<PAGE>
As filed with the Securities and Exchange Commission on September 9, 1999.
Registration No. 333-84033
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
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)
460 Oakmead Parkway, Sunnyvale, CA 94086
(408) 222-6100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Victor Shear
Chief Executive Officer and Chairman of the Board
InterTrust Technologies Corporation
460 Oakmead Parkway, Sunnyvale, CA 94086
(408) 222-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Robert V. Gunderson, Jr., Esq. Laird H. Simons III, Esq.
Bennett L. Yee, Esq. Katherine Tallman Schuda, Esq.
William E. Growney, Jr., Esq. Tyler R. Cozzens, Esq.
Amy S. Cohen, Esq. Pamela A. Sergeeff, Esq.
Margaret E. Paige, Esq. Fenwick & West LLP
Gunderson Dettmer Stough Two Palo Alto Square
Villeneuve Franklin & Hachigian, LLP Palo Alto, California 94306
155 Constitution Drive (650) 494-0600
Menlo Park, California 94025
(650) 321-2400
----------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1999
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 $ and $
per share. We have applied to list the common stock on The Nasdaq Stock
Market's National Market under the symbol ITRU.
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in the common stock involves risks. See Risk Factors on page 7.
<TABLE>
<CAPTION>
Proceeds to
Underwriting InterTrust
Price to Discounts and Technologies
Public Commissions Corporation
------------ ------------- ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
J.P. Morgan & Co.
Salomon Smith Barney
SoundView Technology Group
The date of this prospectus is , 1999.
<PAGE>
Narrative Description of Inside Front Cover
A roughly sketched drawing of a three dimensional box over which appears the
following text and graphics. At the top appears the heading "THE METATRUST
UTILTY." Below, the logos of "Universal Music Group," "PublishOne" and "BMG"
appear next to the caption "Content & Distribution;" the logos of "SAIC",
"Portal," "Harris", "IIS" and "dts" appear next to the caption "Marketing
Alliances;" the logos of "Music Match," "MediaScience," and "Diamond
Multimedia" appear next to the caption "Technology;" and the logos of
"reciprocal," "Nat West," and "Mitsubishi Corporation" appear next to the
caption "Commerce Services." At the bottom of the page, right justified, is
the InterTrust logo above the caption "The MetaTrust Utility; Leading Digital
Rights Management."
<PAGE>
Narrative Description of Gate Fold
Heading Bottom Left Justified InterTrust logo above the caption "The MetaTrust
Utility; Leading Digital Rights Management;" centered heading at the top of the
page of "Digital Rights Management for Global Commerce."
There is a large platform with a waffle-like pattern suspended in space. The
platform is labeled "The MetaTrust Utility." In the center of the platform are
two buildings. The building on the left is marked with the symbol "$" in a
circle. The building on the right is marked with the letter "i" in a circle.
Above the buildings is the caption "Commerce Services Provider" and a bulleted
list that reads: "Processes financial and usage transactions;" "Supports online
and offline transactions;" and "Deploys and manages InterRights Points."
From the building on the left, two arrows marked with the symbol "$" in a circle
point to captions off the bottom of the platform that read "Partners" and
"InterTrust", respectively. To the right of the arrows is the caption
"InterTrust Revenues = % of value of all goods and services sold in system."
Also from the building on the left, an arrow marked with the symbol "$" in a
circle and the letter "i" in a circle points to a human figure next to a
computer monitor showing a three-dimensional cube on its screen. Below is a
sphere with three arrows meeting in its center. Above is the heading
"Publisher" above a bulleted list that reads: "Creates usage rule;" "Associates
rules with content;" and "Packages into DigiBox Container." Below is the
caption "InterRights Point."
Above and to the left is a list under the heading "Target Markets." Below the
heading is the following: the symbol for musical notes in a circle to the left
of the caption "Music;" a drawing of a strip of film inside a circle to the left
of the caption "Videos;" a drawing of a video game joystick to the left of the
caption "Games;" a drawing of an arrow pointing down inside a circle to the left
of the caption "Software;" a drawing of a financial chart inside a circle to the
left of the caption "Business/Financial Information;" a drawing of sheets of
paper inside a circle to the left of the caption "Publishing;" a drawing of a
graduate's cap inside a circle to the left of the caption "Education;" a drawing
of a cross inside a circle to the left of the caption "Healthcare;" and a
drawing of two arrows pointing in two different directions inside a circle to
the left of the caption "Enterprise."
From the computer monitor an arrow points to the right. In the middle of the
arrow is a three dimensional cube. Beneath the cube is the caption "Content and
rules." Above the cube is the heading "DigiBox Container" and a bulleted list
that reads "Protects content" and "Reduces piracy". The arrow points to a
sphere with three arrows meeting in its center. To the right of the sphere is a
web browser labeled "WWW." To the right of the web browser is a compact disk
and a floppy disk. Above the grouping is the heading "Distributor" above a
bulleted list that reads "Adds rules" and "Sells protected content." Below is
the caption "InterRights Point."
From the floppy disk, an arrow points down and to the right. In the middle of
the arrow is a three dimensional cube. Beneath the cube is the caption "Content
and rules." Above the cube is the heading "DigiBox Container" and a bulleted
list that reads "Over Internet" and "On CD and DVD." To the right of the cube
is the caption "User" and a bulleted list that reads "Sees personalized offers;"
"Purchases online and offline;" and "Uses content according to rules." The
arrow points to a sphere with three arrows meeting in its center. To the left
of the sphere is the caption "InterRights Point." To the right of the sphere is
a human figure. An arrow points from the figure to a group of three human
figures. In the middle of the arrow is a three dimensional cube. Beneath the
cube is the caption "Content and rules." Above the cube is the heading "DigiBox
Container." Next to each of the three human figure are spheres with three
arrows meeting in their centers. Below the cube is the caption
"Superdistribution" and a bulleted list that reads "Forwards content and rules;"
"Encourages purchase and redistribution;" and "Transforms copying into sales
channel."
From the human figure, an arrow points downward and to the left. In the middle
of the arrow is a three dimensional cube. Beneath the cube is the caption
"Payment and usage information." Above the cube is the heading "DigiBox
Container". The arrow points to a sphere with three arrows meeting in its
center. Below the sphere is the caption "InterRights Point." To the left of
the sphere is the building marked with the letter "i" in a circle.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 21
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 38
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 58
Related-Party Transactions................................................. 70
Principal Stockholders..................................................... 72
Description of Capital Stock............................................... 74
Shares Eligible for Future Sale............................................ 77
Underwriting............................................................... 79
Notice to Canadian Residents............................................... 82
Legal Matters.............................................................. 83
Experts.................................................................... 83
Where You Can Find More Information........................................ 83
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
You should rely only on information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
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 the 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.
We license our DRM platform as software and tools to partners to build digital
commerce services and applications. These partners intend to offer digital
commerce services and applications that collectively 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 is digitized on computers and sent
over networks.
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--Our platform is designed to protect and manage digital
information in compliance with associated rules;
. Persistent Protection and Management--Our platform is designed so that
both the information itself and the rules regarding its use may be
continually protected, whether the user is online or offline;
. Flexible Business Models--Our platform is designed so that digital
information providers can develop their own commercial models;
. Superdistribution--Our platform is designed so that users of digital
information, if permitted, can forward that information to others who can
use the forwarded information as specified by the associated rules;
4
<PAGE>
. Multiple Content and Media Types--Our platform is designed for use with
most content types and for multiple means of digital distribution;
. Efficient Transaction Processing--Our platform is designed so that
processing partners can take advantage of significant increases in
processing efficiency;
. New Advertising Models--In addition to operating online, our platform is
designed to operate offline and securely store and forward collected
data. This enables new cost effective ways to generate revenue from
advertising; and
. 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 them with content, offers,
and ads, subject to their consent and privacy rights.
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 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 460 Oakmead Parkway, Sunnyvale, California 94086, and
our telephone number is (408) 222-6100.
InterTrust, DigiBox, and our company logo are our registered trademarks.
MetaTrust, MetaTrust Utility, InterRights, Powerchord, RightsWallet, and
TrustMail are our trademarks. This prospectus also contains trademarks of other
companies.
----------------
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;
. 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................. shares
Common stock to be outstanding after the 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 and 311,016
shares of common stock issuable
upon the exercise of an
additional warrant.
Over-allotment option...................... 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 22.
Dividend policy............................ Currently, we do not anticipate
paying cash dividends.
Proposed Nasdaq National Market symbol..... ITRU
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
--------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Total revenues.......... $ 850 $ -- $ 25 $ 1,100 $ 152 $ 50 $ 486
Loss from operations.... (1,549) (3,423) (8,140) (11,938) (19,667) (9,369) (11,613)
Net loss................ (1,588) (3,583) (7,960) (11,709) (19,662) (9,378) (11,411)
Basic and diluted net
loss per share......... $ (0.16) $ (0.35) $ (0.67) $ (0.86) $ (1.41) $ (0.68) $ (0.75)
======= ======= ======= ======== ======== ======= ========
Shares used in computing
basic and diluted net
loss per share......... 9,645 10,223 11,913 13,639 13,966 13,777 15,307
======= ======= ======= ======== ======== ======= ========
Pro forma basic and
diluted net loss per
share.................. $ (0.91) $ (0.43)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 21,688 26,808
======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $15,295 $31,053
Working capital................................... 11,870 28,628
Total assets...................................... 17,220 32,978
Total stockholders' equity........................ 4,645 21,403
</TABLE>
- --------
The pro forma column in the consolidated balance sheet data table above
reflects the sale of 1,309,700 shares of series E preferred stock for
approximately $15.7 million in cash and the conversion of a $1.0 million
promissory note into 83,333 shares of series E preferred stock in July 1999,
the exercise of warrants to purchase 21,692 shares of common stock at 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 as adjusted column in the consolidated balance sheet data table above
reflects our sale of shares of common stock in this offering, at an
assumed initial public offering price of $ per share, and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by us.
6
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you 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 from our licensees in the form of a
percentage of fees paid by users or charged by our licensees in commercial
transactions and services that use our technology and sales of products
incorporating our technology. 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. Applications and
services based on our technology might not be commercially released by our
licensees and, even if they are 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. While we expect to generate the majority of our revenues in the
future from transaction fees, we currently derive all of our revenues from
initial license fees and support fees. Our initial license fees vary depending
on the scope of the license and other commitments by our partners. Depending
upon future events, including competitive or market conditions, we may decide
to reduce or eliminate some fees.
Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of public market analysts or investors, the
market price of our common stock may decrease significantly.
Our 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 decline in the overall demand for digital goods and services;
. a decline in the demand for our Commerce software product;
. our inability to maintain and establish relationships with leading
providers of content, technology, and commerce services;
. our inability to establish relationships with licensees that generate
sufficient revenue;
7
<PAGE>
. 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;
. our inability to release new products or alter pricing to remain
competitive;
. the inability of our licensees and their customers to commercialize our
technology, or delays or deferrals in this commercialization;
. delays or reductions in spending for, or the implementation of,
application software by our potential customers as companies attempt to
stabilize their computer systems before January 1, 2000 to reduce the
risk of computer system problems associated with year 2000 issues; and
. customer budget cycles and changes in these budget cycles.
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 in order to become profitable. We expect to incur significant losses
for at least the next several years. To date, we have recognized minimal
revenues from the license of our software. Our expense levels are relatively
fixed and are based, in part, on expectations regarding future revenues. We
expect our revenues to vary. If revenue levels fall below our expectations, our
net loss will increase because only a small portion of our expenses varies with
our revenues. We may never achieve profitability, and if we do, we cannot
ensure that we will sustain or increase it.
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.
8
<PAGE>
In addition, if our licensees are unable to protect their computer systems
from physical damage, power loss, telecommunications failures, viruses, or
other malicious acts, we could suffer temporary or long-term interruptions in
the delivery and use of our technology by consumers.
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 11 companies have licensed our software for commercial
use. Our ability to attract new licensees will depend on a variety of factors,
including the following:
. performance, reliability and security of our products and services;
. 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;
. cost-effectiveness of our products and services; and
. our ability to effectively market our products and services.
Our ability to attract new licensees will also depend on the performance of
our initial licensees and the overall success of the MetaTrust Utility. Many
potential licensees may resist working with us until our, and our licensees',
applications and services have been successfully introduced into the market and
have achieved market acceptance.
In addition, our licensees might in the future adopt digital rights
management products of other companies, including products that may compete
with our products. Some of our current and future licensees may also decide to
develop products that compete with our products. Our licensees could give
higher priority to the products of other companies or to their own products
than they give to our products. Moreover, we may not be able to establish
relationships with important potential customers if we have already established
relationships with their competitors. Therefore, it is important that we are
perceived as independent of any particular customer or licensee. We might not
be perceived as a neutral and trusted technology and service provider. In
addition, to maintain the trusted operation of the MetaTrust Utility, we
require that products and services operating within the MetaTrust Utility
comply with specifications administered by us. Potential licensees may be
unwilling to be subject to the control of these specifications. We may not be
able to attract a critical mass of licensees 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.
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
9
<PAGE>
with existing computer systems, ability to support a large user base,
functionality, security, and reliability. Furthermore, because digital rights
management solutions are relatively new, many companies will be addressing
these issues for the first time. As a result, deploying our technology requires
us to educate potential licensees about its uses and benefits. The process of
entering into a licensing agreement with a company typically involves lengthy
negotiations. Entering into a licensing agreement also involves a significant
commitment of resources by our licensees and is influenced by their budget
cycles. In many cases, these companies must change established business
practices and conduct business in new ways. As a result of our long sales
cycle, which in the past has generally ranged from six months to 18 months, it
is difficult for us to predict the quarter in which a particular prospect 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. If a licensee does not deploy
our technology, we will not receive transaction fees from that licensee.
Because of the platform nature of our software, after our technology is
licensed our licensees undertake a lengthy process of integrating our
technology into their existing systems or a new system. None of our licensees
has yet commercially deployed our product and only some of our licensees that
have integrated our Commerce software into their system are currently using our
Commerce software in a pilot program for evaluation before commercial
deployment. The timing of commercial deployment by a licensee depends on many
factors including:
. the complexity of the licensee's intended application and the necessary
development efforts;
. the relative importance of digital rights management to the licensee's
business;
. the success of the licensee in signing up customers;
. the ability of the licensee to successfully develop and deploy pilots to
test their desired commercial implementation of our software; and
. the efforts of our partner development and training and support
organizations in providing technical support to the licensee.
Because of the number of factors influencing the integration and deployment
processes, we expect that the period between entering into a licensing
arrangement and the time our licensee commercially deploys applications based
on our Commerce software will vary widely.
Our Commerce software has only recently been used by our licensees in pilot
programs, making evaluation of our business and prospects difficult.
We began offering the general availability release of our Commerce software
in December 1998, and released version 1.2 in May 1999. Our licensees'
applications and services based on our Commerce software are in development or
have only been released for evaluation in very limited pilot programs. 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
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software, including problems relating to security, scalability, fault
tolerance, and interoperability of our software or the combination of our
software with our licensees' software. Consequently, evaluation of our business
and prospects is difficult. We may not successfully address any of these
problems and the failure to do so would seriously harm our business and
operating results. In addition, because we have released our Commerce software
only for pre-commercial evaluation, we have limited insight into trends that
may emerge and affect our business.
Security breaches of our software and our licensees' software could result in
decreased demand for our technology by our licensees or their customers or
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 that we and our
licensees use to protect customer digital content and transaction data. A party
that is able to circumvent our security systems could steal digital content,
customer data or other proprietary information or cause interruptions in our
and our licensees' operations. 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.
Our and our licensees' software and services depend in part on cryptography
technology. The security depends on the integrity of a user's private key and
that it is not stolen or compromised in some other manner. Should an easy
method for circumventing or compromising this technology be developed, then the
security of encryption products utilizing this technology would be reduced or
eliminated. Any significant advances in techniques for attacking cryptographic
systems could also render some or all of our and our licensees' software and
services obsolete or unmarketable. Current or future governmental regulation
regarding the use, scope, and strength of cryptography could also limit our and
our licensees' ability to develop and distribute software with encryption
strong enough to maintain the integrity of keys against compromise. In the
past, there have been public announcements of the successful decoding of
certain cryptographic messages and of the potential misappropriation of keys.
This type of publicity could also harm public perception of the effectiveness
of the cryptography technology included in our Commerce software and our
licensees' applications and services and could significantly harm our business
and operating results.
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. Our Commerce
software has only recently been
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released for limited pilot programs and is being evaluated by our licensees. In
the process of pilot programs and commercial deployment there is significant
risk that we may uncover defects not discovered in our development or pilot
programs. For example, we may not be able to adequately detect problems
associated with scalability or security until our products are widely deployed.
Identified defects may be difficult to resolve, cause delays in widespread
deployment or prevent market acceptance, any of which could significantly harm
our business or operating results.
Our strategy is to have our licensees and other third parties deploy our
technology for use in commercial transactions with their digital content. If
their products and services contain errors or defects, it could seriously
undermine the perceived trust and security needed for a commercial system and
could delay or prevent market acceptance of digital commerce resulting in
serious harm to our business and operating results. Because this is a system
used for commerce, we believe the standards for reliability and performance
will be very high.
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. We could be subject to liability
claims and third party liability claims related to the MetaTrust Utility and
products and services purchased using our technology. Although our license
agreements typically contain provisions designed to limit our exposure to
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.
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. As a result, we face a
number of challenges in integrating this software into our Commerce software
and any future releases of our Commerce 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. Furthermore, we might be forced to limit the features available
in our current or future product offerings. Either alternative could seriously
harm our business and operating results.
Year 2000 issues could force us to incur significant costs or cause our
customers to delay licensing of our products.
We are in the process of assessing any year 2000 issues with the computer
communications, software, and security systems that we use to deliver and
manage our software and services and to manage our internal operations. If our
systems do not operate properly with date calculations
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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.
Our efforts to address year 2000 issues are described in more detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of Year 2000."
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.
There is currently no standard for digital rights and digital rights
management. New products based on new technologies or new industry standards
can quickly render existing products obsolete and unmarketable. Any delays in
our ability to develop and release enhanced or new products could seriously
harm our business and operating results. Our technology is complex and new
products and product enhancements can require long development and testing
periods. In the past we have experienced delays in new product releases, and we
may experience similar delays in the future. Our failure to conform to
prevailing standards, anticipate changes in standards or develop and sell new
product releases on a timely basis could harm our business and operating
results. Our future success will depend on our ability to develop and
introduce, in response to customer and market demands, new releases of our
Commerce software that offer features and functionality that we do not
currently provide.
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
. 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
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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.
In order to be successful in this emerging market, we must be able to
differentiate ourselves from our competitors through our product and service
offerings and the brand name recognition of our software and services, as well
as through our licensees and the MetaTrust Utility. We may not be successful in
differentiating ourselves. Furthermore, enterprises that have already invested
substantial resources in other methods of deploying and managing their
applications and services may be reluctant or slow to adopt a new approach that
may replace, limit, or compete with their existing systems.
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 we expect a number
of companies to create, and pursue patent protection for, inventions and
technologies. Other companies, including our competitors, may obtain patents or
other proprietary rights that would prevent, or limit or interfere with, our,
or our licensees', ability to make, use, or sell products. We and our licensees
might not be able to redesign our products and services or obtain a license on
commercially reasonable terms from the holders of any potentially infringed
intellectual property. Any successful claim of infringement against us or our
licensees and our or their failure or inability to license the infringed
proprietary rights on commercially reasonable terms would seriously harm our
business and operating results. In addition, we may be required to indemnify
our licensees for some third-party claims of infringement.
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, 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
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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. 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.
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. Any steps we take to protect our intellectual
property, including by litigation or other proceedings, may be inadequate, time
consuming, and expensive. Furthermore, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating our intellectual
property. Also, our competitors may independently develop similar, 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.
Legal standards relating to the validity, enforceability, and scope of
intellectual property rights generally, and in Internet-related industries
specifically, are uncertain and still evolving, and the future viability or
value of any of our intellectual property rights is uncertain. Any litigation
surrounding our rights could force us to divert important financial and other
resources away from our business operations. In addition, we sell our products
internationally, and the laws of many countries do not protect our proprietary
rights as well as the laws of the United States.
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. We have
recently hired new managers and key personnel, and we intend to continue to
hire these personnel. We might be unable to assimilate our recently hired key
personnel or locate, hire, and retain additional qualified key personnel.
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
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be significantly harmed. In addition, our future success will depend largely on
our ability to continue attracting and retaining highly skilled personnel. Like
other companies in the San Francisco Bay Area, we face intense competition for
qualified personnel. For 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.
Uncertain laws and economic conditions in international markets could
significantly harm our business and operating results.
In order to be successful, we must continue to enter into international
business partnerships. Our international business activities are subject to a
variety of risks, including the adoption of laws, currency fluctuations,
actions by third parties, and political and economic conditions that could
restrict or eliminate our ability to do business in foreign jurisdictions.
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
revenues and stock price may decline. Because of our transaction fee-based
business model, our revenues and success will rely primarily upon the volume of
electronic commerce transactions that occur using our platform. A number of
factors outside of our control that relate to the music industry could cause
our revenues and stock price to fluctuate. These factors include:
. slow market adoption and growth of sales of digitally downloaded recorded
music through the Internet;
. music content providers' ability 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.
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We will 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.
Rapid growth in the use of and interest in the Internet for commercial
distribution of digital content has occurred only recently and there are few
proven products and services. As a result, acceptance and use 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
. insufficient speed, access, and server reliability.
In addition, consumers generally are concerned with security and privacy on
the Internet and any publicized security problems could inhibit the growth of
the Internet as a means of conducting commercial transactions. Our business and
operating results would be significantly harmed if digital content providers
become unwilling to sell content over the Internet or if consumers become
unwilling to transmit confidential information online.
If the market for digital rights management does not widely develop, there will
not be sufficient demand for our technology and our stock price will decline.
The market for digital rights management has only recently begun to develop
and is rapidly evolving. A viable market for our products may not emerge or be
sustainable. Consumers may not accept protected digital content because, to
date, they have been able to download content for free and use or distribute it
without restriction. In addition, lengthy download time for content and
technical difficulties may discourage consumer acceptance. If the digital
rights management market fails to develop, or develops more slowly than
expected, our business and operating results would be significantly harmed.
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
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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. If a competitor were to establish the dominant industry
standard, our business and operating results could be significantly 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. If we do not obtain required approval,
we may not be able to license our software in international markets, limiting
our ability to gain revenue and grow our business.
To date, communications and commerce on the Internet have not been highly
regulated. However, Congress has held hearings on whether to regulate providers
of services and transactions in the electronic commerce market. It is possible
that Congress or individual states could enact laws regulating Internet
commerce that address issues including user privacy, pricing, and the
characteristics and quality of products and services. In addition, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these companies. This
could increase the cost of transmitting data over the Internet. Moreover, it
may take years to determine the extent to which existing laws relating to
issues including property ownership, libel, and personal privacy apply to the
Internet. Any new laws or regulations relating to the Internet could harm our
business.
As of October 1998, the European Union has adopted a privacy directive that
regulates the collection and use of information that can be associated with
specific individuals. These regulations may inhibit or prohibit the collection
and sharing of personal information in ways that could harm our partners or us.
The globalization of Internet commerce may be harmed by these and similar
regulations since the European Union's privacy directive prohibits transmission
of personal information outside the European Union unless the receiving country
has enacted individual privacy protection laws at least as strong as those
enacted by the European Union's privacy directive. The United States and the
European Union have not yet resolved this matter, they may not do so, and, if
they do so, it may not be in a manner favorable to our licensees or us.
Imposition of sales and other taxes on electronic commerce transactions may
hinder electronic commerce, resulting in lower revenues.
The ability to tax commerce activities over the Internet has not been
established, may change in the future, and may vary from jurisdiction to
jurisdiction. One or more states or foreign countries may seek to impose sales
or other charges on foreign companies that engage in or facilitate electronic
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commerce. A number of proposals have been made at the local and state level and
by foreign governments that would impose additional taxes on the sale of
products and services through the Internet. These proposals, if adopted, could
substantially impair the growth of electronic commerce and could significantly
harm our business and operating results. Moreover, if any state or foreign
country were to successfully assert that we should collect sales or other taxes
on the exchange of products and services through the Internet, our business and
operating results could be significantly harmed.
In 1998, Congress passed the Internet Freedom Act, which imposes a three-
year moratorium on state and local taxes on Internet-based transactions. We
cannot assure you that this moratorium will be extended. Failure to renew this
moratorium would allow various states to impose taxes on electronic commerce,
which could significantly harm our business and operating results.
Risks Related to this Offering
Our stock price may be particularly volatile and could decline substantially
because of the industry we are in.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated 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.
We may need to raise additional funds in the future, which may be on terms
unfavorable to us and which could dilute our stockholders.
We expect the net proceeds from this offering to be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.
After that, we may need to raise additional funds, and additional financing may
not be available on favorable terms, if at all. This could seriously harm our
business and operating results. Furthermore, if we issue additional equity
securities, stockholders may experience dilution, and the new equity securities
could have rights senior to those of existing holders of our common stock. If
we need to raise funds and cannot do so on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities, or
respond to competitive pressures or unanticipated requirements. For a
discussion regarding our working capital, please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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 % 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. 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
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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 shares of common stock.
Other than the shares of common stock sold in this offering, shares will
be eligible for sale in the public market immediately. 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 $ per share. In addition, we have issued options and warrants
to acquire common stock at prices significantly below the initial public
offering price. To the extent outstanding options or warrants 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.
We have broad discretion to use the proceeds from this offering for purposes
with which you may not agree and we may not be successful in investing these
proceeds.
We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion concerning how we will spend
the proceeds, and stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this
offering, in our operations or external investments, to yield a favorable
return.
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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.
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USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we
are offering are estimated to be $ million, at an assumed initial public
offering price of $ 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 $ 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.
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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 conversion of a $1.0 million
promissory note into 83,333 shares of series E preferred stock in July
1999, the exercise of warrants to purchase 21,692 shares of common stock,
and the conversion of all outstanding shares of preferred stock and class
B non-voting common stock into shares of common stock; and
. our pro forma as adjusted capitalization as of June 30, 1999, to reflect
our receipt of the estimated net proceeds from our sale of
shares of common stock in this offering, at an assumed initial public
offering price of $ 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.
This table 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;
. 311,016 shares of common stock issuable upon the exercise of a warrant
outstanding as of September 9, 1999;
. 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,
shares outstanding pro forma as adjusted..... 15 31
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
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
-------- -------- --------
Total capitalization......................... $ 5,645 $ 21,403 $
======== ======== ========
</TABLE>
23
<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 conversion of a $1.0 million
promissory note into 83,333 shares of series E preferred stock in July
1999;
. the exercise of warrants to purchase 21,692 shares of common stock; and
. the conversion of all outstanding shares of preferred stock and class B
non-voting common stock into shares of common stock upon completion of
this offering.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common
stock immediately after completion of this offering. After giving effect to our
sale of shares of common stock in this offering at an assumed initial
public offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us, our
net tangible book value as of June 30, 1999 would have been $ million or
$ per share. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate dilution in
net tangible book value of $ per share to purchasers of common stock in
the offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share as of June 30, 1999... $ 0.68
Increase per share attributable to new investors..................
------
Pro forma net tangible book value per share after the offering......
----
Dilution per share to new investors................................. $
====
</TABLE>
24
<PAGE>
The following table presents, on the pro forma basis describe above as of
June 30, 1999, 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 % $77,960,000 % $2.49
New investors .................
---------- ----- ----------- -----
Totals....................... 100.0% 100.0%
========== ===== =========== =====
</TABLE>
As of June 30, 1999, there were options outstanding to purchase a total of
6,741,411 shares of common stock at a weighted average exercise price of $1.91
per share. In addition, as of 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 and an outstanding warrant to purchase 311,016 shares of our
common stock. To the extent these outstanding options or warrants are
exercised, there will be further dilution to new investors.
25
<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>
26
<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 in order to achieve widespread dissemination of our
technology, an expanding consumer base, and broad participation by digital
information providers. We currently derive all of our revenues from initial
license fees and associated software support 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 licensee. In the future, we may enter into other equity
payment arrangements.
27
<PAGE>
Licenses of our Commerce software generally require the payment of an initial
license fee. Initial license revenue is recognized upon execution of a license
agreement and delivery of our software 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 in advance of revenue recognition 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 specified upgrades 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, subsequent to shipping the general availability version of our
Commerce software at the end of December 1998. At June 30, 1999, we had
approximately $7.7 million of deferred license revenue that will be recognized
in future periods.
For contracts entered into prior to 1998, we recognize 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." 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 subsequent to 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.
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
28
<PAGE>
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. 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
in the future. As a result, we will need to generate significant additional
revenue to achieve and maintain profitability. In addition, we have limited and
delayed insight on consumer trends and sales, which makes prediction of our
future revenues difficult.
Results of Operations
Six Months Ended June 30, 1998 and 1999
Revenues
Total revenues increased from approximately $50,000 in the six months ended
June 30, 1998 to approximately $486,000 in the six months ended June 30, 1999.
Software support 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.
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
29
<PAGE>
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 deemed 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 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.
30
<PAGE>
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.
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
31
<PAGE>
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.
32
<PAGE>
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, subsequent to 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 in order to manage
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.
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 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.
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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.
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with these year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
Our software and associated tools were designed to be year 2000 compliant.
Our year 2000 plan currently in progress will determine whether or not our
products, internal systems, computer hardware and software, and the products of
our critical vendors and suppliers are year 2000 compliant. Our assessment plan
consists of:
. quality assurance testing of our internally developed proprietary
software;
. contacting third-party vendors and licensors of material hardware,
software, and services that are directly or indirectly related to the
delivery of our DRM platform to our partners;
. contacting vendors of the third-party systems;
. assessing repair or replacement requirements;
. implementing repair or replacement; and
. creating contingency plans if there are year 2000 failures.
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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;
. 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.
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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 selected passages provided by SOP 98-4 though
fiscal years beginning on or before March 15, 1999. All of these provisions of
SOP 98-9 are effective for transactions entered into in fiscal years beginning
after March 15, 1999. We believe the adoption of SOP 98-9 will not have a
material effect on our operating results or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. To date, we have not used derivatives, and
management anticipates that the adoption of SFAS 133 will not have a
significant effect on our operating results or financial position.
Qualitative and Quantitative Disclosures about Market Risks
We develop products in the United States and license our products to
partners in North America, Europe, and Asia. As a result, our financial results
could be affected adversely by various factors, including foreign currency
exchange rates or weak economic conditions in foreign markets. Transaction
revenues from our European and Asian partners will be primarily denominated in
foreign currencies and translated generally on a monthly basis to United States
dollars to determine the amount of fees due 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 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.
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
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growing 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 in order to 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. 45 of Business Section
Graphic titled "Commerce Flow Example." In the upper right hand corner is a box
titled "Key" in which there are four symbols. The first is a sphere with three
arrows pointing to its center labeled "InterRights Point." The second is a cube
labeled "DigiBox container." The third is the symbol "$" labeled "Payment." The
fourth is the letter "i" inside a circle labeled "Usage data."
In the center is a web browser labeled "WWW." Above and to the right is a
picture of a piece of paper titled "Usage Rules" with an arrow that points to
the web browser. To the right of the web browser are two compact disks and a
floppy disk. Below is the caption "Distributor." From the web browser an arrow
with a cube in the middle points down towards a box. Inside the box is a human
form, a sphere with three arrows meeting in its center, and a picture of a
computer monitor with an image, entitled "Agree to Rules," projecting from the
screen.
From the box an arrow with a cube in the middle points to the right to a
picture of an electronic device entitled "Information Appliance."
From the box an arrow points to the left to a box entitled "Commerce Services
Providers." In the middle of the arrow is a clear cube with the symbol "$" and
the letter "i" inside. Inside the box there are two buildings and a sphere with
three arrows that meet in its center. The building on the left is marked with
the symbol "$" in a circle. The building on the right is marked with the letter
"i" in a circle.
Two arrows, one with the symbol "$" in the middle and one with the letter "i"
in the middle, point to a box titled "Publishers." Inside the box is a human
form, a sphere with three arrows meeting in its center and a computer monitor.
Pointing towards the sphere is a picture of a piece of paper captioned "Usage
Rules" and a sphere with the caption "Digital Information." An arrow with a
cube in the middle points back to the web browser.
. Packaging Content--With an application developed by one of our partners
using our DRM technology, system participants can be both creators and
consumers of digital information. Working from a 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. In order to
further help achieve our deployment goals, we will work with our partners to
develop business models that promote rapid deployment, for example,
superdistribution which allows users to drive InterRights Point deployment
through redistribution of content.
Leverage the MetaTrust Utility Model
We believe that our neutral utility model is fundamental to achieving
widespread adoption of our DRM platform. 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.
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.
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 Limited 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
Two of our commerce service partners, Mitsubishi and Reciprocal, have
accounted for a significant percentage of our revenues since 1996. One of our
business partners, Bertelsmann, accounted for a significant percentage of our
revenues for 1998. One of our application partners, Computacenter, has
accounted for a significant percentage of our revenues for the six months ended
June 30, 1999. The loss of any of our partners could significantly harm our
revenues. For more information regarding specific percentages of revenues
contributed by our partners please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
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
- --------------------------------------------------------------------------------------------------
Bertelsmann X X
- --------------------------------------------------------------------------------------------------
PublishOne X
- --------------------------------------------------------------------------------------------------
Reuters X
- --------------------------------------------------------------------------------------------------
Universal X
- --------------------------------------------------------------------------------------------------
Computacenter X X X X
- --------------------------------------------------------------------------------------------------
Diamond X
- --------------------------------------------------------------------------------------------------
Mediascience X
- --------------------------------------------------------------------------------------------------
MusicMatch X
</TABLE>
Alliances
In order to help gain penetration into various vertical markets, we have
entered into several alliance agreements. The alliance agreements provide for
cooperative activities regarding product development and targeting specific
strategic business opportunities. To date, we have entered into alliance
agreements with Digital Theater Systems Inc., 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.
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:
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. 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. 52 of Business Section
Box titled "InterTrust DRM Platform." Below the heading, the caption
"InterRights Point" next to a picture of a sphere with three arrows meeting in
its center; the caption "DigiBox Container" next to a picture of a cube; the
caption "Usage Rules" next to a picture of a piece of paper; and the caption
"Transaction Authority" next to a picture of a building.
. InterRights Point. The core element of our architecture is the
InterRights Point, which operates on 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' 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.
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. 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.
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
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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 in order to increase our brand awareness. Our programs are designed to
assist our partners in developing their internal marketing programs and
capabilities. Our marketing organization consisted of 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.
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
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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;
. 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;
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. 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 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.
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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, 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
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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, or MPEG,
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.
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
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<PAGE>
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 28,800 square feet in Sunnyvale, California
under two leases that terminate in September 1999. We have recently entered
into an agreement to lease a facility occupying approximately 66,000 square
feet in Santa Clara, California, which we intend to occupy by the end of
September 1999. The term of the lease is five years, effective mid-September
1999. 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 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 of 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 since June 1999. From September
1995 to June 1999, Mr. Fish served as general counsel and vice president,
corporate development. Before joining InterTrust, Mr. Fish practiced law in the
Silicon Valley, Washington D.C. and New York offices of Weil, Gotshal & Manges,
an international law firm, from August 1989 to August 1995. Mr. Fish received a
B.S. in biomedical engineering from Marquette University and a J.D. from Wayne
State University.
Erwin N. Lenowitz has served as vice chairman of the board, chief financial
officer and secretary of InterTrust since January 1993. Before joining
InterTrust, Mr. Lenowitz served as vice president of business development and
planning for Sun Microsystems, Inc., an enterprise networking company, from
August 1989 to January 1992 and as controller from May 1984 to July 1989.
Mr. Lenowitz received a B.S. in econometrics from the City College of New York
and an M.B.A. from St. Johns University.
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David P. Maher has served as chief technology officer of InterTrust since
June 1999. Before joining InterTrust, Mr. Maher served in various positions at
AT&T from June 1981 to June 1999, including as an AT&T fellow, a Bell Labs
fellow and head of the secure systems research department. At AT&T, Mr. Maher
developed secure wideband transmission systems, cryptographic key management
systems and secure communications devices. In addition, Mr. Maher was chief
architect for AT&T's STU-III secure device, data, and video products for secure
government communications. Mr. Maher has been a consultant for the National
Science Foundation, National Security Agency, National Institute of Standards
and Technology, and the Congressional Office of Technology Assessment, and has
taught electrical engineering, mathematics and computer science at several
institutions. Mr. Maher received B.A., M.S. and Ph.D. degrees in mathematics
from Lehigh University.
Douglas M. Armati has served as senior vice president, strategic sales and
partner development for 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 DSL services, and serves
on its board of advisors. Mr. Davidson received a Sc.B. in physics-mathematics
from Brown University and a J.D. from the University of Michigan.
Richard H. Frank is senior vice president, portable device group of
InterTrust and has served in various other capacities, including chief
technology officer, since joining InterTrust in February 1997. Before joining
InterTrust, Mr. Frank was a senior consultant to electronic commerce companies,
including Novell Corporation, a computer-networking company. From March 1991 to
September 1992, Mr. Frank served as vice president of development at Software
Publishing, a software development company, and as chief technology officer
from September 1992 to September 1994. From January 1979 to September 1984, Mr.
Frank served as chief executive officer at Sorcim, a personal computer software
company. Mr. Frank received a B.A. in chemistry from San Francisco State
University.
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 a 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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<PAGE>
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 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, Mr. Nguyen was a partner at the Silicon Valley
Office of Weil, Gotshal & Manges, where he headed the corporate and technology
transactions group. Mr. Nguyen received a B.S. in computer science from the
University of California, Irvine and a J.D. from the University of California
at Los Angeles.
Bruce Fredrickson has served as a director of InterTrust since February
1993. Mr. Fredrickson has also served as president of Tactical Marketing
Ventures LLC, a marketing firm for computer hardware, software and Internet
service companies, since September 1991. Before his position with Tactical
Marketing Ventures, Mr. Fredrickson served as vice president of marketing for
Ingram Micro, a computer products distributor, from February 1986 to August
1991. Mr. Fredrickson received a B.S. from St. Olaf College and an M.S. from
the University of Colorado.
Satish K. Gupta has served as a director of InterTrust since February 1993.
Mr. Gupta has been the president and chief executive officer of Cradle
Technologies, a semiconductor company, since July 1998. From May 1994 to June
1998, Mr. Gupta was the vice president of corporate marketing and business
development of Cirrus Logic, a semiconductor company, and from June 1991 to May
1994, he was vice president of strategic marketing and advanced development of
Media Vision, a multi-media peripherals company. Mr. Gupta received a B.E. in
electrical engineering 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.
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<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>
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<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 options listed in the table, stock options were granted
in 1999 to Mr. Armati under our 1995 stock plan for 80,000 shares at an
exercise price of $3.50 per share. The option shares vest in equal monthly
installments over a period of 48 months.
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<PAGE>
The table below presents for our chief executive officer and our four other
highest-paid executive officers the number and value of shares underlying
unexercised options that were held by these executive officers as of December
31, 1998. Mr. Davidson exercised options totaling 56,666 shares of common stock
during 1998. No other executive officers listed above exercised stock options
in 1998. No stock appreciation rights were exercised by these executive
officers in 1998, and no stock appreciation rights were outstanding at the end
of that year.
Upon the completion of six months of service, 12.5% of the option shares
listed in the table below become 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 $1.75 per share. Mr. Lenowitz has options to purchase class B non-voting
common stock. Mr. Davidson was granted options to purchase 160,000 shares of
class A voting common stock and 160,000 shares of class B non-voting common
stock, of which he has exercised and purchased 56,666 shares in 1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value Of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
Shares at FY-End (#) at FY-End ($)
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
upon or after the closing of this offering under these plans. However, the
termination of these plans will not affect any outstanding options, which will
remain outstanding until they are exercised, terminate or expire, in keeping
with the terms of their stock option agreements.
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<PAGE>
1999 Equity Incentive Plan
Our board of directors adopted our 1999 equity incentive plan on July 22,
1999. We will also seek stockholder approval of this plan. We have reserved
1,900,000 shares of our common stock for issuance under the 1999 equity
incentive plan. As of January 1 of each year, starting in 2000, the number of
shares reserved for issuance under our 1999 equity incentive plan will be
increased automatically by 4% of the total number of shares of common stock
then outstanding or, if less, 1,500,000 shares. No options have yet been
granted under the 1999 equity incentive plan.
Under the 1999 equity incentive plan, the persons eligible to receive awards
are:
. employees;
. non-employee members of the board of directors; and
. consultants.
The types of awards that may be made under the 1999 equity incentive plan
are:
. options to purchase shares of common stock;
. stock appreciation rights;
. restricted shares; and
. stock units.
Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for favorable tax
treatment. With limited restrictions, if shares awarded under the 1999 equity
incentive plan are forfeited, those shares will again become available for new
awards under the 1999 equity incentive plan.
The compensation committee of our board of directors will administer the
1999 equity incentive plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of our 1999 equity
incentive plan. The committee has the discretion to determine which eligible
individuals are to receive any award, and to determine the type, amount,
vesting requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999 equity
incentive plan must be at least 100% of the fair market value of our common
stock on the option grant date. The exercise price for nonstatutory options
granted under the 1999 equity incentive plan must be at least 85% of the fair
market value of our common stock on the option grant date.
Our 1999 equity incentive plan provides that no participant may receive
options or stock appreciation rights covering more than 500,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 1,000,000 shares in the first year of
employment.
The exercise price may be paid with:
. cash;
. outstanding shares of common stock;
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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. We will seek stockholder approval of this plan. We have reserved
350,000 shares of our common stock for issuance under our 1999 employee stock
purchase plan. As of January 1 each year, starting in 2000, the number of
shares reserved for issuance under this plan will be increased automatically by
2% of the total number of shares of common stock then outstanding or, if less,
350,000 shares. Our 1999 employee stock purchase plan is intended to qualify
under Section 423 of the Internal Revenue Code.
Eligible employees may begin participating in the 1999 employee stock
purchase plan at the start of an offering period. Each offering period, other
than the initial offering period, lasts 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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1999 Non-Employee Directors Option Plan
Our board of directors adopted our 1999 non-employee directors option plan
on July 22, 1999. We will seek stockholder approval of this plan. Only the non-
employee members of our board of directors will be eligible for automatic
option grants under this plan.
We have reserved 350,000 shares of our common stock for issuance under our
1999 non-employee directors option plan. As of January 1 each year, starting in
2000, the number of shares reserved for issuance under our 1999 non-employee
directors option plan will be increased automatically to restore the total
number of shares available under this plan to 350,000 shares. No shares have
yet been issued under our 1999 non-employee directors option plan.
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
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<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.
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<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, a 5%
stockholder of us, at a per share purchase price of $2.555.
In June 1996, we issued and sold 97,846 shares of series A preferred stock
to SLF Partners IV, LP at a per share purchase price of $2.555. One of our
executive officers, Patrick P. Nguyen, is a limited partner of SLF Partners IV,
LP.
Series B Preferred Stock Financing. In December 1997, we issued and sold
233,372 shares of series B preferred stock to Kistler Associates, and in March,
April and December 1998, we issued and sold an aggregate of 466,744 shares of
series B preferred stock to Kistler Associates, in both cases at a per share
purchase price of $4.285.
In 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, LP at a per share purchase
price of $4.285.
In December 1998, we issued and sold 186,500 shares of series B preferred
stock to Ecomm Ventures I, LLC at a per share purchase price of $4.285. One of
our executive officers, Patrick P. Nguyen, is a director of Ecomm Ventures I,
LLC.
Series C Preferred Stock Financing. In March 1999, we issued and sold 29,645
shares of series C preferred stock to Kistler Associates at a per share
purchase price of $5.89.
Series D Preferred Stock Financing. In April 1999, we issued and sold
235,294 shares of series D preferred stock to Kistler Associates at a per share
purchase price of $8.50.
In April 1999, we issued and sold 479,412 shares of series D preferred stock
to SLF Partners IV, LP at a per share purchase price of $8.50.
In April 1999, we issued and sold 25,000 shares of series D preferred stock
to Tactical Marketing Ventures, LLC at a per share purchase price of $8.50.
Bruce Fredrickson, a director of InterTrust, is the president of Tactical
Marketing Ventures, LLC.
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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 executive officers, secured
by a stock pledge agreement. This note accrues interest at the rate of 7% per
year. The principal balance of this note and accrued interest is due upon
consummation of this offering.
Bonus to Executive Officer. In May 1999, our compensation committee approved
a bonus in the amount of $200,000 to Edmund J. Fish, which was paid in June
1999.
Indemnification. We have entered into an indemnification agreement with each
of our officers and directors. See "Management--Indemnification" for a
description of the indemnification available to our officers and directors
under our sixth amended and restated certificate of incorporation, to be
effective after the closing of this offering and our amended and restated
bylaws.
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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 or warrants 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 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 shares.
Unless otherwise indicated, the address for each listed stockholder is: c/o
InterTrust Technologies Corporation, 460 Oakmead Parkway, Sunnyvale, California
94086. To our knowledge, except as indicated in the footnotes to this table and
under applicable community property laws, the persons or entities identified in
this table have sole voting and investment power 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%
Kistler Associates(1)................- 2,372,556 7.5
101 West 79th Street, Suite 22C
New York, NY 10024
Reuters Group PL(2)................... 1,582,211 5.0
85 Fleet Street
London EC4P 4AJ
United Kingdom
Entities affiliated with SLF 1,540,779 4.9
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
David M. Van Wie...................... 344,800 1.1
Duncan M. Davidson(5)................. 300,001 1.0
Edmund J. Fish(6)..................... 291,052 0.9
Douglas M. Armati(7).................. 175,000 0.6
Satish K. Gupta....................... 160,000 0.5
Bruce Fredrickson(8).................. 137,000 0.4
Joseph W. Jennings.................... 133,332 0.4
Executive officers and directors as a
group (14 persons)(9)(10)............ 10,660,141 32.8
</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 shares, or
% of us.
(2) Includes 1,165,544 shares held of record by Reuters New Media, Inc. and
416,667 shares held of record by Blaxmill (Four) Limited.
(3) Includes 1,455,890 shares held of record by SLF Partners IV, L.P. and
84,889 shares held of record by SLF Partners V, L.P.
(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, 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 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. In
addition, there is also outstanding a warrant to purchase 311,016 shares of our
common stock.
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
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<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 our shares of
common stock, and we are required to use our best efforts to effect this
registration. Further, the holders of these demand rights may require us to
file additional registration statements on Form S-3. All of these registration
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in the
registration and our right not to effect a requested registration within six
months following the initial offering of our securities.
Anti-takeover Effects of Delaware Law, and Provisions of the Sixth Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws
Selected provisions of Delaware law, and our sixth amended and restated
certificate of incorporation and amended and restated bylaws, effective upon
the closing of this offering, could make more difficult the acquisition of
InterTrust by means of a tender offer or a proxy contest and the removal of
incumbent officers and directors. These provisions, summarized below, are
expected to discourage particular types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
InterTrust to negotiate first with us. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure InterTrust
outweigh the disadvantages of discouraging these proposals. 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;
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<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 which is not owned by the
interested stockholder.
A business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. An interested stockholder
is a person who, together with affiliates and associates, owns, or within three
years, did own, 15% or more of the corporation's voting stock. The existence of
this provision would be expected to have an anti-takeover effect 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 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.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common
stock outstanding, assuming no exercise of options after 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 described below.
Sales of Restricted Shares
The remaining shares of common stock are treated as restricted
shares under Rule 144. The number of shares of common stock available for sale
in the public market is limited by restrictions under the Securities Act and
lock-up agreements under which the holders of the shares have agreed not to
sell or dispose of any of their shares for a period of 180 days after the date
of this prospectus without the prior written consent of Credit Suisse First
Boston Corporation. On the date of this prospectus, shares other than the
shares being sold in this offering will be eligible for sale.
Beginning 180 days after the date of this prospectus, or earlier with the
consent of Credit Suisse First Boston Corporation, restricted shares
will become available for sale in the public market subject to the limitations
of Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, 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
shares after giving effect to this offering; and
. the average weekly trading volume of our common stock on The Nasdaq
National Market during the four calendar weeks preceding this sale.
Sales under Rule 144 of the Securities Act are subject to restrictions
relating to manner of sale, notice and the availability of current public
information about us. A person who is not our affiliate at any time during the
90 days preceding a sale, and who has beneficially owned shares for at least
two years, may sell these shares immediately following this offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act. However, the transfer agent may
require an opinion of counsel that a proposed sale of shares 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.
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<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 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 by 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 conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, J.P. Morgan
Securities, Inc., Salomon Smith Barney Inc. and SoundView Technology Group,
Inc. are acting as representatives, the following respective numbers of shares
of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation............................
J.P. Morgan Securities, Inc. .....................................
Salomon Smith Barney Inc. ........................................
SoundView Technology Group, Inc. .................................
----------
Total...........................................................
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriting discounts and commissions. This option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
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<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 additional 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 shares of the common stock for employees,
directors and other persons associated with us who have expressed an interest
in purchasing common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares. In addition, Kistler Associates has the right to purchase
shares in the offering and an affiliate of Amerindo Investment
Advisors has the right to purchase shares in the offering.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make in that respect.
We have made application to list our shares of common stock on The Nasdaq
Stock Market's National Market under the symbol ITRU.
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between the
representatives and us. The principal factors to be considered in determining
the public offering price include:
. the information in this prospectus and 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.
80
<PAGE>
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would 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.
81
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws,
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or 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 (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under those securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as agent
and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser sunder relevant Canadian
legislation.
82
<PAGE>
LEGAL MATTERS
The validity of the common stock being offered will be passed upon for
InterTrust by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California and for the underwriters by Fenwick & West LLP, Palo
Alto, California. As of the date of this prospectus, some members and employees
of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, beneficially
owned an aggregate of 17,916 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act 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 our common stock we are
offering, reference is made to the registration statement and the exhibits
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document
referred to 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.
83
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................... F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InterTrust Technologies Corporation
We have audited the accompanying consolidated balance sheets of InterTrust
Technologies Corporation as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of InterTrust
Technologies Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young llp
Palo Alto, California
February 19, 1999,
except for Note 6,
as to which the date is
May 5, 1999
F-2
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
----------------- June 30, (Deficit) at
1997 1998 1999 June 30, 1999
-------- ------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,884 $ 5,575 $ 15,295
Accounts receivable............. 25 1,545 399
Other current assets............ 156 132 304
-------- ------- --------
Total current assets.......... 2,065 7,252 15,998
Property and equipment, net....... 967 938 885
Other assets...................... 79 90 337
-------- ------- --------
$ 3,111 $ 8,280 $ 17,220
======== ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable................ $ 654 $ 549 $ 899
Accrued compensation............ 387 560 740
Other accrued liabilities....... 417 610 720
Convertible promissory note..... -- -- 1,000
Deferred revenue................ -- 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 compensa-
tion (unaudited)... -- -- -- -- 4,273 (4,273) -- -- --
Amortization of de-
ferred compensation
(unaudited)........ -- -- -- -- -- 195 -- -- 195
Forgiveness of note
receivable from
stockholders (unau-
dited)............. -- -- -- -- -- -- 40 -- 40
Net loss (unau-
dited)............. -- -- -- -- -- -- -- (11,411) (11,411)
---------- --- ---------- --- ------- ------- ----- -------- -------
Balance at June 30,
1999 (unaudited).... 12,492,410 $12 17,343,950 $17 $65,801 $(4,078) $(236) $(56,871) $ 4,645
========== === ========== === ======= ======= ===== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss....................... $(7,960) $(11,709) $(19,662) $(9,378) $(11,411)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 119 283 538 211 263
Amortization of deferred
stock compensation and other
stock related compensation
charges..................... 264 99 182 -- 275
Issuance of preferred stock
for accrued interest........ -- -- 37 -- --
Changes in operating assets
and liabilities:
Accounts receivable........ (25) -- (1,520) -- 1,146
Other current assets....... (33) (111) 24 (2) (172)
Accounts payable........... 261 187 (105) 229 350
Accrued compensation....... 172 190 173 101 180
Other accrued liabilities.. (326) 214 193 177 110
Deferred revenue........... 1,500 1,000 6,075 2,000 441
------- -------- -------- ------- --------
Net cash used in operating
activities.................... (6,028) (9,847) (14,065) (6,662) (8,818)
Investing activities
Capital expenditures........... (578) (662) (509) (116) (210)
Other noncurrent assets........ 15 (20) (11) 4 (47)
------- -------- -------- ------- --------
Net cash used in investing
activities.................... (563) (682) (520) (112) (257)
Financing activities
Proceeds from issuance of
convertible
promissory notes.............. -- -- 3,030 3,030 1,000
Repayment of convertible
promissory notes.............. (750) -- -- -- --
Proceeds from issuance of
preferred stock, net.......... 15,136 4,000 14,831 3,900 14,714
Proceeds from issuance of
common stock, net............. 178 54 363 115 3,081
Proceeds from repayment of note
receivables from
stockholders.................. -- -- 52 -- --
------- -------- -------- ------- --------
Net cash provided by financing
activities.................... 14,564 4,054 18,276 7,045 18,795
------- -------- -------- ------- --------
Net increase (decrease) in cash
and cash equivalents.......... 7,973 (6,475) 3,691 271 9,720
Cash and cash equivalents at
beginning of period........... 386 8,359 1,884 1,884 5,575
------- -------- -------- ------- --------
Cash and cash equivalents at
end of period................. $ 8,359 $ 1,884 $ 5,575 $ 2,155 $ 15,295
======= ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months
Years Ended Ended June
December 31, 30,
------------------ ------------
1996 1997 1998 1998 1999
------ ---- ------ ---- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental schedule of cash flow information
Interest paid................................. $ 90 $ -- $ -- $ -- $ --
====== ==== ====== ==== =======
Supplemental schedule of noncash financing
activities
Conversion of convertible promissory notes and
accrued interest
into series B convertible preferred stock.... $ -- $ -- $3,067 $ -- $ --
====== ==== ====== ==== =======
Conversion of convertible promissory notes and
accrued interest into
class A common stock......................... $3,477 $ -- $ -- $ -- $ --
====== ==== ====== ==== =======
Increase in deferred compensation............. $ -- $ -- $ -- $ -- $(4,273)
====== ==== ====== ==== =======
Common stock received in exchange for license
agreement.................................... $ -- $ -- $ -- $ -- $ 200
====== ==== ====== ==== =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
InterTrust Technologies Corporation (InterTrust) has developed a general-
purpose digital rights management (DRM) platform to serve as a foundation for
providers of digital information, technology, and commerce services to
participate in a global system for digital commerce. DRM technologies manage
rights and interests in digital information. InterTrust was formed and
incorporated in January 1990. From inception through December 1998,
InterTrust's efforts were principally devoted to research and development,
raising capital, recruiting personnel, and establishing partner relationships.
InterTrust shipped the general availability version of its, Commerce software,
at the end of fiscal 1998, and is therefore no longer in the development stage.
InterTrust has incurred operating losses to date and had an accumulated
deficit of $56.9 million at June 30, 1999. InterTrust's activities have been
primarily financed through private placements of equity securities. InterTrust
may need to raise additional capital through the issuance of debt or equity
securities. 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 is recognized after
execution of a license agreement and delivery of the product, provided there
are no remaining obligations relating to development, upgrades,
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)
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 is unable to establish the 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 are deferred and recognized on a subscription
basis over the period of obligation. In addition, under license agreements
where Intertrust is obligated to provide specified upgrades and is unable to
determine vendor specific objective evidence of fair value of the specified
upgrade all of the license revenue is deferred. 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 include the right to telephone
and online support and customer training, are generally provided for in the
license agreements for an agreed upon amount generally over a period of two
years. Software support and training service revenue is recognized over the
period in which the services are provided. Certain of InterTrust's partners
were utilizing pre-commercial versions of its product in the development of
their own solutions and, as a result, were utilizing InterTrust's 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.
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)
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 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.
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)
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.
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.
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)
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 shares subject to repurchase.
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of convertible preferred stock not included above that will
automatically convert upon completion of InterTrust's initial public offering
of common stock (using the as-converted method). If the offering contemplated
by this prospectus is consummated, all of the convertible preferred stock
outstanding as of June 30, 1999 and the outstanding convertible promissory note
will automatically be converted into an aggregate of 12,575,743 shares of
common stock. The number of shares to be issued upon conversion of the
convertible promissory note was calculated using the price of the series E
financing completed in July 1999 (see note 7). Pro forma stockholders' equity
at June 30, 1999, as adjusted for the conversion of the convertible preferred
stock and convertible promissory note, is disclosed on the consolidated balance
sheet.
Historical and pro forma basic and diluted net loss per share are as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss...................... $(7,960) $(11,709) $(19,662) $(9,378) $(11,411)
======= ======== ======== ======= ========
Basic and diluted shares:
Weighted average shares of
common stock outstanding.... 11,913 13,681 14,186 13,904 15,609
Less weighted average shares
subject to repurchase....... -- (42) (220) (127) (302)
------- -------- -------- ------- --------
Weighted average shares of
common stock outstanding
used in computing basic and
diluted net per loss share.. 11,913 13,639 13,966 13,777 15,307
======= ======== ======== ======= ========
Basic and diluted net loss
per share................... $(0.67) $ (0.86) $ (1.41) $(0.68) $ (0.75)
======= ======== ======== ======= ========
Pro Forma:
Net loss...................... $(19,662) $(11,411)
======== ========
Weighted average shares of
common stock
outstanding used in computing
basic and diluted
net loss per share........... 13,966 15,307
Adjustment to reflect the
assumed conversion of
convertible preferred stock
from the date of issuance.... 7,722 11,501
-------- --------
Weighted average shares used
in computing pro forma basic
and diluted net loss per
share........................ 21,688 26,808
======== ========
Pro forma basic and diluted
net loss per share .......... $ (0.91) $ (0.43)
======== ========
</TABLE>
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)
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, 1998, and for the six months ended June 30, 1998 and
1999, respectively. The number of common equivalent shares from options and
warrants would be determined on a weighted average basis using the treasury
stock method. The convertible promissory note outstanding at June 30, 1999 was
excluded from the common equivalent share calculation, as it would have been
antidilutive. If InterTrust had reported net income, shares used in computing
diluted net income per share at June 30, 1999 would have included an additional
83,333 shares from the conversion of the convertible promissory note.
Segments
Effective January 1, 1998, InterTrust adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 changes the way companies report
selected segment information in annual financial statements and requires
companies to report selected segment information in interim financial reports
to stockholders. FAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. InterTrust
operates solely in one segment, and therefore, there is no impact on
InterTrust's financial statements as a result of adopting FAS 131. For the year
ended December 31, 1998, revenue from customers outside the United States was
$52,000 and was derived from customers in Europe. For the six months ended June
30, 1999, customers from Asia and Europe accounted for revenue totaling
approximately $194,000 and $130,000, respectively.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which is required to be adopted in years
beginning after June 15, 2000. To date, InterTrust has not used derivatives,
and management anticipates that the adoption of FAS 133 will not have a
significant effect on InterTrust's results of operations or financial position.
2.PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Computer equipment and software..................... $1,271 $1,465 $ 1,665
Furniture and equipment............................. 119 193 203
Leasehold improvements.............................. 56 56 56
------ ------ -------
1,446 1,714 1,924
Accumulated depreciation and amortization........... (479) (776) (1,039)
------ ------ -------
$ 967 $ 938 $ 885
====== ====== =======
</TABLE>
F-13
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
3.COMMITMENTS
InterTrust leases its facilities under agreements expiring in August 1999
(see note 7). Rent under the agreements is expensed to operations on a
straight-line basis over the terms of the leases. Future minimum rental
commitments under operating leases entered into as of December 31, 1998 are
approximately $355,000 in 1999. Rent expense for all operating leases was
approximately $167,000, $258,000, $490,000, and $320,000 in 1996, 1997, 1998,
and for the six months ended June 30, 1999, respectively.
4.STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
InterTrust is authorized to issue 20,000,000 shares of convertible preferred
stock, designated in series (see Note 7). A summary of convertible preferred
stock is as follows (in thousands, except share amounts):
<TABLE>
<CAPTION>
Issued and Outstanding Shares Liquidation Preference
-------------------------------- -----------------------
December 31,
Shares -------------------- June 30, December 31, June 30,
Designated 1997 1998 1999 1998 1999
---------- --------- ---------- ----------- ------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Series A................ 5,000,000 3,966,666 3,966,666 3,966,666 $10,135 $10,135
Series B................ 6,533,722 2,333,722 6,533,721 6,533,721 27,997 27,997
Series C................ 850,000 -- -- 850,000 -- 5,007
Series D................ 1,294,118 -- -- 1,142,023 -- 9,707
--------- ---------- ---------- ------- -------
6,300,388 10,500,387 12,492,410 $38,132 $52,846
========= ========== ========== ======= =======
</TABLE>
The board of directors has the authority to issue the preferred stock in one
or more series and to fix 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 as to affect the voting rights of the series A stockholders, or
increasing or decreasing its total number of authorized shares without the
consent of a majority of the holders of series A preferred stock.
In the event of liquidation, the series A preferred stock has preference
over the series B, C, and D preferred stock and common stock in the amount of
$2.555 per share, plus declared but unpaid dividends. Remaining assets would
then be distributed pro rata based on (i) the number of shares of class A
common stock into which the series A preferred stock converts, (ii) three times
the number of shares of class A common stock into which series B, C, and D
preferred stock converts, and
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)
(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 distribution total equals the aggregate of their
original purchase prices of $4.285, $5.89, and $8.50 per share, respectively.
Each of the series B, C, and D stockholders shall recommence participation
in the distribution of any remaining assets once the common stockholders
receive distributions equal to the original per share purchase price of the
applicable preferred stock. Participation would be pro rata with the common
stock outstanding on a one-for-one conversion of the preferred stock to class A
common stock.
Holders of preferred stock are entitled to one vote for each share of common
stock into which 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. In the event that
dividends are declared on series A preferred stock, the dividends shall be
declared at an annual rate of $0.23 per share. After payment of any declared
annual dividends, the preferred stockholders will receive dividends, when and
if declared by the board of directors, on an as-if-converted basis in an amount
equal to the dividend paid to any other holders of outstanding stock. As of
June 30, 1999, no dividends had been declared.
Each share of preferred stock is convertible, at the option of the holder,
into class A common stock, subject to adjustments for antidilution. In
addition, the preferred shares will automatically convert into common stock
upon an underwritten public offering of InterTrust's common stock at not less
than $3.75 per share, which results in aggregate proceeds to InterTrust in
excess of $10,000,000. The holders of preferred stock also have registration
rights. InterTrust has a right of first refusal should the preferred
stockholder desire to sell or transfer its shares. The repurchase price must be
substantially the same price and under the same terms offered to the third
party. The right of first refusal terminates upon an underwritten public
offering of InterTrust's common stock.
Common Stock
Authorized common stock has been designated as class A voting common stock
and class B nonvoting common stock. The rights, preferences, privileges, and
restrictions of class A voting common stock and class B nonvoting common stock
are identical in all respects except for voting rights. The class B common
stock will convert to class A voting common stock upon the consummation of a
public offering of InterTrust's common stock. A summary of common stock is
as follows:
<TABLE>
<CAPTION>
Issued and Outstanding Shares
---------------------------------
December 31,
Shares --------------------- June 30,
Designated 1997 1998 1999
---------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Class A............................ 50,000,000 12,885,920 13,148,976 15,003,082
Class B............................ 20,000,000 904,340 1,521,672 2,340,868
---------- ---------- ----------
13,790,260 14,670,648 17,343,950
========== ========== ==========
</TABLE>
F-15
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
At December 31, 1998, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock...................................... 10,500,387
Exercise of outstanding stock options.............................. 8,457,989
Shares of common stock available for grant under the 1995 stock op-
tion plan......................................................... 101,846
Exercise of warrants............................................... 626,016
----------
19,686,238
==========
</TABLE>
During 1998, InterTrust received a note receivable in the amount of
approximately $319,000 from one of its officers upon his exercise of an option
to purchase 320,000 shares of common stock. As of December 31, 1998,
approximately 214,000 of these shares were subject to repurchase by InterTrust
at the original exercise price. The repurchase right lapses ratably over the
48-month vesting period of the underlying option. The note bears interest at 8%
per annum and is secured by the related stock and general assets of the
officer. The note and related interest are being forgiven over a period of four
years of employment. InterTrust is recording compensation expense as the note
is forgiven.
1995 Stock Option Plan
In October 1995, the board of directors adopted the 1995 stock option plan
(the 1995 option plan) for issuance of class A common stock to eligible
participants. Incentive stock options granted under the 1995 option plan are at
prices not less than the fair value as determined by the board of directors,
while nonstatutory options granted under the plan are at prices not less than
85% of the fair value on the date of the grant. Options expire after ten years.
Options generally vest ratably over a period of no more than five years.
Non Plan Stock Options
InterTrust's board of directors have granted to eligible participants
nonqualified stock options to purchase shares of class B common stock. The
options generally expire up to six years after the date of grant or earlier if
employment or relationship is terminated. The options generally become
exercisable ratably over a period of no more than four years. The exercisable
options may be exercised in whole or in part but no more frequently than twice
a year and in amounts of no less than 250 shares. There were no options to
purchase shares of class B common stock available for grant at December 31,
1998.
During 1996 and 1997, InterTrust issued options outside of the 1995 option
plan to purchase 160,000 shares of class A common stock at $1.25 per share and
298,332 shares of class A common stock at $1.50 per share, respectively.
F-16
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
Information about stock option activity is summarized as follows (see note
6):
<TABLE>
<CAPTION>
Shares of Common Stock
------------------------------------ Weighted
1995 Option Plan Average
----------------------- Nonplan Exercise
Available Outstanding Outstanding Price
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995... 2,009,600 490,400 3,306,480 $0.51
Shares authorized............. 880,000 -- -- --
Options granted............... (2,326,000) 2,326,000 160,000 $1.16
Options exercised............. -- (207,332) (179,700) $0.54
Unvested shares repurchased... 84,446 -- -- --
Options canceled.............. 32,000 (32,000) (364,852) $0.35
---------- ---------- ----------
Balance at December 31, 1996... 680,046 2,577,068 2,921,928 $0.81
Shares authorized............. 1,600,000 -- -- --
Options granted............... (2,823,300) 2,823,300 882,332 $1.46
Options exercised............. -- (138,916) (92,000) $0.75
Options canceled.............. 720,044 (720,044) (274,016) $1.02
---------- ---------- ----------
Balance at December 31, 1997... 176,790 4,541,408 3,438,244 $1.08
Shares authorized............. 1,200,000 -- -- --
Options granted............... (1,536,000) 1,536,000 80,000 $2.64
Options exercised............. -- (259,275) (617,332) $0.91
Options canceled.............. 261,056 (261,056) -- $1.45
---------- ---------- ----------
Balance at December 31, 1998... 101,846 5,557,077 2,900,912 $1.39
Shares authorized
(unaudited).................. 750,000 -- -- --
Options granted (unaudited)... (933,600) 933,600 22,028 $4.75
Options exercised
(unaudited).................. -- (1,264,548) (1,117,528) $1.17
Options canceled (unaudited).. 219,878 (219,878) (70,252) $2.04
---------- ---------- ----------
Balance at June 30, 1999
(unaudited)................... 138,124 5,006,251 1,735,160 $1.91
========== ========== ==========
Exercisable and vested at
December 31, 1998............. 2,026,979 2,529,244
========== ==========
Exercisable and vested at June
30, 1999 (unaudited).......... 1,527,885 1,675,160
========== ==========
Shares of common stock subject
to repurchase at December 31,
1998.......................... -- 213,334
========== ==========
Shares of common stock subject
to repurchase at
June 30, 1999 (unaudited)..... -- 405,002
========== ==========
</TABLE>
F-17
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
The following table summarizes information about options outstanding under
the 1995 option plan and nonplan options at December 31, 1998:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding ---------------------
---------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
------------- --------- ----------- -------- --------- --------
(In years)
<S> <C> <C> <C> <C> <C>
$0.01 - $0.31 698,160 3.13 $0.17 698,160 $0.17
$0.63 - $0.75 2,106,838 5.67 $0.63 1,834,001 $0.63
$1.25 1,016,168 7.70 $1.25 604,393 $1.25
$1.50 2,681,107 8.03 $1.50 1,093,162 $1.50
$2.00 - $2.50 1,637,216 9.24 $2.37 318,551 $2.29
$3.50 318,500 9.73 $3.50 7,956 $3.50
--------- ---------
$0.01-$3.50 8,457,989 7.30 $1.39 4,556,223 $0.97
========= =========
</TABLE>
In July 1996, InterTrust extended the exercise period of 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
their 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 characteristics significantly different from those of traded
options and since changes in the subjective
F-18
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. The fair value of
InterTrust's stock-based awards to employees was estimated assuming no expected
dividend; a risk-free interest rate of 6%, and expected lives of two years for
nonplan options and five years for options granted under the 1995 option plan.
The weighted-average fair value of options granted during 1996, 1997, and
1998 was $0.40, $0.74, and $1.23 per share, respectively.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss................................ $(8,269) $(12,645) $(21,115)
======= ======== ========
Pro forma basic and diluted net loss per share.... $ (0.97)
========
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the above
stock-based awards is amortized to expense over the vesting period of the
award. Because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1999.
Warrants
As of December 31, 1998, warrants to purchase a total of 306,000 shares of
class A common stock at prices ranging from $0.63 to $2.56 per share were
outstanding. Warrants to purchase 40,000 shares were issued in January 1995 in
connection with convertible notes and were exercised in February 1999. Warrants
to purchase 16,000 shares were issued in May 1995 to a related party in
conjunction with convertible notes of which 13,308 were exercised in May 1999
with the remaining shares exercisable through May 2000. Warrants to purchase
240,000 shares were issued in April 1996 in conjunction with convertible notes
and were exercised in April 1999. Warrants to purchase 10,000 shares were
issued in November 1996 and were exercised in August 1999.
As of December 31, 1998, warrants to purchase a total of 320,016 shares of
class B common stock were outstanding. A warrant to purchase 311,016 shares of
class B common stock was issued in August 1996 in conjunction with a license
agreement. This warrant is exercisable beginning in August 2003 through August
2006 but may be exercised at an earlier date upon the occurrence of certain
events 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 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-19
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
5.INCOME TAXES
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 34% is primarily due to net operating losses not being benefited. 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
------- -------
Total deferred tax assets..................................... 11,000 18,500
Valuation allowances.......................................... (11,000) (18,500)
------- -------
Net deferred tax assets....................................... $ -- $ --
======= =======
</TABLE>
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," provides for the recognition
of deferred tax assets if realization of 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-20
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
6.SUBSEQUENT EVENTS
In March, April, and May 1999, InterTrust issued 850,000 shares of series C
preferred stock at a price of $5.89 per share and 1,142,023 shares of series D
preferred stock at a price of $8.50 per share. The series C and D preferred
stock have similar rights and preferences as the previously issued series B
preferred stock.
7.EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
In July 1999, InterTrust received permission from its shareholders to
increase the available shares under the 1995 option plan by an additional
500,000 shares.
In April 1999, in connection with executing a licensing arrangement,
InterTrust issued to the licensee, for an aggregate amount of $1,000,000, a
noninterest-bearing convertible promissory note. In July 1999, the note
converted into 83,333 shares of series E preferred stock of InterTrust at a
price of $12.00 per share.
In July 1999, the board of directors and stockholders approved the issuance
of up to 1,400,000 shares of series E preferred stock. During July 1999,
InterTrust issued 1,309,700 shares of the series E preferred stock at a price
of $12.00 per share. The series E preferred stock has similar rights and
preferences as the previously issued series B, C and D preferred stock.
In July 1999, InterTrust entered into a lease agreement for office space to
serve as its corporate headquarters and principal operating facility. The lease
period commences September 1, 1999 and extends for a period of 60 months. The
lease requires monthly rental payments of approximately $121,000 plus variable
operating expenses and is subject to increases of 4% per annum.
In July 1999, the board of directors adopted InterTrust's 1999 equity
incentive plan 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 the 1999 non-employee directors
option plan, subject to stockholder approval, to be effective upon completion
of InterTrust's initial public offering of its common stock. The director's
plan provides for the automatic grant of options to purchase
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)
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-22
<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>
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table presents the costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fees, and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 23,630
NASD filing fee.................................................. 9,000
Nasdaq National Market listing fee............................... 90,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 175,000
Road show expenses............................................... 50,000
Blue sky fees and expenses....................................... 5,000
Custodian and transfer agent fees................................ 15,000
Miscellaneous fees and expenses.................................. 82,370
----------
Total.......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit indemnification
under limited circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI, Section 6.1 of our bylaws provides for mandatory
indemnification of our directors, officers and employees to the maximum extent
permitted by the Delaware General Corporation Law. Our sixth amended and
restated certificate of incorporation provides that our officers and directors
shall not be liable for monetary damages for breach of the officers' or
directors' fiduciary duty as officers or directors to our stockholders and us.
This provision in the sixth amended and restated certificate of incorporation
does not eliminate the officers' or directors' fiduciary duty, and, in
appropriate circumstances, equitable remedies like injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
officer or director will continue to be subject to liability for breach of the
officer's or director's duty of loyalty to us or our stockholders for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
officer or director, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect an officer's or director's responsibilities under any
other law, like the federal securities laws or state or federal environmental
laws. We have entered into indemnification agreements with our officers and
directors, a form of which is attached as Exhibit 10.1 and incorporated by
reference. The indemnification agreements provide our officers and directors
with further indemnification to the maximum extent permitted by the Delaware
General Corporation Law. Reference is made to Section 7 of the underwriting
agreement contained in Exhibit 1.1 to this registration statement, indemnifying
officers and directors of ours against limited liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since January 1, 1996, we have issued and sold the following securities:
1. We granted direct issuances or stock options to purchase 7,964,900 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 2,008,839 shares of our common stock
to employees, consultants, and other service providers for aggregate
consideration of approximately $2,594,731 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.
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 1,393,033 shares of our series E
preferred stock for an aggregate purchase price of approximately $16,716,000 to
a group of investors under a stock purchase agreement.
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* Warrant for the purchase of Class B Non-Voting Common Stock made by
the Registrant and held by Upgrade Corporation of America, dated
August 19, 1996.
10.6 Lease between California First, Ltd. and the Registrant dated April
28, 1994.
10.7** Amendment No. 1 to Lease between California First, Ltd. and the
Registrant dated August 10, 1994.
10.8** Amendment No. 2 to Lease between California First, Ltd. and the
Registrant dated April 17, 1997.
10.9** Standard Industrial/Commercial Multi-Tenant Lease-Modified Net and
Addendum between Staffield Investments and the Registrant dated March
21, 1997.
10.10 Addendum No. 2 to Standard Industrial/Commercial Multi-Tenant Lease-
Modified Net between Staffield Investments and the Registrant dated
September 10, 1998.
10.11 Lease between Mission West Properties, L.P. and the Registrant dated
July 21, 1999.
10.12**+ Technology Development, Marketing, and License Agreement by and
between the Registrant and National Westminster Bank PLC dated August
18, 1998.
10.13**+ Technology Development 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
8, 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.
+ 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. 2 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 9th 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. 2 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:
Signature Title Date
/s/ Victor Shear Chairman of the Board and
- ------------------------------- Chief Executive Officer September 9,
Victor Shear (Principal Executive 1999
Officer)
Vice Chairman of the
Erwin N. Lenowitz* Board, Chief Financial September 9,
- ------------------------------- Officer (Principal 1999
Erwin N. Lenowitz Financial and Accounting
Officer) and Secretary
/s/ Edmund J. Fish Director, Senior Operating
- ------------------------------- Officer and Executive September 9,
Edmund J. Fish Vice President, Corporate 1999
Development
Senior Vice President of
David Van Wie* Research and Director September 9,
- ------------------------------- 1999
David Van Wie
Director
Bruce Frederickson* September 9,
- ------------------------------- 1999
Bruce Fredrickson
Director
Satish K. Gupta* September 9,
- ------------------------------- 1999
Satish K. Gupta
*By: /s/ Victor Shear
---------------------------
Victor Shear
Attorney-in-fact
*By: /s/ Edmund J. Fish
---------------------------
Edmund J. Fish
Attorney-in-fact
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* Warrant for the purchase of Class B Non-Voting Common Stock made by
the Registrant and held by Upgrade Corporation of America, dated
August 19, 1996.
10.6 Lease between California First, Ltd. and the Registrant dated April
28, 1994.
10.7** Amendment No. 1 to Lease between California First, Ltd. and the
Registrant dated August 10, 1994.
10.8** Amendment No. 2 to Lease between California First, Ltd. and the
Registrant dated April 17, 1997.
10.9** Standard Industrial/Commercial Multi-Tenant Lease-Modified Net and
Addendum between Staffield Investments and the Registrant dated March
21, 1997.
10.10 Addendum No. 2 to Standard Industrial/Commercial Multi-Tenant Lease-
Modified Net between Staffield Investments and the Registrant dated
September 10, 1998.
10.11 Lease between Mission West Properties, L.P. and the Registrant dated
July 21, 1999.
10.12**+ Technology Development, Marketing, and License Agreement by and
between the Registrant and National Westminster Bank PLC dated August
18, 1998.
10.13**+ Technology Development 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
8, 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.
+ 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 4.2
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER [LOGO FOR INTERTRUST(R)] SHARES
The MetaTrust Utility(TM)
ITR
- ------------------------ ---------------------------
<S> <C> <C>
THIS CERTIFICATE IS TRANSFERABLE IN INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FORE CERTAIN DEFINITIONS
BOSTON, MA OR NEW YORK, NY CUSIP 46113Q 10 9
- ------------------------------------------------------------------------------------------------------------------------------------
This Certifies that
is the owner of
- ------------------------------------------------------------------------------------------------------------------------------------
FULLY PAID AND NONSASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE, OF
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- InterTrust Technologies Corporation ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of
this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated
/s/ Erwin N. Lenowitz /s/ Victor Shear
SECRETARY [Seal of InterTrust PRESIDENT AND CHIEF EXECUTIVE OFFICER
Technologies Corporation]
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
Transfer Agent and Registrar
BY
AUTHORIZED SIGNATURE
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
InterTrust Technologies Corporation
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
TEN ENT -- as tenants by the entireties --------------- ---------------
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
------------------------------------
(State)
UNIF TRF MIN ACT -- Custodian (until age )
------------ --------
(Cust)
under Uniform Transfers
-------------------
(Minor)
to Minors Act
-----------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- ----------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------
X
------------------------------------------------------
X
------------------------------------------------------
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND
NOTICE: WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
-------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.6
CALIFORNIA FIRST, LTD.
AND
ELECTRONIC PUBLISHING RESOURCES, INC.
LEASE
<PAGE>
SUMMARY OF LEASE
CALIFORNIA FIRST, LTD.
1. DATE OF LEASE:
2. LANDLORD: California First, Ltd.
3945 Freedom Circle, Suite 640
Santa Clara, California 95054
3. TENANT: Electronic Publishing Resources,
Inc.
4. PREMISES: 460 Oakmead Parkway
Sunnyvale, California
5. SQUARE FEET: 9,159 square feet
6. PERMITTED USE: General office use and research and
development uses
7. TERM: Three years
(a) SCHEDULED COMMENCEMENT DATE: May 13, 1994
(b) SCHEDULED EXPIRATION DATE: May 12, 1997
8. RENT:
(a) BASIC RENT: $ 6,640.28 per month
(b) ADJUSTMENTS TO BASIC RENT: None
(c) TENANT'S ESTIMATED SHARE OF $ 1,108.24 per month
COMMON AREA CHARGES:
9. SECURITY DEPOSIT: $ 6,640.28
10. PARKING SPACES PROVIDED: Thirty-six (36)
11. OTHER IMPORTANT PROVISIONS: Option to Extend Term
Right to First Refusal on
Expansion Space
First Right to Lease RFR Space
Option to Terminate
Reduced Rent
THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN OR PROVISIONS IN THE
ATTACHED LEASE, IN THE EVENT OF ANY CONFLICT OR INCONSISTENCY BETWEEN THE
PROVISIONS OF THIS SUMMARY AND THE LEASE, THE PROVISIONS OF THE LEASE SHALL
GOVERN.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- -----------------------------------------------------------------------
1. USE
2. TERM
3. POSSESSION
4. MONTHLY RENT
5. ADJUSTMENT OF BASIC RENT
6. RESTRICTION ON USE
7. COMPLIANCE WITH LAWS
8. ALTERATIONS
9. REPAIR AND MAINTENANCE
10. LIENS
11. INSURANCE
12. UTILITIES AND SERVICE
13. TAXES AND OTHER CHARGES
14. ENTRY BY LANDLORD
15. COMMON AREA; PARKING
16. COMMON AREA CHARGES
17. DAMAGE BY FIRE; CASUALTY
18. INDEMNIFICATION
19. ASSIGNMENT AND SUBLETTING
20. DEFAULT
21. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
22. EMINENT DOMAIN
23. NOTICE AND COVENANT TO SURRENDER
24. TENANT'S QUITCLAIM
25. HOLDING OVER
26. SUBORDINATION
27. CERTIFICATE OF ESTOPPEL
28. SALE BY LANDLORD
29. ATTORNMENT TO LENDER OR THIRD PARTY
30. DEFAULT BY LANDLORD
31. CONSTRUCTION CHANGES
32. MEASUREMENT OF PREMISES
33. ATTORNEY FEES
34. SURRENDER
35. WAIVER
36. EASEMENTS; AIRSPACE RIGHTS
37. RULES AND REGULATIONS
38. NOTICES
39. NAME
40. GOVERNING LAW; SEVERABILITY
41. DEFINITIONS
42. TIME
43. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
<PAGE>
44. ENTIRE AGREEMENT
45. CORPORATE AUTHORITY
46. RECORDING
47. REAL ESTATE BROKERS
48. EXHIBITS AND ATTACHMENTS
49. ENVIRONMENTAL MATTERS
50. SIGNAGE
51. SUBMISSION OF LEASE
52. TENANT IMPROVEMENTS
53. ADDITIONAL RENT
54. LANDLORD'S OPTION TO RELOCATE PREMISES
55. OPTION TO EXTEND TERM
56. RIGHT OF FIRST REFUSAL ON EXPANSION SPACE
57. FIRST RIGHT TO LEASE RFR SPACE
58. OPTION TO TERMINATE
59. REDUCED RENT
8
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LEASE
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THIS LEASE is made this 28th day of April, 1994, by and between CALIFORNIA
FIRST, LTD., a Florida limited partnership ("Landlord"), and ELECTRONIC
PUBLISHING RESOURCES, INC., a Delaware corporation ("Tenant").
W I T N E S S E T H :
Landlord leases to Tenant and Tenant leases from Landlord those certain
premises outlined in red on Exhibit A (the "Premises") commonly known as 460
Oakmead Parkway, Sunnyvale, California, which Landlord and Tenant hereby agree
consists of approximately nine thousand one hundred fifty-nine (9,159) square
feet in California First, Ltd. (the "Project"). As used herein the term Project
shall mean and include all of the land described in Exhibit B and all the
buildings, improvements, fixtures and equipment now or hereafter situated on
said land.
Tenant covenants, as a material part of the consideration of this lease, to
perform and observe each and all of the terms, covenants and conditions set
forth below, and this lease is made upon the condition of such performance and
observance.
1. USE
Subject to the restrictions contained in paragraph 6 hereof, Tenant
shall use the Premises for general office use and shall not use or permit the
Premises to be used for any other purpose.
2. TERM
(a) The term shall be for three (3) years (unless sooner terminated
as hereinafter provided) and, subject to paragraphs 2(b) and 3, shall commence
on May 13, 1994 and end on May 12, 1997.
(b) Possession of the Premises shall not be deemed tendered and the
term shall not commence until the first to occur of the following (on or after
May 13, 1994):
(1) One day after a final building permit acknowledging
completion and permitting occupancy is granted by the proper governmental
agency;
(2) Upon the occupancy of the Premises by any of Tenant's
operating personnel; or
(3) Upon substantial completion of all work to be done by
Landlord pursuant to Exhibit C to this lease, exclusive of telephones or other
communication systems and punchlist items, or, if Landlord is prevented from or
delayed in completing its work under
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Exhibit C to this lease due to the acts or omissions of Tenant, then upon the
date by which such work would have been substantially completed but for such
acts or omissions by Tenant.
3. POSSESSION
(a) If Landlord for any reason cannot deliver possession of the
Premises to Tenant by the date of commencement set forth in paragraph 2(a), this
lease shall not be void or voidable, Landlord shall not be liable to Tenant for
any loss or damage on account thereof and, unless Landlord's failure to deliver
possession of the Premises to Tenant by the scheduled commencement date set
forth in paragraph 2(a) is caused by Tenant caused delays as defined in Exhibit
C to this lease, Tenant shall not be liable for rent until the commencement of
the term is determined in accordance with paragraph 2(b). If the term commences
on a date other than the date specified in paragraph 2(a) above, then the
parties shall immediately execute an amendment to this lease stating the actual
date of commencement and the revised expiration date. The expiration date of the
term shall be extended by the same number of days that Tenant's possession of
the Premises was delayed from that set forth in paragraph 2(a).
Notwithstanding the above, if Landlord is unable to deliver possession
of the Premises by June 15, 1994 (plus the number of days of delay caused by
Tenant or by strikes or other causes beyond Landlord's reasonable control), then
Tenant may, at its option (exercisable only within ten (10) days following such
date) and as its sole remedy terminate this lease; provided, however, if Tenant
fails to timely exercise such right within such ten (10) days period, Tenant's
right to terminate shall lapse. If Tenant elects to terminate this lease as
provided in this paragraph, all amounts deposited with Landlord by Tenant shall
be returned to Tenant and Landlord shall not be liable to Tenant for any loss,
damage or expense resulting from Landlord's failure to deliver possession.
(b) Tenant's inability or failure to take possession of the Premises
when delivery is tendered by Landlord (with the improvements to be done pursuant
to Exhibit C to this lease substantially completed) shall not delay the
commencement of the term of this lease or Tenant's obligation to pay rent.
Tenant acknowledges that Landlord shall incur significant expenses upon the
execution of this lease, even if Tenant never takes possession of the Premises,
including without limitation brokerage commissions and fees, legal and other
professional fees, the costs of space planning and the costs of construction of
improvements in the Premises. Tenant acknowledges that all of said expenses
shall be included in measuring Landlord's damages should Tenant breach the terms
of this lease.
4. MONTHLY RENT
(a) Basic Rent. Tenant shall pay to Landlord as basic rent for the
----------
Premises, in advance and subject to adjustment as provided in paragraph 5, the
sum of Six Thousand Six Hundred Forty and 28/100 Dollars ($6,640.28) on or
before the first day of the first full calendar month of the term and on or
before the first day of each and every successive calendar month. Basic rent
for any partial month shall be payable in advance and shall be prorated at the
rate of 1/30th of the monthly basic rent per day.
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(b) Common Area Charges. In addition to the above basic rent and as
-------------------
additional rent, Tenant shall pay to Landlord, subject to adjustments and
reconciliation as provided in paragraph 16 of this lease, the sum of One
Thousand One Hundred Eight and 24/100 Dollars ($1,108.24) on or before the first
day of the first full calendar month of the term and on the first day of each
and every successive calendar month, said sum representing Tenant's estimated
payment of its percentage share of common area charges as provided for in
paragraph 16 of this lease. Payment of common area charges for any partial
month shall be payable in advance and shall be prorated at the rate of 1/30th of
the monthly payment of common area charges per day.
(c) Manner and Place of Payment. All payments of basic rent and
---------------------------
common area charges shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America, at the office of Landlord at 3945
Freedom Circle, Suite 640, Santa Clara, California 95054, or to such other
person or place as Landlord may from time to time designate in writing.
(d) Third Month's Rent. Concurrently with Tenant's execution of this
------------------
lease, Tenant shall deposit with Landlord the sum of Seven Thousand Seven
Hundred Forty-Eight and 52/100 Dollars ($7,748.52) to be applied against the
basic rent and common area charges for the third lease month of the term.
(e) Security Deposit. Concurrently with Tenant's execution of this
----------------
lease, Tenant shall deposit with Landlord the sum of Six Thousand Six Hundred
Forty and 28/100 Dollars ($6,640.28), which sum shall be held by Landlord as a
security deposit for the faithful performance by Tenant of all of the terms,
covenants and conditions of this lease to be kept and performed by Tenant. If
Tenant defaults with respect to any provision of this lease, including but not
limited to, the provisions relating to the payment of basic rent and common area
charges, Landlord may (but shall not be required to) use, apply, or retain all
or any part of this security deposit for the payment of any amount which
Landlord may spend by reason of Tenant's default or to compensate Landlord for
any other loss or damage which Landlord may suffer by reason of default. If any
portion of said deposit is so used, Tenant shall, within ten (10) days after
written demand therefor, deposit cash with Landlord in the amount sufficient to
restore the security deposit to its original amount; Tenant's failure to do so
shall be a material breach of this lease. Landlord shall not be required to keep
this security deposit separate from its general funds and Tenant shall not be
entitled to interest on such deposit. If Tenant is not in default at the
expiration or termination of this lease, the security deposit or any balance
thereof shall be returned to Tenant within thirty (30) days after Tenant has
vacated the Premises. In the event of transfer of Landlord's interest in this
lease, Landlord shall transfer said deposit to Landlord's successor in interest,
and Tenant agrees that Landlord shall thereupon be released from liability for
the return of such deposit or any accounting therefor.
5. ADJUSTMENT OF BASIC RENT
Except as set forth in paragraph 59 below, there shall be no
adjustments to basic rent during the initial term of this lease.
3
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6. RESTRICTION ON USE
Tenant shall not do or permit to be done in or about the Premises or
the Project, nor bring or keep or permit to be brought or kept in or about the
Premises or Project, anything which is prohibited by or will in any way increase
the existing rate of, or otherwise affect, fire or any other insurance covering
the Project or any part thereof, or any of its contents, or will cause a
cancellation of any insurance covering the Project or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in or about
the Premises or the Project which will constitute waste or which will in any way
obstruct or unreasonably interfere with the rights of other tenants or occupants
of the Project or injure or unreasonably annoy them, or use or allow the
Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain
or permit any nuisance in or about the Premises or the Project. No loudspeaker
or other device, system or apparatus which can be heard outside the Premises
shall be used in or at the Premises without the prior written consent of
Landlord. Tenant shall not use the Premises in any manner that will cause or
emit any objectionable odor, noise or light into the adjoining premises or
Common Area. Tenant shall not do anything on the Premises that will cause
damage to the Project and Tenant shall not overload the floor capacity of the
Premises or the Project. No machinery, apparatus or other appliance shall be
used or operated in or on the Premises that will in any manner injure, vibrate
or shake the Premises. Landlord shall be the sole judge, of whether such odor,
noise, light or vibration is such as to violate the provisions of this
paragraph. No waste materials or refuse shall be dumped upon or permitted to
remain upon any part of the Premises or the Project except in trash containers
placed inside exterior enclosures designated for that purpose by Landlord, or
where otherwise designated by Landlord; and no toxic or hazardous materials
shall be disposed of through the plumbing or sewage system. No materials,
supplies, equipment, finished products or semi-finished products, raw materials
or articles of any nature shall be stored or permitted to remain outside of the
building proper. No retail sales shall be made on the Premises. Tenant shall
comply with any covenant, condition or restriction ("C.C. & R.s") affecting the
Premises.
7. COMPLIANCE WITH LAWS
Tenant shall, in connection with its use and occupation of the
Premises, at its sole cost and expense, promptly observe and comply with (i) all
laws, statutes, ordinances and governmental rules, regulations and requirements
of federal, state, county, municipal and other governmental authorities, now or
hereafter in effect, which shall impose any duty upon Landlord or Tenant with
respect to the use, occupancy or alteration to the Premises, (ii) with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted and (iii) with any direction or occupancy certificate
issued pursuant to law by any public authority; provided, however, that no such
failure shall be deemed a breach of these provisions if Tenant, immediately upon
notification, commences to remedy or rectify said failure. The judgment of any
court of competent jurisdiction or the admission of Tenant in any action against
Tenant (whether or not Landlord is a party thereto) that Tenant has violated any
such law, statute, ordinance or governmental rule, regulation, requirement,
direction or provision, shall be conclusive of that fact as between Landlord and
Tenant. This lease shall remain in full force and effect notwithstanding any
loss of use or other effect on Tenant's enjoyment of the Premises by reason of
any governmental laws, statutes, ordinances, rules, regulations and requirements
now or hereafter in effect.
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8. ALTERATIONS
Tenant shall not make or suffer to be made any alteration, addition or
improvement to or of the Premises or any part thereof (collectively referred to
herein as alterations") without (i) the prior written consent of Landlord, which
shall not be unreasonably withheld, (ii) a valid building permit issued by the
appropriate governmental authority and (iii) otherwise complying with all
applicable laws, regulations and requirements of governmental agencies having
jurisdiction and with the rules, regulations and requirements of any board of
fire underwriters or similar body; provided, however, that alterations costing
Five Thousand Dollars ($5,000) or less per lease year in the aggregate shall not
require Landlord's prior consent, provided that such alterations comply with the
terms of items (ii) and (iii) above, and Tenant informs Landlord prior to
commencement of the alterations of (a) the nature of the alterations, (b) the
cost thereof, and (c) the contractor performing the work. Landlord's consent to
any requested alteration shall not create on the part of Landlord or cause
Landlord to incur any responsibility or liability for such alteration's
compliance with all laws, rules and regulations of federal, state, county,
municipal and other governmental authorities. Any alteration made by Tenant
(excluding moveable furniture and trade fixtures not attached to the Premises)
shall at once become a part of the Premises and belong to Landlord. Without
limiting the foregoing, all heating, lighting, electrical (including all wiring,
conduit, outlets, drops, buss ducts, main and subpanels), air conditioning,
partitioning, drapery and carpet installations made by Tenant, regardless of how
attached to the Premises, together with all other alterations that have become
an integral part of the Project in which the Premises are a part, shall be and
become part of the Premises and belong to Landlord upon installation and shall
not be deemed trade fixtures, and shall remain upon and be surrendered with the
Premises at the termination of the lease.
Any alteration made by Tenant shall be made by Tenant at its sole
risk, cost and expense and only after Landlord's written approval of any
contractor or person selected by Tenant for that purpose, and the same shall be
made at such time and in such manner as Landlord may from time to time
designate. Upon Tenant's prior written request, at the time Landlord consents
to such alterations, Landlord shall inform Tenant as to whether Tenant will be
required to remove such alterations at the termination of this lease. Tenant
shall, if required by Landlord, secure at Tenant's cost a completion and lien
indemnity bond for such work. Upon the expiration or sooner termination of the
term, Landlord may, at its sole option, require Tenant, at Tenant's sole cost
and expense, to promptly remove any such alteration made by Tenant and
designated by Landlord to be removed, repair any damage to the Premises caused
by such removal and restore the Premises to its condition existing prior to such
alteration. Any moveable furniture and equipment or trade fixtures remaining on
the Premises at the expiration or other termination of the term shall become the
property of the Landlord unless promptly removed by Tenant.
If during the term any alteration, addition or change of the Premises
is required by law, regulation, ordinance or order of any public authority,
Tenant, at its sole cost and expense, shall promptly make the same. If during
the term any alterations, additions or changes to the Common Area or to the
Project in which the Premises is located is required by law, regulation,
ordinance or order of any public or quasi-public authority, and it is
impractical in Landlord's judgment for the affected tenants to individually make
such alterations, additions or changes, Landlord shall make such alterations,
additions or changes and the cost thereof shall be a
5
<PAGE>
common area charge and Tenant shall pay its percentage share of such cost to
Landlord as provided in paragraph 16.
9. REPAIR AND MAINTENANCE
By entry hereunder, Tenant accepts the Premises as being in good and
sanitary order, condition and repair (excepting only the roof which Landlord
covenants to replace with a new roof as set forth on Exhibit C hereto and
"punchlist items"). Landlord represents that as of the commencement date, the
heating, ventilating and air conditioning system, plumbing and electrical
systems shall be in good working order and repair and Landlord hereby warrants
that the same will remain in good working order and repair for a period of one
hundred twenty (120) days following commencement of the term of this lease.
Except as expressly provided below, Tenant shall at its sole cost keep and
maintain the entire Premises and every part thereof including, without
limitation, the windows, window frames, plate glass, glazing, elevators within
the Premises, truck doors, doors and all door hardware, the interior walls and
partitions, lighting and the electrical, mechanical, and plumbing systems.
Tenant shall also repair and maintain the heating and air conditioning systems
(unless Landlord has elected to keep and maintain the heating and air
conditioning systems as provided below) which shall include, without limitation,
a periodic maintenance agreement with a reputable and licensed heating and air
conditioning service company. If Tenants use of the heating and air
conditioning systems is limited to normal business hours (8:00 a.m. to 6:00
p.m.), such agreement shall provide for service at least as often as every 60
days; if Tenant's use of the heating or air conditioning systems extends beyond
such normal business hours this service shall be as often as may be reasonably
required by Landlord and in any event such service shall meet all warranty
enforcement requirements of such equipment and comply with all manufacturer
recommended maintenance, provided Landlord has furnished Tenant with such
requirements and recommendations. Tenant shall notify Landlord of excess use of
the HVAC systems beyond normal business hours that might require extra service.
Landlord may elect, at its option, to keep and maintain the heating and air
conditioning systems of the Premises and in such event, Tenant shall pay to
Landlord upon demand the full cost of such maintenance.
Subject to the provisions of paragraph 17, Landlord shall keep and
maintain the roof, structural elements, and exterior walls of the buildings
constituting the Project and Common Area in good order and repair. Tenant
waives all rights under and benefits of California Civil Code Sections 1932(1),
1941, and 1942 and under any similar law, statute or ordinance now or hereafter
in effect. The cost of the repairs and maintenance which are the obligation of
Landlord hereunder, including without limitation, maintenance contracts and
supplies, materials, equipment and tools used in such repairs and maintenance
shall be a common area charge and Tenant shall pay its percentage share of such
costs to Landlord as provided in paragraph 16; provided, however, that if any
repairs or maintenance is required because of an act or omission of Tenant, or
its agents, employees or invitees, Tenant shall pay to Landlord upon demand the
full cost of such repairs or maintenance.
Notwithstanding the above, Tenant shall not be responsible for (i) any
maintenance or repair costs associated with the roof for a period of one (1)
year after completion of the roof work required by paragraph 8 of Exhibit C, or
(ii) any maintenance or repair costs
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associated with any structural elements (excluding the roof) or exterior walls
of the buildings constituting the Project.
10. LIENS
Tenant shall keep the Premises and the Project free from any liens
arising out of any work performed, materials furnished or obligations incurred
by Tenant, its agents, employees or contractors. Upon Tenant's receipt of a
preliminary twenty (20) day notice filed by a claimant pursuant to California
Civil Code Section 3097, Tenant shall immediately provide Landlord with a copy
of such notice. Should Tenant have notice of any lien recorded against the
Project, Tenant shall give immediate notice of such lien to Landlord. In the
event that Tenant shall not, within ten (10) days following the imposition of
such lien, cause the same to be released of record, Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but no
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses (including attorneys' fees)
incurred by it in connection therewith, shall be payable to Landlord by Tenant
on demand with interest at the rate of twelve percent (12%) per annum or the
maximum rate permitted by law, whichever is less. Landlord shall have the right
at all times to post and keep posted on the Premises any notices permitted or
required by law, or which Landlord shall deem proper for the protection of
Landlord, the Premises and the Project and any other party having an interest
therein, from mechanics' and materialmen's liens and like liens. Tenant shall
give Landlord at least fifteen (15) days prior notice of the date of
commencement of any construction on the Premises in order to permit the posting
of such notices. In the event Tenant is required to post an improvement bond
with a public agency in connection with any work performed by Tenant on or to
the Premises, Tenant shall include Landlord as an additional obligee.
11. INSURANCE
Tenant, at its sole cost and expense, shall keep in force during the
term (i) commercial general liability and property damage insurance with a
combined single limit of at least $2,000,000 per occurrence insuring against
personal or bodily injury to or death of persons occurring in, on or about the
Premises or Project and any and all liability of the insureds with respect to
the Premises or arising out of Tenant's maintenance, use or occupancy of the
Premises and all areas appurtenant thereto, (ii) direct physical loss-special
insurance covering the leasehold improvements in the Premises and all of
Tenant's equipment, trade fixtures, appliances, furniture, furnishings, and
personal property from time to time located in, on or about the Premises, with
coverage in the amount of the full replacement cost thereof, and (iii) Worker's
Compensation Insurance as required by law, together with employer's liability
coverage with a limit of not less than $1,000,000 for bodily injury for each
accident and for bodily injury by disease for each employee. Tenant's
commercial general liability and property damage insurance and Tenant's Workers
Compensation Insurance shall be endorsed to provide that said insurance shall
not be cancelled or reduced except upon at least thirty (30) days prior written
notice to Landlord. Further, Tenant's commercial general liability and property
damage insurance shall be primary and shall be endorsed to provide that Landlord
and McCandless Management Corporation, and their respective partners, officers,
directors and employees and such other persons or entities as directed from time
to time by Landlord shall be named as
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additional insureds for all liability using ISO Bureau Form CG20111185 (or a
successor form) or such other endorsement form reasonably acceptable to
Landlord; shall contain a severability of interest clause and a cross-liability
endorsement; shall be endorsed to provide that the limits and aggregates apply
per location using ISO Bureau Form CG25041185 (or a successor form) or such
other endorsement form reasonably acceptable to Landlord; and shall be issued by
an insurance company admitted to transact business in the State of California
and rated A+VIII or better in Best's Insurance Reports (or successor report).
The deductibles for all insurance required to be maintained by Tenant hereunder
shall be satisfactory to Landlord. The commercial general liability insurance
carried by Tenant shall specifically insure the performance by Tenant of the
indemnification provisions set forth in paragraph 18 of this lease provided,
however, nothing contained in this paragraph 11 shall be construed to limit the
liability of Tenant under the indemnification provisions set forth in said
paragraph 18. If Landlord or any of the additional insureds named on any of
Tenant's insurance, have other insurance which is applicable to the covered loss
on a contributing, excess or contingent basis, the amount of the Tenant's
insurance company's liability under the policy of insurance maintained by Tenant
shall not be reduced by the existence of such other insurance. Any insurance
carried by Landlord or any of the additional insureds named on Tenant's
insurance policies shall be excess and non-contributing with the insurance so
provided by Tenant.
Tenant shall, prior to the commencement of the term and at least
thirty (30) days prior to any renewal date of any insurance policy required to
be maintained by Tenant pursuant to this paragraph, provide Landlord with a
completed Certificate of Insurance, using a form acceptable in Landlord's
reasonable judgement, attaching thereto copies of all endorsements required to
be provided by Tenant under this lease. Tenant agrees to increase the coverage
or otherwise comply with changes in connection with said commercial general
liability, property damage, direct physical loss and Worker's Compensation
Insurance as Landlord's lender may from time to time reasonably require.
Landlord shall obtain and keep in force a policy or policies of
insurance covering loss or damage to the Premises and Project, in the amount of
the full replacement value thereof, providing protection against those perils
included within the classification of "all risk" insurance, with increased cost
of reconstruction and contingent liability (including demolition), plus a policy
of rental income insurance in the amount of one hundred percent (100%) of twelve
(12) months' rent (including sums paid as additional rent) and such other
insurance as Landlord or Landlord's lender may from time to time require.
Landlord may, but shall not be obligated to unless required by law, obtain flood
and/or earthquake insurance. Landlord shall have no liability to Tenant if
Landlord elects not to obtain flood and/or earthquake insurance unless such
insurance is required by law. The cost of all such insurance purchased by
Landlord, plus any charges for deferred payment of premiums and the amount of
any deductible incurred upon any covered loss within the Project, shall be
common area charges and Tenant shall pay to Landlord its percentage share of
such costs as provided in paragraph 16. If the cost of insurance is increased
due to Tenant's use of the Premises, then Tenant shall pay to Landlord upon
demand the full cost of such increase.
Landlord and Tenant hereby mutually waive any and all rights of
recovery against one another for real or personal property loss or damage
occurring to the Premises or the Project, or any part thereof, or to any
personal property therein, from perils insured against under fire and
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extended insurance and any other property insurance policies existing for the
benefit of the respective parties so long as such insurance permits waiver of
liability and contains a waiver of subrogation without additional premiums.
If Tenant does not take out and maintain insurance as required
pursuant to this paragraph 11, Landlord may, but shall not be obligated to,
after ten (10) days written notice to Tenant, or in the event that such
insurance has lapsed, expired or been cancelled, take out the necessary
insurance and pay the premium therefor, and Tenant shall repay to Landlord
promptly on demand, as additional rent, the amount so paid. In addition,
Landlord may recover from Tenant and Tenant agrees to pay, as additional rent,
any and all reasonable expenses (including attorney fees) and damages which
Landlord may sustain by reason of the failure of Tenant to obtain and maintain
such insurance, it being expressly declared that the expenses and damages of
Landlord shall not be limited to the amount of the premiums thereon.
12. UTILITIES AND SERVICE
Tenant shall pay for all water, gas, light, heat, power, electricity,
telephone, trash pickup, sewer charges and all other services supplied to or
consumed on the Premises. In the event that any service is not separately
metered or billed to the Premises, the cost of such utility service or other
service shall be a common area charge and Tenant shall pay its percentage share
of such cost to Landlord as provided in paragraph 16. In addition, the cost of
all utilities and services furnished by Landlord to the Common Area shall be a
common area charge and Tenant shall pay its percentage share of such cost to
Landlord as provided in paragraph 16.
If Tenant's use of any such utility or service is materially in excess
of the average furnished to the other tenants of the Project, and such utility
or service is not separately metered, then Tenant shall pay to Landlord upon
demand, as additional rent, the full cost of such excess use, or Landlord may
cause such utility or service to be separately metered, in which case Tenant
shall pay the full cost of such utility or service and reimburse Landlord upon
demand for the cost of installing the separate meter.
Landlord shall not be liable for, and Tenant shall not be entitled to
any abatement or reduction of rent by reason of, the failure of any person or
entity to furnish any of the foregoing services when such failure is caused by
accident, breakage, repairs, strikes, lockouts or other labor disturbances or
labor disputes of any character, governmental moratoriums, regulations or other
governmental actions, or by any other cause, similar or dissimilar, beyond the
reasonable control of Landlord. In addition, Tenant shall not be relieved from
the performance of any covenant or agreement in this lease because of any such
failure, and no eviction of Tenant shall result from such failure.
13. TAXES AND OTHER CHARGES
All real estate taxes and assessments and other taxes, fees and
charges of every kind or nature, foreseen or unforeseen, which are levied,
assessed or imposed upon Landlord and/or against the Premises, building, Common
Area or Project, or any part thereof by any federal, state, county, regional,
municipal or other governmental or quasi-public authority, together with any
increases therein for any reason, shall be a common area charge and Tenant
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shall pay its percentage share of such costs to Landlord as provided in
paragraph 16. By way of illustration and not limitation, "other taxes, fees and
charges" as used herein include any and all taxes payable by Landlord (other
than state and federal personal or corporate income taxes measured by the net
income of Landlord from all sources, and premium taxes), whether or not now
customary or within the contemplation of the parties hereto, (i) upon, allocable
to, or measured by the rent payable hereunder, including, without limitation,
any gross income or excise tax levied by the local, state or federal government
with respect to the receipt of such rent, (ii) upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any part thereof, (iii) upon or
measured by the value of Tenant's personal property or leasehold improvements
located in the Premises, (iv) upon this transaction or any document to which
Tenant is a party creating or transferring an interest or estate in the
Premises, (v) upon or with respect to vehicles, parking or the number of persons
employed in or about the Project, and (vi) any tax, license, franchise fee or
other imposition upon Landlord which is otherwise measured by or based in whole
or in part upon the Project or any portion thereof. If Landlord contests any
such tax, fee or charge, the cost and expense incurred by Landlord thereby
(including, but not limited to, costs of attorneys and experts) shall also be
common area charges and Tenant shall pay its percentage share of such costs to
Landlord as provided in paragraph 16. In the event the Premises and any
improvements installed therein by Tenant or Landlord are valued by the assessor
disproportionately higher than those of other tenants in the building or Project
or in the event alterations or improvements are made to the Premises, Tenant's
percentage share of such taxes, assessments, fees and/or charges shall be
readjusted upward accordingly and Tenant agrees to pay such readjusted share.
Such determination shall be made by Landlord from the respective valuations
assigned in the assessor's work sheet or such other information as may be
reasonably available and Landlord's determination thereof shall be conclusive.
Tenant agrees to pay, before delinquency, any and all taxes levied or
assessed during the term hereof upon Tenant's equipment, furniture, fixtures and
other personal property located in the Premises, including carpeting and other
property installed by Tenant notwithstanding that such carpeting or other
property has become a part of the Premises. If any of Tenant's personal
property shall be assessed with the Project, Tenant shall pay to Landlord, as
additional rent, the amount attributable to Tenant's personal property within
ten (10) days after receipt of a written statement from Landlord setting forth
the amount of such taxes, assessments and public charges attributable to
Tenant's personal property.
14. ENTRY BY LANDLORD
Landlord reserves, and shall at all reasonable times have, the right
to enter the Premises (i) to inspect the Premises, (ii) to supply services to be
provided by Landlord hereunder, (iii) to show the Premises to prospective
purchasers, lenders or tenants and to put 'for sale' or 'for lease' signs
thereon, (iv) to post notices required or allowed by this lease or by law, (v)
to alter, improve or repair the Premises and any portion of the Project, and
(vi) to erect scaffolding and other necessary structures in or through the
Premises or the Project where reasonably required by the character of the work
to be performed. Absent Landlord's gross negligence or willful misconduct,
Landlord shall not be liable in any manner for any inconvenience, disturbance,
loss of business, nuisance or other damage arising from Landlord's entry and
acts pursuant to this paragraph and Tenant shall not be entitled to an abatement
or
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reduction of rent if Landlord exercises any rights reserved in this paragraph.
For each of the foregoing purposes, Landlord shall at all times have and retain
a key with which to unlock all of the doors in, on and about the Premises
(excluding Tenant's vaults, safes and similar areas designated in writing by
Tenant in advance), and Landlord shall have the right to use any and all means
which Landlord may deem proper to open said doors in an emergency in order to
obtain entry to the Premises. Any entry by Landlord to the Premises pursuant to
this paragraph shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
Notwithstanding the foregoing, and except in the case of emergency
(such as fire or other similarly dangerous condition), Landlord shall give
Tenant at least twenty-four (24) hours prior notice of its intent to enter the
Premises, and such entry shall be subject to the reasonable security
requirements of Tenant (including that, Landlord must at all times be
accompanied by a Designated Representative (hereafter defined) of Tenant and, if
reasonably possible, during business hours. A Designated Representative shall
be a person on a list provided by Tenant to Landlord, and signed by the CEO of
Tenant. Said list shall be delivered to Landlord by the date Tenant takes
possession of the premises. This list may be modified from time to time in
writing by the CEO of the Tenant and such list shall provide no fewer than three
(3) names of Designated Representatives.
15. COMMON AREA; PARKING
Subject to the terms and conditions of this lease and such rules and
regulations as Landlord may from time to time prescribe, Tenant and Tenant's
employees and invitees shall, in common with other occupants of the Project, and
their respective employees and invitees and others entitled to the use thereof,
have the nonexclusive right to use the access roads, parking areas and
facilities within the Project provided and designated by Landlord for the
general use and convenience of the occupants of the Project which areas and
facilities shall include, but not be limited to, sidewalks, parking, refuse,
landscape and plaza areas, roofs and building exteriors, which areas and
facilities are referred to herein as "Common Area". This right shall terminate
upon the termination of this lease.
Landlord reserves the right from time to time to make changes in the
shape, size, location, amount and extent of the Common Area. Landlord shall
also have the right at any time to change the name, number or designation by
which the Project is commonly known. Landlord further reserves the right to
promulgate such rules and regulations relating to the use of the Common Area,
and any part thereof, as Landlord may deem appropriate for the best interests of
the occupants of the Project. The rules and regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant and Tenant shall abide by them
and cooperate in their observance. Such rules and regulations may be amended by
Landlord from time to time, with or without advance notice.
Tenant shall have the nonexclusive use of thirty-six (36) parking
spaces in the Common Area as designated from time to time by Landlord, six (6)
of which shall be labeled "Visitor," in a location mutually acceptable to both
Landlord and Tenant. Landlord reserves the right at its sole option to assign
and label parking spaces, but it is specifically agreed that
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Landlord is not responsible for policing any such parking spaces. Tenant shall
not at any time park or permit the parking of Tenant's trucks or other vehicles,
or the trucks or other vehicles of others, adjacent to loading areas so as to
interfere in any way with the use of such areas; nor shall Tenant at any time
park or permit the parking of Tenant's vehicles or trucks, or the vehicles or
trucks of Tenant's suppliers or others, in any portion of the Common Area not
designated by Landlord for such use by Tenant. Tenant shall not park or permit
any inoperative vehicle or equipment to be parked on any portion of the Common
Area.
Landlord shall operate, manage and maintain the Common Area. The
manner in which the Common Area shall be operated, managed and maintained and
the expenditures for such operation, management and maintenance shall be at the
sole discretion of Landlord. The cost of such maintenance, operation and
management of the Common Area, including but not limited to landscaping, repair
of paving, parking lots and sidewalks, security and exterminator services and
salaries and employee benefits (including union benefits) of on-site and
accounting personnel engaged in such maintenance and operations management,
shall be a common area charge and Tenant shall pay to Landlord its percentage
share of such costs as provided in paragraph 16.
16. COMMON AREA CHARGES
Tenant shall pay to Landlord, as additional rent, an amount equal to
31.19% of the total common area charges as defined below. Tenant's percentage
share of common area charges shall be paid as follows:
Tenant's estimated monthly payment of common area charges payable by
Tenant during the calendar year in which the term commences is set forth in
paragraph 4(b) of this lease. Prior to the commencement of each succeeding
calendar year of the term (or as soon as practicable thereafter), Landlord shall
deliver to Tenant a written estimate of Tenant's monthly payment of common area
charges. Tenant shall pay, as additional rent, on the first day of each month
during the term in accordance with paragraph 4(b) of the lease, its monthly
share of common area charges as estimated by Landlord. Within one hundred
twenty (120) days of the end of each calendar year and of the termination of
this lease (or as soon as practicable thereafter), Landlord shall deliver to
Tenant a statement of actual common area charges incurred for the preceding
year. If such statement shows that Tenant has paid less than its actual
percentage then Tenant shall on demand pay to Landlord the amount of such
deficiency. If Tenant fails to pay such deficiency due within ten (10) days
after demand, Tenant shall pay an additional five percent (5%) of the amount due
as a penalty. If such statement shows that Tenant has paid more than its actual
percentage share then Landlord shall, at its option, promptly refund such excess
to Tenant or credit the amount thereof to the rent next becoming due from
Tenant. Landlord reserves the right to revise any estimate of common area
charges if actual or projected common area charges show an increase or decrease
in excess of 10% from any earlier estimate for the same period. In such event,
Landlord shall deliver the revised estimate to Tenant, together with an
explanation of the reasons therefor, and Tenant shall revise its payments
accordingly. Landlord's and Tenant's obligation with respect to adjustments at
the end of the term or earlier expiration of this lease shall survive such
termination or expiration.
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As used in this lease, "common area charges" shall include, but not be
limited to, (i) all items identified in paragraphs 8, 9, 11, 12, 13 and 15 as
being common area charges; (ii) amortization of such capital improvements having
a useful life greater than one year as Landlord may have installed for the
purpose of reducing operating costs and/or except as set forth herein, to comply
with all laws, rules and regulations of federal, state, county, municipal and
other governmental authorities now or hereinafter in effect (Tenant's share of
any such capital improvement shall equal Tenant's proportionate share of the
fraction of the cost of such capital improvement equal to the remaining term of
the lease over the useful life of such capital improvement); (iii) salaries and
employee benefits (including union benefits) of personnel engaged in the
operation and maintenance of the Project (or the building in which the Premises
are located) and payroll taxes applicable thereto; (iv) supplies, materials,
equipment and tools used or required in connection with the operation and
maintenance of the Project; (v) licenses, permits and inspection fees; (vi) a
reasonable reserve for repairs and replacement of equipment used in the
maintenance and operation of the Project; (vii) all other operating costs
incurred by Landlord in maintaining and operating the Project; and (viii) an
amount equal to five percent (5%) of the actual expenditures for the aggregate
of all other common area charges as compensation for Landlord's accounting and
processing services (so long as the salaries of the persons performing such
services are not included as a specific common area charge).
Notwithstanding the above, Tenant's proportionate share of common area
charges shall not exceed the following:
1994 $ .059 per square foot per month
1995 $ .061 per square foot per month
1996 $ .063 per square foot per month
1997 $ .066 per square foot per month
Tenant's proportionate share of real estate taxes shall not exceed the
following:
1994 $ .062 per square foot per month
1995 $ .063 per square foot per month
1996 $ .065 per square foot per month
1997 $ .066 per square foot per month
17. DAMAGE BY FIRE; CASUALTY
In the event the Premises are damaged by any casualty which is covered
under an insurance policy required to be maintained by Landlord pursuant to
paragraph 11, Landlord shall be entitled to the use of all insurance proceeds
and shall repair such damage as soon as reasonably possible and this lease shall
continue in full force and effect.
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In the event the Premises are damaged by any casualty not covered
under an insurance policy required to be maintained pursuant to paragraph 11,
Landlord may, at Landlord's option, either (i) repair such damage, at Landlord's
expense, as soon as reasonably possible, in which event this lease shall
continue in full force and effect, or (ii) give written notice to Tenant within
thirty (30) days after the date of the occurrence of such damages of Landlord's
intention to cancel and terminate this lease as of the date of the occurrence of
the damages; provided, however, that if such damage is caused by an act or
omission of Tenant or its agent, servants or employees, then Tenant shall repair
such damage promptly at its sole cost and expense. In the event Landlord elects
to terminate this lease pursuant hereto, Tenant shall have the right within ten
(10) days after receipt of the required notice to notify Landlord in writing of
Tenant's intention to repair such damage at Tenant's expense, without
reimbursement from Landlord, in which event this lease shall continue in full
force and effect and Tenant shall proceed to make such repairs as soon as
reasonably possible. If Tenant does not give such notice within the ten (10)
day period, this lease shall be cancelled and terminated as of the date of the
occurrence of such damage. Under no circumstances shall Landlord be required to
repair any injury or damage to (by fire or other cause), or to make any
restoration or replacement of, any of Tenant's personal property, trade fixtures
or property leased from third parties, whether or not the same is attached to
the Premises.
If the Premises are totally destroyed during the term from any cause
(including any destruction required by any authorized public authority), whether
or not covered by the insurance required under paragraph 11, this lease shall
automatically terminate as of the date of such destruction, unless the parties
agree otherwise.
If the Premises are partially or totally destroyed or damaged and
Landlord or Tenant repair them pursuant to this lease, the rent payable
hereunder for the period during which such damage and repair continues shall be
abated only in proportion to the square footage of the Premises rendered
untenantable to Tenant by such damage or destruction. Tenant shall have no
claim against Landlord for any damage, loss or expense suffered by reason of any
such damage, destruction, repair or restoration. The parties waive the
provisions of California Civil Code sections 1932(2) and 1933(4) (which
provisions permit the termination of a lease upon destruction of the leased
premises), and hereby agree that the provisions of this paragraph 17 shall
govern in the event of such destruction.
18. INDEMNIFICATION
Landlord shall not be liable to Tenant and Tenant hereby waives all
claims against Landlord for any injury to or death of any person or damage to or
destruction of property in or about the Premises or the Project by or from any
cause whatsoever except the failure of Landlord to perform its obligations under
this lease where such failure has persisted for an unreasonable period of time
after notice of such failure and except Landlord's gross negligence or willful
misconduct. Without limiting the foregoing, Landlord shall not be liable to
Tenant for any injury to or death of any person or damages to or destruction of
property by reason of, or arising from, any latent defect in the Premises or
Project or the act or negligence of any other tenant of the Project. Tenant
shall immediately notify Landlord of any defect in the Premises or Project.
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Except as to injury to persons or damage to property the principal
cause of which is the failure by Landlord to observe any of the terms and
conditions of this lease or Landlord's gross negligence or willful misconduct,
Tenant shall hold Landlord harmless from and defend Landlord against any claim,
liability, loss, damage or reasonable expense (including attorney fees) arising
out of any injury to or death of any person or damage to or destruction of
property occurring in, on or about the Premises from any cause whatsoever or on
account of the use, condition, occupational safety or occupancy of the Premises.
Tenant shall further hold Landlord harmless from and defend Landlord against any
claim, liability, loss, damage or expense (including attorney fees) arising (i)
from Tenant's use of the Premises or from the conduct of its business or from
any activity or work done, permitted or suffered by Tenant or its agents or
employees in or about the Premises or Project, (ii) out of the failure of Tenant
to observe or comply with Tenant's obligation to observe and comply with laws or
other requirements as set forth in paragraph 7, (iii) by reason of Tenant's use,
handling, storage, or disposal of toxic or hazardous materials or waste, (iv) by
reason of any labor or service performed for, or materials used by or furnished
to, Tenant or any contractor engaged by Tenant with respect to the Premises, or
(v) from any other act, neglect, fault or omission of Tenant or its agents or
employees.
The provisions of this paragraph 18 shall survive the expiration or
earlier termination of this lease.
19. ASSIGNMENT AND SUBLETTING
Tenant shall not voluntarily assign, encumber or otherwise transfer
its interest in this lease or in the Premises, or sublease all or any part of
the Premises, or allow any other person or entity to occupy or use all or any
part of the Premises, without first obtaining Landlord's written consent, which
shall not be unreasonably withheld, and otherwise complying with the
requirements of this paragraph 19. Any assignment, encumbrance or sublease
without Landlord's consent, shall constitute a default.
If Tenant desires to sublet or assign all or any portion of the
Premises, Tenant shall give Landlord written notice thereof, specifying the
projected commencement date of the proposed sublet or assignment (which date
shall be not less than fifteen (15) days or more than one hundred twenty (120)
days after the date of Landlord's receipt of such notice), the portions of the
Premises proposed to be sublet or assigned, the terms and conditions of the
proposed assignment or sublease (including the rent to be paid by the proposed
assignee or subtenant) and the name, address and telephone number of the
proposed assignee or subtenant. Tenant shall further provide Landlord with such
other information concerning the proposed assignee or subtenant as requested by
Landlord.
If Landlord consents in writing to the proposed assignment or sublet,
Tenant shall be free to assign or sublet all or a portion of the Premises
subject to the following conditions: (i) any sublease shall be on the same terms
set forth in the notice given to Landlord; (ii) no sublease shall be valid and
no subtenant shall take possession of the sublet premises until an executed
counterpart of such sublease has been delivered to Landlord; (iii) no subtenant
shall have a further right to sublet; (iv) fifty percent (50%) of any sums or
other economic consideration received by Tenant as a result of such assignment
or sublet (except rental or other
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payments received which are attributable to the amortization over the term of
this lease of the cost of leasehold improvements constructed for such assignees
or subtenant), whether denominated rentals or otherwise, less brokerage fees,
which exceed, in the aggregate, the total sums which Tenant is obligated to pay
Landlord under this lease (prorated to reflect obligations allocable to that
portion of the Premises subject to such sublease), shall be payable to Landlord
as additional rent under this lease without affecting or reducing any other
obligation of Tenant hereunder; (v) no sublet or assignment shall release Tenant
of Tenant's obligation or alter the primary liability of Tenant to pay the rent
and to perform all other obligations to be performed by Tenant hereunder; and
(vi) any assignee or subtenant must expressly agree to assume and perform all of
the covenants and conditions of Tenant under this lease. Tenant shall pay to
Landlord promptly upon demand as additional rent, Landlord's actual attorneys'
fees and other reasonable costs incurred for reviewing, processing or
documenting any requested assignment or sublease, whether or not Landlord's
consent is granted. Tenant shall not be entitled to assign this lease or
sublease all or any part of the Premises (and any attempt to do so shall be
voidable by Landlord) during any period in which Tenant is in default under this
lease.
If Tenant is a partnership, a withdrawal or change, voluntary or
involuntary or by operation of law, of any general partner or the dissolution of
the partnership shall be deemed an assignment of this lease subject to all the
conditions of this paragraph 19. If Tenant is a corporation any dissolution,
merger, consolidation or other reorganization of Tenant or the sale or other
transfer of a controlling percentage of the capital stock of Tenant or the sale
of more than fifty percent (50%) of the value of Tenant's assets shall be an
assignment of this lease subject to all the conditions of this paragraph 19.
The term "controlling percentage" means the ownership of, and the right to vote,
stock possessing more than 50% of the total combined voting power of all classes
of Tenant's capital stock issued, outstanding and entitled to vote. This
paragraph shall not apply if Tenant is a corporation the stock of which is
traded through an exchange.
The acceptance of rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provision hereof. Consent to one
assignment or sublet shall not be deemed consent to any subsequent assignment or
sublet. In the event of default by any assignee of Tenant or any successor of
Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
such assignee or successor. Landlord may consent to subsequent assignments or
sublets of this lease or amendments or modifications to this lease with
assignees of Tenant, with notice to Tenant, or any successor of Tenant, and
obtaining Tenant's consent thereto and such action shall not relieve Tenant of
liability under this lease.
No interest of Tenant in this lease shall be assignable by operation
of law (including, without limitation, the transfer of this lease by testacy or
intestacy). Each of the following acts shall be considered an involuntary
assignment: (i) if Tenant is or becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors or institutes a proceeding under the
Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a partnership
or consists of more than one person or entity, if any partner of the partnership
or other person or entity is or becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors; (ii) if a writ of attachment or
execution is levied on this lease; or (iii) if, in any proceeding or action to
which Tenant is a party, a receiver is appointed with authority to take
possession of the
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Premises. An involuntary assignment shall constitute a default by Tenant and
Landlord shall have the right to elect to terminate this lease, in which case
this lease shall not be treated as an asset of Tenant.
Tenant immediately and irrevocably assigns to Landlord, as security
for Tenant's obligations under this lease, all rent from any subletting of all
or a part of the Premises as permitted by this lease, and Landlord, as assignee
and as attorney-in-fact for Tenant, or a receiver of Tenant appointed on
Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this lease; except that, until the occurrence of an act or
default by Tenant, Tenant shall have the right to collect such rent, subject to
promptly forwarding to Landlord any portion thereof to which Landlord is
entitled pursuant to this paragraph 19.
Notwithstanding the above requirement that Tenant obtain the consent
of Landlord prior to any assignment or sublet, Tenant may, without obtaining the
prior consent of Landlord, assign or sublease the whole or any part of the
Premises, or sell or transfer a controlling percentage of the capital stock of
Tenant or sell more than fifty percent (50%) of the value of Tenant's assets, to
any corporation or other entity which is wholly owned by Tenant or of which
Tenant is a wholly owned subsidiary, or which is wholly-owned by either of the
foregoing, provided that (i) Tenant shall give written notice thereof to
Landlord in the manner required for other assignments or subleases by this
paragraph 19; (ii) Tenant shall continue to be fully obligated under this lease;
(iii) any such assignee or sublessee shall expressly assume and agree to perform
all the terms and conditions of this lease to be performed by Tenant; and (iv)
any such assignment or sublet shall be subject to all other terms and conditions
of this paragraph 19 pertaining to assignments and/or sublets (excepting only
the requirement concerning prior written consent of Landlord).
20. DEFAULT
The occurrence of any of the following shall constitute a default by
Tenant: (i) failure of Tenant to pay any rent or other sum payable hereunder
within five (5) days of when due (provided, however, once per lease year, Tenant
shall be entitled to written notice from Landlord of Tenant's failure to make
the foregoing payments and Tenant shall not be in default until five (5) days
after the date that Landlord gives Tenant such notice); (ii) abandonment of the
Premises (Tenant's failure to occupy and conduct business in the Premises for
fourteen (14) consecutive days shall be deemed an abandonment) and Tenant has
defaulted under (i) above; or (iii) failure of Tenant to perform any other term,
covenant or condition of this lease if the failure to perform is not cured
within thirty (30) days after notice thereof has been given to Tenant (provided
that if such default cannot reasonably be cured within thirty (30) days, Tenant
shall not be in default if Tenant commences to cure such failure to perform
within the thirty (30) day period and diligently and in good faith continues to
cure the failure to perform). Notwithstanding the above, prior to Landlord
instituting an unlawful detainer action, Landlord shall give Tenant the
requisite three days' notice, in writing, as required by California Code of
Civil Procedures Section 1161. The notice referred to in clause (iii) above
shall specify the failure to perform and the applicable lease provision and
shall demand that Tenant perform the provisions of this lease within the
applicable period of time. No notice shall be deemed a forfeiture or
termination of this lease unless Landlord so elects in the notice. No notice
shall be required in the event of abandonment or vacation of the Premises.
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In addition to the above, the occurrence of any of the following
events shall also constitute a default by Tenant: (i) Tenant fails generally to
pay its debts as they become due or admits in writing its inability to pay its
debts, or makes a general assignment for the benefit of creditors (for purposes
of determining whether Tenant is not paying its debts as they become due, a debt
shall be deemed overdue upon the earliest to occur of the following: ninety (90)
days from the date a statement therefor has been rendered; the date on which any
action or proceeding therefor is commenced; or the date on which a formal notice
of default or demand has been sent); (ii) Tenant fails to furnish to Landlord a
schedule of Tenant's aged accounts payable within thirty (30) days after
Landlord's written request; (iii) any financial statements given to Landlord by
Tenant, any assignee of Tenant, subtenant of Tenant, any guarantor of Tenant, or
successor in interest of Tenant (including, without limitation, any schedule of
Tenant's aged accounts payable) are materially false; or (iv) any financial
statement or other financial information furnished by Tenant pursuant to the
provisions of this lease or at the request of Landlord evidences that either
Tenant's net worth or its net assets are at least twenty-five percent (25%) less
than the net worth or net assets shown in either the immediately prior financial
statement or the financial statement of Tenant furnished at the time of
execution of this lease, and Tenant fails to furnish promptly to Landlord, after
notice from Landlord to Tenant, an additional security deposit in cash
equivalent to the aggregate of the basic rent and common area charges (without
regard to any rent abatement) payable hereunder for the twelve (12) full
calendar months immediately preceding such notice. At any time during the term
of this lease, but no more than once per calendar year, Landlord, at Landlord's
option, shall have the right to receive from Tenant, upon Landlord's request, a
current annual balance sheet for Landlord's review. If the balance sheet shows
a negative net worth, Landlord may terminate this lease by giving Tenant sixty
(60) days prior written notice.
In the event of a default by Tenant, then Landlord, in addition to any
other rights and remedies of Landlord at law or in equity, shall have the right
either to terminate Tenant's right to possession of the Premises (and thereby
terminate this lease) or, from time to time and without termination of this
lease, to relet the Premises or any part thereof for the account and in the name
of Tenant for such term and on such terms and conditions as Landlord in its sole
discretion may deem advisable, with the right to make alterations and repairs to
the Premises.
Should Landlord elect to keep this lease in full force and effect,
Landlord shall have the right to enforce all of Landlord's rights and remedies
under this lease, including but not limited to the right to recover and to relet
the Premises and such other rights and remedies as Landlord may have under
California Civil Code Section 1951.4 (or successor Code section) or any other
California statute. If Landlord relets the Premises, then Tenant shall pay to
Landlord, as soon as ascertained, the costs and expenses incurred by Landlord in
such reletting and in making alterations and repairs. Rentals received by
Landlord from such reletting shall be applied (i) to the payment of any
indebtedness due hereunder, other than basic rent and common area charges, from
Tenant to Landlord; (ii) to the payment of the cost of any repairs necessary to
return the Premises to good condition normal wear and tear excepted, including
the cost of alterations and the cost of storing any of Tenant's property left on
the Premises at the time of reletting; and (iii) to the payment of basic rent or
common area charges due and unpaid hereunder. The residue, if any, shall be
held by Landlord and applied in payment of future rent or damages in the event
of termination as the same may become due and payable hereunder and the balance,
if any at the end of the term of this lease, shall be paid to Tenant. Should
the basic
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rent and common area charges received from time to time from such reletting
during any month be less than that agreed to be paid during that month by Tenant
hereunder, Tenant shall pay such deficiency to Landlord. Such deficiency shall
be calculated and paid monthly. No such reletting of the Premises by Landlord
shall be construed as an election on its part to terminate this lease unless a
notice of such intention is given to Tenant or unless the termination hereof is
decreed by a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Landlord may at any time thereafter elect to terminate this
lease for such previous breach, provided it has not been cured.
Should Landlord at any time terminate this lease for any breach, in
addition to any other remedy it may have, it shall have the immediate right of
entry and may remove all persons and property from the Premises and shall have
all the rights and remedies of a landlord provided by California Civil Code
Section 1951.2 or any successor code section. Upon such termination, in
addition to all its other rights and remedies, Landlord shall be entitled to
recover from Tenant all damages it may incur by reason of such breach, including
the cost of recovering the Premises and including (i) the worth at the time of
award of the unpaid rent which had been earned at the time of termination; (ii)
the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
lease or which in the ordinary course of events would be likely to result
therefrom. The "worth at the time of award" of the amounts referred to in (i)
and (ii) above is computed by allowing interest at the rate of twelve percent
(12%) per annum. The "worth at the time of award" of the amount referred to in
(iii) above shall be computed by discounting such amount at the discount rate of
the federal reserve bank of San Francisco at the time of award plus one percent
(1%). Tenant waives the provisions of Section 1179 of the California Code of
Civil Procedure (which Section allows Tenant to petition of court of competent
jurisdiction for relief against forfeiture of this lease). Property removed
from the Premises may be stored in a public or private warehouse or elsewhere at
the sole cost and expense of Tenant. In the event that Tenant shall not
immediately pay the cost of storage of such property after the same has been
stored for a period of thirty (30) days or more, Landlord may sell any or all
thereof at a public or private sale in such manner and at such times and places
that Landlord, in its sole discretion, may deem proper, after notice to Tenant.
21. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
Landlord, at any time after Tenant commits a default, may, but shall
not be obligated to, cure the default at Tenant's cost. If Landlord at any
time, by reason of Tenant's default, pays any sum or does any act that requires
the payment of any sum, the sum paid by Landlord shall be due immediately from
Tenant to Landlord and shall bear interest at the rate of twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less, from the date
the sum is paid by Landlord until Landlord is reimbursed by Tenant. Amounts due
Landlord hereunder shall be additional rent.
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22. EMINENT DOMAIN
If all or any part of the Premises shall be taken by any public or
quasi-public authority under the power of eminent domain or conveyance in lieu
thereof, this lease shall terminate as to any portion of the Premises so taken
or conveyed, and any portion rendered untenantable as a result of such taking or
conveyance on the date when title vests in the condemnor, and Landlord shall be
entitled to any and all payments, income, rent, award or any interest therein
whatsoever which may be paid or made in connection with such taking or
conveyance. Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this lease. Notwithstanding the foregoing,
Tenant shall be entitled to any compensation for depreciation to and cost of
removal of Tenant's compensation for its relocation expenses necessitated by
such taking, but in each case only to the extent the condemning authority makes
a separate award therefor or specifically identifies a portion of the award as
being therefor. Each party waives the provisions of Section 1265.130 of the
California Code of Civil Procedure (which section allows either party to
petition the Superior Court to terminate this lease in the event of a partial
taking of the Premises).
If any action or proceeding is commenced for such taking of the
Premises or any portion thereof or of any other space in the Project, or if
Landlord is advised in writing by any entity or body having the right or power
of condemnation of its intention to condemn the Premises or any portion thereof
or of any other space in the Project, and Landlord shall decide to discontinue
the use and operation of the Project or decide to demolish, alter or rebuild the
Project, then Landlord shall have the right to terminate this lease by giving
Tenant written notice thereof within sixty (60) days of the earlier of the date
of Landlord's receipt of such notice of intention to condemn or the commencement
of said action or proceeding. Such termination shall be effective as of the
last day of the calendar month next following the month in which such notice is
given or the date on which title shall vest in the condemnor, whichever occurs
first.
In the event of a partial taking, or conveyance in lieu thereof, of
the Premises and fifty percent (50%) or more of the number of square feet in the
Premises are taken, or rendered untenantable, then Tenant may terminate this
lease. Any election by Tenant to so terminate shall be by written notice given
to Landlord within sixty (60) days from the date of such taking or conveyance
and shall be effective on the last day of the calendar month next following the
month in which such notice is given or the date on which title shall vest in the
condemnor, whichever occurs first.
If a portion of the Premises is taken by power of eminent domain or
conveyance in lieu thereof and neither Landlord nor Tenant terminates this lease
as provided above, then this lease shall continue in full force and effect as to
the part of the Premises not so taken or conveyed and all payments of rent shall
be apportioned as of the date of such taking or conveyance so that thereafter
the amounts to be paid by Tenant shall be in the ratio that the area of the
portion of the Premises not so taken bears to the total area of the Premises
prior to such taking.
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23. NOTICE AND COVENANT TO SURRENDER
On the last day of the term or on the effective date of any earlier
termination, Tenant shall surrender to Landlord the Premises in its condition
existing as of the commencement of the term and, except as otherwise provided by
Landlord pursuant to the terms of paragraph 8 of this lease, all of the
improvements and alterations made to the Premises in their condition existing as
of the date of completion of construction and/or installation (normal wear and
tear excepted). On or prior to the last day of the term or the effective date
of any earlier termination, Tenant shall remove all of Tenant's personal
property and trade fixtures, together with improvements or alterations that
Tenant is obligated to remove pursuant to the provisions of paragraph 8 of this
lease, from the Premises, and all such property not removed shall be deemed
abandoned. In addition, on or prior to the expiration or earlier termination of
this lease, Tenant shall remove, at Tenant's sole cost and expense, all
telephone, other communication, computer and any other cabling and wiring of any
sort installed in the space above the suspended ceiling of Premises or anywhere
else in the Premises and shall promptly repair any damage to the suspended
ceiling, lights, light fixtures, walls and any other part of the Premises
resulting from such removal.
If the Premises are not surrendered as required in this paragraph,
Tenant shall indemnify Landlord against all loss, liability and reasonable
expense (including but not limited to, attorney fees) resulting from the failure
by Tenant in so surrendering the Premises, including, without limitation, any
claims made by any succeeding tenants. It is agreed between Landlord and Tenant
that the provisions of this paragraph shall survive termination of this lease.
24. TENANT'S QUITCLAIM
At the expiration or earlier termination of this lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days after written
demand from Landlord to Tenant, any quitclaim deed or other document required to
remove the cloud or encumbrance created by this lease from the real property of
which the Premises are a part. This obligation shall survive said expiration or
termination.
25. HOLDING OVER
Any holding over after the expiration or termination of this lease
with the written consent of Landlord shall be construed to be a tenancy from
month to month at the monthly rent in effect on the date of such expiration or
termination. All provisions of this lease, except those pertaining to the term
and any option to extend, shall apply to the month to month tenancy. The
provisions of this paragraph are in addition to, and do not affect, Landlord's
right of reentry or other rights hereunder or provided by law.
If Tenant shall retain possession of the Premises or any part thereof
without Landlord's consent following the expiration or sooner termination of
this lease for any reason, then Tenant shall pay to Landlord for each day of
such retention one hundred fifty percent (150%) of the amount of the daily
rental in effect during the last month prior to the date of such expiration or
termination. Tenant shall also indemnify and hold Landlord harmless from any
loss, liability and reasonable expense (including, but not limited to, attorneys
fees) resulting from
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delay by Tenant in surrendering the Premises, including without limitation any
claims made by any succeeding tenant founded on such delay. Acceptance of rent
by Landlord following expiration or termination shall not constitute a renewal
of this lease, and nothing contained in this paragraph shall waive Landlord's
right of re-entry or any other right. Tenant shall be only a Tenant at
sufferance, whether or not Landlord accepts any rent from Tenant, while Tenant
is holding over without Landlord's written consent.
26. SUBORDINATION
In the event Landlord's title or leasehold interest is now or
hereafter encumbered in order to secure a loan to Landlord, Tenant shall, at the
request of Landlord or the lender, execute in writing an agreement subordinating
its rights under this lease to the lien of such encumbrance, or, if so
requested, agreeing that the lien of lender's encumbrance shall be or remain
subject and subordinate to the rights of Tenant under this lease.
Notwithstanding any such subordination, Tenant's possession under this lease
shall not be disturbed if Tenant is not in default and so long as Tenant shall
pay all amounts due hereunder and otherwise observe and perform all provisions
of this lease. In addition, if in connection with any such loan the lender
shall request reasonable modifications of this lease as a condition to such
financing, Tenant will not unreasonably withhold, delay or defer its consent
thereof, provided that such modifications do not increase the obligations of
Tenant hereunder or materially adversely affect the leasehold interest hereby
created or Tenant's rights hereunder.
27. CERTIFICATE OF ESTOPPEL
Each party shall, within five (5) calendar days after request
therefor, execute and deliver to the other party, in recordable form, a
certificate stating that the lease is unmodified and in full force and effect,
or in full force and effect as modified and stating the modifications. The
certificate shall also state the amount of the monthly rent, the date to which
monthly rent has been paid in advance, the amount of the security deposit and/or
prepaid monthly rent, and shall include such other items as Landlord or
Landlord's lender or Tenant or Tenant's lender, as the case may be, may
reasonably request. Failure to deliver such certificate within such time shall
constitute a conclusive acknowledgment by the party failing to deliver the
certificate that the lease is in full force and effect and has not been modified
except as may be represented by the party requesting the certificate. Any such
certificate requested by Landlord may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises or Project. Further,
within five (5) calendar days following written request made by Landlord in
connection with any request by any lender, prospective lender or prospective
purchaser or encumbrancer of the Premises or the Project, Tenant shall furnish
to Landlord current financial statements of Tenant provided that such statements
are and will be held by such parties as strictly confidential and shall not be
disclosed to any other third party.
28. SALE BY LANDLORD
In the event the original Landlord hereunder, or any successor owner
of the Project or Premises, shall sell or convey the Project or Premises, all
liabilities and obligations on the part of the original Landlord, or such
successor owner, under this lease accruing thereafter shall terminate, and
thereupon all such liabilities and obligations shall be binding upon the new
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owner. Tenant agrees to attorn to such new owner and to look solely to such new
owner for performance of any and all such liabilities and obligations.
29. ATTORNMENT TO LENDER OR THIRD PARTY
In the event the interest of Landlord in the land and buildings in
which the Premises are located (whether such interest of Landlord is a fee title
interest or a leasehold interest) is encumbered by deed of trust, and such
interest is acquired by a lender or any other third party through judicial
foreclosure or by exercise of a power of sale at private trustee's foreclosure
sale, Tenant hereby agrees to release Landlord of any obligation arising on or
after any such foreclosure sale and to attorn to the purchaser at any such
foreclosure sale and to recognize such purchaser as the Landlord under this
lease.
30. DEFAULT BY LANDLORD
Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within a reasonable time, but in no event
earlier than thirty (30) days after written notice by Tenant to Landlord
specifying wherein Landlord has failed to perform such obligations; provided,
however, that if the nature of Landlord's obligations is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
If Landlord is in default of this lease, Tenant's sole remedy shall be
to institute suit against Landlord in a court of competent jurisdiction, and
Tenant shall have no right to offset any sums expended by Tenant as a result of
Landlord's default against future rent and other sums due and payable pursuant
to this lease. If Landlord is in default of this lease, and as a consequence
Tenant recovers a money judgment against Landlord, the judgment shall be
satisfied only out of the proceeds of sale received on execution of the judgment
and levy against the right, title and interest of Landlord in the Project of
which the Premises are a part, and out of rent or other income from such real
property receivable by Landlord or out of the consideration received by Landlord
from the sale or other disposition of all or any part of Landlord's right, title
and interest in the Project of which the Premises are a part. Neither Landlord
nor any of the partners comprising the partnership designated as Landlord shall
be personally liable for any deficiency.
31. CONSTRUCTION CHANGES
It is understood that the description of the Premises and the location
of ductwork, plumbing and other facilities therein are subject to such changes
as Landlord or Landlord's architect determines to be desirable in the course of
construction of the Premises and/or the improvements constructed or being
constructed therein, and no such changes or any changes in plans for any other
portions of the Project, shall affect this lease or entitle Tenant to any
reduction of rent hereunder or result in any liability of Landlord to Tenant,
provided that such change shall not materially reduce the square footage of the
Premises or the suitability of the Premises for Tenant's use.
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32. MEASUREMENT OF PREMISES
Tenant understands and agrees that any reference to square footage of
the Premises is approximate only and includes all interior partitions and
columns, one-half of exterior walls, and one-half of the partitions separating
the Premises from the rest of the Project, Tenant's proportionate share of the
Common Area and, if applicable, covered areas immediately outside the entry
doors or loading docks. Tenant waives any claim against Landlord regarding the
accuracy of any such measurement and agrees that there shall not be any
adjustment in basic rent or common area charges or other amounts payable
hereunder by reason of inaccuracies in such measurement.
33. ATTORNEY FEES
If either party commences an action against the other party arising
out of or in connection with this lease, the prevailing party shall be entitled
to have and recover from the losing party all expenses of litigation, including,
without limitation, travel expenses, attorney fees, expert witness fees, trial
and appellate court costs, and deposition and transcript expenses. If either
party becomes a party to any litigation concerning this lease, or concerning the
Premises or the Project, by reason of any act or omission of the other party or
its authorized representatives, the party that causes the other party to become
involved in the litigation shall be liable to the other party for all expenses
of litigation, including, without limitation, travel expenses, attorney fees,
expert witness fees, trial and appellate court costs, and deposition and
transcript expenses.
34. SURRENDER
The voluntary or other surrender of this lease or the Premises by
Tenant, or a mutual cancellation of this lease, shall not work a merger, and at
the option of Landlord shall either terminate all or any existing subleases or
subtenancies or operate as an assignment to Landlord of all or any such
subleases or subtenancies.
35. WAIVER
No delay or omission in the exercise of any right or remedy of
Landlord on any default by Tenant shall impair such right or remedy or be
construed as a waiver. The receipt and acceptance by Landlord of delinquent
rent or other payments shall not constitute a waiver of any other default and
acceptance of partial payments shall not be construed as a waiver of the balance
of such payment due. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute an
acceptance of the surrender of the Premises by Tenant before the expiration of
the term. Only a written notice from Landlord to Tenant shall constitute
acceptance of the surrender of the Premises and accomplish a termination of this
lease. Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of this
lease.
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36. EASEMENTS; AIRSPACE RIGHTS
Landlord reserves the right to alter the boundaries of the Project and
grant easements and dedicate for public use portions of the Project without
Tenant's consent, provided that no such grant or dedication shall interfere with
Tenant's use of the Premises or otherwise cause Tenant to incur cost or expense.
From time to time, and upon Landlord's demand, Tenant shall execute, acknowledge
and deliver to Landlord, in accordance with Landlord's instructions, any and all
documents, instruments, maps or plats necessary to effectuate Tenant's covenants
hereunder.
This lease confers no rights either with regard to the subsurface of
or airspace above the land on which the Project is located or with regard to
airspace above the building of which the Premises are a part. Tenant agrees
that no diminution or shutting off of light or view by a structure which is or
may be erected (whether or not by Landlord) on property adjacent to the building
of which the Premises are a part or to property adjacent thereto, shall in any
way affect this lease, or entitle Tenant to any reduction of rent, or result in
any liability of Landlord to Tenant.
37. RULES AND REGULATIONS
Landlord shall have the right from time to time to promulgate rules
and regulations for the safety, care and cleanliness of the Premises, the
Project and the Common Area, or for the preservation of good order. On delivery
of a copy of such rules and regulations to Tenant, Tenant shall comply with the
rules and regulations, and a violation of any of them shall constitute a default
by Tenant under this lease. If there is a conflict between the rules and
regulations and any of the provisions of this lease, the provisions of this
lease shall prevail. Such rules and regulations may be amended by Landlord from
time to time with or without advance notice.
38. NOTICES
All notices, demands, requests, consents and other communications
which may be given or are required to be given by either party to the other
shall be in writing and shall be sufficiently made and delivered if personally
served or if sent by United States first class mail, postage prepaid. Prior to
the commencement date, all such communications from Landlord to Tenant shall be
served or addressed to Tenant at 10690 Castine Avenue, Cupertino, California
95014; on or after the commencement date all such communications from Landlord
to Tenant shall be addressed to Tenant at the Premises. All such communications
by Tenant to Landlord shall be sent to Landlord at its offices at 3945 Freedom
Circle, Suite 640, Santa Clara, California 95054. Either party may change its
address by notifying the other of such change. Each such communication shall be
deemed received on the date of the personal service or mailing thereof in the
manner herein provided, as the case may be.
39. NAME
Tenant shall not use the name of the Project for any purpose, other
than as the address of the business conducted by Tenant in the Premises, without
the prior written consent of Landlord.
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40. GOVERNING LAW; SEVERABILITY
This lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of this
lease shall be held or rendered invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full force
and effect.
41. DEFINITIONS
As used in this lease, the following words and phrases shall have the
following meanings:
Authorized representative: any officer, agent, employee or
-------------------------
independent contractor retained or employed by either party, acting within
authority given him by that party.
Encumbrance: any deed of trust, mortgage or other written security
-----------
device or agreement affecting the Premises or the Project that constitutes
security for the payment of a debt or performance of an obligation, and the note
or obligation secured by such deed of trust, mortgage or other written security
device or agreement.
Lease month: the period of time determined by reference to the day of
-----------
the month in which the term commences and continuing to one day short of the
same numbered day in the next succeeding month; e.g., the tenth day Of one month
to and including the ninth day in the next succeeding month.
Lender: the beneficiary, mortgagee or other holder of an encumbrance,
------
as defined above.
Lien: a charge imposed on the Premises by someone other than Landlord,
----
by which the Premises are made security for the performance of an act. Most of
the liens referred to in this lease are mechanic's liens.
Maintenance: repairs, replacement, repainting and cleaning.
-----------
Monthly Rent: the sum of the monthly payments of basic rent and
------------
common area charges.
Person: one or more human beings, or legal entities or other
------
artificial persons, including, without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human being and legal
entities.
Provision: any term, agreement, covenant, condition, clause,
---------
qualification, restriction, reservation or other stipulation in the lease that
defines or otherwise controls, establishes or limits the performance required or
permitted by either party.
Rent: basic rent, common area charges, additional rent, and all other
----
amounts payable by Tenant to Landlord required by this lease or arising by
subsequent actions of the parties made pursuant to this lease.
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Words used in any gender include other genders. If there be more than
one Tenant, the obligations of Tenant hereunder are joint and several. All
provisions whether covenants or conditions, on the part of Tenant shall be
deemed to be both covenants and conditions. The paragraph headings are for
convenience of reference only and shall have no effect upon the construction or
interpretation of any provision hereof.
42. TIME
Time is of the essence of this lease and of each and all of its
provisions.
43. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
Any amount due from Tenant to Landlord hereunder which is not paid
within five (5) days of when due shall bear interest at the rate of ten percent
(10%) per annum from when due until paid, unless otherwise specifically provided
herein, but the payment of such interest shall not excuse or cure any default by
Tenant under this lease. In addition, Tenant acknowledges that late payment by
Tenant to Landlord of basic rent or common area charges or of any other amount
due Landlord from Tenant, will cause Landlord to incur costs not contemplated by
this lease, the exact amount of such costs being extremely difficult and
impractical to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord, e.g., by
the terms of any encumbrance and note secured by any encumbrance covering the
Premises. Therefore, if any such payment due from Tenant is not received by
Landlord within five (5) days of when due, Tenant shall pay to Landlord an
additional sum of five percent (5%) of the overdue payment as a late charge.
The parties agree that this late charge represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's
default with respect to the overdue amount, nor prevent Landlord from exercising
any of the other rights and remedies available to Landlord. No notice to Tenant
of failure to pay shall be required prior to the imposition of such interest
and/or late charge, and any notice period provided for in paragraph 20 shall not
affect the imposition of such interest and/or late charge. Any interest and
late charge imposed pursuant to this paragraph shall be and constitute
additional rent payable by Tenant to Landlord.
44. ENTIRE AGREEMENT
This lease, including any exhibits and attachments, constitutes the
entire agreement between Landlord and Tenant relative to the Premises and this
lease and the exhibits and attachments may be altered, amended or revoked only
by an instrument in writing signed by both Landlord and Tenant. Landlord and
Tenant agree hereby that all prior or contemporaneous oral agreements between
and among themselves or their agents or representatives relative to the leasing
of the Premises are merged in or revoked by this lease.
45. CORPORATE AUTHORITY
If Tenant is a corporation, each individual executing this lease on
behalf of the corporation represents and warrants that he is duly authorized to
execute and deliver this lease on behalf of the corporation in accordance with a
duly adopted resolution of the Board of Directors of said corporation and that
this lease is binding upon said corporation in accordance with its
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terms. If Tenant is a corporation, Tenant shall deliver to Landlord, within ten
(10) days of the execution of this lease, a copy of the resolution of the Board
of Directors of Tenant authorizing the execution of this lease and naming the
officers that are authorized to execute this lease on behalf of Tenant, which
copy shall be certified by Tenant's president or secretary as correct and in
full force and effect.
46. RECORDING
Neither Landlord nor Tenant shall record this lease or a short form
memorandum hereof without the consent of the other.
47. REAL ESTATE BROKERS
Each party represents and warrants to the other party that it has not
had dealings in any manner with any real estate broker, finder or other person
with respect to the Premises and the negotiation and execution of this lease
except Wayne Mascia Associates. Except as to commissions and fees to be paid as
provided in this paragraph, each party shall indemnify and hold harmless the
other party from all damage, loss, liability and expense (including attorneys'
fees and related costs) arising out of or resulting from any claims for
commissions or fees that may or have been asserted against the other party by
any broker, finder or other person with whom Tenant or Landlord has or
purportedly has dealt with in connection with the Premises and the negotiation
and execution of this lease. To the extent agreed to between Landlord and Wayne
Mascia Associates, Landlord shall pay all broker leasing commissions to Wayne
Mascia Associates incurred in connection with the Premises and the negotiation
and execution of this lease; Landlord and Tenant agree that Landlord shall not
be obligated to pay any broker leasing commissions, consulting fees, finder fees
or any other fees or commissions arising out of or relating to any extended term
of this lease or to any expansion or relocation of the Premises at any time.
48. EXHIBITS AND ATTACHMENTS
All exhibits and attachments to this lease are a part hereof
49. ENVIRONMENTAL MATTERS
A. Tenant's Covenants Regarding Hazardous Materials.
------------------------------------------------
(1) Hazardous Materials Handling. Tenant, its agents, invitees,
----------------------------
employees, contractors, sublessees, assigns and/or successors shall not use,
store, dispose, release or otherwise cause to be present or permit the use,
storage, disposal, release or presence of Hazardous Materials (as defined below)
on or about the Premises or Project. As used herein "Hazardous Materials" shall
mean any petroleum or petroleum byproducts, flammable explosives, asbestos, urea
formaldehyde, radioactive materials or waste and any "hazardous substance",
"hazardous waste", "hazardous materials", "toxic substance" or "toxic waste" as
those terms are defined under the provisions of the California Health and Safety
Code and/or the provisions of the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), as amended by
the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. Section 9601
et seq.), or any other hazardous or toxic
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substance, material or waste which is or becomes regulated by any local
governmental authority, the State of California or any agency thereof, or the
United States Government or any agency thereof.
(2) Notices. Tenant shall immediately notify Landlord in
-------
writing of: (i) any enforcement, cleanup, removal or other governmental or
regulatory action instituted, completed or threatened pursuant to any law,
regulation or ordinance relating to the industrial hygiene, environmental
protection or the use, analysis, generation, manufacture, storage, presence,
disposal or transportation of any Hazardous Materials (collectively "Hazardous
Materials Laws"); (ii) any claim made or threatened by any person against
Tenant, the Premises, Project or buildings within the Project relating to
damage, contribution, cost recovery, compensation, loss or injury resulting from
or claimed to result from any Hazardous Materials; and (iii) any reports made to
any environmental agency arising out of or in connection with any Hazardous
Materials in, on or removed from the Premises, Project or buildings within the
Project, including any complaints, notices, warnings, reports or asserted
violations in connection therewith. Tenant shall also supply to Landlord as
promptly as possible, and in any event within five (5) business days after
Tenant first receives or sends the same, with copies of all claims, reports,
complaints, notices, warnings or asserted violations relating in any way to the
Premises, Project or buildings within the Project or Tenant's use thereof.
Tenant shall promptly deliver to Landlord copies of hazardous waste manifests
reflecting the legal and proper disposal of all Hazardous Materials removed from
the Premises.
B. Indemnification of Landlord. Tenant shall indemnify, defend (by
---------------------------
counsel acceptable to Landlord), protect, and hold Landlord, and each of
Landlord's partners, employees, agents, attorneys, successors and assigns, free
and harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees) for death of or
injury to any person or damage to any property whatsoever (including water
tables and atmosphere), arising from or caused in whole or in part, directly or
indirectly, by (i) the presence in, on, under or about the Premises, Project or
buildings within the Project or discharge in or from the Premises, Project or
buildings within the Project of any Hazardous Materials or Tenant's use,
analysis, storage, transportation, disposal, release, threatened release,
discharge or generation of Hazardous Materials to, in, on, under, about or from
the Premises, Project or buildings within the Project, or (ii) Tenant's failure
to comply with any Hazardous Materials Laws whether knowingly, unknowingly,
intentionally or unintentionally. Tenant's obligations hereunder shall include,
without limitation, and whether foreseeable or unforeseeable, all costs of any
required or necessary repair, cleanup or detoxification or decontamination of
the Premises, Project or buildings within the Project, and the preparation and
implementation of any closure remedial action or other required plans in
connection therewith. In addition, Tenant shall reimburse Landlord for (i)
losses in or reductions to rental income resulting from Tenant's use, storage or
disposal of Hazardous Materials, (ii) all costs of refitting or other
alterations to the Premises, Project or buildings within the Project required as
a result of Tenant's use, storage, or disposal of Hazardous Materials including,
without limitation, alterations required to accommodate an alternate use of the
Premises, Project or buildings within the Project, and (iii) any diminution in
the fair market value of the Premises, Project or buildings within the Project
caused by Tenant's use, storage, or disposal of Hazardous Materials. For
purposes of this paragraph 49, any acts or omissions of Tenant, or by employees,
agents, assignees, contractors or
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<PAGE>
subcontractors of Tenant or others acting for or on behalf of Tenant (whether or
not they are negligent, intentional, willful or unlawful) shall be strictly
attributable to Tenant.
C. Survival. The provisions of this paragraph 49 shall survive the
--------
expiration or earlier termination of the term of this lease.
50. SIGNAGE
Tenant shall not, without obtaining the prior written consent of
Landlord, install or attach any sign or advertising material on any part of the
outside of the Premises, or on any part of the inside of the Premises which is
visible from the outside of the Premises, or in the halls, lobbies, windows or
elevators of the building in which the Premises are located or on or about any
other portion of the Common Area or Project. If Landlord consents to the
installation of any sign or other advertising material, the location, size,
design, color and other physical aspects thereof shall be subject to Landlord's
prior written approval and shall be in accordance with any sign program
applicable to the Project. Subject to the terms of this paragraph 50, Tenant
shall be permitted to use the existing monument sign base for Tenant's signage.
In addition to any other requirements of this paragraph 50, the installation of
any sign or other advertising material by or for Tenant must comply with all
applicable laws, statutes, requirements, rules, ordinances and any C.C. & R.'s
or other similar requirements. With respect to any permitted sign installed by
or for Tenant, Tenant shall maintain such sign or other advertising material in
good condition and repair and shall remove such sign or other advertising
material on the expiration or earlier termination of the term of this lease.
The cost of any permitted sign or advertising material and all costs associated
with the installation, maintenance and removal thereof shall be paid for solely
by Tenant. If Tenant fails to properly maintain or remove any permitted sign or
other advertising material, Landlord may do so at Tenant's expense. Any cost
incurred by Landlord in connection with such maintenance or removal shall be
deemed additional rent and shall be paid by Tenant to Landlord within ten (10)
days following notice from Landlord. Landlord may remove any unpermitted sign
or advertising material without notice to Tenant and the cost of such removal
shall be additional rent and shall be paid by Tenant within ten (10) days
following notice from Landlord. Landlord shall not be liable to Tenant for any
damage, loss or expense resulting from Landlord's removal of any sign or
advertising material in accordance with this paragraph 50. The provisions of
this paragraph 50 shall survive the expiration or earlier termination of this
lease.
51. SUBMISSION OF LEASE
The submission of this lease to Tenant for examination or signature by
Tenant is not an offer to lease the Premises to Tenant, nor an agreement by
Landlord to reserve the Premises for Tenant. Landlord will not be bound to
Tenant until this lease has been duly executed and delivered by both Landlord
and Tenant.
52. TENANT IMPROVEMENTS
Improvements to the Premises shall be constructed and installed in
accordance with the plans and specifications, and other terms and conditions,
set forth in Exhibit C to this lease, the contents of which is incorporated
herein and made a part hereof by this reference. The
30
<PAGE>
improvements shall be constructed and installed at the expense of Landlord
and/or Tenant as set forth in Exhibit C to this lease and in each case shall be
performed in a diligent and workmanlike manner.
53. ADDITIONAL RENT
All costs, charges, fees, penalties, interest and any other payments
(including Tenant's reimbursement to Landlord of costs incurred by Landlord)
which Tenant is required to make to Landlord pursuant to the terms and
conditions of this lease and any amendments to this lease shall be and
constitute additional rent payable by Tenant to Landlord when due as specified
in this lease and any amendments to this lease.
54. LANDLORD'S OPTION TO RELOCATE PREMISES
[INTENTIONALLY OMITTED.]
55. OPTION TO EXTEND TERM
Landlord grants to Tenant the option to extend the term for one period
of two (2) years (the "Extended Term") following the expiration of the initial
term set forth in paragraph 2 ("Initial Term") under all the provisions of this
lease except for the amount of the basic rent. The basic rent for the Extended
Term shall be adjusted to ninety-five percent (95%) of the then market rate (as
defined in paragraph (c) below); provided that in no event shall the basic rent
for the Extended Term be less than the basic rent in effect at the expiration of
the Initial Term. This option is further subject to the following terms and
conditions:
(a) Tenant must deliver its irrevocable written notice of Tenant's
exercise of this option to Landlord not less than six (6) lease months, nor more
than twelve (12) lease months, prior to the expiration of the Initial Term. Time
is of the essence with respect to the time period during which Tenant must
deliver to Landlord its written notice of exercise and, therefore, if Tenant
fails to give Landlord its irrevocable written notice of its exercise of this
option within the time period provided above then this option shall expire and
be of no further force or effect.
(b) The parties shall have thirty (30) days from the date Landlord
received Tenant's notice of exercise in which to agree on the amount
constituting the market rate. If Landlord and Tenant agree on the amount of the
market rate, they shall immediately execute an amendment to this lease setting
forth the expiration date of the Extended Term and the amount of the basic rent
to be paid by Tenant during the Extended Term. If Landlord and Tenant are unable
to agree on the amount of the market rate within such time period, then, at the
request of either party, the market rate shall be determined in the following
manner: (i) within thirty (30) days of the request of either party, Landlord and
Tenant shall each select a licensed real estate broker with not less than five
(5) years experience in the business of commercial leasing of property of the
same type and use and in the same geographic area, as the Premises; (ii) within
fifteen (15) days of their appointment, such two real estate brokers shall
select a third broker who is similarly qualified; (iii) within thirty (30) days
from the appointment of the third broker, the three brokers so selected shall,
acting as a board of arbitrators, then determine the amount of the market rate,
basing their determination on standard procedures and tests normally employed in
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<PAGE>
determining market rates and applying the factors included within the definition
of market rate set forth in subparagraph (c) below. The decision of the
majority of said brokers shall be final and binding upon the parties hereto. If
a majority of the brokers are unable to agree on the market rate within the
stipulated period of time, the three opinions of the market rate shall be added
together and their total divided by three; the resulting quotient shall be the
market rate. If, however, the low opinion and/or the high opinion are/is more
than 15% lower and/or higher than the middle opinion, the low opinion and/or the
high opinion, as the case may be, shall be disregarded. If only one opinion is
disregarded, the remaining two opinions shall be added together and their total
divided by two and the resulting quotient shall be the market rate. If both the
low opinion and the high opinion are disregarded as stated in this paragraph,
the middle opinion shall be the market rate. If a party does not appoint a
qualified broker within the required time period, the broker appointed by the
other party shall be the sole broker and shall determine the market rate. If
the two brokers appointed by the parties are unable to agree on the third
broker, either of the parties to the lease, by giving ten (10) days' notice to
the other party, can apply to the then president of the county real estate board
of the county in which the Premises are located, or to the presiding judge of
the superior court of that county, for the selection of a third broker who meets
the qualifications stated in this paragraph. Each party shall pay the expenses
and charges of the broker appointed by it and the parties shall pay the expenses
and charges of the third broker in equal shares. When the market rate has been
so determined, Landlord and Tenant shall immediately execute an amendment to
this lease stating the basic rent for the Extended Term.
(c) As used herein, the "market rate" shall be the monthly rent
(triple net) then obtained for two (2) year fixed rate leases of comparable
terms for premises in the Project and in buildings and/or projects within the
same geographical area of similar types and identity, quality and location as
the Project.
(d) Common area charges shall continue to be determined and payable
as provided in paragraph 16 of this lease.
(e) Tenant shall not assign or otherwise transfer this option or any
interest therein and any attempt to do so shall render this option null and
void. Tenant shall have no right to extend the term beyond the Extended Term.
If Tenant is in default under this lease at the date of delivery of Tenant's
notice of exercise to Landlord, then such notice shall be of no effect and this
lease shall expire at the end of the Initial Term; if Tenant is in default under
this lease on the last day of the Initial Term, then Landlord may in its sole
discretion elect to have Tenant's exercise of this option be of no effect, in
which case this lease shall expire at the end of the Initial Term.
56. RIGHT OF FIRST REFUSAL ON EXPANSION SPACE
Landlord hereby grants to Tenant a right of first refusal on that
certain space located at 462 Oakmead Parkway, Sunnyvale, California consisting
of approximately six thousand two hundred fifty (6,250) square feet, as outlined
in blue on Exhibit D (the "Expansion Space"), subject to the following terms and
conditions:
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<PAGE>
(a) This first right of refusal shall only be effective during the
Initial Term of this lease to Tenant. Upon Landlord's receipt of any lease
proposal/offer to lease the Expansion Space from any third party ("Third Party
Offer") which is acceptable to Landlord, Landlord, prior to entering into a
lease with such third party, shall provide Tenant with written notice
("Landlord's Notice") of the terms and conditions of the Third Party Offer (the
"Offer").
(b) Tenant shall have five (5) business days from receipt of
Landlord's Notice to deliver to Landlord its written unconditional and
irrevocable acceptance of the Offer. If Tenant accepts the Offer, an amendment
to this lease or a new lease covering the Expansion Space and incorporating said
terms and conditions shall promptly be executed. If a new lease is executed with
Tenant covering the Expansion Space such new lease shall provide that any
default under this lease will also constitute a default under such new lease and
Tenant agrees that any default by it under such new lease will also constitute a
default under this lease. In the event Tenant rejects the Offer, or does not
answer within the specified time, or fails for any reason (unless such failure
is due to the fault or delay of Landlord) to execute such amendment or new lease
within thirty (30) days of Tenant's acceptance of the Offer, Landlord shall
thereafter be released from any further obligation with respect to the Offer and
be free to negotiate with said third party making the Third Party Offer and to
lease to such third party (without further obligation to Tenant) the Expansion
Space or any portion thereof upon any terms and conditions substantially similar
to those contained in the Offer.
(c) This first right to lease shall be subordinate to any existing
rights of refusal, rights of expansion, options to extend or renew, and other
rights contained in leases (or amendments to leases) executed prior to the date
of this lease. In addition, this first right to lease shall not apply and Tenant
shall have no rights hereunder in the event any tenant (or its successors or
assigns) that now or hereafter occupies all or any portion of the Expansion
Space desires to extend, renew or otherwise modify its lease or desires to
expand its premises to include any portion of the Expansion Space, and Landlord
shall be free to extend, renew or modify such lease or amend such lease to add
any portion of the Expansion Space without notice to Tenant.
(d) This first right to lease shall be void and of no force and
effect and shall confer no rights on Tenant during any period in which Tenant is
in default under this lease.
(e) Notwithstanding anything in this paragraph to the contrary,
Tenant's exercise of this first right to lease shall be subject to Landlord's
review and approval of Tenant's financial condition (including, without
limitation, Tenant's net worth, current ratio and working capital reserves) at
the time Tenant exercises this first right to lease and notwithstanding Tenant's
rights hereunder Landlord shall have no obligation to lease the Expansion Space
to Tenant unless Tenant's financial condition at the time of acceptance of the
Offer is equal to or better than as shown on the financial statements dated
December 31, 1993, previously provided to Landlord by Tenant. Landlord agrees
that all information regarding Tenant's financial condition, provided pursuant
to this paragraph 56(e) and paragraph 57(e), shall be held by Landlord as
strictly confidential, and shall not be disclosed by Landlord to any third party
for any purpose whatsoever.
(f) All rights granted to Tenant pursuant to this paragraph are
personal to Tenant and may not be transferred or assigned. If Landlord transfers
its ownership interest in the
33
<PAGE>
Premises or Project, this first right to lease shall be binding on the
transferee of Landlord's interest.
57. FIRST RIGHT TO LEASE RFR SPACE
Landlord hereby grants to Tenant the first right to lease that certain
space located at 464 Oakmead Parkway, Sunnyvale, California consisting of
approximately thirteen thousand nine hundred fifty-nine (13,959) square feet, as
outlined in blue on Exhibit E (the "RFR Space"), subject to the following terms
and conditions:
(a) This first right to lease shall only be effective during the
Initial Term of this lease to Tenant. Upon notice from Landlord that the RFR
Space will be available for lease within six '(6) months from the date of such
notice, Landlord shall notify Tenant in writing of such availability and such
notice shall set forth the terms and conditions, including, but not limited to,
basic rent, under which Landlord will lease the RFR Space to Tenant ("Offer").
(b) Tenant shall have five (5) business days from receipt of the
notice to deliver to Landlord its written unconditional and irrevocable
acceptance of the Offer. If Tenant accepts the Offer, an amendment to this lease
or a new lease covering the RFR Space and incorporating said terms and
conditions shall promptly be executed. If a new lease is executed with Tenant
covering the RFR Space such new lease shall provide that any default under this
lease will also constitute a default under such new lease and Tenant agrees that
any default by it under such new lease will also constitute a default under this
lease. In the event Tenant rejects the Offer, or does not answer within the
specified time, or fails for any reason (unless such failure is due to the fault
or delay of Landlord) to execute such amendment or new lease within thirty (30)
days of Tenant's acceptance of the Offer, Landlord shall thereafter be released
from any further obligation with respect to the Offer and be free to negotiate
with any number of third parties and to lease (without further obligation to
Tenant) the RFR Space or any portion thereof upon any terms and conditions.
(c) This second right to lease shall be subordinate to any existing
rights of refusal, rights of expansion, options to extend or renew, and other
rights contained in leases (or amendments to leases) executed prior to the date
of this lease. In addition, this second right to lease shall not apply and
Tenant shall have no rights hereunder in the event any tenant (or its successors
or assigns) that now or hereafter occupies all or any portion of the RFR Space
desires to extend, renew or otherwise modify its lease or desires to expand its
premises to include any portion of the RFR Space, and Landlord shall be free to
extend, renew or modify such lease or amend such lease to add any portion of the
RFR Space without notice to Tenant.
(d) This second right to lease shall be void and of no force and
effect and shall confer no rights on Tenant during any period in which Tenant is
in default under this lease.
(e) Notwithstanding anything in this paragraph to the contrary,
Tenant's exercise of this second right to lease shall be subject to Landlord's
review and approval of Tenant's financial condition (including, without
limitation, Tenant's net worth, current ratio and working capital reserves) at
the time Tenant exercises this second right to lease and notwithstanding
Tenant's rights hereunder Landlord shall have no obligation to lease the RFR
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Space to Tenant unless Tenant's financial condition at the time of acceptance of
the Offer is equal to or better than as shown on the financial statements dated
December 31, 1993, previously provided to Landlord by Tenant.
(f) All rights granted to Tenant pursuant to this paragraph are
personal to Tenant and may not be transferred or assigned. If Landlord transfers
its ownership interest in the Premises or Project, this second right to lease
shall be binding on the transferee of Landlord's interest.
58. OPTION TO TERMINATE
Tenant shall have the option to cancel and terminate this lease
effective on the last day of the twenty-fourth (24th) lease month of the initial
three (3) year lease term ("Termination Date") subject to the following terms
and conditions:
(a) Tenant must give Landlord its irrevocable written notice of
Tenant's election to terminate no later than by the last day of the twenty-first
(21st) lease month of the initial three (3) year lease term;
(b) Concurrently with delivery of Tenant's notice of election to
terminate, Tenant shall pay to Landlord, the sum of Eleven Thousand Four Hundred
Twenty-One and 00/100 Dollars ($11,421.00).
(c) If Tenant fails to strictly comply with the terms of paragraph
58(a) and (b) above, this option to terminate shall automatically expire and be
of no further force or effect.
59. REDUCED RENT
As consideration for Tenant's performance of all obligations to be
performed by Tenant under this lease and notwithstanding the provisions of
paragraph 4(a) of this lease, Landlord hereby conditionally excuses Tenant from
the payment of basic rent for the first two (2) lease months of the term of this
lease; provided, however, Tenant does not commit a default hereunder at any time
during the term of this lease, which default continues beyond the expiration of
any applicable cure period. Should Tenant at any time during the term be in
default hereunder beyond the expiration of any applicable cure periods, then the
total sum of such basic rent so conditionally excused shall become immediately
due and payable by Tenant to Landlord. If at the expiration of the term of this
lease Tenant has not committed a default hereunder, which has continued beyond
the expiration of any applicable cure periods, Landlord shall waive any payment
of basic rent so conditionally excused. Landlord and Tenant agree that no
portion of the basic rent paid by Tenant during the portion of the term of this
lease occurring after the expiration of any period during which such rent was
abated shall be allocated, for income tax purposes, by Landlord or Tenant to
such rent abatement period, nor is such rent intended by the parties to be
allocable, for income tax purposes, to any abatement period.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
lease on the date first above written.
Landlord: Tenant:
- -------- ------
CALIFORNIA FIRST, LTD., ELECTRONICS PUBLISHING
a Florida limited partnership RESOURCES, INC.,
a Delaware corporation
By: McCandless Partnership, a By:___________________________________
California general partnership, (Signature)
a General Partner
___________________________________
(Printed Name)
By: _______________________________
Birk S. McCandless, as ___________________________________
Trustee under the Birk S. (Title)
McCandless and Mary McCandless
Inter Vivos Trust Agreement ___________________________________
dated February 17, 1982, a (Date)
General Partner
36
<PAGE>
EXHIBIT A
Exhibit A is a map of the property located at 460 Oakmead Parkway, Sunnyvale,
California, which graphically depicts the floorplan of the Registrant's leased
space. The floorplan consists of sixty two rooms. Fourteen of the rooms are
labeled as follows: "Open Office," "Stor.," "Lunch Room," "Comp. Room," "File
Room," "Stor," "Phone Room," "Storage," "Conference Room," "Conference Room,"
"Copy Room," "Conference Room," "Lobby" and "Lunch Room."
<PAGE>
EXHIBIT B
Exhibit B is an architectural blueprint for 460-464 Oakmead Parkway, Sunnyvale,
California. The blueprint describes the dimensions of the building and the
outdoor parking areas.
<PAGE>
WORK LETTER AGREEMENT
EXISTING SPACE - TURNKEY
CONSTRUCTION EXHIBIT C
- --------------------------------------------------------------------------------
THIS WORK LETTER AGREEMENT (hereinafter "Exhibit C") is attached to
and forms a part of that certain lease ("Lease") by and between CALIFORNIA
FIRST, LTD., a Florida limited partnership ("Landlord"), and ELECTRONIC
PUBLISHING RESOURCES, INC., a Delaware corporation ("Tenant"), pursuant to which
Landlord leases to Tenant those certain premises located at 460 Oakmead Parkway,
Sunnyvale, California and consisting of approximately nine thousand one hundred
fifty-nine (9,159) square feet ("Premises"). All capitalized terms used herein
shall have the meaning ascribed to them in the Lease unless otherwise defined
below. The Premises shall be improved in accordance with the following:
1. Existing Improvements:
---------------------
Tenant accepts the Premises in their existing condition and the
improvements constructed therewith, and Tenant hereby approves the same as
installed, subject only to such changes as may subsequently be agreed upon by
Landlord and Tenant. Such improvements are hereafter called "Existing
Improvements".
2. Tenant Improvements:
-------------------
As used herein, "Tenant Improvements" shall include those items and
specifications shown on the Final Construction Drawings prepared in accordance
with paragraph 3 below, including those specifications (as appropriate) set
forth and described in Exhibit C-1, attached hereto, exclusive of Existing
Improvements. Landlord shall construct Tenant Improvements in accordance with
the Final Construction Drawings, Exhibit C-1 and the provisions of this Exhibit
C. Unless otherwise specifically agreed to by Landlord in writing, the
installation, wiring, maintenance and removal of furniture partition systems,
telephone and other communication systems, data cabling, alarm and/or security
systems and any other systems not specifically set forth on the Final
Construction Drawings, and all cost and expense associated therewith, shall be
the sole responsibility of Tenant, and Tenant shall be entitled to enter the
Premises prior to the commencement of the lease term only for the purpose of
installing said systems; provided that Tenant cooperates with and coordinates
its work with Landlord's General Contractor and Tenant's work shall not
interfere with construction of the Tenant Improvements by Landlord's General
Contractor. In connection with the construction and installation of the Tenant
Improvements, Landlord or Landlord's general contractor shall have no obligation
to move any of Tenant's property located in or about the Premises including, but
not limited to, furniture, inventory and trade fixtures, at the time of such
construction and installation. If at the time of construction and installation
of the Tenant Improvements Tenant has property located in or about the Premises
that inhibits or prevents in any way the construction and installation of the
Tenant Improvements, Tenant shall immediately, upon receipt of notification
therefore from Landlord or Landlord's general contractor, at Tenant's sole cost
and expense, move such property to another location within the Premises or, upon
receipt of Landlord's prior approval, to another location within the Project
designated by Landlord in Landlord's sole discretion;
1
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Tenant's failure to immediately move such property upon receipt of notification
therefore from Landlord or Landlord's general contractor shall be deemed a
Tenant caused delay subject to the provisions of paragraph 6 of this Exhibit C.
If at the time of construction and installation of the Tenant Improvements
Tenant has property located in or about the Premises, Landlord and Landlord's
general contractor shall incur no liability to Tenant or any other party in the
event such property is damaged, destroyed or stolen during the construction and
installation of the Tenant Improvements.
3. Tenant Improvement Design Schedule:
----------------------------------
The plans and specifications for the Tenant Improvements and any other
improvements shall be completed in accordance with the following:
(a) Tenant shall approve preliminary floor plan layouts ("Preliminary
Floor Plans") prepared by Landlord by Completed. The Preliminary Floor Plans
shall show all walls, doors, and other Tenant Improvements as desired by Tenant
in sufficient detail for Landlord's architect to prepare architectural
construction drawings and related documents "Architectural Construction
Documents").
(b) Between Completed and Completed, Landlord's architect and
Tenant's representative shall meet as needed to review and complete the final
details related to the Preliminary Floor Plans, so that on Completed, 1994 the
Architectural Construction Documents are subject only to minor changes.
(c) No later than Completed, Tenant shall have made the decisions
required and supplied to Landlord the information necessary for Landlord's
architect to complete the Architectural Construction Documents in enough detail
for Landlord's general contractor to bid the work, select subcontractors and to
proceed toward the design of electrical, mechanical and any other requirements
not included on the Architectural Construction Documents. Upon Landlord's
general contractor's selection of subcontractors, Landlord's general contractor
and subcontractors shall prepare design specifications outlining in reasonable
detail electrical, mechanical and any other requirements not included on the
Architectural Construction Documents ("Electrical and Mechanical Drawings").
(d) Upon completion of the Architectural Construction Documents,
Tenant shall approve the same subject to changes, deletions or additions as
provided in paragraphs 4 and 5 of this Exhibit C.
(e) Upon completion of the Electrical and Mechanical Drawings,
Landlord or Landlord's general contractor shall submit the Architectural
Construction Documents and Electrical and Mechanical Drawings (collectively the
"City Ready Plans") to the City to obtain a building permit.
(f) Tenant shall have decided upon color and material specifications
by April 7, 1994.
2
<PAGE>
(g) As used herein, "Final Construction Drawings" shall include the
City Ready Plans, as approved by the City, and any subsequent additions,
deletions or changes to the Tenant Improvements permitted or required pursuant
to paragraphs 4 and 5 of this Exhibit C.
4. Changes by Tenant:
-----------------
Tenant may request changes, deletions or additions to the Tenant
Improvements; provided, however, that the effectiveness of any such requested
change, deletion or addition shall be subject to written approval by an
authorized representative of Landlord and to obtaining any required governmental
permits or other approvals. If any such change, deletion or addition increases
the cost of construction and installation of the Tenant Improvements, Tenant
shall immediately pay to Landlord the full amount of such increase in the cost
of construction and installation of the Tenant Improvements. In no event shall
work on any change, deletion or addition requested pursuant to this paragraph 4
commence prior to (i) Landlord and Tenant approving, in writing, such change,
deletion or addition, and (ii) Landlord's receipt from Tenant of payment of the
full amount of the increase in the cost of construction and installation of the
Tenant Improvements.
5. Changes by Authority:
--------------------
Landlord agrees that if any change, deletion or addition to any of the
improvements proposed to be constructed or installed is required by any
governmental authority in connection with obtaining any governmental permit or
approval, or otherwise, then such change, deletion or addition shall promptly be
made at Landlord's expense.
6. Delays Caused by Tenant:
-----------------------
If the commencement of the term is delayed due in any respect to
Tenant's failure to meet the schedule set forth in paragraph 3 above, or due to
construction delays related to any changes required by Tenant, or due to any
other failures by Tenant to perform its obligations under this Exhibit C or
otherwise under the Lease, then any such delays shall be deemed Tenant caused
delays for purposes of determining the commencement date of the Lease pursuant
to paragraph 2(b) of the Lease.
7. Punch List:
----------
Within ten (10) business days after commencement of the term, Tenant
shall deliver to Landlord a list of items ("Punch List") that Tenant believes
Landlord should complete or correct in order for the Premises to be acceptable.
Landlord shall commence to complete or correct the items as soon as possible,
except those items that Landlord reasonably contends are not justified. If
Tenant does not deliver the Punch List to Landlord within the ten (10) day
period, Tenant shall be deemed to have accepted the Premises and approved the
construction. Nothing in this paragraph 7 shall delay the commencement of the
term or Tenant's obligation to pay rent or to make other payments due Landlord
under the Lease.
3
<PAGE>
8. Landlord's Responsibility:
-------------------------
Landlord, at Landlord's sole cost and expense, shall, prior to
September 30, 1994, install a new roof on the building in which the Premises is
located and strip, repair and seal the parking lot. Landlord hereby warrants
that the new roof on the building in which the Premises are located shall be
free from defects for a period of twelve (12) months following completion
thereof. Landlord, at Landlord's cost, shall be responsible for any required
code upgrades (including seismic reinforcements) to the Premises which are
required to be made by governmental authority, and all alterations required
pursuant to the Americans With Disabilities Act or CFR Title 24, which are not
caused by or the result of Tenant's specific use or alteration of the Premises.
9. Attachments:
-----------
All references in the Lease to Exhibit C shall be deemed to also
include Exhibits C-1 and C-________.
4
<PAGE>
EXHIBIT D
Exhibit D is a graphical depiction of the space located at 462 Oakmead Parkway,
Sunnyvale, California consisting of approximately six thousand two hundred and
fifty square feet. The depiction consists of three connected areas, labeled
"#460," "#462" and "#464." The area labeled "#462" is captioned "Expansion
Space."
<PAGE>
EXHIBIT E
Exhibit E is a graphical depiction of the space located at 464 Oakmead Parkway,
Sunnyvale, California consisting of approximately thirteen thousand nine hundred
fifty-nine square feet. The depiction consists of three areas labeled "#460,"
"#462," and "#464." The area labeled "#464" is captioned "RFR SPACE."
<PAGE>
EXHIBIT 10.10
ADDENDUM #2 TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT
LEASE-MODIFIED NET
The Undersigned, being Lessor and Lessee under that certain Lease and Addendum
dated March 21, 1997 (collectively, the "Lease"), for the Premises known as 440
Oakmead Parkway, Sunnyvale, CA, with a net rentable area of approximately 6,031
square feet, do hereby agree to extend and modify the provisions of said Lease
as follows:
1. Expansion: Commencing September 15, 1998, the Existing Premises shall
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be increased in size by approximately 7,400 square feet of net
rentable area, as outlined on attached Exhibit A (the "Expansion
Space"). The address of said Expansion Space is 444 Oakmead Parkway,
Sunnyvale, CA. The Existing Premises plus the Expansion Space
(collectively, the "Premises") shall consist of approximately 13,431
square feet of net rentable area.
2. Term: The Lease Term for the Expansion Space shall commerce upon the
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earlier to occur of (i) when Lessor makes the Expansion Space
available to Lessee, or (ii) September 15, 1998 and shall terminate on
August 31, 1999. In the event that the current tenant does not vacate
the Expansion Space by September 15, 1998, the commencement date of
the Lease with respect to the Expansion Space and Tenant's obligation
to pay Rent on the Expansion Space shall be delayed until the day
following their departure.
3. Base Rent & Lessee's Share: Commencing the earlier to occur of (i)
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when Lessor makes the Expansion Space available to Lessee, or (ii)
September 15, 1998, the monthly Base Rent for the Expansion Space
shall be Fourteen Thousand Eight Hundred and no/100 Dollars
($14,800.00) ($2.00 per square foot), and Lessee's Share (as defined
in (P)1.6(b) of the Lease) shall be increased proportionate to the
increase in the leased premises.
4. Security Deposit: An additional Security Deposit in the amount of
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Fourteen Thousand Eight Hundred and no/100 Dollars ($14,800.00) shall
be due and payable to Landlord upon execution of this Addendum.
5. Option to Extend: Lessor grants to Lessee an option to extend the
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Lease for the Expansion Space for a period of three (3) years at the
then current market rent as determined by (P)58 of the Lease. This
option to extend must be exercised, if at all, by notice in writing
("Option Notice") given to Lessor by May 4, 1999; PROVIDED HOWEVER,
that if Lessee is in default on the date of giving the Option Notice,
the Option Notice shall be totally ineffective; or if Lessee is in
default on the date the extended term is to commerce, the extended
term shall not commence, and the lease as to the Expansion Space shall
expire at the end of the term.
6. Tenant Improvement: Lessor shall install store front glass in the
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existing roll up truck door, recarpet floors that are currently
covered with VCT and install blinds
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in the conference room, as shown on the attached Exhibit A. Upon
Lessor's completion of the above described work, Lessee shall pay to
Lessor $6,025.00, which represents an estimated 50% of the cost of
said improvements. In the event Lessee fails to exercise its option to
extend (Paragraph 5, above) Lessee shall, not later than May 4, 1999,
pay to Lessor an additional $6,025.00 (the "Remaining Amount"). The
Remaining Amount shall be due and payable should Lessee at any time be
in default of the Lease. In addition, Lessor shall on or about
September 15, 1998, at its sole expense, cause all the existing
interior walls to be repainted and the existing carpets cleaned.
7. All other terms, covenants and conditions of said Lease shall remain
in full force and effect.
Approved and accepted this 10th day of September, 1998.
LANDLORD: TENANT:
STAFFIELD INVESTMENTS INTERTRUST
By:_____________________________ By:_____________________________
Don Pearlman, Partner Erwin Lenowitz, Vice Chairman
Exhibit A
Exhibit A is a map of the property located at 444 Oakmead Parkway,
Sunnyvale, California, which graphically depicts the floor plan of the
registrant's leased space. The floor plan consists of two open office areas,
three smaller offices, a conference room, a break room, a lobby, and restrooms.
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Exhibit 10.11
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STANDARD FORM LEASE
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Parties: This Lease, executed in duplicate at Cupertino, California, on July
21st, 1999, by and between Mission West Properties, L.P., a Delaware limited
partnership, and InterTrust Technologies Corporation, a Delaware corporation,
hereinafter called respectively Lessor and Lessee, without regard to number or
gender.
Use: Witnesseth: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, for the purpose of conducting therein office, research and development,
light manufacturing, and warehouse activities, and any other legal activity; and
for no other purpose without obtaining the prior written consent of Lessor.
Premises: The real property with appurtenances as shown on Exhibit A (the
"Premises") situated in the City of Santa Clara, County of Santa Clara, State of
California, and more particularly described as follows:
The Premises includes 65,780 square feet of building, including
all improvements thereto, as shown on Exhibit A-1 including the
right to use 240 parking spaces at the Premises. The address for
the Premises is 4750 Patrick Henry Drive, Santa Clara,
California. Lessee's pro-rata share of the Premises is 100%.
Term: The term shall be for sixty (60) months unless extended pursuant to
Section 35 of this Lease (the "Lease Term"), commencing on the Commencement Data
as defined in Section 1 and ending sixty (60) months thereafter.
Rent: Base rent shall be payable in monthly installments as follows:
Base rent Estimated CAC* Total
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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,
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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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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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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.
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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 map of the property located at 4750 Patrick Henry Drive, Santa
Clara, California, which graphically depicts the floor plan of the Registrant's
leased space. The floor plan consists of eighty one rooms and open office areas.
<PAGE>
Exhibit A-1
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.
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EXHIBIT 10.16
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE HEREUNDER
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND AS SUCH MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECTED EXCEPT PURSUANT TO A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO SUCH WARRANT OR SECURITIES,
OR DELIVERY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECTATION
IS IN COMPLIANCE WITH THE ACT OR UNLESS SOLD IN FULL COMPLIANCE WITH
RULE 144 PROMULGATED UNDER THE ACT.
INTERTRUST TECHNOLOGIES CORPORATION
Class A Common Stock Warrant
September 7, 1999
THIS CERTIFIES THAT for value received, and subject to the provisions and
upon the terms and conditions hereinafter set forth, Allen & Company
Incorporated (the "Holder") is entitled to subscribe for and purchase shares
(the "Shares") of Class A Common Stock of InterTrust Technologies Corporation, a
Delaware corporation (the "Company"), at a price per share equal to fourteen
dollars ($14.00) (the "Warrant Price"). The term "Grant Date" shall mean the
date set forth above.
1. Voluntary Exercise. This Warrant may be exercised for up to fifty percent
------------------
(50%) of the Shares in full or in part at any time (or from time to time) after
the one-year anniversary of the Grant Date and as to all or part of the balance
of the Shares in full or in part at any time (or from time to time) after the
two-year anniversary of the Grant Date (each, an "Exercise Date") at a per
share price equal to the Warrant Price; provided, however, that this Warrant
may, at the Holder's discretion, be exercised in full as to all the Shares prior
to the Exercise Dates immediately prior to the closing of (a) a sale of all or
substantially all of the Company's assets or (b) the merger or consolidation of
the Company with another corporation whereby the Company's stockholders
immediately prior to such merger or consolidation will hold less than 50% of the
outstanding securities of the surviving corporation immediately following such
merger or consolidation (such sale, merger or consolidation shall be referred to
herein as a "Sale of the Company"). The Company will provide reasonable prior
written notice of the closing of a Sale of the Company to the Holder as the
Company is required to provide to Holders of Class A Common Stock under
applicable law. Without limiting the forgoing, upon the notice described in the
immediately preceding sentence, the Holder may transfer the Warrant to a third
party, subject to the prior written approval of the Company, not to be
unreasonably withheld (such approval may be reasonably withheld where such third
party has a material adverse interest, or is directly competitive, with the
Company or any other entity that is a party to the Sale of the Company);
provided that such third party transferee will be subject to the voluntary
exercise provision of the first sentence of this Section 1 and the termination
provisions of Section 2 and other terms of this Warrant.
2. Termination. Notwithstanding paragraph 1 above, this Warrant shall
-----------
terminate and be of no further force and effect upon the earlier of: (i) the
five (5) year anniversary of the Grant Date; and (ii) at the sole discretion of
the Company upon the closing of a Sale of the Company. Notwithstanding the
representations, warranties and terms hereof, this issuance and exercise of this
Warrant shall be subject to the Securities Act of 1933, as amended and the rules
and regulations promulgated thereunder. The Company shall have the right to
take, and shall have no liability resulting from, such actions as deemed
necessary by the SEC in connection with the issuance and exercise of this
Warrant.
3. Number of Shares. Subject to the terms and conditions hereinafter set
----------------
forth, the Holder is entitled, upon surrender of this Warrant, to purchase Three
Hundred Twenty-Five Thousand (325,000) Shares of Class A Common Stock from the
Company.
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Method of Exercise; Net Issue Exercise.
4. --------------------------------------
(a) Method of Exercise; Payment; Issuance of New Warrant. The purchase right
-----------------------------------------------------
represented by this Warrant may be exercised by the Holder, in whole or in part,
at the election of the Holder, by the surrender of this Warrant (with the notice
of exercise form attached hereto as Exhibit A duly executed) at the principal
---------
office of the Company and by the payment to the Company, by check or wire
transfer, of an amount equal to the then applicable Warrant Price per share
multiplied by the number of Shares then being purchased. The person or persons
in whose name(s) any certificate(s) representing Shares shall be issuable upon
exercise of this Warrant shall be deemed to have become the holder(s) of record
of, and shall be treated for all purposes as the record holder(s) of, the shares
represented thereby (and such shares shall be deemed to have been issued)
immediately prior to the close of business on the date or dates upon which this
Warrant is exercised. In the event of any exercise of the rights represented by
this Warrant, certificates for the shares of stock so purchased shall be
delivered to the Holder as soon as possible and in any event within fifteen (15)
business days of receipt of such notice and, unless this Warrant has been fully
exercised or expired, a new warrant representing the portion of the Shares, if
any, with respect to which this Warrant shall not then have been exercised shall
also be issued to the Holder as soon as possible and in any event within such
fifteen (15) business day period.
(b) Net Issue Exercise. In lieu of exercising this Warrant pursuant to
------------------
subparagraph 4(a) above, the Holder may elect to receive shares equal to the
value of this Warrant (or the portion thereof being canceled) by surrender of
this Warrant at the principal office of the Company together with notice of such
election in which event the Company shall issue to the Holder a number of Shares
computed using the following formula:
X = Y(A- B)
-------
A
Where: X = The number of Shares to be issued to the Holder.
Y = the number of Shares purchasable under this Warrant (or the
portion thereof being canceled) at the time of such
exercise.
A = the fair market value of one share of Class A Common Stock
at the time of such exercise.
B = Warrant Price (as adjusted to the date of such calculation).
For purposes of this subparagraph 4(b), the fair market value of the Class A
Common Stock shall be determined as follows:
(i) if this Warrant is exercised prior to an initial
public offering of the Company's Common Stock (an "IPO"), the fair market value
of the Class A Common Stock shall be determined in good faith by the Company's
Board of Directors;
(ii) if the exercise is in connection with the IPO, and
if the Company's registration statement relating to such public offering has
been declared effective by the Securities and Exchange Commission ("SEC"), then
the fair market value per share shall be the initial "Price to Public" specified
in the final prospectus with respect to the offering; or
(iii) if this Warrant is exercised after, and not in
connection with, the Company's IPO, and:
(a) if traded on a securities exchange, the fair
market value shall be deemed to be the average of
the closing prices over the ten (10) day trading
period immediately preceding three days
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<PAGE>
before the day the current fair market value of
the securities is being determined; or
(b) if actively traded over-the-counter, the fair
market value shall be deemed to be the average of
the closing bid and asked prices quoted on the
Nasdaq system (or similar system) over the ten
(10) day trading period immediately preceding
three days before the day the current fair market
value of the securities is being determined.
5. Stock Fully Paid: Reservation of Shares. All Shares that may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant shall, upon
issuance, be fully paid and non-assessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which the
rights represented by the Warrant may be exercised, the Company will at all
times have authorized and reserved for the purpose of issuance upon exercise of
the purchase rights evidenced by this Warrant, a sufficient number of shares of
Class A Common Stock to provide for the exercise of the right represented by
this Warrant.
6. Adjustment of Shares. The kind of securities purchasable upon the
--------------------
exercise of the Warrant shall be subject to adjustment from time to time upon
the occurrence of certain events as follows:
(a) Reclassification. In case of any reclassification, change or
----------------
conversion of Class A Common Stock issuable upon exercise of this Warrant (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), the Company
shall execute a new Warrant (in form and substance reasonably satisfactory to
the Holder, as the holder of this Warrant) providing that the Holder shall have
the right to exercise such new Warrant and upon such exercise to receive, in
lieu of each share of Class A Common Stock theretofore issuable upon exercise of
this Warrant, the kind of shares of stock, other securities, money and property
receivable upon such reclassification or change by a holder of one share of
Class A Common Stock. Such new Warrant shall provide for adjustments that shall
be as nearly equivalent as may be practicable to the adjustments provided for in
this Paragraph 6. The provisions of this subparagraph 6(a) shall similarly
apply to successive reclassifications or changes.
(b) Merger or Consolidation. Subject to Paragraphs 1 and 2 above,
-----------------------
upon a Sale of the Company or other business combination in which the Class A
Common Stock is converted or exchanged into the rights or interest of another
company, the Company, or such successor or purchasing corporation, as the case
may be, shall execute a new Warrant (in form and substance reasonably
satisfactory to the Holder) providing that the Holder shall have the right to
exercise such new warrant and upon such exercise to receive, in lieu of each
share of Class A Common Stock theretofore issuable upon exercise of this
Warrant, the kind of shares of stock, other securities, money and property
receivable upon such merger or consolidation by a holder of one share of Class A
Common Stock. Such new Warrant shall provide for adjustments that shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Paragraph 6. The provisions of this subparagraph 6(b) shall similarly apply to
successive mergers and consolidations.
(c) Stock Splits, Stock Dividends, etc.
-----------------------------------
(i) In case the Company shall (A) declare a dividend or
make a distribution on its Class A Common Stock payable in shares of its capital
stock, (B) subdivide its outstanding shares of Class A Common Stock through
stock split or otherwise, or (C) combine its outstanding shares of Class A
Common Stock into a smaller number of shares of Class A Common Stock, the number
and/or nature of Shares purchasable upon exercise of this Warrant immediately
prior thereto shall be adjusted so that the Holder shall be entitled to receive
the kind and number of Shares or other securities of the Company which he would
have owned or have been entitled to receive after the happening of any of the
events described above, had such Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. An adjustment
made pursuant to this paragraph (c)(i) shall become effective retroactively as
of the record date of such event.
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<PAGE>
(ii) Extraordinary Dividends. In case the Company shall issue
-----------------------
rights, options or warrants or securities convertible into Class A Common Stock
to all the holders of its shares of Class A Common Stock generally, entitling
them (for a period expiring within forty-five (45) days after the record date
referred below in this paragraph (c)(ii)) to subscribe for or purchase shares of
Class A Common Stock at a price per share which (together with the value of the
consideration, if any, paid for such rights, options, warrants or convertible
securities) is lower on the record date referred to below than the then fair
market value per share of Class A Common Stock (as determined pursuant to
Section 4(b)) the number of Shares thereafter purchasable upon the exercise of
this Warrant shall be determined by multiplying the number of Shares immediately
theretofore purchasable upon exercise of this Warrant by a fraction, of which
the numerator shall be the number of shares of Class A Common Stock outstanding
on such record date plus the number of additional shares of Class A Common Stock
offered for subscription or purchase, and of which the denominator shall be the
number of shares of Class A Common Stock outstanding on such record date plus
the number of shares which the aggregate offering price of the total number of
shares of Class A Common Stock so offered would purchase at the then fair market
value per share of Class A Common Stock. Such adjustment shall be made whenever
such rights, options, warrants or convertible securities are issued, and shall
become effective retroactively as of the record date for the determination of
shareholders entitled to receive such rights, options, warrants or convertible
securities.
(d) In the event the Company shall declare a dividend, or make a
distribution to the holders of its Class A Common Stock generally, whether in
cash, property or assets of any kind, including any dividend payable in stock or
securities of any other issuer owned by the Company (excluding regularly payable
cash dividends declared from time to time by the Company's Board of Directors or
any dividend or distribution referred to in Section 6(c)(i) above), the Warrant
Price shall be reduced, without any further action by the parties hereto, by the
Per Share Value (as hereinafter defined) of the dividend. For purposes of this
Section 6(d), the "Per Share Value" of a cash dividend or other distribution
shall be the dollar amount of the distribution on each share of Class A Common
Stock and the "Per Share Value" of any dividend or distribution other than cash
shall be equal to the fair market value of such non-cash distribution on each
share of Class A Common Stock as determined in good faith by the Board of
Directors of the Company.
(e) Whenever the number of Shares purchasable upon the exercise of
this Warrant is adjusted, as provided in this Section 6, the Warrant Price shall
also be appropriately adjusted, if necessary, in order to protect the rights of
the Holder. In that regard, in the case of any event described in Section 6(c),
the Warrant Price shall also be appropriately adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Shares purchasable upon the exercise of this
Warrant immediately prior to such adjustment, and of which the denominator shall
be the number of Shares so purchasable immediately thereafter.
(f) No Impairment. The Company will not, by amendment of its Restated
-------------
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Paragraph 6 and in the taking of all such action as may
be necessary or appropriate in order to protect the rights of the Holder as the
holder of this Warrant against impairment.
(g) Notices of Record Date. In the event of any taking by the Company
----------------------
of a record of its stockholders for the purpose of determining stockholders who
are entitled to receive payment of any dividend (other than a cash dividend) or
other distribution, any right to subscribe for, purchase or otherwise acquire
any share of any class or any other securities or property, or to receive any
other right, or any proposed liquidation, dissolution or winding up of the
Company, the Company shall mail to the Holder, as the holder of the Warrant, at
least twenty (20) days prior to the date specified therein, a notice specifying
the date on which any such
4
<PAGE>
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
7. Right of First Refusal: Restriction on Transfer.
-----------------------------------------------
(a) Grant. The Company is hereby granted the right of first
-----
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the shares. For purposes of this Paragraph 7, the term "transfer"
shall include any sale, assignment, pledge, encumbrance or other disposition for
value of the shares intended to be made by the Holder; provided, however, that
the Holder may transfer any Shares to an investment fund or funds managed by
Holder or an affiliate of Holder, including officers, directors and employees of
Holder (a "Permitted Transferee"), and provided that Holder submits to the
Company an irrevocable joint and several undertaking for the benefit of the
Company executed by the Holder or an affiliate of Holder and the Permitted
Transferee(s) that Holder or an affiliate of Holder may represent the Permitted
Transferee(s) on all matters related to the Shares, without first making such an
offer to the Company.
(b) Notice of Intended Disposition. In the event the Holder
------------------------------
desires to accept a bona fide third-party offer for any or all of the shares
(the shares subject to such offer to be hereinafter called the "Target Shares"),
Holder shall promptly deliver to the Corporate Secretary of the Company written
notice (the "Disposition Notice") in accordance with this Warrant of the terms
and conditions of the offer, including the purchase price and the identity of
the third-party offeror.
(c) Exercise of Right. The Company (or its assignees) shall, for
-----------------
a period of fifteen (15) business days following receipt of the Disposition
Notice, have the right to repurchase all but not less than all of the Target
Shares specified in the Disposition Notice upon substantially the same terms and
conditions specified therein. Such right shall be exercisable by delivery of
written notice (the "Exercise Notice") in accordance with this Warrant to Holder
prior to the expiration of the fifteen (15) business day exercise period. If the
First Refusal Right is exercised with respect to the Target Shares specified in
the Disposition Notice, then the Company (or its assignees) shall effect the
repurchase of the Target Shares, including payment of the purchase price, not
more than fifteen (15) business days after delivery of the Exercise Notice; and
at such time Holder shall deliver to the Company the certificates representing
the Target Shares to be repurchased, each certificate to be properly endorsed
for transfer.
(d) Non-Exercise of Right. In the event the Exercise Notice is
---------------------
not given to Holder within fifteen (15) business days following the date of the
Company's receipt of the Disposition Notice or the Company does not complete a
purchase within fifteen (15) days after an Exercise Notice is delivered, Holder
shall have a period of forty-five (45) days thereafter in which to sell or
otherwise dispose of the Target Shares to the third-party offeror identified in
the Disposition Notice upon terms and conditions (including the purchase price)
no more favorable to such third-party offeror than those specified in the
Disposition Notice. The third-party offeror shall acquire the Target Shares
subject to the Company's First Refusal Right hereunder. In the event Holder does
not effect such sale or disposition of the Target Shares within the specified
forty-five (45) day period, the Company's First Refusal Right shall continue to
be applicable to any subsequent disposition of the Target Shares by Holder until
such right lapses in accordance with subparagraph 7(f).
(e) Restriction on Transfer. Except with the Company's prior
-----------------------
written consent, neither the Holder nor any transferee of Holder shall sell or
transfer in any manner (the "Transfer Restriction") any Shares purchased
hereunder to any person or entity engaged in, or reasonably anticipated by the
Company to become engaged in, the business of providing electronic commerce
solutions or related technology (a "Restricted Party"). The Holder or any
transferee of Holder may request that the Company waive the restriction on the
sale or transfer of Shares described in the preceding sentence to a Restricted
Party as to a particular proposed sale or transfer, but the Company shall have
no obligation to waive such restriction on the sale or transfer of any such
Shares to any Restricted Party.
5
<PAGE>
(f) Lapse. The First Refusal Right and Transfer Restriction under
-----
this Paragraph 7 shall lapse and cease to have effect upon the closing of the
IPO.
8. Fractional Shares. No fractional shares of Class A Common Stock shall
-----------------
be issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor upon the basis
of the fair market value of the Class A Common Stock then in effect.
9. Transfers and Exchanges. This Warrant or portions hereof may only be
-----------------------
transferred to a Permitted Transferee.
10. Rights as Stockholder. The Holder, as the holder of the Warrant,
---------------------
shall not be entitled to vote or receive dividends and shall not be deemed the
holder of Class A Common Stock, nor shall anything contained herein be construed
to confer upon the Holder as the holder of this Warrant, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to receive
notice of meetings, or to receive dividends or subscription rights or otherwise
until this Warrant shall have been exercised and the shares of Class A Common
Stock purchasable upon the exercise hereof shall have become deliverable, as
provided herein.
11. Representations and Warranties of the Company. This Warrant is issued
---------------------------------------------
and delivered on the basis of the following:
(a) Due Authorization. This Warrant has been duly authorized and
-----------------
executed by the Company and when delivered will be the valid and binding
obligation of the Company enforceable in accordance with its terms.
(b) Due Issuance. The shares of Class A Common Stock purchasable
------------
upon the exercise hereof have been duly authorized and reserved for issuance by
the Company and when issued in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable.
12. Representations and Warranties of the Holder.
--------------------------------------------
(a) Investment Intent. Holder hereby warrants and represents that
-----------------
Holder is acquiring this Warrant, and any Shares issued upon exercise of this
Warrant, for Holder's own account and not with a view to their resale or
distribution.
(b) Exempt from Registration. Holder acknowledges that this
------------------------
Warrant has not been registered under the Act on the ground that the issuance of
this Warrant is exempt from registration pursuant to Section 4(2) of the Act,
and that the Company's reliance on such exemption is predicated on the
representations of Holder set forth herein.
(c) Investment Experience. In connection with the investment
-------------------
representations made herein Holder represents that it is able to fend for itself
in the transactions contemplated by this Warrant, has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment, has the ability to bear the economic risks
of its investment, and has been furnished with and has had access to such
information as it has requested and deemed appropriate to its investment
decision.
(d) Restricted Securities. Holder hereby confirms that Holder has
---------------------
been informed that this Warrant, and the Shares issued upon exercise of this
Warrant, are restricted securities under the Act and may not be resold or
transferred unless this Warrant, and the Shares issued upon exercise of this
Warrant, are first registered under the federal securities laws or unless an
exemption from such registration is available. Accordingly, Holder hereby
acknowledges that Holder is prepared to hold this Warrant, and the Shares issued
upon exercise of this Warrant, for an indefinite period and that Holder is aware
that Rule 144 of the Securities
6
<PAGE>
and Exchange Commission issued under the Act is not presently available to
exempt the issuance of this Warrant from the registration requirements of the
Act.
(e) Disposition of Shares. Holder hereby agrees that Holder shall
---------------------
make no disposition of this Warrant and the Shares issued upon exercise of this
Warrant, unless and until:
(1) Holder shall have notified the Company of the proposed
disposition;
(2) Holder shall have complied with all requirements of this
Agreement applicable to the disposition; and
(3) Holder shall have provided the Company with written assurance, in
form and substance satisfactory to the Company, that (i) the proposed
disposition does not require registration of the Shares under the Act, or
(ii) all appropriate action necessary for compliance with the registration
requirements of the Act or of any exemption from registration available
under the Act (including Rule 144) has been taken.
(f) Restrictive Legends. In order to reflect the restrictions on
-------------------
disposition of the Shares issued upon exercise of this Warrant, the stock
certificates for the Shares will be endorsed with the following restrictive
legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF (a) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES
UNDER SUCH ACT, (b) A 'NO ACTION' LETTER OF THE SECURITIES AND EXCHANGE
COMMISSION WITH RESPECT TO SUCH SALE OR OFFER, OR (c) SATISFACTORY
ASSURANCES TO INTERTRUST TECHNOLOGIES CORPORATION THAT REGISTRATION UNDER
SUCH ACT IS NOT REQURIED WITH RESPECT TO SUCH SALE OR OFFER."
(g) Market Stand-Off. Holder hereby agrees that, during the period of
----------------
duration (not to exceed 180 days) specified by the Company and an underwriter of
Common Stock or other securities of the Company, following the effective date of
the IPO, it shall not, to the extent requested by the Company and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Company held by it at any time during such period
except Common Stock included in such registration; provided, however, that all
offers and directors of the Company, and all other persons with registration
rights (whether or not pursuant to this Agreement) enter into similar
agreements.
13. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and the Holder.
14. Notices. Any notice, request or other document required or permitted
-------
to be given or delivered to the Holder or the Company shall be delivered, or
shall be sent by certified or registered mail, postage prepaid, to such Holder's
address as shown on the books of the Company or to the Company at the address
indicated on the signature page of this Warrant.
15. Successors and Assigns. The terms and provisions of this Warrant
----------------------
shall be binding upon the Company, the Holder, and their respective successors
and assigns, subject at all times to the restrictions set forth in this Warrant.
16. Lost Warrants or Stock Certificates. The Company covenants to the
-----------------------------------
holder hereof that upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this
7
<PAGE>
Warrant or any stock certificate and, in the case of any such loss, theft or
destruction, upon receipt of any indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and cancellation
of such Warrant or stock certificate, the Company will make and deliver a new
Warrant or stock certificate, or like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant or stock certificate.
17. Descriptive Headings. The descriptive headings of the several
--------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
18. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of California, USA.
19. Entire Agreement. This Warrant and the exhibits hereto embody the
----------------
entire agreement and understanding of Holder and Company with respect to the
subject matter hereof, and supersede all prior and contemporaneous agreements
and understandings, oral or written, relative to said subject matter.
20. Attorney's Fees. If any action at law or in equity is necessary to
---------------
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
22. Registration Rights. The Company agrees that the Shares issued or
-------------------
issuable upon exercise of this Warrant shall be deemed "Registrable Securities"
as such term is defined in the Company's Series E Preferred Stock Purchase
Agreement with Holder dated July 27, 1999 (the "Series E Agreement") solely for
purposes of granting "piggyback" registration rights under subsection 4.1(c) of
the Series E Agreement and "piggyback" rights to have the Shares registered in
connection with registrations effected pursuant to subsections 4.1(b) and 4.1(h)
of the Series E Agreement; provided, however, that in the event of any cutback
of securities requested by the underwriters, the Shares shall be subject to
cutback prior to any cutbacks on any holders of Common Stock issued or issuable
upon conversion of the Company's Preferred Stock and then only on a pro rata
basis with other holders of Common Stock. The Holder shall also be entitled to
the benefits and bound by the obligations in subsection 4.1(g) of the Series E
Agreement relating to indemnification with respect to registered resales of the
Shares.
8
<PAGE>
IN WITNESS WHEREOF, InterTrust Technologies Corporation has caused this
Warrant to be executed by its officers hereunto duly authorized effective as of
the date first above written.
INTERTRUST TECHNOLOGIES
CORPORATION
By:________________________________
Victor Shear, Chairman and
Chief Executive Officer
Address: 460 Oakmead Parkway
Sunnyvale, CA 94086
AGREED AND ACKNOWLEDGED:
ALLEN & COMPANY INCORPORATED
By:_________________________
____________________________
Please Print Name
____________________________
Title, if applicable
9
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
To: InterTrust Technologies Corporation
460 Oakmead Parkway
Sunnyvale, CA 94086
Attn: Edmund J. Fish, Senior Operating Officer and EVP, Corporate
Development
1. The undersigned hereby elects to purchase
___________ shares of Class A Common Stock of InterTrust
Technologies Corporation pursuant to the terms of the
attached Warrant, and tenders herewith payment of the
purchase price of such shares in full.
2. Please issue a certificate or certificates
representing said shares in the name of the undersigned or
in such other name or names as are specified below:
Name: ______________________________
Address: ______________________________
______________________________
______________________________
3. The undersigned represents that the
aforesaid shares being acquired for the account of the
undersigned are for investment and not with a view to, or
for resale in connection with, the distribution thereof and
that the undersigned has no present intention of
distributing or reselling such shares.
____________________________
Signature
_______________________
(Date)
10
<PAGE>
EXHIBIT 21.1
List of Subsidiaries of InterTrust Technology Corporation
---------------------------------------------------------
InterTrust International Corporation 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. 2 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 8, 1999
