agreements in January 1999, after shipping the general availability
version of our product at the end of December 1998. The increase in software
support and training services revenue beginning in the quarter ended December
31, 1998 was the result of training services associated with new partner
agreements. Software support and training services 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 software support
and training 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 with the intention of
managing cash flow. As a result of these efforts, our operating costs and
expenses declined 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 decrease in
sales and marketing spending in the quarter ended June 30, 1998 also reflects a
reduction in marketing personnel. Increases in sales and marketing expenses
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 generally
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. 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 writedown of
abandoned computer equipment, and higher building maintenance expenses.
We anticipate that research and development, sales and marketing, and
general and administrative expenses will increase in absolute dollars 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. Beginning in the quarter ending December 31, 1999,
we also expect to incur increases in our quarterly operating costs and expenses
of approximately $260,000 as a result of the new facility lease we entered into
in July 1999.
We expect our revenues to vary. If our revenue levels fall below our
expectations, our net loss will increase because only a small portion of our
expenses varies with our revenues. In the future, our operating results may
fall below the expectations of securities analysts and investors. If this
occurs, 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 had raised approximately $61.2
million through equity financings. In July 1999, we raised approximately $15.7
million through the sale of preferred stock.
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
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primarily attributable to a net loss in the period 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 equipment 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 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.
At June 30, 1999, our principal source of liquidity included $15.3 million
in cash and cash equivalents. We believe that the net proceeds of this
offering, together with our cash and 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. From then on, 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 and 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 respond
to competitive pressures or anticipated requirements or take advantage of
future opportunities.
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;
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. 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 if there are 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
that 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.
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 of expense 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 costs 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 address year 2000 compliance adequately 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;
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. lost transaction revenues;
. increased operating costs; and
. claims of mismanagement, misrepresentation or breach of contract.
Contingency Plan
We have developed our year 2000 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
our 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.
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 some passages provided by SOP 98-4 though fiscal
years beginning on or before March 15, 1999. All 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 to us. 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.
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BUSINESS
Overview
We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce system.
We provide our DRM platform as software and tools to licensees, which we call
partners. These partners intend to offer digital commerce services and
applications that collectively will form a global commerce system, which we
have branded as 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 make 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 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. Our general purpose DRM platform is
designed to manage a broad range of rights across digital information and media
types.
Our current partners include BMG Entertainment Storage Media, Computacenter,
Diamond Multimedia Systems, Mediascience, Mitsubishi Corporation, MusicMatch,
National Westminster Bank, PublishOne, Reciprocal, and Universal Music Group.
We also have alliances with Digital Theater Systems, Fraunhofer-Institut,
Harris Corporation, Portal Software, and Science Application Information
Company. These partners actively endorse or promote our products and services.
Some of our partners are conducting, or are planning to conduct, commercial
trials, and have announced that their applications and services will 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 International Data Corporation, total worldwide
Internet commerce spending was $50.4 billion in 1998 and is estimated to grow
to $1.3 trillion in 2003. International Data Corporation further estimates that
worldwide Internet commerce spending per online buyer will grow from $1,635 in
1998 to $7,216 per year in 2003.
While most Internet commerce to date has involved the delivery of physical
goods like books and compact discs 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, videos, games, software, publications, 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
growing
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number of households and businesses connected to the Internet, and by
electronic devices other than the personal computer, 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 and cable modems, and
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 compact discs 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 compact disc and DVD devices. As the number of
users connected to the Internet and the amount of digital information
transmitted over the Internet increases, these users and this 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-
compact disc quality has rapidly become recognized as a major threat to the
industry. With readily available MP3-enabled software, music can be copied from
compact discs into computers, compressed to under 10% of its former size,
redistributed, played, and even copied back onto a blank compact disc for
private use or pirated resale. Songs in the MP3 format can be moved from
personal computers to new portable consumer devices and can then be played
through headphones or stereo speakers. Every compact disc 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, publications, 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 and supply
chain and product information. Some of this information is also personal in
nature, 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 comes not only from the outside--a hacker trying to break into the
protected computer or decrypt an encrypted transmission. The threat comes also
from the inside--a user may be authorized initially to access digital
information but performs an unauthorized act, 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 this information and these 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 to serve 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 compliance with specified rules. Our platform
consists of:
. DRM Software and Technology--We license platform software and tools to
partners that build products and operate commerce services. Our
technology is designed to operate on the personal computers, devices, and
servers in this global system and to provide the capability to package
and publish protected information with rules for use. These rules are
designed to be flexible, and can be applied and changed dynamically,
enabling our partners to develop and
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program their business models easily. The rules are designed to be
persistently enforced wherever the content may travel.
. MetaTrust Utility Services--We maintain and administer the specifications
that 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 is designed to have broad capabilities to
address the needs of all parties seeking to distribute and manage digital
goods. We believe 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 consistent with the rights and interests of all
parties.
. Persistent Protection and Management--Our platform is designed to allow
content providers to 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 may be forwarded to other
people.
. Flexible Business Models--Our platform is designed to allow content
providers to specify and establish their own commercial models with fully
programmable rules that manage the use of digital information. These
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. Our platform is also designed so that these
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--We believe 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. Our
platform is designed to enable providers to get paid and users 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 so that they may use the content.
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. Multiple Content and Media Types--Content providers can use our platform
for multiple content types. Our platform is designed to permit
distributors to employ various means of digital distribution, including
compact discs, DVDs, the 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 MetaTrust Utility system.
Payment processors can use our technology both for digital goods
transactions and to process payments for physical goods sold
electronically.
. Efficient Transaction Processing--We believe processing partners can take
advantage of significant increases in efficiency, including offline
processing, immediate payment across all participants in the chain of
distribution, and automated application of rules. Our platform is
designed to 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 distribution 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, we believe advertising can be managed and audited
locally on a user's machine every time the user sees the advertisement,
whether the user is on-line or off-line. Our platform is designed to
allow a rule to 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 price content and generate revenue from
advertising.
. Personalized Marketing--Our platform is designed so that 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 is designed to locally process ads and
promotions as easily as digital content, this automated personalization
can occur on the network or offline on the consumer's personal computer.
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, our partners can collectively build a global digital commerce
system, which we have branded as 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 by
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
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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 is designed to 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.
Commerce Flow Example
Narrative Description of Graphic on p. 38 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 information."
In the center is a cube labeled "Distributor." Above and to the right is a
picture of a piece of paper titled "Usage Rules." From the cube an arrow with a
cube in the middle points down towards a box labeled "User." 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 sphere 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
provider." In the middle of the arrow is a web brower labeled "www" next to two
compact disks and a floppy disk. 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, both in clear cubes, point to a box titled "Publisher." 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 cube in the center of the
graphic.
. 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 personal computer, in
this example, a user creates digital information and, using an
InterRights Point, associates business rules with the information and
packages the information securely in a DigiBox container.
. Distributing Content--The information is disseminated in DigiBox
containers over networks, on optical disks, or by other means of
delivering digital information. The information can securely travel
through unsecure networks, because the information in a DigiBox container
is itself protected. Distributors, portals, and web sites 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 can receive content in a DigiBox container, select
the content and set in motion a secure process. The InterRights Point
compares identity characteristics of the user
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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 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 processing, as specified by the rules. The
InterRights Point forwards the transactions in secure DigiBox containers
to our processing partners which 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 digital information,
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 digital information, 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 encourage 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 that 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. We
believe that these partners' reputations, markets, and customer base will
facilitate user acceptance of the MetaTrust Utility.
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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. 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. We will also
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. We believe partners are more likely to
participate in building a global commerce system if they perceive that the
provider of the foundational technology is unlikely 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 our 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 as a small 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. In addition, we
have developed and plan to develop further special technology and services to
assist our partners in promoting the use of the MetaTrust Utility in various
vertical markets.
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 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 11 United States patents, and will continue to develop our
intellectual property in the fields of digital rights management and electronic
commerce.
Strategic Partners and Markets
We license our DRM technology to our partners to build 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.
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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.
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 our 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.
Samsung SDS--Samsung SDS, part of the Samsung Group, is Korea's leading
information services company. Samsung SDS's license to our Commerce software
allows it to create financial and usage clearinghouses, develop software, and
act as a deployment manager in Korea, for commercial and enterprise customers.
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 our Commerce software enables it to develop applications and
services in a wide range of vertical markets including music, business
information, software, and computer games.
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PublishOne--PublishOne Inc. was founded in February 1999 to develop digital
publishing applications and services based on our DRM technology. PublishOne's
license to our 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 to have future activities in
other content areas, including education. We licensed our Commerce software to
PublishOne and received an initial license fee in the form of a minority equity
position in PublishOne.
Reuters--Reuters 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 our 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 our 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 1998. Diamond has
licensed our Commerce application developer's kit 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
web site.
Mediascience--Mediascience, Inc. 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.
MusicMatch--MusicMatch, Inc. was the first company to introduce an MP3
jukebox music player, which is still one of the most popular MP3 music 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.
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Our Partners and Potential Markets
Through the end of 1998, we were 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 months
ended June 30, 1999. Bertelsmann accounted for 21% of total revenues in 1998.
Computacenter accounted for 13% of total revenues in the six 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.
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>
Entertainment: Publishing: Regulated: Enterprise:
Market .music .business information .government .secure document
.video .financial information .healthcare exchange
.audio books .traditional media .education .enterprise
.games .images .telecommunications information portals
Partner .secure email .trading/brokering
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mitsubishi X X X X
- --------------------------------------------------------------------------------------------------
NatWest X X X
- --------------------------------------------------------------------------------------------------
Reciprocal X X X
- --------------------------------------------------------------------------------------------------
Samsung X X X X
- --------------------------------------------------------------------------------------------------
Bertelsmann X X
- --------------------------------------------------------------------------------------------------
PublishOne X
- --------------------------------------------------------------------------------------------------
Reuters X
- --------------------------------------------------------------------------------------------------
Universal X
- --------------------------------------------------------------------------------------------------
Computacenter X X X X
- --------------------------------------------------------------------------------------------------
Diamond X
- --------------------------------------------------------------------------------------------------
Mediascience X
- --------------------------------------------------------------------------------------------------
MusicMatch X
</TABLE>
Alliances
We have entered into several alliance agreements to help us penetrate
various vertical markets. 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., 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.
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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.
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 our 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;
. 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 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 plan to develop further special technology to assist
our partners in promoting 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 appropriate partners
accelerate the adoption of our DRM platform for protected digital music
distribution.
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MetaTrust Utility Services
We plan to 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 our 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 that interface 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. We have designed, and plan
to continue to design, countermeasures that we intend 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 we
believe add fundamental new functionality to traditional computing
environments. By using proven security technologies plus this new
functionality, we have created platform software designed to enable 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 is
designed to enable digital commerce to operate in
compliance with provider-specified rules through a
network of independent, protected processing
environments, which we have branded as InterRights
Points. Our technology is currently implemented as
software and includes tools, components, sample
applications, documentation and training that allow
our partners and their customers to build digital
commerce applications and services and take
advantage 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. 45 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 personal computers and servers in
the MetaTrust Utility. DRM processing occurs at InterRights Points. Each
InterRights Point acts as a secure virtual machine, a software
application acting as a processing device, that is designed to manage
each party's digital rights remotely. Each InterRights Point creates a
local, secure database that stores the users'
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rights, identities, transactions, budgets and keys. We are currently
developing different implementations of the InterRights Point for use in
other electronic devices. In particular, we are developing technology for
securely managing the transfer of digital information to portable
electronic devices like MP3 music players.
. 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. Our design permits
information in a DigiBox container to 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 designed to allow providers to create and change
rules and to associate them with digital information. Rules are protected
in the same way content is protected. Like content, they are stored in
DigiBox containers for distribution. Rules are designed to 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 are designed to 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 is designed to receive transaction records from
InterRights Points, store the records, and forward them, as specified by
usage rules, for further processing, including payment fulfillment. The
transaction authority framework is also designed to store messages
resulting from this further processing, like payment confirmation, and
when the InterRights Point next connects to the data center, send these
messages to the InterRights Points. The transaction authority framework
includes administrative software, called the deployment manager, that is
designed to activate InterRights Points and manage 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. These efforts are in the development stage.
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 the 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 11 employees as of
August 31, 1999, five in Sunnyvale, one in Washington D.C., three in London,
England and two in Sydney, Australia.
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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 our partners on using our DRM as well as on developing
cross-partner and new customer relationships. Our partner development
organization consisted of six employees as of August 31, 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 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 nine individuals as of August 31, 1999.
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. 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 August 31, 1999, our research and development and training and support
organizations were comprised of 99 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 and components, security and 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. The product management group 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.
The deployment operations group 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 partners' engineering staffs.
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Training and Support
Our training and support organizations work closely with the partner
development organization to provide partners with the training and support
contemplated under their 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 web site 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 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.
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. The DRM market is new and we are not aware
of any one competitor that has established a dominant position in the market.
However, it is possible that one or more companies could become a dominant,
competitive force in the future. 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 Systems, and Xerox; and
. companies offering hardware-based content metering and copy protection
systems, including Sony, Wave Systems, and the 4C Entity, comprised of
IBM, Intel, Matsushita, and Toshiba.
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;
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. price of solution, from as high as 30-40% to a nominal percentage of
transaction value;
. range of usage environments, from personal computer-based, online-only to
multiple devices, offline and online;
. choice of service providers, from being tied to a single vendor that 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 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 partners' 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, 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 these
areas.
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 obtain and use our products or technology to
develop similar technology. If we are unable to protect our intellectual
property adequately, 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 August 31, 1999, we held 11 United States patents
and one European patent. We also have filed 31 additional United States patent
applications, as well as counterpart foreign applications in
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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 might 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, relating 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 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 May 1999, we received a letter from representatives of TechSearch
LLC offering us a license to a patent held by TechSearch. We have reviewed the
patent and do not believe that we need to obtain a license to this patent. In
the future, we could be found to infringe upon the patent rights of E-Data, TAU
Systems, TechSearch, 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 might not be able to obtain
licenses to continue offering these products without substantial reengineering.
Efforts to undertake this reengineering might not be successful; licenses might
be unavailable on commercially reasonable terms, if at all; and litigation
might 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,
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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 one or more of these words in
their marks, alone or in combination with other words. We do not expect to be
able to prevent all third-party uses of these words. 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
relating to our proprietary rights may or take actions that would harm our
business.
Our partners may rely in part on licenses included within the sealed
packaging of commercial software and licenses on a web site that are entered
into by clicking with a computer mouse on a button denoting assent to the terms
of the license displayed on the web site. These licenses, however, may be or
become 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 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 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 Bodies and Industry Groups
We participate in selected industry groups to promote digital rights
management in the 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 Picture Experts Group, Secure
Digital Music Initiative, Open Platform Initiative for Multimedia Access, The
Cross Industry Working Team, and Copy Protection Technical Working Group. We
believe our activities in the Moving Picture Experts Group and the Secure
Digital Music Initiative are of particular importance.
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MPEG-4, the standard for multimedia software and devices, includes an
intellectual property management and protection 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
intellectual property management and protection interface, which is consistent
with our technology. MPEG-4 content developers can use our technology to
incorporate intellectual property management and protection capabilities into
their applications.
The Secure Digital Music Initiative 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 the Secure Digital Music Initiative from the beginning. We have
been active as one of three vice-chairs of the first working group, which
devised the specifications for secure digital music compliant-portable devices.
Following the approval of the Secure Digital Music Initiative portable devices
specification, we believe our technology will enable the protection and
management of digital audio content on the Internet, personal computers, and
portable devices. We plan to continue participating actively and developing our
technology to be compliant with emerging Secure Digital Music Initiative
specifications.
Employees
At August 31, 1999, we had a total of 144 employees. Of the total, 99 were
in research and development and training and support, 26 were in marketing,
sales and partner development, and business development, and 19 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 with specified terms. Our future
success also depends on our continuing ability to attract and retain highly
qualified technical, sales, and senior management personnel. Competition for
these personnel is intense, and we may not be able to retain our key technical,
sales and senior management personnel or to 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 66,000 square feet in Santa Clara, California
under a lease that terminates in September 2004. We have also entered into a
three-year lease for a research and development facility occupying
approximately 3,900 square feet in Portland, Oregon. This lease commences
October 1999. InterTrust International, our wholly-owned subsidiary, has an
office located in London, England.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages and positions as of
August 31, 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.......... 37 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 and
Partner Development
Duncan M. Davidson...... 46 Senior Vice President, Business Development
Richard H. Frank........ 57 Senior Vice President, Portable Device Group
B. Nicholas Garnett..... 45 Senior Vice President, Trust Utility of InterTrust International
Joseph W. Jennings...... 45 Senior Vice President, Marketing
Richard A. Landsman..... 47 Senior Vice President, Product Development and Support
David M. Van Wie........ 34 Director and Senior Vice President, Research
Patrick P. Nguyen....... 32 Vice President, Global Alliances
Bruce Fredrickson....... 56 Director
Satish K. Gupta......... 54 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 of InterTrust since June 1999.
From September 1995 to June 1999, Mr. Fish served as general counsel and vice
president, corporate development of InterTrust. 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, the National Security Agency, the 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 and
partner development of InterTrust since April 1999. From June 1997 to March
1999, Mr. Armati served as vice president, strategic sales and managing
director of the United Kingdom branch of InterTrust International. From
December 1996 to June 1997, Mr. Armati served as an independent consultant to
InterTrust International. 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 high speed data
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.
B. Nicholas Garnett has served as senior vice president, trust utility of
InterTrust International, our subsidiary, since August 1999. Before joining
InterTrust International, from March 1992 to July 1999, Mr. Garnett was the
director general and chief executive officer of the International Federation of
the Phonographic Industry, which was instrumental in establishing the recording
industry's worldwide anti-piracy structure. Mr. Garnett received an M.A. in law
from the University of Cambridge and a D.E.A. in French law from the University
of Bordeaux.
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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.
Richard A. Landsman is senior vice president, product development and
support of InterTrust and has served in various other 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.
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, from February 1993 to June 1998, Mr. Nguyen
worked at the Silicon Valley Office of Weil, Gotshal & Manges, where he was
made a partner in January 1998 and headed the corporate and technology
transaction group. Mr. Nguyen received a B.S. in computer science from the
University of California at 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. in liberal arts from St. Olaf College and
an M.S. in communications and media 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 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 in India from Birla Institute of Technology and Science,
an S.M. in electrical engineering from Massachusetts Institute of Technology,
and an M.S. in engineering and economic systems from Stanford University.
55
<PAGE>
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. Fredrickson and Gupta.
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 Gupta.
Director Compensation
Messrs. Fredrickson and Gupta 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.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors currently consists of
Messrs. Fredrickson and Gupta. 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 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.
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<PAGE>
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 for 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 and Partner
Development
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>
57
<PAGE>
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 option holder 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 in keeping with 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 % of Total Appreciation for
Underlying Options Granted Exercise Option Term
Options To Employees Price Expiration ---------------------
Name Granted(#) In 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 option listed in the table, stock options were granted in
February 1999 to Mr. Armati under our 1995 stock plan for 80,000 shares at an
exercise price of $3.50 per share. Upon the completion of six months of
service, 12.5% of the option shares will vest. Upon the completion of each of
the next 42 months of service, an additional 1/48th of the option shares become
vested.
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<PAGE>
The table below presents for our chief executive officer and our four other
highest-paid executive officers any options exercised during 1998 and the value
realized from that exercise. It also presents the number and value of shares
underlying unexercised options that were held by these executive officers as of
December 31, 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.
Upon the completion of six months of service, 12.5% of the option shares
listed in the table below became vested. Upon the completion of each of the
next 42 months of service, an additional 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 a holder
of an option may be repurchased by us at the original exercise price paid per
share if the option holder 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 $1.75 per share. Mr. Lenowitz has options to purchase class B non-voting
common stock. Mr. Davidson was granted options to purchase 160,000 shares of
class A voting common stock and 160,000 shares of class B non-voting common
stock, of which he has exercised and purchased 56,666 shares in 1998 and
190,000 shares in 1999.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value Of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
Shares at FY-End (#) at FY-End ($)
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
after the closing of this offering under these plans. However, the termination
of these plans will not affect any options outstanding under these plans, which
will remain outstanding until they are exercised, terminate or expire, in
keeping with the terms of the related stock option agreements.
59
<PAGE>
1999 Equity Incentive Plan
Our board of directors adopted our 1999 equity incentive plan on July 22,
1999. Our stockholders have also approved this plan. We have reserved 1,900,000
shares of our common stock for 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 option holder 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;
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<PAGE>
. the cashless exercise method through a designated broker;
. a pledge of shares to a broker; or
. a promissory note.
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.
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<PAGE>
1999 Employee Stock Purchase Plan
Our board of directors adopted our 1999 employee stock purchase plan on July
22, 1999. Our stockholders have also approved 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, will last 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.
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<PAGE>
1999 Non-Employee Directors Option Plan
Our board of directors adopted our 1999 non-employee directors option plan
on July 22, 1999. Our stockholders have also approved 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.
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, two of our other executive officers who are not among our
four highest-paid executive officers during 1998 were also granted options that
63
<PAGE>
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.
64
<PAGE>
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 these individuals or entities, 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, one of our
5% stockholders, 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,
L.P.
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 June 1997 and January 1998, we issued and sold an aggregate of 1,165,544
shares of series B preferred stock to Reuters New Media, Inc., an entity
affiliated with Reuters Group PLC, one of our 5% stockholders, 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, L.P. 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, L.P. 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.
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<PAGE>
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 416,667 shares of our series E preferred
stock to Blaxmill (Four) Limited, an entity affiliated with Reuters Group PLC,
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.
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 executive 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 directors and an executive
officer, 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 these agreements.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The table on the next page presents selected information regarding
beneficial ownership of our outstanding common stock as of August 31, 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 over securities
and includes the shares issuable under stock options that are exercisable
within 60 days of August 31, 1999. Shares issuable under stock options
exercisable within 60 days are considered outstanding for computing the
percentage of the person holding the options but are not considered outstanding
for computing the percentage of any other person. Consequently, the table on
the next page includes information regarding shares issuable under stock
options exercisable within 60 days of August 31, 1999 for the following persons
and in the following amounts:
<TABLE>
<CAPTION>
Name Shares Subject to Options
---- -------------------------
<S> <C>
David M. VanWie.................................... 320,800
Erwin N. Lenowitz.................................. 160,000
Joseph W. Jennings................................. 133,332
Satish K. Gupta.................................... 80,000
Edmund J. Fish..................................... 18,333
Duncan M. Davidson................................. 10,000
Douglas M. Armati.................................. 6,667
</TABLE>
Percentage ownership calculations are based on 31,461,011 shares of common
stock outstanding as of August 31, 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 6,692 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 975,000 shares.
Unless otherwise indicated, the address for each listed stockholder is: c/o
InterTrust Technologies Corporation, 4750 Patrick Henry Blvd., Santa Clara,
California 95054. 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 over
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 24.5% 20.3%
Kistler Associates(1)................- 2,372,556 7.5 6.2
955 5th Avenue, Apt. 6B
New York, NY 10021
Reuters Group PLC(2).................. 1,582,211 5.0 4.2
85 Fleet Street
London EC4P 4AJ
United Kingdom
Entities affiliated with SLF 1,540,779 4.9 4.1
Partners(3).........................-
Attn: Steven L. Fingerhood, General
Partner
301 Mission Street, Suite 350
San Francisco, CA 94105
Erwin N. Lenowitz(4).................. 558,206 1.8 1.5
David M. Van Wie...................... 344,800 1.1 0.9
Duncan M. Davidson(5)................. 300,001 1.0 0.8
Edmund J. Fish(6)..................... 291,052 0.9 0.8
Douglas M. Armati(7).................. 175,000 0.6 0.5
Satish K. Gupta....................... 160,000 0.5 0.4
Bruce Fredrickson(8).................. 137,000 0.4 0.4
Joseph W. Jennings.................... 133,332 0.4 0.4
Executive officers and directors as a
group (14 persons)(9)(10)............ 10,660,141 32.8 27.3
</TABLE>
- --------
(1) Kistler Associates has the right to purchase shares of common stock in this
offering. If it exercises this right in full, it will own approximately
2,599,556 shares, or 6.8% of us.
(2) Represents 1,165,544 shares held of record by Reuters New Media, Inc. and
416,667 shares held of record by Blaxmill (Four) Limited.
(3) Represents 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.
(4) 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.
(5) Includes 210,001 shares held by the Davidson Family Revocable Trust of
which 76,667 shares are subject to a right of repurchase by us as of August
31, 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 InterTrust
employees, Mr. Davidson is taking a security interest in 80,624 shares of
common stock.
(6) Includes 3,334 shares subject to a right of repurchase by us as of August
31, 1999.
(7) Includes 56,667 shares subject to a right of repurchase by us as of August
31, 1999.
(8) 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.
(9) Includes 1,057,255 shares subject to options that are exercisable within 60
days of August 31, 1999 and the shares described in Notes 3 through 7.
(10) Includes 16,667 shares held by Patrick P. Nguyen, one of our executive
officers, subject to a right of repurchase by us as of August 31, 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.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon the consummation of this offering and giving effect to the filing of
our sixth amended and restated certificate of incorporation, 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 August 31, 1999, there were 31,461,011 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 6,692 shares of common stock, upon the closing
of this offering, that were held of record by approximately 307 stockholders.
There will be 37,961,011 shares of common stock outstanding, assuming no
exercise of the underwriters' over-allotment option and assuming no exercise
after August 31, 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. 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 325,000 shares of common stock at an
exercise price of $14.00 per share. The warrant expires in September 2004.
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
69
<PAGE>
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.
Registration Rights
After this offering, the holders of approximately 19,014,401 shares of
common stock will be entitled to rights relating 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 to register their 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. For example,
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;
70
<PAGE>
. 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
. 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 that 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 when
transactions are 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 amended and restated 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
regarding 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.
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 37,961,011 shares of common
stock outstanding, assuming no exercise by the underwriters of their over-
allotment option to purchase up to 975,000 shares and assuming no exercise of
options after August 31, 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 of the Securities Act described below.
Sales of Restricted Shares
The remaining 31,461,011 shares of common stock are treated as restricted
shares under Rule 144 of the Securities Act. 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, 663,091
shares other than the 6,500,000 shares being sold in this offering will be
eligible for sale unless purchased by our "affiliates" or by some participants
in our directed share program who enter into lock up agreements. Beginning 180
days after the date of this prospectus, or earlier with the consent of Credit
Suisse First Boston Corporation, 27,144,146 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, any person who has beneficially owned
restricted shares for at least one year is entitled to sell within any three-
month period a limited number of shares of common stock. The limit is the
greater of:
. 1% of the then-outstanding shares of our common stock, approximately
379,610 shares after giving effect to this offering; or
. 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, may sell these shares immediately following this offering without
complying with 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
qualifies under 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 cause a reduction in the market price of the common stock and
could impair our future ability to raise capital through an offering of our
equity securities.
72
<PAGE>
Options
As of August 31, 1999, options to purchase a total of 6,882,994 shares of
common stock were outstanding and options to purchase 3,256,634 shares of
common stock were exercisable. Substantially all of the shares subject to
options are subject to lock-up agreements. An additional 180,722 shares of
common stock were available as of August 31, 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.
Rule 701 under the Securities Act provides that shares of our 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. Rule 701 also
provides that shares of common stock acquired on the exercise of outstanding
options may be resold by our 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 our 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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<PAGE>
UNDERWRITING
Under the terms and subject to the 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........................................................... 6,500,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 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.
74
<PAGE>
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 dispose of, directly or indirectly, or file
with the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any of our shares of common
stock without the 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 resulting from the exercise of employee options outstanding on the
date of this prospectus.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 1,300,000 shares of the common stock for current
and potential customers, others with whom we do business, existing
stockholders, employees, 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, of the 1,300,000 shares,
Kistler Associates has the right to purchase up to approximately 227,000 shares
in the offering and an affiliate of Amerindo Investment Advisors has the right
to purchase up to approximately 227,000 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 in this prospectus or 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 compliance 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.
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<PAGE>
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed 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 be in
the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or elsewhere 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.
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.
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<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. As as a result, any resale of the common
stock in Canada must comply with applicable securities laws, which will vary
depending on the relevant jurisdiction, and which may require resales to be
made under 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 considered to represent to us and the dealer from which
the purchase confirmation is received that 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, that where
required by law, the purchaser is purchasing as principal and not as agent, and
that 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
for 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 purchasers under relevant Canadian
legislation.
77
<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 relating 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 about InterTrust and the 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 summarize only the provisions of these documents that are material
to investors. You should refer to the exhibits to this registration statement
for the complete contents of these contracts and documents. The registration
statement, including the exhibits, may be inspected without charge at the
public reference facilities maintained by the Securities and Exchange
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 Securities and Exchange Commission. The Securities and
Exchange 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 Securities and Exchange
Commission. The address of the site is http://www.sec.gov.
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<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................ -- 594 769
-------- ------- --------
Total current liabilities..... 1,458 2,313 4,128
Deferred revenue--long-term
portion.......................... 2,500 7,981 8,447
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 and training
services.................... 25 100 152 50 177
------- -------- -------- ------- --------
Total revenues............. 25 1,100 152 50 486
Cost of revenues:
Licenses..................... -- -- -- -- 42
Software support and training
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
stock 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 stock com-
pensation (unau-
dited)............. -- -- -- -- 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
notes receivable 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 stock 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 to serve as a foundation for
providers of digital information, technology, and commerce services to
participate in a global e-commerce system. 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. This 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 and training services. License revenue, net of any discounts
granted, is recognized after execution of a
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)
license agreement and delivery of the product, provided there are no remaining
obligations relating to development, upgrades, new releases, or other future
deliverables, and provided that the license fee is fixed or determinable, and
collection of the fee is probable. For contracts entered after January 1, 1998,
InterTrust allocates revenue between the elements of the arrangements,
including the license, software support and training services, and the rights
to unspecified upgrades and new releases based on the vendor specific evidence
of the fair value of each of the elements. If Intertrust does not have vendor
specific objective evidence of the fair value of the undelivered elements,
license revenue is not recognized for the delivered elements. InterTrust's
license agreements generally include the right to obtain access to upgrades and
new releases for a specified period. Under these circumstances, the license
payments received in advance of revenue recognition, including license fees
received in the form of a minority equity position, are deferred and recognized
on a subscription basis over the period of obligation beginning upon delivery
of the licensed product. In addition, under license agreements where Intertrust
is obligated to provide specified upgrades and does not have vendor specific
objective evidence of fair value of the specified upgrade, all of the license
revenue is deferred until the specified upgrade has been delivered. Upon
delivery of the specified upgrade, license revenue is recognized using the
subscription method.
InterTrust began recognizing 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.
For contracts entered into prior to 1998, Intertrust recognizes revenue as
the amounts are earned under the related agreements, provided no significant
obligations exist and the related receivable is deemed collectible, in
accordance with Statement of Position 91-1, "Software Revenue Recognition."
InterTrust's license revenue in 1997 was derived from a license of a pre-
commercial version of its software.
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 relating 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. Prepaid transaction fees are
recorded as deferred revenue and will be recognized when the related
transactions occur. InterTrust had received $1,000,000 in prepaid transaction
fees from a preferred stockholder, which is 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 and training services, which typically include the right to
telephone and online support and customer training, are generally provided for
in the license agreements for an agreed upon amount. Software support and
training service revenue is recognized over the period in which
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)
the services are provided, generally two years. 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 software support and training services prior to the shipment of
its commercial release in December 1998. Costs incurred to provide software
support and training services are included as a component of cost of revenues.
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 some passages provided by
SOP 98-4 through fiscal years beginning on or before March 15, 1999. All
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.
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, these 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
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)
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.
Investment in Non-Public Entity
In May 1999, InterTrust received an approximately 10% equity interest in a
non-public entity as consideration for a license fee. This investment was
recorded at its estimated fair value and is being accounted for using the cost
method. The Company will assess the recoverability of this investment on a
quarterly basis.
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 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 the 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, as a result, 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.
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)
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 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, as a result, 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. 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 the weighted average number of shares
subject to repurchase.
Pro forma net loss per share has been computed as described above but also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of convertible preferred stock not included above that will
automatically convert upon completion of InterTrust's initial public offering
into 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.
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)
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 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, and 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
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)
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>
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 the six months ended June 30, 1999, respectively.
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)
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 its rights, preferences, privileges, and
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 designation of the series.
In compliance 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 so 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 the 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 to a
maximum aggregate amount of $7.665 per share. Series B, C, and D preferred
stockholders are to receive distributions until their total distributions equal
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 will 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, assuming a one-for-one conversion of the preferred stock to class
A common stock.
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)
Holders of preferred stock are entitled to one vote for each share of common
stock into which the 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, C, D, and E preferred stock and common
stock, when and if declared by the board of directors. If dividends are
declared on series A preferred stock, the dividends must 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
dividends 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 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, that results in aggregate proceeds to InterTrust in
excess of $10,000,000. The holders of preferred stock also have registration
rights. InterTrust has a right of first refusal should any preferred
stockholder desire to sell or transfer its shares. The repurchase price must be
substantially the same price and the repurchase terms must be substantially 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 for voting rights. The class B non-voting
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>
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
option plan.................................................... 101,846
Exercise of warrants............................................ 626,016
----------
19,686,238
==========
</TABLE>
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)
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 values as determined by the board of directors,
while nonstatutory options granted under the plan are at prices not less than
85% of the fair values on the respective dates 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 has 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-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)
Information about stock option activity is summarized as follows:
<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-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)
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 some fully vested
options to purchase class B common stock for an additional six-year period. The
difference between the exercise price and what was considered to be the fair
value of the 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 some 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 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 what was considered to be
the fair values for accounting purposes of the shares of common stock subject
to the options. These 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
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)
characteristics significantly different from those of traded options and since
changes in the subjective 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 and were exercised in August 1999.
As of December 31, 1998, warrants to purchase a total of 320,016 shares of
class B non-voting common stock were outstanding. A warrant to purchase 311,016
shares of class B non-voting 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 at InterTrust's discretion. This warrant may
be terminated upon the closing of an initial public offering of InterTrust's
common stock. Warrants to purchase 9,000 shares of class B non-voting common
stock at a weighted average exercise price of $1.61 per share were issued in
1998 in connection with professional services. Of this amount, 5,000 shares
were exercised in August 1999 and 4,000 shares are exercisable through the
earlier of the completion of an initial public offering of InterTrust's common
stock or December 2003.
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)
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. For that
reason, 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
------- -------
Gross 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 these 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-21
<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 rights and preferences similar to the previously issued series B
preferred stock.
7.EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
In July 1999, InterTrust's stockholders approved a proposal 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 subject to stockholder approval, to be effective upon completion
of InterTrust's initial public offering of its common stock. This 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 this 1999 plan.
In July 1999, the board of directors adopted InterTrust's 1999 employee
stock 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 this
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 InterTrust's 1999 non-employee
directors option plan, subject to stockholder approval, to be effective upon
completion of InterTrust's initial public
F-22
<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)
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.
In September 1999, InterTrust entered into a financial consulting agreement
with Allen & Company Inc. Concurrently, InterTrust issued a warrant to Allen &
Company for 325,000 shares of common stock at an exercise price of $14.00 per
share. The warrant is exercisable as to 50% of the shares one year after the
date of grant and the balance of such shares two years after the date of grant
or immediately prior to a merger or sale of InterTrust. The warrant expires
five years from the date of grant and is subject to early termination upon the
sale or merger of InterTrust.
F-23
<PAGE>
Narrative Description of Outside 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>
[LOGO OF INTERTRUST]
<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............................................. $ 29,093
NASD filing fee.................................................. 10,965
Nasdaq National Market listing fee............................... 90,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 450,000
Accounting fees and expenses..................................... 250,000
Road show expenses............................................... 50,000
Blue sky fees and expenses....................................... 5,000
Custodian and transfer agent fees................................ 15,000
Miscellaneous fees and expenses.................................. 99,942
----------
Total.......................................................... $1,150,000
==========
</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
our officers and directors 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 7,964,900 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 stock plan.
2. We issued and sold an aggregate of 2,025,305 shares of our common stock
to employees, consultants, and other service providers for aggregate
consideration of approximately $2,624,030 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 stock 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 January, 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. The warrant
will be terminated upon the initial public offering of our common stock.
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. The warrant was subsequently exercised and we
issued 10,000 shares thereunder.
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. The warrant was subsequently exercised and we issued 2,000
shares thereunder.
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. The warrant was subsequently exercised and we issued 3,000
shares thereunder.
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 1,309,700 shares of our series E
preferred stock for an aggregate purchase price of approximately $15,716,000 to
a group of investors under a stock purchase agreement and issued 83,333 shares
of our series E preferred stock upon the conversion of a $1.0 million
promissory note.
17. On September 7, 1999, we issued a warrant to purchase 325,000 shares of
our class A voting common stock with an exercise price of $14.00 per share to
Allen & Company Inc. in connection with a financial consulting agreement.
The sale of the above securities was determined 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 and 3.4.
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*** [This exhibit has been omitted]
10.6**** [This exhibit has been omitted]
10.7**** [This exhibit has been omitted]
10.8**** [This exhibit has been omitted]
10.9**** [This exhibit has been omitted]
10.10**** [This exhibit has been omitted]
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 and License Agreement by and between the
Registrant and Universal Music Group, Inc. dated April 13, 1999.
10.14**+ Technology Development and License Agreement by and between the
Registrant and Upgrade Corporation of America dated August 7, 1996
10.15**+ Technology Development and License Agreement by and between the
Registrant and Mitsubishi Corporation dated October 7, 1996.
10.16** Warrant for the purchase of Class A Voting Common Stock made by the
Registrant and held by Allen & Company Incorporated, dated September
7, 1999
21.1 Subsidiaries of the Registrant.
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.
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
*** This warrant will be terminated upon the initial public offering.
**** These leases are no longer in existence.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
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 Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, State of California, on this 28th day of September, 1999.
Intertrust Technologies Corporation
By /s/ Victor Shear
----------------------------------
Victor Shear
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons on behalf of the Registrant and in the capacities and on the date
indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Victor Shear Chairman of the Board and
- ------------------------------- Chief Executive Officer September 28,
Victor Shear (Principal Executive 1999
Officer)
Erwin N. Lenowitz* Vice Chairman of the
- ------------------------------- Board, Chief Financial September 28,
Erwin N. Lenowitz Officer (Principal 1999
Financial and Accounting
Officer) and Secretary
/s/ Edmund J. Fish Director, Senior Operating
- ------------------------------- Officer and Executive September 28,
Edmund J. Fish Vice President, Corporate 1999
Development
David Van Wie*
- ------------------------------- Director and Senior Vice September 28,
David Van Wie President of Research 1999
Bruce Frederickson* Director
- ------------------------------- September 28,
Bruce Fredrickson 1999
Satish K. Gupta* Director
- ------------------------------- September 28,
Satish K. Gupta 1999
*By: /s/ Victor Shear
---------------------------
Victor Shear
Attorney-in-fact
*By: /s/ Edmund J. Fish
---------------------------
Edmund J. Fish
Attorney-in-fact
</TABLE>
II-6
<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 and 3.4.
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*** [This exhibit has been omitted]
10.6**** [This exhibit has been omitted]
10.7**** [This exhibit has been omitted]
10.8**** [This exhibit has been omitted]
10.9**** [This exhibit has been omitted]
10.10**** [This exhibit has been omitted]
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 and License Agreement by and between the
Registrant and Universal Music Group, Inc. dated April 13, 1999.
10.14**+ Technology Development and License Agreement by and between the
Registrant and Upgrade Corporation of America dated August 7, 1996
10.15**+ Technology Development and License Agreement by and between the
Registrant and Mitsubishi Corporation dated October 7, 1996.
10.16** Warrant for the purchase of Class A Voting Common Stock made by the
Registrant and held by Allen & Company Incorporated, dated September
7, 1999
21.1 Subsidiaries of the Registrant.
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.
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
*** This warrant will be terminated upon the initial public offering.
**** These leases are no longer in existence.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
<PAGE>
Exhibit 1.1
DRAFT DATED September 20, 1999
_____________ Shares
INTERTRUST TECHNOLOGIES CORPORATION
Common Stock, $0.001 par value
UNDERWRITING AGREEMENT
----------------------
__________________,1999
Credit Suisse First Boston Corporation
J.P. Morgan Securities, Inc.
Salomon Smith Barney Inc.
SoundView Technology Group
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. InterTrust Technologies Corporation, a Delaware
corporation ("Company"), proposes to issue and sell shares ("Firm Securities")
of its Common Stock, $0.001 par value ("Securities"), and also proposes to issue
and sell to the Underwriters, at the option of the Underwriters, an aggregate of
not more than additional shares ("Optional Securities") of its Securities as set
forth below. The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities". As part of the offering
contemplated by this Agreement, Salomon Smith Barney (the "Designated
Underwriter") has agreed to reserve out of the Firm Securities set forth
opposite its name on Schedule A to this Agreement, up to shares, for sale to the
Company's employees, officers and directors and other parties associated with
the Company (collectively, "Participants"), as set forth in the Prospectus (as
defined herein) under the heading "Underwriting" (the "Directed Share Program").
The Firm Securities to be sold by the Designated Underwriter pursuant to the
Directed Share Program (the "Directed Shares") will be sold by the Designated
Underwriter pursuant to this Agreement at the public offering price. Any
Directed Shares not orally confirmed for purchase by a Participant by the end of
the business day on which this Agreement is executed will be offered to the
public by the Designated Underwriter as set forth in the Prospectus. The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-84033) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (ii) is proposed to be amended by amendment or
post-effective
1
<PAGE>
amendment. If such registration statement ("initial registration
statement") has been declared effective, either (i) an additional
registration statement ("additional registration statement") relating to
the Offered Securities may have been filed with the Commission pursuant to
Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities all
have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the additional registration
statement or (ii) such an additional registration statement is proposed to
be filed with the Commission pursuant to Rule 462(b) and will become
effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (i) if the
Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (ii) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect
to such additional registration statement means the date and time as of
which such registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the date
of the Effective Time thereof. The initial registration statement, as
amended at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on
which it is filed and including all information (if any) deemed to be a
part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and individually as a "Registration Statement".
The form of prospectus relating to the Offered Securities, as first filed
with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
424(b)") under the Act or (if no such filing is required) as included in a
Registration Statement, is hereinafter referred to as the "Prospectus". No
document has been or will be prepared or distributed in reliance on Rule
434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the
rules
2
<PAGE>
and regulations of the Commission ("Rules and Regulations") and did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the Act
and the Rules and Regulations and did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading and (iii) on the date of this
Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects to
the requirements of the Act and the Rules and Regulations, and neither of
such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all respects to
the requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein, it
being understood and agreed that the only such information is that
described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification and where failure to be
so qualified would have a material adverse effect on the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole (a "Material Adverse
Effect").
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification and where failure to be so qualified would not have a
Material Adverse Effect; all of the issued and outstanding capital stock of
each subsidiary of the Company has been duly authorized and validly issued
and is fully paid and nonassessable; and the capital stock of each
subsidiary owned by the Company, directly or through subsidiaries, is owned
free from liens, encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized; all outstanding shares of
capital stock of the Company are, and, when the Offered Securities have
been delivered and paid for in accordance with this Agreement on each
Closing Date (as defined below), such Offered Securities will have been,
validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus; and the
3
<PAGE>
stockholders of the Company have no preemptive rights with respect to the
Securities which have not been waived or terminated on or prior to the
Closing Date.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(h) The Offered Securities have been approved for listing on the The
Nasdaq Stock Market's National Market subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws.
(j) The execution, delivery and performance of this Agreement, and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, (i) any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
(ii) any agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary is
bound or to which any of the properties of the Company or any such
subsidiary is subject, in each case the breach, violation or default of
which would result in a Material Adverse Effect, or (iii) the charter or
by-laws of the Company or any such subsidiary, and the Company has full
power and authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered by
the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
4
<PAGE>
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or presently
employed by them, and have not received any notice of infringement of or
conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor any
of its subsidiaries is in violation of any statute, any rule, regulation,
decision or order of any governmental agency or body or any court, domestic
or foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively,
"environmental laws"), owns or operates any real property contaminated with
any substance that is subject to any environmental laws, is liable for any
off-site disposal or contamination pursuant to any environmental laws, or
is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware of
any pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of the
sale of the Offered Securities; and no such actions, suits or proceedings
are threatened or, to the Company's knowledge, contemplated.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and, except as otherwise
disclosed in the Prospectus, such financial statements have been prepared
in conformity with the generally accepted accounting principles in the
United States applied on a consistent basis and the schedules included in
each Registration Statement present fairly the information required to be
stated therein.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or contemplated
by the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(u) Furthermore, the Company represents and warrants to the
Underwriters that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
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jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with
the Directed Share Program, and that (ii) no authorization, approval,
consent, license, order, registration or qualification of or with any
government, governmental instrumentality or court, other than such as have
been obtained, is necessary under the securities law and regulations of
foreign jurisdictions in which the Directed Shares are offered outside the
United States.
(v) The Company has not offered, or caused the Underwriters to offer,
any offered Securities to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share, the respective
numbers of Firm Securities set forth opposite the names of the Underwriters in
Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an account
at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn
to the order of the Company at the office of Gunderson, Dettmer, Stough,
Villeneuve, Franklin & Hachigian, LLP ("Gunderson Detmer"), 155 Constitution
Drive, Menlo Park, California 94025, at A.M., New York time, on
, or at such other time not later than seven full business days thereafter as
CSFBC and the Company determine, such time being herein referred to as the
"First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange
Act of 1934, the First Closing Date (if later than the otherwise applicable
settlement date) shall be the settlement date for payment of funds and delivery
of securities for all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as CSFBC requests and
will be made available for checking and packaging at the above office of
at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per share to be paid for the Firm Securities. The Company agrees
to sell to the Underwriters the number of Optional Securities specified in such
notice and the Underwriters agree, severally and not jointly, to purchase such
Optional Securities. Such Optional Securities shall be purchased for the account
of each Underwriter in the same proportion as the number of Firm Securities set
forth opposite such Underwriter's name bears to the total number of Firm
Securities (subject to adjustment by CSFBC to eliminate fractions) and may be
purchased by the Underwriters only for the purpose of covering over-allotments
made in connection with the sale of the Firm Securities. No Optional Securities
shall be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase
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Optional Securities is given. The Company will deliver the Optional Securities
being purchased on each Optional Closing Date to the Representatives for the
accounts of the several Underwriters, against payment of the purchase price
therefor in Federal (same day) funds by official bank check or checks or wire
transfer to an account at a bank acceptable to CSFBC drawn to the order of the
Company, at the above office of Gunderson Detmer. The certificates for the
Optional Securities being purchased on each Optional Closing Date will be in
definitive form, in such denominations and registered in such names as CSFBC
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the above office of
at a reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as
of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b)
on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later date
as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial or any additional registration statement as filed or
the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent; and the
Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters'
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<PAGE>
delivery of, any such amendment or supplement shall constitute a waiver of
any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (five of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC reasonably requests. The Prospectus shall
be so furnished on or prior to 3:00 P.M., New York time, on the business
day following the later of the execution and delivery of this Agreement or
the Effective Time of the Initial Registration Statement. All other
documents shall be so furnished as soon as available. The Company will pay
the expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution; provided, however, that the Company will not
be required to arrange for the qualification of the Offered Securities in
any jurisdiction in which the Company would, as a result of such
qualification, be required to qualify to do business as a foreign
corporation or to execute a general consent to service of process effecting
such qualification.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 or mailed to
stockholders, and (ii) from time to time, such other information concerning
the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under the
laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto, for the filing fee incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers
of the Offered Securities (except as otherwise agreed in writing) and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
8
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(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act relating
to, any additional shares of its Securities or securities convertible into
or exchangeable or exercisable for any shares of its Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of CSFBC except
issuances of Securities pursuant to the conversion or exchange of
convertible or exchangeable securities or the exercise of warrants or
options, in each case outstanding on the date hereof, grants of employee
and director stock options or employee stock purchases pursuant to the
terms of plans in effect on the date hereof or issuances of Securities
pursuant to the exercise of such options.
(j) The Company agrees to use reasonable best efforts to cause all
directors, officers, and stockholders to agree that, without the prior
written consent of CSFBC on behalf of the Underwriters, such person or
entity will not, for a period of 180 days following the commencement of the
public offering of the Offered Securities by the Underwriters, directly or
indirectly, sale, make any short sale of, grant any option for the purchase
of, or otherwise transfer or dispose of, any of such Securities, or any
such securities convertible into or exercisable or exchangeable for
Securities.
(k) The Company agrees to use reasonable best efforts to cause each
person who acquires Securities of the Company pursuant to the exercise of
any option, including but not limited to options granted under the
Company's 1992 Stock Plan, 1995 Stock Plan, 1999 Equity Incentive Plan,
1999 Non-Employee Directors Option Plan and 1999 Employee Stock Purchase
Plan to sign an agreement that restricts such person from selling, making
any short sale of, granting any option for the purchase of, or otherwise
transferring or disposing of, any of such Securities, or any such
securities convertible into or exercisable or exchangeable for Securities,
for a period of 180 days after the date of the Prospectus without the prior
written consent of CSFBC; and the Company will issue and impose a stop-
transfer instruction with the Company's transfer agent in order to enforce
the foregoing lock-up agreements.
(l) The Company will (i) use reasonable best efforts to enforce the
terms of each agreement described in paragraphs (j) and (k) of this Section
5 and each other similar "lock-up" and "market standoff" provision
contained in any agreement pursuant to which any Securities have been
acquired from the Company (each a "Lock-up Agreement"), and (ii) issue
stop-transfer instructions to the transfer agent for the Securities with
respect to any transaction or contemplated transaction that would
constitute a breach or a default under the applicable Lock-up Agreement. In
addition, except with the prior written consent of CSFBC, the Company
agrees (i) not to amend or terminate, or waive any right under, any Lock-up
Agreement, or take any other action that would directly or indirectly have
the same effect as an amendment or termination, or waiver of any right
under any Lock-up Agreement, that would permit any holder of Securities, or
any securities convertible into, or exercisable or exchangeable for,
Securities, to make any short sale of, grant any option for the purchase
of, or otherwise transfer or dispose of, any such Securities or other
securities, prior to the expiration of the 180 days after the date of the
Prospectus and (ii) not to consent to any sale, short sale, grant of an
option for the purchase of, or other disposition or transfer of shares of
Securities, or securities convertible into or exercisable or exchangeable
for Securities, subject to a Lock-up Agreement.
(m) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the
NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of the effectiveness of the
Registration Statement. The Designated Underwriter will notify the Company
as to which
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Participants will need to be so restricted. The Company will
direct the transfer agent to place stop transfer restrictions upon such
securities for such period of time.
(n) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Shares Program
and stamp duties, similar taxes or duties or other taxes, if any, incurred
by the underwriters in connection with the Directed Share Program.
Furthermore, the Company covenants with the Underwriters that the
Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of Ernst & Young LLP
confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder
and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above,
a reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act
and the related published Rules and Regulations or any material
modifications should be made to such unaudited financial
statements for them to be in conformity with generally accepted
accounting principles;
(B) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business days
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prior to the date of such letter, there was any change in the
capital stock or any increase in short-term indebtedness or long-
term debt of the Company and its consolidated subsidiaries or, at
the date of the latest available balance sheet read by such
accountants, there was any decrease in consolidated total current
assets or net assets, as compared with amounts shown on the
latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest
income statement included in the Prospectus to the closing date
of the latest available income statement read by such accountants
there were any decreases, as compared with the corresponding
period of the previous year and with the period of corresponding
length ended the date of the latest income statement included in
the Prospectus, in consolidated total revenues or any increase in
loss from operations or any increase in the total or per share
amounts of consolidated net loss.
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
by CSFBC. If the Effective Time of the Additional Registration Statement
(if any) is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus
is printed and distributed to any Underwriter, or shall have occurred at
such later date as shall have been consented to by CSFBC. If the Effective
Time of the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section 5(a) of
this Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement
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shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Representatives,
shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as one enterprise which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any material suspension or material limitation of
trading in securities generally on the New York Stock Exchange or any
setting of minimum prices for trading on such exchange, or any suspension
of trading of any securities of the Company on any exchange or in the over-
the-counter market; (iii) any banking moratorium declared by U.S. Federal
or New York authorities; or (iv) any outbreak or escalation of major
hostilities in which the United States is involved, any declaration of war
by Congress or any other substantial national or international calamity or
emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment
for the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Gunderson, Dettmer, Stough, Villeneuve, Franklin &
Hachigian, LLP, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification;
(ii) The Offered Securities delivered on such Closing Date and
all other outstanding shares of the Common Stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and the stockholders of the Company have no preemptive
rights with respect to the Securities;
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act;
(iv) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940;
(v) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the
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transactions contemplated by this Agreement in connection with the
issuance or sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be
required under state securities laws;
(vi) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or order
of any governmental agency or body or any court having jurisdiction
over the Company or any subsidiary of the Company or any of their
properties, or any agreement or instrument to which the Company or any
such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company
or any such subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement;
(vii) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge of
such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations;
(viii) The statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport
to summarize certain provisions of the capital stock of the Company,
provide an accurate and fair summary of such provisions; the
statements set forth under the headings "Management--Employment
Benefit Plans," "Management--Change in Control Agreements," and
"Shares Eligible for Future Sale" in the Prospectus, insofar as such
statements constitute a summary of legal matters, documents or
proceedings referred to therein, have been reviewed by such counsel
and accurately and fairly present the information called for with
respect to such legal matters, documents and proceedings as required
by the Act and the rules and regulations thereunder; and the
descriptions in the Registration Statement and Prospectus of statutes,
legal and governmental proceedings and contracts and other documents
are accurate and fairly present the information required to be shown;
and
(ix) This Agreement has been duly authorized, executed and
delivered by the Company.
Such opinion shall also contain a statement to the effect that such counsel
participated in meetings at which representatives of the Underwriters,
their legal counsel, and the Company were present, and based on such
meetings, such counsel has no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective date
or as of such Closing Date, contained any
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<PAGE>
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date, contained any
untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and such counsel
do not know of any legal or governmental proceedings required to be
described in a Registration Statement or the Prospectus which are not
described as required, or of any contracts or documents of a character
required to be described in a Registration Statement or to be filed as
exhibits to a Registration Statement which are not described and filed as
required; it being understood that such counsel expresses no statement as
to the financial statements and the notes thereto, financial schedules,
other financial data and statistical data derived therefrom.
(e) The Representatives shall have received from Fenwick & West LLP,
counsel for the Underwriters, such opinion or opinions, dated such Closing
Date, with respect to the incorporation of the Company, the validity of the
Offered Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the Representatives
may require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon
such matters.
(f) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated by
the Commission; the Additional Registration Statement (if any) satisfying
the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
pursuant to Rule 462(b), including payment of the applicable filing fee in
accordance with Rule 111(a) or (b) under the Act, prior to the time the
Prospectus was printed and distributed to any Underwriter; and, subsequent
to the date of the most recent financial statements in the Prospectus,
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
(h) The Representatives shall have received an opinion, dated such
Closing Date, of Finnegan and Henderson, intellectual property counsel for
the Company, to the effect that:
(i) Such counsel are familiar with the technology used by the
Company in its business and the manner of its use thereof and have
read the Registration Statements and the Prospectus, including
particularly the portions of the Registration Statements and the
Prospectus referring to patents, trade secrets, trademarks, service
marks or other proprietary information or materials;
(ii) The Company is listed in the records of the United States
Patent and Trademark Office as the holder of record of the patents
listed on a schedule to such opinion (the "Patents") and each of the
applications listed on a schedule to such opinion (the
"Applications"). To the knowledge of such counsel, there are no claims
of third parties to any ownership interest or lien with respect to any
of the Patents or Applications.
14
<PAGE>
Such counsel is not aware of any material defect in form in the
preparation or filing of the Applications on behalf of the Company. To
the knowledge of such counsel, the Applications are being pursued by
the Company. To the knowledge of such counsel, the Company owns as its
sole property the Patents and pending Applications;
(iii) The Company is listed in the records of the appropriate
foreign offices as the sole holder of record of the foreign patents
listed on a schedule to such opinion (the "Foreign Patents") and each
of the applications listed on a schedule to such opinion (the "Foreign
Applications"). Such counsel knows of no claims of third parties to
any ownership interest or lien with respect to the Foreign Patents or
Foreign Applications. Such counsel is not aware of any material defect
of form in the preparation or filing of the Foreign Applications on
behalf of the Company. To the knowledge of such counsel, the Foreign
Applications are being pursued by the Company. To the knowledge of
such counsel, the Company owns as its sole property the Foreign
Patents and pending Foreign Applications;
(iv) Such counsel knows of no reason why the Patents or Foreign
Patents are not valid as issued. Such counsel has no knowledge of any
reason why any patent to be issued as a result of any Application or
Foreign Application would not be valid or would not afford the Company
useful patent protection with respect thereto;
(v) As to the statements under the captions "Risk Factors--We
and our licensees may be found to infringe proprietary rights of
others, resulting in litigation, redesign expenses, or costly
licenses.", "Risk Factors--Protection of our intellectual property is
limited and efforts to protect our intellectual property may be
inadequate, time consuming, and expensive." and "Business--
Intellectual Property," nothing has come to the attention of such
counsel which caused them to believe that the above-mentioned sections
of any Registration Statement or any amendment thereto, as of its
effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of the Closing Date or
any Optional Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or at the Closing Date or
any Optional Closing Date, the above-mentioned sections in the
Prospectus or any amendment or supplement thereto contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and
(vi) Such counsel knows of no material action, suit, claim or
proceeding relating to patents, patent rights or licenses, trademarks
or trademark rights, copyrights, collaborative research, licenses or
royalty arrangements or agreements or trade secrets, know-how or
proprietary techniques, including processes and substances, owned by
or affecting the business or operations of the Company which are
pending or threatened against the Company or any of its officers or
directors.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
15
<PAGE>
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, 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, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "Designated Entities"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any who
controls the Company within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the 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 or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the
paragraph under the caption "Underwriting" and the information contained in the
paragraph under the caption "Underwriting."
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against
16
<PAGE>
the indemnifying party under subsection (a) or (b) above, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under subsection (a) or (b) above. In
case any such action is brought against any indemnified party and it notifies
the indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation.
Notwithstanding anything contained herein to the contrary, if indemnity may be
sought pursuant to the last paragraph in Section 7 (a) hereof in respect of such
action or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local counsel)
for the Designated Underwriter for the defense of any losses, claims, damages
and liabilities arising out of the Directed Share Program, and all persons, if
any, who control the Designated Underwriter within the meaning of either Section
15 of the Act of Section 20 of the Exchange Act. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement (i) includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act by
or on behalf of an indemnified party.
(d) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
17
<PAGE>
(e) The obligations of the Company under this Section shall be in addition
to any liability which the Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed a Registration Statement and to each person, if any, who controls the
Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 460 Oakmead Parkway, Sunnyvale,
California 94086, Attention: Edmund J. Fish, Senior Operating Officer Executive
Vice President, Corporate Development; provided,
18
<PAGE>
however, that any notice to an Underwriter pursuant to Section 7 will be mailed,
delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
19
<PAGE>
If the foregoing is in accordance with the Representatives' understanding of
our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
INTERTRUST TECHNOLOGIES CORPORATION
By........................................
[Insert title]
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the
date first above written.
Credit Suisse First Boston Corporation
J.P. Morgan & Co.
Salomon Smith Barney Inc.
SoundView Technology Group
Acting on behalf of themselves and as the Representatives of the several
Underwriters
By Credit Suisse First Boston Corporation
By.......................................
[Insert title]
20
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Underwriter Number of
----------- Firm Securities
---------------
<S> <C>
Credit Suisse First Boston Corporation.....................................
J.P. Morgan & Co...........................................................
Salomon Smith Barney Inc...................................................
SoundView Technology Group.................................................
---------------
Total.......................................................
===============
</TABLE>
21
<PAGE>
September 28, 1999
InterTrust Technologies Corporation
460 Oakmead Parkway
Sunnyvale, CA 94086
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
84033) originally filed by InterTrust Technologies Corporation (the "Company")
with the Securities and Exchange Commission (the "Commission") on July 29, 1999,
as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 7,475,000 shares of the Company's Common Stock (the "Shares"). The
Shares, which include an over-allotment option granted by the Company to the
Underwriters to purchase up to 975,000 additional shares of the Company's
Common Stock, are to be sold to the Underwriters by the Company as described in
the Registration Statement for resale to the public. As your counsel in
connection with this transaction, we have examined the proceedings taken and are
familiar with the proceedings proposed to be taken by you in connection with the
sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares being sold by the Company and upon completion of the proceedings being
taken in order to permit such transactions to be carried out in accordance with
the securities laws of the various states where required, the Shares being sold
by the Company, when issued and sold in the manner described in the Registration
Statement and in accordance with the resolutions adopted by the Board of
Directors of the Company, will be legally and validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<PAGE>
Exhibit 10.11
- --------------------------------------------------------------------------------
STANDARD FORM LEASE
- --------------------------------------------------------------------------------
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
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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
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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
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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
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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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<PAGE>
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.
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<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:
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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
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<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
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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.
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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 site plan of the property located at 4750 Patrick Henry Drive,
Santa Clara, California, which graphically depicts the layout and the dimensions
of the floor plan of the Registrant's leased space and the registrant's outside
parking 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.
Exhibit B-1
Exhibit B-1 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, and includes the improvements referenced in Exhibit B.
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EXHIBIT 21.1
List of Subsidiaries of InterTrust Technology Corporation
---------------------------------------------------------
InterTrust Technologies International Corporation LTD. United Kingdom
InterRights Corporation Delaware
<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 Amendment No. 3 to 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
September 28, 1999
