<PAGE>
As filed with the Securities and Exchange Commission on April 6, 2000.
Registration No. 333-32484
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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)
<TABLE>
<S> <C> <C>
Delaware 7371 52-1672106
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
4750 Patrick Henry Drive, Santa Clara, CA 95054
(408) 855-0100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Victor Shear
Chief Executive Officer and Chairman of the Board
InterTrust Technologies Corporation
4750 Patrick Henry Drive, Santa Clara, CA 95054
(408) 855-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Robert V. Gunderson, Jr., Esq. Laird H. Simons III, Esq.
Bennett L. Yee, Esq. Katherine Tallman Schuda, Esq.
William E. Growney, Jr., 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
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE CHART
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value per share....... 5,520,000 $30.81 $170,071,200 $44,899
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes shares that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c). Based on the average of the high
and low prices of the common stock on April 5, 2000 as reported on The
Nasdaq National Market.
(3) The Registration Fee was paid in connection with the original filing on
March 15, 2000.
---------------
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 APRIL 6, 2000
4,800,000 Shares
[LOGO OF INTERTRUST]
Common Stock
--------
We are selling 2,000,000 shares of common stock and the selling stockholders
are selling 2,800,000 shares of common stock. We will not receive any of the
proceeds from the shares of common stock sold by the selling stockholders.
Our common stock is quoted on The Nasdaq Stock Market's National Market under
the symbol ITRU. On April 5, 2000, the last reported sale price of our common
stock was $32.13 per share.
The underwriters have an option to purchase from us and the selling
stockholders a maximum of 720,000 additional shares to cover over-allotments of
shares.
Investing in the common stock involves risks. See Risk Factors on page 6.
<TABLE>
<CAPTION>
Proceeds to
Underwriting InterTrust Proceeds to
Price to Discounts and Technologies Selling
Public Commissions Corporation Stockholders
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total...................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2000.
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
Wit SoundView
The date of this prospectus is , 2000
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Price Range of Common Stock.............................................. 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 33
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 55
Related-Party Transactions................................................. 66
Principal and Selling Stockholders......................................... 68
Description of Capital Stock............................................... 72
Shares Eligible for Future Sale............................................ 75
Underwriting............................................................... 77
Notice to Canadian Residents............................................... 80
Legal Matters.............................................................. 82
Experts.................................................................... 82
Where You Can Find More Information........................................ 82
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
You should rely only on the 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.
<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 6.
InterTrust Technologies Corporation
We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce system
for digital commerce. We license our DRM platform to partners to build digital
commerce services and applications. These partners intend to offer digital
commerce services and applications that collectively will form a global
commerce system, which we have branded as the MetaTrust Utility. We maintain
the MetaTrust Utility's foundation and will receive as a fee from our partners
a small percentage of the value of goods and services that run through the
system.
DRM technologies protect and manage rights and interests in digital
information. DRM is needed by any industry that distributes information that
can be put into digital form. These types of information include music, videos,
software, games, publications, business information, and images. DRM also
applies to organizations and individuals who want to protect the vast amount of
proprietary and personal information that has been computerized.
Our technology is designed to enable all these industries, organizations,
and individuals, and each of their constituencies, to protect and manage their
rights and interests in digital information. Holders of these rights and
interests can easily associate usage rules with the digital information and
persistently apply these rules throughout the lifecycle of the information.
When these rights and rules are based on a common foundation, they can form the
basis for a global system for digital commerce.
We believe our DRM platform represents a new computing technology that
addresses a key threat to digital commerce--the threat of a user who has been
authorized to receive and decrypt digital information and then seeks to use it
in an unauthorized way. Our DRM platform enables automation of many aspects of
the secure commercial exchange of digital information and is designed to allow
digital commerce to be conducted more efficiently.
We believe our platform provides the following benefits:
<TABLE>
<S> <C>
. robust security; . multiple content and media types;
. persistent protection and management; . efficient transaction processing;
. flexible business models; . new advertising models; and
. superdistribution; . personalized marketing.
</TABLE>
Our current partners include ASPSecure.com, ARM, BMG Entertainment Storage
Media, Cirrus Logic, Creative Technology, Computacenter, Diamond Multimedia
Systems, LOAD Media Network, Massive Media Group, Mediascience, Mitsubishi
Corporation, MusicMatch, National Westminster Bank (Magex),
PricewaterhouseCoopers, PublishOne, Reciprocal, RioPort, Samsung SDS, SingTel,
3
<PAGE>
Spectra.Net, Universal Music Group and Wave Systems. We also have alliances
with Adobe Systems, Digital Theater Systems, Dolby, Fraunhofer-Institut,
Marimba, Portal Software, QDesign and Sony Corporation. 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 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 to:
. expand our key strategic partnerships;
. promote widespread deployment of our technology;
. leverage our neutral MetaTrust Utility model; and
. maintain our technology lead.
We were incorporated in Delaware in January 1990. Our principal executive
offices are located at 4750 Patrick Henry Drive, Santa Clara, California 95054,
and our telephone number is (408) 855-0100.
InterTrust, DigiBox, and our logo are our registered trademarks. MetaTrust,
MetaTrust Utility, InterRights, Powerchord, Rights/PD, RightsWallet, TrustMail,
and TrustNet are our trademarks. This prospectus also contains trademarks of
other companies.
----------------
Except as otherwise indicated, information in this prospectus:
. gives effect to our two-for-one stock split of all outstanding shares of
our common stock which occurred on February 24, 2000 through the issuance
of a stock dividend; and
. assumes no exercise of the underwriters' over-allotment option.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by us......................... 2,000,000 shares
Common stock offered by the selling stockholders... 2,800,000 shares
Common stock to be outstanding after the offering.. 81,216,996 shares
Use of proceeds.................................... General corporate
purposes, including
working capital and
potential strategic
investments and
acquisitions. For more
information about our use
of proceeds, please see
the use of proceeds
section on page 18.
Dividend policy.................................... Currently, we do not
anticipate paying cash
dividends.
Nasdaq National Market symbol...................... ITRU
</TABLE>
- --------
The table above is based on the number of shares outstanding as of December 31,
1999 as adjusted to give effect to our two-for-one stock split effected on
February 24, 2000. It excludes:
. 16,255,090 shares of common stock issuable upon the exercise of stock
options and warrants outstanding as of December 31, 1999 at a weighted
average exercise price of $3.11 and 1,088,600 additional shares of
common stock available for issuance under our stock option plan as of
December 31, 1999. From December 31, 1999 through February 29, 2000 we
issued options to purchase 132,000 shares of common stock at a weighted
average exercise price of $74.82.
. 700,000 shares of common stock available for issuance under our 1999
employee stock purchase plan as of December 31, 1999.
. 700,000 shares of common stock available for issuance under our 1999
non-employee directors plan as of December 31, 1999.
. 230,464 shares of common stock issued in connection with our acquisition
of Infinite Ink on March 8, 2000 and 68,052 shares issuable upon
exercise of options we assumed as part of that acquisition.
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Total revenues................ $ -- $ 25 $ 1,100 $ 152 $ 1,541
Loss from operations.......... (3,423) (8,140) (11,938) (19,667) (30,156)
Net loss...................... (3,583) (7,960) (11,709) (19,662) (28,605)
Basic and diluted net loss per
share........................ $ (0.18) $ (0.33) $ (0.43) $ (0.70) $ (0.71)
Shares used in computing basic
and diluted net loss per
share........................ 20,446 23,826 27,278 27,932 40,426
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------
As
Actual Adjusted
-------- --------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term investments......... $140,834 $200,931
Working capital.............................................. 136,551 196,648
Total assets................................................. 151,497 211,594
Total stockholders' equity................................... 133,352 193,449
</TABLE>
The as adjusted column in the consolidated balance sheet data table above
reflects our sale of 2,000,000 shares of common stock in this offering, at an
assumed public offering price of $32.13 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
5
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you might lose all or part of your investment.
Risks Related to Our Business
Our business model is new and unproven, and we may not succeed in generating
sufficient revenue to sustain or grow our business.
Our business model is new and unproven and may not generate sufficient
revenue for us to be successful. The success of our business depends upon our
ability to generate transaction fees in the form of a percentage of fees
charged by our licensees in commercial transactions. However, our licensees
have not yet used our technology in any significant commercial distribution of
their products and we have not earned any transaction fees under this business
model. The volume of products and services distributed using our technology may
be too small to support or grow our business. While some companies have
licensed our technology, other companies may wish to use other technology based
on different business models, including the payment of a one-time license fee
without sharing in ongoing revenues. If we are unable to generate revenues from
transaction fees, our current revenues, consisting of initial license fees and
support fees, will be insufficient to sustain our business.
Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of public market analysts or investors, the
market price of our common stock may decrease significantly.
Our operating results have varied from period to period and, in some future
quarter or quarters, will likely fall below the expectations of securities
analysts or investors, causing the market price of our common stock to decline.
Our quarterly operating results may fail to meet these expectations for a
number of reasons, including:
. a quarterly decline in the overall demand for digital goods and services;
. a quarterly decline in the demand for our Commerce software product;
. our failure to quickly reduce costs in the event of unanticipated
declines in revenues in a given period;
. delays in the timing of licensing our Commerce software and services;
. the nature and types of our licensing arrangements;
. expenses related to the issuance of stock to our partners;
. the inability of our licensees and their customers to commercialize our
technology, or delays or deferrals in this commercialization; and
. customer budget cycles and changes in these budget cycles.
6
<PAGE>
We have a history of losses, and we expect our operating expenses and losses to
increase significantly.
Our failure to increase our revenues significantly would seriously harm our
business. We have experienced operating losses in each quarterly and annual
period since inception, and we expect to incur significant and increasing
losses in the future. We incurred net losses of $11.7 million in 1997, $19.7
million in 1998, and $28.6 million in 1999. As of December 31, 1999, we had an
accumulated deficit of $74.1 million. We expect to significantly increase our
research and development, sales and marketing, and general and administrative
expenses. As a result of these additional expenses, we must significantly
increase our revenues to become profitable. We expect to incur significant
losses for at least the next several years.
If third parties do not deploy our technology and create a market for digital
commerce, our business will be harmed.
Relationships with leading digital information, technology, and commerce
service providers are critical to our success. Our business and operating
results would be harmed to the extent our licensees fail, in whole or in part,
to:
. deploy our technology;
. develop an infrastructure for the sale and delivery of digital goods and
services;
. generate transaction fees from the sale of digital content and services;
. develop and deploy new applications; and
. promote brand preference for InterTrust products and services and the
MetaTrust Utility.
We need to significantly increase the number of companies that license our
technology to sustain and grow our business.
We will not generate sufficient revenue to grow our business unless we
maintain relationships with existing licensees and significantly increase the
number of companies that license our technology and use it for the sale and
management of digital information and services. We have not yet attracted, and
may not in the future be able to attract, a sufficient number of these
companies. To date, only 22 companies have licensed our software for commercial
use. Our ability to attract new licensees will depend on a variety of factors,
including the following:
. the performance, reliability and security of our products and services;
. the scalability of our products and services--the ability to rapidly
increase deployment size from a limited number of end-users to a very
large number of end-users;
. the cost-effectiveness of our products and services; and
. our ability to market our products and services effectively.
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
7
<PAGE>
market and have achieved market acceptance. We may not be able to attract a
critical mass of licensees that will develop products and establish
clearinghouses and other commerce services, and our licensees may not achieve
the widespread deployment of users we believe is necessary for us to become
successful.
In addition, we may not be able to establish relationships with important
potential customers if we have already established relationships with their
competitors. Therefore, it is important that we are perceived as a neutral and
trusted technology and service provider. In addition, we require that products
and services operating within the MetaTrust Utility comply with specifications
administered by us. Potential licensees may be unwilling to be subject to the
control of these specifications.
The long and complex process of licensing our Commerce software could delay the
deployment of our technology and harm our business.
Licensing our Commerce software is a long and complex process. If initial
license fees are delayed or reduced as a result of this process, our future
revenue and operating results could be impaired. Before committing to license
our product, our licensees must generally consider a wide range of issues
including product benefits, installation and infrastructure requirements,
ability to work with existing computer systems, ability to support a large user
base, functionality, security, and reliability. The process of entering into a
licensing agreement with a company typically involves lengthy negotiations. As
a result of our long sales cycle, which in the past has generally ranged from
six months to 18 months, it is difficult for us to predict the quarter in which
a particular prospect might sign a license agreement.
Because our technology must be integrated into the products and services of our
licensees, there will be significant delay between our licensing the software
and our licensees' commercial deployment of their products and services, which
will delay our receipt of transaction fee revenue.
Our success depends upon the deployment of our technology by a potential
licensee in the use and sale of digital content. Our licensees undertake a
lengthy process of integrating our technology into their existing systems or a
new system. Until a licensee deploys our technology, we do not receive
transaction fees from that licensee.
We expect that the period between entering into a licensing arrangement and
the time our licensee commercially deploys applications based on our Commerce
software will be lengthy and will vary, which makes it difficult for us to
predict when revenue will be recognized.
Our Commerce software has only recently been used by our licensees in pilot
programs, making evaluation of our business and prospects difficult.
We began offering the general availability release of our Commerce software
in December 1998, and released version 1.2.3 in February 2000. 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 on
a large scale. It is possible that we or our licensees may uncover serious
technical and other problems
8
<PAGE>
resulting in the delay or failure of major commercial deployment of our
licensees' implementation of our Commerce software, including problems relating
to security, the ability to support a large user base, and interoperability of
our software or the combination of our software with our licensees' software.
We may not successfully address any of these problems, and the failure to do so
would seriously harm our business and operating results.
Security breaches of our software and our licensees' software could result in
decreased demand for our technology by our licensees or their customers or in
litigation.
The secure transmission and trusted management of proprietary or
confidential information over the Internet are essential to establishing and
maintaining confidence in our Commerce software and the software and services
developed using our software. Without this confidence, potential or current
licensees may not use our technology and their customers may not trust and use
our licensees' products. Therefore, security concerns and security breaches of
our and our licensees' software could harm our business and operating results.
Advances in computer capabilities, new discoveries, or other developments could
result in a compromise or breach of the security technology, including
cryptography technology, that we and our licensees use to protect customer
digital content and transaction data. Security breaches could damage our
reputation and expose us to a risk of loss or litigation. Our insurance
policies have low coverage limits that may not be adequate to reimburse us for
losses caused by security breaches. We cannot guarantee that our security
measures will prevent security breaches.
Defects in our software and the software of our licensees could delay
deployment of our technology and reduce our revenues.
Defects or errors in current or future products could result in delayed or
failed deployment of our technology, lost revenues, or a delay in or failure to
achieve market acceptance, any of which could seriously harm our business and
operating results. Complex software products like ours often contain errors or
defects, including errors relating to security, particularly when first
introduced or when new versions or enhancements are released. Because this is a
system used for commerce, we believe the standards for reliability and
performance may be very high.
If our licensees' products and services contain errors or defects not
discovered in the process of development and pilot programs, it could seriously
undermine the perceived trust and security needed for a commercial system and
could delay or prevent market acceptance of digital commerce resulting in
serious harm to our business and operating results.
The deployment and use of our products expose us to substantial risks of
product liability claims because our products are expected to be used in
sensitive and valuable digital commerce transactions and because we require our
partners to comply with our specifications. Although our license agreements
typically contain provisions designed to limit our exposure to product
liability claims, it is possible that these limitations of liability provisions
may not be effective as a result of existing or future laws or unfavorable
judicial decisions. A product liability claim brought against us, even if not
successful, would likely be time consuming and costly to defend and could
significantly harm our business and operating results.
9
<PAGE>
If we are unable to continue obtaining third-party software and applications,
we could be forced to change our product offering or find alternative
suppliers, which could delay shipment of our product.
We integrate third-party software with our software. We would be seriously
harmed if the providers from which we license software ceased to deliver and
support reliable products, enhance their current products, or respond to
emerging industry standards. In addition, the third-party software may not
continue to be available to us on commercially reasonable terms or at all. The
loss of, or inability to maintain or obtain this software, could result in
shipment delays or reductions, or could force us to limit the features
available in our current or future product offerings. Either alternative could
seriously harm our business and operating results.
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, competing formats, uncertain product life cycles, and changes in
customer demands. To succeed, we must develop and introduce, in response to
customer and market demands, new releases of our Commerce software that offer
features and functionality that we do not currently provide. Any delays in our
ability to develop and release enhanced or new products could seriously harm
our business and operating results. In the past, we have experienced delays in
new product releases, and we may experience similar delays in the future.
Our markets are highly competitive and we may not be able to compete
successfully against current or potential competitors, reducing our market
share and revenue growth.
Our markets are new, rapidly evolving, and highly competitive, and we expect
this competition to persist and intensify in the future. Our failure to
maintain and enhance our competitive position could reduce our market share and
cause our revenues to grow more slowly than anticipated or not at all. We
encounter current or potential competition from a number of sources, including:
. providers of secure digital distribution technology like Adobe, AT&T,
IBM, Microsoft, Liquid Audio, Preview Systems, and Xerox;
. providers of hardware-based content metering and copy protection systems,
including Sony 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 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.
10
<PAGE>
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do. Many
of these companies have more extensive customer bases and broader partner
relationships that they could leverage, including relationships with many of
our current and potential partners. These companies also have significantly
more established customer support and professional services organizations than
we do. In addition, these companies may adopt aggressive pricing policies. For
a more detailed description of our competitive position, including some of our
competitors and competitive products, please see "Business--Competition."
We and our licensees may be found to infringe proprietary rights of others,
resulting in litigation, redesign expenses, or costly licenses.
Digital rights management is an emerging field in which our competitors may
obtain patents or other proprietary rights that would prevent, or limit or
interfere with, our, or our licensees', ability to make, use, or sell products.
Furthermore, companies in the software market are increasingly bringing suits
alleging infringement of their proprietary rights, particularly patent rights.
We and our licensees could incur substantial costs to defend or settle any
litigation, and intellectual property litigation could force us to do one or
more of the following:
. cease selling, incorporating, or using products or services that
incorporate the infringed intellectual property;
. obtain a license from the holder of the infringed intellectual property
right; or
. redesign products or services to avoid infringement.
Our licensees' products and services may be subject to a claim of patent
infringement independent of any infringement by our software.
In the past, we have received notices alleging potential infringement by us
of the proprietary rights of others. In January 1996, we received a letter from
an attorney representing E-Data Corporation containing an allegation of
infringement of a patent E-Data allegedly owns. We exchanged correspondence
with E-Data's attorneys ending in September 1996. We have not heard from any
representative of E-Data since that time. In November 1997, we received a
letter from representatives of TAU Systems Corporation informing us of two
patents held by TAU Systems. In the letter, the representatives stated their
opinion that our Commerce software contained various elements recited in the
two patents and requested that we discuss licensing the technology of these
patents. We responded to the letter stating that, although we had not
undertaken a detailed review of the patents, we were unaware of any of our
products having one of the elements required by the patent claims. We have not
received any further correspondence from TAU Systems. In May 1999, we received
a letter from representatives of TechSearch LLC offering us a license to a
patent held by TechSearch. We have reviewed the patent and do not believe that
we need to obtain a license to this patent. In the future, however, we or our
licensees could be found to infringe upon the patent rights of E-Data, TAU
Systems, TechSearch, or other companies.
11
<PAGE>
Protection of our intellectual property is limited and efforts to protect our
intellectual property may be inadequate, time consuming, and expensive.
Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyright, trade secret, and trademark laws, as well as
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and may be time consuming and expensive.
Furthermore, despite our efforts, we may be unable to prevent third parties
from infringing upon or misappropriating our intellectual property. Also, our
competitors may independently develop similar, but not infringing, technology,
duplicate our products, or design around our patents or our other intellectual
property.
Our patent applications or trademark registrations may not be approved.
Moreover, even if approved, the resulting patents or trademarks may not provide
us with any competitive advantage or may be challenged by third parties. If
challenged, our patents might not be upheld or their claims could be narrowed.
Any litigation surrounding our rights could force us to divert important
financial and other resources away from our business operations. In addition,
we license our products internationally, and the laws of many countries do not
protect our proprietary rights as well as the laws of the United States.
To successfully license our product and grow our business, we must retain and
attract key personnel; competition for these personnel is intense.
Our success depends largely on the skills, experience, and performance of
the members of our senior management and other key personnel, including our
chairman of the board and chief executive officer, Victor Shear. None of our
senior management or other key personnel must remain employed for any specific
time period. If we lose key employees, our business and operating results could
be significantly harmed. In addition, our future success will depend largely on
our ability to continue attracting, integrating, and retaining highly skilled
personnel. We recently announced that our chief financial officer, Erwin N.
Lenowitz, will be resigning for personal reasons as of the earlier of the
hiring of a replacement or May 30, 2000. If we are unable to fill this
function, our business could be harmed. In addition, competition for qualified
sales and marketing personnel is intense. We may not be able to hire enough
qualified individuals in the future or in a timely manner. New employees
require extensive training and typically take at least four to six months to
achieve full productivity. Although we provide compensation packages that
include stock options, cash incentives, and other employee benefits, the
volatility and current market price of our common stock may make it difficult
for us to attract, assimilate, and retain highly qualified employees.
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 87 employees at December 31, 1997 to 190 employees at February
29, 2000. To be successful, we will need to implement additional management
information systems, improve our operating, administrative, financial and
accounting
12
<PAGE>
systems and controls, train new employees, and maintain close coordination
among our executive, engineering, accounting, finance, marketing, and
operations organizations.
Industry-Related Risks
Our revenues may not grow and our stock price may decline if digital music
commerce over the Internet does not develop.
We currently devote a significant portion of our time, resources, and
attention pursuing partnerships and business within the music industry. As a
result, if digital music commerce over the Internet does not develop, our
business and operating results will be significantly harmed. A number of
factors could delay or prevent the development of digital music commerce. These
factors include:
. music content providers' inability to attract significant music artists,
record labels, and recordings to be distributed in their format;
. lack of development and adoption of compression technology to facilitate
digital delivery of music or related information like music videos; and
. lack of development and adoption of consumer devices that are able to
play downloaded digital music.
We may not receive sufficient revenues to be successful and our stock price
will decline if use of the Internet for commercial distribution of digital
content is not widely accepted.
Acceptance and use of the Internet for commercial distribution of digital
content may not continue to develop at recent rates, and a sufficiently broad
base of consumers may not adopt, and continue to use, the Internet and other
online services as a medium for digital commerce. Because our transaction fees
are derived from digital commerce transactions, if digital commerce is not
accepted for any reason, our revenues would not grow sufficiently and our
business and operating results would be significantly harmed.
We depend on the widespread acceptance of commerce in digital information
over the Internet, through DVD, and other means. These methods for distribution
of digital information may not be commercially accepted for a number of
reasons, including:
. failure to develop the necessary infrastructure for communication of
digital information and for payment processing;
. failure to develop or deploy enabling technologies, including compression
or broadband technology necessary for distribution of particular digital
content over the Internet;
. reduced demand for paid digital content due to the widespread
availability of free content online and the ability to use and distribute
this content without restriction; and
. insufficient speed, access, and server reliability, as well as lengthy
download time for content.
If standards for digital rights management are not adopted, confusion among
content providers, distributors, and consumers may depress the level of digital
commerce, which would reduce our revenues.
If standards for digital rights management are not adopted or complied with,
content providers may delay distributing content until they are confident that
the technology by which the content is to
13
<PAGE>
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 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. There is
uncertainty in the market as to the best way to offer music digitally. For
example, there are a number of different software formats available and it is
possible that not all music will play on the same devices. Consumer acceptance
of digital delivery of music depends upon the ability of the various software
formats to work together. Consequently, if a standard format for the secure
delivery of content on the Internet is not adopted, or if the standards are not
compatible with our digital rights management technology, our business and
operating results would likely be harmed.
We may face increased governmental regulation and legal uncertainties that
could increase our costs and provide a barrier to doing business.
Exports of software products utilizing encryption technology are generally
restricted by the United States and various foreign governments. Although we
have obtained approval to export our Commerce software, changes in export laws
and regulations may impose restrictions that affect our ability to distribute
products and services internationally, limiting our ability to gain revenue and
grow our business.
It is also possible that Congress or individual states could enact laws
regulating or taxing Internet commerce. In addition, several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers in a manner similar to long distance telephone
carriers and to impose access fees on these companies. Access fees, sales taxes
or any other taxes or fees could increase the cost of transmitting data over
the Internet and reduce the number or amount of transactions from which we
would get our transaction fees.
Risks Related to this Offering
Our stock price has been particularly volatile and could decline substantially
because of the industry in which we compete.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of Internet-
related companies in general, and our stock price in particular, have been
extremely volatile, and have experienced fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
For example, from October 27, 1999, the date of the initial public offering of
our common stock, through April 6, 2000, our stock price has fluctuated from
$9.00 per share to $99.75 and has on many days fluctuated more than 10%. The
trading prices of many technology companies' stocks are at or near historical
highs and reflect valuations substantially above historical levels. These
trading prices and valuations may fall significantly. 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 that
could significantly harm our business and operating results.
14
<PAGE>
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 31.0% of our outstanding common stock, assuming no exercise of
the underwriters' over-allotment option. As a result, these stockholders will
be able to significantly influence all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could have the effect of delaying or preventing a third
party from acquiring control over us. For information regarding the ownership
of our outstanding stock by our executive officers and directors and their
affiliates, please see "Principal and Selling Stockholders."
We have implemented anti-takeover provisions that could make it more difficult
to acquire us.
Our 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.
After this offering, we will have outstanding approximately 81.4 million
shares of common stock, of which approximately 20.5 million shares, including
the shares sold in this offering, plus any shares issued upon exercise of the
underwriters' over-allotment option, will be freely tradeable. The remaining
approximately 60.9 million shares of common stock outstanding after this
offering will become available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date of Availability for Sale
------------ -----------------------------
<C> <S>
11.8 million April 24, 2000
46.2 million Ninety days following the date of this prospectus
2.9 million At various times thereafter, upon the expiration of
respective one-year holding periods.
</TABLE>
If our stockholders sell substantial amounts of common stock in the public
market, including shares issuable upon the exercise of outstanding options, the
market price of our common stock could fall. See "Shares Eligible for Future
Sale" and "Underwriting."
As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.
The public offering price will be 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
15
<PAGE>
immediate substantial dilution. In addition, we have issued options and
warrants to acquire common stock at prices significantly below the public
offering price. To the extent outstanding options or the warrant are ultimately
exercised, there will be further dilution to investors in this offering. We
have in the past and may in the future issue equity securities to our partners
and in connection with acquisitions of businesses, products and technologies.
Any such additional equity issuances may cause further dilution to investors in
this offering. If we issue additional equity securities, stockholders may
experience dilution, and the new equity securities could have rights senior to
those of existing holders of our common stock.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future business or financial performance. In some
cases, you can identify forward-looking statements by terminology--for
instance, may, will, should, expect, plan, anticipate, believe, estimate,
predict, potential or continue, the negative of these terms, or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the risk
factors section. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.
17
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 2,000,000 shares of common stock we
are offering are estimated to be $60.1 million, assuming a public offering
price of $32.13 per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us. 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 investment in, or
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 short-term investment grade
interest-bearing securities. We will not receive any proceeds from the sale of
shares by the selling stockholders.
DIVIDEND POLICY
We have not paid any cash dividends since inception and do not currently
intend to pay any cash dividends.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on The Nasdaq National Market under the
symbol ITRU since our initial public offering on October 27, 1999. The
following table shows the high and low per share prices of our common stock for
the periods indicated.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1999
Fourth Fiscal Quarter (beginning October 27, 1999).......... $93.63 $ 9.00
Fiscal 2000
First Fiscal Quarter ....................................... $99.75 $42.75
Second Fiscal Quarter (through April 5, 2000)............... $41.88 $24.00
</TABLE>
On April 5, 2000, the last reported sale price of our common stock on The
Nasdaq National Market was $32.13 per share. On December 31, 1999, there were
approximately 421 holders of record of our common stock.
18
<PAGE>
CAPITALIZATION
The following table presents the following information:
. our actual capitalization as of December 31, 1999; and
. our as adjusted capitalization as of December 31, 1999, to reflect our
receipt of the estimated net proceeds from our sale of 2,000,000 shares
of common stock in this offering, at an assumed public offering price of
$32.13 per share and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
The number of shares outstanding excludes the following shares:
. 16,255,090 shares of common stock issuable upon the exercise of stock
options and warrants outstanding as of December 31, 1999 at a weighted
average exercise price of $3.11 per share;
. 1,088,600 shares of common stock available for issuance under our 1999
equity incentive plan as of December 31, 1999;
. 132,000 shares of common stock issuable upon the exercise of outstanding
stock options issued by us from December 31, 1999 through February 29,
2000 at a weighted average exercise price of $74.82;
. 700,000 shares of common stock available for issuance under our 1999
employee stock purchase plan as of December 31, 1999;
. 700,000 shares of common stock available for issuance under our 1999 non-
employee directors option plan as of December 31, 1999; and
. 230,464 shares of common stock issued in connection with our acquisition
of Infinite Ink on March 8, 2000 and 68,052 shares issuable upon exercise
of options we assumed in connection with that acquisition.
<TABLE>
<CAPTION>
December 31, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Stockholders' equity:
Convertible preferred stock, 10,000,000 shares
authorized, no shares outstanding actual or as
adjusted............................................... $ -- $ --
Common stock, 120,000,000 shares authorized, 79,216,996
shares issued and outstanding actual, 82,216,996 shares
outstanding as adjusted................................ 79 81
Additional paid-in capital.............................. 214,241 274,336
Deferred stock compensation............................. (6,600) (6,600)
Notes receivable from stockholders...................... (196) (196)
Accumulated other comprehensive income (loss)........... (107) (107)
Accumulated deficit..................................... (74,065) (74,065)
-------- --------
Total stockholders' equity............................ 133,352 193,449
-------- --------
Total capitalization.................................. $133,352 $193,449
======== ========
</TABLE>
19
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999 was $129.8 million, or
approximately $1.64 per share. Net tangible book value per share represents the
amount of stockholders' equity, less intangible assets, divided by 79,216,996
shares of common stock outstanding.
Net tangible book value dilution per share to new investors represents the
difference between the assumed public offering price and the net tangible book
value per share immediately after completion of this offering. Our net tangible
book value as of December 31, 1999 would have been $189.9 million or $2.34 per
share after giving effect to the sale of shares of our common stock in this
offering less estimated discounts, commissions and expenses and assuming no
exercise of the underwriters' over-allotment option. This amount represents an
immediate increase in net tangible book value to existing stockholders and an
immediate dilution in net tangible book value to purchasers of common stock in
the offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $32.13
Net tangible book value per share as of December 31, 1999........ $1.64
Increase per share attributable to new investors................. 0.70
-----
Pro forma net tangible book value per share after the offering..... 2.34
------
Dilution per share to new investors................................ $29.79
======
</TABLE>
This table excludes options and warrants to purchase 16,255,090 shares of
our common stock that were outstanding as of December 31, 1999 at a weighted
average exercise price of $3.11 per share. The exercise of outstanding options
and warrants having an exercise price less than the offering price would
increase the dilutive effect to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The consolidated statements of operations data for the years ended
December 31, 1997, 1998 and 1999, and the consolidated balance sheet data at
December 31, 1998 and 1999 are derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent auditors,
and are included in this prospectus. The consolidated statements of operations
data for the years ended December 31, 1995 and 1996, and the consolidated
balance sheet data at December 31, 1995, 1996 and 1997 are derived from our
consolidated financial statements not included in this prospectus, which have
been audited by Ernst & Young LLP, independent auditors. The historical results
are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues:
Licenses..................... $ -- $ -- $ 1,000 $ -- $ 778
Software support and training
services.................... -- 25 100 152 613
Clearinghouse services....... -- -- -- -- 150
------- ------- -------- -------- --------
Total revenues.............. -- 25 1,100 152 1,541
Cost of revenues:
Licenses..................... -- -- -- 141
Software support and training
services.................... -- 5 102 191 470
Clearinghouse services....... -- -- -- -- 436
------- ------- -------- -------- --------
Total cost of revenues...... -- 5 102 191 1,047
------- ------- -------- -------- --------
Gross profit (loss)........... -- 20 998 (39) 494
Operating costs and expenses:
Research and development..... 2,620 4,852 8,287 13,041 16,472
Sales and marketing.......... -- 1,573 2,717 3,870 6,886
General and administrative... 803 1,735 1,932 2,717 5,588
Amortization of deferred
stock compensation.......... -- -- -- -- 1,704
------- ------- -------- -------- --------
Total operating costs and
expenses................... 3,423 8,160 12,936 19,628 30,650
------- ------- -------- -------- --------
Loss from operations.......... (3,423) (8,140) (11,938) (19,667) (30,156)
Interest income (expense),
net.......................... (160) 180 229 5 1,876
------- ------- -------- -------- --------
Loss before provision for
foreign taxes................ (3,583) (7,960) (11,709) (19,662) (28,280)
Provision for foreign taxes... -- -- -- -- (325)
------- ------- -------- -------- --------
Net loss...................... $(3,583) $(7,960) $(11,709) $(19,662) $(28,605)
======= ======= ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.18) $ (0.33) $ (0.43) $ (0.70) $ (0.71)
======= ======= ======== ======== ========
Shares used in computing basic
and diluted net loss per
share........................ 20,466 23,826 27,278 27,932 40,426
======= ======= ======== ======== ========
<CAPTION>
December 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents and
short-term investments....... $ 386 $ 8,359 $ 1,884 $ 5,575 $140,834
Working capital (deficit)..... (4,590) 7,561 607 4,939 136,551
Total assets.................. 603 9,076 3,111 8,280 151,497
Total stockholders' equity
(deficit).................... (4,387) 6,708 (847) (2,014) 133,352
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce system.
InterTrust was formed and incorporated in January 1990. From inception through
1998, our efforts were principally devoted to research and development, raising
capital, recruiting personnel, and establishing licensing relationships. As a
result, we were considered a development stage enterprise during this period.
The general availability version of our Commerce software was not delivered to
our partners until December 1998, and some of our partners have conducted or
are about to conduct pilot programs using this software. Some partners began
using the technology on a limited commercial basis in January 2000.
We license our DRM platform to companies to build digital commerce services
and applications. Our goal is to license to content, technology, and commerce
services partners to achieve widespread dissemination of our technology, an
expanding consumer base, and broad participation by digital information
providers. We currently derive all of our revenues from initial license fees,
associated software support and training services, and TrustNet clearinghouse
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. Some of 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 TrustNet
clearinghouse services, initial license fees and software support and training
services fees. However, we do not expect to recognize any transaction revenue
until the third or fourth quarter of 2000. 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 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 four basic types of license agreements: commerce service licenses,
business licenses, applications licenses and hardware 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.
Examples of partner commitments include deploying licensed products within a
specified time frame, exclusively using portions of our technology, and using
and publicly promoting us as the partner's preferred digital
22
<PAGE>
rights management technology. We have in the past decided, and may in the
future decide, to reduce or eliminate initial license fees based on these
factors. We do not believe that we can determine the amount of foregone revenue
due to reduced or eliminated license fees with any reliable degree of
certainty. Our license fees are negotiated based on the terms and conditions of
each individual agreement and take into account the scope of the license, the
term, and the other commitments made by our partners that provide strategic
value to us. In addition, we have entered into a limited number of license
agreements which have varying license scopes and terms and which do not provide
adequate comparable data to determine the amount of foregone revenue. In
connection with our strategy to promote widespread use of our technology,
through December 31, 1999, we have on three occasions received initial license
fees for our Commerce software in the form of minority equity positions in the
licensees. In the future, we may enter into other equity payment arrangements.
Licenses of our Commerce software generally require the payment of an
initial license fee. Initial license revenue, net of any discounts granted, is
recognized upon execution of a license agreement and delivery of our software
if we have no remaining obligations relating to development, upgrades, new
releases, or other future deliverables, if the license fee is fixed or
determinable, and if collection of the fee is probable. Our license agreements
generally include the right to obtain access to upgrades and new releases, on a
when and if available basis, for a specified period. Under these circumstances,
the license payments received, net of any discounts granted, 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 a
specified upgrade and do not have vendor specific objective evidence of fair
value of the specified upgrade, all of the license revenue is deferred until
the specified upgrade has been delivered. Upon delivery of the specified
upgrade, license revenue is recognized using the subscription method. We began
recognizing revenue under some license agreements in January 1999, after
shipping the general availability version of our Commerce software at the end
of December 1998. At December 31, 1999, we had approximately $13.2 million of
deferred license revenue that will be recognized in future periods.
Through December 31, 1999, on three occasions we received license fees in
the form of minority equity positions in non-public entities in exchange for
technology licenses. We received approximately 1.7 million shares of common
stock from one licensee, 882 shares of common stock from the second licensee,
and 148,300 shares of common stock from the third licensee, which we believe
represented approximately 10%, 18% and 5% of the outstanding shares of the
licensees as of the license date. Because the entities were recently formed,
privately-held companies and we were unable to obtain sufficient evidence of
the fair value of the common stock of the entities, we did not record revenue
or deferred revenue from the license fees. We are obligated to provide
unspecified upgrades and new releases, on a when and if available basis, to the
licensees over a two year period under the agreements for additional fees. We
are not obligated to provide any funding to any licensee for the development of
the licensee's software.
For contracts entered into before 1998, we recognize revenue as the amounts
are earned under the related agreements, provided no significant obligations
exist and the related receivable is determined to be collectible, consistent
with Statement of Position 91-1, Software Revenue Recognition. Our license
revenues in 1997 were derived from licenses of pre-commercial versions of our
software.
23
<PAGE>
Our license agreements also require the payment of a transaction fee that is
a percentage of revenues received by our partners from transactions and
services that use our technology and sales of products incorporating our
technology. Transactions involving the use of our technology to conduct the
sale, lease, rental, or licensing of commercial content require the payment of
a transaction fee based on the amounts paid by users or charged by our partners
for selling or distributing the content. Transactions involving the use of our
technology for commercial services generally require the payment of a
transaction fee based on the amounts paid by users or charged by our partners
for the services. Transactions involving the sale, lease, rental, or licensing
of products incorporating our technology generally require the payment of a
transaction fee based on the amounts paid by users or charged by our partners
for the product. Our partners are required to pay all amounts due for
transaction fees within specified periods, depending on the licensing
arrangement. Our revenue recognition policy relating to transaction fees is to
recognize the revenue when the amounts due are known, which will generally be
in the quarter after the transaction. Prepaid transaction fees are recorded as
deferred revenue and will be recognized when the related transactions occur. We
have received $1.5 million in prepaid transaction fees which are included in
deferred revenue as of December 31, 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 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.
TrustNet clearinghouse service revenues represent primarily service fees
from our customers for the use of our TrustNet clearinghouse infrastructure in
pilot and test applications and services. Service revenues generally include
consulting and system integration services provided to the customer to
establish an interface with the TrustNet clearinghouse and monthly service fees
to use TrustNet for the clearing of commercial transactions. Consulting and
system integration fees are recognized as services are performed and monthly
service fees are recognized over the term of the service period.
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 25% of total revenues in 1999. Reciprocal accounted for 9%
of total revenues in 1997, 66% in 1998, and 13% in 1999. Bertelsmann accounted
for 21% of total revenues in 1998. NatWest accounted for 13% of total revenues
in 1998. Computacenter accounted for 12% of total revenues in 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
24
<PAGE>
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 substantially increase in future quarters. We
expect to incur additional losses for at least the next several years. As a
result, we will need to generate significant additional revenue to achieve and
maintain profitability. In addition, we have limited and delayed insight on
consumer trends and sales, which makes prediction of our future revenues
difficult.
In October 1999, we purchased audio decoding and rendering technology and
related assets and received a license to video technology from a third party,
in exchange for 170,000 shares of our common stock and $100,000 in cash. The
purchase price of $1.4 million was capitalized as purchased technology and
included intangible assets. We are amortizing the value of the technology
acquired over its estimated useful life of approximately four years.
In March 2000, we acquired Infinite Ink Corporation, a developer of software
solutions for rendering and protecting electronic publishing. We acquired all
of the shares of capital stock of Infinite Ink in exchange for 230,464 shares
of our common stock and assumed all outstanding options of Infinite Ink, which
were converted into options to purchase 68,052 shares of our common stock. The
transaction was accounted for as a purchase with an estimated purchase price of
approximately $28.0 million. We are currently evaluating the acquisition,
including the value of in-process research and development, in order to
determine the allocation of the purchase price.
Results of Operations
Years Ended December 31, 1998 and 1999
Revenues
Total revenues increased from $152,000 in 1998 to $1.5 million in 1999.
Software support and training services accounted for 100% of total revenues in
1998. License fees, software support and training services, and TrustNet
clearinghouse services accounted for 50%, 40% and 10% of total revenues in
1999.
No license revenues were recognized in 1998 as the general availability
release of our Commerce software was not delivered to our partners until
December 1998. License revenues were $778,000 in 1999, and represent the
amortization of deferred license fees.
Revenues from software support and training services increased from $152,000
in 1998 to $613,000 in 1999. This increase was due to support and training fees
from additional partner licensing agreements.
No TrustNet clearinghouse services revenue was recognized in 1998 as the
service was first offered to our partners in the fourth quarter of 1999.
TrustNet clearinghouse services revenues of $150,000 in 1999 were received from
one partner.
25
<PAGE>
Cost of revenues
Cost of license revenues consists primarily of the costs incurred to
manufacture, package, distribute our products and related documentation and the
amortization of purchased technology. Cost of software support and training
services consists primarily of the cost of personnel, travel related
expenditures, and training materials. These expenditures are incurred both
onsite at our facilities as well as offsite at partner locations. Cost of
TrustNet clearinghouse services includes the cost of personnel, computer
hardware, and support of the off-site service center. Total cost of revenues
was $191,000 in 1998 and $1.0 million in 1999. The period-over-period increase
resulted from increased costs incurred to support our new partners and the
introduction of TrustNet clearinghouse services in 1999.
No costs were incurred for licenses during 1998, as we did not deliver the
general availability release of our Commerce software to our partners until
December 1998. Cost of license revenues was $141,000 in 1999. Cost of license
revenues is expected to increase from the amortization of purchased technology
and 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 revenues increased from
$191,000 in 1998 to $470,000 in 1999. The increase in cost of software support
and training services revenues 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.
No costs were incurred for TrustNet clearinghouse services during 1998, as
we did not provide this service until the fourth quarter of 1999. Costs of
$436,000 incurred in 1999 reflect the cost of personnel, hardware expenses, and
the cost of the off-site service center.
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 $13.0 million in
1998 and $16.5 million in 1999. This increase was primarily attributable to a
$2.6 million increase in personnel costs and consultant services associated
with both product research and development and $329,000 of recruiting costs. 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 $3.9
million in 1998 to $6.9 million in 1999. This increase reflects the costs
associated with increased selling efforts. The increase in these costs is
comprised primarily of $1.4 million in
26
<PAGE>
increased personnel costs, $900,000 in increased public relations and other
promotional costs, and $500,000 in increased travel costs. We expect sales and
marketing expenses to increase significantly in absolute dollars due to planned
growth of our sales and partner development organizations, including the
establishment of additional domestic and international offices, and aggressive
implementation of advertising and promotional programs.
General and administrative
General and administrative expenses consist primarily of salaries and
related expenses for executive, legal, accounting and administrative personnel,
professional service fees, and general corporate expenses. General and
administrative expenses increased from $2.7 million in 1998 to $5.6 million in
1999. This increase was primarily attributable to a $1.5 million increase in
personnel costs, as a result of increased executive, legal and accounting
personnel, a $399,000 increase in outside legal costs, a $364,000 increase in
travel costs, and $200,000 in expenses related to being a public company. 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 $8.3 million in 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
$1.7 million of related compensation expense in 1999. The total charges to be
recognized in future periods from amortization of deferred stock compensation
recorded as of December 31, 1999 are anticipated to be $3.3 million for 2000,
$2.0 million for 2001, $1.1 million for 2002, and $244,000 for 2003.
Interest income (expense), net
Interest income (expense), net, consists primarily of interest earned on
cash and cash equivalents and short-term investments offset by interest expense
incurred on convertible promissory notes. We recognized $42,000 in interest
income in 1998 and approximately $1.9 million of interest income in 1999. The
increase in interest income results from increases in the amount of interest-
bearing investments outstanding, which were primarily derived from the net
proceeds of $123.4 million from our initial public offering in October 1999. We
recorded $37,000 in interest expense in 1998 related to convertible promissory
notes that were subsequently converted to preferred stock. We had no interest
expense in 1999.
Income taxes
We have incurred net losses since inception for federal and state tax
purposes and have not recognized a domestic tax provision or benefit. In 1999,
we recorded a tax provision of $325,000 related to foreign withholding taxes on
two license agreements for which we may receive a tax benefit in the future. As
of December 31, 1999, we had $58.4 million of federal and $7.4 million of
27
<PAGE>
state net operating loss carryforwards to offset against future taxable income.
We also had $1.5 million of federal research and development tax credit
carryforwards. The related deferred tax assets have been fully reserved through
December 31, 1999. The federal net operating loss and tax credit carryforwards
expire in years 2007 through 2019, if not used. The state net operating loss
carryforwards expire in years 2000 through 2004, 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.
Years Ended December 31, 1997 and 1998
Revenues
Total revenues were $1.1 million in 1997 and $152,000 in 1998. The decrease
in total revenues in 1998 was primarily related to $1.0 million of revenue
recognized from a limited term license recorded in 1997.
Software support and training services accounted for 9% of total revenues in
1997 and 100% of total revenues in 1998. Software support and training services
revenues increased from $100,000 in 1997 to $152,000 in 1998. 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 1997 and 1998. Total cost of revenues increased from $102,000 in
1997 to $191,000 in 1998. The increase in the cost of software support and
training services revenues 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 $8.3 million in 1997 to
$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 $3.7 million in 1998.
Sales and marketing
Sales and marketing expenses increased from $2.7 million in 1997 to $3.9
million in 1998. 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 $1.9 million in 1997 to
$2.7 million in 1998. This increase was primarily attributable to increases in
legal and accounting personnel that resulted in increases in personnel costs of
$371,000 in 1998. Expenses associated with the preparation of new patent
applications, patent application processing fees, and attorneys costs
associated with patent applications and maintaining our patent portfolio
totaled $334,000 in 1997 and $237,000 in 1998.
28
<PAGE>
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 decreased from $229,000 in 1997 to $5,000
in 1998. Interest income decreased from $229,000 in 1997 to $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 $37,000 of interest expense in 1998 related to two separate
convertible promissory notes.
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. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses............... $ -- $ -- $ -- $ -- $ 167 $ 142 $ 187 $ 282
Software support and
training services..... 25 25 25 77 65 112 176 260
Clearinghouse
services.............. -- -- -- -- -- -- -- 150
------- ------- ------- ------- ------- ------- ------- -------
Total revenues........ 25 25 25 77 232 254 363 692
Cost of revenues:
Licenses............... -- -- -- -- 32 10 24 75
Software support and
training services..... 40 44 50 57 87 121 126 136
Clearinghouse
services.............. -- -- -- -- -- -- 90 346
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............. 40 44 50 57 119 131 240 557
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)..... (15) (19) (25) 20 113 123 123 135
Operating costs and
expenses:
Research and
development........... 3,215 3,143 3,299 3,384 3,436 3,652 4,587 4,797
Sales and marketing.... 1,004 898 956 1,012 1,134 1,315 1,732 2,705
General and
administrative........ 554 521 683 959 759 1,358 1,521 1,950
Amortization of
deferred stock
compensation.......... -- -- -- -- 27 168 625 884
------- ------- ------- ------- ------- ------- ------- -------
Total operating costs
and expenses......... 4,773 4,562 4,938 5,355 5,356 6,493 8,465 10,336
Loss from operations.... (4,788) (4,581) (4,963) (5,335) (5,243) (6,370) (8,342) (10,201)
Interest and other
income (expense), net.. -- (9) (2) 16 42 160 279 1,395
------- ------- ------- ------- ------- ------- ------- -------
Loss before provision
for foreign taxes...... (4,788) (4,590) (4,965) (5,319) (5,201) (6,210) (8,063) (8,806)
Provision for foreign
taxes.................. -- -- -- -- -- -- -- (325)
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(4,788) $(4,590) $(4,965) $(5,319) $(5,201) $(6,210) $(8,063) $(9,131)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE>
We began recognizing revenue on a subscription basis under a number of
license agreements in January 1999, after shipping the general availability
version of our product at the end of December 1998. The increase in software
support and training services revenue beginning in the quarter ended December
31, 1998 was the result of training services associated with new partner
agreements. Software support and training services revenue in the quarter ended
December 31, 1998 also included a one-time support fee related to a limited
term license. Quarter over quarter increases in the cost of software support
and training services reflect the increased effort of engineering personnel to
provide support services to our partners. During the quarter ended June 30,
1998, we reduced the amount of employee travel, limited the amount of hiring,
and reduced the number of consultants to InterTrust with the intention of
managing cash flow. As a result of these efforts, our operating costs and
expenses declined in all departments during the quarter ended June 30, 1998.
Overall increases in research and development spending since the quarter ended
March 31, 1998 are primarily attributable to increased headcount and spending
on software tools used in the development of our products. The decrease in
sales and marketing spending in the quarter ended June 30, 1998 also reflects a
reduction in marketing personnel. Increases in sales and marketing expenses
beginning in the quarter ended September 30, 1998 reflect additional headcount
both domestically and internationally 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, 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. General and administrative expenses in the quarter ended
December 31, 1999 include higher expenses related to being a public company and
higher building expenses related to our new corporate facility.
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 June 30, 2000, we
also expect to incur increases in our quarterly operating costs and expenses of
$150,000 as a result of the new facility lease we entered into in January 2000.
We expect our revenues to vary. If our revenue levels fall below our
expectations, our net loss will increase because only a small portion of our
expenses varies with our revenues. In the future, our operating results may
fall below the expectations of securities analysts and investors. If this
occurs, the market price of our common stock would likely decline.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments were $140.8 million at
December 31, 1999, an increase of $135.2 million from December 1998. The
increase in 1999 is primarily the result of cash generated from private
placements of equity securities of $31.4 million, the exercise of employee
stock options and warrants for $4.3 million, and net proceeds of $123.4 million
from our initial public offering completed in October 1999.
30
<PAGE>
Net cash used in operating activities totaled $20.4 million in 1999. The
cash used in 1999 is primarily attributable to the net loss of $28.6 million,
increases in accounts receivable of $1.1 million, other current assets of $1.0
million, and deferred compensation of $1.9 million, offset by an increase of
$4.6 million in deferred revenue and increases of $3.1 million in accounts
payable and accrued liabilities.
In 1999, our investing activities consisted primarily of capital
expenditures totaling $3.0 million and purchases of investments totalling $42.7
million. Capital acquisitions were principally comprised of office furniture
and equipment for our new corporate facility and 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.
At December 31, 1999, our principal source of liquidity was $140.8 million
in cash and cash equivalents and short-term investments. We believe that the
net proceeds of this offering, together with our cash and cash equivalents and
credit facilities with our equipment vendors, will be sufficient to meet our
working capital needs for at least the next 12 months. From then on, we may
require additional funds to support our working capital requirements or for
other purposes and may seek to raise additional funds through public or private
equity financing or from other sources. Additional financing may not be
available at all or, if available, may not be obtainable on terms favorable to
us. In addition, any additional financing may be dilutive and new equity
securities could have rights senior to those of existing holders of our common
stock. If we need to raise funds and cannot do so on acceptable terms, we may
not be able to respond to competitive pressures or anticipated requirements or
take advantage of future opportunities.
Recent Accounting Pronouncements
We adopted Statement of Position, or SOP, 97-2, Software Revenue Recognition
and SOP 98-4, Deferral of the Effective Date of a Provision of 97-2, as of
January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue
on software transactions and supersede SOP 98-1. The adoption of SOP 97-2 and
SOP 98-4 did not have a material impact on our operating results.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, Modifications of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to extend the
deferral of the application of some passages provided by SOP 98-4 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. We believe the adoption of SOP 98-9 will not have a material
effect on our operating results or financial condition.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This bulletin summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We are currently assessing the
impact of SAB 101 and believe that its adoption will not have a material impact
on our results of operations or financial position.
31
<PAGE>
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, 1999, our cash
and cash equivalents and short-term investments consisted primarily of demand
deposits, money market funds, U.S. government obligations, and corporate debt
securities held by two major financial institutions in the United States.
32
<PAGE>
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 ASPSecure.com, ARM, BMG Entertainment Storage
Media, Cirrus Logic, Creative Technology, Computacenter, Diamond Multimedia
Systems, LOAD Media Network, Massive Media Group, Mediascience, Mitsubishi
Corporation, MusicMatch, National Westminster Bank (Magex),
PricewaterhouseCoopers, PublishOne, Reciprocal, RioPort, Samsung SDS, SingTel,
Spectra.Net, Universal Music Group, and Wave Systems. We also have alliances
with Adobe Systems, Digital Theater Systems, Dolby, Fraunhofer-Institut,
Marimba, Portal Software, QDesign, and Sony Corporation. These partners,
including alliance partners, actively endorse or promote our products and
services through various sales and marketing activities, including press
releases and trade shows. 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, software, games, publications, business information, and images.
The Internet can be used to disseminate this digital information efficiently to
broad audiences without geographic
33
<PAGE>
boundaries, and can eliminate many of the traditional costs associated with
manufacturing, packaging, and distribution. The use of the Internet for digital
goods is being supported both by the growing 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, software, games, 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
34
<PAGE>
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.
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 e-commerce 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
35
<PAGE>
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 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. Through our TrustNet clearinghouse, we also provide an
infrastructure for our partners to pilot and test their applications and
services. 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
36
<PAGE>
to enable providers to get paid and users to act naturally by forwarding
content they like to their associates or friends. If these parties are not
already part of the digital commerce system, they have an incentive to
join so that they may use the content.
. 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.
37
<PAGE>
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 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
[GRAPHIC APPEARS HERE]
Narrative Description of Graphic in the Business Section
Graphic titled "Commerce Flow Example." In the upper right hand corner is a box
titled "Key" in which there are four symbols. The first is a sphere with three
arrows pointing to its center labeled "InterRights Point." The second is a cube
labeled "DigiBox container." The third is the symbol "$" labeled "Payment." The
fourth is the letter "i" inside a circle labeled "Usage information."
In the center is a cube labeled "Distributor." Above and to the right is a
picture of a piece of paper titled "Usage Rules." From the cube an arrow with a
cube in the middle points down towards a box labeled "User." Inside the box is
a human form, a sphere with three arrows meeting in its center, and a picture
of a computer monitor with an image, entitled "Agree to Rules," projecting from
the screen.
From the box an arrow with a sphere in the middle points to the right to a
picture of an electronic device entitled "Information Appliance."
From the box an arrow points to the left to a box entitled "Commerce services
provider." In the middle of the arrow is a web brower labeled "www" next to two
compact disks and a floppy disk. Inside the box there are two buildings and a
sphere with three arrows that meet in its center. The building on the left is
marked with the symbol "$" in a circle. The building on the right is marked
with the letter "i" in a circle.
Two arrows, one with the symbol "$" in the middle and one with the letter "i"
in the middle, both in clear cubes, point to a box titled "Publisher." Inside
the box is a human form, a sphere with three arrows meeting in its center and a
computer monitor. Pointing towards the sphere is a picture of a piece of paper
captioned "Usage rules" and a sphere with the caption "Digital information." An
arrow with a cube in the middle points back to the cube in the center of the
graphic.
. Packaging Content--With an application developed by one of our partners
using our DRM technology, system participants can be both creators and
consumers of digital information. Working from a personal computer, in
this example, a user creates digital information and, using an
InterRights Point, associates business rules with the information and
packages the information securely in a DigiBox container.
. Distributing Content--The information is disseminated in DigiBox
containers over networks, on optical disks, or by other means of
delivering digital information. The information can securely travel
through unsecure networks, because the information in a DigiBox container
is itself protected. Distributors, portals, and web sites can, as enabled
by the rules of the publisher, add additional rules for use or modify the
rules--for example, mark up price, make promotional offers, bundle the
content with other content, or establish frequent buyer programs.
Importantly, rules for use can be easily changed, even after content is
distributed.
38
<PAGE>
. 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 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 strategic relationships with Diamond
Multimedia Systems and RioPort 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, National Westminster Bank
(Magex), and PricewaterhouseCoopers. We believe that these partners'
reputations, markets, and customer base will facilitate user acceptance of the
MetaTrust Utility.
39
<PAGE>
By having a combination of content, technology, and commerce service
participants in multiple markets in the MetaTrust Utility, we would not depend
on any one partner, any specific commercial model, or any specific vertical
market to succeed.
Promote Widespread InterRights Point Deployment
We have designed our client technology and our licensing structure to
achieve efficient and rapid deployment. Our technology is designed so that it
can be conveniently activated by consumers. It is also designed so that it can
be flexibly deployed by our partners through a variety of means, including
digital download, optical disk distribution, and pre-installation. We will also
work with our partners to develop business models that promote rapid
deployment, for example, superdistribution which allows users to drive
InterRights Point deployment through redistribution of content. Through our
OpenRights initiative, we will also make openly available select components and
application building blocks intended to accelerate the adoption of our DRM
platform to developers in various vertical markets.
Leverage the MetaTrust Utility Model
We believe that our neutral utility model is fundamental to achieving
widespread adoption of our DRM platform. We believe partners are more likely to
participate in building a global commerce system if they perceive that the
provider of the foundational technology is unlikely to engage in commercial
models that directly compete with them. We intend to provide technology and
maintain policies needed for an interoperable, secure, and trusted foundation
for all participants in the MetaTrust Utility. Partners can take advantage of
the global interoperability and general purpose nature of this system to build
on the success of our other partners; as more partners and users participate in
the system, participation in the system becomes more efficient and valuable. In
addition, by structuring our compensation as a small share of the value of
goods and services flowing through the system, we align our interests with
those of our partners. From time to time, we may provide special assistance to
new ventures using our technology and may in return take limited equity
positions if we believe it will not compromise our neutrality. In addition, we
have developed and plan to develop further special technology and services to
assist our partners in promoting the use of the MetaTrust Utility in various
vertical markets.
Maintain Technology Lead
We believe we are the leader in DRM technology and intend to continue
advancing the state-of-the-art of DRM. We have attracted a group of computer
scientists in both our engineering team and in STARLab, our electronic commerce
research facility, to focus on a broad range of topics important to advancing
DRM. These include commerce language, streaming media, security, software
tamper resistance, secure processing hardware, and watermarking. We currently
have 14 United States patents and one European patent, 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
40
<PAGE>
partners and customers into the MetaTrust Utility. While we have received
initial license fees from our partners, over time we anticipate that our
revenues will be derived primarily from transaction fees from our partners' and
their customers' commercial deployment of applications and services.
We currently have five basic types of partnering arrangements: commerce
service licenses, business licenses, applications licenses, hardware licenses,
and alliance agreements. These partners actively endorse and promote our
products at marketing events, including trade shows and conferences, as well as
through press releases. 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.
Magex--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.
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.
PricewaterhouseCoopers--PricewaterhouseCoopers LLP is the world's leading
professional services organization. Pricewaterhouse's license allows it to
create financial and usage clearinghouses, develop software applications, and
act as a deployment manager.
Reciprocal--Reciprocal, Inc. is a venture-backed company formed in 1996 by
SOFTBANK Services Group to provide DRM solutions and clearinghouse services.
Reciprocal's license with us allows it to create financial and usage
clearinghouses, develop software applications, and act as a deployment manager.
Reciprocal has recently made public announcements concerning its initiatives
based on our DRM technology in various vertical markets including music,
business information, and education information.
Samsung SDS--Samsung SDS, part of the Samsung Group, is Korea's leading
information services company. Samsung SDS's license to our Commerce software
allows it to create financial and usage clearinghouses, develop software, and
act as a deployment manager in Korea, for commercial and enterprise customers.
41
<PAGE>
SingTel--National Computer Systems Pte Ltd., a subsidiary of Singapore
Telecommunications Ltd., is a leading IT service provider in Singapore.
SingTel's license allows it to create financial and usage clearinghouses,
develop software applications, and act as a deployment manager.
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.
ASPSecure.com--ASPSecure.com Corporation was founded in August 1999 to
develop applications and services based on our DRM technology. ASPSecure.com's
license to our Commerce software allows it to create a usage clearinghouse and
software applications and services for the application service provider, or
ASP, market. We licensed our Commerce software to ASPSecure.com and received an
initial license fee in the form of a minority equity position in ASPSecure.com.
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.
Massive Media Group--Massive Media Group was founded in October 1999 to
develop entertainment and advertising applications and services based on our
DRM technology. Massive Media Group's license to our Commerce software allows
it to create a usage clearinghouse and software applications and services for
entertainment and advertising. We licensed our Commerce software to Massive
Media Group and received an initial license fee in the form of a minority
equity position in Massive Media Group.
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 Group PLC is one of the largest news and information groups
in the world. Reuters has announced trials with NatWest and is a strategic
business partner of Reciprocal, both of which are our commerce services
partners.
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.
42
<PAGE>
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.
Creative--Singapore-based Creative Technology is a leading provider of
multimedia solutions for personal entertainment. Creative has licensed our
Commerce application developer's kit and our Rights/PD technology to use with
the Creative Nomad player and other hardware and to develop software
applications for distributing entertainment content.
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.
LOAD Media--LOAD Media Network, Inc. is a leading video delivery network
over the Internet. LOAD has licensed our Commerce application developer's kit
to develop applications and services for distributing entertainment content.
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.
RioPort--RioPort Inc. is a leader in the digital audio download market.
RioPort has licensed our Commerce application developer's kit to develop
applications and services for distributing music in connection with its
RioPort.com web site.
Spectra.Net--Spectra.Net Communications, Inc., developer of the ThrottleBox
multimedia software system, licensed our Commerce application developer's kit
to enable Spectra.Net to develop applications and services for distribution of
entertainment content.
Wave Systems--Wave Systems Corp. is creating a secure distributing digital
solution for content. Wave Systems licensed our Commerce application
developer's kit and Rights/PD technology to enable Wave Systems to integrate
our DRM technology into its content distribution services and hardware
platform.
43
<PAGE>
Our Commerce Services, Business and Applications Partners and Potential Markets
Through the end of 1998, we were in the development stage and had a limited
number of licensees. Mitsubishi, a stockholder, accounted for 91% of total
revenues in 1997 and 25% of total revenues in 1999. Reciprocal accounted for 9%
of total revenues in 1997, 66% in 1998, and 13% in 1999. Bertelsmann accounted
for 21% of total revenues in 1998. NatWest accounted for 13% of total revenues
in 1998. Computacenter accounted for 12% of total revenues in 1999. Our success
depends on significantly increasing the number of companies that license our
technology and use it for the sale and management of digital content and
services.
The following table shows the markets in which our commerce services,
business, and applications 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>
Market Entertainment: Publishing: Regulated: Enterprise:
Partner . music . business information . government . secure document
. video . financial information . healthcare exchange
. audio books . traditional media . education . enterprise
. games . images . telecommunications information portals
. secure email . trading/brokering
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Magex X X X X
- ------------------------------------------------------------------------------------------------------------
Mitsubishi X X X X
- ------------------------------------------------------------------------------------------------------------
PricewaterhouseCoopers X X X X
- ------------------------------------------------------------------------------------------------------------
Reciprocal X X X
- ------------------------------------------------------------------------------------------------------------
Samsung X X X X
- ------------------------------------------------------------------------------------------------------------
SingTel X X X X
- ------------------------------------------------------------------------------------------------------------
ASPSecure.com X X
- ------------------------------------------------------------------------------------------------------------
Bertelsmann X X
- ------------------------------------------------------------------------------------------------------------
Massive Media Group X X
- ------------------------------------------------------------------------------------------------------------
PublishOne X
- ------------------------------------------------------------------------------------------------------------
Reuters X
- ------------------------------------------------------------------------------------------------------------
Universal X
- ------------------------------------------------------------------------------------------------------------
Computacenter X X X X
- ------------------------------------------------------------------------------------------------------------
Creative X X
- ------------------------------------------------------------------------------------------------------------
Diamond X
- ------------------------------------------------------------------------------------------------------------
LOAD Media X
- ------------------------------------------------------------------------------------------------------------
Mediascience X
- ------------------------------------------------------------------------------------------------------------
MusicMatch X
- ------------------------------------------------------------------------------------------------------------
RioPort X
- ------------------------------------------------------------------------------------------------------------
Spectra.Net X
- ------------------------------------------------------------------------------------------------------------
Wave Systems X X X X
- ------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
Hardware
We have entered into several agreements aimed at developing chips containing
our DRM.
ARM--ARM is a leading provider of high performance, low-cost, power
efficient RISC processors, peripherals, and system-on-chip designs to leading
international electronics companies. ARM has licensed our technology to
integrate our DRM technology into ARM's designs for its family of core
microprocessors.
Cirrus Logic--Cirrus Logic Inc. is a leader in Internet audio chip
technology. Our technology development agreement and license with Cirrus Logic
is aimed at integrating our DRM technology in Cirrus Logic's secure system-on-
a-chip (SOC) solution for digital audio players, personal digital assistants,
electronic books, cellular telephones, and other information appliances. Cirrus
Logic has announced that it is offering the secure SOC.
Alliances
We have entered into several alliance agreements to help us penetrate
various vertical markets. The alliance agreements provide for cooperative
activities regarding product development and targeting specific strategic
business opportunities. To date, we have entered into alliance agreements with
Adobe Systems, Digital Theater Systems, Dolby, Fraunhofer-Institut, Marimba,
Portal Software, QDesign and Sony Corporation.
Products and MetaTrust Utility Services
Our general purpose DRM platform is comprised of both proprietary software
and technology, and the utility services needed for security, interoperability,
and trustedness of the MetaTrust Utility.
Products
Our Commerce software is a general purpose DRM platform and includes systems
software, development tools, and applications for building, deploying, and
managing digital commerce applications. We shipped the general availability
version of our Commerce software at the end of December 1998. Digital
information providers and software companies can use the product to integrate
rights management capabilities into applications that securely manage, control
usage of, and fulfill digital information commerce through digital distribution
channels. Payment processing and Internet infrastructure companies can use the
product to provide various commerce services, including payment clearing, usage
reporting, market analysis and user profiling, advertising, regulatory
compliance, affinity marketing, and automated trading systems.
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;
45
<PAGE>
. 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.
We have also developed a product called Rights/PD that is designed to extend
our DRM platform to embedded systems, including portable devices and set-top
boxes. Rights/PD is designed to implement a range of DRM functions, including
persistent protection of digital information of all types, and support for
simple to complex business models.
MetaTrust Utility Services
We plan to maintain the specifications and administer the interoperability,
security, and trustedness of the MetaTrust Utility. We do this through our
MetaTrust certification program, which has three essential elements:
. Specifications--Our partners and their products and services must comply
with our specifications. These specifications establish policies that
address technical, procedural, and related matters designed to promote
the security, trustedness, integrity, interoperability, and performance
of products and services in the MetaTrust Utility.
. Certification--We test and certify, or provide the means for testing and
certifying, that products and services of participants in the MetaTrust
Utility comply with our specifications. Certification applies to all
applications that interface with an InterRights Point as well as partner
sites and operations. We expect to provide various procedures designed to
make certification an easy process, including pre-certification of
components.
. Security--Our system addresses numerous areas of security, including
securing digital information after initial use and providing tamper
resistance in the InterRights Point software. We have designed, and plan
to continue to design, countermeasures that we intend to implement if
security is compromised. We also plan on assisting our partners in
cryptographic key management.
Through our TrustNet clearinghouse, we also provide an infrastructure for
our partners to pilot and test their applications and services.
46
<PAGE>
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 in the 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.
. 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.
47
<PAGE>
. 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 Windows 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 20 employees as of
February 29, 2000, 12 in Santa Clara, one in Washington D.C., four in London,
England, two in Sydney, Australia and one in Tokyo, Japan.
Our partner development organization provides a single point of coordination
for all interactions with the customers after they become partners. These
personnel are skilled in both business consulting and systems design to
facilitate the successful deployment of our products. The partner development
organization works with our partners on using our DRM technology as well as on
developing cross-partner and new customer relationships. Our partner
development organization consisted of nine employees as of February 29, 2000.
Marketing
We market our products worldwide primarily through our partners in
combination with our own efforts. We conduct a variety of marketing programs
worldwide to educate our target market, create awareness and generate leads for
our MetaTrust Utility. To achieve these goals, we have engaged in marketing
activities including joint partner marketing, print and online advertising
campaigns and trade shows. These programs are targeted at key business unit
executives as well information technology officers. In addition, we conduct
comprehensive public relations programs that include establishing and
maintaining relationships with key trade press, business press, and industry
analysts. We have established consistent branding guidelines for all of our
partners to increase our brand awareness. Our
48
<PAGE>
programs are designed to assist our partners in developing their internal
marketing programs and capabilities. Our marketing organization consisted of 13
individuals as of February 29, 2000.
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
$16.5 million in 1999.
As of February 29, 2000, our research and development and training and
support organizations were comprised of 123 employees and nine contractors.
Product Development
The product development organization is responsible for designing,
developing, and supporting commercial implementations of our DRM technology 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 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 commerce language, streaming
media, security, software tamper resistance, secure processing hardware, and
watermarking. The activities of STARLab are integrated with our important
strategic objectives, including:
. extending our portfolio of intellectual property;
49
<PAGE>
. 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 Adobe,
AT&T, IBM, Liquid Audio, Microsoft, Preview Systems, and Xerox; and
. companies offering hardware-based content metering and copy protection
systems, including Sony and the 4C Entity, comprised of IBM, Intel,
Matsushita, and Toshiba.
In addition to these two categories, in the future, operating system
developers 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;
. 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;
50
<PAGE>
. 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. We currently hold 14 United States patents and one
European patent. We also have filed 38 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. Expenses associated with the preparation of new patent
applications, patent application processing fees, and attorneys costs
associated with patent applications and maintaining our patent portfolio
totaled $334,000 for the year ended December 31, 1997, $237,000 for the year
ended December 31, 1998, and $244,000 for the year ended December 31, 1999.
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.
51
<PAGE>
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 our broad range of technologies, 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, Rights/PD, TrustMail,
TrustNet, and others. We do not know if these marks will be approved. In
addition, a significant portion of our marks use the words inter, trust, meta,
or digi. We are aware of other companies that use one or more of these words in
their marks, alone or in combination with other words. We do not expect to be
able to prevent all third-party uses of these words. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do the laws of the United States, and effective patent, copyright,
trademark, and trade secret protection may not be available in these
jurisdictions. We license our proprietary rights to third parties, and these
licensees may fail to abide by compliance and quality control guidelines
relating to our proprietary rights or may take actions that would harm our
business.
52
<PAGE>
Our partners may rely in part on licenses included within the sealed
packaging of commercial software and licenses on a web site that are entered
into by clicking with a computer mouse on a button denoting assent to the terms
of the license displayed on the web site. These licenses, however, may be or
become unenforceable under the laws of some jurisdictions. As with other
software products, our products are susceptible to unauthorized copying and
uses that may go undetected. Policing unauthorized use is difficult.
Any claims relating to the infringement of third-party proprietary rights,
even if meritless, could result in the expenditure of significant financial and
managerial resources and could result in injunctions preventing us from
distributing particular products and services. These claims could harm our
business. We also rely on technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products and services to perform key functions. Third-party
technology licenses may not continue to be available to us on commercially
reasonable terms. The loss of any of these technologies could harm our
business. Although we generally seek to be indemnified against claims that
technology licensed by us infringes the intellectual property rights of others,
we do not receive indemnification in some cases. In some cases indemnification
is not available for all types of intellectual property and proprietary rights,
and in other cases the scope of indemnification is limited. Even if we receive
broad indemnification, third-party indemnitors are not always well-capitalized
and may not be able to indemnify us in the event of infringement, resulting in
substantial liability to us. Infringement or invalidity claims may arise from
the incorporation of third-party technology, and our customers may make claims
for indemnification. These claims, even if meritless, could result in the
expenditure of significant financial and managerial resources in addition to
potential product or service redevelopment costs and delays, all of which could
harm our business.
Standards Bodies and Industry Groups
We participate in selected industry groups to promote digital rights
management in the computer, consumer electronics, and entertainment markets.
With this aim in mind, we have most recently been involved with the following
standards bodies and industry groups: Moving Picture Experts Group, Secure
Digital Music Initiative, Open Platform Initiative for Multimedia Access, The
Open eBook Initiative, 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 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
53
<PAGE>
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 February 29, 2000, we had a total of 190 employees. Of the total, 123
were in research and development and training and support, 42 were in
marketing, sales and partner development, and business development, and 25 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
facilities occupy approximately 121,000 square feet in Santa Clara, California
under two leases that terminate in September 2004. We also lease office space
for a research and development facility occupying approximately 3,900 square
feet in Portland, Oregon under a lease that terminates in October 2002.
InterTrust International, our wholly-owned subsidiary, has an office located in
London, England.
54
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages and positions as of
February 29, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Victor Shear............ 52 Chairman of the Board and Chief Executive Officer
David C. Chance......... 42 Executive Vice Chairman of the Board
Edmund J. Fish.......... 37 Director, Executive Vice President, and Chief Business Officer
Erwin N. Lenowitz....... 50 Vice Chairman of the Board, Chief Financial Officer, and Secretary
David P. Maher.......... 49 Chief Technology Officer
Douglas M. Armati....... 49 Senior Vice President, Strategic Sales and Partner Development
Ann B. Cowan............ 45 Senior Vice President, TrustNet Products, Services and Operations
Duncan M. Davidson...... 47 Senior Vice President, Business Development
Richard H. Frank........ 58 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
Talal Shamoon........... 36 Senior Vice President, Media
David M. Van Wie........ 35 Director and Senior Vice President, Research
Patrick P. Nguyen....... 33 Senior Vice President, Corporate Development
Bruce Fredrickson....... 57 Director
Satish K. Gupta......... 55 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.
David C. Chance joined InterTrust as an officer and board member with the
title executive vice chairman in October 1999. Before joining InterTrust, from
January 1994 to January 1998, Mr. Chance was deputy managing director of BskyB
Group Ltd., a leading United Kingdom pay-television and media company, and
continued to serve as a consultant and non-executive director until August
1999. In addition, Mr. Chance is a non-executive director of Modern Times
Group, the primary pay-television operator in Scandinavia, and Sunderland
football club. Mr. Chance also serves on the board of the New Millenium
Experience Company, responsible for the Millenium Dome project in London. Mr.
Chance received a B.S. in psychology, a B.A. in industrial relations, and an
M.B.A. from the University of North Carolina at Chapel Hill.
Edmund J. Fish has served as a director, executive vice president, and chief
business officer of InterTrust since January 2000. From June 1999 to January
2000, Mr. Fish served as senior operating officer and executive vice president,
corporate development of InterTrust. From September 1995 to June 1999, Mr. Fish
served as general counsel and vice president, corporate development of
InterTrust. Before joining InterTrust, Mr. Fish practiced law in the Silicon
Valley, Washington D.C. and New York offices of Weil, Gotshal & Manges, an
international law firm, from August 1989 to August 1995. Mr. Fish received a
B.S. in biomedical engineering from Marquette University and a J.D. from Wayne
State University.
55
<PAGE>
Erwin N. Lenowitz has served as vice chairman of the board, chief financial
officer, and secretary of InterTrust since January 1993. On March 13, 2000, Mr.
Lenowitz announced that he would resign as vice chairman, chief financial
officer, and secretary of InterTrust effective upon the earlier of May 30, 2000
or the hiring of a replacement. 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.
David P. Maher has served as chief technology officer of InterTrust since
June 1999. Before joining InterTrust, Mr. Maher served in various positions at
AT&T from June 1981 to June 1999, including as an AT&T fellow, a Bell Labs
fellow and head of the secure systems research department. At AT&T, Mr. Maher
developed secure wideband transmission systems, cryptographic key management
systems and secure communications devices. In addition, Mr. Maher was chief
architect for AT&T's STU-III secure device, data, and video products for secure
government communications. Mr. Maher has been a consultant for the National
Science Foundation, the National Security Agency, the National Institute of
Standards and Technology, and the Congressional Office of Technology
Assessment, and has taught electrical engineering, mathematics and computer
science at several institutions. Mr. Maher received B.A., M.S. and Ph.D.
degrees in mathematics from Lehigh University.
Douglas M. Armati has served as senior vice president, strategic sales and
partner development of InterTrust since April 1999. From June 1997 to March
1999, Mr. Armati served as vice president, strategic sales and managing
director of the United Kingdom branch of InterTrust International. From
December 1996 to June 1997, Mr. Armati served as an independent consultant to
InterTrust International. From January 1994 to December 1996, Mr. Armati was a
principal at Jackson Brevis Ltd., a British consulting firm, focusing on
electronic commerce and intellectual property rights in digital environments.
Mr. Armati received a B.Comm. from Murdoch University.
Ann B. Cowan has served as senior vice president, TrustNet products,
services and operations since October 1999 and as vice president, systems
development of InterTrust from September 1996 to October 1999. Before joining
InterTrust, Ms. Cowan served as director of engineering at Silicon Graphics, a
software workstation and server developer, from June 1995 to September 1996.
Before joining Silicon Graphics, from August 1986 to September 1994, Ms. Cowan
held several management positions in research and product development at
Ingres, a relational database company, most recently as director of Ingres
database and connectivity. Ms. Cowan received a B.A. in computer science from
Texas Christian University.
Duncan M. Davidson has served as senior vice president, business development
of InterTrust since July 1997. Before joining InterTrust, Mr. Davidson was
managing partner of Gemini McKenna, an alliance between Gemini Consulting and
Regis-McKenna, Inc., and The McKenna Group, from August 1995 to July 1997. Mr.
Davidson also served as vice president of Gemini Consulting, the management
consulting arm of Cap Gemini, a systems integrator, and its predecessor, The
MAC Group, from April 1989 to August 1995. Mr. Davidson is a founder of Covad
Communications, a telecommunications company providing high speed data
services, and serves on its board of advisors. Mr. Davidson received a Sc.B. in
physics-mathematics from Brown University and a J.D. from the University of
Michigan.
56
<PAGE>
Richard H. Frank is senior vice president, portable device group of
InterTrust and has served in various other capacities, including chief
technology officer, since joining InterTrust in February 1997. Before joining
InterTrust, Mr. Frank was a senior consultant to electronic commerce companies,
including Novell Corporation, a computer-networking company. From March 1991 to
September 1992, Mr. Frank served as vice president of development at Software
Publishing, a software development company, and as chief technology officer
from September 1992 to September 1994. From January 1979 to September 1984, Mr.
Frank served as chief executive officer at Sorcim, a personal computer software
company. Mr. Frank received a B.A. in chemistry from San Francisco State
University.
B. Nicholas Garnett has served as senior vice president, trust utility of
InterTrust International, our subsidiary, since August 1999. Before joining
InterTrust International, from March 1992 to July 1999, Mr. Garnett was the
director general and chief executive officer of the International Federation of
the Phonographic Industry, which was instrumental in establishing the recording
industry's worldwide anti-piracy structure. Mr. Garnett received an M.A. in law
from the University of Cambridge and a D.E.A. in French law from the University
of Bordeaux.
Joseph W. Jennings has served as senior vice president, marketing of
InterTrust since February 1998. Before joining InterTrust, Mr. Jennings served
as a consultant to the venture capital firms of Sigma Partners, Mohr Davidow
Ventures, and InnoCal Ventures from January 1995 to December 1997. From July
1994 to January 1998, Mr. Jennings served as president of GCI Jennings, a
technology marketing communications company. Mr. Jennings received a B.A. in
political science from Whitman College and an M.B.A from the University of
Washington.
Richard A. Landsman is senior vice president, product development and
support of InterTrust and has served in various other positions since joining
InterTrust in July 1997. Before joining InterTrust, from October 1992 to July
1997, Mr. Landsman worked for Borland International, Inc., a provider of
programming and data base tools, where he directed Borland's Java development
tools business and managed Borland's C++ class libraries and frameworks team.
Before joining Borland, Mr. Landsman served as a senior manager at Lotus
Development, a productivity applications software company, from January 1983 to
October 1992. Mr. Landsman received a B.S. in management and finance from the
University of Massachusetts and an M.S. in computer science from Boston
University.
Talal Shamoon has served as senior vice president, media of InterTrust since
February 2000. From June 1999 to February 2000, Dr. Shamoon served as our vice
president, corporate development and technology initiatives. From June 1997 to
June 1999, Dr. Shamoon served as a member of the research staff of STARLab.
Before joining InterTrust, from October 1994 to June 1997, Dr. Shamoon worked
for NEC Research Institute, an advanced research facility of NEC focused on
computer science and physics, where he focused on multimedia security, signal
processing and data compression. Dr. Shamoon received B.S., M. Eng and Ph.D
degrees in electrical engineering from Cornell 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
57
<PAGE>
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 senior vice president, corporate development, and has
also served as vice president, global alliances, since joining InterTrust in
July 1998. Before joining InterTrust, from February 1993 to June 1998, Mr.
Nguyen worked at the Silicon Valley Office of Weil, Gotshal & Manges, where he
was made a partner in January 1998 and headed the corporate and technology
transaction group. Mr. Nguyen received a B.S. in computer science from the
University of California at Irvine and a J.D. from the University of California
at Los Angeles.
Bruce Fredrickson has served as a director of InterTrust since February
1993. Mr. Fredrickson has also served as president of Tactical Marketing
Ventures LLC, a marketing firm for computer hardware, software, and Internet
service companies, since September 1991. Before his position with Tactical
Marketing Ventures, Mr. Fredrickson served as vice president of marketing for
Ingram Micro, a computer products distributor, from February 1986 to August
1991. Mr. Fredrickson received a B.S. in liberal arts from St. Olaf College and
an M.S. in communications and media from the University of Colorado.
Satish K. Gupta has served as a director of InterTrust since February 1993.
Mr. Gupta has been the president and chief executive officer of Cradle
Technologies, a semiconductor company, since July 1998. From May 1994 to June
1998, Mr. Gupta was vice president of corporate marketing and business
development of Cirrus Logic, a semiconductor company, and from June 1991 to May
1994, he was vice president of strategic marketing and advanced development of
Media Vision, a multi-media peripherals company. Mr. Gupta received a B.E. in
electrical engineering in India from Birla Institute of Technology and Science,
an S.M. in electrical engineering from Massachusetts Institute of Technology,
and an M.S. in engineering and economic systems from Stanford University.
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
58
<PAGE>
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 our 1999 equity incentive plan and 1999 employee stock
purchase plan. The current members of the compensation committee are Messrs.
Fredrickson and Gupta.
Director Compensation
Except for grants of stock options, our board members generally do not
receive compensation for services provided as a director. We also do not pay
compensation for committee participation or special assignments of the board of
directors.
Messrs. Fredrickson and Gupta, our non-employee directors, have each
received an option for 160,000 shares of common stock at an exercise price of
$0.3125 per share and an option for 30,000 shares of common stock at an
exercise price per share of $7.00. Non-employee directors are eligible to
receive automatic option grants under our 1999 non-employee directors option
plan and eligible to receive options and be issued shares of common stock under
our 1999 equity incentive plan. Directors who are also our employees are
eligible to receive options and be issued shares of our common stock under the
1999 equity incentive plan and are eligible to participate in our 1999 employee
stock purchase plan. In March 2000, we granted an option to purchase 40,000
shares of common stock at an exercise price of $82.50 per share to each of
Messrs. Fredrickson and Gupta.
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 amended and restated certificate of incorporation 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.
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;
59
<PAGE>
. 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
1999 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 $100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------- ------------
Securities
Other Annual Underlying
Name and Principal Position(s) Year Salary ($) Bonus ($) Compensation ($) Options (#)
- ------------------------------ ---- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Victor Shear............................ 1999 $175,000 -- $38,528(1) --
Chairman of the Board and 1998 175,000 -- -- --
Chief Executive Officer
Edmund J. Fish.......................... 1999 180,000 $200,000 -- --
Executive Vice President and 1998 169,751 -- -- 80,000
Chief Business Officer
Duncan M. Davidson...................... 1999 220,000 -- -- --
Senior Vice President, 1998 220,000 -- -- --
Business Development
Joseph W. Jennings...................... 1999 200,000 -- -- --
Senior Vice President, 1998 167,340 -- -- 640,000
Marketing
Erwin N. Lenowitz ...................... 1999 205,000 -- -- --
Vice Chairman of the Board, 1998 175,000 -- -- --
Chief Financial Officer, and Secretary
</TABLE>
- --------
(1) Represents $24,568 in rental payments and $13,960 in leased car payments.
During 1999, no options or stock appreciation rights were granted to our
chief executive officer and our four other highest-paid executive officers.
The table below presents for our chief executive officer and our four other
highest-paid executive officers any options exercised during 1999 and the value
realized from that exercise. It also presents the number and value of shares
underlying unexercised options that were held by these executive officers as of
December 31, 1999. No stock appreciation rights were exercised by these
executive officers in 1999, and no stock appreciation rights were outstanding
at the end of that year.
60
<PAGE>
Upon the completion of six months of service, 12.5% of the option shares
listed in the table below became vested. Upon the completion of each of the
next 42 months of service, an additional 1/48th of the option shares become
vested. Our board may provide for the options to become immediately
exercisable; in that case, any unvested shares that are purchased by a holder
of an option may be repurchased by us at the original exercise price paid per
share if the option holder ceases service with us before vesting in these
shares.
The figures in the value of unexercised in-the-money options at fiscal year-
end column are based on the fair market value of our common stock at the end of
1999, less the exercise price payable for these shares. The fair market value
for our common stock at the end of 1999 was $58.81 per share.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End (#) at FY-End ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Victor Shear............ -- -- -- -- -- --
Edmund J. Fish.......... 345,334 $247,908 53,334 116,668 $ 3,090,705 $ 6,725,302
Duncan M. Davidson...... 386,668 426,672 13,333 126,667 774,147 7,354,603
Joseph W. Jennings...... -- -- 293,332 346,668 16,884,923 19,995,077
Erwin N. Lenowitz....... 720,000 410,400 -- -- -- --
</TABLE>
Employee Benefit Plans
1999 Equity Incentive Plan
Our board of directors adopted our 1999 equity incentive plan on July 22,
1999. Our stockholders have also approved this plan. We have reserved 3,800,000
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, 3,000,000 shares. As of December 31, 1999, options to
purchase 2,711,400 shares of our common stock had been granted under the 1999
equity incentive plan, no options to purchase shares of our common stock under
the 1999 equity incentive plan had been exercised and 1,088,600 shares remained
available for future grant. Effective January 1, 2000, the number of shares
reserved for issuance under the 1999 equity incentive plan was automatically
increased by 3,000,000 shares.
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;
61
<PAGE>
. restricted shares; and
. stock units.
Options may be incentive stock options that qualify for favorable tax
treatment for the option holder under Section 422 of the Internal Revenue Code
of 1986 or nonstatutory stock options not designed to qualify for favorable tax
treatment. With limited restrictions, if shares awarded under the 1999 equity
incentive plan are forfeited, those shares will again become available for new
awards under the 1999 equity incentive plan.
The compensation committee of our board of directors administers 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 1,000,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 2,000,000 shares in the first year of
employment.
The exercise price may be paid with:
. cash;
. outstanding shares of common stock;
. the cashless exercise method through a designated broker;
. a pledge of shares to a broker; or
. a promissory note.
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.
62
<PAGE>
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 will 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 will be cancelled for
a cash payment.
Our board of directors may amend or terminate the 1999 equity incentive plan
at any time. If our board amends the plan, stockholder approval of the
amendment will be sought only if required by applicable law. The 1999 equity
incentive plan will continue in effect indefinitely unless the board terminates
the plan.
1999 Employee Stock Purchase Plan
Our board of directors adopted our 1999 employee stock purchase plan on July
22, 1999. Our stockholders have also approved this plan. We have reserved
700,000 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,
700,000 shares. The automatic increase effective January 1, 2000 was for
700,000 shares. Our 1999 employee stock purchase plan is intended to qualify
under Section 423 of the Internal Revenue Code.
Eligible employees may begin participating in the 1999 employee stock
purchase plan at the start of an offering period. Each offering period, other
than the initial offering period, will last 24 months. Two overlapping offering
periods will start on May 1 and November 1 of each calendar year. The first
offering period started on October 27, 1999 and will 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.
The compensation committee of our board of directors administers 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
63
<PAGE>
compensation. The initial period during which payroll deductions may be
contributed began on October 27, 1999 and will end on April 30, 2000. Each
participant may purchase up to 1,200 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:
. $9.00; or
. the fair market value per share of our common stock on the purchase date.
Employees may end their participation in the 1999 employee stock purchase
plan at any time. Participation ends automatically upon termination of
employment with InterTrust.
If a change in control of InterTrust occurs, our 1999 employee stock
purchase plan will end, and shares will be purchased with the payroll
deductions accumulated to date by participating employees, unless this plan is
assumed by the surviving corporation or its parent. Our board of directors may
amend or terminate the 1999 employee stock purchase plan at any time. If our
board of directors increases the number of shares of common stock reserved for
issuance under this plan, it must seek the approval of our stockholders.
1999 Non-Employee Directors Option Plan
Our board of directors adopted our 1999 non-employee directors option plan
on July 22, 1999. Our stockholders have also approved this plan. Only the non-
employee members of our board of directors are eligible for automatic option
grants under this plan.
We have reserved 700,000 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 700,000 shares.
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 joins our board of directors as a non-employee director
will receive at that time a fully vested option for 30,000 shares of our common
stock. In addition, at each of our annual
64
<PAGE>
stockholders' meetings, beginning in 2000, each non-employee director who will
continue to be a director after that meeting will automatically be granted on
the date of that meeting a fully vested option for 10,000 shares of our common
stock. However, any non-employee director who receives an option for 30,000
shares under this plan will first become eligible to receive the annual option
for 10,000 shares at the annual meeting that occurs during the calendar year
following the year in which he received the option for 30,000 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 640,000 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 640,000 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. Edmund J. Fish, our executive vice president and chief business
officer, has received option grants for 86,667 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 1999 were also granted options that provide that upon a change
in control transaction, the vesting of the options will accelerate and 50% and
100%, respectively, 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.
65
<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, all of which reflect the two-for-one
stock split effected in February 2000.
Series A Preferred Stock Financing. In March 1996, we issued and sold
2,348,336 shares of series A preferred stock to Kistler Associates, one of our
5% stockholders, at a per share purchase price of $1.278.
In June 1996, we issued and sold 195,692 shares of series A preferred stock
to SLF Partners IV, L.P. at a per share purchase price of $1.278. One of our
executive officers, Patrick P. Nguyen, is a limited partner of SLF Partners IV,
L.P.
Series B Preferred Stock Financing. In December 1997, we issued and sold
466,744 shares of series B preferred stock to Kistler Associates, and in March,
April, and December 1998, we issued and sold an aggregate of 933,488 shares of
series B preferred stock to Kistler Associates, in both cases at a per share
purchase price of $2.143.
In July and December 1998, we issued and sold an aggregate of 1,757,264
shares of series B preferred stock to SLF Partners IV, L.P. at a per share
purchase price of $2.143.
In December 1998, we issued and sold 373,000 shares of series B preferred
stock to Ecomm Ventures I, LLC at a per share purchase price of $2.143. 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 59,290
shares of series C preferred stock to Kistler Associates at a per share
purchase price of $2.945.
Series D Preferred Stock Financing. In April 1999, we issued and sold
470,588 shares of series D preferred stock to Kistler Associates at a per share
purchase price of $4.25.
In April 1999, we issued and sold 958,824 shares of series D preferred stock
to SLF Partners IV, L.P. at a per share purchase price of $4.25.
In April 1999, we issued and sold 50,000 shares of series D preferred stock
to Tactical Marketing Ventures, LLC at a per share purchase price of $4.25.
Bruce Fredrickson, a director of InterTrust, is the president of Tactical
Marketing Ventures, LLC.
In June 1999, we issued and sold 398,824 shares of series D preferred stock
to Ecomm Ventures II, LLC at a per share purchase price of $4.25. One of our
executive officers, Patrick P. Nguyen, is a director of Ecomm Ventures II, LLC.
66
<PAGE>
Series E Preferred Stock Financing. In July 1999, we issued and sold 466,666
shares of series E preferred stock to Kistler Associates at a per share
purchase price of $6.00.
In July 1999, we issued and sold 100,002 shares of series E preferred stock
to Duncan M. Davidson, one of our executive officers, at a per share purchase
price of $6.00.
Option to Purchase Class B Non-Voting Common Stock. In October 1993, we
granted an option to purchase 320,000 shares of our class B non-voting common
stock to Electronic Ventures, LLC at an exercise price of $0.3125. This option
was exercised on December 3, 1999. Erwin N. Lenowitz, one of our executive
officers, is a managing director of Electronic Ventures, LLC.
Options to Purchase Common Stock. In October 1999, we granted an option to
purchase 600,000 shares of our common stock at an exercise price of $7.65 to
David C. Chance, one of our executive officers and a director. In March 2000,
we granted options to purchase 40,000 shares of our common stock at an exercise
price of $82.50 to each of our Messrs. Fredrickson and Gupta.
Messrs. Fredrickson and Gupta are members of our board of directors.
Loan to Executive Officer. In December 1997 and January 1998, we loaned a
total of $62,290 to Edmund J. Fish, one of our directors and an executive
officer, secured by a stock pledge agreement. This note accrues interest at the
rate of 7% per year. The principal balance of this note and accrued interest is
due and payable on June 1, 2000.
All of our shares of preferred stock and non-voting common stock converted
to common stock upon the occurrence of our initial public offering in 1999.
Indemnification. We have entered into an indemnification agreement with each
of our officers and directors. See "Management--Indemnification" for a
description of the indemnification available to our officers and directors
under these agreements.
67
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table on the next page presents selected information regarding
beneficial ownership of our outstanding common stock as of February 29, 2000,
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;
. all of our directors and executive officers as a group; and
. all other selling stockholders.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes sole or shared voting or investment power over securities
and includes the shares issuable under stock options that are exercisable
within 60 days of February 29, 2000. Shares issuable under stock options
exercisable within 60 days are considered outstanding for computing the
percentage of the person holding the options but are not considered outstanding
for computing the percentage of any other person. Consequently, the table on
the next page includes information regarding shares issuable under stock
options exercisable within 60 days of February 29, 2000 for the following
persons and in the following amounts:
<TABLE>
<CAPTION>
Name Shares Subject to Options
---- -------------------------
<S> <C>
David M. Van Wie................................... 641,600
Richard H. Frank................................... 477,666
Joseph W. Jennings................................. 346,666
Satish K. Gupta.................................... 160,000
Ann B. Cowan....................................... 117,012
David C. Chance.................................... 100,000
Edmund J. Fish..................................... 86,667
Patrick P. Nguyen.................................. 67,499
Talal Shamoon...................................... 60,833
David P. Maher..................................... 41,250
Duncan M. Davidson................................. 40,000
Douglas M. Armati.................................. 33,334
Other selling stockholders......................... 3,012,411
</TABLE>
Percentage ownership calculations are based on 79,408,518 shares of common
stock outstanding as of February 29, 2000 and 81,408,518 shares of common stock
outstanding after the completion of the offering. The numbers shown in the
table below assume no exercise by the underwriters of their over-allotment
option to purchase up to 720,000 shares.
Unless otherwise indicated, the address for each listed stockholder is: c/o
InterTrust Technologies Corporation, 4750 Patrick Henry Drive, Santa Clara,
California 95054. To our knowledge, except as indicated in the footnotes to
this table and under applicable community property laws, the persons or
entities identified in this table have sole voting and investment power over
all shares of common stock shown as beneficially owned by them.
68
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially
Owned Prior Shares Beneficially
to Offering Owned After Offering
------------------ -----------------------
Named Executive Officers, Number
Directors, of Shares
and greater than 5% Being
Stockholders Number Percent Offered Number Percent
- ------------------------- ---------- ------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Victor Shear............... 15,389,716 19.4% 286,620 15,103,096 18.6%
Kistler Associates......... 5,183,146 6.5 300,000 4,883,146 6.0
955 5th Avenue, Apt. 6B
New York, NY 10021
Erwin N. Lenowitz(1)....... 773,550 1.0 55,540 718,010 *
David M. Van Wie........... 689,600 * 50,000 639,600 *
Duncan M. Davidson(2)...... 640,002 * 0 640,002 *
Edmund J. Fish............. 630,105 * 62,000 568,105 *
Joseph W. Jennings......... 346,666 * 33,333 313,333 *
Satish K. Gupta............ 350,000 * 35,000 315,000 *
Bruce Fredrickson(3)....... 304,000 * 30,400 273,600 *
David C. Chance............ 200,000 * 0 200,000 *
Executive officers and
directors as a group
(17 persons)(4)(5)........ 21,657,394 26.5 753,393 20,904,001 25.0
Greater than 1% Selling
Stockholders
- -----------------------
Reuters New Media, Inc..... 3,164,422 4.0 316,442 2,847,980 3.5
SOFTBANK Ventures, Inc..... 2,333,724 2.9 233,372 2,100,352 2.6
Lion Investments, Limited.. 824,286 1.0 70,000 754,286 *
Westpool Investment Trust.. 824,286 1.0 70,000 754,286 *
Other Selling Executive
Officers
- -----------------------
Patrick P. Nguyen(5)....... 640,237 * 20,000 620,237 *
Richard H. Frank........... 497,666 * 50,667 446,999 *
Richard A. Landsman........ 359,164 * 35,000 324,164 *
Douglas M. Armati.......... 335,440 * 35,000 300,440 *
Ann B. Cowan............... 302,082 * 20,000 282,082 *
Talal Shamoon.............. 120,833 * 2,000 118,833 *
David P. Maher............. 45,000 * 4,500 40,500 *
Other Selling Stockholders
- --------------------------
Douglas Derwin............. 740,000 * 25,000 715,000 *
Karl Ginter................ 688,000 * 92,880 595,120 *
Frank J. Spahn............. 640,000 * 86,400 553,600 *
Allen & Company
Incorporated.............. 500,000 * 102,509 397,491 *
Universal Music Group...... 416,666 * 50,000 366,666 *
W. Olin Sibert............. 397,499 * 40,000 357,499 *
Bayview Investors Ltd...... 367,384 * 55,108 312,276 *
Alexander Tsukerman........ 352,000 * 35,000 317,000 *
William Jordan............. 344,000 * 56,000 288,000 *
Kenneth Grant.............. 321,500 * 25,000 296,500 *
James Horning.............. 211,666 * 24,000 187,666 *
ITOCHU Techno Science...... 195,692 * 24,462 171,230 *
Richard Rohlfing........... 187,500 * 24,750 162,750 *
Closefire Ltd.............. 179,136 * 25,000 154,136 *
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially Shares Beneficially
Owned Prior Owned After
to Offering Number Offering
--------------- of Shares ----------------------
Other Selling Stockholders Being
(cont.) Number Percent Offered Number Percent
- -------------------------- ------- ------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
John McGinty................. 164,997 * 30,000 134,997 *
Kirk Loevner................. 155,520 * 30,000 125,520 *
Edward I. Frankel............ 139,736 * 40,000 99,736 *
Ken Colgan................... 128,541 * 10,000 118,541 *
Alan G. Arndt................ 121,000 * 16,000 105,000 *
Leslie Matheson.............. 113,333 * 5,000 108,333 *
S. Lance Zaklan.............. 110,832 * 14,456 96,376 *
Xuejun Xu.................... 109,700 * 12,000 97,700 *
Paul Brody................... 109,583 * 10,000 99,583 *
Deborah Downs................ 108,750 * 15,000 93,750 *
Jerome T. Sherman............ 98,854 * 15,000 83,854 *
Andrew Wright................ 90,000 * 8,000 82,000 *
Timothy J. Parsell........... 83,328 * 12,499 70,829 *
John Amster.................. 84,539 * 10,000 74,539 *
Leo & Maureen Quinn.......... 69,074 * 12,851 56,223 *
Luke Tomasello............... 68,750 * 9,281 59,469 *
Carl Edward Quinn............ 68,750 * 9,000 59,750 *
John Guttag.................. 65,000 * 12,000 53,000 *
Gary Barg.................... 62,000 * 3,000 59,000 *
Marvin J. Schneider.......... 53,750 * 4,000 49,750 *
Patricia M. Jamison.......... 52,083 * 6,469 45,614 *
Paul Klapper................. 52,574 * 7,001 45,573 *
Harvey Kushner............... 48,686 * 7,303 41,383 *
Other selling stockholders... 797,126 1.0 125,158 671,968 *
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
70
<PAGE>
(1) Includes 30,010 shares held in trust for Jeremy Lenowitz.
(2) Includes 420,002 shares held by the Davidson Family Revocable Trust of
which 113,334 shares are subject to a right of repurchase by us as of
February 29, 2000. 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 an
InterTrust employee in July 1999, Mr. Davidson took a security interest in
129,998 shares of common stock.
(3) Includes 50,000 shares held of record by Tactical Marketing Ventures, LLC.
Mr. Fredrickson is the chief executive officer of Tactical Marketing
Ventures, LLC and disclaims beneficial ownership of these shares, except to
the extent of his pecuniary interest arising from his interest in Tactical
Marketing Ventures, LLC.
(4) Includes 2,465,860 shares subject to options that are exercisable within 60
days of February 29, 2000 and the shares described in Notes 1 through 3.
(5) Includes 13,334 shares held by Patrick P. Nguyen, one of our executive
officers, subject to a right of repurchase by us as of February 29, 2000.
Also includes 398,824 shares held by Ecomm Ventures II, LLC. Mr. Nguyen is
a director of Ecomm Ventures II, LLC. 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 7,248
shares held by SLF Partners IV, LP. Mr. Nguyen is a limited partner of SLF
Partners IV, LP.
71
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 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 amended and restated certificate of incorporation provide further
information about our capital stock.
Common Stock
As of February 29, 2000, there were 79,408,518 shares of common stock
outstanding that were held of record by approximately 477 stockholders. There
will be 81,408,518 shares of common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and no exercise after February 29, 2000
of outstanding options or warrants, after giving effect to the sale of the
shares of common stock to the public offered by us 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
As of February 29, 2000 there was an outstanding warrant to purchase a total
of 650,000 shares of common stock at an exercise price of $7.00 per share. This
warrant expires in September 2004. There was a second warrant outstanding to
purchase 56,008 shares of common stock at an exercise price of $9.00 per share.
This warrant expires in October 2000.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue the preferred stock in one or more series
and to fix the rights, preferences, privileges, and related restrictions,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences, and the number
of shares constituting any series or the designation of the series. The
issuance of preferred stock may have the effect of delaying, deferring, or
preventing a change in control of us without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. At present, we have no plans to issue any of
our preferred stock.
72
<PAGE>
Registration Rights
The holders of approximately 36,778,180 shares of common stock are 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 approximately 26,317,616 shares of the
registrable securities are also entitled to specified demand registration
rights under which they may require us to file a registration statement under
the Securities Act at our expense to register their shares of common stock, and
we are required to use our best efforts to effect this registration. Further,
the holders of these demand rights may require us to file additional
registration statements on Form S-3. All of these registration rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in the registration and
our right not to effect a requested registration until April 26, 2000.
Anti-takeover Effects of Delaware Law, and Provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws
Selected provisions of Delaware law, and our amended and restated
certificate of incorporation and amended and restated bylaws 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;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock; or
. on or after the date of the business combination, the business
combination is approved by the board and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
73
<PAGE>
A business combination includes a merger, asset sale, or other transaction
resulting in a financial benefit to the stockholder. An interested stockholder
is a person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock. The existence of
this provision would be expected to have an anti-takeover effect when
transactions are not approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
Stockholder Meetings. Under our amended and restated bylaws, special
meetings of the stockholders can only be called by our board of directors or by
the chairman of the board, the chief executive officer or at the request of
stockholders holding at least 20% of our capital stock.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our amended and restated bylaws establish advance notice procedures
regarding stockholder proposals and the nomination of candidates for election
as directors, other than nominations made by or at the direction of our board
of directors or a related committee.
Elimination of Stockholder Action By Written Consent. Our 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 our common stock is Boston EquiServe
L.P.
The Nasdaq National Market Listing
Our common stock is quoted on The Nasdaq Stock Market's National Market
under the symbol ITRU.
74
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales occurring, could adversely affect
prevailing market prices of our common stock or our future ability to raise
capital through an offering of equity securities.
As of February 29, 2000, we will have 81,408,518 shares of common stock
outstanding upon completion of this offering, assuming no exercise by the
underwriters of their over-allotment option to purchase up to 720,000 shares
and assuming no exercise of options after February 29, 2000. Of these shares,
4,600,000 of the shares sold by us and by the selling stockholders in this
offering, 5,320,000 shares if the underwriters' over-allotment option is
exercised in full, as well as the 14,950,000 shares sold in our initial public
offering and approximately 0.9 million additional shares, will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares held by persons that directly or indirectly control, or
are controlled by, or are under common control with us, may generally only be
sold in compliance with the limitations of Rule 144 of the Securities Act
described below.
Sales of Restricted Shares
The remaining approximately 60,900,000 shares outstanding upon completion of
this offering will be restricted securities as that term is defined under Rule
144. We issued and sold these restricted securities in private transactions in
reliance on exemptions from registration under the Securities Act. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
under the Securities Act, as summarized below.
Pursuant to lock-up agreements entered into in connection with our initial
public offering in October 1999, all the executive officers, directors and
stockholders of InterTrust agreed not to dispose of their shares for a period
of 180 days following the initial public offering; provided, however, that
Credit Suisse First Boston Corporation has the right, in its sole discretion,
to release all or any portion of the shares subject to the initial public
offering lock-up agreements at any time and without notice. In addition,
holders of a total of 48,283,682 shares of our common stock, including our
officers, directors, and selling stockholders in this offering, have entered
into lock-up agreements that extend for a period ending 90 days after the date
of this prospectus, subject to limited exceptions. Credit Suisse First Boston
Corporation may in its sole discretion, at any time without notice, release all
or any portion of the shares subject to these lock-up agreements. At June 1,
2000, upon the request of Erwin Lenowitz, our chief financial officer and vice
chairman of the board of directors, Credit Suisse First Boston Corporation has
agreed to release all of Mr. Lenowitz's shares from any lock-up restrictions.
Taking into account the lock-up agreements, the following shares will be
eligible for sale in the public market at the following times:
. Upon completion of this offering, 4,800,000 shares sold in the offering,
as well as approximately 15,831,000 shares outstanding prior to the
offering, will be immediately available for sale in the public market.
. On April 24, 2000, lock-up restrictions will expire on approximately
11,837,000 shares and these shares will then be immediately available for
sale in the public market.
75
<PAGE>
. Approximately 46,130,000 shares will be eligible for sale following the
expiration of the 90-day lock-up period following this offering, subject,
in certain cases, to volume, manner of sale, or other limitations under
Rule 144.
. After the expiration of the 90 day lock-up period, the remaining
approximately 2,934,000 shares, as well as approximately 230,000 shares
issued in connection with our acquisition of Infinite Ink, will be
eligible for sale beginning on various dates after the expiration of
their respective one-year holding periods subject, in certain cases, to
volume, manner of sale, or other limitations under Rule 144.
In general, under Rule 144, after the expiration of the applicable lock-up
period, a person who has beneficially owned restricted securities for at least
one year would be entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of:
. 1% of the then-outstanding shares of common stock; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
InterTrust. Under Rule 144(k), a person who has not been our affiliate at any
time during the three months before a sale and who has beneficially owned the
shares proposed to be sold for at least two years can sell these shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Following the expiration of the applicable lock-up period, shares issued
upon exercise of options we granted prior to the date of this prospectus will
also be available for sale in the public market pursuant to Rule 701 under the
Securities Act.
We have filed registration statements on Form S-8 to register approximately
22,210,796 shares of common stock reserved for issuance under the InterTrust
1992 stock plan, the InterTrust 1995 stock plan, the 1999 equity incentive
plan, the 1999 employee stock purchase plan and certain additional option
agreements. Shares issued under the foregoing plans, after the filing of the
registration statements on Form S-8, may be sold in the open market, subject,
in the case of some holders, to the Rule 144 limitations applicable to
affiliates, the lock-up agreements and vesting restrictions imposed by us.
In addition, following this offering, the holders of approximately
36,778,180 shares of outstanding common stock will, under some circumstances,
have rights to require us to register their shares for future sale. For a
description of the registration rights we have granted see "Description of
Capital Stock--Registration Rights."
76
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we and the selling stockholders 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 Wit
SoundView Corporation are acting as representatives, the following respective
numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
J.P. Morgan Securities Inc. .......................................
Salomon Smith Barney Inc. .........................................
Wit SoundView Corporation..........................................
---------
Total............................................................ 6,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We and several of the selling stockholders have granted to the underwriters
a 30-day option to purchase on a pro rata basis up to 720,000 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
and the selling stockholders 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..................... $ $ $ $
Underwriting Discounts and
Commissions paid by selling stockholders.. $ $ $ $
</TABLE>
77
<PAGE>
We and holders of a total of 48,283,682 shares of our common stock,
including our officers and directors and the selling stockholders, have agreed
that we and they will not offer, sell, contract to sell, announce our intention
to sell, pledge or dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any of our shares of common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 90 days after the date of this prospectus. These
agreements have limited exceptions, including in our case issuances resulting
from the exercise of employee options outstanding on the date of this
prospectus and grants of employee stock options under plans in effect on the
date of this prospectus. In connection with our initial public offering, our
officers and directors and substantially all of our stockholders entered into
similar agreements that extend until April 24, 2000. See "Shares Eligible for
Future Sale."
We and the selling stockholders 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.
The common stock is quoted on The Nasdaq Stock Market's National Market
under the symbol ITRU.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids, and "passive" market making 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.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed to cover
syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
. In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
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.
A prospectus in electronic format will be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to the
underwriters for sale to their on-line brokerage account holders. Internet
78
<PAGE>
distributions will be allocated by the underwriters that will make Internet
distributions on the same basis as other allocations. Wit Capital Corporation
is an on-line broker/dealer that has received an allocation of shares of common
stock through its affiliate Wit SoundView Corporation.
Other than the prospectus in electronic format, the information contained on
any underwriter's web site and any information contained on any other web site
maintained by an underwriter is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been approved or
endorsed by us or any underwriter in its capacity as an underwriter and should
not be relied upon by investors.
In July 1999, an affiliate of Credit Suisse First Boston Corporation
purchased 83,332 shares of our series E preferred stock for a total purchase
price of $499,992.
79
<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 and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected. As a
result, any resale of the common stock in Canada must comply with applicable
securities laws, which will vary depending on the relevant jurisdiction, and
which may require resales to be made under available statutory exemptions or
under a discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice before any
resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be considered to represent to us, the selling stockholders,
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, 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 and the selling stockholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or these persons. All or a substantial
portion of the assets of the issuer and these persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or these persons in Canada or to enforce a judgment obtained in
Canadian courts against the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. The report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
for common stock acquired on the same date and under the same prospectus
exemption.
80
<PAGE>
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors about the tax consequences of an investment in the common stock in
their particular circumstances and about the eligibility of the common stock
for investment by the purchasers under relevant Canadian legislation.
81
<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 55,832 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999, and for each of the three
years in the period ended December 31, 1999, as described in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act relating to the common stock
being offered. This prospectus does not contain all of the information
presented in the registration statement and the exhibits to the registration
statement. For further information about InterTrust and the common stock we are
offering, reference is made to the registration statement and the exhibits
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document
referred to summarize only the provisions of these documents that are material
to investors. You should refer to the exhibits to this registration statement
for the complete contents of these contracts and documents. The registration
statement, including the exhibits, may be inspected without charge at the
public reference facilities maintained by the Securities and Exchange
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part may be obtained from this office after payment of
fees prescribed by the Securities and Exchange Commission.
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Copies of our reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC:
<TABLE>
<C> <S> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 5000 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington D.C. 20549 or by calling the SEC at 1-800-SEC-0330. 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.
82
<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-7
Notes to Consolidated Financial Statements.................................. F-9
</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, 1998 and 1999, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
January 14, 2000, except as to
the paragraph titled "Stock Split"
of Note 1, as to which the date is
January 27, 2000
F-2
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 5,575 $ 98,286
Short-term investments................................... -- 42,548
Accounts receivable...................................... 1,545 2,562
Other current assets..................................... 132 1,182
-------- --------
Total current assets................................... 7,252 144,578
Property and equipment, net................................ 938 3,356
Intangible assets.......................................... 90 3,563
-------- --------
$ 8,280 $151,497
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable......................................... $ 549 $ 2,184
Accrued compensation..................................... 560 1,113
Other accrued liabilities................................ 610 1,678
Deferred revenue......................................... 594 3,052
-------- --------
Total current liabilities.............................. 2,313 8,027
Deferred revenue--long-term portion........................ 7,981 10,118
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value, 10,000,000
shares authorized, 21,000,774 shares and none issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 21 --
Common stock, $0.001 par value, 120,000,000 shares
authorized, 29,341,296 and 79,216,996 shares issued and
outstanding at December 31, 1998 and 1999............... 29 79
Additional paid-in capital................................. 43,672 214,241
Deferred stock compensation................................ -- (6,600)
Notes receivable from stockholders......................... (276) (196)
Accumulated other comprehensive income (loss).............. -- (107)
Accumulated deficit........................................ (45,460) (74,065)
-------- --------
Total stockholders' equity (deficit)................... (2,014) 133,352
-------- --------
$ 8,280 $151,497
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Licenses...................................... $ 1,000 $ -- $ 778
Software support and training services........ 100 152 613
Clearinghouse services........................ -- -- 150
-------- -------- --------
Total revenues.............................. 1,100 152 1,541
Cost of revenues:
Licenses...................................... -- -- 141
Software support and training services........ 102 191 470
Clearinghouse services........................ -- -- 436
-------- -------- --------
Total cost of revenues...................... 102 191 1,047
-------- -------- --------
Gross profit (loss)............................. 998 (39) 494
Operating costs and expenses:
Research and development...................... 8,287 13,041 16,472
Sales and marketing........................... 2,717 3,870 6,886
General and administrative.................... 1,932 2,717 5,588
Amortization of deferred stock compensation... -- -- 1,704
-------- -------- --------
Total operating costs and expenses.......... 12,936 19,628 30,650
-------- -------- --------
Loss from operations............................ (11,938) (19,667) (30,156)
Interest and other income, net.................. 229 5 1,876
-------- -------- --------
Loss before provision for foreign taxes......... (11,709) (19,662) (28,280)
Provision for foreign taxes..................... -- -- (325)
-------- -------- --------
Net loss........................................ $(11,709) $(19,662) $(28,605)
======== ======== ========
Net loss per share..............................
Basic and diluted net loss per share............ $ (0.43) $ (0.70) $ (0.71)
======== ======== ========
Shares used in computing basic and diluted net
loss per share................................. 27,278 27,932 40,426
======== ======== ========
</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 Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other
------------------- ----------------- Paid-In Stock From Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Income (Loss) Deficit
----------- ------ ---------- ------ ---------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............. 10,733,800 $ 11 27,186,688 $27 $ 20,760 $ -- $ -- $ -- $(14,089)
Issuance of
series B
preferred
stock........... 1,866,976 2 -- -- 3,998 -- -- -- --
Issuance of
common stock
upon exercise of
warrant......... -- -- 32,000 -- 20 -- -- -- --
Issuance of
common stock
upon exercise of
options......... -- -- 361,832 -- 152 -- (68) -- --
Compensation
related to stock
option granted.. -- -- -- -- 49 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (11,709)
----------- ---- ---------- --- -------- -------- ---- ------- --------
Balance at
December 31,
1997............. 12,600,776 13 27,580,520 27 24,979 -- (68) -- (25,798)
Issuance of
series B
preferred
stock........... 6,968,288 7 -- -- 14,824 -- -- -- --
Issuance of
series B
preferred stock
upon conversion
of convertible
note payable and
accrued
interest........ 1,431,710 1 -- -- 3,066 -- -- -- --
Issuance of
common stock
upon exercise of
options......... -- -- 1,637,800 2 727 -- (366) -- --
Forgiveness of
note receivable
from
stockholder..... -- -- -- -- -- -- 106 -- --
Issuance of
common stock
upon net
exercise of
options and
related
compensation.... -- -- 57,262 -- 50 -- -- -- --
Issuance of
common stock
upon net
exercise of
warrant and
related
compensation.... -- -- 65,714 -- 26 -- -- -- --
Payments on
notes receivable
from
stockholders.... -- -- -- -- -- -- 52 -- --
Net loss........ -- -- -- -- -- -- -- -- (19,662)
----------- ---- ---------- --- -------- -------- ---- ------- --------
Balance at
December 31,
1998............. 21,000,774 21 29,341,296 29 43,672 -- (276) -- (45,460)
Issuance of
series C
preferred
stock........... 1,700,000 2 -- -- 5,005 -- -- -- --
Issuance of
series D
preferred
stock........... 2,284,046 2 -- -- 9,705 -- -- -- --
Issuance of
series E
preferred
stock........... 2,619,400 3 -- -- 15,688 -- -- -- --
Issuance of
series E
preferred stock
upon conversion
of note
payable......... 166,666 -- -- -- 1,000 -- -- -- --
Issuance of
common stock
upon exercise of
options......... -- -- 6,354,814 6 3,893 -- -- -- --
Issuance of
common stock
upon exercise of
warrants........ -- -- 630,000 1 374 -- -- -- --
Conversion of
preferred stock
to common stock
upon completion
of initial
public
offering........ (27,770,886) (28) 27,770,886 28 -- -- -- -- --
<CAPTION>
Total
Total Stockholders'
Comprehensive Equity
Income (Loss) (Deficit)
------------- -------------
<S> <C> <C>
Balance at
December 31,
1996............. $ -- $ 6,709
Issuance of
series B
preferred
stock........... -- 4,000
Issuance of
common stock
upon exercise of
warrant......... -- 20
Issuance of
common stock
upon exercise of
options......... -- 84
Compensation
related to stock
option granted.. -- 49
Net loss........ -- (11,709)
------------- -------------
Balance at
December 31,
1997............. -- (847)
Issuance of
series B
preferred
stock........... -- 14,831
Issuance of
series B
preferred stock
upon conversion
of convertible
note payable and
accrued
interest........ -- 3,067
Issuance of
common stock
upon exercise of
options......... -- 363
Forgiveness of
note receivable
from
stockholder..... -- 106
Issuance of
common stock
upon net
exercise of
options and
related
compensation.... -- 50
Issuance of
common stock
upon net
exercise of
warrant and
related
compensation.... -- 26
Payments on
notes receivable
from
stockholders.... -- 52
Net loss........ -- (19,662)
------------- -------------
Balance at
December 31,
1998............. -- (2,014)
Issuance of
series C
preferred
stock........... -- 5,007
Issuance of
series D
preferred
stock........... -- 9,707
Issuance of
series E
preferred
stock........... -- 15,691
Issuance of
series E
preferred stock
upon conversion
of note
payable......... -- 1,000
Issuance of
common stock
upon exercise of
options......... -- 3,899
Issuance of
common stock
upon exercise of
warrants........ -- 375
Conversion of
preferred stock
to common stock
upon completion
of initial
public
offering........ -- --
</TABLE>
See accompanying notes.
F-5
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other
----------------- ----------------- Paid-In Stock From Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Income (Loss) Deficit
---------- ------ ---------- ------ ---------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock in
public offering,
net of issuance
costs of
$11,123......... -- -- 14,950,000 15 123,412 -- -- -- --
Issuance of
common stock for
asset
acquisition..... -- -- 170,000 -- 1,190 -- -- -- --
Issuance of
option for
patent
acquistion...... -- -- -- -- 1,919 -- -- -- --
Compensation
related to
issuance of
common stock
warrant......... -- -- -- -- 79 -- -- --
Deferred stock
compensation.... -- -- -- -- 8,304 (8,304) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 1,704 -- -- --
Forgiveness of
note receivable
from
stockholders.... -- -- -- -- -- -- 80 -- --
Unrealized loss
on short-term
investments..... -- -- -- -- -- -- -- (107) --
Net loss........ -- -- -- -- -- -- -- -- (28,605)
---------- ----- ---------- --- -------- ------- ----- ----- --------
Total
comprehensive
loss............
Balance at
December 31,
1999............. -- $ -- 79,216,996 $79 $214,241 $(6,600) $(196) $(107) $(74,065)
========== ===== ========== === ======== ======= ===== ===== ========
<CAPTION>
Total
Total Stockholders'
Comprehensive Equity
Income (Loss) (Deficit)
------------- -------------
<S> <C> <C>
Issuance of
common stock in
public offering,
net of issuance
costs of
$11,123......... -- 123,427
Issuance of
common stock for
asset
acquisition..... -- 1,190
Issuance of
option for
patent
acquistion...... -- 1,919
Compensation
related to
issuance of
common stock
warrant......... -- 79
Deferred stock
compensation.... -- --
Amortization of
deferred
compensation.... -- 1,704
Forgiveness of
note receivable
from
stockholders.... 80
Unrealized loss
on short-term
investments..... (107) (107)
Net loss........ (28,605) (28,605)
------------- -------------
Total
comprehensive
loss............ $(28,712)
=============
Balance at
December 31,
1999............. $133,352
=============
</TABLE>
See accompanying notes.
F-6
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net loss......................................... $(11,709) $(19,662) $(28,605)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 283 538 660
Amortization of deferred stock compensation and
other stock related compensation charges...... 99 182 1,863
Issuance of preferred stock for accrued
interest...................................... -- 37 --
Changes in operating assets and liabilities:
Accounts receivable.......................... -- (1,520) (1,017)
Other current assets......................... (111) 24 (1,040)
Accounts payable............................. 187 (105) 1,635
Accrued compensation......................... 190 173 553
Other accrued liabilities.................... 214 193 928
Deferred revenue............................. 1,000 6,075 4,595
-------- -------- --------
Net cash used in operating activities............ (9,847) (14,065) (20,428)
Investing activities
Purchases of short-term investments.............. -- -- (42,655)
Capital expenditures............................. (662) (509) (3,017)
Other noncurrent assets.......................... (20) (11) (295)
-------- -------- --------
Net cash used in investing activities............ (682) (520) (45,967)
Financing activities
Proceeds from issuance of convertible promissory
notes........................................... -- 3,030 1,000
Proceeds from issuance of preferred stock, net... 4,000 14,831 30,405
Proceeds from exercise of stock options and
warrants, net................................... 54 363 4,274
Proceeds from issuance of common stock, net...... -- -- 123,427
Proceeds from repayment of notes receivable from
stockholders.................................... -- 52 --
-------- -------- --------
Net cash provided by financing activities........ 4,054 18,276 159,106
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (6,475) 3,691 92,711
Cash and cash equivalents at beginning of
period.......................................... 8,359 1,884 5,575
-------- -------- --------
Cash and cash equivalents at end of period....... $ 1,884 $ 5,575 $ 98,286
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
--------------- --------
<S> <C> <C> <C>
Supplemental schedule of noncash financing activities
Technology asset acquisition:
Common stock issued in exchange for assets.......... $ -- $ -- $ 1,190
====== ======== ========
Other assets received in exchange................... $ -- $ -- $ 10
====== ======== ========
Other liabilities assumed in exchange............... $ -- $ -- $ 140
====== ======== ========
Patent acquired in exchange for stock option......... $ -- $ -- $ 1,919
====== ======== ========
Increase in deferred stock compensation.............. $ -- $ -- $ 8,304
====== ======== ========
Conversion of convertible promissory notes and
accrued interest into convertible preferred stock... $ -- $ 3,067 $ 1,000
====== ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
InterTrust Technologies Corporation (InterTrust) has developed a general-
purpose digital rights management (DRM) platform to serve as a foundation for
providers of digital information, technology, and commerce services to
participate in a global e-commerce system. DRM technologies manage rights and
interests in digital information. InterTrust was formed and incorporated in
January 1990. InterTrust first shipped the general availability version of its
Commerce software at the end of fiscal 1998. All of InterTrust's revenues
through December 31, 1999 have been generated from licenses of and services
related to its Commerce software.
Stock Split
On January 27, 2000, InterTrust's Board of Directors approved a two-for-one
stock split (in the form of a 100% stock dividend) of the company's common
stock. All share and per share amounts in these consolidated financial
statements have been adjusted to give effect to the stock split.
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.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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, clearinghouse services,
transaction fees, and software support and training services. License revenue,
net of any discounts granted, is recognized after execution of a license
agreement and delivery of the product, provided there are no remaining
obligations relating to development, upgrades, new releases, or other future
deliverables, and provided that the license fee is fixed or determinable, and
collection of the fee is probable. For contracts entered after January 1, 1998,
InterTrust allocates revenue between the elements of the arrangements,
including the license, software support and training services, and the rights
to unspecified upgrades and new releases based on the vendor specific evidence
of the fair value of each of the elements. If Intertrust does not have vendor
specific objective evidence of the fair value of the undelivered elements,
license revenue is deferred for the delivered elements. InterTrust's license
agreements generally include the right to obtain access to upgrades and new
releases, on a when and
F-9
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
if available basis, 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
Intertrust is obligated to provide specified upgrades and does not have vendor
specific objective evidence of fair value of the specified upgrade, all of the
license revenue is deferred until the specified upgrade has been delivered.
Upon delivery of the specified upgrade, license revenue is recognized using the
subscription method.
InterTrust began recognizing revenue under some license agreements in
January 1999, subsequent to shipment of the general availability version of its
Commerce software at the end of fiscal 1998. Under license agreements with two
preferred stockholders, InterTrust had received a total of $4,000,000 from
nonrefundable license payments as of December 31, 1999.
In 1999, InterTrust received license fees in the form of minority equity
positions in three non-public entities in exchange for technology licenses.
InterTrust received approximately 1.7 million shares of common stock from one
licensee, 882 shares of common stock from a second licensee and 148,300 shares
of common stock in a third licensee. InterTrust believes these shares represent
approximately 10%, 18% and 5% of the outstanding shares of the licensees as of
the license date. Because the entities are recently formed, privately held
companies and InterTrust was unable to obtain sufficient evidence of the fair
value of the common stock of the entities, InterTrust did not record revenue or
deferred revenue from the license fees. InterTrust is obligated to provide
unspecified upgrades and new releases, on a when and if available basis, to the
licensees over a two year period under the agreements for additional fees.
InterTrust is not obligated to provide any funding to the licensees for the
development of the licensees' software.
For contracts entered into prior to 1998, InterTrust recognized revenue as
the amounts were earned under the related agreements, provided no significant
obligations existed and the related receivable was 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 to InterTrust 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 1999. No transaction revenue has been recognized from
commercial transactions or services as of December 31, 1999.
F-10
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Clearinghouse service revenues represent primarily service fees for the use
of InterTrust's Trustnet clearinghouse. Service revenues typically include
consulting services provided to the customer to establish an interface with the
clearinghouse and monthly service fees to use Trustnet for the clearing of
commercial transactions. Consulting fees are recognized as services are
performed and monthly clearinghouse service fees are recognized over the term
of the service period. Costs incurred to provide consulting personnel, computer
hardware and support of an off-site service center are included as a component
of cost of revenues.
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. Certain of InterTrust's partners were
utilizing pre-commercial versions of its product in the development of their
own solutions and, as a result, were utilizing InterTrust's software support
and training services prior to the shipment of its commercial release in
December 1998. Costs incurred to provide software support and training services
are included as a component of cost of revenues.
InterTrust adopted Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), and Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of 97-2" (SOP 98-4), as of January 1, 1998. SOP
97-2 and SOP 98-4 provide guidance for recognizing revenue on software
transactions and supersede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on InterTrust's operating results.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modifications of SOP 97-2, Software Revenue
Recognition With Respect to Certain Transactions" (SOP 98-9). SOP 98-9 amends
SOP 98-4 to extend the deferral of the application of some passages provided by
SOP 98-4 through fiscal years beginning on or before March 15, 1999. All
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. InterTrust will adopt the provisions of
SOP 98-9 on January 1, 2000 and does not expect the application of this
statement to materially impact the Company's revenues, results of operations or
financial condition.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). This bulletin summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. InterTrust is currently assessing
the impact of SAB 101 and believes that adoption of SAB 101 will not have a
material impact on InterTrust's results of operations or financial position.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value.
InterTrust considers all highly liquid instruments with insignificant interest
rate risk and maturities of three months or less to be cash equivalents. Cash
equivalents consist primarily high-grade commercial paper and money market
funds.
F-11
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-term Investments
Short-term investments are comprised primarily of U.S. government
obligations and corporate debt securities and are classified as available-for-
sale investments. The carrying value of the investments is adjusted to fair
value with a resulting adjustment to stockholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity, both of which are included in interest income. Realized
gains and loses are recorded using the specific identification method and have
been minimal through December 31, 1999.
Foreign Currency Translation
The U.S. dollar is the functional currency for InterTrust's foreign
operations. Gains and losses on the translation into U.S. dollars of amounts
denominated in foreign currencies are included in net income.
Concentration of Credit Risk
InterTrust operates in the internet industry, which is rapidly evolving and
intensely competitive.
Financial instruments that potentially subject InterTrust to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents and short-term
investments are custodied with two major financial institutions and such
deposits exceed federally insured limits. 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 stockholder, accounted for 91% of total
revenues in 1997 and 25% of total revenues in 1999. A second customer, also a
stockholder, accounted for 9%, 66% and 13% of total revenues in 1997, 1998,
and 1999, respectively. One customer accounted for 12% of total revenues in
1999. Two customers accounted for 13% and 21% of total revenues in 1998. One
customer accounted for 74% of accounts receivable at December 31, 1999.
Fair Value of Financial Instruments
The carrying values of InterTrust's financial instruments, which include
cash and cash equivalents, accounts receivable, current liabilities, and notes
receivable from stockholders, approximate their fair value.
Investment in Non-Public Entities
In 1999, InterTrust received approximately 10%, 18% and 5% equity interests
in three non-public entities as consideration for license fees. Because the
entities were recently formed, privately held companies and InterTrust was
unable to obtain sufficient evidence of the fair value of the common stock of
the entity, InterTrust did not record revenue or deferred revenue from the
license fees.
F-12
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Intangible Assets
Intangible assets are primarily comprised of purchased technology and patent
rights, and capitalized patent application costs related to internally
developed technology. These assets are amortized using the straight-line method
over the estimated useful lives of the assets, generally four to seventeen
years. As of December 31, 1999, InterTrust has recorded intangible assets
valued at approximately $3.4 million and $61,000 of related net accumulated
amortization.
In October 1999, InterTrust purchased audio decoding and rendering
technology and related assets, received a license to video decoding and
rendering technology, and assumed certain liabilities, in exchange for 170,000
shares of InterTrust's common stock which was valued at $1.3 million and
$100,000 in cash. The purchase price of $1.4 million was capitalized as
purchased technology, and is being amortized over a four year expected life.
InterTrust also agreed to pay up to an additional $10,000 for legal fees and
$130,000 for tax liabilities incurred by the selling shareholders for a period
of one year from the date of the agreement.
In December 1999, InterTrust issued to a consultant a fully vested option to
purchase 60,000 shares of common stock at an exercise price of $55 per share in
exchange for patent rights to certain technology. The option is exercisable
through December 2006. The value of the patent was based on the fair value of
the option of $1.9 million and was capitalized as an intangible asset. The fair
value of the option was determined using the Black-Sholes method. The asset is
being amortized over its expected useful life of seventeen years
InterTrust evaluates the recoverability of its long-lived assets in
accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". FAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
InterTrust assesses the impairment of long-lived assets when events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable.
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.
F-13
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Statement of Financial Accounting Standards No. 130,"Reporting Comprehensive
Income", requires companies to report unrealized holding gains and losses on
available-for-sale securities in 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). Comprehensive
income (loss) for the periods ended December 31, 1999 has been included in
InterTrust's Consolidated Statement of Changes in Stockholders' Equity. There
was no difference between the comprehensive loss and the net loss in either of
the years ended December 31, 1997 or 1998.
Net Loss per Share
InterTrust computes net loss per share in accordance with FAS No. 128,
"Earnings per Share", and SEC Staff Accounting Bulletin 98 (SAB 98). Under the
provisions of FAS 128 and SAB 98, basic and diluted net loss per share are
computed by dividing the net loss available to common stockholders by the
weighted average number of common and common equivalent shares outstanding
during the period less shares subject to repurchase. Common equivalent shares,
comprised of incremental common shares issuable upon the exercise of stock
options and warrants, have not been included in the computation of diluted net
loss per share as their effect is anti-dilutive.
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
F-14
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
therefore there is no impact on InterTrust's financial statements as a result
of adopting FAS 131. For the year ended December 31, 1999, customers from Asia
and Europe accounted for revenue totaling approximately $597,000 and $349,000,
respectively. For the year ended December 31, 1998, revenue from customers
outside the United States was $52,000 and was derived from customers in Europe.
2. INVESTMENTS
The following is a summary fair value of available for sale securities at
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Money market mutual funds............ $ 24,770 $ -- $ (12) $ 24,758
U.S. Government and agency
obligations......................... 30,037 -- (18) 30,019
Auction rate preferred stock......... 28,947 3 -- 28,950
Corporate debt and equity
securities.......................... 51,685 -- (80) 51,605
-------- ---- ----- --------
$135,439 $ 3 $(110) $135,332
======== ==== ===== ========
Included in short-term investments... $ 42,548
Included in cash and cash
equivalents......................... 92,784
--------
$135,332
========
</TABLE>
The following table summarizes the fair value of debt maturities at December
31, 1999 (in thousands):
<TABLE>
<CAPTION>
Amortized
Fair Cost Value
--------- --------
<S> <C> <C>
Due in less than 1 year..................................... $ 95,243 $ 95,209
Due in 1-2 years............................................ 11,710 11,674
Due in 2-3 years............................................ 3,716 3,691
-------- --------
$110,669 $110,574
======== ========
</TABLE>
InterTrust has classified its investments with maturities in excess of one
year as short-term investments as it intends to liquidate the investments
within twelve months.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Computer equipment and software................................ $1,465 $ 2,727
Furniture and equipment........................................ 193 1,814
Leasehold improvements......................................... 56 190
------ -------
1,714 4,731
Accumulated depreciation and amortization...................... (776) (1,375)
------ -------
$ 938 $ 3,356
====== =======
</TABLE>
F-15
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. COMMITMENTS
InterTrust has entered into noncancellable operating leases for facilities
and equipment that expire at various dates through August 2004. Rent under the
agreements is expensed to operations on a straight-line basis over the terms of
the leases. Future minimum lease payments under these leases at December 31,
1999 are as follows (in thousands):
<TABLE>
<S> <C>
Years ending December 31:
2000.................................................................. $2,288
2001.................................................................. $2,129
2002.................................................................. $1,784
2003.................................................................. $1,838
2004.................................................................. $1,255
------
Total minimum lease payments........................................ $9,294
======
</TABLE>
Rent expense for all operating leases was approximately $320,000, $258,000,
and $1,199,000 in 1997, 1998, 1999, respectively.
5. STOCKHOLDERS' EQUITY (DEFICIT)
In October 1999, InterTrust raised approximately $123.4 million, net of
issuance costs, from an initial public offering of 14,950,000 shares of its
common stock. In connection with the offering all of the then outstanding
shares of Series A, B, C, D,and E preferred stock and Class A and B common
stock were converted into common stock on a one-for-one basis.
Preferred Stock
Effective October 1999, the stockholders of InterTrust approved an amendment
to InterTrust's certificate of incorporation authorizing 10,000,000 shares of
preferred Stock. 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.
1999 and 1995 Stock Option Plans
Pursuant to the 1999 Equity Incentive Plan and 1995 Stock Option Plan,
incentive stock options may be granted at prices not less than the fair values
as determined by the board of directors, while nonstatutory options granted
under the plans are at prices not less than 85% of the fair values on the
respective dates of the grant. Options expire after ten years. Options
generally vest ratably over a period of no more than five years. The 1999
Equity Incentive Plan provides for an automatic annual increase to the plan by
the lesser of 4% of the outstanding common stock at January 1 or 3,000,000
shares. At December 31, 1999, no options were available for further grant under
the 1995 Stock Option Plan.
F-16
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non Plan Stock Options
InterTrust's board of directors has granted to eligible participants
nonqualified stock options to purchase shares of 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.
Information about stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares
---------------------
Weighted
Average
Exercise
Available Outstanding Price
---------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1996................ 1,360,092 10,997,992 $0.41
Shares authorized......................... 4,964,664 -- --
Options granted........................... (7,411,264) 7,411,264 $0.73
Options exercised......................... -- (461,832) $0.38
Options canceled.......................... 1,440,088 (1,988,120) $0.51
---------- ---------- -----
Balance at December 31, 1997................ 353,580 15,959,304 $0.54
Shares authorized......................... 2,560,000 -- --
Options granted........................... (3,232,000) 3,232,000 $2.64
Options exercised......................... -- (1,753,214) $0.46
Options canceled.......................... 522,112 (522,112) $0.73
---------- ---------- -----
Balance at December 31, 1998................ 203,692 16,915,978 $0.70
Shares authorized......................... 6,524,056 -- --
Options granted........................... (5,830,658) 5,830,658 $6.66
Options exercised......................... -- (6,368,706) $0.64
Options canceled.......................... 828,848 (828,848) $1.16
Options expired........................... (637,338) -- --
---------- ---------- -----
Balance at December 31, 1999................ 1,088,600 15,549,082 $2.93
========== ========== =====
Exercisable and vested at December 31,
1999....................................... 6,609,913
==========
Shares of common stock subject to repurchase
at December 31, 1999....................... 500,001
==========
</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 640,000 shares of common stock. As of December 31, 1999,
approximately 267,000 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.
F-17
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options at December 31,
1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------------------------------------------
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 - $0.63 3,754,700 4.70 $ 0.36 3,463,321 $ 0.33
$0.75 3,239,700 7.16 $ 0.75 1,622,734 $ 0.75
$1.00 - $1.75 3,881,464 8.49 $ 1.38 1,216,511 $ 1.27
$3.00 - $7.65 3,861,818 9.68 $ 6.17 220,641 $ 5.30
$9.00 - $62.94 811,400 9.84 $15.52 86,706 $41.14
---------- ---------
$0.01 - $3.50 15,549,082 7.66 $ 2.93 6,609,913 $ 1.31
========== =========
</TABLE>
Stock-Based Compensation
In connection with the grant of options to employees during the year ended
December 31, 1999, InterTrust recorded deferred stock compensation of
$8,304,000 for the difference between the exercise prices of those options at
their respective dates of grant and what was considered to be the fair values
for accounting purposes of the shares of common stock subject to the options.
These amounts are included as a reduction of stockholders' equity and are being
amortized on a graded vesting method. The compensation expense of $1,704,000
during the year ended December 31, 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 loss 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. Because InterTrust's
options grants have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing 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 near-zero volatility as a non public company
in 1997 and 1998, and the following weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life in years...................................... 5.0 4.0 4.0
Risk-free interest rate..................................... 6.0% 6.0% 5.3%
Volatility.................................................. 0.0 0.0 .50
</TABLE>
F-18
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average fair value of options granted during 1997, 1998 and
1999 was $0.37, $0.61, and $3.54 per share, respectively.
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. InterTrust's pro forma information is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss........................... $(12,645) $(21,115) $(34,481)
======== ======== ========
Pro forma basic and diluted net loss per
share....................................... $ (0.46) $ (0.76) $ (0.85)
======== ======== ========
</TABLE>
Employee Stock Purchase Plan
In 1999, the stockholders approved InterTrust's 1999 employee stock purchase
plan. A total of 700,000 shares of common stock have 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. The 1999 employee stock purchase plan
provides for an automatic annual increase to the plan by the lesser of 2% of
the outstanding common stock at January 1 or 700,000 shares. No shares had been
issued from the plan as of December 31, 1999.
Non-Employee Directors Option Plan
In 1999, the stockholders approved InterTrust's 1999 non-employee directors
option plan. The director's plan provides for the automatic grant of options to
purchase shares of common stock to non-employee directors of InterTrust. A
total of 700,000 shares of common stock have been reserved for issuance under
the director's plan. The directors plan provides for an automatic annual
increase to the plan at January 1 to restore the available shares to 700,000
shares. No shares had been issued from the plan as of December 31, 1999.
Warrants
In September 1999, InterTrust entered into a financial consulting
arrangement and concurrently issued a warrant to purchase 650,000 shares of
common stock at an exercise price of $7.00 per share. The warrant was fully
vested and non-forfeitable upon issuance but is only 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. The fair
value of the warrant of $1,466,000 was determined using the Black-Scholes
method and is being amortized over the life of the service agreement.
In October 1999, InterTrust issued a warrant to purchase 56,008 shares of
common stock at an exercise price of $9.00 per share. The warrant is
exercisable after April 24, 2000 or immediately
F-19
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
prior to a merger or sale of InterTrust. The warrant expires one year after the
date of grant and is subject to early termination upon the sale of InterTrust.
The warrant was issued in exchange for recruiting services. The fair value of
the warrant of $79,000 was determined using the Black-Scholes method and was
expensed on the grant date, when the related services were provided.
At December 31, 1999, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Exercise of outstanding stock options............................. 15,549,082
Shares of common stock available for grant........................ 1,088,600
Employee stock purchase plan...................................... 700,000
Non employees directors option plan............................... 700,000
Exercise of warrants.............................................. 706,008
----------
18,743,690
==========
</TABLE>
6. INCOME TAXES
For the year ended December 31, 1999, InterTrust recorded a tax provision of
$325,000. This provision represents foreign withholding taxes on license
payments received during the year.
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 federal or state income taxes for the years
ended December 31, 1997, 1998, and 1999.
Significant components of InterTrust's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 12,500 $ 20,300
Capitalized research and development................... 1,800 1,300
Research credit carryforwards.......................... 1,700 2,200
Deferred revenue....................................... 1,000 5,200
Other.................................................. 1,500 100
-------- --------
Gross deferred tax assets................................ 18,500 29,100
Valuation allowances..................................... (18,500) (29,100)
-------- --------
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.
F-20
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The valuation allowance increased by approximately $7.5 million and $10.6
million during the years ended December 31, 1998 and 1999, respectively.
Approximately $200,000 of the valuation allowance at December 31, 1999 relates
to the tax benefits of stock option deductions that will be credited to
additional paid-in capital when realized.
As of December 31, 1999, InterTrust had federal and state net operating loss
carryforwards of approximately $58.4 million and $7.4 million, respectively.
InterTrust also had federal research and development tax credit carryforwards
of approximately $1.5 million. The federal and state net operating loss
carryforwards expire in years 2000 through 2019, if not utilized. The federal
research and development carryforwards expire in years 2011 through 2019, 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.
7. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Basic and diluted net loss per Share:
Numerator
Net loss.................................. $(11,709) $(19,662) $(28,605)
======== ======== ========
Denominator
Weighted average shares of common stock
outstanding................................ 27,362 28,372 41,036
Less weighted average shares subject to
repurchase................................. (84) (440) (610)
-------- -------- --------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net per loss share................. 27,278 27,932 40,426
======== ======== ========
Basic and diluted net loss per share.......... $ (0.43) $ (0.70) $ (0.71)
======== ======== ========
</TABLE>
If InterTrust had reported net income, diluted net income per share would
have included the shares used in the computation of pro forma net loss per
share as well as the effect of approximately 17,274,000, 18,168,000, and
16,255,000 shares purchasable under outstanding options and warrants not
included above for the years ended December 31, 1997, 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 in 1999 was also excluded
from the common equivalent share calculation, as it would have been
antidilutive.
F-21
<PAGE>
INTERTRUST TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 401(k) PROFIT SHARING PLAN
In 1996, InterTrust established a 401(k) Profit Sharing Plan (the "401(k)
Plan") which covers substantially all employees. Under the 401(k) Plan,
employees are permitted to contribute up to 20% of gross compensation not to
exceed the annual 402(g) limitation for any plan year. InterTrust may make
discretionary contributions but no contributions have been made to the 401(k)
Plan since inception.
9. SUBSEQUENT EVENTS (unaudited)
In March 2000, InterTrust acquired Infinite Ink Corporation ("Infinite
Ink"), a developer of software solutions for rendering and protecting
electronic publishing. Under the terms of the purchase agreement, InterTrust
acquired all of the shares of capital stock of Infinite Ink in exchange for
230,464 shares of InterTrust common stock and assumed all outstanding options
of Infinite Ink which were converted into options for 68,052 shares of
InterTrust common stock. The transaction was accounted for as a purchase with
an estimated purchase price of approximately $28 million. InterTrust is
currently evaluating the acquisition, including the value of in-process
research and development, in order to determine the allocation of the purchase
price.
In February 2000, InterTrust signed a lease agreement for an additional
58,000 square feet of office space in Santa Clara, California. The lease
commences in March 2000 and expires in August 2004. During the term of the
lease, InterTrust will incur a minimum lease obligation of approximately $6.4
million.
F-22
<PAGE>
[LOGO OF INTERTRUST]
<PAGE>
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table presents the costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fees, and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $155,000
NASD filing fee.................................................... 30,500
Nasdaq National Market listing fee................................. 17,500
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 400,000
Accounting fees and expenses....................................... 100,000
Blue sky fees and expenses......................................... 10,000
Custodian and transfer agent fees.................................. 10,000
Miscellaneous fees and expenses.................................... 77,000
--------
Total............................................................ $950,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit indemnification
under limited circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI, Section 6.1 of our bylaws provides for mandatory
indemnification of our directors, officers, and employees to the maximum extent
permitted by the Delaware General Corporation Law. Our sixth amended and
restated certificate of incorporation provides that our officers and directors
shall not be liable for monetary damages for breach of the officers' or
directors' fiduciary duty as officers or directors to our stockholders and us.
This provision in the sixth amended and restated certificate of incorporation
does not eliminate the officers' or directors' fiduciary duty, and, in
appropriate circumstances, equitable remedies like injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
officer or director will continue to be subject to liability for breach of the
officer's or director's duty of loyalty to us or our stockholders for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
officer or director, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect an officer's or director's responsibilities under any
other law, like the federal securities laws or state or federal environmental
laws. We have entered into indemnification agreements with our officers and
directors, a form of which is attached as Exhibit 10.1 and incorporated by
reference. The indemnification agreements provide our officers and directors
with further indemnification to the maximum extent permitted by the Delaware
General Corporation Law. Reference is made to Section 7 of the underwriting
agreement contained in Exhibit 1.1 to this registration statement, indemnifying
our officers and directors against limited liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since January 1, 1996, we have issued and sold the following unregistered
securities, all of which reflect the two-for-one stock split effected in
February 2000:
1. We granted direct issuances or stock options to purchase 16,199,800
shares of our common stock at exercise prices ranging from $0.3125 to $7.00 per
share to employees, consultants, directors, and other service providers under
our 1995 stock plan. We granted direct issuances or stock options to purchase
2,468,720 shares of our common stock at exercise prices ranging from $0.005 to
$3.825 per share to service providers outside of the 1995 stock plan and 1999
equity incentive plan.
2. We issued and sold an aggregate of 4,364,100 shares of our common stock
to employees, consultants, and other service providers for aggregate
consideration of approximately $3,028,423 under direct issuances or exercises
of options granted under our 1995 stock plan. We issued and sold an aggregate
of 3,804,400 shares of our common stock to employees, consultants, and other
service providers for aggregate consideration of approximately $1,215,131 under
direct issuances or exercises of options granted under our 1992 stock plan. We
issued and sold an aggregate of 640,720 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 32,000 shares of
our class A voting common stock with an exercise price of $0.625 per share to
Alexander Communications in connection with the payment of a convertible
promissory note. The warrant was subsequently exercised and we issued 32,000
shares thereunder.
4. On April 24, 1996, we issued a warrant to purchase 16,000 shares of our
class A voting common stock with an exercise price of $0.625 per share to John
Holmgreen in connection with the payment of a convertible promissory note. The
warrant was subsequently exercised and we issued 16,000 shares thereunder.
5. On April 24, 1996, we issued two warrants to purchase a total of 400,000
shares of our class A voting common stock with an exercise price of $0.625 per
share to Otto Candies, LLC in connection with the payment of two convertible
promissory notes. The warrants were subsequently exercised and we issued
400,000 shares thereunder.
6. On April 27, 1996, we issued a warrant to purchase 64,000 shares of our
class A voting common stock with an exercise price of $0.625 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 64,000 shares
thereunder.
7. In March, April, and June 1996, we issued and sold 7,933,332 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.
II-2
<PAGE>
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
13,067,442 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.
9. On August 19, 1996, we issued a warrant to purchase 622,032 shares of our
class B non-voting common stock to Upgrade Corporation of America. The warrant
was terminated upon the initial public offering of our common stock.
10. On November 1, 1996, we issued a warrant to purchase 20,000 shares of
our class A voting common stock with an exercise price of $1.28 per share to
the Rutherford Bolen Group. The warrant was subsequently exercised and we
issued 20,000 shares thereunder.
11. On April 28, 1998, we issued a warrant to purchase 4,000 shares of our
class B non-voting common stock with an exercise price of $0.75 per share to
Peter Williams. The warrant was subsequently exercised and we issued 4,000
shares thereunder.
12. On June 4, 1998, we issued a warrant to purchase 6,000 shares of our
class B non-voting common stock with an exercise price of $0.75 per share to
Peter Williams. The warrant was subsequently exercised and we issued 6,000
shares thereunder.
13. On December 21, 1998, we issued a warrant to purchase 8,000 shares of
our class B non-voting common stock with an exercise price of $0.875 per share
to Bill Horne.
14. In March 1999, we issued and sold 1,700,000 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 2,284,046 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 2,619,400 shares of our series E
preferred stock for an aggregate purchase price of approximately $15,716,000 to
a group of investors under a stock purchase agreement and issued 166,666 shares
of our series E preferred stock upon the conversion of a $1.0 million
promissory note.
17. On September 7, 1999, we issued a warrant to purchase 650,000 shares of
our class A voting common stock with an exercise price of $7.00 per share to
Allen & Company Inc. in connection with a financial consulting agreement.
18. On October 12, 1999, we issued 170,000 shares of our class A voting
common stock to a Mpeg TV LLC in exchange for the purchase of audio decoding
and rendering technology and related assets and a license to video technology
valued at $1,190,000.
19. On March 8, 2000, we issued 230,464 shares of common stock in exchange
for all of the capital stock of Infinite Ink. The transaction was accounted for
as a purchase at a value of $28.0 million.
II-3
<PAGE>
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-4
<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.
10.11* Lease between Mission West Properties, L.P. and the Registrant dated
July 21, 1999.
10.12* Technology Development, Marketing, and License Agreement by and
between the Registrant and National Westminster Bank PLC dated August
18, 1998.
10.13* Technology Development and License Agreement by and between the
Registrant and Universal Music Group, Inc. dated April 13, 1999.
10.14* Technology Development and License Agreement by and between the
Registrant and Upgrade Corporation of America dated August 7, 1996
10.15* Technology Development and License Agreement by and between the
Registrant and Mitsubishi Corporation dated October 7, 1996.
10.16* Warrant for the purchase of Class A Voting Common Stock made by the
Registrant and held by Allen & Company Incorporated, dated September
7, 1999
10.17* Amendment to Technology, Development, Marketing and License Agreement
by and between the Registrant and National Westminster Bank dated
August 18, 1998.
10.18* Amendment to Technology Development and License Agreement by and
between the Registrant and Universal Music Group, Inc. dated April 13,
1999.
10.19** Building Lease Agreement by and between First State Realty of America,
Inc. and the Registrant dated January 24, 2000.
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>
- --------
* Incorporated by reference to similarly numbered exhibit to the Registration
Statement on Form S-1 filed by the Registrant (Reg. No. 333-84033).
** Previously filed.
II-5
<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
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-6
<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
Santa Clara, State of California, on this 6th day of April, 2000.
Intertrust Technologies Corporation
/s/ Victor Shear
By __________________________________
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 dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Victor Shear Chairman of the Board and April 6, 2000
______________________________________ Chief Executive Officer
Victor Shear (Principal Executive
Officer)
/s/ David C. Chance* Executive Vice Chairman April 6, 2000
______________________________________
David C. Chance
/s/ Erwin N. Lenowitz* Vice Chairman of the April 6, 2000
______________________________________ Board, Chief Financial
Erwin N. Lenowitz Officer (Principal
Financial and Accounting
Officer) and Secretary
/s/ Edmund J. Fish Director, Executive Vice April 6, 2000
______________________________________ President, and Chief
Edmund J. Fish Business Officer
/s/ David Van Wie* Director and Senior Vice April 6, 2000
______________________________________ President of Research
David Van Wie
/s/ Bruce Fredrickson* Director April 6, 2000
______________________________________
Bruce Fredrickson
/s/ Satish K. Gupta* Director April 6, 2000
______________________________________
Satish K. Gupta
*/s/ Victor Shear
______________________________________
Attorney-in-Fact
*/s/ Edmund J. Fish
______________________________________
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Fifth Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Form of Sixth Amended and Restated Certificate of Incorporation to be
filed upon the closing of the offering made under this Registration
Statement.
3.3* Bylaws of the Registrant.
3.4* Amended and Restated Bylaws of the Registrant to be effective upon the
closing of the offering made under this Registration Statement.
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3 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.
10.11* Lease between Mission West Properties, L.P. and the Registrant dated
July 21, 1999.
10.12* Technology Development, Marketing, and License Agreement by and
between the Registrant and National Westminster Bank PLC dated August
18, 1998.
10.13* Technology Development and License Agreement by and between the
Registrant and Universal Music Group, Inc. dated April 13, 1999.
10.14* Technology Development and License Agreement by and between the
Registrant and Upgrade Corporation of America dated August 7, 1996
10.15* Technology Development and License Agreement by and between the
Registrant and Mitsubishi Corporation dated October 7, 1996.
10.16* Warrant for the purchase of Class A Voting Common Stock made by the
Registrant and held by Allen & Company Incorporated, dated September
7, 1999
10.17* Amendment to Technology, Development, Marketing and License Agreement
by and between the Registrant and National Westminster Bank dated
August 18, 1998.
10.18* Amendment to Technology Development and License Agreement by and
between the Registrant and Universal Music Group, Inc. dated April 13,
1999.
10.19** Building Lease Agreement by and between First State Realty of America,
Inc. and the Registrant dated January 24, 2000.
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>
- --------
* Incorporated by reference to similarly numbered exhibit to the Registration
Statement on Form S-1 filed by the Registrant (Reg. No. 333-84033).
** Previously filed.
<PAGE>
EXHIBIT 1.1
_____________ Shares
INTERTRUST TECHNOLOGIES CORPORATION
Common Stock, $0.001 par value
UNDERWRITING AGREEMENT
----------------------
, 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
J.P. MORGAN SECURITIES, INC.
SALOMON SMITH BARNEY INC.
WIT SOUNDVIEW CORPORATION
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. InterTrust Technologies Corporation, a Delaware
corporation ("Company"), proposes to issue and sell _________ shares of its
Common Stock, $0.001 par value ("Securities"), and the stockholders listed in
Schedule A hereto ("Selling Stockholders") propose severally to sell an
aggregate of _________ outstanding shares of the Securities (such __________
shares of Securities being hereinafter referred to as the "Firm Securities").
Certain of the Selling Stockholders also propose to sell to the Underwriters, at
the option of the Underwriters, an aggregate of not more than __________
additional outstanding shares of the Company's Securities, as set forth below
(such ___________ additional shares being hereinafter referred to as the
"Optional Securities"). The Firm Securities and the Optional Securities are
herein collectively called the "Offered Securities". The Company and the
Selling Stockholders hereby agree with the several Underwriters named in
Schedule B hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333-32484) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (A) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (B) is proposed to be amended by amendment or
post-effective amendment. If such registration statement (the "initial
registration statement") has been declared effective, either (A) an
additional registration statement (the "additional registration statement")
relating to the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
become effective upon filing pursuant to such Rule and the Offered
Securities all have been duly registered under the Act pursuant to the
initial registration statement and, if applicable, the additional
registration statement or (B) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the
<PAGE>
Commission prior to the execution and delivery of this Agreement, the most
recent amendment (if any) to each such registration statement has been
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of
the additional registration statement, Rule 462(b). For purposes of this
Agreement, "Effective Time" with respect to the initial registration
statement or, if filed prior to the execution and delivery of this
Agreement, the additional registration statement means (A) if the Company
has advised the Representatives that it does not propose to amend such
registration statement, the date and time as of which such registration
statement, or the most recent post-effective amendment thereto (if any)
filed prior to the execution and delivery of this Agreement, was declared
effective by the Commission or has become effective upon filing pursuant to
Rule 462(c), or (B) if the Company has advised the Representatives that it
proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment, as the
case may be, is declared effective by the Commission. If an additional
registration statement has not been filed prior to the execution and
delivery of this Agreement but the Company has advised the Representatives
that it proposes to file one, "Effective Time" with respect to such
additional registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration statement
or the additional registration statement (if any) means the date of the
Effective Time thereof. The initial registration statement, as amended at
its Effective Time, including all information contained in the additional
registration statement (if any) and deemed to be a part of the initial
registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on
which it is filed and including all information (if any) deemed to be a
part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are hereinafter referred to collectively as the
"Registration Statements" and individually as a "Registration Statement".
The form of prospectus relating to the Offered Securities, as first filed
with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
424(b)") under the Act or (if no such filing is required) as included in a
Registration Statement, is hereinafter referred to as the "Prospectus". No
document has been or will be prepared or distributed in reliance on Rule
434 under the Act.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the
rules and regulations of the Commission ("Rules and Regulations") and did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the Act
and the Rules and Regulations and did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects to
the requirements of the Act and the Rules and Regulations, and neither of
such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all respects to
the requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do not
apply to statements in or
2
<PAGE>
omissions from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information is that described as such in Section
7(c) hereof.
(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification and where failure to be
so qualified would have a material adverse effect on the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole (a "Material Adverse
Effect").
(iv) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct of
its business requires such qualification and where failure to be so
qualified would not have a Material Adverse Effect; all of the issued and
outstanding capital stock of each subsidiary of the Company has been duly
authorized and validly issued and is fully paid and nonassessable; and the
capital stock of each subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and defects.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered Securities
will have been, validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive rights with respect to the
Securities which have not been waived or terminated on or prior to the
Closing Date.
(vi) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(vii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(viii) The Offered Securities have been approved for listing on the
The Nasdaq Stock Market's National Market subject to notice of issuance.
(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities, except
such as have been obtained and made under the Act and such as may be
required under state securities laws.
(x) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, (i) any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
(ii) any agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary is
bound or to which any of the properties of the Company or any such
subsidiary is subject, in each case the breach, violation or default of
which would result in a Material
3
<PAGE>
Adverse Effect, or (iii) the charter or by-laws of the Company or any such
subsidiary, and the Company has full power and authority to authorize,
issue and sell the Offered Securities as contemplated by this Agreement.
(xi) This Agreement has been duly authorized, executed and delivered
by the Company.
(xii) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by them
and have not received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(xv) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trade names and other rights to inventions,
know-how, copyrights, confidential information and other intellectual
property and, to the Company's knowledge, trademarks and patents
(collectively, "intellectual property rights") necessary to conduct the
business now operated by them, or presently employed by them, and, except
as disclosed in the Prospectus, have not received any notice of
infringement of or conflict with asserted rights of others with respect to
any intellectual property rights that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries (i) is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration
of the environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), (ii) owns or operates any real
property contaminated with any substance that is subject to any
environmental laws, (iii) is liable for any off-site disposal or
contamination pursuant to any environmental laws, or (iv) is subject to any
claim relating to any environmental laws, any of which violation,
contamination, liability or claim would individually or in the aggregate
have a Material Adverse Effect; and the Company is not aware of any pending
investigation which might lead to such a claim.
(xvii) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of the
sale of the Offered Securities; and, to the Company's knowledge, no such
actions, suits or proceedings are threatened or contemplated.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis.
(xix) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or
4
<PAGE>
contemplated by the Prospectus, there has been no dividend or distribution
of any kind declared, paid or made by the Company on any class of its
capital stock.
(xx) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(b) Each Selling Stockholder severally represents and warrants to, and
agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the Offered
Securities to be delivered by such Selling Stockholder on such Closing Date
and full right, power and authority to enter into this Agreement and to
sell, assign, transfer and deliver the Offered Securities to be delivered
by such Selling Stockholder on such Closing Date hereunder; and upon the
delivery of and payment for the Offered Securities on each Closing Date
hereunder the several Underwriters will acquire valid and unencumbered
title to the Offered Securities to be delivered by such Selling Stockholder
on such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of the
Act and the Rules and Regulations and did not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (B) on
the Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all respects to the
requirements of the Act and the Rules and Regulations and did not include,
or will not include, any untrue statement of a material fact and did not
omit, or will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (C)
on the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration
Statement each conforms, and at the time of filing of the Prospectus
pursuant to Rule 424(b) or (if no such filing is required) at the Effective
Date of the Additional Registration Statement in which the Prospectus is
included, each Registration Statement and the Prospectus will conform, in
all respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading. If the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement:
on the Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all respects to
the requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. With respect to (A) Victor
Shear, Edmund J. Fish, Erwin N. Lenowitz, David M. Van Wie, Bruce
Fredrickson and Satish K. Gupta (the "Senior Management"), the two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information is that described as such in Section 7(c) and (B) all
Selling Stockholders other than the Senior Management, the two preceding
sentences apply only to the extent that any statements in or omissions from
a Registration Statement or the Prospectus are based on written information
furnished to the Company by such Selling Stockholder specifically for use
therein.
(iii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between such Selling Stockholder and any
person that would give rise to a valid claim against such Selling
Stockholder or any Underwriter for a brokerage commission, finder's fee or
other like payment in connection with this offering.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and each Selling Stockholder
agree, severally and not jointly, to sell to each Underwriter, and each
Underwriter agrees, severally and not
5
<PAGE>
jointly, to purchase from the Company and each Selling Stockholder, at a
purchase price of $ per share, that number of Firm Securities (rounded up or
down, as determined by Credit Suisse First Boston Corporation ("CSFBC") in its
discretion, in order to avoid fractions) obtained by multiplying Firm Securities
in the case of the Company and the number of Firm Securities set forth opposite
the name of such Selling Stockholder in Schedule A hereto, in the case of a
Selling Stockholder, in each case by a fraction the numerator of which is the
number of Firm Securities set forth opposite the name of such Underwriter in
Schedule B hereto and the denominator of which is the total number of Firm
Securities.
Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with Boston EquiServe L.P.,
as custodian ("Custodian"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Stockholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Stockholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death or other event or termination had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death or other event or termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of the
purchase price in Federal (same day) funds by official bank check or checks or
wire transfer to an account at a bank acceptable to CSFBC drawn to the order of
the Company in the case of shares of Firm Securities and to the Custodian in the
case of shares of Firm Securities, at the office of Gunderson, Dettmer, Stough,
Villeneuve, Franklin & Hachigian, LLP ("Gunderson Dettmer"), 155 Constitution
Drive, Menlo Park, California 94025, at 10:00 A.M., New York time, on
,2000, or at such other time not later than seven full business days thereafter
as CSFBC and the Company determine, such time being herein referred to as the
"First Closing Date". The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the office of CSFBC at least 24 hours prior to the First Closing
Date.
In addition, upon written notice from CSFBC given to the Company and the
Selling Stockholders from time to time not more than 30 days subsequent to the
date of the Prospectus, the Underwriters may purchase all or less than all of
the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Selling Stockholders agree, severally and not jointly, to
sell to the Underwriters the respective numbers of Optional Securities obtained
by multiplying the number of Optional Securities specified in such notice by a
fraction the numerator of which is the number of shares set forth opposite the
names of such Selling Stockholders in Schedule A hereto under the caption
"Number of Optional Securities to be Sold" and the denominator of which is the
total number of Optional Securities (subject to adjustment by CSFBC to eliminate
fractions). Such Optional Securities shall be purchased from each Selling
Stockholder for the account of each Underwriter in the same proportion as the
number of Firm Securities set forth opposite such Underwriter's name bears to
the total number of Firm Securities (subject to adjustment by CSFBC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company and
the Selling Stockholders.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Custodian will deliver
the Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Custodian, at the office of Gunderson Dettmer. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as CSFBC requests upon reasonable notice prior to
6
<PAGE>
such Optional Closing Date and will be made available for checking and packaging
at the office of CSFBC at a reasonable time in advance of such Optional Closing
Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule
424(b) not later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business day after
the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is prior to
the execution and delivery of this Agreement and an additional registration
statement is necessary to register a portion of the Offered Securities under the
Act but the Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement or, if
filed, will file a post-effective amendment thereto with the Commission pursuant
to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make such
filing at such later date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial or any additional registration statement as filed or the
related prospectus or the Initial Registration Statement, the Additional
Registration Statement (if any) or the Prospectus and will not effect such
amendment or supplementation without CSFBC's consent; and the Company will also
advise CSFBC promptly of the effectiveness of each Registration Statement (if
its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its reasonable
best efforts to prevent the issuance of any such stop order and to obtain as
soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (five of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
CSFBC reasonably requests. The Prospectus shall be so furnished on or prior to
3:00 P.M., New York time, on the
7
<PAGE>
business day following the later of the execution and delivery of this Agreement
or the Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the expenses of
printing and distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC designates and
will continue such qualifications in effect so long as required for the
distribution; provided, however, that the Company will not be required to
arrange for the qualification of the Offered Securities in any jurisdiction in
which the Company would, as a result of such qualification, be required to
qualify to do business as a foreign corporation or to execute a general consent
to service of process effecting such qualification.
(g) During the period of five years hereafter, the Company will furnish
to the Representatives and, upon request, to each of the other Underwriters, as
soon as practicable after the end of each fiscal year, a copy of its annual
report to stockholders for such year; and the Company will furnish to the
Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as CSFBC may reasonably
request.
(h) The Company agrees with the several Underwriters and the Selling
Stockholders that the Company will pay all expenses incident to the performance
of the obligations of the Company and the Selling Stockholders under this
Agreement, for any filing fees and other expenses (including fees and
disbursements of counsel) incurred in connection with qualification of the
Offered Securities for sale under the laws of such jurisdictions as CSFBC
designates and the printing of memoranda relating thereto, for the filing fee
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. of the Offered Securities, for any travel expenses of
the Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers of the
Offered Securities (except as otherwise agreed in writing), for any transfer
taxes on the sale by the Selling Stockholders to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the Prospectus
(including any amendments and supplements thereto) to the Underwriters.
(i) For a period of 90 days after the date of the public offering of
the Offered Securities, the Company will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Act relating to, any additional
shares of its Securities or securities convertible into or exchangeable or
exercisable for any shares of its Securities, or publicly disclose the intention
to make any such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC except (i) issuances of Securities pursuant to the
conversion or exchange of convertible or exchangeable securities or the exercise
of warrants or options, in each case outstanding on the date hereof, (ii) grants
of employee and director stock options, or employee stock purchases pursuant to
the terms of plans in effect on the date hereof, (iii) issuances of Securities
pursuant to the exercise of such options or (iv) issuances in the aggregate of
no more than 500,000 additional shares of the Company's Securities, or
securities convertible or exchangeable therefor.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), of Ernst & Young LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
8
<PAGE>
(i) in their opinion the financial statements examined by them and
included in the Registration Statements comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in Statement of Auditing Standards No. 71, Interim
Financial Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility for
financial and accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations or any material modifications
should be made to such unaudited financial statements for them to be in
conformity with generally accepted accounting principles;
(B) at the date of the latest available balance sheet read by
such accountants, or at a subsequent specified date not more than three
business days prior to the date of such letter, there was any change in
the capital stock or any increase in short-term indebtedness or long-
term debt of the Company and its consolidated subsidiaries or, at the
date of the latest available balance sheet read by such accountants,
there was any decrease in consolidated total current assets or net
assets, as compared with amounts shown on the latest balance sheet
included in the Prospectus; or
(C) for the period from the closing date of the latest income
statement included in the Prospectus to the closing date of the latest
available income statement read by such accountants there were any
decreases, as compared with the corresponding period of the previous
year and with the period of corresponding length ended the date of the
latest income statement included in the Prospectus, in consolidated
total revenues or any increase in loss from operations or any increase
in the total or per share amounts of consolidated net loss.
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information contained
in the Registration Statements (in each case to the extent that such dollar
amounts, percentages and other financial information are derived from the
general accounting records of the Company and its subsidiaries subject to
the internal controls of the Company's accounting system or are derived
directly from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such dollar
amounts, percentages and other financial information to be in agreement
with such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
9
<PAGE>
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or such later date as shall have been consented to by CSFBC. If the
Effective Time of the Additional Registration Statement (if any) is not prior to
the execution and delivery of this Agreement, such Effective Time shall have
occurred not later than 10:00 P.M., New York time, on the date of this Agreement
or, if earlier, the time the Prospectus is printed and distributed to any
Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there shall
not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, properties
or results of operations of the Company and its subsidiaries taken as one
enterprise which, in the judgment of a majority in interest of the Underwriters
including the Representatives, is material and adverse and makes it impractical
or inadvisable to proceed with completion of the public offering or the sale of
and payment for the Offered Securities; (ii) any material suspension or material
limitation of trading in securities generally on the New York Stock Exchange or
any setting of minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the over-the-
counter market; (iii) any banking moratorium declared by U.S. Federal or New
York authorities; or (iv) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the Offered
Securities.
(d) The Representatives shall have received an opinion, dated such Closing
Date, of Gunderson, Dettmer, Stough, Villeneuve, Franklin & Hachigian, LLP,
counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified
to do business as a foreign corporation in good standing in California;
(ii) The Offered Securities delivered on such Closing Date and all
other outstanding shares of the Common Stock of the Company have been duly
authorized and validly issued, and conform to the description thereof
contained in the Prospectus, and to such counsel's knowledge, are fully
paid and nonassessable. The issuance of the Securities by the Company is
not subject to any preemptive rights pursuant to the Company's certificate
of incorporation or bylaws or applicable federal or California law or
Delaware corporate law or any agreement filed as an exhibit to the
Registration Statement;
(iii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings known to such counsel between the Company and
any person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to
any other registration statement filed by the Company under the Act;
(iv) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940;
(v) No consent, approval, authorization or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance or sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws;
10
<PAGE>
(vi) The execution, delivery and performance of this Agreement and
the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, (i) any applicable federal, Delaware corporate or California
statute, rule or regulation, or (ii) to such counsel's knowledge, any order
of any governmental agency or body or any court having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
(iii) any agreement or instrument that is filed as an exhibit to the
Registration Statement, or (iv) the charter or by-laws of the Company or
any such subsidiary, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated by this
Agreement;
(vii) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became effective
under the Act as of the date and time (if determinable) specified in such
opinion, the Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on the date
specified therein or was included in the Initial Registration Statement or
the Additional Registration Statement (as the case may be), and, to the
knowledge of such counsel (based solely upon oral advice from the staff of
the Commission), no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all material
respects with the requirements of the Act and the Rules and Regulations;
(viii) The statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide
an accurate and fair summary of such provisions; the statements set forth
under the headings "Management--Employment Benefit Plans," "Management--
Change in Control Agreements," "Management--Indemnification," "Shares
Eligible for Future Sale," and "Underwriting" to the extent of the
description of this Agreement, in the Prospectus, and Part II--Item 14 and
Part II--Item 15 in the Registration Statement, insofar as such statements
constitute a summary of legal matters, documents or proceedings referred to
therein, have been reviewed by such counsel and accurately and fairly
present the information called for with respect to such legal matters,
documents and proceedings as required by the Act and the rules and
regulations thereunder; and
(ix) This Agreement has been duly authorized, executed and delivered
by the Company.
Such opinion shall also contain a statement to the effect that such
counsel participated in meetings at which representatives of the
Underwriters, their legal counsel, and the Company were present, and based
on such meetings, such counsel has no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective date
or as of such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto, as of its issue date or
as of such Closing Date, contained any untrue statement of a material fact
or omitted to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and such counsel do not know of any legal or
governmental proceedings required to be described in a Registration
Statement or the Prospectus which are not described as required, or of any
contracts or documents of a character required to be described in a
Registration Statement or to be filed as exhibits to a Registration
Statement which are not described and filed as required; it being
understood that such counsel expresses no statement as to the financial
statements and the notes thereto, financial schedules, other financial data
and statistical data derived therefrom and statistical market estimates
included therein.
(e) The Representatives shall have received an opinion, dated such Closing
Date, of Dickstein Shapiro Morin & Oshinsky LLP, counsel for the Selling
Stockholders, to the effect that:
(i) Each Selling Stockholder had valid and unencumbered title to the
Offered Securities delivered by such Selling Stockholder on such Closing
Date and had full right, power and authority to sell, assign, transfer and
deliver the Offered Securities delivered by such Selling Stockholder on
such Closing Date hereunder; and the
11
<PAGE>
several Underwriters have acquired valid and unencumbered title to the
Offered Securities purchased by them from the Selling Stockholders on such
Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by Selling Stockholder for the consummation of the
transactions contemplated by the Custody Agreement or this Agreement in
connection with the sale of the Offered Securities sold by the Selling
Stockholders, except such as have been obtained and made under the Act and
such as may be required under state securities laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the transactions
therein and herein contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any
statute, any rule, regulation or order of any governmental agency or body
or any court having jurisdiction over any Selling Stockholder or any of
their properties or any agreement or instrument to which any Selling
Stockholder is a party or by which any Selling Stockholder is bound or to
which any of the properties of any Selling Stockholder is subject, or the
charter or by-laws of any Selling Stockholder which is a corporation;
(iv) The Power of Attorney and related Custody Agreement with
respect to each Selling Stockholder have been duly authorized, executed and
delivered by such Selling Stockholder and constitute valid and legally
binding obligations of each such Selling Stockholder enforceable in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles; and
(v) This Agreement has been duly authorized, executed and delivered
by each Selling Stockholder.
(f) The Representatives shall have received from Fenwick & West LLP,
counsel for the Underwriters, such opinion or opinions, dated such Closing Date,
with respect to the incorporation of the Company, the validity of the Offered
Securities delivered on such Closing Date, the Registration Statements, the
Prospectus and other related matters as the Representatives may require, and the
Selling Stockhkolders and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.
(g) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal financial
or accounting officer of the Company in which such officers, to the best of
their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such Closing
Date, of Ernst & Young LLP which meets the requirements of subsection (a) of
this Section, except that the specified date referred to in such subsection will
be a date not more than three days prior to such Closing Date for the purposes
of this subsection.
(i) The Representatives shall have received an opinion, dated such Closing
Date, of Finnegan, Henderson, Farabow, Garrett & Dunner LLP, intellectual
property counsel for the Company, to the effect that:
(i) Such counsel have read the portions of the Registration
Statements and the Prospectus referring to patents;
12
<PAGE>
(ii) Nothing has come to the attention of such counsel that has
caused such counsel to believe that the applications listed on a schedule
to such opinion that were prepared by such counsel (the "Applications")
were not properly prepared and filed, or that the patents listed on a
schedule to such opinion (the "Patents") are not owned by or assigned to
the Company. Such counsel is not aware of any material defects, not
disclosed to the Underwriters or their counsel, which could form a basis
for a successful challenge to validity of any patent issued from any
Application;
(iii) Such counsel is not aware of any facts, not disclosed to the
Underwriters or their counsel which could form the basis of a successful
challenge to the validity of any Patent;
(iv) As to the statements under the captions "Risk Factors--We and
our licensees may be found to infringe proprietary rights of others,
resulting in litigation, redesign expenses, or costly licenses.", "Risk
Factors--Protection of our intellectual property is limited and efforts to
protect our intellectual property may be inadequate, time consuming, and
expensive." and "Business--Intellectual Property," to the knowledge of such
counsel, (A) insofar as such statements in the above-mentioned sections of
any Registration Statement or any amendment thereto constitute matters of
United States patent law or legal conclusions thereunder, such statements
are accurate and (B) none of the above-mentioned sections of any
Registration Statement or any amendment thereto, as of its effective date
or as of such Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and
(v) Such counsel is not aware of any material pending or threatened
action, suit, claim or governmental proceeding relating to patents or
patent applications owned by or assigned to the Company (other than the
patent application proceedings themselves); to such counsel's knowledge,
the Company has not received any notice from a third party challenging the
validity of any of the United States patents owned by the Company; and to
such counsel's knowledge, the Company has not received any notice of
infringement with respect to any United States patent except as disclosed
in the Prospectus; and such counsel is not aware of any others who have
asserted any ownership rights in the patents.
(j) On or prior to the date of this Agreement, the Representative shall
have received lockup letters from __________________________.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company and each of the
Senior Management, jointly and severally, will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person, if any, who
controls such Underwriter within the meaning of Section 15 of the Act, against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that neither the Company nor any
of the Senior Management will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company or any of the Senior Management by any
Underwriter through the Representatives specifically for use therein, it being
understood and agreed that the only such information furnished by any
Underwriter consists of the information described as such in subsection (c)
below; provided, that the liability of each individual member of the Senior
Management pursuant to this subsection (a) shall be limited to an amount equal
to the net proceeds received by such individual member of the Senior Management
from the sale of Securities hereunder.
13
<PAGE>
In addition, the Company and each of the Underwriters agree with the Senior
Management that any claim of such Underwriter against the Senior Management for
indemnification, reimbursement or advancement of expenses pursuant to this
Section 7 (except for any breach of any representation or warranty in Section
2(b) hereof) shall first be sought by such Underwriter to be satisfied in full
by the Company and shall be satisfied by the Senior Management only to the
extent that (i) such claim has not been satisfied in full by the Company and
(ii) 30 days have passed since the termination of active negotiations between
the Company and the Underwriters regarding such claim. The Company and the
Senior Management may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible, including, without
limitation, allocating between the Company and the Senior Management the
liability resulting from a breach of the representations and warranties of the
Company and the Senior Management hereunder. The indemnity provided for in this
Section 7 shall be in addition to any liability which the Senior Management may
otherwise have. Senior Management will not, without the prior written consent
of the Representatives, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not any
such Representative or any person who controls any such Representatives is a
party to such claim, action, suit, or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(b) Each of the Selling Stockholders, severally and jointly, will indemnify
and hold harmless each Underwriter, its partners, directors and officers and
each person who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in any Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Selling
Stockholder (other than Senior Management) expressly for use therein; and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that the Selling Stockholders will not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement in or omission or
alleged omission from any of such documents in reliance upon and in conformity
with written information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below, and provided, further,
that the liability of a Selling Stockholder pursuant to this subsection (b)
shall be limited to an amount equal to the net proceeds received by such Selling
Stockholder from the sale of Securities hereunder.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the Act and the Selling
Stockholders, against any losses, claims, damages or liabilities to which the
Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company and each Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the
14
<PAGE>
caption "Underwriting" and the information contained in the ______ and _______
paragraphs under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement (i) includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act by
or on behalf of an indemnified party.
(e) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Senior Management and the Selling Stockholders on the one hand and
the Underwriters on the other from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, the
Senior Management and the Selling Stockholder on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Senior Management and the Selling Stockholders on the one hand and
the Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company, the Senior Management and the Selling Stockholders bear to the
total underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company, the Senior Management, the Selling Stockholders or the Underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (e). Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under this
Section shall be in addition to any liability which the Company and the Selling
Stockholder may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the
15
<PAGE>
Company, to each officer of the Company who has signed a Registration Statement
and to each person, if any, who controls the Company within the meaning of the
Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company and the Selling Stockholders for
the purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC, the Company and the Selling Stockholders for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter, the Company or the Selling Stockholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company, the Selling Stockholders and the Underwriters
pursuant to Section 7 shall remain in effect, and if any Offered Securities have
been purchased hereunder the representations and warranties in Section 2 and all
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 8
or the occurrence of any event specified in clause (iii), (iv) or (v) of Section
6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 4750 Patrick Henry Blvd., Santa
Clara, California 95054, Attention: Edmund J. Fish, Executive Vice President
and Chief Business Officer or, if sent to the Selling Stockholder or any of
them, will be mailed, delivered or telegraphed and confirmed to Victor Shear and
Edmund J. Fish at 4750 Patrick Henry Blvd., Santa Clara, California 95054;
provided, however, that any notice to any party pursuant to Section 7 will be
mailed, delivered or telegraphed and confirmed to such party.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective, personal representatives,
successors and the officers and directors and controlling persons referred to in
Section 7, and no other person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters. Victor Shear and Edmund J. Fish, or either of them,
will act for the Selling
16
<PAGE>
Stockholders in connection with such transactions, and any action under or in
respect of this Agreement taken by either of them will be binding upon all the
Selling Stockholders.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
17
<PAGE>
If the foregoing is in accordance with the Representatives' understanding of
our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement among the Selling
Stockholders, the Company and the several Underwriters in accordance with its
terms.
Very truly yours,
INTERTRUST TECHNOLOGIES CORPORATION
By
--------------------------------------
Edmund J. Fish
Executive Vice President and Chief Business
Officer
THE SELLING STOCKHOLDERS IDENTIFIED IN
SCHEDULE A
*By
-------------------------------------------
Attorney-in-fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
J.P. MORGAN & CO.
SALOMON SMITH BARNEY INC.
WIT SOUNDVIEW CORPORATION
Acting on behalf of themselves and as the Representatives of the several
Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By
-----------------------------------------
William J.B. Brady III
Managing Director
18
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Number of Optional
Firm Securities Securities to
Selling Stockholder to be Sold be Sold
------------------ --------------- -------------
<S> <C> <C>
--------------- -------------
Total...............................................
=============== =============
</TABLE>
19
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Underwriter Firm Securities
----------- -----------------------------
<S> <C>
Credit Suisse First Boston Corporation...................................
J.P. Morgan & Co Inc.....................................................
Salomon Smith Barney Inc.................................................
Wit SoundView Corporation................................................
Total..................................................... --
=============================
</TABLE>
20
<PAGE>
EXHIBIT 5.1
April 6, 2000
InterTrust Technologies Corporation
4750 Patrick Henry Drive
Santa Clara, CA 95054
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333-
32484) originally filed by InterTrust Technologies Corporation (the "Company")
with the Securities and Exchange Commission (the "Commission") on March 15,
2000, as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 5,520,000 shares of the Company's Common Stock (the "Shares"). The
Shares, which include an over-allotment option granted by the Company and
Selling Stockholders to the Underwriters to purchase up to 720,000 additional
shares of the Company's Common Stock, are to be sold to the Underwriters by the
Company and Selling Stockholders as described in the Registration Statement for
resale to the public. As your counsel in connection with this transaction, we
have examined the proceedings taken and are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares being sold by the Company and upon completion of the proceedings being
taken in order to permit such transactions to be carried out in accordance with
the securities laws of the various states where required, the Shares being sold
by the Company, when issued and sold in the manner described in the Registration
Statement and in accordance with the resolutions adopted by the Board of
Directors of the Company, will be legally and validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<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 January 14,
2000, except as to the paragraph titled "Stock Split" of Note 1, as to which
the date is January 27, 2000, with respect to the consolidated financial
statements of InterTrust Technologies Corporation in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-32484) and related Prospectus of
InterTrust Technologies Corporation for the registration of 5,520,000 shares of
its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
April 5, 2000
