<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Statement number 333-87181
[LOGO OF PREVIEW SYSTEMS]
3,800,000 Shares
Common Stock
This is the initial public offering for Preview Systems, Inc. No public
market currently exists for our shares. The shares we are offering have been
approved for listing on the Nasdaq National Market under the symbol "PRVW."
The initial public offering price is $21.00 per share.
--------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price.................................... $21.00 $79,800,000
Underwriting Discounts and Commissions................... $ 1.47 $ 5,586,000
Proceeds to Preview Systems.............................. $19.53 $74,214,000
</TABLE>
--------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 570,000 shares of our common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on December 13, 1999.
--------------------
Robertson Stephens
Dain Rauscher Wessels
SoundView Technology Group
Fidelity Capital Markets
a division of National Financial
Services Corporation
The date of this prospectus is December 7, 1999
<PAGE>
Narrative Description of Inside Front Cover
Headline Upper Left Justified: "e-Commerce of Digital Goods."
Below this headline, two diagrams descend down either side of the page,
separated by a series of centered arrows. The left diagram is labeled
"PHYSICAL" and the right is labeled "ELECTRONIC."
The "PHYSICAL" diagram begins with four box-shaped graphics that represent
warehouses. A horizontal text block extends across the warehouses containing
the text: "WAREHOUSE: physical inventory produced" and "OFFICE BUILDING: order-
taking." Directly below is a second graphic which represents the computer
screen of an online environment. A smaller window on the right side of this
screen contains the words "Add to shopping cart," which represents shopping
basket technology used by online stores. Spanning this graphic is a horizontal
text block containing the words: "ONLINE STOREFRONT: order placed." Directly
below is a third graphic, which represents a single warehouse containing boxes.
A horizontal text block spans this graphic: "PHYSICAL INVENTORY ACCESSED." The
next graphic below represents a truck. Directly below the truck is a text
block: "PHYSICAL INVENTORY DELIVERED." Below and to the right of the truck is a
graphic representation of a house and a person, which is intersected by a final
horizontal text block: "PHYSICAL GOODS RECEIVED." To the right of the person
graphic, is a graphic representation of a calendar, which has approximately
three and a half weeks shaded in.
The second diagram begins below the word "ELECTRONIC" with a graphic
composed of four cylindrical figures resembling electric coils. A horizontal
text block is below this graphic, containing the text: "DIGITAL PACKAGING:
digital inventory database," and "electronic license management." Below this
graphic is a mirror image of the online environment and shopping basket window
graphic described in the "PHYSICAL" diagram. The text block near the bottom of
this graphic contains the same words: "ONLINE STOREFRONT: order placed."
Directly below is a graphical representation of a person and a personal
computer. Directly to the left of the person is the text: "DIGITAL INVENTORY
ACCESSED, DELIVERED AND LICENSED." Below and to the right is a graphic
representing a stopwatch, with a small shaded area indicating that a short time
has passed.
<PAGE>
Narrative Description of Left and Right Gate Folds
This two page spread contains a single diagram. The left side gate fold
contains the diagram's headline, upper left justified: "Preview Systems--
Enabling e-Commerce Networks for Digital Goods."
The diagram is divided into three areas of vertical logo columns, one on
the left gate fold, two on the right. Each logo column is divided horizontally
with half the logos in the upper part of the page and the other half in the
lower part. A respective text heading is located where each column is divided,
designating the logo category. The left column, which appears on the left gate
fold, is labeled "PUBLISHERS."
Ascending upwards from the label are the following company logos:
"Symantec," "NetObjects," "Broderbund" and "DigitalSquare." Descending from the
label are the following company logos: "macromedia," "JustSystems," "EMI Music
Publishing," "The Learning Company" and "Lotus."
The center column, which appears on the left side of the right gate fold,
is labeled "DISTRIBUTORS AND SERVICE PROVIDERS." Ascending upwards from the
label are the following company logos: "Ingram Micro," "TrustMarque," "Navarre
Corporation, "Softway" and "vitessa-Distributing Ecommerce." Descending from
the label are the following company logos: "Sony," "NetSales," "releasenow.com:
your e-commerce department," "ChargeNow.com" and "supertracks."
The right column, which appears on the right side of the right gate fold,
is labeled "ORIGINAL EQUIPMENT MANUFACTURERS AND RESELLERS." Ascending upwards
from the label are the following company logos: "beyond.com: The Software
Superstore," "Prisma," "e-academy.com" and "Buy.com." Descending from the label
are the following company logos: "IngramMicro," "somm.com," "softline," "Dustin
AB," and "Vector."
Spanning the background of this diagram, crossing the left and right folds,
is a graphical representation of the world. In the center of this diagram is a
circle centered behind the label "DISTRIBUTORS AND SERVICE PROVIDERS."
Rediating out from the circle in a bow tie-shaped graphic are lines of 1s and
0s, representing digital code.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until January 1, 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Risks related to our business........................................... 7
Risks related to our industry........................................... 13
Risks related to our offering........................................... 15
You Should Not Rely on Forward-Looking Statements Because They Are
Inherently Uncertain................................................... 17
How We Intend to Use the Proceeds From This Offering..................... 17
Dividend Policy.......................................................... 17
Other Information........................................................ 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 21
Business................................................................. 29
Management............................................................... 41
Certain Transactions..................................................... 54
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 64
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information................................................... 67
Index to Financial Statements............................................ F-1
</TABLE>
---------------------
Our logo and certain titles and logos of our products mentioned in this
prospectus are our service marks or trademarks. Each trademark, trade name or
service mark of any other company appearing in this prospectus belongs to its
holder.
3
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all the information
that may be important to you. You should read the entire prospectus,
especially "Risk Factors" and the consolidated financial statements and notes,
before deciding to invest in shares of our common stock.
Our Company
We develop and market a solution that enables networks for the electronic
distribution and licensing of digital goods through the Internet. Digital
goods are products such as software, music, images, video and documents that
can be produced, delivered and licensed electronically. Our solution supports
direct and indirect distribution and electronically connects publishers,
distributors and resellers of digital goods within these networks. We earn
transaction fees based on the value of digital goods that are distributed and
licensed using our solution.
International Data Corporation projects that the retail market for
electronic software distribution will increase to $14.9 billion by 2003 from
an estimated $351 million in 1998. Electronic distribution of digital goods
and licenses can reduce costs, increase selling opportunities, and facilitate
real-time exchange of information among distribution channel participants.
However, many existing electronic distribution systems compete with existing
distribution channels, fail to adequately enforce distribution and licensing
rights and do not integrate sales information from multiple distribution
channels.
Our solution provides publishers, distributors and resellers the ability to
implement networks for the electronic distribution and licensing of digital
goods. Our solution supports a variety of leading software and hardware
platforms, employs sophisticated encryption techniques to maximize security
and is scalable. In addition, it automates real-time exchange of information
among network participants.
We have licensed our solution to leading software publishers such as
Symantec and Macromedia for the electronic distribution of their products
through direct or indirect channels. We have also licensed our solution to
Ingram Micro, the leading worldwide wholesale distributor of computer-based
technology products and services. Our agreement enables Ingram Micro to use
our solution to supply its resellers electronically and to sublicense
appropriate network components to its resellers. We also have licensed our
solution to service providers who offer our solution on an outsourcing basis.
Finally, we are working directly and through third parties with original
equipment manufacturers to bundle encrypted digital goods with their computer
products and provide means for online electronic licensing.
We seek to establish our solution as the de facto standard infrastructure
solution for participants in the electronic distribution and licensing of
digital goods. Key elements of our strategy are to target and secure the
support of leading software publishers and distributors, increase the number
of participants using digital goods networks, extend our solution into other
digital goods markets such as music, expand our solution to support volume
licensing to organizations and enhance our solution with value-added services.
We have a non-exclusive agreement with Intel Corporation to license and
incorporate Intel's content protection agent system into our solution for
secure electronic distribution of digital music.
Our principal executive offices are located at 1601 South De Anza
Boulevard, Suite 100, Cupertino, California 95014, and our telephone number is
(408) 873-3450. The information contained on our web site is not part of this
prospectus.
-------------------
Except where we state otherwise, information in this prospectus is based on
the following assumptions:
. a one-for-two reverse split of all outstanding shares of our common
stock and preferred stock to be completed immediately prior to the
effectiveness of this offering;
. the conversion of all outstanding shares of preferred stock into shares
of common stock upon the effectiveness of this offering; and
. no exercise of the underwriters' overallotment option.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Preview Systems............ 3,800,000 shares
Common stock to be outstanding after the offering.. 15,767,684 shares
Use of proceeds.................................... For general corporate
purposes, including
working capital and
capital expenditures
Nasdaq National Market symbol...................... PRVW
</TABLE>
The common stock to be outstanding after the offering is based on the
number of shares outstanding as of September 30, 1999. This excludes:
. 264,800 shares issuable upon exercise of a warrant issued to Virgin
Holdings, Inc. at an exercise price equal to the lesser of $9 per share
or the offering price to the public in this offering.
. 2,277,417 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $3.63 per share as of September 30,
1999;
. 495,397 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $9.62 per share as of September 30,
1999, 322,045 of which represent rights to acquire convertible preferred
stock which convert one for one to common stock; and
. 2,150,419 shares available for future issuance under our stock and
option plans as of September 30, 1999.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
We were incorporated in Delaware in April 1998 to acquire all of the
outstanding equity interests of Preview Software and Portland Software. We
completed both of these mergers on August 5, 1998. We accounted for our merger
with Preview Software as a reorganization under common control and we recorded
the underlying net assets at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the following summary
consolidated financial data for the years ended December 31, 1996, 1997 and
1998 and the nine months ended September 30, 1998 and 1999 reflect our
operations and those of Preview Software, and reflect the operations of
Portland Software from August 5, 1998. The statements of operations data
displayed in the "Pro Forma 1998" column gives effect to the Portland Software
merger as if the transaction had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
-------------------------------------- -----------------
Pro Forma
1996 1997 1998 1998 1998 1999
------ ------- -------- ----------- ------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Network transaction
fees................ $ 148 $ 262 $ 435 $ 618 $ 230 $ 1,482
Services.............. -- -- 175 191 23 782
------ ------- -------- -------- ------- --------
Total revenues..... 148 262 610 809 253 2,264
Operating expenses:
Research and
development......... 34 1,016 2,978 4,056 1,857 4,281
Sales and marketing... 172 822 2,915 4,202 2,024 4,350
General and
administrative...... 184 785 3,127 5,179 1,869 3,845
Amortization of
intangibles......... -- -- 866 2,084 347 1,557
Acquired in-process
research and
development......... -- -- 2,091 -- 2,091 --
------ ------- -------- -------- ------- --------
Total operating
expenses......... 390 2,623 11,977 15,521 8,188 14,033
------ ------- -------- -------- ------- --------
Loss from operations.... (242) (2,361) (11,367) (14,712) (7,935) (11,769)
------ ------- -------- -------- ------- --------
Net loss................ $ (242) $(2,380) $(11,276) $(14,550) $(7,890) $(11,520)
====== ======= ======== ======== ======= ========
Basic and diluted net
loss per share........ $(0.69) $ (6.45) $ (7.55) $ (5.51) $ (7.14) $ (3.95)
====== ======= ======== ======== ======= ========
Shares used in computing
net loss per share.... 350 369 1,494 2,641 1,105 2,920
====== ======= ======== ======== ======= ========
</TABLE>
The As Adjusted consolidated balance sheets data summarized below reflects
the conversion of our preferred stock into 8,788,273 shares of common stock
upon the completion of this offering and the application of the net proceeds
from the sale of the 3,800,000 shares of common stock offered by us at an
initial public offering price of $21.00 per share after deducting estimated
underwriting discounts and commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
September 30, 1999
(unaudited)
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments.......... $20,551 $ 93,794
Working capital............................................ 19,821 93,064
Total assets............................................... 29,117 102,360
Long-term portion of debt and capital lease obligations.... 351 351
Total stockholders' equity................................. 24,022 97,265
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment in our company. In addition, you should keep in mind that the risks
described below are not the only risks that we face. The risks described below
are the risks that we currently believe are material risks of this offering.
However, additional risks not presently known to us, or risks that we currently
believe are not material, may also impair our business operations. Moreover,
you should refer to the other information contained in this prospectus for a
better understanding of our business.
Our business, financial condition, or results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by these risks, then the trading price of our common stock could decline, and
you could lose all or part of your investment.
Risks related to our business
Because our business model is new and unproven, we may not succeed in
generating sufficient revenues to sustain or increase our business.
Our success depends upon our ability to generate network transaction fees
based on a percentage of the sales fulfilled by our customers using our
solution. This business model is unproven, our customers have only recently
begun to use our solution to distribute their products and we have not received
any significant network transaction fees under this transaction fee model. If
we are unable to generate significant revenues from network transaction fees,
our current revenues, consisting of annual minimum network transaction fees
payable upon execution and renewal of customer agreements, will be insufficient
to sustain our business. If customers wish to use different business models,
such as the payment of a one-time license fee instead of ongoing network
transaction fees, our revenues will suffer and we will not be able to grow our
business. Our existing customers may not elect to renew our agreements or they,
as well as future customers, may seek more favorable terms. For more
information about our business model, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
Our limited operating history makes it difficult for you to evaluate our
business and your investment.
We were formed in April 1998 to acquire all of the outstanding equity
interests of Preview Software and Portland Software. These acquisitions closed
in August 1998. Prior to August 1998, Portland Software and Preview Software
had achieved only limited distribution of their respective products. For
example, in 1996, 1997 and the six months ended June 30, 1998, total revenues
generated by both businesses were approximately $335,000, $763,000 and
$262,000, respectively. Subsequent to these acquisitions and through September
30, 1999, our total revenues were approximately $2.8 million. A majority of our
significant customers entered into their agreements with us since September
1998. Accordingly, we have a limited operating history and you have little
historical basis upon which to evaluate our business, products, markets and
general prospects of your investment.
If our relationship with Ingram Micro does not succeed, our revenues will
suffer and we may be unable to sustain or increase our business.
Our relationship with Ingram Micro, the leading wholesale distributor of
computer-based technology products and services worldwide, is significant to us
financially and is key to our strategy of building networks of participants
using our solution. As of September 30, 1999 Ingram Micro had not yet
commercially launched an electronic software distribution program using our
solution and it is not obligated to do so under our non-exclusive agreement. If
Ingram Micro delays or fails to successfully launch an electronic software
distribution program using our solution or fails to generate significant
software sales using our solution, our business will be seriously harmed. Our
agreement with Ingram Micro has an initial one-year term. Any failure to renew
or termination of this agreement could result in revenue shortfalls, preventing
us from growing or sustaining our business.
7
<PAGE>
We expect operating expenses to increase significantly, we have incurred
significant net losses and we expect our losses will continue in the future.
As of September 30, 1999, we had an accumulated deficit of $25.4 million.
We experienced net losses of $11.3 million and $2.4 million in 1998 and 1997,
respectively, and $11.5 million for the nine months ended September 30, 1999.
We have not achieved profitability and we expect significant operating losses
and negative cash flow to continue for at least the next two years, and
possibly longer. Our losses will continue to increase because we expect to
incur additional costs and expenses related to research and development as well
as expanding our organization, especially in general and administrative
functions, sales, marketing and consulting.
In addition, we are in the early stages of expanding our solution to
address electronic distribution of digital music. We anticipate that this
effort will entail additional significant increases in research and development
costs as well as in sales and marketing. We do not expect to recognize
meaningful revenues from the music business for at least the next 12 months, if
ever. Because we will spend these amounts before we receive any incremental
revenues from these efforts, our losses will be greater than the losses we
would incur if we developed our business more slowly. In addition, we may find
that these efforts are more expensive than we currently anticipate, which would
further increase our losses.
The loss of any of our current major customers would cause our revenues to
decline.
Sony Marketing of Japan accounted for approximately 45% of our revenues in
1998. Sony Marketing and Ingram Micro accounted for approximately 46% of our
revenues in the nine month period ended September 30, 1999. We expect that
Ingram Micro will account for a significant percentage of our future revenues
although we can give you no assurance in that regard. We expect that a small
percentage of our customers will continue to account for a substantial portion
of our revenues for at least the next 12 months. Contracts with these customers
are generally short term in nature, varying in length from one to three years,
and can be terminated by the customer on short notice without significant
penalties. If any one of these contracts is not renewed or otherwise ends, we
would lose a large portion of our revenues.
If a significant number of distribution channel participants do not agree to
sell digital goods through our solution, we may not be successful.
The distribution channel for digital goods is complex and multi-tiered,
consisting of publishers which sell to distributors, resellers and end
customers; distributors which sell to resellers; original equipment
manufacturers which sell to resellers and end customers; and resellers which
sell to end customers. Unless a significant number of these channel
participants adopts our solution in a timely manner, we will not achieve the
critical mass of participants we believe necessary for our success. Our success
depends on the adoption of our solution not only by our customers but by the
distribution channel partners of our customers as well. For example, in order
for a distributor to sell digital goods using our solution, the publisher of
the goods must consent to distribute its goods electronically and the reseller
of the goods must also agree to use our solution. We do not know whether our
customers' distribution channel partners will agree to use our solution. We
depend on our customers to obtain publisher consents and to facilitate the
adoption of our solution by their distribution channel partners. Unless a
significant number of our customers' distribution channel partners agrees to
sell digital goods through our solution, we may not be able to earn enough
revenues from our network transaction fees to become profitable or execute our
business model.
If Microsoft does not consent to the electronic distribution of its products
through distributors using our solution or adopt our solution for direct sales,
we may be unable to increase our revenues or become profitable.
Sales of Microsoft products accounted for approximately 13% of worldwide
software sales in 1998 based on Microsoft's public reports and industry analyst
data. If Microsoft does not consent to the electronic distribution of its
products through distributors using our solution or adopt our solution for
direct sales, we will
8
<PAGE>
lose a significant revenue opportunity. Additionally, Microsoft may initiate
its own standard for the electronic distribution of its software over the
Internet. Microsoft has initiated programs for the secure electronic
distribution of music. If distribution channel participants favor Microsoft's
existing or future solution for electronic distribution of digital goods, we
may be unable to increase our revenues or become profitable.
Our sales cycle is lengthy and unpredictable which could cause us to fail to
achieve projected results.
Our sales cycle is a long and complex process. If network transaction fees
are delayed or reduced as a result of this process, our future revenue and
operating results could be impaired. Our sales process requires a significant
level of education regarding the use and benefits of our solution. The purchase
and deployment of our solution involves a significant commitment of capital and
other resources. As a result, our customers typically spend substantial time
performing internal reviews and obtaining corporate approvals before making a
purchasing decision. Accordingly, the period between our initial sales call and
the signing of a contract with significant sales potential typically ranges
from four to six months and can be significantly longer. Therefore, the timing
of sales to new customers is difficult to predict. Delays in receiving signed
contracts with major customers could cause us to fail to achieve our projected
results, as well as those of industry analysts, which would have a severe
adverse effect on the price of our stock.
Our solution has not been used under high-volume transaction conditions and it
may not meet the demands of our high-volume customers.
Our solution has not yet been subjected to the volume of business and the
complexity we anticipate will be required to fully support the future
transactions of our largest customers. If our solution is not capable of
processing the necessary volume of transactions, our business will be seriously
harmed because the number of revenue generating transactions using our solution
will be limited, customers may elect to use another solution and we may be
exposed to adverse publicity. In addition, it is likely that production
software tools, diagnostic tools and maintenance upgrades, as well as
significant financial and other resources, will be required to achieve
reliability and resolve technical issues related to large-scale transactions.
If our maintenance and upgrades to our solution disrupt our customers'
operations, we may suffer lost revenues and harm to our reputation.
We will need to upgrade and improve our solution periodically. Upgrading or
deploying a new version of our solution requires the cooperation of our
existing customers and their network participants. These network participants
may be reluctant to upgrade our solution since this process can be complicated,
time-consuming and poses the risk of network failures. If our periodic upgrades
and maintenance cause disruptions, we will lose revenue generating
transactions, our customers may elect to use other solutions and we may also be
the subject of negative publicity that may further adversely affect our
business and reputation.
Delays caused by integrating our solution with channel participants' existing
systems may cause revenue shortfalls in a particular quarter.
Our customers and their distribution channel partners must integrate our
solution into their existing systems or a new system. Our business model is
based on receiving network transaction fees. Thus, our success depends upon the
timely and successful deployment of our solution by customers and their
distribution channel partners for the distribution and licensing of digital
goods.
The timing and success of commercial deployment depends upon the:
. complexity of our customers' systems and necessary development efforts;
. technical and engineering capabilities of our customers;
9
<PAGE>
. budget for and relative importance of electronic distribution of
digital goods to our customers;
. ability of our customers to integrate and test the implementation of
our solution successfully; and
. efforts of our consulting, training and support services staff in
providing technical support to our customers.
We have in the past experienced, and continue to experience, delays in the
period between entering into a licensing arrangement and the time a customer
commercially deploys our solution. We expect that this period will continue to
vary widely from customer to customer.
Variations in the volume of sales of digital goods and services over the
Internet will cause fluctuations in our quarterly operating results, which
could cause our stock price to decline.
The amount of network transaction fees we receive in any given quarter will
depend on the sales of digital goods that occur using our solution. Because
sales of digital goods using our solution are outside of our control, it will
be difficult for us to make accurate quarterly revenue projections even if our
solution is deployed commercially by our licensees. In addition, our revenues
will depend on the number of new deployments of our solution that occur in a
particular quarter. However, in the short term our operating expenses are
relatively fixed and based in part on our revenue projections. As a result, if
our revenue projections are not accurate for a particular quarter, our actual
operating results for that quarter could fall below the expectations of
analysts and investors. Our failure to meet these expectations would likely
cause the market price of our common stock to decline significantly and
rapidly.
Security breaches to our encryption technology may harm our reputation and
business and may cause us to expend significant additional resources to protect
against future breaches.
Individuals, referred to as crackers, have in the past gained unlicensed
access to secured digital goods distributed through our solution. While we
expend significant efforts to make unauthorized access increasingly difficult,
we expect that determined crackers will continue their attempts to crack our
solution and may prove successful. We will have to expend significant capital
and other resources to alleviate problems caused by these attempts to crack our
solution.
Any breach of our security systems could harm our reputation, which could
materially harm our business. A party who is able to circumvent our security
measures could misappropriate digital goods without paying the required license
fees, gain unauthorized access to proprietary information, erase or modify
electronic audit trails, or disrupt our customers' operations. Security
breaches could also harm our reputation and expose us to litigation and
liability. We cannot assure you that our security measures will prevent
security breaches or that a failure to prevent such security breaches will not
seriously harm our business.
We do not expect to recognize any significant revenues from the use of our
solution by our customers to sell digital music for at least the next 12
months, and we may not ever recognize meaningful revenues from these sales.
We have only recently begun to explore and market our solution for
electronic distribution of music and no customer is currently using our
solution to distribute music. As a result, we do not believe that we will
recognize any significant revenue from the use of our solution to sell music or
any type of digital goods other than software for at least the next 12 months,
if at all. We expect to incur significant expenses to develop and promote the
use of our solution for the electronic distribution of music. If electronic
distribution of music fails to develop or we are unable to penetrate this
market, we will have expended a great deal of time, effort and financial
resources that could have been directed to more beneficial activities. In
addition, our business may be adversely impacted if our efforts are not
successful. Recently, many public companies engaged in music e-commerce have
experienced significant volatility in their stock prices. To the extent we are
perceived as participating in music e-commerce, we may also experience similar
volatility in our stock price.
10
<PAGE>
We are relying on Intel to provide us with its content protection agent
system that we can integrate with our solution. If we are unable to
successfully integrate it into our solution, we may be unable to provide a
viable solution for electronic distribution of music. Even if we successfully
incorporate the content protection agent system into our solution, it may not
provide adequate security.
We also rely upon third parties to create digital music players that
support the content protection agent system technology developed by Intel. If
such third parties fail to support this technology or end customers do not
purchase devices to play music distributed through our solution, our solution
may not gain market acceptance.
Other companies, such as Microsoft and Liquid Audio, have already begun to
distribute digital music using their proprietary methods. If these methods are
successful before we are able to implement our solution, our plans to use our
solution for the distribution of digital music may be seriously harmed.
Our intellectual property rights are difficult and costly to protect because
our industry is characterized by the existence of a large number of patents and
frequent litigation. This may place a significant burden on our management team
and may make it difficult for us to operate our business successfully.
The digital encryption and distribution industry is characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. We regard our patents, copyrights, trademarks, trade dress,
trade secrets, and similar intellectual property as critical to our success. We
have 15 patent applications pending with the United States Patent and Trademark
Office as of September 30, 1999. Additionally, as of September 30, 1999, two
patents were issued and three patents were allowed by the United States Patent
and Trademark Office. Our proprietary technologies will be protected from
unauthorized use by third parties only to the extent that they are covered by
valid and enforceable patents or copyrights or are effectively maintained as
trade secrets. These legal protections afford only limited protection and may
be time consuming and expensive. In addition, litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Litigation could result in substantial costs and diversion of
management and technical resources away from our business operations. Despite
our efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property. If we are not able to protect our
intellectual property rights, our business may not succeed.
Factors outside our control may limit our expansion in international markets
and may prevent us from developing international revenues.
Although we sell our solution to customers outside the United States, we
might not succeed in expanding our international presence. As a result of our
agreement with Sony Marketing of Japan which provides them the exclusive right
to distribute our products in Japan, our success in this market depends on
their efforts and ability to sell our solution. This grant of an exclusive
right to Sony Marketing may prevent widespread adoption of our solution by the
Japanese market which may prevent us from becoming a widely-used solution in
Japan.
Conducting our business outside the United States subjects us to unfavorable
international regulations and conditions affecting businesses that operate in
our industry and could cause our international business to fail.
Conducting our business outside of the United States is subject to
additional risks related to our business which are largely outside our control,
including:
. the possibility that the scarcity of high speed Internet access, the
high cost of Internet access and the pace of future improvements in
access to the Internet in countries outside the United States will
limit the market for electronic distribution and licensing of digital
goods;
11
<PAGE>
. reduced protection of our patents, copyrights and other intellectual
property rights;
. potential tax withholding of our network transaction fees;
. U.S. and international export and use restrictions on our encryption
technology; and
. currency rate fluctuations that can impact our network transaction fees
that are denominated in local currencies.
One or more of these factors may materially and adversely affect our future
international operations, and consequently, our business.
If our key employees do not continue to work for us, our business will be
harmed because competition for replacements is intense.
We are substantially dependent on the continued services of our officers
and key personnel who are all at-will employees. These individuals have
acquired specialized knowledge and skills with respect to our business. As a
result, if any of these individuals were to leave, we could face substantial
difficulty in hiring qualified successors and could experience a loss in
productivity while the new employee obtains the necessary training and
experience. We expect that we will need to hire additional personnel in all
areas. The competition for qualified personnel in our industry is intense,
particularly in the San Francisco Bay Area, where our corporate headquarters
are located. At times, we have experienced difficulties in hiring personnel
with the right training or experience, particularly in technical areas. New
employees require extensive training and typically require four to six months
of training to achieve full productivity. Our success depends on attracting and
retaining personnel.
The year 2000 bug could cause our solution and the software products of our
suppliers to malfunction.
Prior versions of our solution in current production used by some of our
customers may not operate properly with date calculations involving the year
2000. If these customers do not upgrade our solution prior to December 31,
1999, they may suffer severe outages. This may harm our relationship with these
customers and damage our reputation. It is also possible that these customers
may sue us because our software was not year 2000 compliant. Although we expect
to contest these claims, if any, the cost of litigating this issue may be
significant. In a worst case scenario, year 2000 problems could:
. prevent or delay transactions using our solution until we are able to
remedy year 2000 problems, resulting in lost or delayed revenues;
. reduce sales of our solution and services;
. require us to incur significant and unanticipated expenditures to remedy
year 2000 problems;
. cause our customers to focus on their own year 2000 problems, reducing
sales of our solution; and
. cause our customers to experience reduced software sales, reducing our
network transaction fees which are based on a percentage of such sales.
12
<PAGE>
Risks related to our industry
The success of our business will largely depend on the widespread acceptance of
commerce in digital goods over the Internet.
The use of the Internet for distribution and licensing of digital goods may
not be commercially accepted for a number of reasons, including the:
. failure to adequately develop the necessary infrastructure for the
electronic distribution and licensing of digital goods, including data
compression or broadband communication technology;
. lack of adequate speed, access, or server reliability;
. public perception of the security and confidentiality of digital
information and the confidentiality of its providers and users;
. development of competing technologies;
. rate of adoption of electronic distribution and licensing of digital
goods by the existing retail and other channels;
. demand for digital goods that are available for purchase through
electronic distribution; and
. level of end customer comfort with the process of downloading software,
music and other digital goods over the Internet, including the ease of
use.
In addition, our business would be seriously harmed if publishers,
distributors or resellers of digital goods are unwilling to sell their digital
goods over the Internet. These factors are outside of our control. If commerce
in digital goods does not achieve widespread market acceptance or grow
significantly, we may be unable to generate sufficient revenue to sustain our
business.
Our market is subject to rapid technological changes; we may not be able to
introduce new products and enhancements on a timely basis, impairing our
ability to generate future revenue.
The market for electronic distribution and licensing of digital goods is
fragmented and marked by rapid technological change, frequent new product
introductions and enhancements, uncertain product life cycles, and changes in
customer demands. There is currently no standard for electronic distribution
and licensing of digital goods. New products based on new technologies or new
industry standards can quickly render existing products obsolete and
unmarketable. In the past we have experienced delays in new product releases
and we may experience similar delays in the future. Any delays in our ability
to develop and release enhanced or new systems could seriously impair our
ability to generate future revenue.
We are in a highly competitive industry, and we expect to face increased
competition in the future; increased competition may reduce our revenues and
market opportunity.
The market for electronic distribution and licensing of digital goods is
new, rapidly evolving and intensely competitive. We expect competition to
intensify in the future. We currently compete directly with other providers of
electronic commerce solutions for digital goods such as Cybersource, Digital
River and InterTrust Technologies. More broadly, we compete with other
providers of technology to secure digital content such as AT&T, IBM, Liquid
Audio, Microsoft, Real Networks, Reciprocal and Xerox, as well as solutions
developed in-house. In the future, operating system manufacturers may include
digital rights management solutions in their operating systems.
We believe that the principal competitive factors in our markets include:
. software publisher, music label, distributor and reseller
relationships;
. system security, scalability and reliability;
13
<PAGE>
. breadth of products and services;
. price; and
. speed of deployment.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and much greater
financial, marketing and other resources than we do. In addition, larger, well-
established and well-financed entities may acquire, invest in or form joint
ventures with competitors as the use of the Internet and other online services
increases. Increased competition may result in reduced prices, and loss of
market share may negatively impact our ability to obtain network transaction
fees. In addition, adoption by publishers, distributors and resellers of
competing systems may significantly limit the size of the potential market for
our solution. We may not be able to compete successfully against current and
future competitors, and any inability to do so would materially adversely
affect our business.
We may be sued for violating the intellectual property rights of others.
The digital encryption and distribution industry is characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. We have not completed an in-depth and exhaustive analysis of
such patents or applications. Some of our competitors have extensive patent
portfolios with broad claims. As the number of competitors in the market grows
and the functionality of our solution increases, the possibility of an
intellectual property claim against us increases. In addition, because patent
applications can take many years to issue, there may be a patent application
now pending, of which we are unaware, which will cause us to be infringing when
it is issued in the future. To address these patent infringement or other
intellectual property claims, we may have to redesign our solution to avoid
infringement or enter into royalty or licensing agreements on disadvantageous
commercial terms. We may be unable to successfully redesign our solution or
obtain a necessary license. A successful claim against us or our licensees, or
our failure to design around the infringed technology or license it or similar
technology, would harm our business. In addition, any infringement or other
intellectual property claims, with or without merit, which are brought against
us could be time consuming and expensive to litigate or settle and could divert
management's attention from our business.
In April 1998, our predecessor and subsidiary, Portland Software, 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 Portland Software's ZipLock System software contained various
elements recited in the two patents and requested that Portland Software
discuss licensing the technology of these patents. Portland Software responded
to the letter stating that although it had not undertaken a detailed review of
the patents, it was unaware of any of its products having one of the elements
required by the patent claims. In March 1999, we received correspondence from
TAU Systems, essentially reiterating the above claims. In August 1999, after
further investigation of the TAU Systems patents, we notified TAU Systems that
we do not believe our software falls within the scope of coverage of TAU
Systems' patents and, therefore, we were not interested in licensing
arrangements. We have not received further correspondence from TAU Systems. On
March 30, 1999, the United States District Court for the District of
Connecticut dismissed a lawsuit filed by E-Data against several defendants,
including Portland Software, alleging that they infringed E-Data's U.S. Patent
No. 4,528,643 ("System for Reproducing Information in Material Objects at a
Point of Sale Location") issued July 9, 1985. Although the suit was dismissed,
it may be reinstated depending upon the outcome of E-Data's appeal before the
Federal Circuit of a New York district court's dismissal of a prior patent
infringement suit on the same patent that was filed by E-Data against different
defendants. In the future, we or our licensees could be found to infringe upon
the patent rights of TAU Systems, E-Data or other companies.
Legal uncertainties and potential government regulation could increase our
costs and be a barrier to doing business.
To date, communications and commerce on the Internet have not been highly
regulated. State and federal governments may decide to enact new laws or
regulations at any time and it may take years to determine the extent to which
existing laws relating to issues including property ownership, defamation, and
personal privacy apply to the Internet. Any new laws or regulations or
implementations of existing laws and regulations relating to the Internet could
harm our business.
14
<PAGE>
The European Union has adopted a privacy directive that regulates the
collection and use of information that identifies an individual person. These
regulations may inhibit or prohibit the collection and sharing of personal
information in ways that could harm our partners or us. The globalization of
Internet commerce may be harmed by these and similar regulations since the
European Union privacy directive prohibits transmission of personal information
outside the European Union unless the receiving country has enacted individual
privacy protection laws at least as strong as those enacted by the European
Union privacy directive. The United States and the European Union have not yet
resolved this matter and they may not ever do so, in a manner favorable to our
customers or us.
Imposition of sales and other taxes on electronic commerce transactions may
hinder electronic commerce.
The taxation of commerce activities in connection with the Internet has not
been established, may change in the future and may vary from jurisdiction to
jurisdiction. One or more states or other countries may seek to impose sales or
other taxes on companies that engage in or facilitate electronic commerce. A
number of proposals have been made at the local, state, and international level
that would impose additional taxes on the sale of products and services through
the Internet. These proposals, if adopted, could substantially impair the
growth of electronic commerce and could significantly harm our business.
Moreover, if any state or other country were to assert successfully that we
should collect sales or other taxes on the exchange of products and services
through the Internet, our business may be harmed.
Risks related to our offering
We may need to raise additional funds in the future, which could result in
dilution.
We require substantial working capital to fund our business. We expect the
net proceeds from this offering, together with our existing capital resources,
to be sufficient to meet our working capital and capital expenditure needs for
at least the next 12 months. After that, we may need to raise additional funds,
and additional financing may not be available on favorable terms, if at all.
This could seriously harm our business and operating results. Furthermore, if
we issue additional equity securities, stockholders may experience dilution,
and the new equity securities could have rights senior to those of existing
holders of our common stock. If we raise additional funds through the issuance
of debt securities, holders of these securities could have rights, preferences,
and privileges senior to holders of common stock, and the terms of this debt
could impose restrictions on our operations. If we need to raise funds and
cannot do so on acceptable terms, we may not be able to develop or enhance our
solution, take advantage of future opportunities, or respond to competitive
pressures or unanticipated requirements.
Our securities have no prior market and our stock price may decline after the
offering.
Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters. In addition, an active public market for our common stock may not
develop or be sustained after this offering.
Our executive officers and directors will continue to have substantial control
over us after the offering which could delay or prevent a merger or other
change in control.
Our executive officers, directors and entities affiliated with them will,
in the aggregate, beneficially own approximately 28.8% of our outstanding
common stock upon completion of this offering. These stockholders, if acting
together, would be able to influence significantly election of directors and
all other matters requiring approval by our stockholders. This concentration of
voting control could have the effect of delaying or preventing a merger or
other change in control, even if it would benefit our other stockholders. See
"Principal Stockholders" on page 56 for more detailed information regarding
share ownership of our officers and directors.
15
<PAGE>
Some provisions of our charter documents may have anti-takeover effects that
could discourage a change in control, even if an acquisition would be
beneficial to our stockholders.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. These provisions
include:
. authorizing the issuance of shares of undesignated preferred stock
without a vote of stockholders;
. prohibiting stockholder action by written consent; and
. limitations on stockholders' ability to call special stockholder
meetings.
Substantial sales of our common stock could depress our stock price.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of September 30, 1999, upon
completion of this offering, we will have 15,767,684 outstanding shares of
common stock. Other than the shares of common stock sold in this offering,
33,687 shares will be eligible for sale in the public market immediately. Most
of our stockholders will be subject to agreements with the underwriters or us
that restrict their ability to transfer their stock for 180 days from the date
of this prospectus. After these agreements expire, an additional 7,047,968
shares will be eligible for sale in the public market. For a detailed
discussion of the shares eligible for future sale, please see "Shares Eligible
for Future Sale."
As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.
The initial public offering price is substantially higher than the tangible
book value per share of our outstanding common stock. As a result, investors
purchasing common stock in this offering will incur immediate substantial
dilution of $15.27 per share, based on an initial public offering price of
$21.00 and assuming exercise of all outstanding options and warrants. In
addition, we have issued options to acquire common stock at prices
significantly below the initial public offering price. To the extent
outstanding options are ultimately exercised, there will be further dilution to
investors in this offering. We have in the past and may in the future issue
equity securities to our partners. Any issuances to these partners may cause
further dilution to investors in this offering.
16
<PAGE>
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words like "anticipate," "believe," "plan," "expect,"
"future," "intend," and similar expressions to identify forward-looking
statements. This prospectus also contains forward-looking statements attributed
to third parties relating to their estimates regarding the growth of Internet
use and electronic distribution and licensing of digital goods. You should not
place undue reliance on these forward-looking statements, which apply only as
of the date of this prospectus. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons,
including the risks faced by us and described in the preceding pages and
elsewhere in this prospectus. 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.
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
Our net proceeds from the sale of the 3,800,000 shares of common stock we
are offering will be $73.2 million, or $84.4 million if the underwriters'
option to purchase additional shares is exercised in full, based on an initial
public offering price of $21.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. We
currently expect to use the net proceeds primarily for general corporate
purposes, including working capital. In addition, although we have no present
commitments or agreements with respect to any acquisitions, we may use a
portion of the net proceeds for further development of our product lines
through acquisitions of products, technologies and businesses. We will have
significant discretion in applying the net proceeds of this offering. Prior to
these uses, we will invest the net proceeds in short-term, investment grade,
interest-bearing securities.
DIVIDEND POLICY
Our policy is to retain earnings to provide funds for the operation and
expansion of our business and, accordingly, we have never paid cash dividends
on our capital stock. Any payment of future cash dividends and the amounts of
the dividends will depend upon our earnings, financial requirements, and other
factors deemed relevant by our board of directors. In addition, our bank loan
arrangements restrict our ability to pay dividends. We have no plans to pay
dividends in the future. See "Description of Capital Stock--Dividends."
OTHER INFORMATION
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
This prospectus includes estimates regarding the Internet industry. The
estimates that we used were taken or derived from information published by
sources including International Data Corporation, a firm that provides market
and strategic information to the information technology industry. Although we
believe that the estimates we used were generally indicative of the matters for
which we used them, this data is inherently imprecise, and you are cautioned
not to place undue reliance on those estimates.
17
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. our actual capitalization as of September 30, 1999;
. the filing of and amendment to our certificate of incorporation to
provide for authorized capital stock of 75,000,000 shares of common
stock and 5,000,000 shares of undesignated preferred stock, to be
effective upon the closing of the initial public offering;
. our pro forma capitalization, after giving effect to the automatic
conversion of all outstanding shares of preferred stock into 8,788,273
shares of common stock; and
. the pro forma as adjusted capitalization, after giving effect to the
sale of 3,800,000 shares of common stock at an initial public offering
price of $21.00 per share in this offering, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses that we expect to pay in connection with this offering.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes to the consolidated financial statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term portion of debt and capital lease
obligations................................... $ 351 $ 351 $ 351
-------- -------- -------
Stockholders' equity:
Preferred stock, par value $0.0002 per share;
5,000,000 shares authorized, actual
8,788,273 shares issued and outstanding;
none issued or outstanding, pro forma; none
issued or outstanding, pro forma as
adjusted.................................... -- -- --
Common stock, par value $0.0002 per share;
75,000,000 shares authorized, 3,179,411
shares issued and outstanding, actual;
11,967,684 issued and outstanding, pro
forma; 15,767,684 shares issued and
outstanding, pro forma as adjusted ......... -- 2 3
Additional paid-in capital..................... 51,473 51,471 124,713
Stockholders notes receivable ................. (1,912) (1,912) (1,912)
Deferred compensation.......................... (131) (131) (131)
Accumulated deficit............................ (25,408) (25,408) (25,408)
-------- -------- -------
Total stockholders' equity................... 24,022 24,022 97,265
-------- -------- -------
Total capitalization......................... $ 24,373 $ 24,373 $97,616
======== ======== =======
</TABLE>
- --------
The information in the table above excludes:
. options outstanding to purchase an aggregate of 2,204,389 shares of
common stock issued to our employees, directors and consultants under
our stock and option plans and an additional 2,150,419 shares available
for future issuance under these plans;
. options outstanding to purchase an aggregate of 73,028 shares of common
stock issued outside of our stock option plans;
. warrants to purchase an aggregate of 438,152 shares of our common stock;
and
. warrants to purchase an aggregate of 322,045 shares of our preferred
stock of various series.
18
<PAGE>
DILUTION
We calculate pro forma net tangible book value per share by dividing our
net tangible book value (total assets less intangible assets and total
liabilities) by our total number of shares of common stock outstanding,
assuming conversion of all outstanding shares of preferred stock. Our pro forma
net tangible book value as of September 30, 1999 was approximately $20.0
million or $1.67 per share of common stock. Assuming exercise of all
outstanding options and warrants, our pro forma net tangible book value as of
September 30, 1999 was approximately $33.0 million or $2.24 per share of common
stock. After giving effect to the sale of the 3,800,000 shares of common stock
offered by us at an initial public offering price of $21.00 per share (less
estimated underwriting discounts and commissions and expenses we expect to pay
in connection with this offering) and the exercise of all outstanding options
and warrants, our pro forma net tangible book value as of September 30, 1999
would have been $106.3 million or $5.73 per share of common stock. This
represents an immediate increase in net tangible book value of $3.49 per share
to existing stockholders and an immediate dilution of $15.27 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $21.00
Pro forma net tangible book value per share as of September 30,
1999 assuming exercise of all outstanding options and
warrants...................................................... 2.24
Increase per share attributable to new investors................ 3.49
----
Pro forma net tangible book value per share after the offering,
assuming exercise of all outstanding options and warrants..... 5.73
------
Dilution per share to new investors............................. $15.27
======
</TABLE>
The following table shows on a pro forma basis, as of September 30, 1999,
with respect to existing common and preferred stockholders, option and warrant
holders and new investors, the number of shares of common stock and preferred
shares convertible into common stock purchased from us or exercisable pursuant
to stock options or warrants, the total consideration paid to us, and the
average price per share paid to us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders,
including preferred
stockholders........... 11,967,684 64.5% $ 50,331,000 36.8% $4.21
Assumed exercise of
outstanding options and
warrants............... 2,772,814 15.0 13,040,236 9.5 4.70
New investors............ 3,800,000 20.5 73,242,500 53.6 19.27
---------- ----- ------------ -----
Totals................. 18,540,498 100.0% $136,613,736 100.0% $7.37
========== ===== ============ =====
</TABLE>
The information presented with respect to the existing stockholders
excludes the following:
. 2,150,419 shares available for future issuance under our stock and
option plans;
. 264,800 shares issuable upon exercise of a warrant issued to Virgin
Holdings, Inc. in October 1999 at an exercise price equal to the lesser
of $9.00 per share or the offering price to the public in this
offering.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
We were formed in April 1998 to acquire all of the outstanding equity
interests of Preview Software and Portland Software. We completed both of these
mergers on August 5, 1998. In accordance with Accounting Principles Board
Opinion No. 16, we determined the stockholders of Preview Software to be our
controlling stockholders. As a result, we accounted for our merger with Preview
Software as a reorganization under common control with the underlying net
assets recorded by us at historical cost. We accounted for our merger with
Portland Software using the purchase method. Due to the fact that neither our
predecessor nor we were formed prior to October 1995 and activity from October
1995 to December 1995 was not material, no financial data prior to 1996 is
presented. Therefore, the following selected consolidated financial data for
the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999 reflect our operations and those of Preview
Software, and reflect the operations of Portland Software from August 5, 1998.
The financial statements for the years ended December 31, 1996, 1997 and 1998
are derived from our audited financial statements. See "Management's Discussion
and Analysis of Financial Condition." The financial statements for the nine-
month periods ended September 30, 1998 and 1999 and the pro forma financial
statement are derived from unaudited consolidated financial statements. In our
opinion, the unaudited consolidated financial statements have been prepared on
substantially the same basis as the audited consolidated financial statements
and include all adjustments, consisting only of recurring adjustments,
necessary for a fair presentation of the results of operations for these
periods. The pro forma statement of operations data for the year ended December
31, 1998 gives effect to the merger with Portland Software as if this
transaction had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
-------------------------------------- -----------------
Pro Forma
1996 1997 1998 1998 1998 1999
------ ------- -------- ----------- ------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Network transaction
fees................ $ 148 $ 262 $ 435 $ 618 $ 230 $ 1,482
Services.............. -- -- 175 191 23 782
------ ------- -------- -------- ------- --------
Total revenues..... 148 262 610 809 253 2,264
Operating expenses:
Research and
development......... 34 1,016 2,978 4,056 1,857 4,281
Sales and marketing... 172 822 2,915 4,202 2,024 4,350
General and
administrative...... 184 785 3,127 5,179 1,869 3,845
Amortization of
intangibles......... -- -- 866 2,084 347 1,557
Acquired in-process
research and
development......... -- -- 2,091 -- 2,091 --
------ ------- -------- -------- ------- --------
Total operating
expenses......... 390 2,623 11,977 15,521 8,188 14,033
------ ------- -------- -------- ------- --------
Loss from operations.... (242) (2,361) (11,367) (14,712) (7,935) (11,769)
Other income (expense),
net................... -- (19) 91 162 45 249
------ ------- -------- -------- ------- --------
Net loss................ $ (242) $(2,380) $(11,276) $(14,550) $(7,890) $(11,520)
====== ======= ======== ======== ======= ========
Basic and diluted net
loss per share........ $(0.69) $ (6.45) $ (7.55) $ (5.51) $ (7.14) $ (3.95)
====== ======= ======== ======== ======= ========
Shares used in computing
net loss per share.... 350 369 1,494 2,641 1,105 2,920
====== ======= ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1996 1997 1998 1999
---- ------- ------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheets Data:
Cash and cash equivalents................. $ 30 $ 2,489 $ 4,886 $20,551
Working capital (deficit)................. (22) 2,291 3,021 19,821
Total assets.............................. 90 3,122 12,490 29,117
Long-term portion of debt and capital
lease obligations....................... -- 11 435 351
Stockholders' equity...................... -- 2,713 8,006 24,022
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause future results to differ
materially from those projected in the forward-looking statements include, but
are not limited to, those discussed below and elsewhere in this prospectus,
particularly in "Risk Factors."
Overview
We acquired all of the outstanding equity interests of Preview Software and
Portland Software on August 5, 1998. Prior to the acquisitions, Portland
Software developed and licensed infrastructure software applications designed
to enable electronic software distribution among multiple distribution channel
partners. Preview Software developed and licensed electronic software
distribution products that enabled management and enforcement of licensing
rights both prior to and after electronic delivery to end customers. During the
period immediately preceding merger discussions, several key customers
expressed to both companies the desire to license a system that would feature
Portland Software's server software with the capabilities provided by Preview
Software's client software. As a result, the two companies decided to merge and
combine their software and services into a single comprehensive solution. We
were formed in April 1998 to effect this business combination.
In accordance with Accounting Principles Board Opinion No. 16, we
determined that the stockholders of Preview Software were our controlling
stockholders. Accordingly, we accounted for our merger with Preview Software as
a reorganization under common control with the underlying net assets of Preview
Software recorded by us at historical cost. We accounted for our merger with
Portland Software using the purchase method. Therefore, the accompanying
consolidated financial statements reflect our operations and those of Preview
Software for all periods presented and reflect the operations of Portland
Software since August 5, 1998. Due to the impact of purchase accounting and our
short operating history, we believe that the results of operations for the
periods presented are not indicative of future results of operations.
On August 5, 1998, we capitalized $6.0 million in the form of acquired
technology, patents and other intangibles in connection with the Portland
merger. We are amortizing these intangible assets over two to three years, the
estimated useful lives of the related assets. Amortization of intangibles will
result in a charge of approximately $521,000 and $2.1 million on a quarterly
and annual basis, respectively, through August 2000 and approximately $467,000
and $1.9 million on a quarterly and annual basis, respectively, from September
2000 through August 2001.
In October 1999, we issued a warrant to purchase 264,800 shares of common
stock to Virgin Holdings, Inc. at an exercise price per share equal to the
lesser of $9 or the price per share to the public in this offering. These
shares are exercisable as follows: 99,300 shares are currently exercisable;
33,100 shares become exercisable upon achievement of a performance milestone;
and an additional 132,400 shares become exercisable upon achievement of a final
milestone. We expect the first milestone to occur in the first quarter of 2000
and the second to occur at the end of 2000. We will record a non-cash charge in
our statement of operations for the fair value, as determined by the Black-
Scholes valuation model, when the vesting milestones are achieved and the
warrant becomes exercisable for these shares. The charge will be included in
sales and marketing expense and may have a material impact on our results of
operations.
We generally provide rights to use our solution and ongoing customer
support through annual licensing agreements. These agreements typically require
the payment of network transaction fees based on a percentage of the sales
fulfilled using our solution. Prior to the Portland merger, Preview Software's
revenues were typically based on one-time license fees which were recognized
over the term of the license. Currently, our network transaction fees are based
on a percentage of the sales fulfilled using our solution. Our customers
typically commit to minimum network transaction fees that entitle them to
fulfill an agreed amount of sales
21
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during the one-year term of the agreement. Some or all of the minimum network
transaction fees are prepaid upon signing the agreement. We record deferred
revenue related to these fees and recognize them on a straight-line basis over
the license period. To the extent sales fulfilled using our solution exceed the
agreed amount of sales, we recognize incremental network transaction fees. We
will recognize these incremental network transaction fees when the amounts due
are known, which will generally be in the month subsequent to our customers'
sales. Through September 30, 1999, we have not earned any incremental network
transaction fees.
We entered into a three-year agreement with Sony Marketing of Japan in
September 1998 that gives Sony Marketing the exclusive right to use and
sublicense our solution in Japan, including future upgrades, enhancements and
new products. The agreement also provided for training and support through June
1999. We received non-creditable, upfront payments for the license, services
and training to be performed by us. We recorded deferred revenue on these
upfront fees and recognize the license portion as network transaction fees on a
straight-line basis over the three-year term of the agreement. We recognized
the service revenue as work was performed. In addition, beginning April 1999,
Sony Marketing has agreed to pay us network transaction fees based on a
percentage of the revenue it receives from distributing our solution and
providing related services. Sony Marketing committed to pay us annual minimum
network transaction fees. If the network transaction fees paid by Sony
Marketing during the initial annual period are less than the annual minimum
network transactions fees, Sony Marketing must pay us any shortfall. Beginning
April 2000, if network transaction fees are less than a specified target, Sony
Marketing, at its option, may forego its exclusivity rights rather than pay the
shortfall. During the first year of the agreement, we will recognize the annual
minimum network transactions fees over 12 months until we have earned network
transaction fees in excess of these annual minimum network transaction fees. In
subsequent years, we will recognize the network transaction fees as they are
earned.
Service revenues generally consist of consulting, training and integration
fees. We typically bill these services and recognize them as the related
services are performed or when contract milestones are achieved.
Results of Operations
Nine Months Ended September 30, 1999 Compared to September 30, 1998
Revenues. Total revenues were $2.3 million for the nine months ended
September 30, 1999 compared to $253,000 for the nine months ended September 30,
1998.
Network transaction fees were $1.5 million for the nine months ended
September 30, 1999 compared to $230,000 for the nine months ended September 30,
1998. The increase in network transaction fees is the result of increased sales
and marketing efforts subsequent to the Portland merger, including a $457,000
increase with Sony Marketing, our distributor in Japan, and a $100,000 increase
with Ingram Micro, another distributor.
Service revenues were $782,000 for the nine months ended September 30, 1999
compared to $23,000 for the nine months ended September 30, 1998. Approximately
$450,000 of the increase in service revenues was the result of training and
consulting services performed for Sony Marketing and Ingram Micro in connection
with their agreements. The remainder of the increase resulted from increases
with several other customers.
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
were $4.3 million for the nine months ended September 30, 1999 compared to $1.9
million for the nine months ended September 30, 1998. Approximately $2.1
million of the increase in research and development expenses resulted from
increases in personnel and consultants as a result of the Portland merger. We
believe that continued investment in research and development is critical to
attaining our strategic objectives and we expect these expenses to increase in
the future.
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Sales and Marketing. Sales and marketing expenses consist of salaries and
related expenses for personnel engaged in direct sales, partner development,
marketing and field service support, consultant fees, advertising, promotional
materials and trade show exhibit expenses. Sales and marketing expenses were
$4.4 million for the nine months ended September 30, 1999 compared to $2.0
million for the nine months ended September 30, 1998. Approximately $1.5
million of the increase was related to increased head count following the
acquisition of Portland Software. In addition, advertising and other related
costs and travel costs each increased approximately $200,000. We expect sales
and marketing expenses to increase in the future due to planned growth of our
sales and partner development efforts.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, legal, accounting and
administrative personnel, professional services and general corporate expenses.
General and administrative expenses were $3.8 million for the nine months ended
September 30, 1999 compared to $1.9 million for the nine months ended September
30, 1998. Approximately $650,000 of the increase related to increased head
count following the Portland Software merger, approximately $560,000 related to
increased legal costs and approximately $225,000 related to increased
facilities costs. Another $200,000 related to increased depreciation expense
due to the increase fixed asset balance. We expect general and administrative
expenses to increase in the future as we add personnel, incur additional costs
to support continued growth and implement additional internal systems necessary
to support a public company.
Amortization of Intangibles. Amortization of intangibles consists of the
amortization of patent costs and intangibles acquired in connection with the
Portland merger. Amortization of intangibles was $1.6 million for the nine
months ended September 30, 1999 compared to $347,000 for the nine months ended
September 30, 1998. The increase in amortization of intangibles for the nine
months ended September 30, 1999 resulted from the Portland merger which
occurred on August 5, 1998.
Acquired In-Process Research and Development. In 1998, upon consummation of
the Portland merger, we recorded an unusual charge of $2.1 million which
represented acquired in-process research and development. The value assigned to
in-process research and development represented research and development
efforts in process at the acquisition date for which technological feasibility
had not yet been established and which had no alternative future uses. The
significant projects in process at the merger date represented the next version
of Portland Software's ZipLock product, localization of the ZipLock product for
foreign markets, a volume licensing version of the ZipLock product, and the
extension of the ZipLock product into other digital media such as music. The
value was determined by estimating the costs to further develop the acquired
in-process technology into commercially viable products, estimating the
resulting net cash flows from such products, and discounting the net cash flows
back to their present value using a discount rate of 45%. The discount rate
included a factor that took into account the uncertainty surrounding the
successful development of the acquired in-process technology. At the time of
the acquisition, the in-process technology under development was expected to be
commercially viable on dates ranging from late 1998 to 2000. Expenditures to
complete these projects were expected to total approximately $1.0 million.
These estimates are subject to change, given the uncertainties of the
development process, and no assurances can be given that deviations from these
estimates will not occur. Additionally, these projects will require
expenditures for additional research and development after they have reached a
state of technological and commercial feasibility. To date, expenditures and
results have not differed significantly from the forecast assumptions.
Income Taxes. We have incurred net losses since inception for federal and
state tax purposes and have not recognized any tax benefit. We are in a net
deferred tax asset position, which has been fully reserved. We will continue to
provide a valuation allowance for our net deferred tax assets until it becomes
more likely than not, in our assessment, that our net deferred tax assets will
be realized.
Inflation did not have a material impact on the results of operations for
the nine-month periods ended September 30, 1999 and 1998.
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Year Ended December 31, 1998, 1997 and 1996
Revenues. Total revenues were $610,000 in 1998 compared to $262,000 in
1997 and $148,000 in 1996.
Network transaction fees were $435,000 in 1998 compared to $262,000 in 1997
and $148,000 in 1996. The increase in network transaction fees in 1998
compared to 1997 was the result of increased sales and marketing efforts
subsequent to the Portland merger. The increase in network transaction fees in
1997 compared to 1996 was primarily the result of increased sales and
marketing activities.
Service revenues were $175,000 in 1998 and $0 for the years ended December
31, 1997 and 1996. Approximately $121,000 of the increase in service revenues
was a result of training and custom consulting services performed for Sony
Marketing of Japan in 1998 in connection with their agreement.
Two customers, Sony Marketing of Japan and Cybersource, accounted for 45%
and 13%, respectively, of total revenues in 1998. Two customers accounted for
21% and 12%, respectively, of total revenues in 1997. Two customers accounted
for 54% and 20%, respectively, of total revenues in 1996.
Research and Development. Research and development expenses were $3.0
million, $1.0 million and $34,000 in 1998, 1997 and 1996, respectively.
Research and development expenses for 1998 compared to 1997 increased
primarily due to an approximate $1.3 million increase in personnel costs
following the Portland merger. In addition, approximately $300,000 of the
increase was a result of the cost of software used in product development.
Approximately $840,000 of the increase in research and development expenses
for 1997 compared to 1996 was a result of increased personnel costs and
consultant fees, and approximately $100,000 was a result of the cost of
software used in product development.
Sales and Marketing. Sales and marketing expenses were $2.9 million,
$822,000 and $172,000 in 1998, 1997 and 1996, respectively. Sales and
marketing expenses for 1998 compared to 1997 increased primarily due to an
approximate $1.4 million increase in personnel costs following the Portland
merger. In addition, approximately $430,000 resulted from increased
advertising and other related costs and approximately $110,000 related to
increased travel costs. Approximately $320,000 of the increase for 1997
compared to 1996 resulted from increased personnel costs and approximately
$200,000 resulted from increased advertising and other related costs.
General and Administrative. General and administrative expenses were $3.1
million, $785,000 and $184,000 in 1998, 1997 and 1996, respectively. General
and administrative expenses for 1998 increased compared to 1997 primarily due
to an approximate $730,000 increase in personal costs following the Portland
merger. In addition, legal and facilities costs each increased approximately
$300,000. Approximately $195,000 of the increase for 1997 compared to 1996
resulted from increased personnel costs and approximately $250,000 related to
increased legal costs.
Amortization of Intangibles. Amortization of intangibles was $866,000 in
1998 compared to $0 in 1997 and 1996. The increase was related to the Portland
merger in August 1998.
Income Taxes. We have incurred net losses since inception for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
December 31, 1998, we had approximately $15.7 million of federal and state net
operating loss carryforwards to offset against future taxable income. The
federal net operating loss and tax credit carryforwards expire on various
dates through 2018, if not used. The state net operating loss carryforwards
expire on various dates through 2013, if not used. Utilization of net
operating losses and credits is 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.
Inflation did not have a material impact on the results of operations for
1998, 1997 and 1996.
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Quarterly Results of Operations
The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations. The historical data has been
derived from our unaudited consolidated financial statements, and, in our
opinion, 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 historical quarterly information should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses for at least the next two years and possibly longer.
<TABLE>
<CAPTION>
Quarters Ended (unaudited)
---------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Network transaction
fees................. $ 61 $ 50 $ 119 $ 205 $ 295 $ 447 $ 740
Services............... -- -- 23 152 168 311 303
------- ------- ------- ------- ------- ------- -------
Total revenues........ 61 50 142 357 463 758 1,043
Operating expenses:
Research and
development.......... 574 517 766 1,121 1,341 1,413 1,527
Sales and marketing.... 467 512 1,045 891 1,039 1,455 1,856
General and
administrative....... 661 525 683 1,258 1,169 1,205 1,471
Amortization of
intangibles.......... -- -- 347 519 519 519 519
Acquired in-process
research and
development.......... -- -- 2,091 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,702 1,554 4,932 3,789 4,068 4,592 5,373
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,641) (1,504) (4,790) (3,432) (3,605) (3,834) (4,330)
Other income (expense),
net................... 20 15 10 46 27 (24) 246
------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,621) $(1,489) $(4,780) $(3,386) $(3,578) $(3,858) $(4,084)
======= ======= ======= ======= ======= ======= =======
</TABLE>
The increase in revenues for the periods presented primarily resulted from
the recognition of network transaction fees and service fees associated with
execution of agreements with publishers and with Sony Marketing of Japan in
September 1998 and Ingram Micro in June 1999.
Operating expenses have increased primarily as a result of increased
operating activities and personnel. The increase in research and development
expenses over the five quarters ended September 30, 1999 resulted from
increases in personnel, consultant fees and the cost of software used in
product development. The increase in sales and marketing expenses for the
quarter ended September 30, 1998 was due to increases in personnel, increases
in head count following the Portland merger, the Portland merger and rebranding
efforts related to the newly-combined entity. The increase in sales and
marketing expenses during the quarter ended June 30, 1999 was a result of
increases in sales and marketing personnel and increased expenditures on
marketing programs. The increase in general and administrative expenses for the
quarter ended September 30, 1998 related principally to costs associated with
the Portland merger.
The amortization of capitalized intangibles beginning in the third quarter
of 1998 relates to the amortization of intangibles acquired in the Portland
merger. The $2.1 million acquired in-process research and development charge, a
material unusual charge, incurred in the third quarter of 1998, relates to the
Portland merger.
Due to our limited operating history, we are unsure what effect, if any,
the seasonal nature of our customers' business will have on our quarterly
results of operations.
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Liquidity and Capital Resources
Historically, we have funded our operations through the sale of preferred
stock and, to a much lesser degree, our bank credit facility. Through September
30, 1999, we raised cash proceeds of $39.9 million through these privately
placed preferred stock financings and had outstanding borrowings at September
30, 1999, including capital lease commitments, of $704,000. At September 30,
1999, our principal sources of liquidity included $20.6 million in cash and
cash equivalents and available borrowings under the line of credit facility
discussed below.
Through September 30, 1999, we have used the majority of our financing
proceeds to fund operating activities. To a much lesser extent, we have used
the financing proceeds to acquire computer hardware and software used to
support our product development and growing employee base. Expenditures for
property and equipment amounted to $561,000 in 1998 and $524,000 for the nine
months ended September 30, 1999. In the future, we anticipate a substantial
increase in capital expenditures and lease commitments consistent with
anticipated growth in operations and personnel.
In November 1998, we entered into a loan agreement with a bank, which
provides for borrowings under a revolving line of credit of up to $1.0 million,
and borrowing under a term loan. Amounts borrowed under the line of credit and
the term loan bear interest at the bank's prime rate plus 1% (9.25% at
September 30, 1999). Interest is payable monthly on borrowings under the
revolving line of credit and the term loan is payable in 36 equal installments
of $13,000 of principal, plus interest. Borrowings are collateralized by all of
our tangible and intangible assets. As of September 30, 1999, amounts
outstanding under the line of credit were $0, and amounts outstanding under the
term loan were $341,000. Under this agreement, we are required to maintain
compliance with financial covenants regarding minimum tangible net worth,
liquidity coverage and ratio of quick assets to current liabilities minus
deferred revenue. We were in compliance with these financial covenants at
September 30, 1999. The revolving line of credit expired on November 1, 1999
and the term loan matures on November 2, 2001.
Accounts receivable were $2.0 million at September 30, 1999 compared to
$152,000 at December 31, 1998. The increase was primarily attributable to the
execution of new licensing agreements with publishers and Ingram Micro.
Accounts payable were $746,000 at September 30, 1999 compared to $442,000 at
December 31, 1998, primarily as a result of increased business activity.
We believe that the net proceeds of this offering, together with cash on
hand and cash available under our credit facilities, will be sufficient to meet
our working capital needs through at least the next 12 months. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise additional funds through public or private
equity financing or from other sources. Additional financing may not be
available at all or, if available, may not be obtainable on terms favorable to
us. In addition, any additional financing may be dilutive to our stockholders.
If we raise additional funds through the issuance of debt securities, holders
of these securities could have rights, preferences, and privileges senior to
holders of common stock, and the terms of this debt could impose restrictions
on our operations.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with these "year 2000" requirements.
Internal Systems
We are currently assessing the ability of our internal systems to satisfy
the year 2000 requirements and expect to complete the program before November
30, 1999. We have not incurred material costs to date in this process, and
currently do not believe that the cost of additional actions will have a
material effect on our results
26
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of operations or financial condition. Although we currently believe that our
systems satisfy year 2000 requirements in all material respects, our current
systems may contain undetected errors or defects with year 2000 date functions
that may result in material costs. We do not have a specific contingency plan
to handle year 2000 problems if they occur. Based on our assessment to date, we
currently believe that year 2000 costs to us will not exceed $50,000. However,
in a worst case scenario, year 2000 problems could cause us to cease normal
operations for an indefinite period until we are able to repair our internal
systems. Although we are not aware of any material operational issues or costs
associated with preparing our internal systems for the year 2000, we may
experience serious unanticipated negative consequences or material costs caused
by undetected errors or defects in the technology used in our internal systems.
Products
Our products are currently designed and tested to be year 2000 compliant.
By "year 2000 compliant," we mean that the products will operate according to
their published documentation and will record, store, process and present
calendar dates falling on or after January 1, 2000 in the same manner, and with
the same functionality, as they record, store, process and present calendar
dates falling on or before December 31, 1999. We believe that the current
version of our solution is year 2000 compliant.
Prior versions of our solution in current production use by some of our
customers are not year 2000 compliant and must be upgraded prior to December
31, 1999 in order to avoid problems at the rollover to January 1, 2000. We will
complete the upgrade for our customers in the normal course of our customer
support. As a result, we have not incurred and do not expect to incur any
material expenses related to these upgrades. Customers who fail to upgrade our
solution or any other third party software or hardware that is not year 2000
compliant that our solution relies on prior to that time may suffer severe
outages. This may harm our relationships with these customers and may damage
our reputation with other current or prospective customers. It is also possible
that customers with non-year 2000 compliant systems may decide to sue us
because our software was not year 2000 compliant. Although we expect to contest
these claims, the costs of litigation surrounding this issue may be significant
and, in a worst case scenario, year 2000 problems could prevent any
transactions using our solution from taking place until we are able to repair
our solution.
We have asked our key distributors about their readiness for problems
resulting from the year 2000 problem. They have referred us to publicly
available filings which indicate that their systems are largely compliant with
year 2000 requirements, but that a risk exists that their systems may still
fail. If the systems of our key distributors fail, our network transaction fees
generated through these distributors may decline. We cannot predict the costs
we may incur from lost network transaction fees that may result from any
failures of the systems of our key distributors.
We have not independently verified whether any third-party software
encrypted with our solution is year 2000 compliant. We have encouraged users of
our solution to contact third-party vendors to determine the year 2000
compliant status of their products. If third-party software encrypted with our
solution is not year 2000 compliant, our customers' sales may be adversely
affected. As a result, our network transaction fees with these customers may
decline. We cannot predict the costs we may incur from lost network transaction
fees that may result from the sale of non-year 2000 compliant software by our
customers. We have not independently verified whether the components from our
third-party manufacturers are year 2000 compliant. We have warranted in our
license agreements that our solution as delivered by us and without
customization, will be year 2000 compliant provided that the entire system and
supporting products with which our solution is used are also year 2000
compliant. This includes hardware, system software such as the operating system
and database software, and application software, either purchased, contracted,
or created in-house. In addition, our customers may also be concerned about
year 2000 issues or distracted by their own year 2000 compliance programs,
either of which could adversely affect our business.
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Qualitative and Quantitative Disclosures about Market Risks
We develop products in the United States and make agreements with customers
in North America, Europe, and Asia. As a result, our financial results could be
adversely affected by various factors, including foreign currency exchange
rates or weak economic conditions in foreign markets. Network transaction fees
from our European and Asian partners will be primarily denominated in foreign
currencies and generally translated on a monthly basis to U.S. dollars to
determine the amount of fees we are due. As a result, we could be affected
adversely by fluctuations in foreign currency exchange rates.
Our exposure to market risk for changes in interest rates is limited to the
exposure related to our debt instruments and credit facilities which are tied
to market rates. We do not plan to use derivative financial instruments in our
investment portfolio. We plan to ensure the safety and preservation of our
invested principal funds by limiting default risk market risk, and reinvestment
risk. We plan to mitigate default risk by investing in high credit quality
securities.
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BUSINESS
The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those discussed in the forward-looking statements as a result of a variety
of several factors, including those identified in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Overview
We develop and market a solution that enables networks for the electronic
distribution and licensing of digital goods through the Internet. Digital goods
are products such as software, music, images, video and documents that can be
produced, delivered and licensed electronically. Our solution supports direct
and indirect distribution and electronically connects publishers, distributors
and resellers of digital goods within these networks. We earn transaction fees
based on the value of digital goods that are distributed and licensed using our
solution.
Industry Overview
The rapid growth of Internet users, content and functionality is enabling
complex business-to-business and business-to-consumer communications and
commerce. According to International Data Corporation, total worldwide Internet
commerce spending in 1998 was $50.4 billion and is estimated to grow to $1.3
trillion in 2003, representing a compound annual growth rate of 92%. Much of
this spending to date has been for products that were sold over the Internet
and delivered to the end customer in a physical form. As a result, the Internet
has been primarily used as an efficient sales and marketing channel. However,
for digital goods, the Internet can also be an efficient means for electronic
production, distribution and fulfillment. In addition, licensing rights can be
separated from digital content, distributed and managed electronically and
tailored to meet each customer's needs.
The Sale and Distribution of Digital Goods
Digital goods are characterized by two elements: digital content and
associated licensing rights. Both digital content and licenses can be produced,
stored and distributed physically or electronically. Digital goods such as
software programs or music have traditionally been distributed through a
physical distribution chain. The software or music is copied onto physical
media (e.g. floppy disks, CDs, DVDs), inserted into physical packaging (e.g.
cardboard boxes, plastic jewel cases) and physically distributed through a
multi-party distribution chain that eventually delivers the goods to a retail
store or a corporate reseller where they are ultimately purchased by the
customer. We refer to retail stores and corporate resellers collectively as
resellers.
Although the multi-party distribution chain is complex, it delivers
critical value to each of its participants. Content publishers, at one end of
the distribution chain, desire to maximize the number of points of sale for
their products but generally cannot efficiently establish independent
relationships with tens of thousands of resellers. Similarly, resellers, at the
other end of the distribution chain, desire to maximize their product
selection, but generally cannot efficiently work with each publisher
independently and, therefore, value a few key sources for their product
inventory. Distributors link these two ends of the distribution chain by
offering broad product selection through their relationships with publishers
and extensive points of sale through their relationships with resellers.
Aggregating numerous publishers and resellers enables distributors to reduce
the administrative costs and logistical complexity entailed if every vendor had
to establish unique relationships with every existing or potential reseller of
its products.
The distribution chain for digital goods has three common distribution
models: direct, 2-tier and 3-tier. The software industry provides a good
example of how these models work. Many publishers employ all three models
simultaneously to maximize their points of distribution.
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[Chart Appears Here]
Narrative Description of Graphic #1 in body of S-1--1/3 size of total page
This graphic represents the distribution model. This is centered in the middle
of the graphic area. There is a solid bar that represents the Customers.
Directly below this bar is another solid bar that is 75% of the size above.
This represents the Resellers/GEMs. Directly below this bar is another solid
bar that is 75% of the Resellers/GEMs bar. This represents the Distributors.
Directly below this bar is another solid bar the same length as the Customers
bar at the top of the graphic. This represents the Publishers.
There are one way arrows that connect to the various bars. Starting from the
bottom of the graphic-- a solid direct arrow that starts at the Publisher bar
and goes straight to the Customers bar. A solid direct arrow that is 2/3 the
length of the first arrow, that starts at the Publisher bar and goes straight
to the Resellers/GEMs bar. A solid direct arrow that is 1/3 the length of the
first arrow, that starts at the Resellers/GEMs bar and goes straight to the
Customers bar. A solid direct arrow that is 1/3 the length of the first bar
that goes from the Publishers bar to the Distributors bar. A solid direct arrow
of the same 1/3 length that goes straight from the Distributor bar to the
Resellers/GEMs bar. A solid direct arrow of the same 1/3 length that goes
straight from the Resellers/GEMs bar to the Customers bar.
Behind the solid bar and direct arrows are three shadowed shapes. The first is
flush left on the graphic and is the standard shape of an hourglass. It is
widest on the upper and lower surfaces, and comes in slightly at the solid
Distributor bar -- this represents 3-Tier. The second is thin inverted
hourglass shadow that is widest on the upper and lower -surfaces, and comes in
slightly at the solid Resellers/GEMs bar this represents 2-Tier. Lastly, flush
right on the graphic and downward point arrow shape that is wider at the solid
Customer bar and narrow to point at the solid Publisher bar- this represents
Direct. Below the solid Publishers Bar are the words 3-Tier, 2-Tier, and
Direct.
Direct--publishers use direct marketing and sales methods to generate
orders and ship products directly to the customer. The direct model gives
publishers valuable information about customer needs and allows them to control
pricing and quality of service.
2-Tier--publishers establish relationships with resellers who purchase
products directly from the publisher and, in turn, offer them to their
customers. This model is used by publishers to distribute into specific
markets, expanding their market reach.
3-Tier--publishers establish relationships with large distributors such as
Ingram Micro, Merisel and Tech Data who, in turn, establish relationships with
resellers, such as CompUSA and Software Spectrum, who, in turn, sell the
software to end customers. This model is an efficient means for publishers to
reach tens of thousands of large and small resellers through only a few
distributors.
Original equipment manufacturers--original equipment manufacturers
represent a variant of the 2-tier and 3-tier models. Original equipment
manufacturers include prepackaged or bundled software with their equipment to
increase the perceived value of their product offering. Publishers provide
their software to original equipment manufacturers and who distribute their
products, together with the software, directly to their customers in a 2-tier
model or through resellers in a 3-tier model. This model provides publishers
with an effective means to increase unit volume.
The distribution of music and other high volume digital goods is similar to
software distribution in many respects. For example, music labels acquire
rights to recorded works from artists. These labels distribute music in
physical media such as CDs through large retail chains as well as distribution
channels to other resellers. Music is also distributed through clubs, mail
order and other direct sales channels as well as over the Internet.
Limitations of Physical Distribution of Digital Goods and Licenses
In each distribution model, participants in the physical distribution of
digital goods must manage the costs of manufacturing, warehousing and shipping
physical inventory. In addition, the physical distribution process imposes
significant time delays and geographic constraints on the delivery of products
and licenses. These numerous and complex inter-relationships pose challenges to
the timely and accurate sharing of information about customers, products,
configuration, pricing, inventory and order status. Further, limitations on
warehousing, transportation systems and retail shelf space restrict the number
of products that publishers can make available to customers and discourage
distributors from carrying low volume products. Finally, paper-based licenses
are difficult to manage and enforce.
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Electronic Distribution of Digital Goods and Licenses
The Internet provides a foundation for electronic distribution of digital
goods and licenses. International Data Corporation projects that the retail
market for electronic software distribution will increase to $14.9 billion by
2003 from an estimated $351 million in 1998. Electronic distribution of digital
goods and licenses can:
. Reduce costs. Electronic distribution can reduce manufacturing,
packaging, inventory and shipping costs associated with physical media
alternatives. For software distributed electronically, businesses can:
reduce costs incurred managing paper-based licenses; adjust the number
of authorized users easily from a software master license; and improve
asset management through the electronic use reporting. Secure
electronic management of distribution and licensing rights can also
reduce illegal distribution and piracy.
. Increase selling opportunities. Because electronic inventory requires
no physical shelf space, resellers are able to offer a virtually
unlimited number of products. Publishers can deliver new products and
upgrades to distributors and resellers across the globe immediately
upon their release. Resellers and original equipment manufacturers can
expand distribution by providing customers with encrypted digital
content stored on computer hard drives, DVDs or CDs and by allowing
customers to complete the sales process through the subsequent purchase
of a license over the Internet. Publishers can more effectively tailor
licensing fees and licensing options to meet customer needs.
. Facilitate real-time information exchange. Electronic distribution can
provide publishers, distributors and resellers access to sales
information in real time. Our interactive communications agent can
enable the automatic flow of usage and marketing information with
customers, whether or not there is a continuous Internet connection.
Although electronic distribution of digital goods offers many advantages,
many existing systems for the electronic distribution of digital goods displace
and compete with existing distribution channels rather than support them. Some
systems offer insufficient security against improper distribution and piracy.
In addition, most systems provide insufficient real-time information on sales
transactions involving multiple distribution partners. Finally, we believe many
systems offer inadequate means for distributing licenses. For example, many
corporations that use some form of electronic software distribution still
employ manual processes for managing licenses.
We believe that a distributed, scalable and flexible network infrastructure
is required to realize the full potential of electronic distribution. This
electronic network should meet the needs of the direct, 2-tier and 3-tier
distribution models, allowing the participants in these models to maintain
their existing relationships as well as create new ones. In addition,
participants should be allowed to transmit information about customers,
products, configuration, pricing, inventory and order status on a timely and
accurate basis. Finally, this network should secure and control access to
digital products in order to preserve intellectual property rights, protect
against piracy and provide flexible licensing rights.
The Preview Systems Solution
We develop and market infrastructure software that allows our customers to
implement Internet-based networks for the electronic distribution and licensing
of digital goods. Our solution provides publishers, distributors, original
equipment manufacturers, and resellers the ability to implement and maintain
common networks that allows them to conduct business with each other
electronically and seamlessly. Our solution is flexible and compatible with a
diversity of business and technical requirements and provides a common
technical infrastructure that uses the Internet to link participants engaged in
the electronic distribution of digital goods and associated licensing.
Our solution has the following characteristics:
Channel neutral. Our solution is designed to support direct, 2-tier and 3-
tier models for the electronic distribution of digital goods. We do not compete
directly with channel participants but instead can electronically connect them
to one or more of their publisher, distributor or reseller channel partners.
Thus, our solution
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enables rather than limits our customers' business choices and market reach. We
have established relationships with Ingram Micro, the leading worldwide
wholesale distributor of computer-based technology products and services, as
well as several large software publishers such as Macromedia, Mattel, through
The Learning Company and other divisions, and Symantec. We are pursuing similar
relationships in the music industry.
Integrates with existing systems. Our solution supports a variety of
leading hardware and software platforms, including: Microsoft, Sun and Apple
operating systems; BroadVision, Microsoft and Open Market e-commerce systems;
and Microsoft, Oracle and Sybase database management systems. Our solution is
designed to be deployed across large and technically diverse distribution
channels. It provides a common network for electronic distribution and
licensing of digital goods and exchanging information. Our solution can be used
to allow existing e-commerce websites to sell and distribute digital goods
electronically. Finally, customers can implement our solution directly or
outsource operations to a service provider.
Enables many simultaneous distribution methods. Our solution enables
publishers to supply multiple distributors electronically, while simultaneously
selling directly to end customers. Similarly, resellers can connect
electronically to multiple distributors and sell digital goods from each
distributor's inventory of digital goods on a single integrated web site.
Supports multiple licensing models. Our solution separates the delivery of
digital goods from the associated licensing rights, ensuring that access and
use of the digital goods complies with the license terms. For example, digital
goods can be stored in an encrypted format on hard drives of newly purchased
personal computers but cannot be accessed by customers until the associated
license rights are purchased online. Thus, software, music or video content can
be sold without having to actually download the content. Our solution enables a
variety of licensing models, such as selling perpetual licenses prior to
download, granting of limited time trials prior to sale and other licensing
models that may be requested by our customers.
Enables international distribution. We designed our solution to support
global networks. We have localized our client software interfaces in the
following 14 languages: Chinese (simplified and traditional), Dutch, English,
Finnish, French, German, Italian, Japanese, Korean, Norwegian, Portuguese,
Spanish and Swedish. We have obtained export licenses for components of our
solution that use U.S. government regulated encryption technologies. When
required, we have obtained approval to use our encryption systems in other
countries.
Automates communication among network participants. Our solution automates
the flow of digital goods, license rights, distribution rights, inventory
tracking data, branding and other information. Information for each transaction
is automatically transmitted to network participants. This means that a
publisher that uses our solution can automatically receive information in real
time about the sale of its products. Our solution can collect data from
multiple distribution channels as transactions in a single database,
consolidating direct and indirect sales information. In addition, we have
developed an interactive communications agent that can facilitate the flow of
information to and from the end customer.
Secures digital goods and licenses. Our solution uses sophisticated
encryption techniques to maximize the security and integrity of digital goods
and licensing rights in a variety of secure licensing and distribution models.
Our solution provides secure communications between participants, produces
auditable transaction records, controls user access, and in general ensures
that agreed business rules are respected by all parties in the distribution
chain. Our solution can also provide persistent protection to enforce license
rights on an ongoing basis after delivery of software to the end customer. We
use secure protocols for communication among our servers, client and gateway
software modules. We also signed an agreement with Intel to license its content
protection agent system and to incorporate it into our solution for secure
distribution and licensing of digital music.
Scalable. Our solution employs a distributed network architecture. Our
solution is designed to allow customers to support modest transaction volumes
on a single inexpensive computer server and higher transaction volumes on
multiple load balanced servers. Customers that operate high volume e-commerce
web
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sites can deploy our solution on multiple servers to distribute the data and
processing more evenly, creating redundancy to protect against failures.
Strategy
We seek to establish our solution as the de facto standard infrastructure
software for electronic distribution and licensing of digital goods. Key
elements of our strategy are to:
Target and secure the support of leading software publishers and
distributors. We have licensed our solution to Ingram Micro, Macromedia,
Mattel, through The Learning Company and other divisions, and Symantec. We have
worked closely for over two years with large publishers and distributors to
understand and solve their business and technical requirements. We intend to
license our solution to, and as part of that process, work closely with the
publishers and distributors that control the majority of software industry
revenues. Our strategy is to use these customers as reference accounts since
they have the potential to validate our solution in the marketplace, persuading
potential customers to consider our solution.
Expand the number of participants using digital goods networks. We believe
the benefits of digital goods networks increase as a network gains additional
participants. We intend to leverage our customer relationships with leading
publishers and distributors to add more resellers to distribute digital goods
electronically. We are working directly and through third parties with
manufacturers of personal computers, to bundle encrypted digital goods with
their computer products and provide a means for online electronic licensing. We
have licensed our solution to service providers such as NetSales and
ReleaseNow.com which enable publishers to outsource their direct sales and
accelerate their time to market. We intend to license our solution to
additional service providers. We also intend to expand into new geographical
markets. We have a marketing and distribution partnership with Sony Marketing
of Japan. Sony Marketing has licensed our solution to several Japanese
companies. In Europe, we have a number of customers, including Prisma,
Softline, Softway International, Somm.com and TrustMarque International.
Extend our solution into other digital goods markets. To date, we have
focused predominantly on the software market because we believe it is the
largest and most commercialized market for digital goods. As electronic
distribution of other digital goods such as music develops commercially, we
intend to build a presence in these markets. We believe the security,
distribution and piracy concerns of these markets are similar to those of the
software industry and we believe that our solution will allow us to address
these needs successfully. We have an agreement with Intel to incorporate its
content protection agent system into our solution for secure electronic
distribution of digital music. We are currently pursuing relationships with
leading companies in the music industry. In October 1999, we entered into an
agreement with Virgin Holdings, Inc. pursuant to which EMI Recorded Music, an
affiliate of Virgin, selected us as its preferred, first choice technology
provider for the digital distribution of music and agreed to recommend our
solution to EMI's worldwide channel partners. In addition, we intend to
leverage our relationships with customers who have a presence in multiple
markets by offering a convenient means to distribute music and software through
our future integrated solution.
Expand our solution to support volume licensing for
organizations. Organizations frequently acquire software through volume
licenses and require licensing support to adjust the number of authorized
users. Currently, license distribution and management is often a burdensome
manual process for distribution channels. Our solution allows our customers to
automate aspects of the license distribution and management process. We intend
to work with our customers to enhance our volume licensing and software asset
management capabilities.
Enhance our solution with value-added services. As digital goods networks
using our solution grow, we intend to develop value-added services that provide
additional marketing and sales benefits to our customers. We intend to work
with our customers to enhance our solution with our interactive communications
agent to enable software publishers to market and support the needs of their
individual customers.
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Products
We offer a flexible, secure and scalable infrastructure solution for
electronic distribution of digital goods. Our solution is specifically designed
to meet the needs of each participant in the distribution chain. The table
below describes each component of the network and includes product names, and
key features of our solution as well as target users.
<TABLE>
<CAPTION>
Components Key Features Target Users
- --------------------------------------------------------------------------------
<S> <C> <C>
Digital .Publisher
Packaging Encrypts products for digital
(Vbox and distribution and offers several
ZipLock options to protect intellectual
Builder) property and licensing rights
- --------------------------------------------------------------------------------
Inventory and Manages the database .Publisher
License of digital goods, inventory and provides .Distributor
Management secure, automated and reliable
System fulfillment of licenses and products,
(ZipLock records transactions and exchanges
System) information with other servers
- --------------------------------------------------------------------------------
Merchandizing .Publisher
and License Adds digital goods shopping .Reseller
Selling System cart functionality to Internet
(ZipLock storefronts and enables electronic delivery
Gateway) of digital inventory and licenses
- --------------------------------------------------------------------------------
Off-Line Provides a software storefront . Publisher
Storefront using CD, DVD or hard disk .Reseller
(PortableStore) storage media that delivers .Original
encrypted digital goods ready for online equipment
licensing manufacturer
- --------------------------------------------------------------------------------
Rights and Manages the secure download .End customer
Delivery Client and the usage rights of digital goods
(Vbox Client) on the user's computer
- --------------------------------------------------------------------------------
Interactive Monitors software use and hardware .Publisher
Communications configuration, displays targeted .Reseller
Agent messages within the publisher's .End customer
applications and collects customer's responses
</TABLE>
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These components are designed to integrate with the infrastructure of each
network participant and automate the electronic flow of digital goods, license
rights and related information among them. An example is shown in the
following diagram.
Narrative Description of Graphic # 2 in Body of S-1- 1/3 size of total page
Upper left corner are two icon-based visuals. One represents the software
element and the other representing the music element.
There is a Unique Product key reference that is followed by an arrow. This
arrow points to the right and is in the direction of a rectangle. This
rectangle represents the Publisher. In this area is shaded box which is the
graphic representation of the server. Next to this box is a cylinder that
represents the digital inventory. Outside this rectangle to the right is the
title "Digital Packaging Below this title are three sub headings that are
bulleted with small hollow squares: Creation of Digital Good, Secure
Packaging, and Track Sales Information.
There is a two-way arrow that points directly below the Publisher rectangle to
another rectangle that represents the Distributor. Inside this rectangle is a
shaded box as mentioned about that represents the server. Next to this box is
a cylinder that represents the digital inventory. Outside the rectangle to the
right is the title "Digital Inventory & License Management." Below this title
are three sub headings, which are bulleted with small hollow squares: Digital
Inventory Management, Product Delivery, and Audit Trail. In addition, there is
a narrow one way arrow that goes from the Distributor rectangle to the
Customer rectangle referred to below.
There is a two-way arrow that points to another rectangle box that is half the
size in width. It is right justified approximately 45% and under the
Distributor rectangle and represents the Resellers. In this rectangle is one
box which symbolizes the gateway. Outside this rectangle to the right is the
title "Digital Merchandising & Licensing System." Below this title are four
sub headings, which are bulleted with small hollow squares: Delivery of
License, Reseller Branding, Digital Packing Slip, and Shopping Basket. In
addition, there is a narrow one way arrow that goes from the Resellers
rectangle to the Offline Storefront referred to below.
There is a two way arrow chat points to another rectangle box that is the same
size as the Resellers rectangle and represents the Customer. Outside this
rectangle to the right is the title "Hard Disk Delivery." Below this title are
two four sub headings which are bulleted with small hollow squares: Digital
Rights Management and Communications Agent.
Directly below the text placed to the right of the Customer rectangle, reads
the title "Offline Storefront." Below this title are two sub headings which
are bulleted with hollow squares: CD and DVD.
The above diagram reflects only one possible network configuration. Our
solution enables other concurrent technical and business models.
Professional Services
We provide our customers with the support needed to implement and maintain
flexible, scalable and secure networks for the electronic distribution of
digital goods.
Our solution includes the following services:
. Consulting. We offer a range of consulting services, including
installation, customization and integration. We work closely with our
customers to define their unique business needs and provide services to
meet these needs through business analysis and design, project planning
and management, technology analysis, integration and configuration,
testing and change management.
. Customer support. Our technical support services include email and
phone support, remote diagnosis, online support and software updates.
We also offer a premium support program that allows our customers to
contact a support representative 24 hours a day, 7 days a week.
. Education and training. We offer technical training courses to help our
customers implement, customize, use and administer our solution.
We provide limited consulting, training and support as part of our
installation fee and maintenance agreements. We provide additional consulting,
training and premium support, generally on a time-and-materials basis.
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Customers and Strategic Relationships
Our customers and users of our solution consist of software publishers,
distributors, original equipment manufacturers and service providers. Some
companies license our solutions directly from us. Others use our technology
through sublicenses or outsourcing agreements with our customers. The table
below includes a partial list of these companies. Only the entities listed
under "Direct Relationships" below license our solution from us.
<TABLE>
<CAPTION>
Business Type Direct Relationships Indirect Relationships
- ------------------------------------------------------------------------------
<S> <C> <C>
Publishers .Just Systems .Intuit
.Macromedia .INXight
.Mattel .NetObjects
(Broderbund and The Learning Company)
.Symantec
- ------------------------------------------------------------------------------
Service .Chargenow.com
providers .Digital Square
.Vitessa
.NetSales
.ReleaseNow.com
.Scot Crest Group
.Supertracks
.Trustmarque
- ------------------------------------------------------------------------------
Distributors .Ingram Micro .Navarre
.Softway
- ------------------------------------------------------------------------------
Resellers and .Dustin .Beyond.com
original .e-academy.com .Buy.com
equipment .Prisma .Vector
manufacturers .Softline
.Somm.com
</TABLE>
Several leading software publishers have selected our solution to
distribute their products electronically through direct and indirect channels.
Macromedia and Mattel have opted for an in-house model that integrates our
solution with the rest of their e-commerce systems. Symantec and Intuit have
chosen an outsource model and operate our solution through Beyond.com and the
Scot Crest Group, respectively. NetObjects and INXight have chosen NetSales and
ReleaseNow.com as their respective service providers to maintain and operate
our solution to distribute their products. Service providers can also aggregate
inventory from publishers to support direct and indirect sales through large
distributors. NetSales has established an electronic connection to our solution
at Ingram Micro. We have agreed to provide versions of our PortableStore for
distribution of encrypted digital goods for online licensing with selected
personal computers.
We have the following strategic relationships:
Ingram Micro. We have been working with Ingram Micro on electronic software
distribution since August 1998. On June 30, 1999, we signed an agreement with
Ingram Micro to use our solution and to sublicense appropriate components to
Ingram Micro's resellers. The contract grants Ingram Micro a nonexclusive
license to use our solution in exchange for network transaction fees that are
based on a percentage of sales that Ingram Micro fulfills using our solution.
Upon signing the agreement, Ingram Micro committed to minimum network
transaction fees. We will recognize these minimum network transaction fees on a
straight line basis over the one-year term of the agreement. Under the
agreement, we are entitled to additional fees for training, technical support
and maintenance related to Ingram Micro's use of our solution. We anticipate
that revenue from Ingram Micro may represent a significant portion of our
business although there can be no
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assurance in this regard. As of September 30, 1999, Ingram Micro has not yet
commercially deployed our solution and is not obligated to do so under the
agreement. Aside from the minimum network transaction fees, we have not yet
earned or received any network transaction fees from this agreement. The
contract automatically renews for an additional year if neither party
terminates the contract by providing a 45-day advance notice to the other
party.
Sony Marketing of Japan. In September 1998, we signed a three-year
agreement with Sony Marketing of Japan, granting it the exclusive right to use
and sublicense our solution in Japan, including future upgrades, enhancements
and new products. We received a non-creditable, upfront payment for the
license, training and support. Beginning April 1999, Sony Marketing has agreed
to pay us network transaction fees based on a percentage of the revenue it
receives from distributing our solution and providing related services. Sony
Marketing committed to pay us annual minimum network transaction fees. If the
network transaction fees paid by Sony Marketing during the initial annual
period are less than the annual minimum network transaction fees, Sony
Marketing must pay us any shortfall. Beginning April 2000, if network
transaction fees are less than the specified target, Sony Marketing, at its
option, may give up its exclusivity rights rather than pay the shortfall.
During the first year of the agreement, we are recognizing the annual minimum
network transaction fees on a straight line basis over 12 months until we have
earned network transaction fees in excess of the annual minimum network
transaction fees. In subsequent years we will recognize the network transaction
fees as they are earned. The exclusivity under this agreement means that we
cannot compete with Sony Marketing by offering our solution in Japan. This
exclusivity terminates if Sony Marketing provides us with 180-day prior notice
that it desires to offer a competing product. The agreement may be renewed by
Sony Marketing for up to three additional three-year terms upon providing us
prior notice and upon mutual agreement on performance and payment criteria for
such renewal terms.
Sony Marketing of Japan and Ingram Micro each accounted for more than 10%
of our revenues in the nine months ended September 30, 1999. Substantially all
of the revenues we have received from these two parties reflects minimum
network transaction fees and service fees associated with implementing our
solution.
Intel Corporation. In September 1999, we signed a non-exclusive agreement
with Intel Corporation to license Intel's content protection agent system and
to incorporate this technology into our solution. The objective of this
agreement is the development, sales and marketing of our solution for the
digital music market.
Virgin Holdings, Inc. In October 1999, we entered into an agreement with
Virgin Holdings, Inc., pursuant to which EMI Recorded Music, an affiliate of
Virgin, selected us as its preferred, first choice technology provider for the
digital distribution of music and agreed to recommend our solution to EMI's
worldwide channel partners. We and EMI also agreed to cooperate closely to
develop the emerging market for digital music distribution.
Sales and Marketing
We promote and sell our solution to publishers, original equipment
manufacturers, distributors and resellers through our direct sales force in
North America and Europe. In Japan, we promote and sell our solution through
our exclusive relationship with Sony Marketing of Japan. As of September 30,
1999, we had 33 employees in our sales and marketing organization worldwide. We
intend to increase the size of our direct sales force and establish additional
sales offices in the United States and internationally.
We complement our direct sales efforts with our service provider partners
who provide an outsource solution to some publishers and resellers. Service
providers combine our solution with other technology to provide an outsource
electronic commerce service to publishers and resellers of digital goods. These
arrangements allow publishers and resellers to more rapidly offer products for
sale via the Internet or to establish an Internet store without the need to
invest in the technology. As of September 30, 1999 we had relationships with 16
service providers located in nine countries. We intend to establish additional
relationships with service providers and broaden our indirect sales force
through relationships with systems integrators.
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Our marketing efforts are designed to create greater awareness of our
solution and the benefits it affords to publishers, distributors and resellers
of digital goods. We market our solution through targeted activities including
trade shows, conferences, direct mail, electronic marketing and marketing
materials. In addition, we engage in co-marketing activities with our
customers, including production and distribution of co-branded collateral,
joint sponsorship of conferences and public relations.
Technology
We have developed a set of technologies for the establishment of channel
neutral, flexible, scalable and secure networks for the electronic distribution
of digital goods. These technologies include server components, components for
integration with shopping catalogs, databases and web browsers, management and
audit tools. They include tools for encryption of digital goods, and client
software for the reliable delivery of digital goods and management of digital
use rights. They also include agent software for monitoring usage and
personalized marketing.
Our solution employs a distributed server architecture. Our inventory
license and management system is typically operated by large publishers,
service providers and distributors. Servers can be operated by resellers who
can choose to run their own inventory and license management system or simply
integrate into their web site a gateway component connected to a distributor.
Distributors can add additional gateways to support increasing numbers of
connected electronic resellers. Publishers, distributors and resellers, have
real-time control over the management of distribution rights and the issuance
of licenses to end-users. Upon completion of a license transaction by a
reseller, an electronic transaction is automatically recorded in the databases
of the relevant distributor and publisher, creating an audit trail for each
participant in the sale. Thus, immediately following the completion of a
license transaction between a reseller and a customer, the distributor can
directly and electronically deliver the purchased digital goods to the
customer. This distributed architecture of our solution contributes to its
flexibility, security, reliability and scalability.
The architecture of our network separates the issuance of electronic
licenses from the delivery of digital goods. The distributor can provide
electronic delivery directly to all of the customers of its resellers. Our
solution integrates with standard web server technology for which highly
scalable solutions are readily available from third parties. Our solution is
capable of addressing high-bandwidth requirements associated with multiple
simultaneous downloads of large electronic files. Our solution can be deployed
on the Microsoft Windows NT and Sun Solaris operating systems. Customers can
support modest transaction volumes on a single inexpensive computer server
while higher transaction volumes can be supported by multiple load balanced
servers. Our solution can be integrated with industry standard web storefronts
such as Microsoft Site Server. Open Market and BroadVision and databases such
as Microsoft SQL Server, Oracle, and Sybase. Our solution allows our customers
to use their existing web storefronts and databases for processing and storage
of digital goods transactions, as well as to employ customary techniques for
data replication and load management.
Our solution encrypts digital goods using our software tools and records
the encryption key, distribution rights and licensing options in a database. In
addition, each gateway controls the pricing, branding and purchase processes
and communicates securely with servers to initiate the electronic transfer of
digital goods and/or licenses to end customers. Our server has network
administration functions that enable electronic distribution to other networked
servers, and each server can support multiple gateways. Our solution
automatically provides an electronic audit trail with each transaction recorded
on servers in the distributed network.
Our client software allows the end customer's personal computer to
communicate reliably and securely with the network to manage downloads of goods
and licenses. Our client software employs various encryption and tamper
resistant techniques to enforce rights even when the end customer's computer is
not connected to the Internet. In addition, our interactive communications
agent can enable the automatic flow of usage and marketing information with
customers, whether or not there is a continuous Internet connection.
Communications between servers, from gateways to servers, and from client
software to servers and gateways are secured using standard encryption
techniques.
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By employing a distributed architecture and by interfacing with standard
technologies where appropriate, we have designed a highly scalable and robust
network solution to enable secure and automated digital goods commerce and
real-time information flow between multiple business entities. We have also
enabled seamless communication and rights management with customers both when
connected and when disconnected from the Internet.
Competition
The competition for digital goods solutions is strong and evolves quickly.
We expect that competition will intensify, both with respect to existing
competitors as well as with the entry of new competitors into our markets.
Several companies are currently offering, or are expected to offer in the near
future, products or services that compete with our solutions, including: AT&T,
CyberSource, Digital River, IBM, InterTrust, Liquid Audio, Microsoft,
Reciprocal and Xerox.
The primary bases for competition currently include:
. level of acceptance and deployment by publishers, distributors and
resellers;
. convenience and ease of use for customers;
. degree of security, scalability and reliability;
. compatibility with multiple distribution channels;
. price and pricing model;
. support of multiple operating systems;
. level of integration with existing e-commerce infrastructures;
. ability to support multiple licensing models;
. support for several types of digital goods;
. localization for foreign languages; and
. government approval for export of strong encryption techniques.
Intellectual Property
Our success depends in part on our ability to protect our proprietary
rights to the technologies used in our solution. If we do not adequately
protect our proprietary rights, our competitors can use the intellectual
property that we have developed to enhance their products and services, which
would harm our business. We rely on a combination of patents, copyright and
trademark laws, trade secrets, confidentiality provisions and other contractual
provisions to protect our proprietary rights, but these legal means afford only
limited protection.
We are actively seeking patent protection for our intellectual property. We
have 15 patent applications pending with the United States Patent and Trademark
Office.
As of September 30, 1999, two patents were issued and three patents were
allowed by the Patent and Trademark Office based upon our inventions.We pursue
international counterpart patents where appropriate. In addition, in May 1998,
we acquired a United States patent that was issued in 1987.
Despite any measures taken to protect our intellectual property,
unauthorized parties may attempt to copy aspects of our solution or to obtain
and use information that we regard as proprietary. In addition, the laws of
some countries may not protect our proprietary rights as fully as do the laws
of the United States. Thus, the measures we are taking to protect our
proprietary rights in the United States and internationally may not be
adequate. Finally, our competitors may independently develop similar
technologies.
39
<PAGE>
Employees
As of September 30, 1999, we had 96 employees, of which 49 were employed in
research and development, 33 were employed in sales and marketing, and 14 were
employed in administrative positions. In addition, we retain 21 full-time
contractors. Our employees are not represented by a collective bargaining unit.
We have never experienced a work stoppage and believe that our relations with
our employees are good.
Properties
Our principal executive and administrative offices are located in
Cupertino, California where we lease approximately 10,400 square feet. In
addition, we have executive and administrative offices located in Portland,
Oregon, where we lease approximately 17,800 square feet. We have also entered
into a sublease for approximately 3,500 square feet of additional office space
in Cupertino, California. We also maintain a small sales office in the London
metropolitan area. We believe our existing facilities are adequate to meet
current requirements and that additional or substitute space will be available
as needed to accommodate any expansion of operations.
40
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of October 15, 1999
are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------- --- ---------------------------------------------------
<S> <C> <C>
Vincent Pluvinage..... 41 President, Chief Executive Officer and Director
G. Bradford Solso..... 43 Chief Operating Officer and Chief Financial Officer
Jeffrey E. Brown...... 31 Vice President, Professional Services
Michael W. Davison.... 42 Vice President, Operations and Planning
Christopher Dittmer... 40 Vice President, Marketing
Michel A. Floyd....... 41 Vice President, Engineering
Cay S. Horstmann...... 40 Vice President, Chief Technology Officer
Michael J. Pinkman.... 39 Vice President, Worldwide Sales
Frank A. Tycksen,
Jr.................. 36 Vice President and Co-Founder
Edward J. Wholihan.... 39 Vice President, Business Development
Gerard H.
Langeler(2)......... 49 Chairman of the Board of Directors
Bruce R. Bourbon(2)... 58 Director
Donald L. Lucas(1).... 69 Director
Gary E. Rieschel(1)... 43 Director
R. Douglas Rivers(1).. 43 Director
Jo Ann Heidi
Roizen(2)........... 41 Director
</TABLE>
- --------
(1)Member of the audit committee.
(2)Member of the compensation committee.
Vincent Pluvinage, President, Chief Executive Officer and Director, joined
Preview Software in June 1997 and has been with Preview Systems since the
mergers of Preview Software and Portland Software in August 1998. Prior to
joining Preview Software, Dr. Pluvinage led the research and development,
international operations, business development and strategic marketing efforts
for ReSound Corporation, a developer of advanced hearing technologies, where he
held a variety of senior management positions from March 1987 to May 1997. From
June 1985 to March 1987, Dr. Pluvinage was a member of the technical staff at
AT&T Bell Labs, a developer of advanced communication products, and
participated in the spin-off of technologies from AT&T Bell Labs to ReSound.
Dr. Pluvinage completed the Advanced Executive Management program at Stanford
University and holds a Ph.D. degree in Bioengineering from the University of
Michigan and an M.S. degree, summa cum laude, in Applied Physics Engineering
from the Universite Catholique de Louvain in Belgium.
G. Bradford Solso, Chief Operating Officer and Chief Financial Officer,
joined Preview in July 1999. Prior to joining Preview, Mr. Solso was the acting
Chief Financial Officer of Convoy Corporation, a software company, from April
1999 to July 1999. From November 1998 to January 1999, Mr. Solso was the Chief
Financial Officer of Aloha Networks, Inc., an Internet service provider. From
October 1997 to August 1998, Mr. Solso was Vice President and Chief Financial
Officer of iPass, Inc., an Internet service provider. From November 1995 to
August 1997, Mr. Solso was Chief Financial Officer of CATS Software, Inc., a
risk management software company. Prior to 1995, Mr. Solso served for 14 years
at Visa International, a financial services company, in a variety of management
positions, most recently as Senior Vice President, where he was responsible for
all treasury activities including settlement operations, capital markets
activities and risk management. Mr. Solso holds a B.A. degree in Business
Administration from California State University, San Francisco. He is a
certified public accountant.
Jeffrey E. Brown, Vice President, Professional Services, joined Preview in
July 1999. Prior to joining Preview, Mr. Brown was with Andersen Consulting, a
business consulting firm, from November 1991 to July 1999, most recently
serving as a senior manager. From 1996 through 1999, Mr. Brown managed an
Andersen
41
<PAGE>
Consulting Internet solution center, where he was responsible for delivering
large-scale e-commerce solutions for companies. Mr. Brown holds a B.S. degree
in Mathematics from the University of Washington.
Michael W. Davison, Vice President, Operations and Planning joined Preview
Software in March 1998 and has been with Preview Systems since the mergers of
Preview Software and Portland Software in August 1998. Prior to joining Preview
Software, Mr. Davison was the Director of Strategic Marketing at Claris
Corporation, a software company, from 1992 to 1998, where he was responsible
for development and implementation of Claris' online marketing and electronic
commerce strategies. From 1990 to 1992, he served as Imaging Market Manager for
Informix Software, a relational database supplier. Mr. Davison has also held
business development and marketing management positions at several start-up
companies in the technology industry. Mr. Davison was chairman of the Software
Publishers' Association, Electronic Software Distribution committee and a
member of the SPA Internet Section Board. Mr. Davison holds an M.B.A. degree
from Santa Clara University and a B.A. degree in History from the University of
California at Berkeley.
Christopher Dittmer, Vice President, Marketing, joined Preview in May 1999.
From May 1998 to February 1999, he served as Vice President, Worldwide
Marketing and Business Development at CyberStar, a network service provider.
From November 1995 to May 1998, he held a variety of positions at Oracle
Corporation, a software company, most recently as Vice President International
Marketing and Field Support. From June 1991 to February 1995, he served in a
variety of positions at Microsoft Corporation, a software company, most
recently as End User Business Unit Manager at Microsoft Far East Headquarters,
and, prior to that, as Network Business Unit Manager at Microsoft Europe. Mr.
Dittmer holds an M.S. degree in Material Science and Engineering from Stanford
University and a B.S. degree in Physics and a B.A. degree in French and German
from Humboldt State University.
Michel A. Floyd, Vice President, Engineering, joined Preview Software in
August 1997 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Prior to joining Preview
Software, Dr. Floyd was Vice President of Engineering at Optimal Networks, a
developer of network monitoring and analysis tools, from March 1996 to June
1997. From January 1996 to March 1996, Dr. Floyd was Director of Engineering at
Cadence Design Systems, a developer of high-level network simulation tools.
From September 1995 to December 1995, Dr. Floyd was Vice President of
Engineering at Systems & Networks, a developer of network simulation and design
tools. From January 1995 to August 1995, he was Vice President of Engineering
at Covalent, a developer of commercial print management products. From 1994 to
1995, Dr. Floyd was a Manager at Xsoft, a division of Xerox, where he helped
develop an electronic commerce system for commercial printers. Dr. Floyd holds
B.S., M.S., and Sc.D. degrees in Aero-Astro Engineering from the Massachusetts
Institute of Technology.
Cay S. Horstmann, Vice President, Chief Technology Officer, joined Preview
Software in 1997 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Dr. Horstmann is also currently
a Professor of Computer Science at San Jose State University. Prior to joining
Preview Software, Dr. Horstmann was the President of Horstmann Software, a
developer of technical word processing software, from 1986 to 1996. From 1990
to 1996, Dr. Horstmann was active as a consultant and as an instructor for
Technology Exchange/ACM professional training courses. Dr. Horstmann has
authored many books and magazine articles, including columns for C++ Report and
Java Report, as well as the Sun Microsystems Press book "Core Java." He holds a
Ph.D. degree in Mathematics from the University of Michigan, an M.S. degree in
Computer Science from Syracuse University, and a Diploma in Mathematics and
Computer Science from the Christian-Albrechts-University in Kiel, Germany.
Michael J. Pinkman, Vice President, Worldwide Sales, joined Preview in
October 1999. Prior to joining Preview, Mr. Pinkman was Vice President,
Worldwide Sales, at HyCurve, Inc., an Internet start-up company, where he was
responsible for establishing and maintaining the company's sales organization.
From 1990 to 1998, he held a variety of managerial positions at Adobe Systems,
Inc., a software company, most recently as Director of Channel Sales, North
America, where he managed the North American sales organization. Mr. Pinkman
holds a B.A. degree in Business from Lycoming College in Williamsport,
Pennsylvania.
42
<PAGE>
Frank A. Tycksen, Jr., Vice President and Co-Founder, co-founded Portland
Software in 1994 and has been with Preview Systems since the mergers of Preview
Software and Portland Software in August 1998. Prior to joining Portland
Software, Mr. Tycksen was employed by Second Nature Software, a software
company, as Senior Software Engineer from 1992 to 1994. From 1987 to 1994, Mr.
Tycksen was employed by Central Point Software, a software company, as Manager
of Data Recovery Utilities, where he co-authored Central Point Software's PC
Tools utility. Mr. Tycksen holds A.S. and B.S. degrees in Computer Systems
Engineering from the Oregon Institute of Technology.
Edward J. Wholihan, Vice President, Business Development, joined Portland
Software in August 1996 and has been with Preview Systems since the mergers of
Preview Software and Portland Software in August 1998. Prior to joining
Portland Software, he was employed by McKinsey and Company, a management
consulting firm, from 1989 to 1996, where he most recently served as Senior
Engagement Manager, developing and implementing marketing, operational, and
financial strategies. Mr. Wholihan holds an M.B.A. degree from Stanford
University and a B.A. degree in Economics from Yale University.
Gerard H. Langeler has served as Chairman of the Board of Directors of
Preview Systems since the mergers of Preview Software and Portland Software in
August 1998 and, prior to that, served as a director of Portland Software
beginning in 1996. Since 1992, he has been a General Partner with Olympic
Venture Partners, a venture capital investment firm. Prior to joining Olympic
Venture Partners, he was a co-founder of Mentor Graphics Corporation, a
software company, where he served in a number of roles from 1981 to 1992,
including President and Chief Operating Officer. He currently serves as a
director for Vascular Solutions, 800.com, Captivate Networks, and Webridge, all
privately-held companies. Mr. Langeler holds an A.B. degree in Chemistry from
Cornell University and an M.B.A. degree from Harvard Business School.
Bruce R. Bourbon has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Mr. Bourbon
is currently a Managing General Partner of Telos Venture Partners, a venture
capital investment fund, where he has been a general partner since December
1995. From 1994 to 1995, Mr. Bourbon was an independent management consultant.
From 1990 to 1994, he was President and Chief Executive Officer of Vertex
Semiconductor, a high-end ASIC gate arrays company. From 1991 to 1994, Mr.
Bourbon was Vice President of Marketing for Toshiba America, an electronic
component provider. From 1987 to 1990, Mr. Bourbon served as Vice President of
Marketing at Cadence Design Systems, a software company. He holds a B.S. degree
in Electrical Engineering from California State Polytechnic University and an
M.S. degree in Electrical Engineering from University of California, Los
Angeles.
Donald L. Lucas has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Since 1967,
Mr. Lucas has been involved in venture capital activities as a private
individual. Mr. Lucas currently serves as a director for Cadence Design
Systems, Inc., Coulter Pharmaceutical, Inc., Macromedia, Inc., Oracle
Corporation, Transcend Services, Inc. and Tricord Systems, Inc. Mr. Lucas also
serves as a director for several privately held companies. He holds a B.A.
degree in Economics and an M.B.A. degree from Stanford University.
Gary E. Rieschel has served as a director of Preview since July 1999. Mr.
Rieschel is the Executive Managing Director of SOFTBANK Technology Ventures, a
venture fund focused on early stage Internet companies. Since joining SOFTBANK
in January 1996, he has led SOFTBANK's venture capital activities in the United
States. Mr. Rieschel has over fifteen years experience in the high technology
field, including holding executive positions at nCUBE, a provider of broadcast
video, as Vice President Marketing in 1995; Cisco Systems, a provider of a
computer networking products, as Director Worldwide Channels from 1993 to 1994;
Sequent Computer Systems, a computer software company, as Director and General
Manager from 1992 to 1993; and Intel Corporation, a semiconductor and computer
company, from 1979 to 1982. Mr. Rieschel spent over four years in Tokyo as
General Manager of Sequent Computer Systems' Asian operations. He serves as a
director for Message Media, Inc. and Net2Phone, Inc. and is a member of
SOFTBANK's Global Executive
43
<PAGE>
Board. Mr. Rieschel holds a B.A. degree in Biology from Reed College and an
M.B.A. degree from Harvard Business School.
R. Douglas Rivers has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as Chairman of Preview Software beginning in 1996. Dr. Rivers is
Co-founder, President and Chief Executive Officer of InterSurvey, a provider of
Internet-based market research services. Dr. Rivers was a Co-founder and
Partner at Pacific Economics Group, an economic consulting firm, from 1997 to
1998, and a Senior Economist at Arthur Andersen L.L.P., an accounting firm,
from 1992 to 1997. Since 1989, Dr. Rivers has been a Professor of Political
Science at Stanford University and, since 1994, a Senior Fellow at the Hoover
Institution. From 1987 to 1989, Dr. Rivers was an Associate Professor of
Political Science at University of California, Los Angeles. From 1983 to 1987,
Dr. Rivers was an Assistant Professor of Political Science at the California
Institute of Technology. From 1980 to 1983, Dr. Rivers was an Assistant
Professor of Government at Harvard University. Dr. Rivers holds a Ph.D. degree
in Political Science and Economics from Harvard University and a B.A. degree in
Political Science from Columbia University.
Jo Ann Heidi Roizen has served as a director of Preview Systems since the
mergers of Preview Software and Portland Software in August 1998 and, prior to
that, served as a director of Preview Software beginning in 1997. Ms. Roizen is
a venture partner with SOFTBANK Technology Ventures, a venture fund focused on
early stage Internet companies. She also serves as a director for Great Plains
Software and Softbook Press, Inc., both privately held companies. She is also
an advisory board member of Time Domain Corporation, Garage.com and the
Microsoft Silicon Valley Developer Center. Ms. Roizen is also a member of the
Stanford Board of Trustees Nominating Committee. Prior to joining SOFTBANK in
April 1999, Ms. Roizen was Vice President of Worldwide Developer Relations for
Apple Computer, a computer manufacturer, from 1996 to 1997. From 1983 to 1996,
she was CEO of T/Maker Company, a software developer and publisher. Ms. Roizen
is a past president of the Software Publishers' Association and has served as a
Public Governor of the Pacific Exchange. Ms. Roizen holds an A.B. degree in
English and an M.B.A. degree from Stanford University.
There are no family relationships among any of our directors or executive
officers.
Board Composition
Our bylaws currently provide for a board of directors of seven directors.
In accordance with the terms of our amended and restated certificate of
incorporation, effective after the closing of this offering and upon our
qualification as a "listed corporation" pursuant to the California General
Corporation Code, the terms of office of the directors will be divided into
three classes:
. Class I, whose term will expire at the annual meeting of stockholders
to be held in the year 2000 or a special meeting held instead of the
annual meeting;
. Class II, whose term will expire at the annual meeting of stockholders
to be held in the year 2001 or a special meeting held instead of the
annual meeting; and
. Class III, whose term will expire at the annual meeting of stockholders
to be held in the year 2002 or a special meeting held instead of the
annual meeting.
The Class I directors will be: Vincent Pluvinage and Bruce R. Bourbon, the
Class II directors will be Gerard H. Langeler and Gary Rieschel, and the Class
III directors will be Donald L. Lucas, R. Douglas Rivers and Jo Ann Heidi
Roizen. At each annual meeting of stockholders after the initial classification
or special meeting held instead of an annual meeting, the successors to those
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following the
election or special meeting.
In addition, our amended and restated certificate of incorporation provides
that any additional directorships resulting from an increase in the number of
directors will be filled only by the affirmative vote of the directors then in
office, unless otherwise specified by resolution of the board of directors.
Additional
44
<PAGE>
directorships will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Preview, although our directors
may be removed for cause by the affirmative vote of the holders of a majority
of our common stock.
Board Compensation
None of our directors is paid any fee or other compensation for acting as a
director, although directors are reimbursed for reasonable expenses incurred in
attending board or committee meetings. Directors who are also employees are
eligible to participate in our 1998 Stock Option Plan, and, as of this
offering, they will also be eligible to participate in our 1999 Employee Stock
Purchase Plan. Directors who are not employees are eligible to participate in
our 1998 Stock Option Plan and, as of this offering, will also be eligible for
automatic grants and to participate in our 1999 Directors' Stock Option Plan.
See "Stock Plans."
We have entered into indemnification agreements with each member of the
board of directors and certain of our officers providing for the
indemnification of these persons to the fullest extent permitted by law.
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Mr. Lucas, Mr. Rieschel and Dr. Rivers. The
audit committee reviews our financial statements and accounting practices and
makes recommendations to the board regarding the selection of independent
auditors. The compensation committee consists of Mr. Langeler, Mr. Bourbon and
Ms. Roizen. The compensation committee makes recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and administers our employee benefit plans.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee of the board is an
officer or employee of Preview. None of our executive officers serves as a
member of a board of directors or compensation committee of any entity that has
one or more executive officers serving on our compensation committee.
45
<PAGE>
Executive Compensation
The following table sets forth all compensation awarded to, earned by, or
paid to our chief executive officer and each of our other four most highly
compensated executive officers, each of whose total cash compensation exceeded
$100,000 during fiscal year 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------- ------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus Options (#) Compensation
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Vincent Pluvinage........................ $ 162,056 $ 0 150,000 $229
President and Chief Executive Officer
David Gregory Kott....................... 120,000 32,942 117,373 229
Vice President, Sales
Michel A. Floyd.......................... 130,091 0 35,000 201
Vice President, Engineering
Cay S. Horstmann......................... 129,167 0 35,000 201
Vice President, Chief Technology Officer
Frank A. Tycksen, Jr..................... 120,000 0 46,047 204
Vice President and Co-Founder
</TABLE>
The amounts listed under the column entitled "All Other Compensation"
represent term life insurance premiums we paid on behalf of these executive
officers. As of October 15, 1999 Mr. Kott was no longer one of our officers.
46
<PAGE>
Option Grants
The following table shows certain information regarding stock options
granted to each of the executive officers listed in the Summary Compensation
Table during fiscal year 1998. The exercise price of each option granted is
equal to the fair market value of our common stock as determined by our board
of directors on the date of each grant. We did not grant any stock appreciation
rights to these individuals during the year.
The percentage of total options granted is based on a total of 899,585
options to purchase our common stock granted under all option plans in fiscal
year 1998. Potential realizable values are net of exercise price, but before
taxes associated with exercise. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by the Securities and Exchange
Commission. There is no assurance provided to any executive officer or any
other holder of our securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of our common stock appreciates
over the option term, no value will be realized from the option grants.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value At Assumed
--------------------------------------------- Annual Rates of
Number Of Percent Of Stock
Securities Total Options Price Appreciation
Underlying Granted To Exercise For Option Term
Options Employees In Price Per Expiration ---------------------
Name Granted Fiscal Year Share Date 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Vincent Pluvinage....... 150,000 16.7% $2.00 9/10/08 $ 188,668 $ 478,123
David Gregory Kott...... 50,000 5.6 2.00 9/10/08 62,889 159,374
Michel A. Floyd......... 35,000 3.9 2.00 9/10/08 44,023 111,562
Cay S. Horstmann........ 35,000 3.9 2.00 9/10/08 44,023 111,562
Frank A. Tycksen, Jr.... 30,000 3.3 2.00 9/10/08 37,734 95,625
500 0.1 2.00 12/21/08 629 1,594
</TABLE>
All of the stock options granted in fiscal year 1998 to Dr. Pluvinage, Dr.
Floyd, Dr. Horstmann, Mr. Kott and Mr. Tycksen's options for 30,000 shares vest
in monthly installments equal to 2.08% of the total number of shares per month
for 48 months, in any case as long as the respective individual remains an
employee with, consultant to, or director of Preview.
Mr. Tycksen's options for 500 shares vest 25% on December 3, 1999 and 2.08%
of the total each month thereafter as long as Mr. Tycksen remains an employee
with, consultant to, or director of Preview.
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<PAGE>
Aggregate Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option
Values
The following table sets forth the number of shares of common stock
acquired upon the exercise of stock options by each of the executive officers
listed in the Summary Compensation Table during fiscal year 1998, and the
number and value of securities underlying unexercised options held by each of
these individuals as of December 31, 1998. The value realized is based on the
fair market value of the shares on the date of exercise as determined by the
board of directors minus the exercise price. The value of unexercised in-the-
money options is based on a $2.00 per share value, the fair market value as of
December 31, 1998, as determined by the board of directors, minus the exercise
price, multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Value Options at December 31, 1998 at December 31, 1998
Name on Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
---- ----------- -------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C>
Vincent Pluvinage....... 50,000 $25,000 25,000/125,000 $0/$0
David Gregory Kott...... -- -- 19,438/97,934 0/0
Michel A. Floyd......... -- -- 23,697/76,303 27,890/69,609
Cay S. Horstmann........ 15,625 7,813 12,395/69,480 10,937/59,375
Frank A. Tycksen, Jr.... -- -- 7,613/38,434 0/0
</TABLE>
Change of Control and Termination Arrangements
We have entered into arrangements with each of the officers listed in the
Summary Compensation Table which provide them with certain benefits in the
event of a change of control of us and/or termination of the respective
officer's employment with us. A change of control is generally defined as the
acquisition of a majority of our stock or sale of all of our assets.
Under our arrangement with Dr. Pluvinage, in the event of a change of
control, 50% of the unvested options granted to Dr. Pluvinage under the Preview
Software 1997 plan will immediately vest at the time of the change of control.
In addition, if the acquiring company fails to assume or does not provide Dr.
Pluvinage with options of equivalent value, the remaining 50% of the unvested
options will also immediately vest. Moreover, in the event that Dr. Pluvinage
is terminated for any reason other than for cause or his own willful
termination, 50% of his unvested options under the Preview Software 1997 plan
will immediately vest and he will receive a cash amount equal to one year base
salary.
Under our arrangement with Mr. Kott, in the event of a change of control,
as to options to purchase 16,195 shares, 100% of the shares will immediately
vest if Mr. Kott is terminated without cause, required to relocate or
experiences a material reduction in his responsibilities or compensation within
90 days of the change in control. In addition, these shares will immediately
vest in the event of an initial public offering. As to options to purchase
98,587 shares, 50% of these shares will immediately vest if Mr. Kott is
terminated without cause, required to relocate or experiences a material
reduction in his responsibilities or compensation within 90 days of a change of
control. In addition, even if no change of control occurs, 33 1/3% of these
shares will immediately vest if Mr. Kott is terminated without cause, required
to relocate or experiences a material reduction in his responsibilities or
compensation.
Under our arrangements with Messrs. Floyd, Horstmann and Tycksen,
respectively, in the event of a change of control, 50% of certain of their
unvested shares under our stock option plans will become fully vested if within
90 days of the change of control they are terminated without cause or
experience a material reduction in their responsibilities. For Dr. Floyd, this
change of control arrangement applies to options to purchase 100,000 shares of
our common stock. For Dr. Horstmann, this change of control arrangement applies
to options to purchase 97,500 shares of our common stock. For Mr. Tycksen, this
change of control arrangement applies to options to purchase 45,547 shares of
our common stock.
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<PAGE>
Stock Plans
1998 Stock Option Plan. Our 1998 plan provides for the grant of incentive
stock options to employees, including employee directors, and of nonstatutory
stock options to employees, directors (including employee and non-employee
directors) and consultants. The purposes of the 1998 plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. Our board
of directors and stockholders originally adopted and approved the 1998 plan in
July 1998. As of September 30, 1999, the board of directors had authorized an
aggregate of 2,850,000 shares for issuance under the 1998 plan. The 1998 plan,
which was amended by the board of directors in August 1999, provides for, among
other things, an automatic annual increase on the first day of each of our
fiscal years beginning in 2000 and ending in 2008 equal to the lesser of:
. 800,000 shares;
. 3% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. such lesser number of shares as the board of directors determines.
This amendment to the 1998 plan will be submitted for approval by our
stockholders prior to the completion of this offering. The application of these
automatic annual increase provisions will result in a maximum total authorized
pool of 10,050,000 shares. Unless terminated earlier by the board of directors,
the 1998 plan will terminate in July 2008.
As of September 30, 1999, options to purchase 1,483,107 shares of common
stock were outstanding under the 1998 plan at a weighted average exercise price
of $4.93 per share, 16,473 shares had been issued upon exercise of outstanding
options, 1,350,419 shares remained available for future grant, and 2,833,526
shares were reserved for issuance.
The 1998 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options granted under the 1998 plan, including the number of shares
subject to the option, the exercise price, and the vesting and exercisability
of the option and any other conditions to which the option is subject. In no
event, however, may an employee receive awards for more than 1,000,000 shares
under the 1998 plan in any fiscal year. Incentive stock options granted under
the 1998 plan must have an exercise price of at least 100% of the fair market
value of the common stock on the date of grant, and not less than 110% of the
fair market value in the case of incentive stock options granted to an employee
who holds more than 10% of the total voting power of all classes of our stock
or parent or subsidiary's stock. Prior to this offering, nonstatutory stock
options granted under the 1998 plan were required to have an exercise price of
at least 85% of the fair market value of the common stock on the date of grant.
After the date of this offering, the exercise price of nonstatutory stock
options will no longer be subject to these restrictions, although nonstatutory
stock options granted to our Chief Executive Officer and our four other most
highly compensated officers will generally equal at least 100% of the grant
date fair market value if we intend that options to those individuals will
qualify as performance-based compensation under applicable tax law. Payment of
the exercise price may be made in cash or such other consideration as
determined by the administrator.
With respect to options granted under the 1998 plan, the administrator
determines the term of options, which may not exceed 10 years (or 5 years in
the case of an incentive stock option granted to an employee who holds more
than 10% of the total voting power of all classes of our stock or a parent or
subsidiary's stock). Generally, an option granted under the 1998 plan is
nontransferable other than by will or the laws of descent and distribution, and
may be exercised during the lifetime of the optionee only by such optionee.
However, the administrator may, in its discretion, provide for the limited
transferability of nonstatutory stock options granted under the 1998 plan under
certain circumstances. The administrator determines when options become
exercisable. Options granted under the 1998 plan generally become exercisable
at the rate of 25% of the total number of shares subject to the options on the
first anniversary of the vesting commencement date and 1/48 of the total number
of shares subject to the options each month thereafter.
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If we sell all or substantially all of our assets or if we are acquired by
another corporation, each outstanding option may be assumed or an equivalent
award substituted by the successor corporation. However, if the successor
corporation does not agree to such assumption or substitution, the outstanding
options will terminate. The administrator has the authority to amend or
terminate the 1998 plan, but no action may be taken that impairs the rights of
any holder of an outstanding option without the holder's consent. In addition,
we must obtain stockholder approval of amendments to the plan as required by
applicable law.
1999 Executive Stock Option Plan. Our board of directors adopted the 1999
executive plan in October 1999 and our stockholders approved it in December
1999. A total of 862,500 shares of common stock were reserved for issuance
under this plan, of which 862,500 shares will have been granted as of the date
of this offering. The terms of the 1999 executive plan options are similar to
the terms of options issuable under our 1998 plan except that only officers are
eligible to participate in the 1999 plan and the 1999 plan does not provide for
automatic annual increases in the number of shares authorized.
1999 Employee Stock Purchase Plan. Our board of directors adopted the 1999
employee stock purchase plan in August 1999 and our stockholders approved it in
December 1999. A total of 500,000 shares of common stock were reserved for
issuance under the 1999 purchase plan, none of which have been issued as of the
date of this offering. The number of shares authorized and reserved for
issuance under the 1999 purchase plan will be subject to an automatic annual
increase on the first day of each of our fiscal years over the 10-year term of
the plan, equal to the lesser of:
. 400,000 shares;
. 2% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. a lesser number of shares as the board of directors may determine.
The application of these provisions will result in a total pool of a maximum of
4,500,000 shares authorized and reserved. The 1999 purchase plan becomes
effective upon the date of this offering. Unless terminated earlier by the
board of directors, the 1999 purchase plan shall terminate in October 2009.
The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period is expected
to commence on the date of this offering and end on October 31, 2001; the
initial purchase period is expected to begin on the date of this offering and
end on April 30, 2000. The 1999 purchase plan will be administered by the board
of directors or by a committee appointed by the board. Our employees (including
officers and employee directors), and employees of any majority-owned
subsidiary designated by the board, are eligible to participate in the 1999
purchase plan if they are employed by us or any such subsidiary for at least 20
hours per week and more than five months per year. The 1999 purchase plan
permits eligible employees to purchase common stock through payroll deductions,
which in any event may not exceed 20% of an employee's eligible compensation.
The purchase price is equal to the lower of 85% of the fair market value of the
common stock at the beginning of each offering period or at the end of each
purchase period. Employees may end their participation in the 1999 purchase
plan at any time during an offering period, and participation ends
automatically on termination of employment.
An employee cannot be granted an option under the 1999 purchase plan if
immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or stock of our subsidiaries, or if
the option would permit an employee's rights to purchase stock under the 1999
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 2,000 shares of common stock under the 1999
purchase plan in any one purchase period. If the fair market value of the
common stock on a purchase date of an offering period (other than the final
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purchase date) is less than the fair market value at the beginning of the
offering period, each participant in that offering period shall automatically
be withdrawn from the offering period as of the end of the purchase date and
re-enrolled in a new 24 month offering period beginning on the first business
day following the purchase date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 1999
purchase plan will be assumed or an equivalent right substituted by the
successor corporation. However, the board of directors will shorten any ongoing
offering period so that employees' rights to purchase stock under the 1999
purchase plan are exercised prior to the transaction in the event that the
successor corporation refuses to assume each purchase right or to substitute an
equivalent right. The board of directors has the power to amend or terminate
the 1999 purchase plan and to change or terminate offering periods as long as
such action does not adversely affect any outstanding rights to purchase stock
thereunder. However, the board of directors may amend or terminate the 1999
purchase plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
1999 Directors' Stock Option Plan. Our board of directors adopted the 1999
directors' stock option plan in August 1999 and we intend to submit the plan to
our stockholders for approval in October 1999. It will become effective upon
the date of this offering. A total of 300,000 shares of common stock were
reserved for issuance under the 1999 directors' plan. The number of shares
authorized and reserved for issuance under the 1999 directors' plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years over the 10-year term of the plan, equal to the lesser of:
. 150,000 shares;
. 1% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. a lesser number of shares as the board of directors may determine.
The application of these provisions will result in a total pool of a maximum of
1,800,000 shares authorized and reserved for issuance. The directors' plan
provides for the grant of nonstatutory stock options to our non-employee
directors. The directors' plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the board of directors. To the extent they arise, it is expected
that conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which the
director has a personal interest. Unless terminated earlier, the directors'
plan will terminate in October 2009.
The 1999 directors' plan provides that each person who is a non-employee
director upon the completion of this offering will be granted a nonstatutory
stock option to purchase 10,000 shares of common stock and that each person who
becomes a non-employee director after the completion of this offering will be
granted a nonstatutory stock option to purchase 20,000 shares of common stock
on the date on which the individual first becomes a member of our board of
directors. Thereafter, on the date of each annual stockholders' meeting
immediately after which the director is serving on the board, provided that he
or she has served on the board for at least six months prior to the meeting
date, each non-employee director will be granted an option to purchase 10,000
shares of common stock.
All options granted under the 1999 directors' plan will have a term of 10
years and an exercise price equal to the fair market value of the common stock
on the date of grant and will be nontransferable. All options granted under the
directors' plan shall be vested and exercisable in full immediately upon grant
of such option. If a non-employee director ceases to serve as a director for
any reason other than death or disability, he or she may, but only within 90
days after the date he or she ceases to be a director, exercise options granted
under the directors' plan. If he or she does not exercise the option within
such 90-day period, the option shall terminate. If a director's service
terminates as a result of his or her disability or death, or if a director dies
within three months following termination for any reason, the director or his
or her estate will have 12 months after the date of termination or death, as
applicable, to exercise options that were vested as of the date of termination.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each option outstanding under the 1999
directors' plan will be assumed or equivalent options substituted by the
successor corporation, unless the successor corporation does not agree to such
assumption or substitution, in which case the options will terminate upon
consummation of the transaction to the extent not previously
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exercised. In connection with any merger or asset sale, each director holding
options under the directors' plan will have the right to exercise his or her
options immediately before the consummation of the transaction as to all shares
underlying the options. Our board of directors may amend or terminate the 1999
directors' plan as long as the action does not adversely affect any outstanding
option and we obtain stockholder approval for any amendment to the extent
required by applicable law.
Portland Software Amended and Restated 1994 Stock Incentive Plan. In
connection with the merger in August 1998 with Portland Software, we assumed
the outstanding options issued under the Portland Software plan. As of
September 30, 1999, options to purchase 400,727 shares of our common stock were
outstanding under the Portland Software plan at a weighted average exercise
price of $1.43 per share, 134,080 shares had been issued upon exercise of
outstanding options and no shares remained available for future grant. The
terms of the Portland Software options are similar to the terms of options
issuable under our 1998 plan except that in the event of a sale of all or
substantially all of our assets or our merger with or into another corporation,
the vesting of certain options granted under the Portland Software plan may be
accelerated prior to the effective date of the transaction at the discretion of
our board of directors. Options granted under the Portland Software plan remain
outstanding in accordance with their original terms after conversion of the
number of shares and the exercise price per share that resulted from the
merger.
Preview Software 1997 Stock Option Plan. In connection with the merger in
August 1998 with Preview Software, we assumed the outstanding options issued
under the Preview Software 1997 plan. As of September 30, 1999, options to
purchase 140,708 shares of our common stock were outstanding under the Preview
Software 1997 plan at a weighted average exercise price of $.50 per share,
289,062 shares had been issued upon exercise of outstanding options and no
shares remained available for future grant. The terms of the Preview Software
1997 plan options are similar to the terms of options issuable under our 1998
plan except that in the event of a sale of all or substantially all of our
assets or our merger with or into another corporation, if the successor
corporation does not agree to the assumption or substitution of outstanding
options, the vesting of all outstanding options shall be accelerated and the
options shall become fully exercisable prior to the effective date of the
transaction. Options granted under the Preview Software 1997 plan remain
outstanding in accordance with their original terms after conversion of the
number of shares and the exercise price per share that resulted from the
merger.
Preview Software New 1997 Stock Option Plan. In connection with the merger
in August 1998 with Preview Software, we assumed outstanding options issued
under the Preview Software New 1997 plan. As of September 30, 1999, options to
purchase 179,847 shares of our common stock were outstanding under the Preview
Software New 1997 plan at a weighted average exercise price of $.67 per share,
58,768 shares had been issued upon exercise of outstanding options and no
shares remained available for future grant. The terms of the Preview Software
New 1997 plan options are similar to the terms of options issuable under our
1998 plan. Options granted under the Preview Software New 1997 plan remain
outstanding in accordance with their original terms after conversion of the
number of shares and the exercise price per share that resulted from the
merger.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of the individual's fiduciary duties as a director
except for liability for any breach of the director's duty of loyalty to the
company or to its stockholders, for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or for any transaction
from which a director derives an improper personal benefit.
Our bylaws provide that we indemnify our directors and executive officers
and may indemnify our officers, employees and other agents to the full extent
permitted by law. We believe that indemnification under
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our bylaws covers at least negligence on the part of an indemnified party. Our
bylaws also permit us to advance expenses incurred by an indemnified party in
connection with the defense of any action or proceeding arising out of his or
her status or services as a director, officer, employee or other agent for us
upon an undertaking by him or her to repay advances if it is ultimately
determined that he or she is not entitled to indemnification.
We have entered into separate indemnification agreements with each of our
directors and executive officers. These agreements require us to indemnify the
director or executive officer against expenses, including attorney's fees,
judgments, fines and settlement paid by the individual in connection with any
action, suit or proceeding arising out of the individual's status or service as
a Preview director or officer, if the officer or director acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to
Preview's best interests and not unlawful, and to advance expenses incurred by
the director or executive officer in connection with any proceeding against the
officer or director with respect to which the officer or director is entitled
to indemnification by us. We believe that our amended and restated certificate
of incorporation and bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
At present, we are not aware of any pending litigation or proceeding
involving in any of our directors, officers, employees or agents where
indemnification will be required or permitted. Furthermore, we are not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers or persons controlling
Preview, we have been informed that in the opinion of the Securities and
Exchange Commission the indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
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CERTAIN TRANSACTIONS
Private Placements of Securities
Background. Through a series of mergers in August 1998, we became the owner
of all of the capital stock of Preview Software and Portland Software. As a
part of these transactions, all of the previously outstanding shares of common
and preferred stock and options and warrants to purchase capital stock of each
of Preview Software and Portland Software were converted into outstanding
shares of common and preferred stock and options and warrants to purchase
capital stock of Preview Systems. The equity securities of Preview Software and
Portland Software were converted into equity securities of Preview Systems
based on a ratio designed so that the former security holders of Preview
Software and Portland Software would each own approximately 50% of Preview
Systems on a fully-diluted basis.
In April 1998, Preview Software issued and sold 299,401 shares of its
series D preferred stock at a price of $6.68 per share to several investors,
including the following persons or entities:
. 28,839 shares to the Donald L. Lucas Profit Sharing Trust, with whom
Mr. Lucas, one of our directors, is affiliated;
. 18,713 shares to Mr. Rivers, one of our directors and an owner of more
than 5% of our securities;
. 64,522 shares, to Telos Venture Partners, an entity which beneficially
holds more than 5% of our securities and with whom Mr. Bourbon, one of
our directors, is affiliated; and
. 42,879 shares to Teton Capital Company, with whom Mr. Lucas is
affiliated.
In September and October 1998, we issued and sold 1,162,518 shares of our
series F preferred stock at a price of $5.00 to several investors, including
the following persons or entities:
. 14,089 shares to the Donald L. Lucas Profit Sharing Trust;
. 100,000 shares to Olympic Venture Partners, an entity which
beneficially holds more than 5% of our securities and with whom Mr.
Langeler, one of our directors, is affiliated;
. 26,511 shares to Sand Hill Financial Company, with whom Mr. Lucas is
affiliated;
. 144,000 shares to Telos Venture Partners; and
. 47,900 to Teton Capital Company.
In July 1999, we issued and sold 4,312,448 shares of our series G preferred
stock at a price of $6.72 to several investors, including the following persons
or entities:
. 14,881 shares to the Donald L. Lucas Profit Sharing Trust;
. 44,643 shares to Olympic Venture Partners;
. 1,190,476 shares to SOFTBANK Technology entities, entities which
beneficially hold more than 5% of our securities and with which Mr.
Rieschel and Ms. Roizen, two of our directors, are affiliated;
. 37,202 shares to Telos Venture Partners; and
. 892,856 shares to Morgan Guaranty Trust Company of New York, as
Trustee, Investment Manager and/or Agent which beneficially holds more
than 5% of our securities in those capacities.
Since our inception, we have, from time to time, issued and sold shares of
our common stock and granted options to purchase common stock to our employees,
directors and consultants at the then-fair market value of our common stock as
determined by our board of directors on the date of each respective grant or
sale.
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Transactions with Directors and Officers
In September 1998, we provided a guarantee to a $300,000 loan from a
commercial bank to Dr. Pluvinage, our President and Chief Executive Officer. As
of September 30, 1999, this loan remained outstanding. In connection with this
guarantee, Dr. Pluvinage has pledged to us all of his vested shares of our
capital stock.
In July 1999, we sold 125,000 and 150,000 shares of our common stock at a
price of $6.50 to Dr. Pluvinage, our President and Chief Executive Officer, and
Mr. Solso, our Vice President, Chief Financial Officer, respectively. Under the
terms of these sales, we can repurchase a certain number of their shares of
stock if their employment is terminated voluntarily or involuntarily, subject
to a monthly vesting schedule. In addition, we have a right of first refusal to
purchase any or all of their shares if they decide to sell or transfer their
shares. Further, these shares may be subject to a 180 day lock-up period in the
event of an initial public offering upon the request of the underwriters or us.
In connection with these sales, Dr. Pluvinage and Mr. Solso executed full-
recourse promissory notes in the respective amounts of $812,475 and $974,970 in
favor of Preview with annual interest rates of 5.32%. These notes become due
and payable upon the earlier of July 2002 or termination of their employment
with us. Dr. Pluvinage and Mr. Solso have also entered into pledge and security
agreements granting us a security interest in these shares.
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PRINCIPAL STOCKHOLDERS
The table on the next page sets forth information with respect to the
beneficial ownership of the shares of our common stock on a fully-diluted basis
as of September 30, 1999, and as adjusted to reflect the sale of common stock
offered hereby, as to:
. each person (or group of persons) who is known by us to own
beneficially more than 5% of our common stock on a fully-diluted basis;
. each director and each of the executive officers listed on the Summary
Compensation Table; and
. all directors and executive officers of Preview as a group.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes sole or shared voting or investment power over securities
and includes the shares issuable under stock options that are currently
exercisable or exercisable within 60 days of September 30, 1999. Shares
issuable under the stock options currently exercisable or exercisable within 60
days are considered outstanding for computing the percentage of the person
holding the options but are not considered outstanding for any other person.
Consequently, the table on the next page includes information regarding shares
issuable under stock options currently exercisable or exercisable within 60
days of September 30, 1999 for the following persons and in the following
amounts:
<TABLE>
<CAPTION>
Name Shares Subject to Options
- ---- -------------------------
<S> <C>
Vincent Pluvinage..................................... 56,250
Frank A. Tycksen, Jr.................................. 21,055
Cay S. Horstmann...................................... 34,125
David Gregory Kott.................................... 43,691
Michel A. Floyd....................................... 46,750
Jo Ann Heidi Roizen................................... 21,458
</TABLE>
The applicable percentage of shares beneficially owned is based on
11,967,684 shares of common stock outstanding as of September 30, 1999,
assuming conversion of all shares of preferred stock into common stock, and
15,767,684 shares of common stock to be outstanding upon the consummation of
this offering.
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<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
--------------------
Number of Shares Before After
Name and Address of Beneficial Owner(1) Beneficially Owned Offering Offering(2)
- --------------------------------------- ------------------ -------- -----------
<S> <C> <C> <C>
5% Stockholders
SOFTBANK Technology Ventures (3)....... 1,190,476 9.95% 7.55%
333 W. San Carlos St., Suite 1225
San Jose, CA 95110
Morgan Guaranty Trust Company of New
York (4)............................. 892,856 7.46 5.66
as Trustee, Investment Manager and/or
Agent
522 Fifth Avenue
New York, NY 10036
Telos Venture Partners, LP (5)......... 723,262 6.04 4.58
2350 Mission College Boulevard
Suite 1070
Santa Clara, CA 95054
Van Wagoner Capital Management......... 668,155 5.58 4.24
345 California Street, Suite 2450
San Francisco, CA 94104
Olympic Venture Partners and Affiliates
(6)
340 Oswego Point Drive, Suite 200
Lake Oswego, OR 97503................ 604,886 5.02 3.82
Named Executive Officers and Directors
Vincent Pluvinage...................... 456,250 3.79 2.88
Frank A. Tycksen, Jr. (7).............. 140,254 1.17 *
Cay S. Hortsmann....................... 65,297 * *
David Gregory Kott..................... 64,238 * *
Michel A. Floyd........................ 51,932 * *
Jo Ann Heidi Roizen (3)................ 1,211,934 10.11 7.68
Gary Rieschel (3)...................... 1,190,476 9.95 7.55
Bruce R. Bourbon (5)................... 723,262 6.04 4.58
R. Douglas Rivers (8).................. 632,419 5.28 4.01
Gerard H. Langeler (6)................. 604,886 5.02 3.82
Donald L. Lucas (9).................... 483,752 4.04 3.07
All executive officers and directors as
a group
(16 persons) (10)...................... 4,644,357 37.67 28.80
</TABLE>
- --------
* Less than 1%.
(1) Except as otherwise noted, the address of each person listed in the table
is c/o Preview Systems, Inc., 1601 South DeAnza Boulevard, Suite 100,
Cupertino, CA 95014, and the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where
applicable.
(2) Assumes the underwriters do not exercise their over-allotment option.
(3) Mr. Rieschel and Ms. Roizen are general partners of SOFTBANK. Each of
them disclaims beneficial ownership of these shares except to the extent
of his or her pecuniary interest in them.
(4) Consists of:
. 625,000 shares held directly by Whiting & Co. as Nominee for Morgan
Guaranty Trust Company of New York as Trustee of the Commingled Pension
Trust Fund (Multi-Market Special Investment Fund II) of Morgan Guaranty
Trust Company of New York;
. 133,928 shares held directly by Bost & Co. as Nominee for Morgan
Guaranty Trust Company of New York as Investment Manager and Agent for
a private foundation; and
. 133,928 shares held directly by Whiting & Co. as of Nominee for Morgan
Guaranty Trust Company of NY as Trustee of the Multi-Market Special
Investment Trust Fund of Morgan Guaranty Trust Company of New York.
(5) Includes a warrant to purchase 8,789 shares of common stock. Mr. Bourbon
is a Managing Member of Telos Management LLC, the General Partner of
Telos Venture Partners, LP. He disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in the shares.
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<PAGE>
(6) Consists of:
. 510,123 shares held directly and warrants to purchase 72,583 shares of
common stock held by Olympic Venture Partners III, LP; and
. 18,464 shares held directly and warrants to purchase 3,716 shares of
common stock held by OVP III Entrepreneurs Fund.
Mr. Langeler is a General Partner of OVMC III, the General Partner of
Olympic Venture Partners III, LP and OVP III Entrepreneurs Fund. He
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in them.
(7) Includes 7,773 shares held by members of Mr. Tycksen's family.
(8) Includes a warrant to purchase 3,750 shares of common stock. Also includes
8,375 shares over which Dr. Rivers has voting power because of his
capacity as co-trustee of three trusts containing shares of our common
stock, for which he disclaims beneficial ownership.
(9) Consists of:
. 57,601 shares held by the Donald L. Lucas Profit Sharing Trust dated
1/1/84;
. 62,500 shares held directly and a warrant to purchase 5,859 shares of
common stock held by the Donald L. Lucas & Lygia S. Lucas Trust dated
12/3/84;
. 102,792 shares held by Sand Hill Financial Corporation; and
. 255,000 shares held by Teton Capital Company.
Mr. Lucas is the trustee for the Donald L. Lucas Profit Sharing Trust
dated 1/1/84 and the Donald L. Lucas & Lygia S. Lucas Trust dated 12/3/84.
He also is a General Partner of Teton Capital Company and Sand Hill
Financial Corporation. He disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in them.
(10) Includes 265,962 shares exercisable under outstanding stock options
within 60 days of September 30, 1999 and warrants to purchase 94,697
shares of common and preferred stock.
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DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered hereby, our
authorized capital stock will consist of 75,000,000 shares of common stock,
$0.0002 par value per share, and 5,000,000 shares of undesignated preferred
stock, $0.0002 par value per share. All currently designated shares of
preferred stock will be converted into common stock upon the closing of this
offering.
Common Stock
As of September 30, 1999, there were 11,967,684 shares of our common stock
outstanding that were held of record by approximately 190 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio, and assuming no exercise or conversion of outstanding
convertible securities after September 30, 1999. There will be 15,767,684
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise or conversion of outstanding convertible
securities after September 30, 1999) after giving effect to the sale of the
shares of common stock offered hereby.
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 ratably the dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of Preview, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior 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 available to the common stock. All outstanding shares
of common stock are fully paid and non-assessable.
Preferred Stock
Upon the closing of the offering, we will be authorized to issue 5,000,000
shares of undesignated preferred stock. The board of directors will have the
authority to issue the undesignated preferred stock in one or more series and
to determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of undesignated preferred stock and to fix the number of shares
constituting any series and the designation of the series, without any further
vote or action by the stockholders. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of the
company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of common stock. At present, we have no
plans to issue any shares of preferred stock.
Warrants
At September 30, 1999, there were warrants outstanding to purchase an
aggregate of 173,352 shares of common stock at a weighted average exercise
price of $1.50 per share, an aggregate of 25,430 shares of series C preferred
stock at an exercise price of $3.20 per share, an aggregate of 217,233 shares
of series E preferred stock at an exercise price of $12.88 per share, an
aggregate of 2,700 shares of series F preferred stock at an exercise price of
$5.00 per share, and an aggregate of 76,682 shares of series G preferred stock
at an exercise price equal to the price per share of the common stock hereby
offered.
Of these warrants, the warrants to purchase 170,450 shares of common stock
and the warrants to purchase 76,682 shares of series G preferred stock will
expire upon the consummation of this offering if not exercised prior to that
time. The warrants to purchase shares of preferred stock that survive the
closing of this offering will convert into warrants to purchase shares of
common stock on the closing of this offering on a one-to-one basis. Generally,
the warrants contain provisions for the adjustment of the exercise price and
the aggregate number of shares issuable upon the exercise of the warrant under
certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications, consolidations and certain dilutive
issuances of securities at prices below the then existing warrant exercise
price.
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Registration Rights
As of September 30, 1999, the holders of 8,788,273 shares of common stock
(assuming the conversion of all outstanding preferred stock upon completion of
this offering) and the holders of 322,045 shares issuable upon exercise of
warrants, (referred to in this prospectus as registrable securities), or their
transferees are entitled to certain rights with respect to the registration of
the shares under the Securities Act. These rights are provided under the terms
of an agreement between us and the holders of these securities dated July 2,
1999, as amended. Subject to limitations in the agreement, the holders of at
least 30% of the registrable securities may require, on two occasions beginning
six months after the date of this prospectus, that we use our best efforts to
register the registrable securities for public resale if Form S-3 is not
available, provided that the aggregate offering price to the public is at least
$10,000,000. If we register any of our common stock either for our own account
or for the account of other security holders after the date of this prospectus,
the holders of registrable securities are entitled to include their shares of
common stock in that registration, subject to the ability of the underwriters
to limit the number of shares included in the offering. If the holders of
registrable securities are limited in the amount of shares they may sell in an
offering subsequent to this offering, no one is allowed to sell shares other
than us or the holders of registrable securities, if any, requesting
registration. The holders of registrable securities may also require us, not
more than twice in any twelve-month period, to register all or a portion of the
registrable securities on Form S-3 when the use of that form becomes available
to us, provided, among other limitations, that the proposed aggregate selling
price, net of any underwriters' discounts or commissions, is at least
$1,000,000. We will be responsible for paying all registration expenses,
including the reasonable expense of one special counsel of the selling
stockholders, and the holders selling their shares will be responsible for
paying all selling expenses. See "Shares Eligible for Future Sale."
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Provisions of Delaware law and our charter documents could make the
acquisition of Preview and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Preview to negotiate with us first. 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 Preview outweigh the disadvantages of discouraging these
proposals because, among other things, negotiation of these proposals could
result in an improvement of their terms.
We are subject to the provisions of Section 203 of the Delaware law. In
general, the statute 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 that the person became an interested
stockholder unless, subject to exceptions, the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior, did
own, 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of Preview
without further action by the stockholders.
Our amended and restated certificate of incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. In addition, our amended
and restated certificate of incorporation provides that our board of directors
shall be classified, in which the directors are subject to re-election on a
rotating basis rather than every year. The bylaws provide that special meetings
of stockholders can be called only by the board of directors, the Chairman of
the Board or the President. Moreover, the bylaws set forth an advance notice
procedure with regard to the nomination, other than by or at the direction of
the board of directors, of candidates for election as directors and with regard
to business to be brought before a meeting of stockholders. The foregoing
provisions could have the effect of preventing a change in control of Preview
or making removal of management more difficult. These provisions could also
have the effect of decreasing the market price of the common stock, and
delaying, deferring or preventing a change in control of Preview without any
further action by our stockholders.
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<PAGE>
Our stock option and stock purchase plans generally provide for assumption
of the plans or substitution of an equivalent option of a successor corporation
or, alternatively, at the discretion of the board of directors, exercise of
some or all of the stock options, including non-vested options, or acceleration
of vesting of options issued pursuant to stock grants, upon a change of control
or similar event. The board of directors has authority to issue up to 5,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the stockholders. The rights of the holders of the common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock, thereby delaying, deferring or preventing a change in
control of Preview. Furthermore, the preferred stock may have other rights,
including economic rights senior to the common stock, and as a result, the
issuance of the preferred stock could have a material adverse effect on the
market value of the common stock. We have no present plan to issue shares of
preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company. The transfer agent's address and telephone number is
40 Wall Street, New York, New York 10005, (212) 936-5100.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, only a limited number
of shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale. After these restrictions lapse,
sales of substantial amounts of our common stock in the public market could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Based on shares outstanding as of September 30, 1999, upon completion of
this offering, we will have 15,767,684 outstanding shares of common stock. Of
these shares, the 3,800,000 shares sold in the offering (plus any shares issued
upon exercise of the underwriters' overallotment option) and 33,687 shares not
subject to lock-up agreements will be freely tradable without restriction under
the Securities Act, unless purchased by our "affiliates" as that term is
defined in Rule 144 under the Securities Act, which generally includes
officers, directors or 10% stockholders.
The remaining 11,933,997 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of these shares in the
public market, or the availability of such shares for sale, could adversely
affect the market price of our common stock.
Stockholders who hold most of our outstanding shares have entered into
lock-up agreements in which they have agreed that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of our
common stock or any securities exercisable for or convertible into our common
stock owned by them for a period of 180 days after the date of this prospectus
without the prior written consent of BancBoston Robertson Stephens. As a result
of these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, shares subject to
lock-up agreements may not be sold until such agreements expire or are waived
by BancBoston Robertson Stephens. Taking into account the lock-up agreements,
and assuming BancBoston Robertson Stephens does not release stockholders from
these agreements, the following shares will be eligible for sale in the public
market at the following times:
. beginning on the effective date of this prospectus, only the shares
sold in the offering and 33,687 shares not subject to lock-up
agreements will be immediately available for sale in the public market;
. beginning 181 days after the date of this prospectus, approximately
7,047,968 shares will be eligible for sale pursuant to Rules 144,
144(k) and 701; and
. the remaining shares will be eligible for sale pursuant to Rule 144 at
various times thereafter.
Under Rule 144, the number of shares that may be sold by affiliates are
subject to volume restrictions as described below. In general, under Rule 144,
and beginning after the expiration of the lock-up agreements, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares 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:
. one percent of the number of shares of common stock then outstanding
(which will equal approximately 157,676 shares immediately after the
offering); 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 provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have
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<PAGE>
been an affiliate of us at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
The holders of approximately 8,788,273 shares of common stock and warrants
to purchase 322,045 shares of common stock or their transferees are also
entitled to certain rights with respect to registration of their shares of
common stock for offer or sale to the public. If the holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, the sales could have a material adverse effect on
the market price for our common stock.
As a result of the lock-up agreements, all of our employees holding common
stock or stock options may not sell shares acquired upon exercise for 180 days
after the date of this prospectus. Beginning 181 days after the date of this
prospectus, any employee, officer or director of or consultant to us who
purchased shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell shares in reliance on Rule 144 without having to comply
with the holding period, public information, volume limitation or notice
provisions of Rule 144.
We intend to file registration statements under the Securities Act as
promptly as possible after the effective date to register shares to be issued
pursuant to our employee benefit plans. As a result, any options exercised
under our stock plan after the effectiveness of the registration statement will
also be freely tradable in the public market, except that shares held by
affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of September 30, 1999, there were outstanding
options for the purchase of 2,277,417 shares, of which options to purchase
629,914 shares were exercisable. No shares have been issued to date under our
1999 employee stock purchase plan or 1999 directors' plan.
63
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, SoundView Technology Group, Inc. and Fidelity Capital
Markets, a division of National Financial Services Corporation, have severally
agreed with us, subject to the terms and conditions set forth in the
underwriting agreement, to purchase from us the number of shares of common
stock set forth opposite their respective names below. The underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
BancBoston Robertson Stephens Inc. ........................ 1,800,000
Dain Rauscher Wessels...................................... 792,000
SoundView Technology Group, Inc. .......................... 792,000
Fidelity Capital Markets, a division of National Financial
Services Corporation..................................... 216,000
Prudential Securities Incorporated......................... 100,000
Salomon Smith Barney Inc................................... 100,000
---------
Total.................................................... 3,800,000
=========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to dealers at this price less a
concession not in excess of $0.89 per share, of which $0.10 may be reallowed to
other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 570,000 additional shares of common stock at the same price per
share as we will receive for the 3,800,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, subject to conditions, to
purchase approximately the same percentage of the additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the 3,800,000 shares offered hereby. If
purchased, the additional shares will be sold by the underwriters on the same
terms as those on which the 3,800,000 shares are being sold. We will be
obligated, pursuant to the option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover over-
allotments made in connection with the sale of the shares of common stock
offered hereby. If such option is exercised in full, the total public offering
price, underwriting discounts and commissions and proceeds to us will be $91.8
million, $6.4 million and $85.4 million, respectively.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each of our officers and directors and holders of 93%
of our securities have agreed with the representatives for a period of 180 days
after the date of this prospectus, other than bona fide gifts or distributions
to partners or shareholders, not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to,
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock, now owned directly by such holders or with respect
to which they now have the power of disposition, without the prior written
consent of BancBoston Robertson Stephens Inc. However, BancBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to the lock-up agreement.
There are no agreements between
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<PAGE>
the representatives and any of our stockholders providing consent to the sale
of shares prior to the expiration of the period ending 180 days after the date
of this prospectus.
Future Sales. In addition, we have agreed that during the 180 days after
the date of this prospectus, we will not, subject to certain exceptions,
without the prior written consent of BancBoston Robertson Stephens Inc.:
. Consent to the disposition of any shares held by stockholders subject
to lock-up agreements prior to the expiration of the period ending 180
days after the date of this prospectus; or
. Issue, sell, contract to sell or otherwise dispose of any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than the sale of shares
in this offering, the issuance of common stock upon the exercise of
outstanding options or the issuance of options under our existing stock
option and incentive plans.
Listing. Our common stock has been approved for listing on the Nasdaq
National Market under the symbol "PRVW."
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby has been determined through negotiations
between us and the representatives. Among the factors considered in such
negotiations were prevailing market conditions, our financial information,
market valuations of other companies that we and the representatives believe to
be comparable to us, estimates of our business potential, the present state of
our development and other factors deemed relevant.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Exchange Act, certain persons participating
in this offering may engage in transactions, including stabilizing bids,
syndicate covering transactions or the imposition of penalty bids, that may
have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for, or the purchase of, the common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for, or the
purchase of, the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
Directed Share Program. At our request, the underwriters have reserved up
to 290,000 shares of common stock to be issued by us and offered hereby for
sales, at the initial public offering price, to our directors, officers,
employees, business associates and other related persons. Directors and
officers who purchase the reserved shares are subject to resale restrictions
promulgated by the Securities and Exchange Commission. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby. E*OFFERING Corp.
is administering the directed share program.
NASD Compliance. BancBoston Robertson Stephens Inc. acted as the placement
agent for the private placement of our series G preferred stock in July 1999.
In connection with its services as placement agent, BancBoston Robertson
Stephens Inc. received a warrant to purchase an aggregate of 76,682 shares of
our series G preferred stock at an exercise price per share equal to the price
per share of the common stock hereby
65
<PAGE>
offered. BancBoston Robertson Stephens Inc. has executed an irrevocable
exercise notice to exercise its warrant as of immediately prior to the
consummation of this offering. Pursuant to requirements of the National
Association of Securities, Inc., or NASD, BancBoston Roberston Stephens Inc.
has agreed not to sell, transfer or assign any securities underlying the
warrant for one year after the effective date of this offering. In the series G
preferred private placement, Bayview Investors, Ltd., the general partner of
which is BancBoston Robertson Stephens Inc., purchased 37,203 shares of our
series G preferred stock at $6.72 per share. Also in that private placement,
BancBoston Capital, Inc. purchased 148,810 shares of series G preferred stock
for $6.72 per share. BancBoston Capital, Inc. is a wholly-owned subsidiary of
BancBoston Corporation of which BancBoston Robertson Stephens Inc. is a direct
subsidiary. Pursuant to requirements of the NASD, Bayview Investors, Ltd. and
BancBoston Capital, Inc. have agreed not to sell, transfer or assign any
securities acquired by them in our series G preferred stock financing for three
years after the effective date of this offering.
Fidelity. Fidelity has informed us that it is facilitating electronic
distribution of information regarding the offering by posting Rule 134
compliant offering information on a Fidelity web site dedicated to unaffiliated
investment adviser customers. Interested customers must submit conditional
offers to buy to a Fidelity Brokerage Services, Inc. trading desk
representative. Conditional offers to buy from customers are not received,
confirmed or accepted online.
66
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
on for us by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters in connection with this offering will be
passed on for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Attorneys employed with
Venture Law Group and an entity affiliated with Venture Law Group hold an
aggregate of 24,382 shares of our common stock.
EXPERTS
The consolidated financial statements of Preview Systems, Inc. included in
this registration statement as of December 31, 1997 and 1998 and for the three-
year period ended December 31, 1998, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The financial statements of Portland Software, Inc. as of December 31, 1996
and 1997 and for each of the years in the two-year period ended December 31,
1997 have been included in this registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits thereto.
For further information with respect to us and the common stock offered in this
offering, we refer you to the registration statement and to the attached
exhibits. Statements made in this prospectus concerning the contents of any
document referred to in this prospectus are not necessarily complete. With
respect to each document filed as an exhibit to the registration statement, we
refer you to the exhibit for a more complete description of the matter
involved. You may inspect our registration statement and the attached exhibits
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information
about the public reference facilities by calling the Securities and Exchange
Commission at 1-800-SEC-0330. You may obtain copies of all or any part of our
registration statement from the Securities and Exchange Commission upon payment
of prescribed fees. You may also inspect reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission without charge at a web site
maintained by the Securities and Exchange Commission at http://www.sec.gov.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants--Preview Systems, Inc. and
Subsidiaries........................................................... F-2
Preview Systems, Inc. and Subsidiaries Consolidated Balance Sheets,
December 31, 1997 and 1998 and September 30, 1999 (unaudited).......... F-3
Preview Systems, Inc. and Subsidiaries Consolidated Statements of
Operations, Years Ended December 31, 1996, 1997 and 1998 and Nine
Months Ended September 30, 1998 (unaudited) and 1999 (unaudited)....... F-4
Preview Systems, Inc. and Subsidiaries Consolidated Statements of
Stockholders' Equity, Years Ended December 31, 1996, 1997 and 1998 and
Nine Months Ended September 30, 1999 (unaudited)....................... F-5
Preview Systems, Inc. and Subsidiaries Consolidated Statements of Cash
Flows, Years Ended December 31, 1996, 1997 and 1998 and Nine Months
Ended September 30, 1998 (unaudited) and 1999 (unaudited).............. F-6
Preview Systems, Inc. and Subsidiaries, Notes to Financial Statements.... F-7
Independent Auditors' Report--Portland Software, Inc..................... F-25
Portland Software, Inc. Balance Sheets, December 31, 1996 and 1997....... F-26
Portland Software, Inc. Statements of Operations, Years Ended December
31, 1996 and 1997 and Six Months Ended June 30, 1997 (unaudited) and
1998 (unaudited)....................................................... F-27
Portland Software, Inc. Statements of Shareholders' Equity, Years Ended
December 31, 1996 and 1997 and Six Months Ended June 30, 1998
(unaudited)............................................................ F-28
Portland Software, Inc. Statements of Cash Flows, Years Ended December
31, 1996 and 1997 and Six Months Ended June 30, 1997 (unaudited) and
1998 (unaudited)....................................................... F-29
Portland Software, Inc. Notes to Financial Statements.................... F-30
Preview Systems, Inc. and Subsidiaries Pro Forma Consolidated Statement
of Operations, Year Ended December 31, 1998............................ F-40
Preview Systems, Inc. and Subsidiaries Notes to Pro Forma Consolidated
Statement of Operations................................................ F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Preview Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Preview
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Preview Systems, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Portland, Oregon
April 2, 1999, except for Note 12
as to which the date is December 2, 1999
F-2
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 2,489 $ 4,886 $ 20,551
Accounts receivable, net of allowance for
uncollectible accounts of $0, $0, and
$75, respectively......................... 70 152 1,984
Prepaid expenses............................ 130 360 362
Other current assets........................ -- 55 560
------- -------- --------
Total current assets..................... 2,689 5,453 23,457
Property and equipment, net................... 352 820 1,111
Patents, net.................................. -- 922 731
Acquired technology, net...................... -- 3,881 2,738
Other intangible assets, net.................. -- 917 581
Other assets.................................. 81 497 499
------- -------- --------
Total assets............................. $ 3,122 $ 12,490 $ 29,117
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................... $ -- $ 50 $ --
Current portion of long-term debt........... -- 157 157
Current portion of capital lease
obligations............................... 5 134 196
Accounts payable............................ 183 442 746
Accrued liabilities......................... 210 840 975
Deferred revenue............................ -- 809 1,562
------- -------- --------
Total current liabilities................ 398 2,432 3,636
Long-term debt, less current portion.......... -- 302 184
Capital lease obligations, less current
portion..................................... 11 133 167
Deferred revenue, less current portion........ -- 1,268 765
Other liabilities............................. -- 349 343
------- -------- --------
Total liabilities........................ 409 4,484 5,095
Commitments and contingencies (note 6)
Stockholders' equity:
Preferred stock, $0.0002 per share par
value:
Authorized as September 30, 1999
(unaudited)--9,568; issued and
outstanding--2,176, 4,476 and 8,788
(unaudited) shares, respectively;
aggregate liquidation preference of
$5,279, $23,885 and $52,865
(unaudited).............................. -- -- --
Common stock, $0.0002 per share par value:
Authorized--10,506 shares; issued and
outstanding 582, 2,684 and 3,179
(unaudited).............................. -- -- --
Additional paid-in capital.................. 5,520 22,115 51,473
Stockholders notes receivable............... (100) (125) (1,912)
Deferred compensation....................... (95) (96) (131)
Accumulated deficit......................... (2,612) (13,888) (25,408)
------- -------- --------
Total stockholders' equity............... 2,713 8,006 24,022
------- -------- --------
Total liabilities and stockholders'
equity................................. $ 3,122 $ 12,490 $ 29,117
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
------------------------- -----------------
1996 1997 1998 1998 1999
------ ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Network transaction fees....... $ 148 $ 262 $ 435 $ 230 $ 1,482
Services....................... -- -- 175 23 782
------ ------- -------- ------- --------
Total revenues.............. 148 262 610 253 2,264
Operating expenses:
Research and development....... 34 1,016 2,978 1,857 4,281
Sales and marketing............ 172 822 2,915 2,024 4,350
General and administrative..... 184 785 3,127 1,869 3,845
Amortization of intangibles.... -- -- 866 347 1,557
Acquired in-process research
and development.............. -- -- 2,091 2,091 --
------ ------- -------- ------- --------
Total operating expenses.... 390 2,623 11,977 8,188 14,033
------ ------- -------- ------- --------
Loss from operations............. (242) (2,361) (11,367) (7,935) (11,769)
Other income (expense):
Interest expense............... -- (40) (37) (23) (91)
Interest income................ -- 21 123 64 336
Other, net..................... -- -- 5 4 4
------ ------- -------- ------- --------
Total other income
(expense)................. -- (19) 91 45 249
------ ------- -------- ------- --------
Net loss......................... $ (242) $(2,380) $(11,276) $(7,890) $(11,520)
====== ======= ======== ======= ========
Basic and diluted net loss per
share.......................... $(0.69) $ (6.45) $ (7.55) $ (7.14) $ (3.95)
====== ======= ======== ======= ========
Shares used in per share
calculations................... 350 369 1,494 1,105 2,920
====== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Additional Stockholders Total
------------- ------------- Paid-In Notes Deferred Accumulated Stockholders'
Shares Amount Shares Amount Capital Receivable Compensation Deficit Equity
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 (see Note 1)...... -- $-- -- $-- $ 6 $ -- $ -- $ 10 $ 16
Issuance of common
stock to predecessor
entity (Note 1)....... -- -- 350 -- 66 -- -- -- 66
Issuance of Series A
preferred stock at
$1.00 per share....... 160 -- -- -- 160 -- -- -- 160
Net loss............... -- -- -- -- -- -- -- (242) (242)
----- --- ----- --- ------- ------- ----- -------- --------
Balance at December 31,
1996................... 160 -- 350 -- 232 -- -- (232) --
Issuance of Series A
preferred stock at
$1.00 per share....... 414 -- -- -- 413 -- -- -- 413
Issuance of Series B
preferred stock at
$2.00 per share, net
of issuance costs..... 352 -- -- -- 693 -- -- -- 693
Issuance of Series C
preferred stock at
$3.20 per share, net
of issuance costs..... 1,250 -- -- -- 3,916 -- -- -- 3,916
Fair value of Series C
preferred stock
warrants issued....... -- -- -- -- 40 -- -- -- 40
Exercise of common
stock options for
cash.................. -- -- 32 -- 31 -- -- -- 31
Exercise of common
stock options for
notes receivable...... -- -- 200 -- 100 (100) -- -- --
Compensation related to
issuance of stock
options............... -- -- -- -- 95 -- (95) -- --
Net loss............... -- -- -- -- -- -- -- (2,380) (2,380)
----- --- ----- --- ------- ------- ----- -------- --------
Balance at December 31,
1997................... 2,176 -- 582 -- 5,520 (100) (95) (2,612) 2,713
Issuance of Series D
preferred stock at
$6.68 per share, net
of issuance costs..... 299 -- -- -- 1,965 -- -- -- 1,965
Acquisition of Portland
Software, Inc.:
Issuance of Series E
preferred stock...... 838 -- -- -- 4,190 -- -- -- 4,190
Issuance of common
stock................ -- -- 1,929 -- 3,857 -- -- -- 3,857
Issuance of stock
options and
warrants............. -- -- -- -- 732 -- -- -- 732
Issuance of Series F
preferred stock at
$5.00 per share, net
of issuance costs..... 1,163 -- -- -- 5,685 -- -- -- 5,685
Exercise of common
stock options for cash
and notes receivable.. -- -- 118 -- 61 (25) -- -- 36
Issuance of common
stock for patent
rights................ -- -- 55 -- 55 -- -- -- 55
Compensation related to
issuance of stock
options............... -- -- -- -- 50 -- (50) -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 49 -- 49
Net loss............... -- -- -- -- -- -- -- (11,276) (11,276)
----- --- ----- --- ------- ------- ----- -------- --------
Balance at December 31,
1998................... 4,476 -- 2,684 -- 22,115 (125) (96) (13,888) 8,006
Issuance of Series G
preferred stock at
$6.72 per share, net
of issuance costs..... 4,312 -- -- -- 27,027 -- -- -- 27,027
Issuance of common
stock for notes
receivable............ -- -- 275 -- 1,787 (1,787) -- -- --
Exercise of common
stock options and
warrants for cash..... -- -- 220 -- 325 -- -- -- 325
Compensation related to
issuance of stock
options............... -- -- -- -- 221 -- (221) -- --
Amortization of
deferred
compensation.......... -- -- -- -- (2) -- 186 -- 184
Net loss............... -- -- -- -- -- -- -- (11,520) (11,520)
----- --- ----- --- ------- ------- ----- -------- --------
Balance at September 30,
1999 (unaudited)....... 8,788 $-- 3,179 $-- $51,473 $(1,912) $(131) $(25,408) $ 24,022
===== === ===== === ======= ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
------------------------ -----------------
1996 1997 1998 1998 1999
----- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(242) $(2,380) $(11,276) $(7,890) $(11,520)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 1 51 1,420 764 1,903
Other non-cash expenses......... 64 40 135 124 184
Acquired in-process research
and development............... -- -- 2,091 2,091 --
Changes in operating assets and
liabilities:
Related party receivable....... (25) 25 -- -- --
Accounts receivable............ (10) (61) 315 45 (1,832)
Prepaid expenses and other
current assets............... (4) (126) (77) 166 (507)
Other assets................... -- (81) (313) (327) (2)
Accounts payable............... 37 146 171 123 304
Accrued liabilities and other
liabilities.................. 54 176 (120) (312) 129
Deferred revenue............... -- -- 1,729 29 250
----- ------- -------- ------- --------
Net cash used in operating
activities................. (125) (2,210) (5,925) (5,187) (11,091)
Cash flows from investing
activities:
Acquisition of Portland Software,
Inc., net of cash acquired..... -- -- 978 978 --
Shareholder notes receivable..... -- -- (25) (25) --
Purchases of intangibles......... -- -- (200) (200) --
Purchases of property and
equipment...................... (5) (363) (561) (310) (524)
----- ------- -------- ------- --------
Net cash (used in) provided
by investing activities.... (5) (363) 192 443 (524)
Cash flows from financing
activities:
Borrowings under line of credit,
notes payable and long-term
debt........................... -- 271 459 472 1,880
Repayments under line of credit,
notes payable and long-term
debt........................... -- -- (50) -- (868)
Issuance of preferred stock,
net............................ 160 4,730 7,650 6,253 25,847
Issuance of common stock......... -- 32 61 55 325
Proceeds from obligations under
capital leases................. -- -- 108 40 235
Payment of obligations under
capital leases................. -- (1) (98) (60) (139)
----- ------- -------- ------- --------
Net cash provided by
financing activities....... 160 5,032 8,130 6,760 27,280
----- ------- -------- ------- --------
Net increase in cash and cash
equivalents..................... 30 2,459 2,397 2,016 15,665
Cash and cash equivalents:
Beginning of period.............. -- 30 2,489 2,489 4,886
----- ------- -------- ------- --------
End of period.................... $ 30 $ 2,489 $ 4,886 $ 4,505 $ 20,551
===== ======= ======== ======= ========
Supplemental Disclosure of Cash
Flow Information:
Cash paid for interest........... $ -- $ -- $ 53 $ 41 $ 88
Cash paid for income taxes....... -- 1 11 5 20
Supplemental Disclosure of
Significant Non-Cash
Transactions:
Conversion of promissory notes
into preferred stock........... $ -- $ 271 $ -- $ -- $ 1,180
Issuance of common stock pursuant
to notes receivable............ -- 100 -- -- 1,787
Assets acquired in exchange for
note payable and other
obligations.................... -- -- 509 509 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(In thousands, except per share data)
1. Description of Business and Significant Accounting Policies:
The Company
On August 5, 1998, all of the outstanding equity interests of Preview
Software, Inc. ("Preview Software") and Portland Software, Inc. ("Portland
Software") were merged into Preview Systems, Inc. ("the Company" or "Preview").
In accordance with Accounting Principles Board Opinion No. 16, the stockholders
of Preview Software were determined to be the controlling stockholders of the
Company. Accordingly, the merger of Preview Software into the Company was
accounted for as a reorganization under common control with the underlying net
assets recorded by the Company at historical cost. The merger of Portland
Software into the Company was accounted for using the purchase method.
Therefore, the accompanying consolidated financial statements reflect the
operations of Preview Software for all periods presented and reflect the
operations of Portland Software since August 5, 1998.
Preview Software was incorporated on November 22, 1996, in the state of
California. Effective December 1, 1996, Preview Software acquired intellectual
property, engineering information and net assets from Dynasoft Publishing
Corporation, an S corporation with one stockholder ("Dynasoft"). Dynasoft was
incorporated in October 1995. The Company issued 350 shares of common stock to
Dynasoft in exchange for the net assets of Dynasoft which were recorded at the
predecessor's net book value. Preview Software was the successor entity to
Dynasoft and, accordingly, the 1996 financial statements include the activity
of Dynasoft from January 1, 1996 until the transfer date.
Preview Systems is a provider of an Internet-based infrastructure solution
that enables networks for distribution and licensing of digital goods. Through
their infrastructure solution and strategic relationships, the Company links
software publishers and music labels to their channel partners and end-users
worldwide, creating an end-to-end electronic distribution chain that manages
the e-commerce of digital goods and associated licensing rights.
Unaudited Interim Financial Information
All information subsequent to December 31, 1998, except as included in Note
12, is unaudited. In the opinion of management, the unaudited interim financial
statements as of September 30, 1998 and 1999 and for the nine month periods
then ended have been prepared on the same basis as the annual financial
statements and reflect all adjustments that are necessary for the fair
presentation of results for the periods shown. The results of operations for
such periods are not necessarily indicative of the results expected for the
full fiscal year or for any interim period.
Consolidated Statements
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Portland Software and Preview
Software. All significant intercompany transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, the Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. At
December 31, 1997 and 1998, the Company held its cash and cash equivalents in
checking, money market accounts and commercial paper.
F-7
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Restricted Cash
The Company's Chief Executive Officer has a note payable to a bank in the
amount of $300. The Chief Executive Officer has pledged all of his vested
shares of the Company's common stock to the Company in return for its guarantee
of his $300 note payable. The Company has a time deposit in the amount of $300,
as required security by the bank, which is included in other assets in the
accompanying consolidated balance sheets at December 31, 1998. A deposit of $53
related to the Company's facility lease is included in other assets in the
accompanying consolidated balance sheets. See Note 6.
Fair Value of Financial Instruments
The Company's financial instruments consist of accounts receivable,
accounts payable, capital leases, notes payable and long-term debt. For the
periods presented, the fair value of the Company's financial instruments
approximate their carrying value.
Advertising
The Company expenses the costs of advertising when such costs are incurred.
Advertising expense was $27, $152 and $111 for 1996, 1997 and 1998,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. Capitalized leased property is
recorded at the lesser of the present value of minimum lease payments or the
fair value of the leased property.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements
are amortized on the straight-line method over the shorter of the term of the
related lease or the estimated useful life of the asset. The estimated useful
lives of property and equipment are as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Computer equipment and software..................................... three
Furniture and fixtures.............................................. five
Leasehold improvements.............................................. three
Communications hardware............................................. five
</TABLE>
Acquired Technology and Other Intangible Assets
Intangible assets associated with acquisitions are amortized using the
straight-line method over the estimated useful lives of the related assets,
from two to three years. See Note 2. Accumulated amortization related to
acquired technology and other intangible assets was $0 and $848 at December 31,
1997 and 1998, respectively.
F-8
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Patents
Patents are stated at acquisition cost and are amortized using the
straight-line method over three to six years. Accumulated amortization related
to patents was $0 and $130 at December 31, 1997 and 1998, respectively.
Impairment of Long-lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes
criteria for measuring impairment losses of long-lived assets and determining
when such losses should be recognized. An impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition are less than its carrying amount. The Company has
not identified any such impairment losses to date.
Revenue Recognition
The Company generally provides rights to use of their solution and ongoing
customer support (upgrades, enhancements, phone support, patches, etc) through
annual licensing agreements. These agreements typically require the payment of
a transaction fee based on a percentage of value of sales that are fulfilled
utilizing the Company's solution. Customers typically commit to annual minimum
network transaction fees that entitles them to fulfill an agreed amount of
sales during the one-year term of the agreement. Some or all of the minimum
network transaction fees are due upon execution of the agreement. The Company
records deferred revenue and is recognizing the minimum network transaction fee
on a straight-line basis over the license period. To the extent sales fulfilled
using our solution exceed the agreed minimum amount of sales, the Company
recognizes incremental network transaction fees. Through December 31, 1998, no
incremental transaction fees have been earned. In the future, the Company will
record the incremental network transaction fees, if any, when known, which may
be in the month subsequent to the transaction. Prior to the Portland merger,
Preview Software's revenues were typically based on one-time license fees which
were recognized over the term of the license.
Service revenues generally consist of consulting, training and integration
fees. Such services are typically billed separately from the network
transaction fees and are recognized as the related services are performed or
when contract milestones are achieved.
The Company entered into a three-year agreement with Sony Marketing of
Japan (SMOJ) in September 1998 that provided to SMOJ the exclusive right to use
and sublicense the Company's technology in Japan, including certain future
upgrades, enhancements and new products. The agreement also provided for
training and support through June 1999. The Company received upfront payments
for the license and services to be performed by the Company. The Company
recorded deferred revenue on the upfront fees and is recognizing the license
portion on a straight-line basis over the three-year term of the agreement and
the service revenue was recognized as work was performed through June 1999. In
addition, the Company will receive payments from SMOJ based on a percentage of
the dollar value of transactions and services performed by SMOJ or its
sublicenses utilizing the Company's technology. These payments are subject to
annual minimum network transaction fees beginning April 1, 1999. Beginning
April 1, 2000 SMOJ, at its option, may forgo its exclusive rights rather than
pay the annual minimums. During the first year of the agreement, such minimums
will be recognized over 12 months until such minimums are exceeded; at which
time incremental transaction fees will be recognized. In subsequent years,
network transaction fees will be recorded as earned.
Software Development Costs
Development costs related to software products are expensed as incurred
until technological feasibility of the product has been established. Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between
F-9
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
completion of the working model and the point at which the product is ready for
general release have not been significant, and, accordingly, no costs have been
capitalized.
Income Taxes
The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying consolidated statements of
operations. The Company will continue to provide a valuation allowance for its
net deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's net deferred tax assets will be realized.
Comprehensive Income (Loss)
The Company has adopted the accounting treatment prescribed by Financial
Accounting Standards Board SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income
(loss) and its components in financial statements. Comprehensive income (loss),
as defined, includes all changes in equity during a period from non-owner
sources. To date, the Company has not had any transactions that are required to
be reported in comprehensive income (loss).
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." ("APB No. 25") and complies with
the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant between the exercise price of the
instrument granted and the fair value of the underlying stock.
Net Loss per Share
Basic and diluted loss per share are the same for all periods presented
since the Company was in a loss position in all periods.
Potentially dilutive securities that are not included in the diluted net
loss per share calculation because they would be antidilutive are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
---------------- --------------
1996 1997 1998 1998 1999
---- ----- ----- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Stock options and warrants.................. 38 468 2,134 2,052 2,773
Convertible preferred stock................. 160 2,176 4,476 4,171 8,788
--- ----- ----- ------ -------
Total..................................... 198 2,644 6,610 6,223 11,561
=== ===== ===== ====== =======
</TABLE>
Segment Information
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position. The Company operates exclusively in one segment. Substantially all
revenues result from the sale of product licenses and related services. See
Note 9.
F-10
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral.
At December 31, 1997, one customer represented 45% of the total accounts
receivable balance. At December 31, 1998, four customers represented 30%, 26%,
16% and 16%, respectively, of the total accounts receivable balance. At
September 30, 1999, two customers represented 26% and 13%, respectively, of the
total accounts receivable balance.
Recent Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2 ("SOP 98-4"). SOP 98-4 defers for
one year the application of certain provisions of Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"). Different informal and non-
authoritative interpretations of certain provisions of SOP 97-2 have arisen
and, as a result, the AICPA issued SOP 98-9 in December 1998 which is effective
for periods beginning after March 15, 1999. SOP 98-9 extends the effective date
of SOP 98-4 and provides additional interpretive guidance. The Company's
accounting policies comply with SOP 97-2 and the Company does not anticipate
the need for any adjustments once SOP 98-4 becomes effective.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137").
SFAS 137 is an amendment to Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 137
establishes accounting and reporting standards for all derivative instruments.
SFAS 137 is effective for fiscal years beginning after June 15, 2000. The
Company does not currently have any derivative instruments and, accordingly,
does not expect the adoption of SFAS 137 to have an impact on its financial
position or results of operations.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to current year presentation.
2. Acquisition of Portland Software, Inc.:
The Company was formed in April 1998 to acquire all of the outstanding
equity interests of Preview Software and Portland Software. The Company
completed both of these mergers on August 5, 1998. In accordance with
Accounting Principles Board Opinion No. 16, the stockholders of Preview
Software were determined to be the controlling stockholders of the Company.
Accordingly, the merger with Preview Software was accounted for as a
reorganization under common control with the underlying net assets recorded by
the Company at historical cost. The merger with Portland Software was accounted
for using the purchase method. Therefore, the accompanying consolidated
financial statements reflect the operations of Preview Software for all periods
presented and reflect the operations of Portland Software since August 5, 1998.
The Company acquired all of the outstanding stock of Portland Software
through the issuance of 1,929 of its common shares and 838 of its Series E
preferred shares, at estimated fair values of $2.00 per common share and $5.00
per preferred share. Option and warrant holders of Portland Software exchanged
their rights in common and preferred stock of Portland Software for similar
rights in 998 common shares and 218 Series E
F-11
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
preferred shares of the Company. The fair value of these options and warrants
was computed using the Black Scholes valuation model and was included in the
total consideration. Total consideration was approximately $9,217, allocated
as follows:
<TABLE>
<S> <C>
Acquired technology.................................................. $4,453
In-process research and development.................................. 2,091
Other intangible assets.............................................. 1,085
Patents.............................................................. 484
Net tangible assets.................................................. 1,104
------
Total purchase price............................................... $9,217
======
</TABLE>
The acquired technology represented the estimated fair value of Portland
Software's principal product, the ZipLock ESD system, which was being sold in
the marketplace at the date of acquisition. The fair value was determined
based on management's best estimate of the present value of future cash flows
from sales of the ZipLock ESD system. In connection with the merger with
Portland Software, the Company also acquired the ongoing research and
development activities of Portland Software resulting in an unusual pre-tax
charge of $2,091 related to the write off of in-process research and
development costs. The value assigned to in-process research and development
represents research and development efforts in process at the acquisition date
for which technological feasibility had not yet been established and which had
no alternative future uses. The value was determined by estimating the costs
to further develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such products, and
discounting the net cash flows back to their present value using a discount
rate of 45%. The discount rate included a factor that took into account the
uncertainty surrounding the successful development of the acquired in-process
technology. At the time of the acquisition, the in-process technology under
development was expected to be commercially viable on dates ranging from late
1998 to 2000. Expenditures to complete these projects were expected to total
approximately $1.0 million. These estimates are subject to change, given the
uncertainties of the development process, and no assurances can be given that
deviations from these estimates will not occur. Additionally, these projects
will require expenditures for additional research and development after they
have reached a state of technological and commercial feasibility. To date,
expenditures and results have not differed significantly from the forecast
assumptions.
Acquired technology and other intangible assets acquired are being
amortized over two to three years.
The summary unaudited pro forma financial information giving effect to the
merger with Portland Software as if it had occurred at the beginning of 1997
and 1998 were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Revenues.................................................. $ 763 $ 809
Net loss.................................................. (7,370) (14,550)
Net loss per share........................................ (3.21) (5.51)
</TABLE>
The summary unaudited pro forma information does not purport to be
indicative of the results which would actually have been obtained had the
acquisition occurred at the beginning of the periods indicated or which may be
obtained in the future.
F-12
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment:
Property and equipment consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Computer equipment and software............................... $286 $1,107
Furniture and fixtures........................................ 74 195
Leasehold improvements........................................ 11 44
Communications hardware....................................... 33 115
---- ------
Total property and equipment................................ 404 1,461
Less: Accumulated depreciation................................ (52) (641)
---- ------
$352 $ 820
==== ======
</TABLE>
4. Accrued Liabilities:
Accrued liabilities consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Accrued commissions................................................ $ -- $280
Legal fees payable................................................. 42 20
Employee compensation.............................................. 20 242
Consulting fees.................................................... 57 --
Other.............................................................. 91 298
---- ----
$210 $840
==== ====
</TABLE>
5. Borrowings:
In November 1998, the Company entered into a loan agreement with a bank
which provides for borrowings under a revolving line of credit of up to $1,000,
and borrowing under a term loan. Amounts borrowed under the line of credit and
the term loan bear interest at the bank's prime rate plus 1% (8.75% at December
31, 1998). Interest is payable monthly on borrowings under the revolving line
of credit and the term loan is payable in 36 equal installments of $13 of
principal, plus interest. Borrowings are collateralized by all of the tangible
and intangible assets of the Company. At December 31, 1998, amounts outstanding
under the line of credit were $0, and amounts outstanding under the term loan
were $459. Under this agreement, the Company is required to maintain compliance
with certain financial and other covenants including minimum tangible net
worth, liquidity coverage and ratio of quick assets to current liabilities
minus deferred revenue. At December 31, 1998, the Company was in compliance
with all such covenants. The revolving line of credit expires on November 1,
1999 and the term loan matures on November 2, 2001.
Principal payment requirements on the term loan are as follows for the
years ending December 31:
<TABLE>
<S> <C>
1999................................................................ $157
2000................................................................ 157
2001................................................................ 145
----
Total............................................................. $459
====
</TABLE>
On May 28, 1999, the Company entered into various promissory notes with
certain persons for $1,180. Amounts borrowed under the promissory notes bear
interest at 4.9%. The promissory notes were automatically converted into shares
of the Company's Series G Convertible Preferred Stock ("Series G") upon closing
of the financing in July 1999. See Note 12
As of September 30, 1999, the Company's amounts outstanding under the line
of credit were $0, and amounts outstanding under the term loan were $341. At
September 30, 1999, the Company was in compliance with the covenants.
F-13
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Commitments and Contingencies:
The Company leases its facilities under noncancellable operating leases,
which expire through September 2003. The Company also leases equipment under
non-cancellable capital leases with terms expiring through the year 2002.
Future minimum lease payments relating to these agreements are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999...................................................... $ 160 $ 735
2000...................................................... 101 763
2001...................................................... 38 641
2002...................................................... 6 390
2003...................................................... -- 99
----- ------
Total minimum lease payments............................ 305 $2,628
======
Less: Amount representing interest........................ (38)
-----
Present value of minimum lease payments................... 267
Less: Current portion..................................... (134)
-----
Long term portion......................................... $ 133
=====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $3, $111 and $432, respectively. The Company has a $53 deposit
with a bank. The amount is required to be deposited with the bank in accordance
with the terms of the Company's facility lease agreement and will be released
on a pro-rata basis over the term of the lease.
F-14
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity:
Preferred Stock
Series A Convertible Preferred Stock ("Series A"), Series B Convertible
Preferred Stock ("Series B"), Series C Convertible Preferred Stock ("Series
C"), Series D Convertible Preferred Stock ("Series D"), Series E Convertible
Preferred Stock ("Series E") and Series F Convertible Preferred Stock ("Series
F"), consisted of the following, net of issuance costs:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Series A:
Authorized--574
Outstanding--574 shares; liquidation preference of $574... $ 574 $ 574
Series B:
Authorized--352 shares
Outstanding--352 shares; liquidation preference of $705... $ 693 $ 693
Series C:
Authorized--1,276 shares
Outstanding--1,250 shares; liquidation preference of
$4,000.................................................. $3,916 $3,916
Series D:
Authorized--302 shares
Outstanding--299 shares; liquidation preference of
$2,000.................................................. $ -- $1,965
Series E:
Authorized--1,150 shares
Outstanding--838 shares; liquidation preference of
$10,793................................................. $ -- $4,190
Series F:
Authorized--1,600 shares
Outstanding--1,163 shares; liquidation preference of
$5,813.................................................. $ -- $5,685
</TABLE>
The significant rights, restrictions and preferences of the preferred stock
were as follows:
. Each share of preferred stock is convertible, at the right and option
of the stockholder, into such number of fully paid and non-assessable
shares of common stock as is determined by dividing $1.00, $2.00,
$3.20, $6.68, $12.88 and $5.00 for each share of Series A, B, C, D, E,
and F, respectively, by the conversion price at the time in effect for
such shares. Based on this formula, the conversion ratio is currently
one-for-one for all series, subject to adjustment in the event of
stock splits, stock dividends, or the issuance of equity securities
with a per share price lower than that of the Series A, B, C, D, E,
and F.
. Each stockholder of Series A, B, C, D, E, and F is entitled to the
number of votes equal to the number of shares of common stock into
which the preferred stock can be converted. In addition, as long as at
least 312 shares of preferred stock remain outstanding, certain
contemplated actions of the Company must be approved by a majority of
outstanding preferred stock.
. Upon receiving written request from not less than 30% of the holders
of the Series A, B, C, D, E and F that the Company effect any
registration, qualification or compliance with respect to the common
stock which the preferred stock is convertible into with a value equal
to or greater than $10,000, the Company will promptly give written
notice to all other holders and, as soon as practicable, use its best
efforts to effect such registration, qualification or compliance.
F-15
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
. Any entity holding at least 100 preferred shares has the right of
first refusal to purchase its pro rata portion of any new securities
which the Company may propose to sell and issue.
. Each share of Series A, B, C, D, E, and F will automatically convert
into common stock at the then-effective conversion rate in the event
of the closing of an underwritten public offering of the Company's
common stock from which the Company receives aggregate cash proceeds
in excess of $15,000 and prior to which the market capitalization
(assuming the conversion of all preferred stock, the exercise of all
outstanding warrants and options, and the issuance and exercise of all
remaining unissued options under the Company's stockholder-approved
stock option plans) of the Company at the proposed offering price is
at least $200,000, upon the vote of at least a majority of the
preferred stock or when a majority of the outstanding preferred stock
has converted to common stock.
. Each stockholder of Series A, B, C, D, E, and F is entitled to receive
annual dividends at the rates of $0.08, $0.16, $0.288, $0.60, $1.03
and $0.45 per share, respectively, when and if declared by the Board
of Directors, prior to payment of dividends on common stock. Dividends
are non-cumulative, and no dividends have been declared to date.
. In the event of any consolidation or merger of the Company or a sale
of substantially all of the assets of the Company for which the
aggregate proceeds are less than $200,000, holders of preferred stock
will be paid an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88,
and $5.00 per share, plus an amount equal to all declared but unpaid
dividends for each share of Series A, B, C, D, E, and F, respectively.
If the full amount is not available for distribution, amounts shall be
paid out in proportion to the aggregate preferential amounts owed.
Amounts remaining after the full amount has been paid out will be
distributed to the holders of preferred stock and common stock on a
pro rata basis until stockholders of Series A, B, C, D, E and F shall
have received an amount equal to $2.00, $4.00, $6.40, $13.36, $25.76
and $10.00 per share, respectively. Thereafter, any remaining assets
shall be distributed to the holders of common stock on a pro rata
basis.
. In the event of any consolidation or merger of the Company or a sale
of substantially all of the assets of the Company for which the
aggregate proceeds are more than $200,000, holders of preferred stock
will be paid an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88 and
$5.00 per share, plus an amount equal to all declared but unpaid
dividends for each share of Series A, B, C, D, E and F, respectively.
If the full amount is not available for distribution, amounts shall be
paid out in proportion to the aggregate preferential amounts owed.
Amounts remaining after the full amount has been paid out will be
distributed among the holders of common stock on a pro rata basis.
. In the event of any liquidation, dissolution, or winding up of the
Company, either voluntary or involuntary, in which the aggregate
proceeds to be distributed to all stockholders of the Company is equal
to or less than $200,000, each stockholder of Series A, B, C, D, E and
F shall be entitled to receive, prior and in preference to any
distribution of any assets or surplus funds to the holders of common
stock, an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88 and $5.00
per share for each share of Series A, B, C, D, E, and F, respectively
and, in addition, an amount equal to all declared but unpaid dividends
on Series A, B, C, D, E, and F, respectively. If the full amount is
not available for distribution, amounts shall be paid out in
proportion to the aggregate preferential amounts owed. Amounts
remaining after the full amount has been paid out will be distributed
among the holders of Series A, B, C, D, E and F and common stock on a
pro rata basis, assuming conversion of all shares of Series A, B, C,
D, E and F.
. In the event of any liquidation, dissolution or winding up of the
Company, either voluntary or involuntary, in which the aggregate
proceeds to be distributed to all stockholders of the Company is
F-16
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
greater than $200,000, each stockholder of Series A, B, C, D, E and F
shall be entitled to receive, prior and in preference to any
distribution of any assets or surplus funds to the holders of common
stock, an amount equal to $1.00, $2.00, $3.20, $6.68, $12.88 and $5.00
per share for each share of Series A, B, C, D, E and F, respectively
and, in addition, an amount equal to all declared but unpaid dividends
on Series A, B, C, D, E and F, respectively. If the full amount is not
available for distribution, amounts shall be paid out in proportion to
the aggregate preferential amounts owed. Amounts remaining after the
full amount has been paid out will be distributed among the holders of
common stock on a pro rata basis.
Common Stock
As of December 31, 1998, and September 30, 1999 the Company had reserved
shares of its common stock for future issuance as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Conversion of Series A........................... 574 574
Conversion of Series B........................... 352 352
Conversion of Series C........................... 1,250 1,250
Conversion of Series D........................... 299 299
Conversion of Series E........................... 838 838
Conversion of Series F........................... 1,163 1,163
Conversion of Series G........................... -- 4,312
Exercise of outstanding common stock warrants.... 175 173
Exercise of outstanding preferred stock
warrants....................................... 246 323
Exercise of stock options........................ 3,221 3,628
Employee Stock Purchase Plan and Directors Stock
Option Plan.................................... -- 800
----- ------
Total shares reserved.......................... 8,118 13,712
===== ======
</TABLE>
Warrants Outstanding
As of December 31, 1998, the following warrants were outstanding:
<TABLE>
<CAPTION>
Exercise
Number of Price Expiration
Underlying Security Shares Per Share Date
------------------- --------- --------- --------------
<S> <C> <C> <C>
Common Stock............................. 4 $2.60 December 2000
Common Stock............................. 44 3.86 October 2001
Common Stock............................. 13 3.86 June 2002
Common Stock............................. 8 3.86 July 2002
Common Stock............................. 106 0.04 July 2002
---
175
===
Preferred Stock:
Series C............................... 25 3.20 September 2002
Series E............................... 218 12.88 August 2004
Series F............................... 3 5.00 September 2005
---
246
===
</TABLE>
During the period January 1, 1999 through September 30, 1999, the Company
granted Series G warrants exercisable for 77 shares of Series G Preferred
Stock. The exercise price of these warrants is equal to the price per share of
stock offered in the initial public offering. Common stock warrants exercisable
for 2 shares of the Company's common stock were exercised at $3.86 per share
during the period January 1, 1999 through September 30, 1999.
F-17
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Based Compensation
The Company has four stock option plans, the Old 1997 Stock Option Plan
("Old Plan"), the New 1997 Stock Option Plan ("New Plan"), the 1998 Stock
Option Plan ("98 Plan"), and the Amended and Restated 1994 Stock Option Plan
("94 Plan"), collectively "the Plans". As of December 31, 1998 and September
30, 1999, the Company had reserved an aggregate of 3,221 shares and 4,428
shares, respectively, of common stock for issuance under the Plans and options
issued outside of the Plans combined. After December 31, 1998, the Company does
not intend to grant stock options from any of the above plans other than from
the 98 Plan, under which as of that date there were approximately 634 shares
available for future grant. Subsequent to December 31, 1998, the Old Plan, the
New Plan and the 94 Plan were terminated and therefore, no shares are available
for future grant under these plans.
The Plans provide for the granting of stock options to employees and
consultants of the Company. Options granted under the Plans may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO's") may be granted only to employees of the Company and nonqualified
stock options ("NSO's") may be granted to employees of the Company and to
consultants.
All options granted shall generally be exercisable over a period not to
exceed ten years from the date of grant; however in the case of an ISO granted
to a person owning more than 10% of the combined voting power of all classes of
stock of the Company, the term of the option will be five years from date of
grant. All options granted generally vest ratably over four years.
In accordance with the Plans, the stated exercise price of options shall
not be less than 85% of the estimated fair value of the shares at the date of
grant as determined by the Board of Directors, provided, however, that (a) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (b)
the exercise price of an ISO and NSO granted to a 10% stockholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively.
F-18
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company also has options outstanding outside of the Plans. A summary of
all stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available for Shares Subject Exercise Price
Grant to Options Per Share
------------- -------------- --------------
<S> <C> <C> <C>
Balances, December 31, 1995.... -- -- $ --
Shares reserved................ 70 -- --
Options granted................ (35) 35 0.62
----- ----- -----
Balances, December 31, 1996.... 35 35 0.62
Additional shares reserved..... 724 -- --
Options granted................ (687) 687 0.50
Options cancelled.............. 22 (22) 0.50
Options exercised.............. -- (232) 0.50
----- ----- -----
Balances, December 31, 1997.... 94 468 0.50
Additional shares reserved..... 2,785 -- --
Options granted................ (701) 701 1.67
Options assumed in Portland
Software acquisition......... (826) 826 1.72
Options cancelled.............. 156 (164) 1.24
Options exercised.............. -- (118) 0.61
----- ----- -----
Balances, December 31, 1998.... 1,508 1,713 1.84
Additional shares reserved..... 1,550 -- --
Terminated plans............... (880) -- --
Options granted................ (877) 877 7.08
Options cancelled.............. 50 (93) 1.87
Options exercised.............. -- (220) 1.47
----- ----- -----
Balances, September 30, 1999
(unaudited).................. 1,351 2,277 3.63
===== ===== =====
</TABLE>
Subsequent to December 31, 1998 only options granted from the 98 Plan are
added back to the shares available for grant. Prior to December 31, 1998
options cancelled that were granted outside of the Plans are not added back to
the shares available for grant.
As of December 31, 1998, stock options outstanding, including options
granted outside of the stock option plans, were as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------------------
Weighted Weighted
Range of Number Average Number Average
Contractual Outstanding as of Exercise Price Exercisable as of Exercise Price
Prices December 31, 1998 Per Share December 31, 1998 Per Share
----------- ----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
$0.00--0.20 119 $0.0094 119 $0.0094
0.40--0.60 383 0.50 107 0.50
0.80--1.00 65 1.00 -- --
1.80--2.00 1,146 2.00 310 2.00
----------- ----- ------- --- -------
$0.00--2.00 1,713 $ 1.48 536 $ 1.26
=========== ===== ======= === =======
</TABLE>
F-19
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which
establishes a fair value-based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies who
elect not to adopt the new method of accounting. The Company has adopted SFAS
123 and in accordance with the provisions of SFAS 123, the Company has elected
to continue to apply APB Opinion No. 25 and related interpretations in
accounting for its stock option plans.
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS 123, the Company's net loss would have been adjusted to
the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1996 1997 1998
----- ------- --------
<S> <C> <C> <C>
Net loss:
As reported..................................... $(242) $(2,380) $(11,276)
Pro forma....................................... (242) (2,404) (11,360)
Net loss per share:
As reported..................................... (0.69) (6.45) (7.55)
Pro forma....................................... (0.69) (6.51) (7.60)
</TABLE>
Because the Black-Scholes option valuation model requires the input of
subjective assumptions, the resulting pro forma compensation cost may not be
representative of that to be expected in future periods.
In accordance with SFAS 123, the Company has recorded deferred compensation
using the Black-Scholes option pricing model for options issued to non-
employees. Compensation expense related to these options was $0, $0 and $7 for
1996, 1997 and 1998, respectively.
The weighted average fair value of options granted during 1997 and 1998 was
$0.14 and $0.42, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model, the minimum
value method which excludes volatility factors, as the Company is privately
held. The following assumptions were used:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... n/a 6.25% 5.5%
Expected dividend yield......................... n/a 0% 0%
Expected lives (years).......................... n/a 5 5
</TABLE>
In connection with the issuance of stock options, the Company has recorded
deferred compensation of $145 as of December 31, 1998, representing the
difference between the deemed fair value of the Company's common stock and the
exercise price of stock options at the date of grant. The Company amortizes the
deferred compensation over the applicable vesting period, typically four years.
F-20
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Income Taxes:
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income tax assets and liabilities are
determined using the current applicable enacted tax rates and provisions of the
enacted tax law. The Company had net deferred tax assets and liabilities as
follows:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Net operating loss carryforwards......................... $ 979 $ 6,174
Accruals and reserves.................................... 56 112
Research and development costs capitalized for income tax
purposes............................................... -- 742
Deferred revenue......................................... -- 812
Basis difference in acquired net assets of Portland
Software............................................... -- (1,900)
------- -------
1,035 5,940
Valuation allowance...................................... (1,035) (5,940)
------- -------
Net deferred income taxes................................ $ -- $ --
======= =======
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $15,670 for both federal and state tax purposes. The federal net
operating loss carryforwards expire on various dates through 2018, while the
state net operating loss carryforwards expire on various dates through 2013.
The Company believes that, based on a number of factors, there is sufficient
uncertainty regarding the realizability of net deferred tax assets such that a
full valuation allowance should be recorded. These factors include a history of
operating losses, the competitive nature of the Company's market and the lack
of predictability of revenue. Management will continue to assess the
realizability of the tax benefits available to the Company based on actual and
forecasted operating results. Changes in ownership resulting from the merger
described in Note 2 and other ownership changes may significantly limit the
utilization of net operating loss carryforwards in the future.
9. Segment Information:
The Company operates in one industry segment: the design, development and
marketing of technology that enables the distribution and licensing of digital
goods over the Internet and via other digital media. All long-lived assets are
located in the United States. The Company's geographic information is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States.............................................. $148 $262 $266
Europe..................................................... -- -- 24
Asia....................................................... -- -- 274
Other...................................................... -- -- 46
---- ---- ----
$148 $262 $610
==== ==== ====
</TABLE>
F-21
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Two customers accounted for 54% and 20%, respectively, of total revenues in
1996. Two customers accounted for 21% and 12%, respectively, of total revenues
in 1997. Two customers accounted for 45% and 13% respectively, of total
revenues in 1998. Two customers accounted for 32% and 14%, respectively, of
total revenues in the nine months ended September 30, 1999.
10. Related Party Transactions:
In conjunction with the exercise of stock options for the issuance of 250
shares of common stock to the Chief Executive Officer, the Company issued three
notes receivable aggregating $125. The notes receivable are full recourse,
secured by shares of the Company's common stock and bear interest at 6% per
annum. The principal and unpaid interest are due in full on May 27, 2001 for
$25 of the notes and June 6, 2001 for the remaining $100 of notes. The shares
issued are subject to repurchase by the Company until the notes are paid. See
Note 1--Restricted Cash.
11. Employee Savings Plan:
The Company has a profit sharing plan and trust that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
("401(k) Plan"). Under the terms of the 401(k) Plan, the employees of the
Company may make voluntary contributions to the 401(k) Plan as a percentage of
compensation, but not in excess of the maximum allowed under the Internal
Revenue Code. Employees become eligible to participate in the 401(k) Plan on
the first day of the month following date of hire. The Company currently does
not match employee contributions.
12. Subsequent Events:
In May 1999, 20/20 Software, Inc., an Oregon corporation, filed a civil
complaint against the Company in the United States Court for the District of
Northern California. The complaint alleged that one of the Company's employees,
a former 20/20 employee, misappropriated trade secrets and confidential
information of 20/20 and allegedly used such allegedly misappropriated
information and trade secrets in a product of the Company's predecessor and
subsidiary, Preview Software. In October 1999, the Company and 20/20 decided to
avoid additional expense and inconvenience of further litigation by settling
the dispute, including all claims. The Company and 20/20 signed a stipulated
dismissal with prejudice. As of September 30, 1999, the Company accrued the
settlement amount in accrued liabilities in the accompanying consolidated
balance sheet and recognized the expense as general and administrative expense
in the accompanying consolidated statement of operations.
In July 1999, the Company sold 125 and 150 shares of common stock at a
price of $6.50 to the President and Chief Executive Officer and Vice President,
Chief Financial Officer, respectively. Under the terms of these sales, the
Company can repurchase a certain number of their shares of stock if they quit
or are terminated, subject to a monthly vesting schedule. In addition, the
Company has a right of first refusal to purchase any or all of their shares if
they decide to sell or transfer their shares. In connection with these sales,
the officers executed full-recourse promissory notes in the respective amounts
of $812 and $975 in favor of the Company with annual interest rates of 5.32%.
These notes become due and payable upon the earlier of July 2002 or termination
of their employment with the Company. The officers have also entered into
pledge and security agreements granting the Company a security interest in
these shares.
In July 1999, the Company issued shares of Series G for purposes of
additional working capital and continued development of technology. A total of
4,312 shares of Series G were issued for net proceeds to the
F-22
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company of $25,847. The Series G has substantially the same rights and
preferences as other preferred shares outstanding at December 31, 1998. The
Company obtained cash proceeds of $1,180 through issuance of various notes
payable which were automatically converted into shares of the Company's
Series G. In connection with the Series G offering, the Company also issued a
warrant to purchase 77 shares of Series G.
In July 1999, the Board of Directors of the Company authorized the
reservation of an additional 500 shares of the Company's common stock for
issuance under the 98 Plan. In addition, the 98 Plan was amended in August 1999
to increase the total number of shares authorized by 1,000 and to incorporate
certain other changes. The Board of Directors approved a further amendment to
the 98 Plan to provide for an automatic annual increase on the first day of
each of the Company's fiscal years beginning in 2000 and ending in 2008 equal
to the lesser of (i) 800 shares, (ii) 3% of the Company's outstanding common
stock on the last day of the immediately preceding fiscal year, or (iii) such
lesser number of shares as the Board of Directors determines.
During August 1999, the Board of Directors approved the 1999 Employee Stock
Purchase Plan ("1999 ESPP"), and reserved 500 shares of common stock for
issuance thereunder. The 1999 ESPP will be subject to an automatic annual
increase on the first day of each of the Company's fiscal years over the 10-
year term of the plan, equal to the lesser of (i) 400 shares, (ii) 2% of the
Company's outstanding common stock on the last day of the immediately preceding
fiscal year, or (iii) such lesser number of shares as the Board of Directors
determines.
During August 1999, the Board of Directors also approved the 1999 Directors
Stock Option Plan ("1999 Directors Plan") and reserved 300 shares of common
stock for issuance thereunder. The 1999 Directors Plan will be subject to an
automatic annual increase to the number of shares reserved under the plan on
the first day of each of the Company's fiscal years over the 10-year term of
the plan, equal to the lesser of (i) 150 shares, (ii) 1% of the Company's
outstanding common stock on the last day of the preceding fiscal year, or (iii)
a lesser number of shares as determined by the Board of Directors.
On September 14, 1999, the Company authorized a 1 for 2 reverse stock split
of its common and preferred stock, effective immediately prior to the closing
of the initial public offering. All share and per share amounts have been
retroactively adjusted to reflect this stock split. The Board of Directors
amended the number of authorized common stock to 75,000 shares and the number
of preferred stock to 5,000 shares, to be effective upon the closing of the
initial public offering.
In October 1999, the Company entered into an agreement with Virgin
Holdings, Inc. (an affiliate of EMI Recorded Music), in which Virgin Holdings
selected the Company to be EMI Recorded Music's preferred, recommended
technology provider for the digital distribution of music and agreed to
recommend the Company's solution to EMI Recorded Music's worldwide distributors
and retailers. The Company issued a warrant to purchase 265 shares of common
stock to Virgin Holdings at an exercise price per share equal to the lesser of
$9 or the price per share to the public in the Company's initial public
offering. Upon signing of the agreement, 99 shares are exercisable and the
remaining 166 shares are exercisable upon achievement of certain milestones.
The Company will record a non-cash charge to sales and marketing expense in
their consolidated statement of operations for the fair value, as determined by
the Black-Scholes valuation model, when the vesting milestones are achieved and
the warrant becomes exercisable for these shares.
During October 1999, the Board of Directors approved the 1999 Executive
Stock Option Plan ("1999 Executive Plan"). A total of 863 shares of common
stock were reserved for issuance under this plan, of which 863 shares have been
granted. The terms of the 1999 Executive Plan options are similar to the terms
of the options issuable under the 98 Plan, except that only officers are
eligible to participate in the 1999 Executive Plan and the 1999 Executive Plan
does not provide for automatic annual increases in the number of shares
authorized.
F-23
<PAGE>
PORTLAND SOFTWARE, INC.
FINANCIAL STATEMENTS
December 31, 1996 and 1997
(With Independent Auditors' Report Thereon)
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Portland Software, Inc.:
We have audited the accompanying balance sheets of Portland Software, Inc.
as of December 31, 1996 and 1997 and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Portland Software, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Portland, Oregon
February 20, 1998
F-25
<PAGE>
PORTLAND SOFTWARE, INC.
BALANCE SHEETS
December 31, 1996 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 1,990 $ 4,745
Accounts receivable, net................................... 8 268
Prepaid expenses........................................... 27 10
Other current assets, net.................................. 13 181
------- -------
Total current assets.................................... 2,038 5,204
Property and equipment, net.................................. 181 372
Note receivable from officer................................. -- 55
Other non-current assets..................................... 42 48
Prepaid license fee, net..................................... -- 289
------- -------
Total assets............................................ $ 2,261 $ 5,968
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... 272 169
Accrued expenses........................................... 25 255
Current installments of obligations under capital leases... 81 111
Deferred revenue........................................... -- 40
------- -------
Total current liabilities............................... 378 575
Obligations under capital leases, less current installments.. 59 134
Other non-current liabilities................................ 27 40
------- -------
Total liabilities....................................... 464 749
------- -------
Commitments and contingencies
Shareholders' equity:
Series B preferred stock, $.01 par value; 4,500 share
authorized; convertible; $.2672 cumulative dividends;
issued and outstanding -0- shares and 2,395 shares at
December 31, 1996 and 1997, respectively (liquidation
preference of $8,000).................................... -- 24
Series A preferred stock, $.01 par value; 838 shares
authorized; convertible; issued and outstanding 838
shares at December 31, 1996 and 1997 (liquidation
preference of $2,800).................................... 8 8
Common stock, $.01 par value; 20,000 shares authorized;
issued and outstanding 6,945 shares and 6,988 shares at
December 31, 1996 and 1997, respectively................. 69 70
Additional paid-in capital................................. 5,077 13,464
Accumulated deficit........................................ (3,357) (8,347)
------- -------
Total shareholders' equity.............................. 1,797 5,219
------- -------
Total liabilities and shareholders' equity.............. $ 2,261 $ 5,968
======= =======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
PORTLAND SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31 Ended June 30,
---------------- ----------------
1996 1997 1997 1998
------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Net revenue................................ $ 187 $ 501 $ 174 $ 151
Cost of goods sold......................... 64 156 20 15
------- ------- ------- -------
Gross profit.......................... 123 345 154 136
------- ------- ------- -------
Operating expenses:
Sales and marketing...................... 749 1,901 750 1,108
Research and development................. 1,044 1,640 686 925
General and administrative............... 1,154 1,849 853 962
------- ------- ------- -------
Total operating expenses.............. 2,947 5,390 2,289 2,995
------- ------- ------- -------
Loss from operations..................... (2,824) (5,045) (2,135) (2,859)
------- ------- ------- -------
Other income (expense):
Interest income.......................... 30 107 20 80
Interest expense......................... (23) (52) (30) (15)
------- ------- ------- -------
Total other income (expense).......... 7 55 (10) 65
------- ------- ------- -------
Loss before income taxes................. (2,817) (4,990) (2,145) (2,794)
Income taxes............................... -- -- -- --
------- ------- ------- -------
Net loss.............................. $(2,817) $(4,990) $(2,145) $(2,794)
======= ======= ======= =======
Earnings per share computation:
Net loss................................. $(2,817) $(4,990) $(2,145) $(2,794)
Preferred stock dividends................ -- (234) -- (320)
------- ------- ------- -------
Net loss available to common
shareholders........................... $(2,817) $(5,224) $(2,145) $(3,114)
======= ======= ======= =======
Basic and diluted net loss per share:
Weighted average shares outstanding...... 5,899 6,978 6,956 6,998
======= ======= ======= =======
Net loss................................. $ (0.48) $ (0.75) $ (0.31) $ (0.44)
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
PORTLAND SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series B Series A
preferred stock preferred stock Common stock Additional Total
----------------- ----------------- ------------- paid-in Accumulated shareholders'
Shares Amount Shares Amount Shares Amount capital deficit equity
-------- ------- ------- ------- ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................. -- $ -- -- $ -- 4,417 $44 $ 523 $ (540) $ 27
Issuance of preferred
stock, net........... -- -- 838 8 -- -- 2,792 -- 2,800
Issuance of common
stock................ -- -- -- -- 1,577 16 1,248 -- 1,264
Exercise of common
stock options........ -- -- -- -- 175 2 (2) -- --
Common stock issued in
lieu of cash......... -- -- -- -- 621 6 417 -- 423
Conversion of
convertible debt to
common stock......... -- -- -- -- 155 1 99 -- 100
Net loss............... -- -- -- -- -- -- -- (2,817) (2,817)
-------- ------ ------- ------- ----- --- ------- -------- -------
Balance, December 31,
1996.................. -- -- 838 8 6,945 69 5,077 (3,357) 1,797
Issuance of preferred
stock, net........... 2,149 22 -- -- -- -- 7,109 -- 7,131
Conversion of
convertible debt to
preferred stock...... 246 2 -- -- -- -- 818 -- 820
Exercise of common
stock options........ -- -- -- -- 43 1 10 -- 11
Common stock options
issued in lieu of
cash................. -- -- -- -- -- -- 21 -- 21
Warrants issued in
payment of license
fee.................. -- -- -- -- -- -- 429 -- 429
Net loss............... -- -- -- -- -- -- -- (4,990) (4,990)
-------- ------ ------- ------- ----- --- ------- -------- -------
Balance, December 31,
1997.................. 2,395 $ 24 838 $ 8 6,988 $70 $13,464 $ (8,347) $ 5,219
Exercise of common
stock options
(unaudited).......... -- -- -- -- 38 -- 44 -- 44
Net loss (unaudited)... -- -- -- -- -- -- -- (2,794) (2,794)
-------- ------ ------- ------- ----- --- ------- -------- -------
Balance, June 30, 1998
(unaudited)........... 2,395 $ 24 838 $ 8 7,026 $70 $13,508 $(11,141) $ 2,469
======== ====== ======= ======= ===== === ======= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
PORTLAND SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1996 1997 1997 1998
------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(2,817) $(4,990) (2,145) (2,794)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization.......... 61 173 59 107
Loss on sale of property and
equipment............................ 29 -- -- --
Common stock and options issued in
lieu of cash......................... 423 21 21 --
Net changes in operating assets and
liabilities:
Accounts receivable................... 15 (260) (55) (77)
Prepaid expenses...................... (27) 17 15 7
Other assets.......................... (55) (116) (9) (99)
Accounts payable...................... 258 (103) (130) (40)
Accrued expenses...................... 27 230 102 (63)
Other liabilities..................... -- 53 (18) 237
------- ------- -------- --------
Net cash used in operating
activities........................ (2,086) (4,975) (2,160) (2,722)
------- ------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment...... (49) (111) (19) (28)
------- ------- -------- --------
Net cash used in investing
activities........................ (49) (111) (19) (28)
------- ------- -------- --------
Cash flows from financing activities:
Borrowings under line of credit
agreement............................. -- 250 250 --
Payments on line of credit.............. -- (250) -- --
Payments on obligations under capital
lease................................. (45) (121) (73) (63)
Proceeds from issuance of common stock.. 1,264 11 3 44
Proceeds from issuance of preferred
stock................................. 2,800 7,131 500 --
Proceeds from issuance of convertible
debt.................................. -- 820 -- --
------- ------- -------- --------
Net cash from financing activities.. 4,019 7,841 680 (19)
------- ------- -------- --------
Net increase (decrease) in cash and
cash equivalents.................. 1,884 2,755 (1,499) (2,769)
Cash and cash equivalents at beginning of
year................................... 106 1,990 1,990 4,745
------- ------- -------- --------
Cash and cash equivalents at end of
year................................... $ 1,990 4,745 491 1,976
======= ======= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest.................. $ 15 60 23 18
Cash paid for income taxes.............. -- -- -- --
Supplemental disclosure of non-cash
investing and financing activities:
Obligations under capital lease incurred
for the purchase of property and
equipment............................. $ 160 226 110 59
Preferred stock issued upon conversion
of debt............................... -- 820 -- --
Common stock issued upon conversion of
debt.................................. 100 -- -- --
Warrants issued in payment of license
fee................................... -- 429 -- --
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
(In thousands, except per share data)
(1) Summary of Significant Accounting Policies
(a) Description of Business
Portland Software, Inc. (the Company) was incorporated in October 1994. The
Company develops and markets systems and tools for the electronic distribution,
primarily through the internet, of software and other digital content.
(b) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
maturities of less than three months.
(d) Accounts Receivable
The allowance for doubtful accounts is as follows at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Balance--beginning of period...................................... $-- $--
Provision......................................................... -- 56
Charge offs....................................................... -- (6)
--- ---
Balance--end of period............................................ $-- $50
=== ===
</TABLE>
(e) License Fee
License fees are stated at cost. Amortization is provided for by the
straight-line method over four years. Amortization expense totaled $-0- and $27
for the years ended December 31, 1996 and 1997, respectively.
(f) Advertising
The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was $105 and $66 for the years ended December 31, 1996 and
1997, respectively.
(g) Property and Equipment
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the present value of the minimum lease payments.
Equipment is depreciated using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Property and
equipment under capital leases
F-30
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and leasehold improvements are amortized straight-line over the shorter of the
lease term or estimated useful life of the asset.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences of differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
losses and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
(i) Net Loss Per Share
The Company follows the provisions of SFAS 128, "Earnings Per Share" which
requires presentation of both basic and diluted earnings per share (EPS) on the
face of the income statement. Basic EPS is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if convertible preferred shares outstanding
at the beginning of each year were converted at those dates with related
interest, preferred stock dividend requirements and outstanding common shares
adjusted accordingly. It also assumes that outstanding common shares were
increased by shares issuable upon exercise of those stock options or warrants
for which market price exceeds exercise price, less shares which could have
been purchased by the Company with related proceeds. Neither convertible
preferred stock, warrants, or stock options have been included in the
computation of diluted earnings per share for the years ended December 31, 1996
or 1997, since it would have resulted in an antidilutive effect.
(j) Revenue Recognition
Revenue results primarily from 1) product license and installation fees, 2)
fees charged for transactions processed using the Company's product, and 3)
license fees recognized upon shipment of the product and when no significant
contractual obligations remain outstanding. For those agreements which derive
revenue on a per-transaction basis in exchange for guaranteed amounts, revenue
is recognized at the time of product delivery. Per-transaction fees that exceed
the guarantee are recognized as earned.
A portion of product license revenue is allocated to customer support. This
amount is deferred and recognized ratably over the license period. The Company
generally does not provide for a right of return policy for its software sales.
(k) Royalties
Royalties are accrued based on certain revenues, pursuant to contractual
agreements with developers of software products published by the Company.
Royalty costs are included in the cost of goods sold.
(l) Software Development Costs
Under Statement of Financial Accounting Standards No. 86, software
development costs are to be capitalized beginning when a product's
technological feasibility has been established and ending when a product is
made available for general release to customers. To date, the establishment of
technological feasibility of the Company's products has occurred shortly before
general release and, accordingly, no costs have been capitalized.
F-31
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(m) Stock-Based Compensation
The Company accounts for stock-based compensation using the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. This statement permits a
company to choose either a fair-value-based method of accounting for its stock-
based compensation arrangements or to comply with the current Accounting
Principles Board Opinion 25 (APB Opinion 25) intrinsic-value-based method
adding pro forma disclosures of net income (loss) computed as if the fair-
value-based method had been applied in the financial statements. The Company
applies SFAS No. 123 by retaining the APB Opinion 25 method of accounting for
stock-based compensation for employees with annual pro forma disclosures of net
income (loss). Stock-based compensation for non-employees is accounted for
using the fair-value-based method.
(n) Unaudited Interim Financial Information
All information subsequent to December 31, 1997, is unaudited. In the
opinion of management, the unaudited interim financial statements as of June
30, 1997 and 1998 and for the six month periods then ended have been prepared
on the same basis as the annual financial statements and reflect all
adjustments that are necessary for the fair presentation of results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any interim
period.
(2) Property and Equipment
Property and equipment, net consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- -----
<S> <C> <C>
Software........................................................ $ 9 $ 85
Furniture and fixtures.......................................... 6 13
Equipment....................................................... 236 478
Leasehold improvements.......................................... -- 12
---- -----
251 588
Less accumulated depreciation and amortization.................. (70) (216)
---- -----
$181 $ 372
==== =====
</TABLE>
(3) Prepaid License Fee
On August 1, 1997, the Company entered into an agreement to license the
rights to certain software developed by another company. The Company issued 479
Series B preferred stock warrants in consideration for the license. The value
of warrants granted using the Black-Scholes method utilized the following
assumptions: risk free interest rate of 6.25%, no expected dividend yield or
volatility, and an expected life of two years. Using these assumptions these
warrants have a fair value of $429, a weighted average exercise price of $3.34,
a contractual life of seven years and will be fully vested in 1998. At December
31, 1997, 359 warrants were exercisable. The prepaid license fee is being
amortized over its estimated useful life of four years.
<TABLE>
<CAPTION>
1996 1997
---- -----
<S> <C> <C>
License fee...................................................... $-- $ 429
Less accumulated amortization.................................... -- (27)
--- -----
-- 402
Less current portion included in other current assets, net....... -- (113)
--- -----
$-- $ 289
=== =====
</TABLE>
(4) Line of Credit
In January 1997, the Company arranged a $250 credit facility (the line of
credit) with a bank. The line of credit is secured by the assets of the
Company. The interest rate is a floating rate based on prime (8.5% at
F-32
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997) plus 2% with principal due upon demand. The agreement
contains no covenants. There was no amount outstanding on this line of credit
at December 31, 1997.
(5) Accrued Expenses
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accrued consulting................................................ $-- $ 89
Accrued vacation.................................................. 11 51
Accrued bonuses................................................... -- 33
Other accrued expenses............................................ 14 82
--- ----
$25 $255
=== ====
</TABLE>
(6) Income Taxes
The actual income tax benefit differs from the "expected" benefit computed
by applying the U.S. federal corporate rate as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Computed "expected" income tax rate benefit................... (34)% (34)%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit.............. (4) (4)
Exclusion of earnings for period that S Corporation was
valid..................................................... 1 --
Research and development credit............................. -- (2)
Increase in valuation allowance............................. 37 40
---- ----
Actual income tax rate benefit................................ --% --%
==== ====
</TABLE>
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax assets
and deferred tax liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating losses and U.S. research and
experimentation credits............................... $ 904 $ 2,506
Property and equipment, due to differences in
depreciation.......................................... 40 462
Accrual to cash basis adjustment........................ 109 65
------- -------
1,053 3,033
Less valuation allowance................................ (1,053) (3,033)
------- -------
Net deferred taxes................................... $ -- $ --
======= =======
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1996 and 1997 was an increase of $1,053 and $1,980, respectively.
The Company has available federal and state net operating loss
carryforwards for tax purposes of approximately $6,351 and research and
experimentation credits of approximately $121, which expire in years 2011-2012.
F-33
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Approximately $4,682 of the net operating losses are subject to annual
utilization limitation due to ownership changes under Internal Revenue Code
Section 382 in 1996 and 1997.
(7) Shareholders' Equity
(a) Series B Preferred Stock
The Series B preferred stock has a stated value of $3.34 per share and a
liquidation preference over holders of common stock and Series A preferred
stock of an amount per share equal to $3.34 (the original issue price) plus all
declared but unpaid dividends. Series B preferred stock has a cumulative per
share dividend, on a non-compounded basis, of $.2672 per annum payable at the
Company's option in cash or additional shares of Series B preferred stock. The
dividends are to be declared by the Board of Directors and paid on June 30,
2001 and on a quarterly basis thereafter, unless a liquidating event occurs
before June 30, 2001, in which case the aggregate amount of arrearages in
cumulative Series B preferred stock dividends will be canceled and no further
dividends will accrue. No dividend declarations have been made, and the
aggregate amount of arrearages in cumulative Series B preferred stock dividends
is $234 at December 31, 1997.
Each share is convertible into common stock at any time at the option of
the holder. The initial conversion ratio is one-to-one, but this ratio is
subject to modification under the Company's Articles of Incorporation in the
event of certain dilutive issuance of securities, stock splits, stock
dividends, stock distributions or other common stock equivalent distributions.
Automatic conversion to common stock at the then effective conversion rate will
occur upon the 1) closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the aggregate
price to the public exceeds $10,000 and in which the public offering price per
share of common stock equals or exceeds $10.00, or 2) the date on which a two-
thirds majority of the shares have been converted into shares of common stock
or are otherwise no longer outstanding. The holders of each share of Series B
preferred stock will have the right to the number of votes to which they would
be entitled if the shares were converted to common stock. The Company has
reserved 3,234 shares of the Company's common stock for the conversion of
Series B preferred stock.
Under the Series B preferred stock agreement, the Company is required to
comply with certain operating covenants, including requirements associated with
the issuance of stock options.
(b) Series A Preferred Stock
The Series A preferred stock has a stated value and liquidation preference
of $3.34 per share and carries a dividend of $.2672 per annum payable when and
if declared by the Board of Directors. No dividend declarations have been made.
Series A preferred shareholders have a liquidation preference over holders of
common stock of an amount per share equal to $3.34 (the original issue price)
plus all declared but unpaid dividends. Each share is convertible into common
stock on a one-to-one basis at any time at the option of the holder. The
conversion ratio is subject to modification under the Company's Articles of
Incorporation in the event of stock splits, stock dividends, stock
distributions or other common stock equivalent distributions. Automatic
conversion to common stock at the then effective conversion rate will occur
upon the 1) closing of the issuance of shares following an effective
registration statement under the Securities Act of 1933, in which the aggregate
price to the public equals or exceeds $7,500 and in which the public offering
price per share of common stock equals or exceeds $8.34, or 2) the date on
which a majority of the shares have been converted into shares of common stock
or are otherwise no longer outstanding. The holders of each share of Series A
preferred stock will have the right to the number of votes to which they would
be entitled if the shares were converted to common stock. The Company has
reserved 838 shares of the Company's common stock for the conversion of Series
A preferred stock.
F-34
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(c) Warrants
The Company has granted warrants for 266 shares of common stock at exercise
prices ranging from $.675 to $1.00 per share primarily to the holders of Series
A and Series B preferred stock. The warrants are exercisable at December 31,
1997 at a weighted average exercise price of $.983. Expiration of 14 warrants
will occur on December 21, 2000 or upon consummation of an initial public
offering or upon a change in control, whichever is earlier. 170 warrants expire
on October 18, 2001 or upon consummation of an initial public offering or upon
a change in control, whichever is earlier. The Company has reserved 266 shares
of common stock for the exercise of warrants. The value ascribed to the common
stock warrants using the Black-Scholes method was not significant. The Company
also granted 838 warrants for Series B preferred stock at an exercise price of
$3.34 with an expiration date of August 1, 2004. Both the number of shares of
warrant stock and the exercise price are subject to modification under the
terms of the Series B preferred stock purchase agreement in the event of
certain dilutive issuance of securities, stock splits, stock dividends, stock
distributions or other stock equivalent distributions. A value of $429 was
ascribed to 479 of these warrants using the Black-Scholes method, which were
issued in connection with a license fee. The Company has reserved 838 shares of
Series B preferred stock for the exercise of warrants.
(d) Shareholders' Agreement
The Company and its shareholders have entered into agreements that include
restrictions on the transfer of the Company's common stock. Except for
expressly provided exceptions, no shareholder is allowed to transfer ownership
of stock without the shares being first offered for sale to the Company.
(8) 1994 Stock Incentive Plan
In 1994, the Company adopted an incentive stock option plan (the Plan)
whereby a total of 5,000 shares of common stock have been reserved for the
grant of stock options to selected employees, officers, directors, consultants
and advisors. Options granted pursuant to the Plan may be either incentive
stock options as defined in Section 442A of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options, at the discretion of the Board.
Under the Plan, options generally vest over four years. 25% become exercisable
one year after grant, 25% two years after grant and the remaining 50% vest
ratably over the following two years. Options granted under the Plan must be
exercised within three months of the optionee's termination of employment and
within ten years of the date of the grant. Option prices are generally not less
than the fair market value of the shares at the date of grant. At the time of
the exercise of the option, all optionees must grant the Company or its
designee a right of first refusal with respect to all transfers.
The Company has elected to account for its stock-based compensation plans
under APB Opinion 25; however, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during 1996 and 1997
using the minimum value option-pricing model as prescribed by SFAS 123 using
the following assumptions used for grants in 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Risk-free interest........................................... 6.0% 6.25%
Expected dividend yield...................................... None None
Expected lives............................................... 5 years 5 years
</TABLE>
The total value of options granted during 1996 and 1997 was computed as
approximately $260 and $304, respectively, which would be amortized on a pro
forma basis over the four-year vesting period of the options. The weighted
average fair market value of the option grants during 1996 and 1997 was $0.32
and $1.00 per share, respectively. If the Company had accounted for these
options in accordance with SFAS 123, the
F-35
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company's net loss and net loss per share for the years ended December 31, 1996
and 1997 would have increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net loss:
As reported............................................. $(2,817) $(4,990)
Pro forma............................................... (2,886) (5,265)
Earnings per share--basic and diluted:
As reported............................................. $ (0.48) $ (0.75)
Pro forma............................................... (0.49) (0.79)
</TABLE>
A summary of the status of the Company's Plan at December 31, 1996 and 1997
and changes during the years then ended is presented in the following table:
<TABLE>
<CAPTION>
Weighted
average
exercise
Options price
------- --------
<S> <C> <C>
Outstanding at December 31, 1995............................ 1,058 $.0555
Granted..................................................... 1,012 .9511
Exercised................................................... (175) .0020
Forfeited................................................... (42) .6032
----- ------
Outstanding at December 31, 1996............................ 1,853 .5163
Granted..................................................... 922 .9774
Exercised................................................... (43) .2434
Forfeited................................................... (292) .5415
----- ------
Outstanding at December 31, 1997............................ 2,440 $.7191
===== ======
</TABLE>
A total of 632 and 1,083 incentive and non-qualified stock options were
exercisable at weighted average exercise prices of $.21 and $.36 at December
31, 1996 and 1997, respectively.
At December 31, 1997, the Company has committed to issue 29 non-qualified
stock options in fiscal year 1998 under the Plan to non-employee consultants
for consulting services performed in 1997. The Company accrued a liability of
$29 in 1997 related to this obligation.
During 1997, the Company issued 21 stock options to non-employee
consultants. These options have a weighted average exercise price of $0.01 and
a contractual life of ten years. The options were exercisable at the date of
grant. Included in general and administrative expense is $21 relating to the
value ascribed to these warrants.
The following table sets forth the exercise price range, number of shares
and weighted average remaining contractual lives for stock options at December
31, 1997:
<TABLE>
<CAPTION>
Currently exercisable
---------------------------------------
Weighted Weighted
Weighted average Weighted average
average remaining average remaining
Exercise price Number exercise contractual exercise contractual
range of shares price life in years Number of shares price life in years
-------------- --------- -------- ------------- ---------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
$.002 to .0105 671 $ .005 6.86 671 $ .005 6.86
$.75 135 .750 8.24 115 .750 8.24
$.825 to 1.00 1,384 .990 9.17 234 .970 8.64
$1.10 250 1.100 8.63 63 1.100 8.63
----- ------ ---- ----- ------ ----
$.002 to 1.10 2,440 $ .720 8.43 1,083 $ .360 7.49
===== ====== ==== ===== ====== ====
</TABLE>
F-36
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(9) Commitments and Contingencies
(a) Leases
The Company leases equipment and office space under capital leases and
non-cancelable operating leases which expire at various dates through 2002.
Included in equipment in the accompanying balance sheets are the following
assets held under capital leases at December 31:
<TABLE>
<CAPTION>
1996 1997
---- -----
<S> <C> <C>
Equipment....................................................... $181 $ 408
Less accumulated amortization................................... (53) (113)
---- -----
$128 $ 295
==== =====
</TABLE>
Future minimum lease payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
Year ending December 31:
1998.................................................... $137 $ 293
1999.................................................... 107 330
2000.................................................... 52 344
2001.................................................... 4 354
2002.................................................... -- 390
Thereafter.............................................. -- 100
---- ------
300 $1,811
======
Less amounts representing interest........................ 55
----
245
Less current installment.................................. 111
----
$134
====
</TABLE>
The Company incurred $87 and $210 in operating lease expense during 1996
and 1997, respectively.
(b) Benefit Plan
The Company has a defined contribution plan (the Plan). The Plan covers
primarily all officers and employees of the Company who meet prescribed age
and service requirements. Employees may contribute up to 15% of their
compensation. Matching contributions are determined at the discretion of the
Board of Directors. The Company did not make a matching contribution in 1996
or 1997.
(c) Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on the
Company's financial position.
F-37
<PAGE>
PORTLAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(10) Major Customers
Most of the Company's customers are located in the United States. Aggregate
revenues for three significant customers were 77% and 40% of total revenues for
the years ended December 31, 1996 and 1997, respectively. Related receivables
from such customers were 0% and 30% of trade accounts receivable at December
31, 1996 and 1997, respectively. The Company estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts.
(11) Unaudited Recent Developments
On August 5, 1998, the Company was acquired by Preview Systems, Inc.
through the exchange of all of its outstanding stock for 1,929 common shares
(post split) and 838 Series E Preferred Shares (post split) of Preview Systems,
Inc.
F-38
<PAGE>
PREVIEW SYSTEMS, INC.
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
F-39
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Portland Preview
Preview Software, Systems, Inc.
Systems, Inc. Inc. Adjustments Pro Forma
------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues................... $ 610 $ 199 $ -- $ 809
Operating expenses:
Research and
development............ 2,978 1,078 -- 4,056
Sales and marketing...... 2,915 1,287 -- 4,202
General and
administrative......... 3,127 2,052 -- 5,179
Amortization of
intangibles............ 866 -- 1,218 (a) 2,084
Acquired in-process
research and
development............ 2,091 -- (2,091)(b) --
-------- ------- ------- --------
Total operating
expenses............ 11,977 4,417 (873) 15,521
-------- ------- ------- --------
Operating loss............. (11,367) (4,218) 873 (14,712)
Other income............... 91 71 -- 162
-------- ------- ------- --------
Net loss................... $(11,276) $(4,147) $ 873 $(14,550)
======== ======= ======= ========
Net loss per basic and
diluted share............ $ (7.55) $ -- $ -- $ (5.51)
======== ======= ======= ========
Shares used in per share
calculations............. 1,494 -- 1,147 2,641
======== ======= ======= ========
</TABLE>
F-40
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
1. General
The Company was formed in April 1998 to acquire all of the outstanding
equity interests of Preview Software, Inc. ("Preview Software") and Portland
Software, Inc. ("Portland Software"). The Company completed both of these
mergers on August 5, 1998. In accordance with Accounting Principles Board
Opinion No. 16, the stockholders of Preview Software were determined to be the
controlling shareholders of the Company. Accordingly, the merger of Preview
Software into the Company was accounted for as a reorganization under common
control with the underlying net assets recorded by the Company at historical
cost. The merger of Portland Software into the Company was accounted for using
the purchase method. Therefore, the amounts in the Preview Systems, Inc. column
reflect the consolidated results of operations of Preview Systems, Inc. for the
period January 1, 1998 through August 4, 1998, and the results of operations of
the combined entity from August 5, 1998 through December 31, 1998. The amounts
in the Preview Systems, Inc. Pro Forma column, which are unaudited, also
include the effect of Portland Software, Inc. from January 1, 1998 through
August 4, 1998 when it was acquired.
2. Pro Forma Adjustments
(a) To record additional amortization of acquired capitalized intangibles
as if the merger had occurred on January 1, 1998.
(b) To reverse acquired in-process research and development, a material
non-recurring charge.
F-41
<PAGE>
Edgar Text Description:
Narrative Description of Inside Back Cover
Headline Upper Left Justified: "Delivering Digital Goods to the Desktop."
Centered below the headline are two arrows that point to the first of three
computer screen samples, all of which are centered on the page. Each screen
represents a step in the selection process that a customer would take to order
and download a digital product, which in this example is Norton AntiVirus 6.0
for WinNT. This first screen is topped by a yellow window bar containing a
centered title: "Single Order." Below this bar is a gray box with a series of
text lines. Justified left on the first is: "Placed on: Sep 3 1999." Justified
right on this line is: "Order #: 610296. " Justified with the left margin of
the next line down is a heading title: "Ordered Hem(s)." Three column headings
appear on the right side of the same line: "Quantity," "Unit Price" and
"Extended Price." Justified with the left margin of the next line is:
"SYMANTEC--RETAIL Norton 2000 2.0 for Win96/98/NT." Below the three column
headers on the right of this text are the following: "1," "$49.95" and
"$49.95." Below this line and to the left is the text: "Shipping Addr: 1601 S.
DeAnza Boulevard, Cupertino, CA 950614, United States." Below this line is the
text: "Shipping Method: UPS Tracking Number: Not Available." Below this line is
the text: "Status: Approved As of: Sep 3 1999."
Below this line and justified to the left is: "SYMANTEC Mobile Essentials
2.0 for WinNT-Try Before You Buy." To the right of this text under the three
column headers are the following: "I," "$0.00" and "$0.00." Centered under the
text on the left is an icon and a line of text. The icon is below with a red
arrow pointing down, which is labeled "Download." The underlined, blue text to
the right of the icon reads "Click here to download product." Centered below
this is the following text: "Status: Available" and "As of Sep 3 1999."
Below this line and justified to the left is: "SYMANTEC Norton AntiVirus
5.0 for WinNT." Below the three column headers on the right of the previous
line are the following: "1," "$36.00" and "$36.00." Centered below this line
are a labeled icon and a line of text. The icon is yellow with a red arrow
pointing down, which is labeled, "Download." The underlined, blue text to the
right of the icon reads "Click here to download product." Centered below this
is the following text: "Status: Available" and "As of: Sep 3 1999." On the next
line down is text in-line with the two furthest right columns from above:
"Subtotal Cost:" and "$86.95." On the next line down is text in-line with the
two furthest right columns from above: "Tax:" and "$4.12." On the next line
down is text in-line with the two furthest right columns from above: "Shipping
Charges:" and "$6.95." The final line runs across the bottom of this screen.
Left justified text reads: "Payment Method: VISA." To the right, in-line with
the two furthest right columns from above, is: "Total:" and "$97.02."
An arrow points from the first screen down to the second, which contains a
blue window bar with a right justified title: "Downloading Norton AntiVirus for
WinNT." In the left quarter of the screen below is a rectangular yellow box
containing four lines of text. From top to bottom, they are: "Shop,"
"SYMANTEC," "Powered by" and "beyond.com."
The right three-quarters of this screen are made up of a gray section,
which is topped by a paragraph of text: "Now downloading and verifying your
product and license. A shortcut has been saved on your desktop should you need
to restart this download." Below this is a line of text: "Downloading Norton
AntiVirus for WinNT." Below this is a horizontal graphic bar, which is
approximately sixty percent blue. Below the bar, justified to the right, is a
line of text: "Received: 10584 KB of 12238 KB Completed." Below this, in the
right corner of the screen, is a button containing the text: "Finish Later."
An arrow points down to the final screen, which contains a blue window bar
with a right-justified title: "Thank You for Your Purchase of Norton AntiVirus
for WinNT." In the left quarter of the screen is the same rectangular yellow
box with text as in the previous screen, but in a more elongated shape. The
right, gray section of this screen is divided into five horizontal sections,
each separated by a thin blue line. The first section contains a paragraph of
text: "Your purchase and download has completed successfully. If you
established a connection to the Internet, you may now disconnect." The second
section has a left-justified green and white icon that looks like a pad of
paper. To the right of this is a paragraph: "A packing slip for this
<PAGE>
purchase is located in the following directory. Select one of these choices if
you would like to view or print a copy." Below this is another line of text:
"C:\\WINNT\Vbox\PackingSlips." On the right margin of this section are two
buttons containing text. The top reads, "View Slip," and the bottom reads,
"Print Slip." The third section has a left-justified yellow and white icon that
looks like a piece of paper. To the right of this is a paragraph: "A license
for this product has been installed on this machine and is required should you
ever need to reinstall. Please select Backup to make a copy to guard against
loss." To the right of this paragraph is a button containing the word:
"Backup." The fourth section has a left-justified icon that looks like a
computer. To the right of this is a paragraph: "Your product has been saved in
the following directory. Thank you for shopping at Symantec.
C:\WINNT\Vbox\Installers." The fifth section has three buttons containing text.
The first is flush left and reads: "About Vbox." The other two are in the
bottom right corner of the screen: the left one reads, "Launch," and the right
one reads: "Exit."
Most of the background of the page is blue.
<PAGE>
[PREVIEW SYSTEMS LOGO]
<PAGE>
[LOGO OF PREVIEW SYSTEMS]
3,800,000 Shares
Common Stock
This is the initial public offering for Preview Systems, Inc. No public
market currently exists for our shares. The shares we are offering have been
approved for listing on the Nasdaq National Market under the symbol "PRVW." The
initial public offering price is $21.00 per share.
--------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price.................................... $21.00 $79,800,000
Underwriting Discounts and Commissions................... $ 1.47 $ 5,586,000
Proceeds to Preview Systems.............................. $19.53 $74,214,000
</TABLE>
--------------------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters a 30-day option to purchase up to an
additional 570,000 shares of our common stock to cover over-allotments.
BancBoston Robertson Stephens International Ltd. expects to deliver the shares
of common stock to purchasers on December 13, 1999.
--------------------
Robertson Stephens International
Dain Rauscher Wessels
SoundView Technology Group
Fidelity Capital Markets
a division of National Financial
Services Corporation
The date of this prospectus is December 7, 1999
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, SoundView Technology Group, Inc. and Fidelity Capital
Markets, a division of National Financial Services Corporation, have severally
agreed with us, subject to the terms and conditions set forth in the
underwriting agreement, to purchase from us the number of shares of common
stock set forth opposite their respective names below. The underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
International Underwriters Number of Shares
-------------------------- ----------------
<S> <C>
BancBoston Robertson Stephens Inc. and BancBoston Robertson
Stephens International Limited............................. 1,800,000
Dain Rauscher Wessels........................................ 792,000
SoundView Technology Group, Inc. ............................ 792,000
Fidelity Capital Markets, a division of National Financial
Services Corporation....................................... 216,000
Prudential Securities Incorporated........................... 100,000
Salomon Smith Barney Inc..................................... 100,000
---------
Total...................................................... 3,800,000
=========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price set forth
on the cover page of this prospectus and to dealers at this price less a
concession not in excess of $0.89 per share, of which $0.10 may be reallowed to
other dealers. After the initial public offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 570,000 additional shares of common stock at the same price per
share as we will receive for the 3,800,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment, subject to conditions, to
purchase approximately the same percentage of the additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the 3,800,000 shares offered hereby. If
purchased, the additional shares will be sold by the underwriters on the same
terms as those on which the 3,800,000 shares are being sold. We will be
obligated, pursuant to the option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover over-
allotments made in connection with the sale of the shares of common stock
offered hereby. If such option is exercised in full, the total public offering
price, underwriting discounts and commissions and proceeds to us will be $91.8
million, $6.4 million and $85.4 million, respectively.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each of our officers and directors and holders of 93%
of our securities have agreed with the representatives for a period of 180 days
after the date of this prospectus, other than bona fide gifts or distributions
to partners or shareholders, not to offer to sell, contract to sell, or
otherwise sell, dispose
64
<PAGE>
of, loan, pledge or grant any rights with respect to, any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock, now owned directly by such holders or with respect to which they now
have the power of disposition, without the prior written consent of BancBoston
Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to the lock-up agreement. There are no agreements
between the representatives and any of our stockholders providing consent to
the sale of shares prior to the expiration of the period ending 180 days after
the date of this prospectus.
Future Sales. In addition, we have agreed that during the 180 days after
the date of this prospectus, we will not, subject to certain exceptions,
without the prior written consent of BancBoston Robertson Stephens Inc.:
. Consent to the disposition of any shares held by stockholders subject
to lock-up agreements prior to the expiration of the period ending 180
days after the date of this prospectus; or
. Issue, sell, contract to sell or otherwise dispose of any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than the sale of shares
in this offering, the issuance of common stock upon the exercise of
outstanding options or the issuance of options under our existing stock
option and incentive plans.
Listing. Our common stock has been approved for listing on the Nasdaq
National Market under the symbol "PRVW."
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby has been determined through negotiations
between us and the representatives. Among the factors considered in such
negotiations were prevailing market conditions, our financial information,
market valuations of other companies that we and the representatives believe to
be comparable to us, estimates of our business potential, the present state of
our development and other factors deemed relevant.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Exchange Act, certain persons participating
in this offering may engage in transactions, including stabilizing bids,
syndicate covering transactions or the imposition of penalty bids, that may
have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for, or the purchase of, the common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for, or the
purchase of, the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
Directed Share Program. At our request, the underwriters have reserved up
to 290,000 shares of common stock to be issued by us and offered hereby for
sales, at the initial public offering price, to our directors, officers,
employees, business associates and other related persons. Directors and
officers who purchase the reserved shares are subject to resale restrictions
promulgated by the Securities and Exchange Commission. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby. E*OFFERING Corp.
is administering the directed share program.
65
<PAGE>
NASD Compliance. BancBoston Robertson Stephens Inc. acted as the placement
agent for the private placement of our series G preferred stock in July 1999.
In connection with its services as placement agent, BancBoston Robertson
Stephens Inc. received a warrant to purchase an aggregate of 76,682 shares of
our series G preferred stock at an exercise price per share equal to the price
per share of the common stock hereby offered. BancBoston Robertson Stephens
Inc. has executed an irrevocable exercise notice to exercise its warrant as of
immediately prior to the consummation of this offering. Pursuant to
requirements of the National Association of Securities Dealers, Inc., or NASD,
BancBoston Robertson Stephens Inc. has agreed not to sell, transfer or assign
any securities underlying the warrant for one year after the effective date of
this offering. In the series G preferred private placement, Bayview Investors,
Ltd., the general partner of which is BancBoston Robertson Stephens Inc.,
purchased 37,203 shares of our series G preferred stock at $6.72 per share.
Also in that private placement, BancBoston Capital, Inc. purchased 148,810
shares of series G preferred stock for $6.72 per share. BancBoston Capital,
Inc. is a wholly-owned subsidiary of BancBoston Corporation of which BancBoston
Robertson Stephens Inc. is a direct subsidiary. Pursuant to requirements of the
NASD, Bayview Investors, Ltd. and BancBoston Capital, Inc. have agreed not to
sell, transfer or assign any securities acquired by them in our series G
preferred stock financing for three years after the effective date of this
offering.
Fidelity. Fidelity has informed us that it is facilitating electronic
distribution of information regarding the offering by posting Rule 134
compliant offering information on a Fidelity web site dedicated to unaffiliated
investment adviser customers. Interested customers must submit conditional
offers to buy to a Fidelity Brokerage Services, Inc. trading desk
representative. Conditional offers to buy from customers are not received,
confirmed or accepted online.
United Kingdom Restriction. This prospectus has not been approved as an
investment advertisement that complies with Section 57 of the Financial
Services Act 1986 and may not be issued or passed on in the United Kingdom
except to a person who is of the kind described in Article 11(3) of the
Financial Services Act (Investment Advertisements) (Exemptions) Order 1996 (as
amended), or is a person to whom the prospectus may otherwise lawfully be
issued or passed on.
66
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
on for us by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters in connection with this offering will be
passed on for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Attorneys employed with
Venture Law Group and an entity affiliated with Venture Law Group hold an
aggregate of 24,382 shares of our common stock.
EXPERTS
The consolidated financial statements of Preview Systems, Inc. included in
this registration statement as of December 31, 1997 and 1998 and for the three-
year period ended December 31, 1998, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The financial statements of Portland Software, Inc. as of December 31, 1996
and 1997 and for each of the years in the two-year period ended December 31,
1997 have been included in this registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits thereto.
For further information with respect to us and the common stock offered in this
offering, we refer you to the registration statement and to the attached
exhibits. Statements made in this prospectus concerning the contents of any
document referred to in this prospectus are not necessarily complete. With
respect to each document filed as an exhibit to the registration statement, we
refer you to the exhibit for a more complete description of the matter
involved. You may inspect our registration statement and the attached exhibits
without charge at the public reference facilities maintained by the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at Seven World Trade Center,
13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information
about the public reference facilities by calling the Securities and Exchange
Commission in the United States at 1-800-SEC-0330. You may obtain copies of all
or any part of our registration statement from the Securities and Exchange
Commission upon payment of prescribed fees. You may also inspect reports, proxy
and information statements and other information regarding registrants that
file electronically with the Securities and Exchange Commission without charge
at a web site maintained by the Securities and Exchange Commission at
http://www.sec.gov.
67
<PAGE>
[LOGO OF PREVIEW SYSTEMS]
