<PAGE>
As filed with the Securities and Exchange Commission on March 27, 2000.
Registration No. 333-32484
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
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 Blvd., Santa Clara, CA 95054
(408) 855-0100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Victor Shear
Chief Executive Officer and Chairman of the Board
InterTrust Technologies Corporation
4750 Patrick Henry Blvd., Santa Clara, CA 95054
(408) 855-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<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. [_]
---------------
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 MARCH 27, 2000
6,500,000 Shares
[LOGO OF INTERTRUST]
Common Stock
--------
We are selling 3,000,000 shares of common stock and the selling stockholders
are selling 3,500,000 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 March 24, 2000, the last reported sale price of our common
stock was $50.06 per share.
The underwriters have an option to purchase from selling stockholders a
maximum of 975,000 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 Blvd., 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......................... 3,000,000 shares
Common stock offered by the selling stockholders... 3,500,000 shares
Common stock to be outstanding after the offering.. 82,216,996 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.
. 230,462 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 $282,555
Working capital.............................................. 136,551 278,272
Total assets................................................. 151,497 293,218
Total stockholders' equity................................... 133,352 275,073
</TABLE>
The as adjusted column in the consolidated balance sheet data table above
reflects our sale of 3,000,000 shares of common stock in this offering, at an
assumed public offering price of $50.06 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 March 24 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 31.4% 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 82.4 million
shares of common stock, of which approximately 22.5 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 59.9 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>
9.9 million April 24, 2000
47.1 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 3,000,000 shares of common stock we
are offering are estimated to be $141.7 million, assuming a public offering
price of $50.06 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 (through March 24, 2000)............... $99.75 $42.75
</TABLE>
On March 24, 2000, the last reported sale price of our common stock on The
Nasdaq National Market was $50.06 per share. On December 31, 1999, there were
approximately 421 holders of record of our common stock.
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<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 3,000,000 shares
of common stock in this offering, at an assumed public offering price of
$50.06 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
. 230,462 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 82
Additional paid-in capital.............................. 214,241 355,959
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............................ 133,352 275,073
-------- --------
Total capitalization.................................. $133,352 $275,073
======== ========
</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 $271.5 million or $3.30 per
share after giving effect to the sale of shares of our common stock in this
offering less estimated discounts, commissions and expenses. This amount
represents an immediate increase in net tangible book value to existing
stockholders and an immediate dilution in net tangible book value to purchasers
of common stock in the offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $50.06
Net tangible book value per share as of December 31, 1999........ $1.64
Increase per share attributable to new investors................. 1.66
-----
Pro forma net tangible book value per share after the offering..... 3.30
------
Dilution per share to new investors................................ $46.76
======
</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.
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<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.
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<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 230,462 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.
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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
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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
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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.
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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>
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We began recognizing revenue on a subscription basis under a number of
license agreements in January 1999, after shipping the general availability
version of our product at the end of December 1998. The increase in software
support and training services revenue beginning in the quarter ended December
31, 1998 was the result of training services associated with new partner
agreements. Software support and training services revenue in the quarter ended
December 31, 1998 also included a one-time support fee related to a limited
term license. Quarter over quarter increases in the cost of software support
and training services reflect the increased effort of engineering personnel to
provide support services to our partners. During the quarter ended June 30,
1998, we reduced the amount of employee travel, limited the amount of hiring,
and reduced the number of consultants to InterTrust with the intention of
managing cash flow. As a result of these efforts, our operating costs and
expenses declined in all departments during the quarter ended June 30, 1998.
Overall increases in research and development spending since the quarter ended
March 31, 1998 are primarily attributable to increased headcount and spending
on software tools used in the development of our products. The decrease in
sales and marketing spending in the quarter ended June 30, 1998 also reflects a
reduction in marketing personnel. Increases in sales and marketing expenses
beginning in the quarter ended September 30, 1998 reflect additional headcount
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.
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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.
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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.
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BUSINESS
Overview
We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce system.
We provide our DRM platform as software and tools to licensees, which we call
partners. These partners intend to offer digital commerce services and
applications that collectively will form a global commerce system, which we
have branded as the MetaTrust Utility.
DRM technologies protect and manage the rights and interests in digital
information of artists, authors, producers, publishers, distributors, traders
and brokers, enterprises, governments and other institutions, and consumers.
The Internet and the music industry have dramatized the need for protection and
management of digital information. The very characteristics that make the
Internet ideal for distributing digital information also make it ideal for
pirating. DRM is needed by any industry that distributes information that can
be put into digital form.
Our DRM platform provides a foundation for people and organizations to
define rules for using digital information and building commercial models. Our
technology is designed to protect digital information, apply rules persistently
after information is distributed, and automate many of the commercial
consequences of using the information. Our general purpose DRM platform is
designed to manage a broad range of rights across digital information and media
types.
Our current partners include 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
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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
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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
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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
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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.
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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.
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. 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.
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By having a combination of content, technology, and commerce service
participants in multiple markets in the MetaTrust Utility, we would not depend
on any one partner, any specific commercial model, or any specific vertical
market to succeed.
Promote Widespread InterRights Point Deployment
We have designed our client technology and our licensing structure to
achieve efficient and rapid deployment. Our technology is designed so that it
can be conveniently activated by consumers. It is also designed so that it can
be flexibly deployed by our partners through a variety of means, including
digital download, optical disk distribution, and pre-installation. We will also
work with our partners to develop business models that promote rapid
deployment, for example, superdistribution which allows users to drive
InterRights Point deployment through redistribution of content. 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
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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.
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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.
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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.
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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:
. music . business information . government . secure document
. video . financial information . healthcare exchange
. audio books . traditional media . education . enterprise
. games . images . telecommunications information portals
Partner . secure email . trading/brokering
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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>
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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;
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<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.
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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 [GRAPHIC APPEARS HERE]
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.
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. 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
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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;
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. 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;
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. 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.
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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.
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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
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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.
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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.
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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.
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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
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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
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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.
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<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......................... 3,324,832
</TABLE>
Percentage ownership calculations are based on 79,408,518 shares of common
stock outstanding as of February 29, 2000 and 82,408,518 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 975,000 shares.
Unless otherwise indicated, the address for each listed stockholder is: c/o
InterTrust Technologies Corporation, 4750 Patrick Henry Blvd., Santa Clara,
California 95054. To our knowledge, except as indicated in the footnotes to
this table and under applicable community property laws, the persons or
entities identified in this table have sole voting and investment power over
all shares of common stock shown as beneficially owned by them.
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% 100,000 15,289,716 18.6%
Kistler Associates......... 5,183,146 6.5 414,652 4,768,494 5.8
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 26.5 579,773 21,110,954 24.9
Greater than 1% Selling
Stockholders
- -----------------------
Reuters Group PLC(6)....... 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 2.5
Lion Investments, Limited.. 824,286 1.0 70,000 754,286 *
Westpool Investment Trust.. 824,286 1.0 70,000 754,286 *
Galileo Investments
Limited................... 816,000 1.0 40,000 776,000 *
Other Selling Executive
Officers
- -----------------------
Patrick P. Nguyen(5)....... 640,237 * 23,333 616,904 *
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 * 29,667 272,415 *
Talal Shamoon.............. 120,833 * 2,000 118,833 *
David P. Maher............. 45,000 * 4,500 40,500 *
Other Selling Stockholders
- --------------------------
Douglas Derwin............. 740,000 * 75,000 665,000 *
Karl Ginter................ 688,000 * 92,880 595,120 *
Frank J. Spahn............. 640,000 * 86,400 553,600 *
Banca Euromobiliare
S.P.A..................... 590,096 * 118,019 472,077 *
Allen & Company
Incorporated.............. 500,000 * 102,509 397,491 *
William Strawbridge........ 481,382 * 72,207 409,175 *
Universal Music Group...... 416,666 * 50,000 366,666 *
W. Olin Sibert............. 397,499 * 60,000 337,499 *
Kim Worsencroft............ 375,884 * 56,383 319,501 *
Bayview Investors Ltd...... 367,384 * 55,108 312,276 *
Alexander Tsukerman........ 352,000 * 35,000 317,000 *
William Jordan............. 344,000 * 51,600 292,400 *
Kenneth Grant.............. 321,500 * 43,403 278,097 *
Dandot Corporation, S.A.... 284,692 * 42,704 241,988 *
Whitney Lynn............... 246,916 * 37,037 209,879 *
James Horning.............. 211,666 * 24,000 187,666 *
ITOCHU Techno Science...... 195,692 * 24,462 171,230 *
Steven Spector............. 195,444 * 10,000 185,444 *
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 *
Sophie Limited............... 164,856 * 30,000 134,856 *
E.S. Fishburne............... 159,768 * 23,965 135,803 *
Kirk Loevner................. 155,520 * 30,000 125,520 *
David Lund................... 147,291 * 15,000 132,291 *
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 * 15,300 98,033 *
S. Lance Zaklan.............. 110,832 * 14,456 96,376 *
Xuejun Xu.................... 109,700 * 15,000 94,700 *
Paul Brody................... 109,583 * 10,000 99,583 *
Deborah Downs................ 108,750 * 15,000 93,750 *
Susan Owicki................. 90,000 * 12,000 78,000 *
Andrew Wright................ 90,000 * 13,000 77,000 *
Timothy J. Parsell........... 83,328 * 12,499 70,829 *
David W. Bryant.............. 83,156 * 12,469 70,687 *
John Amster.................. 75,365 * 10,000 65,365 *
Lemanik Sicav Active Growth.. 70,000 * 10,500 59,500 *
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 * 5,000 57,000 *
Elisabeth Pressly............ 60,000 * 9,000 51,000 *
Marvin J. Schneider.......... 53,750 * 8,000 45,750 *
Ganesh Vaidesswaran.......... 52,208 * 7,009 45,199 *
Patricia M. Jamison.......... 52,083 * 6,469 45,614 *
David Taft................... 52,000 * 1,000 51,000 *
Dat Nguyen................... 51,806 * 1,000 50,806 *
Paul Klapper................. 50,000 * 7,001 42,999 *
Harvey Kushner............... 48,686 * 7,303 41,383 *
Edna E. Ilyin................ 48,416 * 2,500 45,916 *
Michael Chorske.............. 46,503 * 5,000 41,503 *
Barry Strauss................ 45,833 * 1,000 44,833 *
James McMahon................ 45,000 * 3,938 41,063 *
HAPNA Foundation............. 39,136 * 5,870 33,266 *
Oscar Steele................. 36,833 * 1,000 35,833 *
Mary Foust................... 36,572 * 5,486 31,086 *
Ralph Hill................... 36,250 * 4,725 31,525 *
Dung D. Phan................. 35,708 * 1,000 34,708 *
Gary Moyer................... 35,208 * 4,612 30,596 *
Jackson Barber............... 34,538 * 5,181 29,357 *
Andrew Goldberg.............. 33,750 * 3,800 29,950 *
Phil Gruenhagen.............. 33,333 * 500 32,833 *
Kevin Driscoll............... 31,416 * 20,000 11,416 *
Raymond B. Wormley........... 31,166 * 2,000 29,166 *
Jeffrey A. Faust............. 30,833 * 6,000 24,833 *
Mark Scadina................. 30,250 * 6,510 23,740 *
John Wiley(7)................ 0 * 30,322 0 *
Other selling stockholders... 826,135 1.0 187,886 638,249 *
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
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<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.
(6) Represents 2,331,088 shares held of record by Reuters New Media, Inc. and
833,334 shares held of record by Blaxmill (Four) Limited.
(7) The table speaks as of February 29, 2000. On March 8, 2000, Mr. Wiley
acquired 202,648 shares of our common stock in connection with our
acquisition of Infinite Ink Corporation. After his sale of shares in this
offering, Mr. Wiley will own 172,326 shares of our common stock.
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<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 82,408,518 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.
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<PAGE>
Registration Rights
The holders of approximately 36,081,765 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 25,711,739 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.
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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.
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<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 82,408,518 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 975,000 shares
and assuming no exercise of options after February 29, 2000. Of these shares,
the 6,500,000 shares sold by us and by the selling stockholders in this
offering, 7,475,000 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, 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 60,950,000 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 49,045,457 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, the 6,500,000 shares sold in the
offering, as well as approximately 16,031,000 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
9,941,000 shares and these shares will then be immediately available for
sale in the public market.
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<PAGE>
. Approximately 47,141,000 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 2,928,000 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
36,081,765 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."
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , , 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.
Several of the selling stockholders have granted to the underwriters a 30-
day option to purchase on a pro rata basis up to 975,000 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 49,045,457 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
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<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.
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<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we 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.
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<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.
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<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.
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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
230,462 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 230,462 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).
** To be filed by amendment.
*** 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. 1 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 27th day of March, 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. 1 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 March 27, 2000
______________________________________ Chief Executive Officer
Victor Shear (Principal Executive
Officer)
/s/ David C. Chance* Executive Vice Chairman March 27, 2000
______________________________________
David C. Chance
/s/ Erwin N. Lenowitz* Vice Chairman of the March 27, 2000
______________________________________ Board, Chief Financial
Erwin N. Lenowitz Officer (Principal
Financial and Accounting
Officer) and Secretary
/s/ Edmund J. Fish Director, Executive Vice March 27, 2000
______________________________________ President, and Chief
Edmund J. Fish Business Officer
/s/ David Van Wie* Director and Senior Vice March 27, 2000
______________________________________ President of Research
David Van Wie
/s/ Bruce Fredrickson* Director March 27, 2000
______________________________________
Bruce Fredrickson
/s/ Satish K. Gupta* Director March 27, 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).
** To be filed by amendment.
*** Previously filed.
<PAGE>
EXHIBIT 10.19
BUILDING LEASE AGREEMENT
By and Between
FIRST STATE REALTY OF AMERICA, INC.
as Landlord
and
INTERTRUST TECHNOLOGIES CORPORATION
as Tenant
Dated: January 24, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 PREMISES.......................................... 1
Section 1.1............................................ 1
Section 1.2............................................ 1
ARTICLE 2 TERM; EXTENSIONS.................................. 1
Section 2.1............................................ 1
Section 2.2............................................ 1
Section 2.3............................................ 2
Section 2.4............................................ 3
Section 2.5............................................ 3
ARTICLE 3 DEFINITIONS....................................... 4
Section 3.1 Definitions................................ 4
Additional Rent................................... 4
Alterations....................................... 4
Annual Base Rent.................................. 4
Building.......................................... 4
CC&R's............................................ 4
Commencement Date................................. 4
Effective Date.................................... 4
Environmental Requirements........................ 4
Event of Default.................................. 4
Expiration Date................................... 5
Extension Term.................................... 5
Extension Term Commencement Date.................. 5
Hazardous Materials............................... 5
HVAC.............................................. 5
Landlord.......................................... 5
Lease Term........................................ 5
Permitted Use..................................... 5
Premises.......................................... 5
Real Property Taxes............................... 6
Rent.............................................. 6
Security Deposit.................................. 6
Tenant............................................ 6
Tenant Affiliate.................................. 6
Tenant's Personal Property........................ 6
ARTICLE 4 RENT.............................................. 6
Section 4.1............................................ 6
Section 4.2............................................ 7
Section 4.3............................................ 7
Section 4.4............................................ 7
Section 4.5............................................ 7
Section 4.6............................................ 7
ARTICLE 5 POSSESSION, LEASEHOLD IMPROVEMENTS................ 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
Section 5.1............................................ 8
Section 5.2............................................ 8
ARTICLE 6 USE OF PREMISES; LIMITATIONS OF USE............... 8
Section 6.1............................................ 8
Section 6.2............................................ 9
Section 6.3............................................ 9
Section 6.4............................................ 9
Section 6.5............................................ 9
ARTICLE 7 TAXES............................................. 10
Section 7.1............................................ 10
Section 7.2............................................ 10
Section 7.3............................................ 10
Section 7.4............................................ 10
ARTICLE 8 INSURANCE......................................... 11
Section 8.1............................................ 11
Section 8.2............................................ 12
Section 8.3............................................ 12
Section 8.4............................................ 12
Section 8.5............................................ 12
Section 8.6............................................ 12
Section 8.7............................................ 13
ARTICLE 9 INDEMNIFICATION................................... 13
Section 9.1............................................ 13
Section 9.2............................................ 14
ARTICLE 10 UTILITIES AND SERVICE............................ 14
Section 10.1........................................... 14
ARTICLE 11 CONSTRUCTION IMPROVEMENTS........................ 14
Section 11.1........................................... 14
Section 11.2........................................... 15
ARTICLE 12 REPAIRS AND MAINTENANCE.......................... 16
Section 12.1........................................... 16
Section 12.2........................................... 16
Section 12.3........................................... 16
Section 12.4........................................... 17
ARTICLE 13 DESTRUCTION - FIRE OR OTHER CAUSES............... 17
Section 13.1........................................... 17
Section 13.2........................................... 17
Section 13.3........................................... 18
ARTICLE 14 CONDEMNATION..................................... 18
Section 14.1........................................... 18
Section 14.2........................................... 18
Section 14.3........................................... 18
Section 14.4........................................... 18
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
Section 14.5........................................... 18
Section 14.6........................................... 19
Section 14.7........................................... 19
Section 14.8........................................... 19
ARTICLE 15 SIGNS AND ADVERTISING............................ 19
ARTICLE 16 ENTRY BY LANDLORD................................ 20
Section 16.1........................................... 20
Section 16.2........................................... 20
Section 16.3........................................... 20
ARTICLE 17 ASSIGNMENT AND SUBLETTING........................ 21
Section 17.1........................................... 21
Section 17.2........................................... 21
Section 17.3........................................... 22
Section 17.4........................................... 22
Section 17.5........................................... 22
Section 17.6........................................... 22
Section 17.7........................................... 23
Section 17.8........................................... 23
ARTICLE 18 SUBORDINATION.................................... 24
Section 18.1........................................... 24
Section 18.2........................................... 24
ARTICLE 19 DEFAULT.......................................... 24
Section 19.1........................................... 24
Section 19.2........................................... 25
Section 19.3........................................... 26
Section 19.4........................................... 26
Section 19.5........................................... 27
Section 19.6........................................... 28
Section 19.7........................................... 28
Section 19.8........................................... 28
ARTICLE 20 NOTICES.......................................... 29
ARTICLE 21 BROKER'S COMMISSIONS............................. 30
ARTICLE 22 MECHANIC'S AND OTHER LIENS....................... 30
Section 22.1........................................... 30
Section 22.2........................................... 30
ARTICLE 23 NO RENT ABATEMENT AND QUIET ENJOYMENT............ 31
Section 23.1........................................... 31
Section 23.2........................................... 31
ARTICLE 24 END OF TERM...................................... 31
Section 24.1........................................... 31
Section 24.2........................................... 31
Section 24.3........................................... 32
Section 24.4........................................... 32
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 25 ESTOPPEL CERTIFICATE............................. 32
Section 25.1........................................... 32
ARTICLE 26 HAZARDOUS SUBSTANCES............................. 32
Section 26.1........................................... 32
Section 26.2........................................... 32
Section 26.3........................................... 33
Section 26.4........................................... 33
Section 26.5........................................... 33
ARTICLE 27 PARKING ENTITLEMENTS............................. 33
Section 27.1........................................... 33
ARTICLE 28 MISCELLANEOUS.................................... 34
Section 28.1........................................... 34
Section 28.2........................................... 34
Section 28.3........................................... 34
Section 28.4........................................... 34
Section 28.5........................................... 34
Section 28.6........................................... 34
Section 28.7........................................... 34
Section 28.8........................................... 34
Section 28.9........................................... 34
Section 28.10.......................................... 34
Section 28.11.......................................... 35
Section 28.12.......................................... 35
</TABLE>
-iv-
<PAGE>
This BUILDING LEASE AGREEMENT (hereinafter the "Lease") dated for reference
purposes as of the 24th day of January, 2000 ("Effective Date"), is made by and
between FIRST STATE REALTY OF AMERICA, INC., a Delaware corporation, and
INTERTRUST TECHNOLOGIES CORPORATION, a Delaware corporation.
ARTICLE 1
PREMISES
Section 1.1 Landlord hereby leases to Tenant and Tenant hereby leases from
-----------
Landlord, for the term and subject to the covenants, agreements and conditions
hereinafter set forth, those certain premises located at 4800 Patrick Henry
Drive, Santa Clara, California (the "Premises") as more particularly described
on EXHIBIT A attached hereto and by this reference incorporated herein, and the
improvements thereon (the "Building") including the exclusive right to use all
parking on the Premises, as such parking may be reconfigured by Tenant from time
to time in accordance with all applicable laws and prior written approval by
Landlord, subject to the estates, interests, liens, charges, encumbrances and
matters set forth in EXHIBIT B annexed hereto and made a part hereof.
Section 1.2 The "Rentable Area" of the Building is agreed to be fifty-
-----------
eight thousand three hundred twenty (58,320) square feet. The area of the
Premises leased to Tenant hereunder is agreed to be fifty-eight thousand three
hundred twenty (58,320) square feet.
ARTICLE 2
TERM; EXTENSIONS
Section 2.1 The term of this Lease (the "Lease Term") shall commence on
-----------
March 9, 2000 (the "Commencement Date") and terminate on August 31, 2004 (the
"Expiration Date"), subject to earlier termination or Tenant's right to extend
the Lease Term under the terms of this Lease. Landlord shall tender possession
of the Premises to Tenant on or before the Commencement Date, provided that the
Commencement Date shall be extended for no more than 60 days for any and all
delays resulting from causes beyond the reasonable control of Landlord. If
Landlord fails to deliver possession by such date other than due to delays
beyond the reasonable control of Landlord, Tenant, as its sole remedy and in
lieu of all other remedies provided herein or by law, may, at its election,
terminate this Lease by serving on Landlord at any time after the Commencement
Date a written Notice of Termination.
Section 2.2 Landlord hereby grants to Tenant the option to extend the
-----------
Lease Term for a term of five (5) years at fair market net rent, determined in
accordance with Section 2.3 below (the "Extension Term"), upon and subject to
the following terms and conditions:
(a) The Extension Term shall commence on the day next succeeding the
Expiration Date of the initial Lease Term.
(b) Tenant shall exercise such option as to the Extension Term by
giving written notice of exercise of the option (the "Option Notice") to
Landlord at least one hundred eighty (180) days but no more than two hundred
seventy (270) days before the first day of such
<PAGE>
Extension Term, time being of the essence. Landlord and Tenant shall have a 30
day period after Landlord receives the Option Notice in which to agree on Annual
Base Rent during the Extension Term, which shall include, without limitation, a
rent escalation for each year of the Extension Term if market lease rates at
that time assume annual rent escalations. If the parties are unable to agree on
the Annual Base Rent for the Extension Term within such 30-day period, the
Annual Base Rent for the Extension Term shall be the fair market net rent (as
defined in Section 2.3 below) for the Premises, which shall be conclusively
determined in the manner set forth in Section 2.3 below.
(c) When exercising such right and on the Expiration Date of the
initial Lease Term, Tenant shall not be in default, beyond any applicable grace
period, in the performance of any of its obligations under this Lease, or
Tenant's exercise of its option shall be deemed ineffective, and this Lease
shall terminate on the Expiration Date without notice.
(d) If Tenant elects to exercise its option to extend the Lease Term,
all the provisions of this Lease shall be applicable during each Extension Term
except that:
(i) Tenant shall have no further right to extend this Lease
beyond the Extension Term;
(ii) Effective as of the commencement of the Extension Term
("Extension Term Commencement Date"), the Annual Base Rent in effect shall be
increased as set forth in this Section 2.2 and Section 2.3 below.
As used hereinafter, the term "Lease Term" shall mean the initial Lease
Term, plus the Extension Term as to which Tenant gives a timely Option Notice
and all references to the Expiration Date shall mean the final day of the Lease
Term as so extended.
Section 2.3
-----------
(a) For purposes of this Lease, "fair market net rent" shall be deemed
to mean the base amount of rental which would typically be paid by a tenant
under a net lease (exclusive of all other sums payable by the tenant under a net
lease such as taxes, insurance premiums, common area maintenance charges, repair
and restoration costs, and similar charges) for premises of a similar type,
design and quality in the same or similar quality geographic area in which the
Premises are situated trader market leasing conditions existing at that time and
including, without limitation, a rent escalation for each year of the Extension
Term if market lease rates at that time assume annual rent escalations.
(b) Within 10 days after the expiration of the 30-day period described
in Section 2.2 above, each party at its cost and by giving notice to the other
party, shall appoint a real estate appraiser with at least five years full-time
commercial appraisal experience in the geographical area in which the Premises
are located, to appraise and set the then fair market net rent for the Extension
Term. If a party does not appoint an appraiser within 10 days after the other
party has given notice of the name of its appraiser, the single appraiser
appointed shall be the sole appraiser and shall set the fair market net rent for
the Extension Term.
-2-
<PAGE>
(c) If the two appraisers are appointed by the parties as stated in
this Section 2.3, they shall meet promptly and attempt to appraise and set the
then fair market net rent for the Extension Term. If they are unable to agree
within 30 days after the second appraiser has been appointed, they shall attempt
to select a third appraiser, meeting the qualifications stated in this Section
2.3, within 10 days after the last day the two appraisers are given to set the
Annual Base Rent. If they are unable to agree on a third appraiser, either of
the parties to this Lease, by giving 10 days written notice to the other party,
may apply to the presiding judge of the Superior Court for Santa Clara County
for the selection of a third appraiser who meets the qualifications stated in
this Section 2.3. Each of the parties shall bear one-half of the cost of
appointing the third appraiser, and of paying the third appraiser's fees. The
third appraiser, however selected, shall be a person who has not previously
acted in any capacity for either party.
(d) Within 30 days after the selection of the third appraiser, a
majority of the appraisers shall appraise and set the fair market net rent for
the Extension Term. If a majority of the appraisers are unable to so set the
fair market net rent within the stipulated period of time, the three appraisals
of same shall be added together and their total divided by three. The resulting
quotient shall be the fair market net rent for the Extension Term.
(e) If, however, the low appraisal and/or the high appraisal are more
than 10% lower or higher than the middle appraisal, the low appraisal and/or the
high appraisal shall he disregarded. If only one appraisal is disregarded, the
remaining two appraisals shall be added together and their total divided by two.
The resulting quotient shall be the fair market net rent for the Premises during
the Extension Terns.
(f) If the foregoing appraisal process continues through the Extension
Term Commencement Date, Tenant shall continue to pay Annual Base Rent at the
rate payable for the last year of the initial term of this Lease. Within 10 days
after completion of the appraisal process, Tenant shall pay to Landlord the
difference between the adjusted Annual Base Rent and the Annual Base Rent
previously paid by Tenant (pursuant to the previous sentence) after the
Extension Term Commencement Date.
Section 2.4 Any holding over by Tenant of all or any part of the Premises
-----------
after the expiration of the Lease Term shall be construed as a tenancy From
month-to-month, upon all of the other terms and conditions as set forth in this
Lease, except that Tenant shall pay as Annual Base Rent for the holdover period
an amount equal to one hundred fifty percent (150%) of the last Annual Base Rent
payable hereunder on a per diem basis plus all Additional Rent payable
hereunder. Landlord may terminate such month-to-month tenancy upon 30 days
written notice to the Tenant.
Section 2.5 Upon written notice from Tenant of its need for early
-----------
possession, Landlord will use reasonable efforts, at no cost or expense to
Landlord, to negotiate and execute a written early lease termination agreement
between Landlord and the current tenant so that Landlord will be able to deliver
possession of the Premises to Tenant prior to the Commencement Date, subject to
all of the terms and conditions of this Lease other than the obligation to pay
Rent, which obligation shall not commence until March 23, 2000.
-3-
<PAGE>
ARTICLE 3
DEFINITIONS
Section 3.1 Definitions. The following terms shall have the following
------------------------
meanings in this Lease:
"Additional Rent" shall mean all payments other than Annual Base Rent
required to be made by Tenant pursuant to this Lease, including without
limitation real estate taxes and insurance, as more particularly describe in
Section 4.5 below.
"Alterations" shall mean any alterations, additions, replacements,
rebuilding, changes or improvements made in, on or about the Building or the
Premises alter the Commencement Date or earlier occupancy pursuant to Section
2.5, including, but not limited to, lighting, HVAC, electrical, partitioning,
fixtures, drapery and carpentry installations.
"Annual Base Rent" shall have the meaning ascribed to such term in
Section 4.1 hereof.
"Building" shall have the meaning ascribed to such term in Section 1.1
hereof.
"CC&R's" shall mean those certain covenants, conditions and
restrictions applicable to the Premises included in EXHIBIT B.
"Commencement Date" shall have the meaning ascribed to such term in
Section 2.1 hereof.
"Effective Date" shall have the meaning ascribed to such term in the
first paragraph on page one.
"Environmental Requirements" shall mean all present and future laws,
statutes, ordinances, rules, regulations, orders, codes, licenses, permits,
decrees, judgments, directives or the equivalent of or by the federal government
or any state or other political subdivision thereof having jurisdiction over the
Premises, or any agency, court, or body of the Federal Government, any State or
other political subdivision thereof having jurisdiction over the Premises,
exercising executive, legislative, judicial, regulatory or administrative
functions and relating to or addressing the protection of the environment or
human health, including, without limitation, the U.S. Environmental Protection
Agency, the Consumer Product Safety Commission, the Food and Drug
Administration, the California Water Resources Control Board, the Regional Water
Quality Control Board, San Francisco Bay Region, the California Air Resources
Board, CAL/OSHA Standards Board, Division of Occupational Safety and Health, the
California Department of Food and Agriculture, the California Department of
Health Services, and any federal agencies that have overlapping jurisdiction
with such California agencies.
"Event of Default" shall have the meaning ascribed to such term in
Section 19.1 hereof.
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"Expiration Date" shall have the meaning ascribed to such term in
Section 2.1 hereof.
"Extension Term" shall have the meaning ascribed to such term in
Section 2.2 hereof.
"Extension Term Commencement Date" shall have the meaning ascribed to
such term in Section 2.2(d) hereof.
"Hazardous Materials" shall mean any material substance that, whether
by its nature or use, is now or hereafter defined as a hazardous waste,
hazardous substance, pollutant or contaminant under any Environmental
Requirement, or which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous or which is now or
hereafter regulated under any Environmental Requirement, including without
limitation under any of the Environmental Protection Agency's lists of hazardous
wastes or which are identified in Sections 66680 through 66685 of Title 22 of
the California Code of Regulations, as the same may be amended from time to time
or which is or contains petroleum, gasoline, diesel fuel or any other petroleum
hydrocarbon product.
"HVAC" shall mean heating, ventilating and air conditioning.
"Landlord" as used herein shall mean only the owner for the time being
in fee of the Premises, or the owner of the leasehold estate created by an
underlying lease, or the mortgagee or the beneficiary under a deed of trust of
the fee or of such underlying lease, in possession for the time being of the
Premises, so that in the event of any sale or transfer of the Premises, or of
the making of any such underlying lease, or of any transfer or assignment or
other conveyance of such underlying lease and the leasehold estate thereby
created, the seller, lessor, transferor or assignor shall be and hereby is
entirely freed and relieved of all agreements, covenants and obligations of
Landlord herein and it shall be deemed and construed without further agreement
between the parties or their successors in interest or between the parties and
the purchase, lessee, transferee or assignee on any such sale, leasing, transfer
or assignment that such purchaser, lessee, transferee or assignee has assumed
and agreed to carry out may and all agreements, covenants and obligations of
Landlord hereunder and that such purchaser, lessee, transferee or assignee has
agreed to recognize Tenant's leasehold interest in the Premises; and provided,
however, that notwithstanding any such sale, leasing, transfer or assignment,
Landlord shall not be released from any liability or obligation to Tenant
accruing prior to the date of such sale, leasing, transfer or assignment, nor
shall the transferring Landlord be released from its obligation relating to the
return of the Security Deposit pursuant to Section 4.6 below, unless said
Security Deposit is transferred by Landlord to such purchaser, lessee,
transferee, or assignee.
"Lease Term" shall have the meaning ascribed to such term in Section
2.1 hereof.
"Permitted Use" shall have the meaning ascribed to such term in
Section 6.1 hereof.
"Premises" shall have the meaning ascribed to such term in Section
1.1.
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"Real Property Taxes" shall have the meaning ascribed to such term in
Section 7.2.
"Rent" shall mean Annual Base Rent, as defined in Section 4.1, and
Additional Rent, as defined in Section 3.1.
"Security Deposit" shall mean the Security Deposit, as defined in
Section 4.6.
"Tenant" shall mean InterTrust Technologies Corporation, a Delaware
corporation, and from and after any valid assignment, with the prior written
consent of Landlord (if required under this Lease), of the whole of Tenant's
interest in this Lease pursuant to the provisions hereof, shall also mean the
assignee thereof, subject, however, to the provisions of Section 17.3 herein.
"Tenant Affiliate" shall have the meaning ascribed to such term in
Section 17.1 hereof.
"Tenant's Personal Property" shall mean Tenant's trade fixtures,
furniture, equipment and other personal property installed or located in the
Premises at any time and from time to time.
ARTICLE 4
RENT
Section 4.1 Tenant agrees to pay to Landlord as annual rent for the use of
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the Premises (herein referred to as "Annual Base Rent"), in lawful money of the
United States, the following SUMS:
Year Annual Base Rent Monthly Installment
- ---- ---------------- -------------------
March 23, 2000, through $1,329,696.00 $110,808.00
March 22, 2001
March 23, 2001, through $1,378,684.80 $114,890.40
March 22, 2002
March 23, 2002, through $1,434,672.00 $119,556.00
March 22, 2003
March 23, 2003, through $1,490,659.20 $124,221.60
March 22, 2004
March 23, 2004, through $ 683,102.16 $128,887.20
August 31, 2004 (Partial Year)
Commencing on March 23, 2000, monthly installments of Annual Base Rent
shall be due and payable in advance, on the first day of each calendar month
during the Lease Term. Monthly installments of Annual Base Rent for any partial
calendar months during the Lease Term shall be proportionately reduced. The rent
payable from March 23, 2000, through April
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30, 2000, shall be due and payable upon execution of this Lease, in the amount
of $143,595.00, which shall be made together with an advance payment of
$24,960.78 (for a total payment of $168,555.78), representing Real Property
Taxes (as defined in Article 7 below) for the remainder of the 1999-2000 tax
year. With regard to the adjustment of Annual Base Rent for the period from
March 23 through March 31 of each year commencing 2001, an adjustment payment
("March Adjustment") shall be made together with the monthly payment of Annual
Base Rent for the month of April immediately following. The 2001 March
Adjustment, due and payable April 1, 2001, shall be in fine amount of $1,207.98;
the 2002, 2003, and 2004 March Adjustments, due and payable April 1 of each
respective year, shall be in the amount of $1,380.51 each.
Section 4.2 All payments of Rent and other charges which are required to
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be made by Tenant to Landlord hereunder shall be made payable to and sent to
First State Realty of America, Inc. at the address set forth in Article 20
below.
Section 4.3 It is the purpose and intent of Landlord and Tenant that
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Annual Base Rent shall be net to Landlord, so that this Lease shall yield, net
to Landlord, the Annual Base Rent specified in Section 4.1 hereof in each year
during the initial Lease Term of this Lease and the Annual Base Rent specified
in Section 2.2 and 2.3 hereof in each year during the Extension Term hereof if
extended and that (except for Landlord's maintenance and repair responsibilities
under Article 12 hereof) all costs, expenses and charges directly relating to
the Premises which may arise or become due during the Lease Term shall be paid
by Tenant, and that Landlord shall be indemnified and saved harmless by Tenant
from and against the same.
Section 4.4 The Annual Base Rent shall be paid to Landlord without notice
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or demand and without abatement, deduction or set-off.
Section 4.5 All taxes, charges, costs and expenses which Tenant assumes
-----------
or agrees to pay under any provisions of this Lease together with all interest
and penalties that may accrue thereon in the event of Tenant's failure to pay
the same as herein provided, all other damages, costs and expenses which
Landlord may suffer or incur, and any and all other sums which may become due,
by reason of any default of Tenant or failure on Tenant's part to comply with
the agreements, terms, covenants and conditions of this Lease on Tenant's part
to be performed, and each or any of them, shall be deemed to be Additional Rent
and, in the event of non-payment, Landlord shall have all the rights and
remedies herein provided in the case of non-payment, of Annual Base Rent.
Section 4.6 Upon the execution of this Lease by Tenant, Tenant shall
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deposit with Landlord, in cash, the sum of One Hundred Twenty-Five Thousand
Dollars ($125,000) as and for a Security Deposit to secure the faithful
performance by Tenant of each term, covenant and condition to be performed or
observed by Tenant under this Lease. If Tenant shall at any time fail to timely
make any payment due or fail to timely perform or observe any term, covenant and
condition on its part to be performed or observed under this Lease, Landlord
may, without waiving or releasing Tenant from any obligation under this Lease,
and without waiving its right to treat such failure as a default hereof, use,
apply, or retain the whole or any part of the Security
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Deposit reasonably necessary to remedy such failure of Tenant and to compensate
Landlord for damage it suffers thereby. If Landlord uses, applies, or retains
all or any portion of the Security Deposit, Tenant shall, within five (5)
business days of written demand by Landlord, remit to Landlord sufficient funds
to restore said Security Deposit to its original sum. Tenant's failure to do so
shall be a material breach of this Lease. Landlord shall not be a trustee of the
Security Deposit, and may commingle it, use it in ordinary business, transfer or
assign it, or use it in any combination of those ways. Tenant shall not be
entitled to any interest on the Security Deposit. Said Security Deposit shall be
returned to Tenant within 30 days following the expiration or sooner termination
of this Lease and surrender of the Premises by Tenant, to the extent not already
applied by Landlord in the manner described above.
ARTICLE 5
POSSESSION, LEASEHOLD IMPROVEMENTS
Section 5.1 Landlord shall, on or before the Commencement Date, deliver
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actual possession of the Premises to Tenant with the roof, HVAC system,
electrical system, plumbing, and lighting in good working condition. Landlord
shall keep the roof, HVAC system, electrical system, plumbing and lighting in
good working condition for up to ninety (90) days after the Commencement Date,
except that Tenant shall repair, at its sole cost, any system failure caused by
Tenant's or Tenant's agents', employees' or contractors' negligence, willful
misconduct, or abuse. Landlord shall, no later than five (5) days before the
Commencement Date, have the Premises, including the interior and exterior
windows, professionally cleaned. In addition, Landlord shall use reasonable
efforts to resurface and re-stripe the asphalt portions of the parking areas
located on the Premises no later than thirty (30) days after the Commencement
Date. Except as expressly set forth in this Section 5.1, Tenant accepts the
Premises in their "as is" condition. Tenant acknowledges that it has made full
and complete investigations and inspections of the Premises, and Tenant accepts
the Premises and acknowledges that the Premises are in good order, condition,
and repair.
Section 5.2 Landlord hereby represents to Tenant that, to the best of
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Landlord's actual knowledge, Landlord has not received notice of any building
code or governmental agency violation. Except for such representation, Tenant
covenants that no representations, statements or warranties, express or implied,
have been made by or on behalf of Landlord in respect of the condition of the
Premises, or the use or occupation that may be made thereof, and that Landlord
shall in no event whatsoever be liable for, and Tenant waives any claims it may
have against Landlord for, any defects therein. Landlord agrees that Tenant
shall not be liable for any latent defects in the Building foundation, exterior
walls and roof except that Tenant shall be responsible for any and all defects,
latent or patent, in the Building foundation, exterior walls and roof caused by
its contractors in connection with completing any tenant improvements.
ARTICLE 6
USE OF PREMISES; LIMITATIONS OF USE
Section 6.1 Permitted Use. Tenant shall be permitted to use the Premises
-------------------------
for software development, storage and distribution, offices, marketing and any
other lawful uses incidental to
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the foregoing (in each case, a "Permitted Use"), in full compliance with all
applicable laws, ordinances, statutes, rules, and regulations, the certificate
of occupancy for the Premises, and the matters set forth in EXHIBIT B annexed
hereto, and for no other use or uses whatsoever.
Section 6.2 Compliance with Laws. Tenant shall comply with all laws,
--------------------------------
ordinances, statutes, rules, and regulations concerning the Premises or Tenant's
use of the Premises, whether the same are presently in effect or hereinafter
enacted, including, without limitation, compliance with all Environmental
Requirements (except for compliance obligations arising from Hazardous Materials
existing on or under the Premises prior to the Commencement Date), the
obligation at Tenant's cost to alter, maintain, or (subject to the terms and
conditions of Article 13 and Article 14) repair the Premises (except for repair
and maintenance obligations of Landlord hereunder) in compliance and conformity
with all laws relating to the condition, use, or occupancy of the Premises
during the Lease Term.
Section 6.3 No Unlawful Occupancy. Tenant shall not use or occupy the
---------------------------------
Premises, nor permit or suffer the Premises or any part thereof to be used or
occupied, for any unlawful or illegal business, use or purpose, nor for any
business, use or purpose reasonably deemed by Landlord disreputable or
extrahazardous, nor in such manner as to constitute a nuisance of any kind, nor
for any purpose or in any way in violation of any present or future governmental
laws, ordinances, requirements, orders, directions, rules or regulations
applicable to the Premises. Tenant shall immediately upon the discovery of any
such unlawful, illegal, disreputable or extrahazardous use take all necessary
steps, legal and equitable, to compel the discontinuance of such use and, if
necessary to discontinue such use, to oust and remove any subtenants, occupants,
or other persons guilty of such unlawful, illegal, disreputable or
extrahazardous use.
Section 6.4 Waste; Nuisance.
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(a) Tenant shall not use the Premises in any manner that will
constitute waste, nuisance, or unreasonable annoyance (including, but without
limitation, the use of loudspeakers or sound or light apparatus that can be
heard or seen outside the Premises in violation of the CC&Rs or applicable legal
requirements) to owners or occupants of adjacent properties.
(b) Tenant shall not use the Premises for sleeping, washing clothes,
or the preparation, manufacture, or mixing of anything that might emit any odor
or objectionable noises or lights onto adjacent properties.
(c) No secondhand store, auction, distress or fire sale, or bankruptcy
or going-out-of-business sale may be conducted on the Premises without
Landlord's prior written consent. Tenant shall not sell or display merchandise
outside the confines of the Building.
Section 6.5 Overloading. Tenant shall not do anything on the Premises that
-----------------------
will cause damage to the Premises. No machinery, apparatus, or other appliance
shall be used or operated in or on the Premises that will in any manner damage
the Premises.
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ARTICLE 7
TAXES
Section 7.1 Tenant shall pay before delinquency all taxes or assessments
-----------
that become payable during the Lease Term which are levied or assessed upon
Tenant's Personal Property.
Section 7.2 Tenant shall be responsible to pay, reimburse and indemnify
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Landlord for all taxes, assessments, water rents, rates and charges, sewer
rents, transit taxes, excises, levies and other governmental impositions and
charges of every kind and nature whatsoever, extraordinary as well as ordinary,
foreseen or unforeseen, and each and every installment thereof which shall or
may during the Lease Term be charged, laid, levied, assessed, imposed, become
due and payable, or liens upon, or arise in connection with the use, occupancy
or possession of, or grow due or payable out of, or for, the Premises or any
part thereof, or any buildings, appurtenances or equipment thereon or therein or
any part thereof, the rent, income or other payments received from subtenants by
Tenant or anyone claiming by, through or under Tenant, any tax attributable to
the execution, delivery, or recording of this Lease or any modification thereof,
and all taxes charged, laid, levied, assessed or imposed in lieu of or in
addition to the foregoing under or by virtue of all present or future laws,
ordinances, requirements, orders, directions, rules or regulations of the
federal, state, county and municipal governments and of all other governmental
authorities whatsoever, and all fees and charges of public and governmental
authorities for construction, maintenance, occupation or use during the term of
any vault, passageway or space in, over or under any sidewalk or street on or
adjacent to the Premises, or for construction, maintenance or use during the
term of any part of any building covered hereby within the limits of any street
(all of the foregoing being collectively referred to herein as "Real Property
Taxes"). Real Property Taxes shall not, however, include any penalties,
interest, or other charges imposed or incurred by reason of Landlord's failure
to pay any Real Property Taxes as the same shall become due (unless such failure
by Landlord is due to Tenant's failure to timely pay Real Property Taxes).
Tenant shall pay before their due date, any and all of the Real Property Taxes
to Landlord within the later of ten (10) days after receipt from Landlord of a
tax bill or other evidence that the Real Property Taxes are due and payable, or
twenty (20) days before the Real Property Taxes are delinquent.
Section 7.3 All such Real Property Taxes which shall be charged, laid,
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levied, assessed or imposed for each fiscal period in which the Lease Term
commences and terminates shall be apportioned pro rata between Landlord and
Tenant in accordance with the respective portions of each such fiscal period
during which such Lease Term shall be in effect based on a 365 day year.
Supplementing the foregoing, Tenant shall be solely responsible for any
increases in Real Property Taxes which result from the transfer of the Premises
to the Tenant.
Section 7.4 Nothing herein contained shall require or be construed to
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require Tenant to pay any estate, succession, transfer, gift, franchise, or
corporation income tax, that is or may be imposed upon Landlord; provided
however, that if at any time during the Lease Term the methods of taxation
prevailing at the commencement of the Lease Term shall be altered so that in
lieu of, as a substitute for, or an addition to the whole or any part of the
taxes, assessments, levies, impositions or charges now levied, assessed or
imposed on real estate and the improvements thereon, there shall be levied,
assessed and imposed, (i) a tax, assessment, levy,
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imposition or charge, wholly or partially as a capital levy, or otherwise, on
the rents received therefrom, or (ii) a tax, assessment, levy (including but not
limited to any municipal, state or federal levy), imposition or charge measured
by or based in whole or in part upon the Premises and imposed upon Landlord, or
(iii) a license fee measured by the rent payable by Tenant under this Lease, or
(iv) a tax, assessment, levy, imposition or charge, wholly or partially
attributable to the execution, delivery, or recording of this Lease or any
modification thereof, then to the extent that such taxes, assessments, levies,
impositions, charges or license fees or the part thereof so measured or based,
would be payable if the Premises were the only property of Landlord subject
thereto, Tenant shall pay and discharge the same as herein provided. Tenant's
tax obligations shall not include any environmental assessments, charges or
liens arising in connection with remediation of Hazardous Materials existing on
the Premises prior to the Tenant taking possession.
Tenant shall have the right, with Landlord's written approval, which
approval shall not be unreasonably withheld, at any time and at Tenant's
expense, to contest in good faith by judicial proceedings or otherwise, any real
or personal property assessment, valuation or tax reasonably deemed to be
excessive by Tenant, and in such event Tenant shall not be obligated to pay such
assessment, valuation or tax until a final judicial determination of such
contest, but shall post such bonds as required by law to protect Landlord
throughout any such contest. If a reduction of taxes is obtained for any year of
the Term during which Tenant paid such taxes, to the extent Landlord receives a
refund of such taxes, Landlord shall refund such amount to Tenant within five
(5) days after such reduction is received by Landlord, which refund obligation
shall survive the expiration or sooner termination of this Lease.
If, by applicable law, any taxes or assessments may be paid in installments
at the option of the taxpayer, then whether or not Landlord elects to pay taxes
and assessments in such installments, Tenant's liability for such taxes and
assessments shall be computed as if such election had been made, and only the
installments thereof which would have become due during the Term shall be
included in Tenant's tax obligations.
ARTICLE 8
INSURANCE
Section 8.1 Tenant, at its cost, shall maintain commercial general
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liability insurance against claims for personal injury, bodily injury, death and
property damage in or about the Premises with a liability limit in the amount of
$5,000,000 in respect of personal injury or death to any one person, and of not
less than $5,000,000 in respect of any one occurrence, and of not less than
$5,000,000 for property damage, insuring against all liability of Tenant and its
authorized representatives arising out of or in connection with Tenant's use or
occupancy of the Premises. All such liability insurance shall insure performance
by Tenant of the indemnity provisions of Section 9.1. Landlord (and, if Landlord
requests, its lender) shall be named as an additional insureds, and the policy
shall contain cross-liability endorsements, but only to the extent the insurance
insures Tenant's performance of its indemnity obligations under Section 9.1. Not
more frequently than each three (3) years, if, in the opinion of Landlord's
lender or the reasonable opinion of an insurance broker retained by Landlord,
the amount of commercial liability insurance coverage at that time is not
adequate, Tenant shall increase the liability limit
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of the insurance coverage as reasonably recommended by either Landlord's lender
or Landlord's insurance broker. Tenant shall, at its sole cost and expense,
procure and maintain at all times when any alterations are being made, (i)
owner's contingent or protective liability insurance covering claims not covered
by or under the provisions of the above mentioned commercial general liability
insurance policy, (ii) contractual liability insurance covering the indemnity
contained in section 9.1 hereof, (iii) host liquor liability insurance, and (iv)
builder's risk completed value coverage for 100% of the contract price, deleting
all co-insurance penalties, against all risks insured against pursuant to
section 8.4 hereof.
Section 8.2 Tenant, at its sole cost, shall maintain on all its personal
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property, tenant improvements, and alterations, in, on, or about the Premises, a
policy providing "Special Form" coverage, to the extent of 100% of their full
replacement value providing for a reasonable deductible approved annually by
Landlord.
Section 8.3 Landlord shall maintain on the Building a policy covering
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such property on a "Special Form" basis including, at Landlord's sole election,
the perils of earthquake to the extent of 100% of full replacement value, and
containing other endorsements designated by Landlord in its sole discretion,
including, without limitation, an endorsement guaranteeing sufficient coverage
to restore the Building to building codes then in effect, and containing no
exclusion for Hazardous Materials contamination due to fire or other causes.
Tenant shall reimburse Landlord for the cost of such insurance during the term
of the Lease from time to time upon delivery of the insurance premium invoice.
Section 8.4 Landlord shall, at its election, maintain loss of rents
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insurance insuring the minimum monthly rent and real property taxes. Said
insurance shall provide coverage for a period of one (1) year if the Building is
destroyed or rendered inaccessible by a risk insured against by the policy of
standard fire and extended coverage insurance, with related endorsements,
described in Section 8.4. Said insurance shall provide that in the event this
Lease is terminated by reason of an insured loss, the period of indemnity for
such coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one (1) full years' loss of rent
from the date of any such loss. Tenant shall reimburse Landlord for the cost of
such insurance during the term of the Lease from time to time upon delivery of
the insurance premium invoice.
Section 8.5 Tenant at its sole cost shall maintain Worker's Compensation
-----------
insurance in the amounts and as required by the State of California.
Section 8.6 The parties release each other, and their respective
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authorized representatives, from any claims for damage to any person or to the
Premises, and to the fixtures, personal property, tenant improvements, and
alterations of either Landlord or Tenant in or on the Premises that are caused
by or result from risks insured against under the fire and extended coverage
insurance policies and commercial liability policies carried by the parties and
in force at the time of any such damage. Each party shall cause each insurance
policy obtained by it to provide that the insurance company waives all right of
recovery by way of subrogation against either party in connection with any
damage covered by such policy. Neither party shall be liable to the other for
any damage caused by fire or any of the risks insured against under such
insurance policy. If any such insurance policy cannot be obtained with a waiver
of subrogation,
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the party undertaking to obtain the insurance shall give notice to the other
party of this fact. With respect to the insurance described in Sections 8.1 and
8.3 hereof, the other party shall have a period of 10 days after receiving the
notice either to place the insurance with a company that is reasonably
satisfactory to the party which gave notice and that will carry the insurance
with a waiver of subrogation, at the sole cost of Tenant, or if the insurance
cannot be obtained, the party which gave notice is relieved of the obligation to
obtain a waiver of subrogation rights with respect to the particular insurance
involved. With respect to insurance other than those policies described in
Sections 8.1 and 8.3 hereof, the other party may purchase or reimburse for the
purchase of such subrogation coverage.
Section 8.7 All the insurance required under this Lease shall: (i) be
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issued by insurance companies admitted to do business in the State of
California, with a financial rating of at least an A-VIII status as rated in the
most recent edition of Best's Insurance Reports and consented to by Landlord;
(ii) as to coverage provided for Landlord as an additional insured, such shall
be primary to, and not contributing with any other insurance available to
Landlord. Any other insurance maintained by Landlord is excess insurance; (iii)
at the insuring party's option, be part of a blanket policy, provided that such
party shall furnish to the other party written evidence specifying the amount of
the total insurance allocated to the Premises, which shall not be less than that
required by Sections 7.2 and 7.3 hereof; (iv) contain an endorsement requiring
30 days written notice from the insurance company to both parties and to
Landlord's lender, if applicable, before cancellation or material change in the
coverage, scope, or amount of any policy; and (v) be evidenced by certificates
to be obtained by the party obtaining the insurance and delivered to the other
party within 10 days after the date such insurance is required to be in effect.
All policies of insurance provided for in Sections 7.2, 7.3, and 7.4 hereof
shall name Landlord and, to the extent required under any Landlord's
encumbrance, Landlord's lender as the insured or additional insureds, as their
respective interests may appear.
ARTICLE 9
INDEMNIFICATION
Section 9.1 Except for Landlord's active negligence or willful
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misconduct, or that of its agents, employees, or contractors, Tenant shall
indemnify and save harmless Landlord against and from all costs, expenses,
liabilities, losses, damages, injunctions, suits, actions, causes of action,
fines, penalties, claims and demands of every kind or nature, including without
limitation reasonable attorneys' fees and costs, by or on behalf of any person,
party or governmental authority whatsoever to the extent arising out of (a) any
failure by Tenant to perform any of the agreements, terms, covenants or
conditions of this Lease on Tenant's part to be performed, (b) any accident,
injury or damage which shall happen in or about the Premises however occurring,
and any matter or thing growing out of the condition, occupation, maintenance,
alteration, repair, use or operation of the Premises, or any part hereof during
the Lease Term, (c) any accident, injury or damage which shall happen on or
under the streets, sidewalks, curbs or vaults in front of or adjacent to the
Premises and any matter or thing growing out of the condition, occupation,
maintenance, alteration, repair, use or operation thereof during the Lease Term,
if resulting form the act, omission, negligence or misconduct of Tenant, its
agents, employees or invitees; (d) Tenant's failure to comply with any laws,
ordinances, requirements, orders, directions, rules or regulations of any
federal, state, county or city governmental authority, or (e) any mechanic's
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lien, conditional bill of sale, chattel mortgage, security agreement or
financing statement made with respect to or filed against the Premises or any
equipment therein or any materials used in the construction or alteration of any
building or improvement thereon, made by the Tenant. Notwithstanding the
foregoing, Tenant's indemnification obligations under this Section 9.1 shall not
extend to any costs, expenses, liabilities, losses, damages, injunctions, suits,
actions, causes of action, frees, penalties, claims, or demands arising out of
(i) Landlord's failure to perform its obligations under this Lease, or (ii) any
Hazardous Materials for which Tenant is not otherwise responsible under this
Lease, except for any act by Tenant or any agent, employee, or contractor of
Tenant with respect to any Hazardous Materials present on or about the Premises
prior to the Commencement Date.
Section 9.2 Tenant is and shall be in exclusive control and possession
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of the Premises as provided herein, and Landlord shall not in any event
whatsoever be liable for any injury or damage to any property or to any person
happening on or about the Premises, nor for any injury or damage to any property
of Tenant, or of any other person contained therein, except for injury, damage,
liability or claims caused by the negligence or willful misconduct of Landlord.
The provisions hereof permitting Landlord to enter and inspect the Premises are
made for the purpose of enabling Landlord to be informed as to whether Tenant is
complying with the agreements, terms, covenants and conditions hereof, and to do
such acts as Tenant shall fail to do following any applicable notice and cure
periods.
ARTICLE 10
UTILITIES AND SERVICE
Section 10.1 Tenant shall provide for and shall pay the costs
------------
for all water, gas, electricity, sewage, telephone and other services and
utilities supplied to the Premises, Landlord shall not be required to furnish to
Tenant any utilities or services of any kind whatsoever during the Lease Term,
such as, but not limited to, water, steam, heat, gas, hot water, electricity,
light and power. Landlord shall in no event be required to make any Alterations
or repairs (except let repairs required to be made by Landlord as set forth in
Section 12.1 hereof) during the Lease Term. At Tenant's sole cost and expense,
Landlord shall cooperate fully with Tenant in the manner and to the extent
reasonably required by Tenant in obtaining such services for the Premises during
the Lease Term. Landlord shall not be liable to Tenant for any interruption or
failure of any utility services to the Premises from any cause whatsoever nor
shall such constitute a constructive eviction or give rise to a right of rent
offset or abatement or effect the obligations of Tenant under this Lease in any
other way whatsoever.
ARTICLE 11
CONSTRUCTION IMPROVEMENTS
Section 11.1 Except for nonstructural Alterations not exceeding $25,000
in the aggregate, Tenant shall not make or suffer to be made any Alterations in,
on or to the Premises or any part thereof without the prior written consent of
Landlord which consent shall not be unreasonably withheld, conditioned, or
delayed. When applying for any such consent, Tenant shall furnish plans and
specifications for the Alterations. Tenant shall keep the Premises free
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from any liens arising out of any work performed, materials furnished or
obligations incurred by Tenant in connection with such Alterations. Landlord
shall have the right to post and keep posted at the Premises any notices which
Landlord may reasonably deem proper for the protection of Landlord, the Premises
and/or the Building from such liens. Furthermore, Tenant shall not at any time
during the Lease Term make any Alteration in or to the Premises or to any
building thereon, unless:
(a) the same shall be performed in a professional workmanlike
manner, at Tenant's sole cost and expense, and shall not weaken or impair the
structural strength, or lessen the value, of such buildings as shall be on the
Premise at the time, or change the purposes for which such buildings may be used
(other than for the uses permitted under Section 6.1 of this Lease);
(b) Tenant shall pay when due or bond all claims for labor or
material furnished to or for Tenant at or for use in or on the Premises, which
claims may be secured by any mechanics or materialmen's lien against the
Premises or any interest therein; and Tenant shall hold Landlord harmless from
any and all claims, costs, or damages arising from labor or materials so
furnished or alleged to have been furnished. Tenant agrees to promptly pursue
and resolve any illegitimate claims for labor and materials and, if necessary,
Landlord shall cooperate in the resolution of such claims at Tenant's expense.
Tenant shall deliver to Landlord written notice of its intention to commence any
work on or in the Premises at least ten (10) days prior to such commencement,
and Landlord shall have the right, but not the obligation, to post a notice of
non-responsibility at the Premises as provided by law;
(c) before the commencement of any such work, such plans and
specifications shall be filed with and approved by all governmental departments
or authorities having jurisdiction, and any public utility company having an
interest therein, and all such work shall be done subject to and in accordance
with the requirements of law and local regulations of all governmental
departments or authorities having jurisdiction and of such public utility
company, including, without limitation, any requirements that Tenant obtain
construction permits for such work and a certificate of occupancy upon
completion; and
(d) furnish to Landlord a letter guaranteeing the completion of
such work, free and clear of all liens, encumbrances, chattel mortgages,
conditional bills of sale, security agreements and financing statements
according to said plans and specifications therefore. None of the foregoing
requirements shall prevent Tenant from contesting in good faith any lien against
the Premises, as long as such contest prevents foreclosure of the lien and
Tenant causes such lien to be bonded or insured over in a manner acceptable to
Landlord in its sole discretion.
Section 11.2 Unless otherwise provided by Landlord in writing
------------
at the time Landlord approves Tenant's request for such Alterations, all
Alterations to the Premises made by Tenant shall become the property of Landlord
and shall remain upon the Premises at the expiration of this Lease, except that
Tenant may remove all personal property, trade fixtures, machinery and equipment
installed by Tenant, and fully restore and damage caused by such removal.
Landlord shall provide written notice to Tenant at the time when Landlord's
approval is given for such Alteration, indicating whether Landlord requires
Tenant ripen such expiration or termination of this Lease to remove any or all
such Alterations, and restore the Premises to the condition that
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would exist except for such Alterations. For any Alterations for which the
consent of Landlord is not required under Paragraph 11.1 above, at Landlord's
sole election, (i) Tenant shall, at Tenant's sole expense, promptly remove such
Alterations upon expiration or earlier termination of this Lease and restore the
Premises to the condition existing as of the Commencement Date, normal wear and
tear excepted, or (ii) such Alterations shall become the property of Landlord
and shall remain upon the Premises at the expiration of this Lease, except that
Tenant may remove all personal property, trade fixtures, machinery and equipment
installed by Tenant, and fully restore and damage caused by such removal. Such
removal, restoration, and repair shall be completed by Tenant not later than the
expiration or sooner termination of this Lease.
ARTICLE 12
REPAIRS AND MAINTENANCE
Section 12.1 Except as otherwise provided in Articles 5, 6, and 12
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hereof, Tenant shall, at all times during the Lease Term, and at its own cost
and expense, keep and maintain in good order, condition, and repair, ordinary
wear and tear and damage caused by the acts of Landlord, its agents, contractors
or employees, by the failure of Landlord to perform its obligations, or by
condemnation, fire or other casualty excepted, the Building and all other
improvements on the Premises as of the Commencement Date of the Lease Term and
thereafter erected by Tenant on the Premises, or forming part thereof, and their
full equipment and appurtenances, including without limitation, all plate glass,
doors, interior non-bearing walls and partitions, ceilings and the electrical,
plumbing, lighting, heating, and air conditioning systems, and make all repairs
thereto and restorations, replacements and renewals thereof, both inside and
outside, structural and nonstructural, extraordinary and ordinary, foreseen or
unforeseen, howsoever the necessity or desirability for repairs may occur, and
whether or not necessitated by latent defects or otherwise; and shall use all
reasonable precaution to prevent waste, damage or injury. Landlord shall
maintain and repair only the Building foundation, exterior walls and windows,
parking lot foundation, and roof, provided that these items are not in any way
affected or disturbed by any tenant improvements or such maintenance and/or
repair was caused by Tenant's use of the Premises, or by the acts of Tenant, its
agents, employees, contractors, licensees, or invitees (collectively, "Tenant
Causes"). If it is determined that any such maintenance or repair is required
due to any Tenant Causes, Tenant shall be responsible for the cost of such
maintenance and/or repair, subject to Section 8.7 above and Article 13 below.
Notwithstanding the foregoing, Landlord shall bear the cost in excess of $2,500
of any single act of maintenance, repair, or replacement of any single HVAC unit
servicing all or any portion of the Premises, except where such maintenance,
repair, or replacement is made necessary by the acts or omissions of Tenant, its
agents, employees, contractors, licensees, or invitees, or by the breach by
Tenant of any of its obligations trader this Lease.
Section 12.2 Tenant shall also, at Tenant's sole cost and expense, put,
------------
keep, replace and maintain in thorough repair and in good, safe and substantial
order and condition, and free from dirt, snow, ice rubbish and other
obstructions or encumbrances, the sidewalks, areas, sidewalk hoists, railings,
gutters and curbs, and all other exterior areas and shall maintain the
landscaping at the Premises in good condition.
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Section 12.3 All of Tenant's Personal Property shall remain the property
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of Tenant, and Tenant shall have the right to remove the same at any time during
the Lease Term or when vacating the Premises. Tenant shall repair any damage
caused to the Premises by reason of the removal of its fixtures, machinery and
equipment. At the end of the Lease Term, Tenant shall surrender the Premises to
Landlord broom clean and in good condition except for reasonable wear and tear,
any damage caused by the acts of Landlord, it agents, contractors, or employees,
by the failure of Landlord to perform its obligations hereunder, or by
condemnation or fire or other casualty and any tenant improvements.
Section 12.4 Tenant waives the benefits of any law existing now or at any
------------
time during the term of this Lease and any extension thereof or thereafter
giving Tenant rights or remedies as a result of the physical condition of the
Premises, and, without limitation, Sections 1932, 1933, 1941, 1941.2, 1942, and.
1942.1 of the Civil Code of California, as well as all right to make repairs at
the expense of Landlord or to terminate this Lease as provided in said Sections
of the Civil Code or otherwise, except as expressly provided herein.
ARTICLE 13
DESTRUCTION - FIRE OR OTHER CAUSES
Section 13.1 If, during the Lease Term, the Building, improvements or the
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equipment (other than Tenant's Personal Property) on, in or appurtenant to the
Premises at the commencement of the Lease Term or thereafter erected thereon or
therein shall be destroyed or damaged in whole or in part by fire or other
cause, Tenant shall give to Landlord immediate notice thereof. Landlord shall
use reasonable efforts to provide Tenant with written notice of the estimated
time for repairs within thirty (30) days following the damage or destruction in
question. Provided that sufficient insurance proceeds, as reasonably estimated
by Landlord, are available for such repair, including deductibles, Landlord
shall, at its own cost and expense, use reasonable efforts to repair, replace
and rebuild the same, at least to the extent of the value and as nearly as
possible to the character of the Building and improvements and the equipment
therein existing immediately prior to such occurrence (other than Tenant's
Personal Property) as soon as reasonably possible; however, Landlord shall in no
event be called upon to repair, replace or rebuild any such buildings,
improvements or equipment, nor to pay any of the costs or expenses thereof
beyond or in excess of the insurance proceeds as herein provided.
Notwithstanding the foregoing, to the extent that the time for such repairs
shall reasonably be estimated by Landlord to exceed 180 days or if the Building
is destroyed to an extent greater than fifty percent (50.0%) of the replacement
cost, Landlord or Tenant may elect to terminated this Lease, and so long as
(where the damage or destruction has been caused by the act or omission of
Tenant, or any agent, employee, officer, contractor, licensee, or invitee of
Tenant) the Landlord receives the insurance proceeds for loss of rent for the
term remaining on this Lease at such time, Tenant may likewise elect to
terminate this Lease. Provided Landlord has received the insurance proceeds for
loss of rent (where the damage or destruction has been caused by the act or
omission of Tenant, or any agent, employee, officer, contractor, licensee, or
invitee of Tenant), if this Lease is not otherwise terminated as provided above
and Landlord thereafter fails to complete the restoration and re-deliver
possession of the damaged portions of the Premises to Tenant within two hundred
ten (210) days following the damage or destruction in question, Tenant may elect
to terminate this Lease. If Landlord does not receive the insurance proceeds for
loss of rent (where the damage or
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destruction has been caused by the act or omission of Tenant, or any agent,
employee, officer, contractor, licensee, or invitee of Tenant), Tenant shall not
be entitled to terminate this Lease.
Section 13.2 Except as specifically provided herein, this Lease shall not
------------
terminate or be affected in any manner by reason of damage to or substantial or
partial destruction of the buildings, improvements or equipment on, in or
appurtenant to the Premises at the commencement of the Lease Term or thereafter
erected thereon or therein, or by reason of the untenantability of the Premises,
or any part thereof, for or due to any reason or cause whatsoever, except that
Tenant shall be entitled to abatement of Rent in proportion to the area that is
rendered untenantable or is not reasonably usable by Tenant for its purposes by
reason of the damage or destruction in question bears to the area of the
Building as a whole, which abatement shall commence upon the occurrence of the
damage or destruction in question and shall continue until the restoration of
the Building or damaged portion thereof is completed and possession thereof is
re-delivered to Tenant, but where the damage or destruction has been caused by
the act or omission of Tenant, or any agent, employee, officer, contractor,
licensee, or invitee of Tenant, then only to the extent of payments received by
Landlord under any loss of rents insurance coverage.
Section 13.3 Tenant waives the provisions of Civil Code Section 1932 (2)
------------
and Civil Code Section 1933 (4) with respect to any destruction of the Premises.
ARTICLE 14
CONDEMNATION
Section 14.1 In the event that the Premises or any part hereof, shall be
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taken in condemnation proceedings or by exercise of any right of eminent domain
or by any agreement in lieu thereof, Landlord shall be entitled to collect the
entire award made in any such proceeding without deduction therefrom for any
estate hereby vested in or owned by Tenant, subject to the rights of the holder
of any mortgage to which this Lease is or shall be subject and subordinate, and
subject also to Tenant's rights as set forth below in this Article 14. Tenant
agrees to execute any and all further documents that may be reasonably required
in order to facilitate collection and distribution by Landlord of any and all
such awards.
Section 14.2 If at any time during the Lease Term the whole of
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the Premises shall be so taken or condemned, this Lease shall terminate and
expire on the date upon which title shall vest in the condemning authority ("the
date of the taking") and the Annual Base Rent provided to be paid by Tenant
shall be apportioned and paid to such date.
Section 14.3 If only a part of the Premises shall be so taken or
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condemned, this Lease shall be unaffected by such taking, except that Tenant may
elect to terminate this Lease, in the event of a partial taking, if the
remaining area of the Premises and/or the means of access thereto shall not be
reasonably sufficient for Tenant to continue the operation of its business.
Tenant shall give notice of such election to Landlord not later than thirty (30)
days after (i) notice of such taking is given by Landlord to Tenant, or (ii) the
date of such taking, whichever occurs sooner. Upon the giving of such notice by
Tenant, this Lease shall terminate on the date of such taking and the Annual
Base Rent shall be prorated as of such termination date. Upon such partial
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taking and this Lease continuing in force as to any part of the Premises, the
Annual Base Rent apportioned to the part taken shall be prorated and adjusted as
of the date of taking and from such date the Annual Base Rent for the Premises
and Additional Rent shall be payable pursuant to Article 4 according to the
rentable area remaining.
Section 14.4 Landlord shall be entitled to receive the entire award,
------------
subject to Tenant's rights as set forth in this Article 14.
Section 14.5 In the event of a partial taking which shall not result in
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termination of this Lease, Landlord shall use reasonable efforts to rebuild,
repair and restore the remainder of any building on the Premises affected
thereby to a complete, independent and self-contained architectural unit, for
the purposes in use before the taking, as soon as reasonably possible, to the
extent of condemnation proceeds received by Landlord; provided, however, that in
the event insufficient or no condemnation award is available to cover the cost
of restoration of the Premises, either party may terminate this Lease if
Landlord elects not to provide additional funds for restoration and Tenant
elects not to provide the additional funds.
Section 14.6 In case of any governmental action, not resulting in the
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taking or condemnation of any portion of the Premises but creating a right to
compensation therefor, such as, without limitation, the changing of the grade of
any street upon which the Premises abut, or if less than a fee title to all or
any portion of the Premises shall be taken or condemned by any federal, state,
municipal or governmental authority for temporary use or occupancy, unless such
taking unreasonably interferes with Tenant's use of the Premises in which case
Tenant may terminate this Lease, this Lease shall continue in full force and
effect without reduction or abatement of rent, and the rights of Landlord and
Tenant shall be unaffected by the other provisions of this Article 14 and shall
be governed by applicable law; provided, however, that:
(a) if any such temporary taking for a period not extending beyond the
Lease Term results in changes or alterations in the Building, improvement,
equipment, required parking or utility infrastructure on the Premises which
would necessitate an expenditure to restore the same to their former condition,
or if any other such governmental action shall require alteration to be made in
the Building, improvement or equipment to adapt the same to the change of grade
or other result of such action, then any award or payment made to cover the
expenses of such restoration or alterations shall be received by Landlord and
applied thereto, or
(b) if any such temporary taking is for a period extending beyond the
Lease Term, the amount of any award or payment allowed or retained for
restoration of any building, improvement or equipment on the Premises, shall
remain the property of Landlord if this Lease shall expire prior to the
restoration of the same to their former condition.
Section 14.7 Each party waives any statutory right in conflict with the
------------
provisions hereof, including without limitation the provisions of the Code of
Civil Procedure Section 1265.130 allowing either party to petition the superior
court to terminate this Lease in the event of a partial taking of the Premises.
Section 14.8 Notwithstanding anything contained in this Article 14 to the
------------
contrary, Tenant shall be entitled to seek a separate award from the condemning
authority for the taking of
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any Tenant's Personal Property, for the interruption of Tenant's business or its
moving or other relocation costs, and for the loss of goodwill, and Landlord
shall have no right, title or interest in or to any separate award made
therefor; provided that no such award shall reduce any award made to Landlord.
ARTICLE 15
SIGNS AND ADVERTISING
Tenant shall not place any sign on or around the Premises without the
advance written consent of City authorities and Landlord, such consent of
Landlord not to be unreasonably delayed, conditioned, or withheld. Tenant shall
maintain any such signs to which Landlord has consented in good condition at its
sole cost and expense. Landlord may enter upon the Premises and remove any sign
not complying with the terms of this section at Tenant's expense.
ARTICLE 16
ENTRY BY LANDLORD
Section 16.1 Landlord and its agents shall have the right to enter into
------------
and upon the Premises at all reasonable times for the purpose of examining and
exhibiting the same; provided, however, that Landlord shall provide notice to
Tenant at least 48 hours in advance thereof, except in case of all emergency.
Supplementing the foregoing, Landlord and its authorized representatives shall
have the right to enter the Premises at all reasonable times for any of the
following purposes;
(a) To determine whether the Premises are in good condition and
whether Tenant is complying with its obligations under this Lease;
(b) To serve, post, or keep posted any notices required or
allowed under the provisions of this Lease;
(c) To post "for sale" signs at any time, and to post "for rent"
or "for lease" signs during the last six (6) months of the Lease Term, or during
any period while Tenant is in default beyond any applicable cure period;
(d) To show the Premises to prospective tenants at any time
during the last six (6) months of the Lease Term, and to show the Premises to
prospective brokers, agents, buyers, tenants, or persons interested in an
exchange, at any time during the Lease Term;
(e) To shore the foundations, footings, and walls of the
Building and other improvements that are a part of the Premises and to erect
scaffolding and protective barricades around and about the Premises, but not so
as to prevent entry to the Premises, and to do any other act or thing necessary
for the safety or preservation of the Premises if any excavation or other
construction is undertaken or is about to be undertaken on any adjacent property
on which excavation or construction is to take place and the adjacent property
owner's authorized representatives; and
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(f) to conduct any tests at the Premises which Landlord deems
reasonable or necessary including, without limitation, ground water tests and
core soil tests, provided, however, that Landlord shall not unreasonably disturb
Tenant's operations and occupancy.
Section 16.2 Landlord shall not be liable in any manner for any
------------
inconvenience, disturbance, loss of business, nuisance, or other damage arising
out of Landlord's entry on the Premises as provided in this Article unless due
to Landlords or its agents' acts, omissions, negligence or willful misconduct.
Section 16.3 Tenant shall not be entitled to an abatement or reduction of
------------
rent if Landlord exercises any rights reserved in this Article. Landlord shall
use reasonable efforts, in the exercise of its rights under this Article 16 by
itself or its agents, to minimize interference with Tenant's use and occupancy
of the Premises.
ARTICLE 17
ASSIGNMENT AND SUBLETTING
Section 17.1 Tenant shall not assign or sublet the Premises or any part
------------
thereof, or otherwise transfer or encumber the Premises or any interest of
Tenant therein or under this Lease, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld, conditioned, or
delayed. Any provision in this Lease to the contrary notwithstanding, Landlord's
consent shall not be required for an assignment or sublease to any person or
entity who controls, is controlled by or is under common control with Tenant, or
which merges with Tenant, results from a consolidation of Tenant and another
entity or entities, or purchases substantially all of the assets of Tenant as a
going concern ("Tenant Affiliate"), provided that, with respect to an assignment
of this Lease to a Tenant Affiliate, before such assignment shall be effective,
(i) said Tenant Affiliate shall assume, in full together with the Tenant, the
obligations of Tenant thereafter accruing under this Lease, (ii) Landlord shall
be given not less than thirty (30) days prior written notice of such assignment
and assumption, (iii) the use of the Premises by the Tenant Affiliate shall be
as set forth in Section 6.1, and (iv) Tenant remains fully obligated on this
Lease for the entire Lease Term. For purposes of this paragraph, the term
"control" means possession, directly or indirectly, of the power to direct or
cause the direction of the management, affairs and policies of anyone, whether
through the ownership of voting securities, by contract or otherwise. Tenant
shall not mortgage this Lease or execute and deliver to a trustee, a deed of
trust affecting this Lease. The sale of capital stock through any public
exchange or issuances for the sole purpose of raising financing shall not be
deemed an assignment, subletting or any other transfer of this Lease or
Premises. Regardless of Landlord's consent, no subletting or assignment shall
release Tenant of Tenant's obligation or alter the primary liability of Tenant
to pay the rent and to perform all other obligations to be performed by Tenant
hereunder, and no subsequent subletting or assignment shall release any such
assignor or sublessor of its obligations or alter its primary liability to pay
rent and perform all other obligations to be performed by Tenant hereunder. In
lieu of consenting to a proposed sublease of the entire Premises for the
remainder of the Lease Term, Landlord may, at its sole election, terminate this
Lease. Such election to terminate shall be made by Landlord's giving written
notice thereof to Tenant. Any such termination shall be effective on the later
of the scheduled
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commencement date of the proposed sublease or thirty (30) days after Landlord's
notice of termination.
Section 17.2 No interest of Tenant in this Lease shall be assignable by
------------
operation of law. Each of the following acts shall be considered an involuntary
assignment.
(a) If Tenant is or becomes bankrupt or insolvent, makes and
assignment for the benefit of creditors, or institutes a proceeding under the
federal bankruptcy laws in which Tenant is the bankrupt; of, if Tenant is a
partnership or consists of more than one person or entity, if any partner of the
partnership or other person or entity is or becomes bankrupt of insolvent, or
makes and assignment for the benefit of creditors;
(b) If a writ of attachment or execution is levied on this
Lease;
(c) If, in any proceeding or action to which Tenant is a party,
a receiver is appointed with authority to take possession of the Premises.
(d) An involuntary assignment shall constitute a default by
Tenant and Landlord shall have the right to elect to terminate this Lease, in
which case this Lease shall not be treated as an asset of Tenant. If a writ of
attachment or execution is levied on this Lease, Tenant shall have ten (10) days
in which to cause the attachment or execution to be removed. If any involuntary
proceeding in bankruptcy is brought against Tenant, or if a receiver is
appointed, Tenant shall have thirty (30) days in which to have the involuntary
proceeding dismissed or the receiver removed.
Section 17.3 Regardless of Landlord's consent, no subletting or
------------
assignment shall release Tenant of Tenant's obligations hereunder or alter the
primary liability of Tenant to pay the Rent and to perform all other obligations
to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any
other person or entity shall not be deemed to be a waiver by Landlord of any
provision hereof. Consent to one assignment or subletting shall not be deemed
consent to any subsequent assignment or subletting. In the event of default by
any assignees of Tenant or any successor of Tenant in the performance of any of
the terms hereof, Landlord may proceed directly against Tenant without the
necessity of exhausting remedies against such assignee or successor. Landlord
may consent to subsequent assignments or subletting of this Lease or amendments
or modifications to this Lease with assignees of Tenant upon obtaining its or
their consent thereto and such action shall not relieve Tenant of liability
under this Lease. Tenant hereby agrees, and expressly waives any rights it may
have under Civil Code Section 711 or otherwise, to claim that the provisions of
this Article 17 or Landlord's exercise of its rights in accordance herewith
constitute an unreasonable restraint on alienation or a breach of any duty of
good faith and fair dealing, it being understood and agreed that the leasehold
estate of Tenant hereunder is expressly limited by the restrictive provisions of
this Article 17.
Section 17.4 In the event Tenant shall assign or sublet the Premises or
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request the consent of Landlord to any assignment or subletting or if Tenant
shall request the consent of Landlord for any act the Tenant proposes to do,
then Tenant shall pay Landlord's reasonable
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attorneys' fees (based upon actual time spent provided such time is reasonable
and the attorneys' regular hourly rate) and any other expense incurred in
connection therewith.
Section 17.5 No assignment made with Landlord's consent or as hereinabove
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permitted, shall be effective until there shall have been delivered to Landlord
an executed counterpart of such assignment containing an agreement, executed by
the assignor and the proposed assignee, wherein and whereby such assignee
assumes due performance of the obligations on the assignor's part thereafter to
be performed under this Lease to the end of the term hereof.
Section 17.6
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(a) If at any time during the Lease Term Tenant desires either
to sublet all or a portion of the Premises or to assign this Lease which
requires Landlord's consent, Tenant shall give notice to Landlord setting forth
the identity of the subtenant and the terms of the sublease, or the assignee and
the terms of the assignment, as the case may be, together with a copy of the
subtenant's or assignee's financial statements for the post three fiscal years
and a copy of the proposed sublease or assignment agreement, as well as any
other information reasonably requested by Landlord. Landlord shall approve or
disapprove the proposed subletting or assignment within fifteen (15) days from
receipt of all such items. In the event that Landlord fails to approve or
disapprove the proposed subletting or assignment within such fifteen (15) day
period, Landlord shall be deemed to have disapproved the subletting or
assignment in question.
(b) Any sublease permitted hereunder shall be subject and
subordinated to the right of Landlord hereunder and shall contain substantially
the following provision:
"Subtenant has been informed and understands that
Sublandlord is the lessee under an underlying lease of the
entire building of which the Subleased Premises form a part.
In the event of any proceeding to terminate such underlying
lease, or in the event of any action or proceeding for the
exercise of a power of sale under a deed of trust or for the
foreclosure of any mortgage to which this lease or such
underlying lease is subordinate, Subtenant acknowledges that
this lease shall be terminable by reason of any termination
of such underlying lease, unless the lessor thereunder or
the purchaser at a sale does not elect to terminate this
lease, in which event Sublessor shall attorn to the lessor
thereunder or to the purchaser at the sale on any such
foreclosure."
(c) Tenant shall furnish Landlord with fully executed or
photocopies of all subleases of space in the Premises and with such information
with respect thereto as Landlord may reasonably require.
Section 17.7 Effective as of the date of the happening of an Event of
------------
Default or breach of this Lease (as described in Article 19 hereof) and after
any applicable notice and cure period, but subject to the rights of the holder
of any mortgage to which this Lease is subject and subordinate, Tenant hereby
assigns to Landlord all of its right, title and interest in and to all present
and future subleases and all rents due and to become due thereunder. After the
effective date of such assignment, Landlord shall apply any net amount collected
by it from subtenants to
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the Annual Base Rent or Additional Rent due hereunder. In the event of the
failure of any subtenant to pay subrent to Landlord pursuant to the foregoing
assignment alter the happening of any such Event of Default or breach of this
Lease, any such rent thereafter collected by Tenant shall be deemed to
constitute a trust fund for the benefit of Landlord.
Section 17.8 If Tenant requests Landlord to consent to a proposed
------------
assignment or subletting, Tenant shall pay to Landlord upon demand, whether or
not consent is ultimately given, Landlord's reasonable attorney's fees,
accountant's fees, and other reasonable expenses incurred in connection with
each such request, as additional rent. Following an assignment or subletting
consented to by Landlord, Tenant or the assignee or subtenant shall remit
directly to Landlord, payable as additional rent, fifty percent (50%) of all
sums (including the value of consideration other than money or its equivalent)
due to Tenant by said assignee or subtenant as consideration for said assignment
or sublease, whether payable before, after or throughout the term of such
assignment or sublease, to the extent said sums exceed the Annual Base Rent and
other amounts then due hereunder for the affected space, and any applicable
broker's commissions and reasonable attorneys' fees. Tenant (or assignee or
subtenant) shall pay such sums to Landlord as the same fall due. No sums due or
paid to Landlord pursuant to this Section 17.8 shall be credited against Annual
Base Rent or Additional Rent (including additional amounts pursuant to this
Section 17.8). The provisions of this Section 17.8 shall not, however, apply to
any assignment or subletting to a Tenant Affiliate.
ARTICLE 18
SUBORDINATION
Section 18.1 This Lease and all rights of Tenant hereunder are and shall
------------
be subject and subordinate to any mortgage, deed of trust or other instrument of
security (including any renewals, modifications, consolidations, replacement and
extension thereof) existing as of the date of this Lease or hereafter placed
upon the Premises, the Building, or any portion of any of the foregoing, by
Landlord; provided, however, as to any future encumbrancers, that the holder of
such instrument enters into an agreement with Tenant, its successors and
assigns, in which such holder agrees not to disturb the possession and other
rights of Tenant under this Lease for so long as Tenant continues to perform its
obligations hereunder and is not in default hereunder beyond any applicable
grace and cure period, and, in the event of acquisition of title by such holder
through foreclosure proceedings or otherwise, to accept Tenant as tenant of the
Premises under the terms and conditions of this Lease, and to perform the
Landlord's obligations hereunder. Tenant agrees to recognize and attorn to any
person or entity acquiring title to the Premises as Landlord by purchase,
foreclosure, or otherwise.
Section 18.2 Tenant shall upon demand at any time or times execute,
------------
acknowledge and deliver to Landlord any and all reasonable instruments that may
be necessary, proper or desirable to subordinate this Lease and all rights
hereunder to the lien of any such mortgage or mortgages and each such renewal,
modification, consolidation, replacement and extension. Upon full execution of
this Lease, Landlord shall request from its current lender secured by the
Premises a non-disturbance agreement with respect to this Lease. No failure of
such lender to honor such request shall, however, be deemed a default by
Landlord under this Lease.
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ARTICLE 19
DEFAULT
Section 19.1 If any of the following events shall occur herein referred
------------
to individually as an "Event of Default" and collectively as "Events of
Default"), Tenant shall be deemed to be materially in default under this Lease:
(a) If Tenant shall fail to pay any Rent or Additional Rent when
and as the same becomes due and payable and such failure is not cured within
three (3) business days after the delivery of notice from Landlord specifying
such failure to pay; provided, however, that such notice shall be in lieu of and
not in addition to any notice required under Section 1161 of the California Code
of Civil Procedure and provided further, that if twice within any twelve month
period the Tenant fails to pay any Rent or other sum when and as the same
becomes due and payable, the cure provision set forth herein shall be reduced
from three (3) business days to three (3) calendar days;
(b) If Tenant shall fail to perform any of the other non-
monetary duties required to be performed by Tenant under this Lease (and unless
a different time period is specified in this Lease), and such failure shall
continue for more than thirty (30) days after discovery thereof by Tenant;
provided, however, that if such duty cannot reasonably be performed within such
thirty (30) day period, Tenant shall have such additional time (up to sixty (60)
days) as is reasonably necessary to perform such duty provided Tenant commences
in good faith to perform such duty and thereafter diligently proceeds therewith
to completion;
(c) If Tenant shall make a general assignment for the benefit of
creditors, or shall be unable to pay its debts generally as they become due file
a petition in bankruptcy, be adjudicated bankrupt, file a petition seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation,
consent to, or acquiesce in, the appointment of a receiver, liquidator, trustee,
custodian or other similar official of itself or of the whole or any substantial
part of its properties or assets;
(d) If, without Tenant's consent or acquiescence, (i) a court of
competent jurisdiction shall enter an order, judgment or decree appointing a
receiver, liquidator, trustee, custodian or other similar official of Tenant, or
of the whole or any substantial part of the property or assets of Tenant and
such order, judgment or decree shall remain unvacated, or not set aside, or
unstayed, for thirty (30) days, or (ii) an involuntary case under said
Bankruptcy Code shall be commenced against Tenant or a petition shall be filed
against it seeking similar relief under any other present or future insolvency
act or other applicable law relating, to bankruptcy, insolvency, reorganization
or relief of debtors and such case of petition shall remain undismissed for
thirty (30) days, or (iii) under the provisions of any other law for the relief
or aid of debtors, any court of competent jurisdiction shall assume custody or
control of Tenant or of the whole or any substantial part of its property or
assets and such custody or control shall remain unterminated or unstayed for
thirty (30) days;
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(e) If, in Landlord's reasonable judgment, Tenant shall vacate
the Premises for such length of time and in such a manner as to endanger the
security or proper maintenance of the Premises or if Tenant shall abandon the
Premises;
(f) If this Lease or the estate of Tenant hereunder shall be
encumbered, mortgaged, transferred or shall pass to or devolve upon any other
person or party, except in a manner permitted under Article 17 hereof.
Section 19.2 At any time after the occurrence of a default (Tenant hereby
------------
waiving its right under Section 1161, subsection 2 of the California Code of
Civil Procedure to have Landlord serve notice of default on Tenant within one
year after rent becomes due), Landlord may serve Tenant with a notice of
default, provided that nothing herein shall be deemed to require a notice as a
condition to Landlord's right to utilize a remedy where notice is not otherwise
required by law. Notices given under this Section 19.2 shall specify the alleged
default and shall demand that Tenant, (i) if the default is one described in
subsection 19.1(a) or 19.1(b) hereof, either quit the Premises or pay the rent
or other amount that is due within three (3) days; or (ii) if the default is one
described in subsection 19.1(d), 19.1(e), or 19.1(f) hereof, quit the Premises;
or (iii) of the default is one described in subsection 19.1(c) hereof, either
quit the Premises or cure the default within 30 days. No such notice shall be
deemed a forfeiture or a termination of this Lease unless Landlord so elects in
the notice. The notice requirements set forth in this Section 19.2 shall be in
lieu of and deemed to satisfy the notice requirements of the unlawful detainer
statutes of California, and Tenant waives any right it may have to any further
or other notice of its default as a condition to Landlord's right to its
remedies described hereunder including, without limitation, any right under
Civil Code Section 1011 or any other law to delay performance due to service by
mail.
Section 19.3 Landlord shall have the remedies set forth in this Article
------------
19 if Tenant commits a default and, in the case of those defaults described in
subsections 19.1 (a) and 19.1 (b), fails to cure same within the time provided
in the notice of default (unless a default described in subsection 19.1(b) is
excused for up to 60 days as provided in subsection 19.1(b)). These remedies are
not exclusive; they are cumulative in addition to any remedies now or later
allowed by law, equity or agreement of the parties. Landlord shall have the
remedy described in California Civil Code section 1951.4 (lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject only to reasonable
limitations).
Section 19.4
------------
(a) Upon the occurrence of a default by Tenant, Landlord may
continue this Lease in full force and effect, and this Lease shall continue in
effect as long as Landlord does not terminate Tenant's right to possession, and
Landlord shall have the right to collect rent and other sums when due. During
the period Tenant is in default, Landlord may enter the Premises and relet them,
or any part of them, to third parties for Tenant's account, provided that
Landlord uses its reasonable good faith efforts to maximize the rent for the
Premises, and, if Tenant has ceased to occupy the Premises, Landlord may alter
or install locks and other security devices at the Premises. Tenant shall be
liable immediately to Landlord for all costs Landlord incurs in reletting the
Premises, including, without limitation, attorneys' fees, brokers' commissions,
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expenses of remodeling the Premises required by the reletting, and like costs.
Reletting may be for a period equal to, shorter or longer than the remaining
term of this Lease.
(b) No act by Landlord allowed by this Section 19.4 shall
terminate this Lease unless Landlord notifies Tenant that Landlord elects to
terminate this Lease. After Tenant's default and for as long as Landlord does
not terminate Tenant's right to possession of the Premises, if Tenant obtains
Landlord's consent (which shall not be unreasonably withheld) Tenant shall have
the right to assign or sublet its interest in this Lease, but Tenant shall not
be released from liability. Any such proposed assignment or subletting shall be
subject to the provisions of Article 17 and Landlord's insistence on full
compliance herewith as a condition far its consent shall be deemed not
unreasonable.
(c) If Landlord elects to relet the Premises as provided in the
foregoing subsection 19.4(a), rent that Landlord receives from reletting shall
be applied to the payment of: (i) first, any indebtedness from Tenant to
Landlord other than rent due from Tenant; (ii) second, all costs incurred by
Landlord in reletting, including, without limitation, brokers' fees or
commissions for the reletting of the whole or any part of the Premises; the cost
of removing and storing the property of Tenant or any other occupant, and the
costs of repairing, altering, maintaining, remodeling or otherwise putting the
Premises into condition acceptable to a new Tenant or Tenants; and (iii) third,
rent due and unpaid under this Lease. After deducting the payments referred to
in this subsection 19.4(e), any sum remaining from the rent Landlord receives
from reletting shall be held by Landlord and applied in payment of future rent
and other amounts as rent and such amounts become due under this Lease. In no
event shall Tenant be entitled to any excess rent received by Landlord. If, on a
date rent or other amount is due under this Lease, the rent received as of such
date from the reletting is less than the rent or other amount due on that date,
or if any costs, including without limitation for maintenance, which Landlord
incurred in reletting remain after applying the rent received from the reletting
as provided in this subsection 19.4(c), Tenant shall pay to Landlord upon
demand, in addition to the remaining rent or other amount due, all such costs.
(d) Tenant shall pay to Landlord the rent due tinder this Lease
on the dates the rent is due, less the rent Landlord has received from any
reletting which exceeds all costs and expenses of Landlord incurred in
connection with Tenant's default and the reletting.
Section 19.5 Upon the occurrence of a default by Tenant, Landlord may
------------
terminate Tenant's right to possession of the Premises or this Lease or both at
any time after a default by Tenant by giving notice to Tenant of Landlord's
election to do so and such termination shall be effective on the date set forth
in such notice (subject only to any cure period provided by Section 19.1). Acts
of maintenance, efforts to relet the Premises, or the appointment of a receiver
on Landlord's initiative to protect Landlord's interest under this Lease shall
not constitute a termination of Tenant's right to possession. No act by Landlord
other than giving notice to Tenant shall terminate this Lease. On such
termination of this Lease, Landlord has the right to recover from Tenant:
(a) The worth, at the time of the award; of the unpaid rent that
had been earned at the time of termination of this Lease;
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(b) The worth, at the time of the award, of the amount by which
the unpaid rent that would have been earned after the date of termination of
this Lease until the time of award exceeds the amount of the loss of rent that
Tenant proves could have been reasonably avoided;
(c) The worth, at the time of the award, of the amount by which
the unpaid rent for the balance of the term after the time of award exceeds the
amount of the loss of rent that Tenant proves could have been reasonably
avoided, and
(d) Any other amount, and court costs, necessary to compensate
Landlord for all detriment proximately caused by Tenant's default, or which in
the ordinary course of things would be likely to result therefrom, including,
without limitation, brokers' fees or commissions and attorneys' fees incurred by
Landlord in connection with reletting the whole or any part of the Premises; the
costs of removing and storing the property of Tenant or of any other occupant;
and the costs of repairing, altering, remodeling, or otherwise putting the
Premises into condition acceptable to a new tenant or tenants.
(e) "The worth, at the time of the award," as used in
subsections 19.5(a) and 19.5(b) hereof, is to be computed by allowing interest
at 10% or such higher maximum rate then permitted by law. "The worth, at the
time of the award," as referred to in subsection 19.5(e) is to be computed by
discounting the amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus 1%.
Section 19.6 Tenant hereby expressly waives any and all rights to recover
------------
or regain possession of the Premises or to reinstate or redeem this Lease to
which it may be entitled by or under any present or future law or decisions
including without limitation, Sections 1174 and 1179 of the California Code of
Civil Procedure. In addition, Tenant hereby expressly waives any and all right
to bring any action whatsoever against any tenant taking possession of the
Premises after Tenant has been dispossessed or evicted hereunder, or to make any
such tenant a party to any action brought by Tenant against Landlord.
Section 19.7 Any personal property of Tenant or of any subtenant or
------------
occupant or other person which shall remain in, on or about the Premises after
the expiration or termination of the term and Tenant's removal from the Premises
shall be deemed to have been abandoned by Tenant and either may be retained by
Landlord as its property or may be disposed of in such manner as Landlord may
see fit; or, at Landlord's option, Landlord may require Tenant forthwith to
remove any or all of Tenant's property. If Tenant fails to do so, Landlord may
remove any such property and place such property in storage in a public
warehouse at the cost and risk of Tenant. If such personal property or any part
hereof shall be sold, Landlord may receive and retain the proceeds of such sale
and apply the same, at its option, against the expenses of the sale, the cost of
moving and storage, any arrears of rent or other stuns payable hereunder and any
damages to which Landlord may be entitled reader this Article 19 or pursuant to
law, in the manner provided in Civil Code Sections 1980 -1991, or in any other
lawful manner. Tenant waives all claims against Landlord with respect to any
disposition of property permitted hereunder and shall hold Landlord harmless as
to any loss, claim, damage or injury of any other person in connection with such
disposition.
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Section 19.8
------------
(a) Tenant hereby waives the requirement that any notice of
default served pursuant to this Article 19 or trader the California unlawful
detainer statutes shall be required to be served on any subtenant in possession
or actual occupation of the Premises.
(b) For purposes of Code of Civil Procedure Section 1011,
concerning services of notices or papers during litigation, "residence" of
Tenant shall mean and be the address for notices to Tenant under this Lease.
(c) If Landlord commences any proceeding for possession of the
Premises, Tenant may interpose in good faith any defenses Tenant may have to
Landlord's action to recover possession, but Tenant shall not interpose any
counterclaim or cross-complaint of whatever nature or description in any such
proceedings for so long as Tenant maintains a right to possession of the
Premises. Tenant's covenants to pay rent shall be independent of each and every
other covenant of this Lease and Tenant hereby expressly waives any right Tenant
may have to deduct Tenant's damages for Landlord's breach or default from rent
or right to set off such damages for purposes of determining whether any rent is
due in any unlawful detainer action brought on a basis of unpaid rent or other
amount due hereunder. This shall not, however, be construed as a waiver of the
right of Tenant to assert such claims in any separate action or actions brought
by Tenant.
(d) If Tenant fails to immediately commence and diligently and
continuously prosecute to completion repairs or any of its other obligations
hereunder required of Tenant after 10 days written notice by Landlord that it do
so (or if Tenant fails to act promptly after such notice in the case of an
emergency), then Landlord, in addition to all other remedies available hereunder
or by law and equity, and without waiving any alternative remedies, including
the right to declare Tenant in breach and default of this Lease, may make or
perform the same, and in that event, Tenant shall reimburse Landlord, upon
demand, as additional rent, for all costs Landlord incurs in taking steps to
perform such obligations or repairs regardless of which party actually completes
the same, together with interest from the date Landlord incurs the cost until
paid at 10% per annum or if greater, the maximum rate permitted by law.
ARTICLE 20
NOTICES
All notices which are required to be given by either party hereunder shall
be in writing, sent by certified mail, postage prepaid, return receipt
requested, or by express mail courier ("Courier") for next day delivery (i.e.
Federal Express, DHL, etc.) and addressed to the parties it the following
addresses:
Landlord:
First State Realty of America, Inc.
P.O. Box 703
New Canaan, CT 06840-0703
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with copies to:
Peter S. Gummo, Esq. Ross G. Adler, Esq.
46 Westchester Avenue and Hopkins & Carley
Pound Ridge, NY 10576 P.O. Box 1469
San Jose, CA 95109-1469
Tenant:
InterTrust Technologies Corporation
4750 Patrick Henry Drive
Santa Clara, CA 95054
attention: Erwin Lenowitz
with a copy to:
Garth E. Pickett, Esq.
Hopkins & Carley
P.O. Box 1469
San Jose, CA 95109-1469
or to such other addresses and to such other persons as the parties may from
time to time designate in writing, by notice as aforesaid. The time of giving of
any such notice shall be deemed to be the earlier of (i) actual delivery; (ii)
the date upon which delivery is attempted and said delivery is refused or
rejected; (iii) one (1) day after sending by Courier; or (iv) two (2) days after
mailing by certified mail; provided, however, that change of address notices
shall be effective only upon actual receipt.
ARTICLE 21
BROKER'S COMMISSIONS
Landlord acknowledges and agrees that it shall pay the brokerage
commissions of Colliers International and Cornish & Carey pursuant to a separate
written agreement between Landlord and such brokers. Landlord and Tenant
represent one to another that each has dealt only with Colliers International
and Cornish & Carey as brokers in connection with this Lease. In the event of a
breach of the foregoing representation, Tenant and Landlord shall indemnify and
defend each other against, and hold one another harmless from, may and all
claims, demands, liabilities, losses, lawsuits, judgments, damages, costs and
expenses (including, but not limited to, attorneys' fees and court costs,
whether incurred at the trial, appellate or administrative levels), which the
other party may incur or suffer, or to which the other party may be subjected,
as a result of such breach. Any liability hereunder shall survive the expiration
or earlier termination of this Lease.
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ARTICLE 22
MECHANIC'S AND OTHER LIENS
Section 22.1 Tenant shall not cause any lien, mortgage or other
------------
encumbrance upon the reversion or other estate of Landlord, or upon any interest
of Landlord in the Premises or in the buildings or improvements thereon; it
being agreed that should Tenant cause any Alterations or repairs to be made to
the Premises, or cause any labor to be performed or material to be furnished
therein, thereon or thereto, neither Landlord nor the Premises shall under any
circumstances be liable for the payment of any expense incurred or for the value
of any work done or material furnished, but all such Alterations and repairs,
and labor and material, shall be made, furnished and performed at Tenant's
expense, and Tenant shall be solely and wholly responsible to contractors,
laborers and materialmen furnishing and performing such labor and material.
Section 22.2 If, because of any act or omission (or alleged act or
------------
omission) of Tenant, any mechanic's or other lien, charge or order for the
payment of money shall be filed against the Premises or any building or
improvements thereon or against Landlord, or any conditional bill of sale,
chattel mortgage, security agreement or financing statement shall be made or
filed for or affecting any equipment or any materials used in the construction
or alteration of, or installed in, any such building or improvement (whether or
not such lien, charge or order, conditional bill of sale, chattel mortgage,
security agreement or financing statement, is valid or enforceable as such),
Tenant shall, at its own cost and expense, cause the same to be canceled and
discharged of record or bonded within fifteen (15) days after notice of filing
thereof. Tenant shall have the right to contest the correctness or the validity
of any such lien if, immediately on demand by Landlord, Tenant procures and
records a lien release bond issued by a corporation authorized to issue surety
bonds in California, in an amount equal to one and one-half (1 1/2) times the
amount of the claim of lien. The bond shall meet the requirement of Civil Code
Section 3143, and shall provide for the payment of any sum that the claimant may
recover on the claim (together with costs of suit, if it recovers in the
action).
ARTICLE 23
NO RENT ABATEMENT AND QUIET ENJOYMENT
Section 23.1 No abatement, diminution or reduction of Rent, charges or
------------
other compensation shall be claimed by or allowed to Tenant, or any persons
claiming under it, except as may be specified in this Lease, whether for
inconvenience, discomfort, interruption of business, or otherwise, arising from
the making of Alterations or repairs to any buildings now on or which may
hereafter be erected on the Premises, by virtue or because of any present or
future governmental laws, ordinances, requirements, orders, directions, rules or
regulations or arising from any other cause or reason.
Section 23.2 As long as Tenant is not in default of this Lease beyond any
------------
applicable cure period, Tenant shall quietly enjoy the Premises without
disturbance by Landlord, or by anyone claiming a right to possession by or
through Landlord, subject to the covenants,
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agreements, terms, provisions, and conditions of this Lease. This covenant of
Landlord is in lieu of any covenant of quiet enjoyment implied by law.
ARTICLE 24
END OF TERM
Section 24.1 Tenant shall, on the last day of the Lease Term, or upon the
------------
sooner termination of the Lease Term, peaceably and quietly surrender and
deliver the Premises to Landlord free of subtenancies (unless Landlord shall
consent to the continuance thereof), broom-clean, including all buildings and,
subject to Section 11.3 herein, Alterations constructed, erected, added or
placed by Tenant thereon, with all equipment in or appurtenant thereto, except
Tenant's Personal Property in good order, condition and repair, reasonable wear
and tear and damage caused by the acts of Landlord, its agents, contractors, or
employees, by Landlord's failure to perform its obligations or by condemnation,
fire, or other casualty excepted.
Section 24.2 Any trade fixtures or personal property not used in
------------
connection with the operation of the Premises and belonging to Tenant or any
assignee or subtenant, if not removed upon surrender of possession or
abandonment by Tenant or such assignee or subtenant shall, if Landlord shall so
elect or unless Landlord shall consent to the continuance of such subtenancy, be
deemed abandoned and become the property of Landlord without any payment or
offset therefor. If Landlord shall not so elect, Landlord may remove such
fixtures or property from the Premises and store them at Tenant's risk and
expense. Except for Landlord's gross negligence and willful misconduct, Tenant
shall repair and restore, and save Landlord harmless from, all damage to the
Premises caused by the removal therefrom, whether by Tenant or by Landlord, of
all such trade fixtures and personal property.
Section 24.3 Upon surrendering the Premises to Landlord as provided
------------
herein, Tenant will pay to Landlord all deposits or other security and all
unapplied prepaid rents received from subtenants and other occupants whose
tenancies may continue beyond the last day of the term of this Lease or the
sooner termination thereof and will deliver to Landlord all original subleases
and modifications thereof, and copies of all lease files, plans, records,
registers and all other papers and documents which may be required for the
proper operation and management of the Premises and are then in Tenant's
possession. It is agreed that Landlord will suffer irreparable injury if such
records, papers and documents are not so delivered and that Landlord shall be
entitled to mandatory injunction (including a temporary mandatory injunction
pendente lite) to enforce such delivery. Tenant shall have access to any
- -------- ----
records, papers and documents so delivered to such extent and at such times as
the same may be reasonably required after the last day of the Lease Term or such
sooner termination thereof. Nothing herein shall require Landlord to recognize
any such existing sublease as continuing in effect after such last day or sooner
termination.
Section 24.4 The provisions of this Article 24 shall survive the
------------
expiration or sooner termination of this Lease.
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ARTICLE 25
ESTOPPEL CERTIFICATE
Section 25.1 Tenant shall, without charge, at any time and from time to
------------
time hereafter, within ten (10) days after delivery to Tenant of a request by
Landlord, certify by a written instrument duly executed and acknowledged to any
mortgagee or purchaser, or any other person, firm or corporation specified by
Landlord, as to the validity and force and effect of this Lease, in accordance
with its tenor, as then constituted, as to the existence of any default on the
part of any party thereunder, as to the existence of rely offsets, counterclaims
or defenses thereto on the part of Tenant, and as to any other matters which may
be reasonably requested by Landlord or such mortgagee, purchase, or other
person.
ARTICLE 26
HAZARDOUS SUBSTANCES
Section 26.1 Tenant represents and warrants that it is not currently in
------------
violation of any Environmental Requirement regarding Hazardous Materials and has
not received any notice of violation, lien, complaint, suit, order or other
notice with respect to any Environmental Requirement and that the Tenant's
current operations are in full compliance with all Environmental Requirements.
Section 26.2 Except with respect to any Hazardous Materials present on the
------------
Premises prior to the Commencement Date and undisturbed at any time by Tenant or
Tenant's agents, employees, contractors, licensees, or invitees, Tenant shall
comply in all respects with all Environmental Requirements at the Premises and
will not generate, store, handle, process or dispose of or otherwise use
Hazardous Materials at, in, on, under or about the Premises, in violation of any
Environmental Requirements. If at any time it is determined that Tenant is in
violation of this Section 26.2, the Tenant will take such action as is necessary
in accordance with relevant Environmental Requirements, at its sole cost and
expenses, to remedy such violation. If the undersigned fails to do so following
notice from Landlord, Landlord may, but shall not be obligated to, take such
action it deems is necessary or desirable to remedy such violation at the
expense of the Tenant. All stuns so expended shall be immediately due and
payable on demand and shall bear interest at the highest rate permitted by law.
Section 26.3 Tenant will defend, indemnify and hold harmless Landlord from
------------
and against any and all claims, demands, penalties, causes of action, fines,
losses, liabilities, settlements, damages, costs, or expenses of whatever kind
or nature, known or unknown, foreseen or unforeseen, contingent or otherwise,
including without limitation, reasonable counsel and consultant fees and
expenses, court costs and litigation expenses, arising out of or in anyway
related to any breach of this Article 26, any damage or injury resulting from
any such Hazardous Material stored, generated, disposed of or used by Tenant or
its agents, employees or contractors in, on or about the Premises and/or any
related violation of any Environmental Requirement by Tenant or its agents,
employees, or contractors.
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Section 26.4 The obligations and liabilities of the Tenant under this
------------
Article 26 shall survive the termination of the Lease and shall continue in full
force and effect.
Section 26.5 Notwithstanding anything contained in this Lease to the
------------
contrary, Tenant shall have no responsibility with respect to any Hazardous
Materials located at, in, on, under, or about the Premises prior to the
Commencement Date that were not caused by Tenant, its agents, employees, or
contractors, except to the extent any such Hazardous Materials are disturbed by
any act of Tenant, or its agents, employees, contractors, licensees, or
invitees.
ARTICLE 27
PARKING ENTITLEMENTS
Section 27.1 Tenant's Parking Entitlements. Tenant shall be entitled to
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the exclusive use of the entire parking area improvements located on the
Premises on the Effective Date of this Lease, including, without limitation, the
non-striped parking areas of the Premises, such as the concrete apron, during
the Term. With the prior written consent of the Landlord, Tenant may reconfigure
the existing parking spaces on the Premises and add parking spaces in accordance
with all applicable laws and regulations, including, without limitation, the
Americans with Disabilities Act, and Tenant shall be entitled to install signage
in conformance with Landlord-approved plans indicating parking spaces for
Tenant's visitor parking and other reserved parking. Landlord shall have no
responsibility for policing or otherwise enforcing parking rights in the
Premises.
ARTICLE 28
MISCELLANEOUS
Section 28.1 The covenants and conditions contained in this Lease shall be
------------
binding upon and inure to the benefit of the successors and assigns of the
parties hereto.
Section 28.2 Time is of the essence in each and every provision of this
------------
Lease.
Section 28.3 This Lease shall not be recorded without the prior written
------------
consent of Landlord.
Section 28.4 If any provision of this Lease or the application thereof to
------------
any persons or circumstances shall to any extent be held to be invalid or
unenforceable, neither the remainder of this Lease nor the application of such
provision to persons or circumstances other than those as to whom or which it is
held to be invalid or unenforceable shall be affected thereby, and every
provision of this Lease shall be valid and enforceable to the fullest extent
permitted by law.
Section 28.5 In the event of any litigation or other proceedings involving
------------
the parties hereto for the enforcement of any of the provisions of this Lease,
or any right of Landlord or Tenant in such litigation or other proceedings, the
unsuccessful party in such litigation or other proceedings hereby agrees to pay
to the successful party all costs and expenses, including reasonable attorney's
fees and court costs (whether incurred at the trial, appellate or administrative
levels), incurred by the successful party in such litigation or other
proceedings, all
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<PAGE>
of which may be included in, and is a party of, any judgment or decision
rendered in such litigation or other proceedings.
Section 28.6 This Lease shall be construed and enforced in accordance
------------
with the laws of the State of California, without reference to choice of law
rules.
Section 28.7 All references herein to a "mortgage" shall be deemed to
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include a deed of trust and all references to a "mortgagee" shall be deemed to
include the holder era deed of trust.
Section 28.8 The terms of this Lease are intended by the parties hereto
------------
as a final expression of their agreement with respect to the subject matter
hereof, and may not be contradicted by evidence or any prior or contemporaneous
agreement. The parties further intend that this Lease constitute the complete
and exclusive statement of its terms, and that no extrinsic evidence whatsoever
may be introduced in any proceedings, if any (judicial or otherwise), other than
by written agreement, executed by all of the parties hereto or their successors
in interest.
Section 28.9 The headings of the various articles of this Lease are
------------
intended solely for means of reference, and are not intended for any purposes
whatsoever to modify, explain or place any construction on any of the provisions
of this Lease.
Section 28.10 Tenant shall provide Landlord copies of all engineering,
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architectural and inspections reports it obtains for the Premises and shall
provide Landlord with a corporate resolution authorizing Tenant to enter into
this transaction, or other evidence satisfactory to Landlord of the authority of
Tenant to enter into this transaction.
Section 28.11 This Lease may be executed in two or more identical
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
Section 28.12 Tenant agrees that if Landlord shall fail to perform any
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covenant or obligation on its part to be performed, and as a consequence
thereof, or if on any other claim by Tenant concerning the Premises or this
Lease, Tenant shall recover a money judgment against Landlord, then such
judgment shall be satisfied only out of Landlord's estate in the Premises or
insurance maintained by Landlord, and Landlord shall have no personal or further
liability whatsoever with respect to any such default or judgment.
IN WITNESS WHEREOF, the parties hereto have executed this Lease on the
dates set forth below and it shall be effective as of the later of such dates.
LANDLORD:
---------
FIRST STATE REALITY OF AMERICA, INC.
By: /s/ Peter S. Gummo
---------------------------------
Peter S. Gummo, President
TENANT:
-------
INTERTRUST TECHNOLOGIES CORPORATION
By: /s/ Erwin N. Lenowitz
---------------------------------
Its: CFO
---------------------------------
By:___________________________________
Its:__________________________________
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<PAGE>
EXHIBIT A
Situated in the State of California, County of Santa Clara, City of Santa Clara
and is described as follows:
All of Parcel 19, as shown upon that certain Map entitled, "Parcel Map being a
Resubdivision of Parcels 1, 3, 4, 5, and 9 and areas A, B and D, as shown on
Parcel Map 3399, recorded in Book 368 of Maps, at pages 36 and 37, Santa Clara
County Records", which Map was filed for record in the office of the Recorder of
the County of Santa Clara, State of California on December 29, 1976 in Book 386
of Maps, at pages 4 and 5.
<PAGE>
EXHIBIT B
1. A Bond No. 52A, Assessment No. 9, for Marriott Business Park Unit 1.
2. A Bond No. 50R, Assessment No. 445, for Bayshore North Improvement.
3. Covenants, conditions and restrictions in the declaration,
Executed by: Marriott Corporation, a Delaware corporation
Recorded: March 15, 1976 in Book B915, at page 228, of official
records said covenants, conditions and restrictions were
modified by instrument:
Recorded: November 16, 1977 in Book D281, at page 411, official
records
4. An easement for the purposes shown and incidental purposes as contained in
the instrument,
In favor of: The City of Santa Clara, California, a municipal
corporation
Purpose: Underground electrical easements
Affects: Said land
Recorded: December 1, 1976 in Book C444, at page 600, official records
5. Agreement For: The installation and maintenance of landscape improvements
Dated: December 14, 1976
Executed By: The City of Santa Clara, a Municipal Corporation
Recorded: December 17, 1976 in Book C484, at page 109, official
records
6. Easement in
favor of: City of Santa Clara
Purpose: Installation and repair of underground electrical systems
together with right of way
Affects; The northerly 10 feed of the southerly 38 feet of the
westerly 243 feet of the easterly 253 feet of parcel 19 of
that parcel map filed for record December 29, 1976 in book
386 of maps at pages 4 and 5, Santa Clara records
Recorded: April 11, 1979, in book E409, at page 558, official records
Any matters arising subsequent to April 13, 1982 provided the same do not
materially interfere with Tenant's intended use of the Premises.
<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. 1 to the
Registration Statement (Form S-1) and related Prospectus of InterTrust
Technologies Corporation for the registration of 7,475,000 shares of its common
stock.
/s/ Ernst & Young LLP
Palo Alto, California
March 24, 2000
