<PAGE>
Filed with the Securities and Exchange Commission on October 29, 1999
Registration No. 333-87181
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
PREVIEW SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
-------------------
Delaware 7371 77-0485517
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
1601 South DeAnza Boulevard, Suite 100
Cupertino, California 95014
(408) 873-3450
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
-------------------
VINCENT PLUVINAGE
Chief Executive Officer
Preview Systems, Inc.
1601 South DeAnza Boulevard, Suite 100
Cupertino, California 95014
(408) 873-3450
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
-------------------
Copies to:
Elias Blawie Alan Austin
Tom Tobiason Steven Bernard
Stephen Venuto John Whittle
Mavis Yee Jon Layman
Venture Law Group, Wilson Sonsini Goodrich & Rosati
A Professional Corporation A Professional Corporation
2800 Sand Hill Road 650 Page Mill Road
Menlo Park, California 94025 Palo Alto, California 94304
(650) 854-4488 (650) 493-9300
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
-------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.0002 per share....... 4,370,000 $12.00 $52,440,000 $14,579
</TABLE>
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(1) Includes an aggregate of 570,000 shares of Common Stock that the
Underwriters have the option to purchase from the Company.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act.
(3) Includes $12,788 previously paid by Registrant on September 16, 1999.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
Explanatory Note
Alternate pages to be used in an International prospectus follow the back
cover page of the U.S. prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1999
[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. We have applied to have the shares we
are offering approved for quotation on the Nasdaq National Market under the
symbol "PRVW." We anticipate that the initial public offering price will be
between $10.00 and $12.00 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........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds to Preview Systems..................................... $ $
</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 , 1999.
--------------
Robertson Stephens
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
SoundView Technology Group
E*OFFERING
The date of this prospectus is , 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," "Packard Bell," "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 , 1999 (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................................................................. 28
Management............................................................... 40
Certain Transactions..................................................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 66
Experts.................................................................. 66
Additional Information................................................... 66
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, such as Packard Bell NEC, to bundle encrypted digital
goods for online licensing with its computer products.
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, expand 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
Proposed 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.
. 2,275,917 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $3.63 per share as of September 30,
1999;
. 492,495 shares issuable upon exercise of outstanding warrants at a
weighted average exercise price of $7.45 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
. 2,151,919 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
assumed initial public offering price of $11.00 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 $58,454
Working capital............................................ 19,821 57,724
Total assets............................................... 29,117 67,020
Long-term portion of debt and capital lease obligations.... 351 351
Total stockholders' equity................................. 24,022 61,925
</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. In the 14 months since these acquisitions, our total
revenues were approximately $2.7 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 in providing
technical support to our customers.
We expect that the period between entering into a licensing arrangement and
the time a customer commercially deploys our solution will vary widely.
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.
We have been and likely will in the future be subject to litigation that may
adversely affect us.
From time to time we have been and expect to continue to be subject to
legal proceedings and claims in the ordinary course of business, including
claims of alleged infringement of third-party intellectual property rights by
us and our licensees. Claims like these, whether or not meritorious, could
result in the expenditure of significant financial and managerial resources and
could materially and adversely affect our business.
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.
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 of the United States is subject to
additional risks 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>
. changes in regulatory requirements, taxes and tariffs;
. reduced protection of intellectual property rights;
. the burden of complying with a variety of international laws;
. potential tax withholding of our network transaction fees;
. longer collection periods;
. U.S. and international export and use restrictions on encryption
technology;
. currency rate fluctuations that can impact our network transaction fees
which are denominated in local currencies; and
. political or economic constraints on international trade or
instability.
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.
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 and may negatively impact our ability to obtain network
transaction fees. In addition, adoption by publishers, distributors and
resellers of competing systems can 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. In
the future, we or our licensees could be found to infringe upon the patent
rights of TAU Systems 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 $7.33 per share, based on an assumed initial public offering price
of $11.00. 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 are estimated to be $37.9 million, or $43.7 million if the
underwriters' option to purchase additional shares is exercised in full, based
on an assumed initial public offering price of $11.00 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
thereof 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 shares of common stock an assumed initial public offering price
of $11.00 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 95,204
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 67,756
-------- -------- -------
Total capitalization......................... $ 24,373 $ 24,373 $68,107
======== ======== =======
</TABLE>
- --------
The information in the table above excludes:
. options outstanding to purchase an aggregate of 2,202,889 shares of
common stock issued to our employees, directors and consultants under
our stock and option plans and an additional 2,151,919 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 435,310 shares of our common stock;
. 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 $31.9 million or $2.17 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 assumed initial public offering price of $11.00 per share
(less estimated underwriting discounts and commissions and expenses we expect
to pay in connection with this offering) and exercise of all outstanding
options and warrants, our pro forma net tangible book value as of September 30,
1999 would have been $69.8 million or $3.77 per share of common stock. This
represents an immediate increase in net tangible book value of $1.60 per share
to existing stockholders and an immediate dilution of $7.23 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $11.00
Pro forma net tangible book value per share as of September 30,
1999 assuming exercise of all outstanding options and
warrants...................................................... 2.17
Increase per share attributable to new investors................ 1.60
----
Pro forma net tangible book value per share after the offering,
assuming exercise of all outstanding options and warrants..... 3.77
------
Dilution per share to new investors............................. $ 7.23
======
</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 64.6% $ 50,331,000 50.2% $4.21
Assumed exercise of
outstanding options and
warrants............... 2,768,412 14.9 11,932,398 11.9 4.31
New investors............ 3,800,000 20.5 37,902,500 37.9 9.97
---------- ----- ------------ ----- -----
Totals................. 18,536,096 100.0% $100,165,898 100.0% $5.40
========== ===== ============ ===== =====
</TABLE>
The information presented with respect to the existing stockholders
excludes the following:
. 2,151,919 shares available for future issuance under our stock and
option plans;
. 264,860 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
<PAGE>
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.
22
<PAGE>
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. 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.
23
<PAGE>
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 $400,000 resulted from increased
advertising and other related costs and approximately $100,000 related to
increase 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.
24
<PAGE>
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 headcount 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.
25
<PAGE>
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 expires 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
<PAGE>
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 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 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.
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.
27
<PAGE>
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 such as Compaq, Dell,
Gateway and Packard Bell NEC 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
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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.
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 digital content stored
on computer hard drives, DVDs or CDs and by allowing customers to
complete the sale 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
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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 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
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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 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 established relationships with 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
maintain and build relationships with the publishers and distributors that
control the majority of software industry revenues.
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 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, such as Packard Bell NEC, to bundle
encrypted digital goods for online licensing with its computer products. We
intend to expand our relationships with service providers such as NetSales and
ReleaseNow.com to enable publishers to outsource their direct sales and
accelerate their time to market. 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 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.
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Enhance our solution with value-added services. As digital goods networks
using our solution grow, we intend to develop and provide 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.
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.
<TABLE>
<CAPTION>
Business Type Direct Relationships Indirect Relationships
- ------------------------------------------------------------------------------
<S> <C> <C>
Publishers .EMI Recorded Music .Intuit
.Just Systems .INXight
.Macromedia .NetObjects
.Mattel
(Broderbund and The Learning Company)
.Symantec
- ------------------------------------------------------------------------------
Service .Chargenow.com
providers .Digital Square
.Vanessa
.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 .Packard Bell NEC .Vector
manufacturers .Prisma
.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 to
Packard Bell NEC 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. (an affiliate of EMI Recorded Music), in which Virgin
Holdings selected us to be EMI Recorded Music's preferred, recommended
technology provider for the digital distribution of music and agreed to
recommend our solution to EMI Recorded Music's worldwide distributors and
retailers. We and Virgin Holdings 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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<PAGE>
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.
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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.
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<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
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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.
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<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
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<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
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<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.
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<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.
45
<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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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 1,481,607 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, 1,351,919 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. We intend to submit this plan to our
stockholders for approval prior to the completion of this offering. 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
particpate 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. We intend to submit this plan to
our stockholders for approval in October 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 Subjects 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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(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 170,450 shares of common stock at a weighted average exercise
price of $1.53 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 of $6.72 per share.
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.
58
<PAGE>
Registration Rights
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 492,495 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.
59
<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.
60
<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 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
61
<PAGE>
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 492,495 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 2,275,917 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.
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<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 E*OFFERING Corp.,
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. ........................
Dain Rauscher Wessels......................................
SoundView Technology Group, Inc. ..........................
E*OFFERING Corp............................................
---------
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 $ per share, of which $ 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 $
million, $ million and $ 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 89%
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
63
<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. We have applied to have our common stock 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 will be determined through negotiations
between us and the representatives. Among the factors to be considered in such
negotiations are 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 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.
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 of $6.72 per share. In that
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
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<PAGE>
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
National Association of Securities Dealers, Inc. each of BancBoston Robertson
Stephens Inc., 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 and, in the case of the warrants, any securities
underlying those warrants for 90 days after the effective date of this
offering.
E*OFFERING Corp. A copy of the prospectus in electronic format will be made
available on the Internet web sites hosted by E*OFFERING Corp. and E*TRADE
Securities, Inc. E*TRADE Securities, Inc. will accept conditional offers to
purchase shares from all of its customers that pass and complete an online
eligibility profile. In the event that the demand for shares from the customers
of E*TRADE Securities, Inc. exceeds the amount of shares allocated to it,
E*TRADE Securities, Inc. will use a random allocation methodology to distribute
shares in even lots of 100 shares/customer.
65
<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.
66
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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 October 22, 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 September
Year Ended December 31, 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 December Ended September
31, 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>
September
December 31, 30,
---------------- ------------
1996 1997 1998 1998 1999
---- ----- ----- ----- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Stock options and warrants.................... 38 468 2,131 2,052 2,768
Convertible preferred stock................... 160 2,176 4,476 4,171 8,788
--- ----- ----- ----- ------
Total....................................... 198 2,644 6,607 6,223 11,556
=== ===== ===== ===== ======
</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. 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
greater than $200,000, each
F-16
<PAGE>
PREVIEW SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.... 172 170
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.......................... 8,115 13,709
===== ======
</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............................. 1 $13.02 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
---
172
===
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>
The Company granted Series G warrants exercisable for 77 shares of Series
G Preferred Stock at an exercise price of $6.72 per share during the period
January 1, 1999 through September 30, 1999. 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................ (876) 876 7.08
Options cancelled.............. 50 (93) 1.87
Options exercised.............. -- (220) 1.47
------ ------ -----
Balances, September 30, 1999
(unaudited).................. 1,352 2,276 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 agreed to pay 20/20 $160 and
20/20 signed a stipulated dismissal with prejudice. As of September 30, 1999,
the Company accrued the $160 settlement 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 subject to stockholder approval, 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"), subject to stockholder approval, 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"), subject to stockholder approval, 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,
subject to stockholder approval, 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.
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
Exercise average remaining average remaining
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1999
[LOGO OF PREVIEW TRAVEL]
3,800,000 Shares
Common Stock
This is the initial public offering for Preview Systems, Inc. No public
market currently exists for our shares. We have applied to have the shares we
are offering approved for quotation on the Nasdaq National Market under the
symbol "PRVW." We anticipate that the initial public offering price will be
between$10.00 and $12.00 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........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds to Preview Systems..................................... $ $
</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 , 1999.
--------------
Robertson Stephens International
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
SoundView Technology Group
E*OFFERING
The date of this prospectus is , 1999
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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 E*OFFERING Corp.,
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>
U.S. Underwriters Number of Shares
----------------- ----------------
<S> <C>
BancBoston Robertson Stephens Inc. ..........................
Dain Rauscher Wessels........................................
SoundView Technology Group, Inc. ............................
E*OFFERING Corp..............................................
<CAPTION>
International Underwriters
--------------------------
<S> <C>
BancBoston Robertson Stephens International Ltd..............
Dain Rauscher Wessels........................................
SoundView Technology Group, Inc. ............................
E*OFFERING Corp..............................................
---------
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 $ per share, of which $ 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 $
million, $ million and $ 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 89%
of our securities have agreed with the representatives for a period of 180 days
after the date of this prospectus, other than bona fid e gifts or
distributions to partners or shareholders, not to offer to sell, contract to
sell, or otherwise sell, dispose
63
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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. We have applied to have our common stock 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 will be determined through negotiations
between us and the representatives. Among the factors to be considered in such
negotiations are 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 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.
64
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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 of $6.72 per share. In that
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 National Association of Securities Dealers,
Inc. each of BancBoston Robertson Stephens Inc., 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 and, in
the case of the warrants, any securities underlying those warrants for 90 days
after the effective date of this offering.
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.
65
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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.
66
<PAGE>
[LOGO OF PREVIEW SYSTEMS]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Preview in connection with
the sale of common stock being registered. All amounts are estimates except the
Securities and Exchange Commission registration fee and the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Amount
to be paid
----------
<S> <C>
Securities and Exchange Commission registration fee.............. $ 12,788
NASD filing fee.................................................. 5,744
Nasdaq National Market listing fee............................... 90,500
Printing and engraving expenses.................................. 225,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 200,000
Blue Sky qualification fees and expenses......................... 3,000
Transfer Agent and Registrar fees................................ 15,000
Miscellaneous fees and expenses.................................. 19,468
--------
Total ......................................................... $971,500
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Articles XII
and XIV of Preview's Sixth Amended and Restated Certificate of Incorporation
(Exhibit 3.3 hereto) and Article VI of Preview's Amended and Restated Bylaws
(Exhibit 3.5 hereto) provide for indemnification of Preview's directors,
officers, employees and other agents to the maximum extent permitted by
Delaware Law. In addition, Preview has entered into indemnification agreements
(Exhibit 10.1 hereto) with its officers and directors. The underwriting
agreement (Exhibit 1.1 hereto) also provides for cross-indemnification among
Preview and the underwriters with respect to certain matters, including matters
arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
(a)Since July 1996, we and our predecessors, Preview Software and Portland
Software, have sold and issued the following unregistered securities (giving
effect to the conversion of the equity securities of Preview Software and
Portland Software after the mergers of these two companies in August 1998):
1. In October 1996, Portland Software issued and sold 217,236 shares of
its series A preferred stock to seven investors for aggregate
consideration of $2,800,000.
2. In December 1996 and September 1997, Preview Software issued and sold
573,500 shares of its series A preferred stock to seven investors for
aggregate consideration of $573,000.
3. In August and September 1997, Portland Software issued and sold
620,675 shares of its series B preferred stock to 14 investors for
aggregate consideration of $8,000,000. In connection with this financing,
Portland Software also issued warrants to purchase an aggregate of 217,236
shares of series B preferred stock to these same 14 investors at an
exercise price of $12.88 per share.
II-1
<PAGE>
4. In September 1997, Preview Software issued and sold 352,500 shares of
series B preferred stock to 13 investors for aggregate consideration of
$705,000.
5. In October 1997, Preview Software issued and sold 1,250,000 shares of
its series C preferred stock to nine investors for aggregate consideration
of $4,000,000. In connection with this financing, Preview Software also
issued warrants to purchase 25,430 shares of series C preferred stock at
an exercise price of $3.20 per share to six of these same investors.
6. In April 1998, Preview Software issued and sold 299,401 shares of
series D preferred stock to 17 investors for aggregate consideration of
$1,999,999.
7. In August 1998, in connection with the mergers of Portland Software
and Preview Software, we issued 2,672,594 shares of common stock,
3,313,306 shares of preferred stock and assumed warrants to purchase
171,746 shares of our common stock and 242,663 shares of our preferred
stock. We also assumed outstanding options to purchase 1,060,443 shares of
common stock. The aggregate purchase price for all of these shares was
paid in shares of Portland Software and Preview Software in connection
with the merger. The exchange ratio for Preview Software capital stock was
1 for 1. The exchange ratio for Portland Software capital stock was
0.518263943 for 1.
8. In September and October 1998, we issued and sold 1,162,518 shares of
series F preferred stock to 37 investors for aggregate consideration of
$5,812,592.
9. In November 1998, we issued a warrant to purchase 2,700 shares of
series F preferred stock at an exercise price of $5.00 to FirstCorp.
10. In July 1999, we issued and sold 4,312,448 shares of series G
preferred stock to 40 investors for aggregate consideration of
$28,979,682. In connection with this financing, we also issued a warrant
to purchase 76,682 shares of series G preferred stock at an exercise price
of $6.72 per share to BancBoston Robertson Stephens, Inc.
11. From inception to September 30, 1999, we and our predecessors
granted options and stock purchase rights to purchase an aggregate of
3,361,897 shares of common stock to our employees, directors and
consultants with exercise prices ranging from $.02 to $9.00. As of
September 30, 1999, we had outstanding options for the purchase of
2,275,917 shares and no outstanding stock purchase rights.
12. On October 19, 1999, we issued a warrant to purchase 264,800 shares
of our common stock to Virgin Holdings, Inc. at an exercise price of the
lesser of $9.00 per share or the offering price to the public in our
initial public offering.
(b)There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances of the securities listed in Item 15(a)(7) above were deemed
to be exempt from registration under the Securities Act in reliance upon
Section 3(a)(10) of the Securities Act. In addition, the issuances described in
Item 15(a)(11) were deemed exempt from registration under the Securities Act in
reliance upon Rule 701 promulgated under the Securities Act. The issuances of
the other above-referenced securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with Preview and its predecessors, to information about Preview and its
predecessors.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a)Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Fourth Amended and Restated Certificate of Incorporation, as
currently in effect.
3.2* Form of Fifth Amended and Restated Certificate of Incorporation, to
be filed and become effective prior to the completion of this
offering.
3.3* Form of Sixth Amended and Restated Certificate of Incorporation, to
be filed and become effective upon the completion of this offering.
3.4* Bylaws, as currently in effect.
3.5* Form of Amended and Restated Bylaws, to become effective upon the
completion of this offering.
4.1 Form of Common Stock Certificate.
5.1 Form of Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement.
10.2* Portland Software Amended and Restated 1994 Stock Option Plan,
including form of stock option agreement.
10.3* Preview Software 1997 Stock Option Plan, as amended, including form
of stock option agreement.
10.4* Preview Software New 1997 Stock Option Plan, as amended, including
form of stock option agreement.
10.5 Preview Systems 1998 Stock Option Plan as amended, including form of
stock option agreement.
10.6* Preview Systems 1999 Directors' Stock Option Plan, including form of
stock option agreement.
10.7* Preview Systems 1999 Employee Stock Purchase Plan, including form of
subscription agreement.
10.8 (a) Second Amended and Restated Rights Agreement between Preview
Systems and certain holders of our securities dated July 2, 1999.
(b) Amendment to Second Amended and Restated Rights Agreement between
Preview Systems and certain holders of our securities dated September
14, 1999.
10.9* Common Stock Purchase Agreement between Preview Systems and Vincent
Pluvinage dated July 5, 1999.
10.10* Common Stock Purchase Agreement between Preview Systems and Brad
Solso dated July 6, 1999.
10.11* (a) One Thousand Broadway Building Lease Agreement between Portland
Software and One Thousand Broadway Building Limited Partnership dated
July 3, 1996.
(b) 1000 Broadway Building First Lease Amendment between Portland
Software and 1000 Broadway Building LP dated August 14, 1996.
(c) First Amendment to One Thousand Broadway Building Lease Agreement
between Portland Software and One Thousand Broadway Building Limited
Partnership dated November 26, 1996.
(d) Second Amendment to One Thousand Broadway Building Lease
Agreement between Portland Software and One Thousand Broadway
Building Limited Partnership dated November 9, 1997.
10.12* (a) Standard Office Lease--Gross between Preview Software and South
Bay/Copley Venture, Inc. dated September 5, 1997.
(b) First Amendment to Lease between Preview Software and South
Bay/Copley Venture, Inc. dated November 25, 1997.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------------------
<C> <S>
(c) Second Amendment to Lease Agreement between Preview Software and
Limar Realty Corp. #26 dated August 26, 1998.
10.13* (a) Loan and Security Agreement between Silicon Valley Bank and
Preview Systems dated
November 2, 1998.
(b) Loan Modification Agreement between Silicon Valley Bank and
Preview Systems dated July 1, 1999.
10.14+ ZipLock ESD System License Agreement between Preview Systems and
Ingram Micro Inc., dated June 30, 1999.
10.15+ License Agreement between Preview Systems and Sony Marketing of Japan,
dated as of September 29, 1998.
10.16* Agreement and Plan of Reorganization by and among Preview Systems,
Preview Software, Portland Software, Preview Acquisition Corp. and
Portland Acquisition Corp. dated as of May 28, 1998.
10.17* Series G Preferred Stock Purchase Agreement between Preview Systems
and certain investors dated as of July 2, 1999.
10.18* Series F Preferred Stock Purchase Agreement between Preview Systems
and certain investors dated as of September 15, 1998.
10.19* Series D Preferred Stock Purchase Agreement between Preview Software
and certain investors dated as of April 21, 1998.
10.20* Pledge Agreement between Preview Systems Inc. and Vincent Pluvinage
dated September 14, 1998.
10.21 Sublease Agreement between Virtual Integration Technology and Preview
Systems dated September 1, 1999.
10.22 Preview Systems 1999 Executive Stock Option Plan, including form of
stock option agreement.
21.1* Subsidiaries of Preview Systems.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
23.3 Form of Consent of Counsel (See Exhibit 5.1).
24.1* Power of Attorney (See Page II-6).
27.1* Financial Data Schedule, December 31, 1998.
27.2 Financial Data Schedule, September 30, 1999.
</TABLE>
- --------
*Previously filed.
+Confidential treatment requested as to certain portions of this exhibit.
(b)Financial Statement Schedules
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Cupertino, State of
California on October 29, 1999.
PREVIEW SYSTEMS, INC.
/s/ Dr. Vincent Pluvinage
By:
----------------------------------
Dr. Vincent Pluvinage
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Vincent
Pluvinage and G. Bradford Solso and each of them, as his or her attorney-in-
fact, with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and any and all Registration Statements
filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in
connection with or related to the offering contemplated by this Registration
Statement and its amendments, if any, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dr. Vincent Pluvinage President, Chief Executive October 29, 1999
____________________________________ Officer, Director
Dr. Vincent Pluvinage
/s/ Mr. G. Bradford Solso Vice President, Chief October 29, 1999
____________________________________ Financial Officer
Mr. G. Bradford Solso
* Chairman of the Board of October 29, 1999
____________________________________ Directors
Mr. Gerard H. Langeler
* Director October 29, 1999
____________________________________
Mr. Bruce R. Bourbon
* Director October 29, 1999
____________________________________
Mr. Donald L. Lucas
* Director October 29, 1999
____________________________________
Mr. Gary E. Rieschel
* Director October 29, 1999
____________________________________
Dr. R. Douglas Rivers
* Director October 29, 1999
____________________________________
Ms. Jo Ann Heidi Roizen
</TABLE>
/s/ G. Bradford Solso
*By________________________
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Fourth Amended and Restated Certificate of Incorporation, as
currently in effect.
3.2* Form of Fifth Amended and Restated Certificate of Incorporation, to
be filed and become effective prior to the completion of this
offering.
3.3* Form of Sixth Amended and Restated Certificate of Incorporation, to
be filed and become effective upon the completion of this offering.
3.4* Bylaws, as currently in effect.
3.5* Form of Amended and Restated Bylaws, to become effective upon the
completion of this offering.
4.1 Form of Common Stock Certificate.
5.1 Form of Opinion of Venture Law Group, A Professional Corporation.
10.1* Form of Indemnification Agreement.
10.2* Portland Software Amended and Restated 1994 Stock Option Plan,
including form of stock option agreement.
10.3* Preview Software 1997 Stock Option Plan, as amended, including form
of stock option agreement.
10.4* Preview Software New 1997 Stock Option Plan, as amended, including
form of stock option agreement.
10.5 Preview Systems 1998 Stock Option Plan as amended, including form of
stock option agreement.
10.6* Preview Systems 1999 Directors' Stock Option Plan, including form of
stock option agreement.
10.7* Preview Systems 1999 Employee Stock Purchase Plan, including form of
subscription agreement.
10.8 (a) Second Amended and Restated Rights Agreement between Preview
Systems and certain holders of our securities dated July 2, 1999.
(b) Amendment to Second Amended and Restated Rights Agreement between
Preview Systems and certain holders of our securities dated September
14, 1999.
10.9* Common Stock Purchase Agreement between Preview Systems and Vincent
Pluvinage dated
July 5, 1999.
10.10* Common Stock Purchase Agreement between Preview Systems and Brad
Solso dated July 6, 1999.
10.11* (a) One Thousand Broadway Building Lease Agreement between Portland
Software and One Thousand Broadway Building Limited Partnership dated
July 3, 1996.
(b) 1000 Broadway Building First Lease Amendment between Portland
Software and 1000 Broadway Building LP dated August 14, 1996.
(c) First Amendment to One Thousand Broadway Building Lease Agreement
between Portland Software and One Thousand Broadway Building Limited
Partnership dated November 26, 1996.
(d) Second Amendment to One Thousand Broadway Building Lease
Agreement between Portland Software and One Thousand Broadway
Building Limited Partnership dated November 9, 1997.
10.12* (a) Standard Office Lease--Gross between Preview Software and South
Bay/Copley Venture, Inc. dated September 5, 1997.
(b) First Amendment to Lease between Preview Software and South
Bay/Copley Venture, Inc. dated November 25, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------------------
<C> <S>
(c) Second Amendment to Lease Agreement between Preview Software and
Limar Realty Corp. #26 dated August 26, 1998.
10.13* (a) Loan and Security Agreement between Silicon Valley Bank and
Preview Systems dated
November 2, 1998.
(b) Loan Modification Agreement between Silicon Valley Bank and
Preview Systems dated July 1, 1999.
10.14+ ZipLock ESD System License Agreement between Preview Systems and
Ingram Micro Inc., dated June 30, 1999.
10.15+ License Agreement between Preview Systems and Sony Marketing of Japan,
dated as of September 29, 1998.
10.16* Agreement and Plan of Reorganization by and among Preview Systems,
Preview Software, Portland Software, Preview Acquisition Corp. and
Portland Acquisition Corp. dated as of May 28, 1998.
10.17* Series G Preferred Stock Purchase Agreement between Preview Systems
and certain investors dated as of July 2, 1999.
10.18* Series F Preferred Stock Purchase Agreement between Preview Systems
and certain investors dated as of September 15, 1998.
10.19* Series D Preferred Stock Purchase Agreement between Preview Software
and certain investors dated as of April 21, 1998.
10.20* Pledge Agreement between Preview Systems Inc. and Vincent Pluvinage
dated September 14, 1998.
10.21 Sublease Agreement between Virtual Integration Technology and Preview
Systems dated September 1, 1999.
10.22 Preview Systems 1999 Executive Stock Option Plan, including form of
stock option agreement.
21.1* Subsidiaries of Preview Systems.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG LLP.
23.3 Form of Consent of Counsel (See Exhibit 5.1).
24.1* Power of Attorney (See Page II-6).
27.1* Financial Data Schedule, December 31, 1998.
27.2 Financial Data Schedule, September 30, 1999.
</TABLE>
- --------
*Previously filed.
+Confidential treatment requested as to certain portions of this exhibit.
<PAGE>
EXHIBIT 1.1
Underwriting Agreement
October ___, 1999
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels
SoundView Technology Group, Inc.
E*OFFERING Corp.
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
Introductory. Preview Systems, Inc., a Delaware corporation (the
"Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares")
- ----------
of its Common Stock, par value $0.0002 per share (the "Common Shares"). In
addition, the Company has granted to the Underwriters an option to purchase up
to an additional [___] Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares". BancBoston Robertson
Stephens Inc., Dain Rauscher Wessels, SoundView Technology Group, Inc. and
E*OFFERING Corp. have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-[ ]), which contains a form of prospectus subject to completion used in
connection with the public offering and sale of the Shares. Each such
prospectus subject to completion used in connection with such public offering is
called a "preliminary prospectus." Such registration statement, as amended,
including the financial statements, exhibits and schedules thereto, in the form
in which it was declared effective by the Commission under the Securities Act of
1933 and the rules and regulations promulgated thereunder (collectively, the
"Securities Act"), including any information deemed to be a part thereof at the
time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities
Act, is called the "Registration Statement". Any registration statement filed
by the Company pursuant to Rule 462(b) under the Securities Act is called the
"Rule 462(b) Registration Statement", and from and after the
<PAGE>
date and time of filing of the Rule 462(b) Registration Statement the term
"Registration Statement" shall include the Rule 462(b) Registration Statement.
Such prospectus, in the form first used by the Underwriters to confirm sales of
the Shares, is called the "Prospectus." All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a preliminary
prospectus or the Prospectus, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. Representations and Warranties of the Company.
The Company hereby represents, warrants and covenants to each Underwriter
as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
-2-
<PAGE>
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to each of the Representatives one complete conformed copy of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the r ights and remedies of creditors or
by general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any class
of capital stock.
-3-
<PAGE>
(h) Independent Accountants. Arthur Andersen LLP, who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) filed with the Commission as a
part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the Securities
Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. Such financial
statements have been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary
Consolidated Financial Data", "Capitalization," "Dilution," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in the Prospectus and in the
Registration Statement fairly present the information set forth therein on a
basis consistent with that of the audited financial statements contained in the
Registration Statement. The pro forma financial statements of the Company and
its subsidiaries and the related notes thereto included under the captions
"Prospectus Summary--Summary Consolidated Financial Data," "Capitalization,"
"Dilution," "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in the
Prospectus and in the Registration Statement present fairly the information
contained therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements and have been
properly presented on the bases described therein, and the assumptions used in
the preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances referred to
therein. No other pro forma financial information is required to be included in
the Registration Statement pursuant to Regulation S-X.
(j) Company's Accounting System. The Company and each of its subsidiaries
maintain a system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21.1 to the Registration Statement.
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(l) Incorporation and Good Standing of the Company and its Subsidiaries.
Each of the Company and its subsidiaries has been duly organized and is validly
existing as a corporation or limited liability company, as the case may be, in
good standing under the laws of the jurisdiction in which it is organized with
full corporate power and authority to own its properties and conduct its
business as described in the prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification.
(m) Capitalization of the Subsidiaries. All the outstanding shares of
capital stock of each subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiaries
are owned by the Company either directly or through wholly owned subsidiaries
free and clear of any security interests, claims, liens or encumbrances.
(n) No Prohibition on Subsidiaries from Paying Dividends or Making Other
Distributions. No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(o) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The Common
Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding Common Shares were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(p) Stock Exchange Listing. The Shares have been approved for listing on
the Nasdaq National Market, subject only to official notice of issuance.
(q) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained
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or made under the Securities Act and such as may be required (i) under the blue
sky laws of any jurisdiction in connection with the purchase and distribution of
the Shares by the Underwriters in the manner contemplated here and in the
Prospectus, (ii) by the National Association of Securities Dealers, LLC and
(iii) by the federal and provincial laws of Canada.
(r) Non-Contravention of Existing Instruments Agreements. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of
its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its or their
properties.
(s) No Defaults or Violations. Neither the Company nor any subsidiary is
in violation or default of (i) any provision of its charter or by-laws, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(t) No Actions, Suits or Proceedings. Except as otherwise disclosed in the
Prospectus, no action, suit or proceeding by or before any court or governmental
agency, authority or body or any arbitrator involving the Company or any of its
subsidiaries or its or their property is pending or, to the best knowledge of
the Company, threatened that (i) could reasonably be expected to have a Material
Adverse Effect on the performance of this Agreement or the consummation of any
of the transactions contemplated hereby or (ii) could reasonably be expected to
result in a Material Adverse Effect.
(u) All Necessary Permits, Etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
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(v) Title to Properties. The Company and each of its subsidiaries has good
and marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(j) above (or elsewhere in the
Prospectus), in each case free and clear of any security interests, mortgages,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such subsidiary. The real property, improvements, equipment and
personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.
(w) Tax Law Compliance. The Company and its subsidiaries have filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(j) above in respect of all
federal, state and foreign income and franchise taxes for all periods as to
which the tax liability of the Company or any of its subsidiaries has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(x) Intellectual Property Rights. Each of the Company and its subsidiaries
owns or possesses adequate rights to use all patents, patent rights or licenses,
inventions, collaborative research agreements, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries do not in the conduct of their business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.
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<PAGE>
(y) Year 2000 Preparedness. There are no issues related to the Company's,
or any of its subsidiaries', preparedness for the Year 2000 that (i) are of a
character required to be described or referred to in the Registration Statement
or Prospectus by the Securities Act which have not been accurately described in
the Registration Statement or Prospectus or (ii) might reasonably be expected to
result in any Material Adverse Change or that might materially affect their
properties, assets or rights. All internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its subsidiaries fully comply with Year 2000 Qualification
Requirements. "Year 2000 Qualifications Requirements" means that the internal
computer systems and each Constituent Component (as defined below) of those
systems and all computer-related products and each Constituent Component (as
defined below) of those products of the Company and each of its Subsidiaries (i)
have been reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations), input and
output data containing date and information correctly regardless of whether the
date contains dates and times before, on or after January 1, 2000, (ii) have
been designated to ensure date and time entry recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The Company
has inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that might
reasonably be expected to result in any Material Adverse Change.
(z) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(aa) Company Not an "Investment Company". The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of payment
for the Shares will not be, an "investment company" or an entity "controlled" by
an "investment company" within the meaning of the Investment Company Act and
will conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(bb) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes,
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<PAGE>
general liability and Directors and Officers liability. The Company has no
reason to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or appropriate
to conduct its business as now conducted and at a cost that would not result in
a Material Adverse Change. Neither of the Company nor any subsidiary has been
denied any insurance coverage which it has sought or for which it has applied.
(cc) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, subcontractors,
or international distributors that might be expected to result in a Material
Adverse Change.
(dd) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(ee) Lock-Up Agreements. Each officer and director of the Company and each
beneficial owner of one or more percent of the outstanding issued share capital
of the Company has agreed to sign an agreement substantially in the form
attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has
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provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancBoston Robertson Stephens Inc.
(ff) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
(gg) No Unlawful Contributions or Other Payments. Neither the Company nor
any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
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<PAGE>
(hh) Environmental Laws. (i) The Company is in compliance with all rules,
laws and regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, except where the failure to comply
would not result in a Material Adverse Change, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et
--
seq.), or otherwise designated as a contaminated site under applicable state
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or local law.
(ii) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended,
and the regulations and published interpretations thereunder (the "Code") of
which the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfounded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
Section 2. Purchase, Sale and Delivery of the Shares.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on Schedule A. The purchase price
----------
per Firm Share to be paid by the several Underwriters to the Company shall be
$[___] per share.
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(b) The First Closing Date. Delivery of the Firm Shares to be purchased by
the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Venture Law
Group, A Professional Corporation, 2800 Sandhill Road, Menlo Park, CA 94025 (or
at such other place as may be agreed upon among the Representatives and the
Company), (i) on the third (3rd) full business day following the first day that
Shares are traded, (ii) if this Agreement is executed and delivered after 1:30
P.M., San Francisco time, the fourth (4th) full business day following the day
that this Agreement is executed and delivered or (iii) at such other time and
date not later that seven (7) full business days following the first day that
Shares are traded as the Representatives and the Company may determine (or at
such time and date to which payment and delivery shall have been postponed
pursuant to Section 8 hereof), such time and date of payment and delivery being
herein called the "Closing Date;" provided, however, that if the Company has not
made available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later that two (2) full business
days following delivery of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of [___] Option Shares from the Company at the purchase price
per share to be paid by the Underwriters for the Firm Shares. The option granted
hereunder is for use by the Underwriters solely in covering any over-allotments
in connection with the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on Schedule A opposite the name of such Underwriter bears to the total number
----------
of Firm Shares. The Representatives may cancel the option at any time prior to
its expiration by giving written notice of such cancellation to the Company.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
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<PAGE>
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
BancBoston Robertson Stephens Inc., individually and not as the Representatives
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon
on the second business day following the date the Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall request.
Section 3. Covenants of the Company.
The Company further covenants and agrees with each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
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Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representatives or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as
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<PAGE>
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the ninety
(90) day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from
the sale of the Shares sold by it in the manner described under the caption "Use
of Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending [___] that satisfies the provisions of Section 11(a) of the Securities
Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company
will not, without the prior written consent of BancBoston Robertson Stephens
Inc., for a period of 180 days following the date of the Prospectus, offer, sell
or contract to sell, or otherwise dispose of or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual
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<PAGE>
disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus.
(m) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
(n) Exchange Act Compliance. During the Prospectus Delivery Period,
the Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within
the time periods required by the Exchange Act.
Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No
Objection from the National Association of Securities Dealers, LLC. The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional
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<PAGE>
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of Underwriters'
Counsel; and the National Association of Securities Dealers, LLC shall have
raised no objection to the fairness and reasonableness of the underwriting terms
and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and
delivery of this Agreement and prior to the First Closing Date, or the Second
Closing Date, as the case may be, there shall not have been any Material Adverse
Change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on
the First Closing Date, or the Second Closing Date, as the case may be, an
opinion of Venture Law Group, A Professional Corporation, counsel for the
Company, substantially in the form of Exhibit B attached hereto, dated the First
---------
Closing Date, or the Second Closing Date, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
---------
questions of law not involving the laws of the United States or the State of
California and Delaware upon opinions of local counsel, and as to questions of
fact upon representations or certificates of officers of the Company and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) Opinion of Patent Counsel for the Company. You shall have
received on the First Closing Date, or the Second Closing Date, as the case may
be, an opinion of [NAME OF PATENT COUNSEL], patent counsel for the Company
substantially in the form of Exhibit C attached hereto.
---------
(f) Opinion of Counsel for the Underwriters. You shall have received
on the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
substantially in the form of Exhibit D hereto. The Company shall have furnished
---------
to such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
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<PAGE>
(g) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Arthur Andersen LLP addressed to the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from
Arthur Andersen LLP shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i) represent, to
the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheet of the Company as of
December 31, 1996, 1997 and 1998 and related consolidated statements of
operations, shareholders' equity, and cash flows for the twelve (12) months
ended December 31, 1996, 1997 and 1998, (iii) state that Arthur Andersen LLP has
performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS
71") for a review of interim financial information and providing the report of
Arthur Andersen LLP as described in SAS 71 on the financial statements for each
of the quarters in the six-quarter period ended June 30, 1999 (the "Quarterly
Financial Statements"), (iv) state that in the course of such review, nothing
came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and address other matters
agreed upon by Arthur Andersen LLP and you. In addition, you shall have
received from Arthur Andersen LLP a letter addressed to the Company and made
available to you for the use of the Underwriters stating that their review of
the Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the Company's
consolidated financial statements as of December 31, 1998, did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.
(h) Officers' Certificate. You shall have received on the First
Closing Date and the Second Closing Date, as the case may be, a certificate of
the Company, dated the First Closing Date
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<PAGE>
or the Second Closing Date, as the case may be, signed by the Chief Executive
Officer and Chief Financial Officer of the Company, to the effect that, and you
shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included therein by the
Securities Act and in all material respects conformed to the requirements
of the Securities Act, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, did not and does not include any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (b) any transaction that is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (c)
any obligation, direct or contingent, that is material to the Company and
its subsidiaries considered as one enterprise, incurred by the Company or
its subsidiaries, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding indebtedness
of the Company or any of its subsidiaries that is material to the Company
and its subsidiaries considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or any of its subsidiaries, or (f) any loss or damage (whether or
not insured) to the property of the Company or any of its subsidiaries
which has been sustained or will have been sustained which has a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(i) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of Exhibit A attached
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<PAGE>
hereto from each officer and director of the Company and each beneficial owner
of one or more percent of the outstanding issued share capital of the Company.
(j) Stock Exchange Listing. The Shares shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(k) Compliance with Prospectus Delivery Requirements. The Company
shall have complied with the provisions of Sections 2(g) and 3(e) hereof with
respect to the furnishing of Prospectuses.
(l) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representatives and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
Section 5. Payment of Expenses. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representatives,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications,
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<PAGE>
registrations and exemptions, (vii) the filing fees incident to, and the
reasonable fees and expenses of counsel for the Underwriters in connection with,
the National Association of Securities Dealers, LLC review and approval of the
Underwriters' participation in the offering and distribution of the Common
Shares, (viii) the fees and expenses associated with listing the Common Stock on
the Nasdaq National Market, (ix) all costs and expenses incident to the
preparation and undertaking of "road show" preparations to be made to
prospective investors, and (x) all other fees, costs and expenses referred to in
Item 13 of Part II of the Registration Statement. Except as provided in this
Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay their own
expenses, including the fees and disbursements of their counsel.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement
is terminated by the Representatives pursuant to Section 4, Section 7, Section 8
or Section 9, or if the sale to the Underwriters of the Shares on the First
Closing Date is not consummated because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse the Representatives and the
other Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.
Section 7. Indemnification and Contribution.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection
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<PAGE>
with, or relating in any manner to, the Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon any matter covered by
clause (i), (ii), (iii) or (iv) above, provided that the Company shall not be
liable under this clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter through its bad faith
or willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
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<PAGE>
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph and the second
paragraph under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
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indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section
7(b) and Section 8), representing the indemnified parties who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall
not be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section
7 is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received
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by the Company bears to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(f) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 7(f) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (f), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and
-24-
<PAGE>
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Securities Act and the
Exchange Act.
Section 8. Default of One or More of the Several Underwriters. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Common Shares
set forth opposite their respective names on Schedule A bears to the aggregate
----------
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representatives or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. Termination of this Agreement. Prior to the First Closing
Date, this Agreement may be terminated by the Representatives by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and
-25-
<PAGE>
on the terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured. Any termination pursuant to
this Section 9 shall be without liability on the part of (a) the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 5 and
6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any
other party except that the provisions of Section 7 shall at all times be
effective and shall survive such termination.
Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
Section 11. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
Preview Systems, Inc.
1601 S. DeAnza, Suite 100
Cupertino, CA 95041
Facsimile: (408) 873-3465
Attention: Vincent Pluvinage, President and CEO
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. Successors. This Agreement will inure to the benefit
of and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit
-26-
<PAGE>
of the employees, officers and directors and controlling persons referred to in
Section 7, and to their respective successors, and no other person will have any
right or obligation hereunder. The term "successors" shall not include any
purchaser of the Shares as such from any of the Underwriters merely by reason of
such purchase.
Section 13. Partial Unenforceability. The invalidity or
Unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
Section 14. Governing Law Provisions.
(a) Governing Law. This agreement shall be governed by and construed
in accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without
-27-
<PAGE>
limitation, any immunity pursuant to the United States Foreign Sovereign
Immunities Act of 1976, as amended.
Section 15. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
[The remainder of this page has been intentionally left blank.]
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
PREVIEW SYSTEMS, INC.
By: ____________________________________
Vincent Pluvinage
President and CEO
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
DAIN RAUSCHER WESSELS
SOUNDVIEW TECHNOLOGY GROUP, INC.
E*OFFERING CORP.
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
- ----------
By BANCBOSTON ROBERTSON STEPHENS INC.
By:_________________________________
Authorized Signatory
-29-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Underwriters To be Purchased
- ------------------------------------------ ------------------------
<S> <C>
BANCBOSTON ROBERTSON [___]
STEPHENS INC............................
DAIN RAUSCHER WESSELS..................... [___]
SOUNDVIEW TECHNOLOGY [___]
GROUP, INC..............................
E*OFFERING CORP.
[___]..................................... [___]
[___]..................................... [___]
[___]..................................... [___]
Total................................ [___]
</TABLE>
S-A
<PAGE>
Exhibit A
LOCK-UP AGREEMENT
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels
SoundView Technology Group, Inc.
E*OFFERING
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock (the "Common Stock") of Preview Systems, Inc. (the "Company") or
securities convertible into or exchangeable or exercisable for Common Stock.
The Company proposes to carry out a public offering of Common Stock (the
"Offering") for which you will act as the representatives (the
"Representatives") of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market, (iv) with respect to sales or purchases of
Common Stock acquired on the open market or (v) with the prior written consent
of BancBoston Robertson Stephens Inc., for a period commencing on the date
hereof and continuing to a date 180 days after the Registration Statement is
declared effective by the Securities and Exchange Commission (the "Lock-up
Period"). The foregoing restriction has been expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such
A-1
<PAGE>
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that included, relates to or derives any significant
part of its value from Securities. The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or Securities held by
the undersigned except in compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Very truly yours,
Name:
-------------------------------------------------
Printed Name of Holder
By:
-------------------------------------------------
Signature
-------------------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
Date:
-------------------------------------------------
A-2
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Company Counsel
(i) The Company and each Significant Subsidiary (as that term is
defined in Regulation S-X of the Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation;
(ii) The Company and each Significant Subsidiary has the corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction,
if any, in which the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a Material Adverse Effect. To
such counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than [list
subsidiaries];
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein, the issued and outstanding shares of capital stock of the
Company have been duly and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right;
(v) All issued and outstanding shares of capital stock of each
Significant Subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and, to such counsel's knowledge,
have not been issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right and are
owned by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable, and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first refusal
or other similar right;
(vii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the Shares to
be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company and, assuming due authorization, execution and delivery by you, is a
valid and binding agreement of the Company,
B-1
<PAGE>
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(ix) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Securities Act;
(x) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and offering of the Firm
Shares or the Option Shares has been validly registered under the Securities Act
and the Rules and Regulations, and the class of the Firm Shares or the Option
Shares has been validly registered under the Exchange Act and the applicable
rules and regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements (including supporting
schedules) and financial data derived therefrom as to which such counsel need
express no opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of the Act
and the applicable Rules and Regulations;
(xii) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of such
matters and conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply with Delaware
law;
(xiii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and fairly
present the information required to be presented by the Securities Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required to
be described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which are not described or
referred to therein or filed as required;
(xv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the Company's charter or
bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other
B-2
<PAGE>
evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument known to
such counsel to which the Company is a party or by which its properties are
bound, or any applicable statute, rule or regulation known to such counsel or,
to such counsel's knowledge, any order, writ or decree of any court, government
or governmental agency or body having jurisdiction over the Company or any of
its subsidiaries, or over any of their properties or operations;
(xvi) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries, or over any of their properties or
operations is necessary in connection with the consummation by the Company of
the transactions herein contemplated, except (i) such as have been obtained
under the Securities Act, (ii) such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters, (iii) such as may be required by the National
Association of Securities Dealers, LLC and (iv) such as may be required under
the federal or provincial laws of Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its subsidiaries
of a character required to be disclosed in the Registration Statement or the
Prospectus by the Securities Act, other than those described therein;
(xviii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective charter or
bylaws, or (b) in material breach of any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order, writ or decree
of any court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries, or over any of their properties or operations; and
(xix) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Company Shares or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Company Shares or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights.
(xx) The Company is not and, after giving effect to the offering and
the sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be, an "investment company" as such term is defined
in the Investment Company Act of 1940, as amended.
(xxi) To such counsel's knowledge, the Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights
B-3
<PAGE>
(collectively, "Intellectual Property Rights") reasonably necessary to conduct
their business as now conducted; and the expected expiration of any such
Intellectual Property Rights would not result in a Material Adverse Effect. The
Company has not received any notice of infringement or conflict with asserted
Intellectual Property Rights of others, which infringement or conflict, if the
subject of an unfavorable decision, would result in a Material Adverse Effect.
To such counsel's knowledge, the Company's discoveries, inventions, products, or
processes referred to in the Registration Statement or Prospectus do not
infringe or conflict with any right or patent which is the subject of a patent
application known to the Company.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other Representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-4
<PAGE>
Exhibit C
Matters to be Covered in the Opinion of
Patent Counsel for the Company
Such counsel are familiar with the technology used by the Company in
its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) The Company is listed in the records of the United States Patent and
Trademark Office as the holder of record of the patents listed on a schedule to
such opinion (the "Patents") and each of the applications listed on a schedule
to such opinion (the "Applications"). To the knowledge of such counsel, there
are no claims of third parties to any ownership interest or lien with respect to
any of the Patents or Applications. Such counsel is not aware of any material
defect in form in the preparation or filing of the Applications on behalf of the
Company. To the knowledge of such counsel, the Applications are being pursued
by the Company. To the knowledge of such counsel, the Company owns as its sole
property the Patents and pending Applications;
(ii) The Company is listed in the records of the appropriate foreign
offices as the sole holder of record of the foreign patents listed on a schedule
to such opinion (the "Foreign Patents") and each of the applications listed on a
schedule to such opinion (the "Foreign Applications"). Such counsel knows of no
claims of third parties to any ownership interest or lien with respect to the
Foreign Patents or Foreign Applications. Such counsel is not aware of any
material defect of form in the preparation or filing of the Foreign Applications
on behalf of the Company. To the knowledge of such counsel, the Foreign
Applications are being pursued by the Company. To the knowledge of such counsel,
the Company owns as its sole property the Foreign Patents and pending Foreign
Applications;
(iii) Such counsel knows of no reason why the Patents or Foreign Patents
are not valid as issued. Such counsel has no knowledge of any reason why any
patent to be issued as a result of any Application or Foreign Application would
not be valid or would not afford the Company useful patent protection with
respect thereto;
(iv) As to the statements under the captions "Risk Factors -- Our
intellectual property rights are difficult and costly to protect," "Risk
Factors -- We may be sued for violating the intellectual property rights of
others" and "Business -Intellectual Property," nothing has come to the attention
of such counsel which caused them to believe that the above-mentioned sections
of the Registration Statement, at the time the Registration Statement became
effective and at all times subsequent thereto up to and on the Closing Date and
on any later date on which Option Stock are to be purchased the Registration
Statement and any amendment or supplement thereto made available and reviewed by
such counsel contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading,
C-1
<PAGE>
or at the Closing Date or any later date on which the Option Stock are to be
purchased, as the case may be, the above-mentioned sections of the Registration
Statement, Prospectus and any amendment or supplement thereto made available and
reviewed by such counsel contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and
(v) Such counsel knows of no material action, suit, claim or proceeding
relating to patents, patent rights or licenses, trademarks or trademark rights,
copyrights, collaborative research, licenses or royalty arrangements or
agreements or trade secrets, know-how or proprietary techniques, including
processes and substances, owned by or affecting the business or operations of
the Company which are pending or threatened against the Company or any of its
officers or directors.
C-2
<PAGE>
Exhibit D
Matters to be Covered in the Opinion of Underwriters' Counsel
(i) The [Firm Shares] [Option Shares] have been duly authorized and,
upon issuance and delivery and payment therefor in accordance with the terms of
the Underwriting Agreement, will be validly issued, fully paid and non-
assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has become
effective under the Act and, to such counsel's knowledge, no stop order
proceedings with respect thereto have been instituted or threatened or are
pending under the Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the offering of the
Firm Shares or the Option Shares has been validly registered under the
Securities Act and the Rules and Regulations, and the class of the Firm Shares
or the Option Shares has been validly registered under the Exchange Act and the
applicable rules and regulations of the Commission thereunder;
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Venture Law Group and [ ], each dated the
date hereof, and furnished to you in accordance with the provisions of the
Underwriting Agreement. Such opinions appear on their face to be appropriately
responsive to the requirements of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other Representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact
D-1
<PAGE>
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
D-2
<PAGE>
Exhibit 4.1
<TABLE>
<S> <C> <C>
COMMON STOCK COMMON STOCK
[SEAL] [SEAL]
INCORPORATED UNDER THE LAWS [LOGO OF PREVIEW SYSTEMS] SEE RESERVE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 741379 10 1
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK, $.0002 PAR VALUE PER SHARE, OF
Preview Systems, Inc.
transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this
Certificate property endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
Elias J. Blawie Vincent Pluvinage
SECRETARY [SEAL OF PREVIEW SYSTEMS, INC.] PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE>
Preview Systems, Inc.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT...............Custodian...................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act________________________________________
in common (State)
COM PROP -- as community property UNIF TRF MIN ACT...........Custodian (until age............)
(Cust)
....................under Uniform Transfers
(Minor)
to Minors Act ............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING
ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated _____________________
X__________________________________________
X__________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE>
EXHIBIT 5.1
Form of Issuer's Counsel
Legal Opinion
____________, 1999
Preview Systems, Inc.
1601 South DeAnza Boulevard, Suite 100
Cupertino, CA
Registration Statement on Form S-1 (File No. 333-87181)
-------------------------------------------------------
Ladies and Gentlemen:
We have examined the amended Registration Statement on Form S-1 (File No.
333-87181) (the "Registration Statement") to be filed by you with the Securities
and Exchange Commission on or about , 1999, in connection with the
registration under the Securities Act of 1933 of shares of your Common Stock
(the "Shares"). As your legal counsel in connection with this transaction, we
have examined the proceedings taken and we are familiar with the proceedings
proposed to be taken by you in connection with the sale and issuance of the
Shares. It is our opinion that upon completion of the proceedings being taken in
order to permit such transactions to be carried out in accordance with the
securities laws of the various states where required, the Shares, when issued
and sold in the manner described in the Registration Statement, will be legally
and validly issued, full paid and nonassessable. We consent to the use of this
opinion as an exhibit to the Registration Statement and further consent to the
use of our name wherever it appears in the Registration Statement and in any
amendment to it.
Sincerely,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
<PAGE>
EXHIBIT 10.5
PREVIEW SYSTEMS, INC.
1998 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1998 Stock Option Plan
--------------------
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business. Options granted under the Plan may be incentive stock
options (as defined under Section 422 of the Code) or nonstatutory stock
options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code, as amended,
and the regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall
-----------
apply:
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary in which the
---------
Company owns an equity interest or which, together with the Company, is under
common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any stock exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Preview Systems, Inc., a Delaware corporation.
-------
(i) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(j) "Continuous Status as an Employee or Consultant" means the absence
----------------------------------------------
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as
<PAGE>
an Employee or Consultant shall not be considered interrupted in the case of:
(i) sick leave; (ii) military leave; (iii) any other leave of absence approved
by the Administrator, provided that such leave is for a period of not more than
ninety (90) days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute, or unless provided otherwise pursuant to
Company policy adopted from time to time; or (iv) in the case of transfers
between locations of the Company or between the Company, its Subsidiaries or
their respective successors. For purposes of this Plan, a change in status from
an Employee to a Consultant or from a Consultant to an Employee will not
constitute an interruption of Continuous Status as an Employee or Consultant.
(k) "Director" means a member of the Board of Directors of the
--------
Company.
(l) "Employee" means any person (including, if appropriate, Officers,
--------
Directors and Named Executives) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company, with the status of employment determined
based upon such minimum number of hours or periods worked as shall be determined
by the Administrator in its discretion, subject to any requirements of the Code.
The payment of a director's fee to a Director shall not be sufficient to
constitute "employment" of such Director by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(n) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(o) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
-2-
<PAGE>
(p) "Listed Security" means any security of the Company that is
---------------
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(q) "Named Executive" means any individual who, on the last day of
---------------
the Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(r) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(v) "Optionee" means an Employee or Consultant who receives an
--------
Option.
(w) "Parent" means a "parent corporation," whether now or hereafter
------ ------------------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(x) "Plan" means this 1998 Stock Option Plan.
----
(y) "Reporting Person" means an officer, director, or greater than
----------------
ten percent shareholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(z) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
(aa) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(bb) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
---------- ----------------------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
-3-
<PAGE>
(dd) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section
-------------------------
12 of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 2,850,000 shares of Common Stock (on a post-split basis),
plus 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)
800,000 Shares (on a post-split basis), (ii) three percent (3%) of the Shares
outstanding on the last day of the immediately preceding fiscal year, or (iii)
such lesser number of shares as is determined by the Board of Directors. The
shares may be authorized, but unissued, or reacquired Common Stock. If an
Option should expire or become unexercisable for any reason without having been
exercised in full, the unpurchased Shares that were subject thereto shall,
unless the Plan shall have been terminated, become available for future grant
under the Plan. In addition, any shares of Common Stock which are retained by
the Company upon exercise of an Option in order to satisfy the exercise or
purchase price for such Option or any withholding taxes due with respect to such
exercise shall be treated as not issued and shall continue to be available under
the Plan. Shares repurchased by the Company pursuant to any repurchase right
which the Company may have shall not be available for future grant under the
Plan.
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Optionees and, if permitted by the Applicable Laws, the Board may
authorize one or more officers (who may (but need not) be Officers) to grant
Options to Employees and Consultants.
(b) Administration With Respect to Reporting Persons. With respect to
------------------------------------------------
Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed pursuant
---------------------
to this Section 4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan pursuant
to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and
Section 162(m) of the Code.
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and
-4-
<PAGE>
subject to the approval of any relevant authorities, including the approval, if
required, of any Stock Exchange, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom Options may
from time to time be granted hereunder;
(iii) to determine whether and to what extent Options or any
combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any option granted hereunder;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 10(g) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to construe and interpret the terms of the Plan and Options
granted under the Plan; and
(x) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options to participants who are foreign
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(e) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
holders of Options.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options may be granted
--------------------
to Employees and Consultants. Incentive Stock Options may be granted only to
Employees, provided however that Employees of an Affiliate shall not be eligible
to receive Incentive Stock Options. An Employee or Consultant who has been
granted an Option may, if he or she is otherwise eligible, be granted additional
Options.
-5-
<PAGE>
(b) Type of Option. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Options
designated as Incentive Stock Options are exercisable for the first time by any
Optionee during any calendar year (under all plans of the Company or any Parent
or Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) Employment Relationship. The Plan shall not confer upon any
-----------------------
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with such
Optionee's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated
--------------
in the Option Agreement; provided, however, that the term shall be no more than
ten (10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as
---------------------------------
provided in Section 13 below, the maximum number of Shares which may be subject
to Options granted to any one Employee under this Plan for any fiscal year of
the Company shall be 1,000,000 Shares.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of grant.
-6-
<PAGE>
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security, to a person who, at the time of the grant of
such Option, is a Ten Percent Holder, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of the grant.
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant if such
Option is intended to qualify as performance-based compensation under Section
162(m) of the Code; or
(C) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to any person other than a Named Executive or a
Ten Percent Holder, the per Share exercise price shall be no less than 85% of
the Fair Market Value per Share on the date of grant if required by the
Applicable Laws and, if not so required, shall be such price as is determined by
the Administrator.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (7) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery of
the subscription agreement, (8) any combination of the foregoing methods of
payment, or (9) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
-7-
<PAGE>
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan; provided, however, that if required by the Applicable Laws, any
Option granted prior to the date, if any, upon which the Common Stock becomes a
Listed Security shall become exercisable at the rate of at least 20% per year
over five years from the date the Option is granted. In the event that any of
the Shares issued upon exercise of an Option (which exercise occurs prior to the
date, if any, upon which the Common Stock becomes a Listed Security) should be
subject to a right of repurchase in the Company's favor, such repurchase right
shall, if required by the Applicable Laws, lapse at the rate of at least 20% per
year over five years from the date the Option is granted. Notwithstanding the
above, in the case of an Option granted to an officer (including but not limited
to Officers), Director or Consultant of the Company or any Parent or Subsidiary
of the Company, the Option may become fully exercisable, and a repurchase right,
if any, in favor of the Company shall lapse, at any time or during any period
established by the Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. In the
----------------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee or
Consultant with the Company, such Optionee may, but only within three (3) months
(or such other period of time not less than thirty (30) days as is determined by
the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option and not exceeding three (3)
months) after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that the Optionee was
entitled to exercise it at the date of such
-8-
<PAGE>
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of such termination, or if Optionee does not exercise such Option to
the extent so entitled within the time specified herein, the Option shall
terminate. No termination shall be deemed to occur and this Section 10(b) shall
not apply if (i) the Optionee is a Consultant who becomes an Employee; or (ii)
the Optionee is an Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 10(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from
the date of such termination (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
---
422 of the Code) within three (3) months of the date of such termination, the
Option will not qualify for ISO treatment under the Code. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within six
months (6) from the date of termination, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of Optionee's Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following
-9-
<PAGE>
termination of an Optionee's Continuous Status as an Employee or Consultant from
the periods set forth in Sections 10(b), 10(c) and 10(d) above or in the Option
Agreement to such greater time as the Board shall deem appropriate, provided
that in no event shall such Option be exercisable later than the date of
expiration of the term of such Option as set forth in the Option Agreement.
(f) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(g) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Taxes.
-----
(a) As a condition of the exercise of an Option granted under the
Plan, the Participant (or in the case of the Participant's death, the person
exercising the Option) shall make such arrangements as the Administrator may
require for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the exercise of
Option and the issuance of Shares. The Company shall not be required to issue
any Shares under the Plan until such obligations are satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option.
(c) This Section 11(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option that number of Shares having a Fair Market Value
determined as of the applicable Tax Date (as defined below) equal to the amount
required to be withheld. For purposes of this Section 11, the Fair Market Value
of the Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined under the Applicable Laws (the "Tax
---
Date").
- ----
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Participant for more than six (6) months on the date of
-10-
<PAGE>
surrender, and (ii) have a Fair Market Value determined as of the applicable Tax
Date equal to the amount required to be withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 11(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 11(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option is exercised but such
Participant shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the applicable Tax Date.
12. Adjustments Upon Changes in Capitalization, Merger or Certain
-------------------------------------------------------------
Other Transactions.
- ------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or that have been returned to the Plan upon cancellation or expiration
of an Option, and the numbers of shares set forth in Section 3(a)(i) and 8
above, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination, recapitalization or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale of all
------------------------
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's shareholders, each outstanding Option shall be assumed or an
equivalent option or right shall be substituted by such successor corporation or
a parent or subsidiary of such successor corporation, unless the
-11-
<PAGE>
successor corporation does not agree to assume the Option or to substitute an
equivalent option, in which case such Option shall terminate upon the
consummation of the merger or sale of assets.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
13. Non-Transferability of Options. Options may not be sold,
------------------------------
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution provided that, after the
date, if any, upon which the Common Stock becomes a Listed Security, the
Administrator may in its discretion grant transferable Nonstatutory Stock
Options pursuant to Option Agreements specifying (i) the manner in which such
Nonstatutory Stock Options are transferable and (ii) that any such transfer
shall be subject to the Applicable Laws. The designation of a beneficiary by an
Optionee will not constitute a transfer. An Option may be exercised, during the
lifetime of the holder of Option, only by such holder or a transferee permitted
by this Section 13.
14. Time of Granting Options. The date of grant of an Option shall,
------------------------
for all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board; provided
however that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option is
so granted within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with the Applicable Laws, the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without
-12-
<PAGE>
limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any Stock
Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
17. Reservation of Shares. The Company, during the term of this
---------------------
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan. The inability of
the Company to obtain authority from any regulatory body having jurisdiction,
which authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options shall be evidenced by written agreements in
----------
such form as the Administrator shall approve from time to time.
19. Stockholder Approval. If required by the Applicable Laws,
--------------------
continuance of the Plan shall be subject to approval by the stockholders of the
Company within twelve (12) months before or after the date the Plan, or an
amendment to the Plan, is adopted. Such stockholder approval shall be obtained
in the degree and manner required under the Applicable Laws. All Options issued
under the Plan shall become void in the event such approval is not obtained.
20. Information and Documents to Optionees. Prior to the date, if
--------------------------------------
any, on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws, the Company shall provide financial statements at least
annually to each Optionee during the period such Optionee has one or more
Options outstanding, and in the case of an individual who acquired Shares
pursuant to the Plan, during the period such individual owns such Shares. The
Company shall not be required to provide such information if the issuance of
Options under the Plan is limited to key employees whose duties in connection
with the Company assure their access to equivalent information. In addition, at
the time of issuance of any securities under the Plan, the Company shall provide
to the Optionee a copy of the Plan and a copy of any agreement(s) pursuant to
which securities under the Plan are issued.
-13-
<PAGE>
PREVIEW SYSTEMS, INC.
1998 STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
(Optionee)
__________________________
__________________________
You have been granted an option to purchase Common Stock "Common Stock" of
------------
Preview Systems, Inc. (the "Company") as follows:
-------
Board Approval Date: ((BoardApprovalDate))
Date of Grant (Later of Board
Approval Date or Commencement
of Employment/Consulting): ((GrantDate))
Vesting Commencement Date: ((VestingCommencementDate0)
Exercise Price per Share: $((ExercisePrice))
Total Number of Shares Granted: ((NoofShares))
Total Exercise Price: $((TotalExercisePrice))
Type of Option: ((NoSharesISO)) Incentive Stock Option
-----------
((NoSharesNSO)) Nonstatutory Stock
-----------
Option
Term/Expiration Date: ((ExpirDate))
Vesting Schedule: This Option may be exercised, in whole
or in part, in accordance with the
following schedule:
((VestingSchedule))
Termination Period: This Option may be exercised for 90 days
after termination of employment or
consulting relationship except as set
out in Sections 6 and 7 of the Stock
Option Agreement (but in no event later
than the Expiration Date).
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the 1998 Stock Option Plan and the Stock Option
Agreement, both of which are attached and made a part of this document.
((Optionee)): Preview Systems, Inc.
___________________________ By:______________________________
Signature
___________________________ ______________________________
Print Name Print Name and Title
-2-
<PAGE>
PREVIEW SYSTEMS, INC.
1998 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. Preview Systems, Inc., a Delaware corporation (the
---------------
"Company"), hereby grants to ((Optionee)) ("Optionee"), an option (the "Option")
------- -------- ------
to purchase a total number of shares of Common Stock (the "Shares") set forth in
------
the Notice of Stock Option Grant, at the exercise price per share set forth in
the Notice of Stock Option Grant (the "Exercise Price") subject to the terms,
--------------
definitions and provisions of the Preview Systems, Inc. 1998 Stock Option Plan
(the "Plan") adopted by the Company, which is incorporated herein by reference.
----
Unless otherwise defined herein, the terms defined in the Plan shall have the
same defined meanings in this Option.
If designated an Incentive Stock Option, this Option is intended to qualify as
an Incentive Stock Option as defined in Section 422 of the Code.
2. Exercise of Option. This Option shall be exercisable during its Term
------------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant and with the provisions of Section 9 of the Plan as follows:
(a) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 5, 6 and 7 below, subject to the limitation contained in Section
2(a)(i).
(iii) In no event may this Option be exercised after the
Expiration Date of this Option as set forth in the Notice of Stock Option Grant.
(b) Method of Exercise. This Option shall be exercisable by execution
------------------
and delivery of the Exercise Notice and Restricted Stock Purchase Agreement
attached hereto as Exhibit A (the "Exercise Agreement") or of any other form of
--------- ------------------
written notice approved for such purpose by the Company which shall state the
election to exercise the Option, the number of Shares in respect of which the
Option is being exercised, and such other representations and agreements as to
the holder's investment intent with respect to such shares of Common Stock as
may be required by the Company pursuant to the provisions of the Plan. Such
written notice shall be signed by Optionee and shall be delivered in person or
by certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of
applicable law and the
<PAGE>
requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to Optionee on the date on which the Option is exercised with
respect to such Shares.
3. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination thereof, at the election of Optionee:
(a) cash or check;
(b) cancellation of outstanding indebtedness;
(c) surrender of other shares of Common Stock of the Company which
(i) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by Optionee for more than six months on the date of surrender,
and (ii) have a Fair Market Value on the date of surrender equal to the Exercise
Price of the Shares as to which the Option is being exercised; or
(d) if there is a public market for the Shares and they are
registered under the Exchange Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the Exercise
Price.
4. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
5. Termination of Relationship. In the event of termination of
---------------------------
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "Termination
-----------
Date"), exercise this Option during the Termination Period set forth in the
- ----
Notice of Stock Option Grant. To the extent that Optionee was not entitled to
exercise this Option at such Termination Date, or if Optionee does not exercise
this Option within the Termination Period, the Option shall terminate.
6. Disability of Optionee.
----------------------
(a) Notwithstanding the provisions of Section 5 above, in the event of
termination of Optionee's Continuous Status as an Employee or Consultant as a
result of Optionee's total and permanent disability (as defined in Section
22(e)(3) of the Code), Optionee may, but only within twelve months from the
Termination Date (but in no event later than the Expiration Date set forth in
the Notice of Stock Option Grant), exercise this Option to the extent Optionee
was entitled to exercise it as of such Termination Date. To the extent that
Optionee was not entitled to exercise the Option as of the Termination Date, or
if
-2-
<PAGE>
Optionee does not exercise such Option (to the extent so entitled) within the
time specified in this Section 6(a), the Option shall terminate.
(b) Notwithstanding the provisions of Section 5 above, in the event of
termination of Optionee's consulting relationship or Continuous Status as an
Employee as a result of disability not constituting a total and permanent
disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but
only within six months from the Termination Date (but in no event later than the
Expiration Date set forth in the Notice of Stock Option Grant), exercise the
Option to the extent Optionee was entitled to exercise it as of such Termination
Date; provided, however, that if this is an Incentive Stock Option and Optionee
fails to exercise this Incentive Stock Option within three months from the
Termination Date, this Option will cease to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the Exercise
Price for the Shares and the Fair Market Value of the Shares on the date of
exercise. To the extent that Optionee was not entitled to exercise the Option
at the Termination Date, or if Optionee does not exercise such Option to the
extent so entitled within the time specified in this Section 6(b), the Option
shall terminate.
7. Death of Optionee. In the event of the death of Optionee (a) during
-----------------
the Term of this Option and while an Employee or Consultant of the Company and
having been in Continuous Status as an Employee or Consultant since the date of
grant of the Option, or (b) within 30 days after Optionee's Termination Date,
the Option may be exercised at any time within six months following the date of
death (but in no event later than the Expiration Date set forth in the Notice of
Stock Option Grant), by Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the Termination Date.
8. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him or her. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
9. Term of Option. This Option may be exercised only within the Term set
--------------
forth in the Notice of Stock Option Grant, subject to the limitations set forth
in Section 7 of the Plan.
10. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of certain of the federal and California tax consequences of
exercise of this Option and disposition of the Shares under the laws in effect
as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of Incentive Stock Option. If this Option qualifies as
----------------------------------
an Incentive Stock Option, there will be no regular federal or California income
tax liability upon the exercise of the Option, although the excess, if any, of
the Fair Market Value of the
-3-
<PAGE>
Shares on the date of exercise over the Exercise Price will be treated as an
adjustment to the alternative minimum tax for federal tax purposes and may
subject Optionee to the alternative minimum tax in the year of exercise.
(b) Exercise of Nonstatutory Stock Option. If this Option does not
-------------------------------------
qualify as an Incentive Stock Option, there may be a regular federal income tax
liability and a California income tax liability upon the exercise of the Option.
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is
an employee, the Company will be required to withhold from Optionee's
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
(c) Disposition of Shares. In the case of a Nonstatutory Stock
---------------------
Option, if Shares are held for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes. In the case of an Incentive Stock Option,
if Shares transferred pursuant to the Option are held for at least one year
after exercise and are disposed of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and California income tax purposes. In either case,
the long-term capital gain will be taxed for federal income tax and alternative
minimum tax purposes at a maximum rate of 28% if the Shares are held more than
one year but less than 18 months after exercise and at 20% if the Shares are
held more than 18 months after exercise. If Shares purchased under an Incentive
Stock Option are disposed of within one year after exercise or within two years
after the Date of Grant, any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (i) the Fair Market
Value of the Shares on the date of exercise, or (ii) the sale price of the
Shares.
(d) Notice of Disqualifying Disposition of Incentive Stock Option
-------------------------------------------------------------
Shares. If the Option granted to Optionee herein is an Incentive Stock Option,
- ------
and if Optionee sells or otherwise disposes of any of the Shares acquired
pursuant to the Incentive Stock Option on or before the later of (i) the date
two years after the Date of Grant, or (ii) the date one year after the date of
exercise, Optionee shall immediately notify the Company in writing of such
disposition. Optionee acknowledges and agrees that he or she may be subject to
income tax withholding by the Company on the compensation income recognized by
Optionee from the early disposition by payment in cash or out of the current
earnings paid to Optionee.
11. Withholding Tax Obligations. Optionee understands that, upon
---------------------------
exercising a Nonstatutory Stock Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then Fair Market Value of the
Shares over the Exercise Price. However, the timing of this income recognition
may be deferred for up to six months if Optionee is subject to Section 16 of the
Exchange Act. If Optionee is an employee, the Company will be required to
withhold from Optionee's compensation, or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
-4-
<PAGE>
compensation income. Additionally, Optionee may at some point be required to
satisfy tax withholding obligations with respect to the disqualifying
disposition of an Incentive Stock Option. Optionee shall satisfy his or her tax
withholding obligation arising upon the exercise of this Option by one or some
combination of the following methods: (a) by cash payment, (b) out of Optionee's
current compensation, (c) if permitted by the Administrator, in its discretion,
by surrendering to the Company Shares which (i) in the case of Shares previously
acquired from the Company, have been owned by Optionee for more than six months
on the date of surrender, and (ii) have a Fair Market Value on the date of
surrender equal to or greater than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a Fair Market Value equal to the amount required to be withheld. For this
purpose, the Fair Market Value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
---
Date").
- -----
If Optionee is subject to Section 16 of the Exchange Act (an "Insider"),
-------
any surrender of previously owned Shares to satisfy tax withholding obligations
arising upon exercise of this Option must comply with the applicable provisions
of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3").
----------
All elections by Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
12. Market Standoff Agreement. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Optionee agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any securities of the Company (other
than those included in the registration) without the prior written consent of
the Company or such underwriters, as the case may be, for such period of time
(not to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing as may be requested by the underwriters at
the time of the Company's initial public offering.
[Signature page follows]
-5-
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one
document.
Preview Systems, Inc.
By:__________________________________________
__________________________________________
(Print name and title)
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Dated: ________________________ ______________________________
((Optionee))
-6-
<PAGE>
EXHIBIT A
---------
PREVIEW SYSTEMS, INC.
1998 STOCK OPTION PLAN
EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT
-------------------------------------------------------
This Agreement ("Agreement") is made as of ______________, by and between
---------
Preview Systems, Inc., a Delaware corporation (the "Company"), and ((Optionee))
-------
("Purchaser"). To the extent any capitalized terms used in this Agreement are
---------
not defined, they shall have the meaning ascribed to them in the 1998 Stock
Option Plan.
1. Exercise of Option. Subject to the terms and conditions hereof,
------------------
Purchaser hereby elects to exercise his or her option to purchase __________
shares of the Common Stock (the "Shares") of the Company under and pursuant to
------
the Company's 1998 Stock Option Plan (the "Plan") and the Stock Option Agreement
----
dated ______________, (the "Option Agreement"). The purchase price for the
----------------
Shares shall be $((ExercisePrice)) per Share for a total purchase price of
$_______________. The term "Shares" refers to the purchased Shares and all
------
securities received in replacement of the Shares or as stock dividends or
splits, all securities received in replacement of the Shares in a
recapitalization, merger, reorganization, exchange or the like, and all new,
substituted or additional securities or other properties to which Purchaser is
entitled by reason of Purchaser's ownership of the Shares.
2. Time and Place of Exercise. The purchase and sale of the Shares under
--------------------------
this Agreement shall occur at the principal office of the Company simultaneously
with the execution and delivery of this Agreement in accordance with the
provisions of Section 2(b) of the Option Agreement. On such date, the Company
will deliver to Purchaser a certificate representing the Shares to be purchased
by Purchaser (which shall be issued in Purchaser's name) against payment of the
exercise price therefor by Purchaser by (a) check made payable to the Company,
(b) cancellation of indebtedness of the Company to Purchaser, (c) delivery of
shares of the Common Stock of the Company in accordance with Section 3 of the
Option Agreement, or (d) a combination of the foregoing.
3. Limitations on Transfer. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares except in compliance with the
provisions below and applicable securities laws.
(a) Right of First Refusal. Before any Shares held by Purchaser or
----------------------
any transferee of Purchaser (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
------
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section 3(a) (the "Right of First Refusal").
----------------------
(i) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
------
Holder's bona fide
<PAGE>
intention to sell or otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number
-------------------
of Shares to be transferred to each Proposed Transferee; and (iv) the terms and
conditions of each proposed sale or transfer. The Holder shall offer the Shares
at the same price (the "Offered Price") and upon the same terms (or terms as
-------------
similar as reasonably possible) to the Company or its assignee(s).
(ii) Exercise of Right of First Refusal. At any time within 30 days
----------------------------------
after receipt of the Notice, the Company and/or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection
(iii) below.
(iii) Purchase Price. The purchase price ("Purchase Price") for
-------------- --------------
the Shares purchased by the Company or its assignee(s) under this Section 3(a)
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(iv) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(v) Holder's Right to Transfer. If all of the Shares proposed in
--------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section 3(a), then the
Holder may sell or otherwise transfer such Shares to that Proposed Transferee at
the Offered Price or at a higher price, provided that such sale or other
transfer is consummated within 60 days after the date of the Notice and provided
further that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section 3 shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, or if the Holder
proposes to change the price or other terms to make them more favorable to the
Proposed Transferee, a new Notice shall be given to the Company, and the Company
and/or its assignees shall again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
(vi) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section 3(a) notwithstanding, the transfer of any or all of
the Shares during Purchaser's lifetime or on Purchaser's death by will or
intestacy to Purchaser's Immediate Family (as defined below) or a trust for the
benefit of Purchaser's Immediate Family shall be exempt from the provisions of
this Section 3(a). "Immediate Family" as used herein shall mean spouse, lineal
----------------
descendant or antecedent, father, mother, brother or sister. In such case, the
transferee or other recipient shall receive and hold the Shares so transferred
subject to the
-2-
<PAGE>
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section 3.
(b) Involuntary Transfer.
--------------------
(i) Company's Right to Purchase upon Involuntary Transfer. In
-----------------------------------------------------
the event, at any time after the date of this Agreement, of any transfer by
operation of law or other involuntary transfer (including divorce or death, but
excluding, in the event of death, a transfer to Immediate Family as set forth in
Section 3(a)(vi) above) of all or a portion of the Shares by the record holder
thereof, the Company shall have the right to purchase all of the Shares
transferred at the greater of the purchase price paid by Purchaser pursuant to
this Agreement or the Fair Market Value of the Shares on the date of transfer.
Upon such a transfer, the person acquiring the Shares shall promptly notify the
Secretary of the Company of such transfer. The right to purchase such Shares
shall be provided to the Company for a period of 30 days following receipt by
the Company of written notice by the person acquiring the Shares.
(ii) Price for Involuntary Transfer. With respect to any stock to
------------------------------
be transferred pursuant to Section 3(b)(i), the price per Share shall be a price
set by the Board of Directors of the Company that will reflect the current value
of the stock in terms of present earnings and future prospects of the Company.
The Company shall notify Purchaser or his or her executor of the price so
determined within 30 days after receipt by it of written notice of the transfer
or proposed transfer of Shares. However, if the Purchaser does not agree with
the valuation as determined by the Board of Directors of the Company, the
Purchaser shall be entitled to have the valuation determined by an independent
appraiser to be mutually agreed upon by the Company and the Purchaser and whose
fees shall be borne equally by the Company and the Purchaser.
(c) Assignment. The right of the Company to purchase any part of the
----------
Shares may be assigned in whole or in part to any stockholder or stockholders of
the Company or other persons or organizations; provided, however, that an
assignee, other than a corporation that is the Parent or a 100% owned Subsidiary
of the Company, must pay the Company, upon assignment of such right, cash equal
to the difference between the original purchase price and Fair Market Value, if
the original purchase price is less than the Fair Market Value of the Shares
subject to the assignment.
(d) Restrictions Binding on Transferees. All transferees of Shares or
-----------------------------------
any interest therein will receive and hold such Shares or interest subject to
the provisions of this Agreement. Any sale or transfer of the Shares shall be
void unless the provisions of this Agreement are satisfied.
(e) Termination of Rights. The Right of First Refusal and the
---------------------
Company's right to repurchase the Shares in the event of an involuntary transfer
pursuant to Section 3(b) above shall terminate upon the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act").
--------------
-3-
<PAGE>
(f) Market Standoff Agreement. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any securities of the Company (other
than those included in the registration) without the prior written consent of
the Company or such underwriters, as the case may be, for such period of time
(not to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing as may be requested by the underwriters at
the time of the Company's initial public offering.
4. Investment and Taxation Representations. In connection with the
---------------------------------------
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser is
purchasing the Shares for investment for his or her own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act.
(b) Purchaser understands that the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted securities"
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Purchaser must hold the Shares indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser's purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted any tax consultants Purchaser
deems advisable in connection with the purchase or disposition of the Shares and
that Purchaser is not relying on the Company for any tax advice.
5. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. The certificate or certificates representing the Shares
-------
shall bear the following legends (as well as any legends required by applicable
state and federal corporate and securities laws):
-4-
<PAGE>
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
(b) Stop-Transfer Notices. Purchaser agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
(d) Removal of Legend. When all of the following events have
-----------------
occurred, the Shares then held by Purchaser will no longer be subject to the
legend referred to in Section 5(a)(ii): (i) the termination of the Right of
First Refusal; and (ii) the expiration or termination of the market standoff
provisions of Section 3(f) (and of any agreement entered pursuant to Section
3(f)). After such time, and upon Purchaser's request, a new certificate or
certificates representing the Shares not repurchased shall be issued without the
legend referred to in Section 5(a)(ii), and delivered to Purchaser.
6. No Employment Rights. Nothing in this Agreement shall affect in any
--------------------
manner whatsoever the right or power of the Company, or a Parent or Subsidiary
of the Company, to terminate Purchaser's employment or consulting relationship,
for any reason, with or without cause.
-5-
<PAGE>
7. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(d) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient when delivered personally or sent
by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address as set forth below or as subsequently
modified by written notice.
(f) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) Successors and Assigns. The rights and benefits of this Agreement
----------------------
shall inure to the benefit of, and be enforceable by the Company's successors
and assigns. The rights and obligations of Purchaser under this Agreement may
only be assigned with the prior written consent of the Company.
[Signature Page Follows]
-6-
<PAGE>
The parties have executed this Exercise Notice and Restricted Stock
Purchase Agreement as of the date first set forth above.
COMPANY:
Preview Systems, Inc.
By:___________________________________________
Name:____________________________________________
(print)
Title:___________________________________________
1601 S. DeAnza Blvd., Suite 100
Cupertino, CA 95014
PURCHASER:
((OPTIONEE))
_________________________________________________
(Signature)
_________________________________________________
(Print Name)
Address:
_________________________________________________
_________________________________________________
I, ______________________, spouse of ((Optionee)), have read and hereby approve
the foregoing Agreement. In consideration of the Company's granting my spouse
the right to purchase the Shares as set forth in the Agreement, I hereby agree
to be bound irrevocably by the Agreement and further agree that any community
property or similar interest that I may have in the Shares shall hereby be
similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-
fact with respect to any amendment or exercise of any rights under the
Agreement.
___________________________________________
Spouse of ((Optionee))
-7-
<PAGE>
EXHIBIT 10.8(a)
PREVIEW SYSTEMS, INC.
---------------------
SECOND AMENDED AND RESTATED RIGHTS AGREEMENT
--------------------------------------------
This Second Amended and Restated Rights Agreement (the "Agreement") is made
---------
as of the 2nd day of July, 1999, by and among Preview Systems, Inc., a Delaware
corporation (the "Company") and certain purchasers of the Company's Preferred
-------
Stock (each, an "Investor," and collectively, the "Investors") set forth on
-------- ---------
Exhibit A hereto. This Agreement amends and restates in its entirety the First
Amended and Restated Rights Agreement (the "Prior Agreement") by and among the
---------------
Company and certain purchasers of the Company's Preferred Stock listed on
Exhibit A thereto dated as of September 15, 1998.
In consideration of the mutual promises and covenants hereinafter set
forth, the parties agree as follows:
SECTION 1
Restrictions on Transferability;
--------------------------------
Registration Rights
-------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Conversion Shares" means the Common Stock issued or issuable upon
-----------------
conversion of the Preferred Shares.
"Holder" shall mean any Investor holding Registrable Securities and
------
any person holding Registrable Securities to whom the rights under this
Agreement have been transferred in accordance with Section 1.14 hereof.
"Initiating Holders" shall mean any Investors or transferees of
------------------
Investors under Section 1.14 hereof who in the aggregate are Holders of not less
than thirty percent (30%) of the Registrable Securities.
"Preferred Shares" shall mean (i) the Company's Series A Preferred
----------------
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred
Stock and (ii) 5,400 shares of Series F Preferred Stock subject to a warrant
held by FirstCorp First Portland Corporation dated November 19, 1998.
<PAGE>
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 1.5, 1.6 and 1.7 of this Agreement,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"Registrable Securities" means (i) the Conversion Shares and (ii)
----------------------
any Common Stock of the Company issued or issuable in respect of the Preferred
Shares or Conversion Shares or other securities issued or issuable with respect
to the Preferred Shares or Conversion Shares upon any stock split, stock
dividend, recapitalization, or similar event, or any Common Stock otherwise
issued or issuable with respect to the Conversion Shares or Preferred Shares;
provided, however, (x) that for the purposes of Section 1.5, 1.7 and 1.14 the
- -------- -------
shares listed in the foregoing clauses (i) and (ii) related to the 5,400 shares
of Series F Preferred Stock subject to a warrant held by FirstCorp First
Portland Corporation dated November 19, 1998 shall not be deemed Registrable
Securities and FirstCorp First Portland Corporation shall not be deemed a Holder
and (y) that shares of Common Stock or other securities shall only be treated as
Registrable Securities if and so long as they have not been (A) sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, or (B) sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act under
Section 4(1) thereof so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale.
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legend set forth in Section 1.3 of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (except as
provided by Section 1.9).
1.2 Restrictions. The Preferred Shares and the Conversion Shares shall
------------
not be sold, assigned, transferred or pledged except upon the conditions
specified in this Agreement, which conditions are intended to ensure compliance
with the provisions of the Securities Act. The Investors will cause any
proposed purchaser, assignee, transferee or pledgee of the Preferred Shares and
the Conversion Shares to agree to take and hold such securities subject to the
provisions and upon the conditions specified in this Agreement.
-2-
<PAGE>
1.3 Restrictive Legend. Each certificate representing (i) the Preferred
------------------
Shares, (ii) the Conversion Shares and (iii) any other securities issued in
respect of the securities referenced in clauses (i) and (ii) upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar event,
shall (unless otherwise permitted by the provisions of Section 1.4 below) be
stamped or otherwise imprinted with legends in the following form (in addition
to any legend required under applicable state securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH
MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT
SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SAID ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY."
Each Investor and Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
this Section 1.
1.4 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (i) an unqualified written
opinion of legal counsel who shall, and whose legal opinion shall be, reasonably
satisfactory to the Company, addressed to the Company, to the effect that the
proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act, or (ii) a "no action" letter from the
Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the holder of such
Restricted Securities shall be entitled to transfer such Restricted Securities
in accordance with the terms of the notice delivered by the holder to the
Company. The Company will not require such a legal opinion or "no action"
letter (a) in any transaction in compliance with Rule 144, (b) in any
transaction in which an Investor which is a corporation distributes Restricted
Securities after six (6) months after the purchase thereof solely to its
majority-owned subsidiaries or affiliates for no consideration, or (c) in any
transaction in
-3-
<PAGE>
which an Investor which is a partnership distributes Restricted Securities after
six (6) months after the purchase thereof solely to partners thereof for no
consideration, provided that each transferee agrees in writing to be subject to
the terms of this Section 1.4. Each certificate evidencing the Restricted
Securities transferred as above provided shall bear, except if such transfer is
made pursuant to Rule 144, the appropriate restrictive legend set forth in
Section 1.3 above, except that such certificate shall not bear such restrictive
legend if, in the opinion of counsel for such holder and the Company, such
legend is not required in order to establish compliance with any provisions of
the Securities Act.
1.5 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect any registration,
qualification or compliance with respect to the Registrable Securities, the
anticipated aggregate offering price, net of underwriting discounts and
commissions, which would equal or exceed $10,000,000, the Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within thirty (30) days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to take
-------- -------
any action to effect any such registration, qualification or compliance pursuant
to this Section 1.5:
(1) In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(2) Prior to June 30, 2001;
(3) During the one hundred eighty (180) day period commencing
on the effective date of the registration statement pertaining to the initial
public offering of securities of the Company;
-4-
<PAGE>
(4) If the Company delivers notice to the Holders within
thirty (30) days of any registration request of its intent to file a
registration statement for an initial public offering of securities within
ninety (90) days;
(5) After the Company has effected two (2) such registrations
pursuant to this subparagraph 1.5(a), such registration has been declared or
ordered effective and the securities offered pursuant to such registration have
been sold; or
(6) If the Company shall furnish to such Holders a
certificate, signed by the President of the Company, stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its stockholders for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to register,
qualify or comply under this Section 1.5 shall be deferred for a period not to
exceed ninety (90) days from the date of receipt of written request from the
Initiating Holders; provided, however, that this right to delay any requested
registration statement shall not be utilized more than once in any twelve (12)
month period.
Subject to the foregoing clauses (1) through (6), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. In the event that a registration pursuant to
------------
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 1.5 and the inclusion of such Holder's
Registrable Securities in the underwriting, to the extent requested, to the
extent provided in this Agreement.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders (which managing underwriter shall
be reasonably acceptable to the Company). Notwithstanding any other provision
of this Section 1.5, if the managing underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Company shall so advise all Holders of Registrable
Securities and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by such Holders at the time of filing the
registration statement. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing
-5-
<PAGE>
underwriter and the Initiating Holders. The Registrable Securities and/or other
securities so withdrawn shall also be withdrawn from registration, and such
Registrable Securities shall not be transferred in a public distribution prior
to one hundred eighty (180) days after the effective date of such registration.
1.6 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time, the
----------------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved in
such registration, all the Registrable Securities specified in a written request
or requests received within thirty (30) days after receipt of such written
notice from the Company by any Holder, but only to the extent (subject to the
25% requirement set forth in paragraph 1.6(b)) that such inclusion will not
diminish the number of securities included by the Company or by holders of the
Company's securities who have demanded such registration.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration). Notwithstanding any other
provision of this Section 1.6, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the registrable securities to
be included in such registration to a minimum of 25% of the total shares to be
included in such underwriting or exclude them entirely in the case of the
Company's initial public offering (provided that only primary shares to be
issued by the Company are being registered in such initial public offering).
The Company shall so advise all Holders and the other holders distributing their
securities through such underwriting pursuant to piggyback registration rights
similar to this Section 1.6, and the number of shares of Registrable Securities
and other securities that may be included in the registration and underwriting
shall be first allocated among all Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement, and after satisfaction
of the requirements of the Holders, the remaining shares that may be included in
the registration and underwriting shall be allocated among the selling security
holders (other than
-6-
<PAGE>
any such selling security holder that initiated the registration pursuant to
demand registration rights) in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such other security holders
at the time of filing of the registration statement. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder or other
holder to the nearest 100 shares. If any Holder or other holder disapproves of
the terms of any such underwriting, he or she may elect to withdraw therefrom by
written notice to the Company and the managing underwriter. Any securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration, and shall not be transferred in a public distribution prior to one
hundred eighty (180) days (or such shorter period of time as the underwriters
may require) after the effective date of the registration statement relating
thereto (the "Lock-Up Period"); provided,however, that if such registration is
--------------
not the Company's initial public offering such Lock-Up Period shall be ninety
(90) days unless the managing underwriter determines that marketing factors
require a longer period in which case the Lock-Up period shall be specified by
the managing underwriter but shall not exceed one hundred eighty (180) days.
1.7 Registration on Form S-3.
------------------------
(a) If any Holder or Holders of the then outstanding Registrable
Securities request that the Company file a registration statement on Form S-3
(or any successor form to Form S-3) for a public offering of shares of the
Registrable Securities, the reasonably anticipated aggregate price to the public
of which, net of underwriting discounts and commissions, would exceed
$1,000,000, and the Company is a registrant entitled to use Form S-3 to register
the Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form; provided, however, that the Company shall not be required to
--------- --------
effect more than two registrations pursuant to this Section 1.7 in any twelve
(12) month period. The Company will (i) promptly give written notice of the
proposed registration to all other Holders, and (ii) as soon as practicable,
use its best efforts to effect such registration (including, without limitation,
the execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within thirty (30) days after receipt of such written notice from
the Company. The substantive provisions of Section 1.5(b) shall be applicable
to each registration initiated under this Section 1.7.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act, (ii) during the period
starting with the date sixty (60) days prior to the filing of, and ending on a
date three (3) months
-7-
<PAGE>
following the effective date of, a registration statement (other than with
respect to a registration statement relating to a Rule 145 transaction, an
offering solely to employees or any other registration which is not appropriate
for the registration of Registrable Securities), provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective, or (iii) if the Company shall
furnish to such Holder a certificate signed by the president of the Company
stating that, in the good faith judgment of the Board of Directors, it would be
seriously detrimental to the Company or its stockholders for registration
statements to be filed in the near future, then the Company's obligation to use
its best efforts to file a registration statement shall be deferred for a period
not to exceed ninety (90) days from the receipt of the request to file such
registration by such Holder or Holders; provided, however, that this right to
delay any requested registration shall not be utilized more than once in any
twelve (12)-month period.
1.8 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, unless approved by Holders of at least a majority of the
Registrable Securities issued or issuable upon conversion of the Preferred
Stock, the Company shall not enter into any agreement granting any holder or
prospective holder of any securities of the Company registration rights with
respect to such securities unless such new registration rights, including
standoff obligations, are subordinate to the registration rights granted Holders
under this Agreement.
1.9 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration pursuant to Sections 1.5, 1.6 and 1.7 and the
reasonable cost of one special legal counsel to represent all of the Holders
together in any such registration shall be borne by the Company, provided that
the Company shall not be required to pay the Registration Expenses of any
registration proceeding begun pursuant to Section 1.5, the request of which has
been subsequently withdrawn by the Initiating Holders. In such case, the
Holders of Registrable Securities to have been registered shall bear all such
Registration Expenses pro rata on the basis of the number of shares to have been
registered. Notwithstanding the foregoing, however, if at the time of the
withdrawal, the Holders have learned of a material adverse change in the
condition, business or prospects of the Company from that known to the Holders
at the time of their request, of which the Company had knowledge at the time of
the request, then the Holders shall not be required to pay any of said
Registration Expenses. Unless otherwise stated, all other Selling Expenses
relating to securities registered on behalf of the Holders shall be borne by the
Holders of the registered securities included in such registration pro rata on
the basis of the number of shares so registered.
1.10 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and
-8-
<PAGE>
remain effective for at least one hundred eighty (180) days or until the
distribution described in the registration statement has been completed; and
(b) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
1.11 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
brought by a third party, arising out of or based on any of the following
statements, omissions or violations (each, a "Violation"): (i) any untrue
---------
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, (ii) any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or (iii) any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder, controlling person or underwriter and stated to be specifically for use
therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other such Holder, each of its officers and directors and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any Violation, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating
-9-
<PAGE>
or defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided, however, that in no event (except in the case of gross negligence or
willful fraud) shall any indemnity under this Section 1.11(b) exceed the net
proceeds from the offering received by such Holder upon the sale of Registrable
Securities included in such registration.
(c) Each party entitled to indemnification under this Section 1.11
(the "Indemnified Party") shall give notice to the party required to provide
-----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
------------------
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(d) The foregoing indemnity agreements of the Company and Holders are
subject to the condition that, insofar as they relate to any Violation made in a
preliminary prospectus, but eliminated or remedied in the amended prospectus on
file with the Securities and Exchange Commission at the time the registration
statement in question becomes effective or the amended prospectus is filed with
the Securities and Exchange Commission pursuant to Rule 424(b) of the Securities
Act (the "Final Prospectus"), such indemnity agreement shall not inure to the
----------------
benefit of any person if a copy of the Final Prospectus was furnished to the
indemnified party and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act.
1.12 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.13 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted
-10-
<PAGE>
Securities to the public without registration, after such time as a public
market exists for the Common Stock of the Company, the Company agrees to use its
best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act");
------------
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) So long as an Investor owns any Restricted Securities, to furnish
to the Investor forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company and other information in the possession of or reasonably
obtainable by the Company as an Investor may reasonably request in availing
itself of any rule or regulation of the Commission allowing an Investor to sell
any such securities without registration.
1.14 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by an
Investor (together with any affiliate); provided, that (a) such transfer may
--------
otherwise be effected in accordance with applicable securities laws, (b) notice
of such assignment is given to the Company, and (c) such transferee or assignee
(i) is a wholly-owned subsidiary or constituent partner (including limited
partners) or member of such Investor, (ii) is an immediate family member or
trust for the benefit of an individual Investor, or (iii) acquires from such
Investor the lesser of (x) 50,000 or more shares of Restricted Securities (as
appropriately adjusted for stock splits and the like) or (y) all of the
Restricted Securities then owned by such Investor, and (d) such transferee or
assignee assumes the obligations of the transferring Holder hereunder.
1.15 Standoff Agreement. Each Holder agrees in connection with the
------------------
Company's initial public offering that, upon request of the Company or the
underwriters managing such underwritten initial public offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed one hundred eighty (180) days from the effective date of such
registration) as may be requested by the Company or such managing underwriters.
-11-
<PAGE>
1.16 Termination of Rights. The rights of any particular Holder to cause
---------------------
the Company to register securities under Sections 1.5, 1.6 and 1.7 shall
terminate on the earlier of (i) with respect to such Holder following a bona
fide firm underwritten public offering (a "Qualifying Offering") of shares of
-------------------
the Company's Common Stock registered under the Securities Act (provided the
aggregate offering price, net of underwriting discounts and commissions, exceeds
ten million dollars ($10,000,000)) at such time as such Holder is able to
dispose of all its Registrable Securities in one three-month period pursuant to
the provisions of Rule 144; provided, that such Holder holds Registrable
--------
Securities constituting less than 1% of the outstanding voting stock of the
Company, or (ii) five (5) years following the effective date of a Qualifying
Offering.
SECTION 2
Right of Participation
----------------------
2.1 Investor's Right of Participation.
---------------------------------
(a) Right of Participation. Subject to the terms and conditions
----------------------
contained in this Section 2.1, the Company hereby grants to each Investor
holding at least 200,000 Preferred Shares (the "Major Investors") as of the
---------------
execution date of this Agreement the right of first refusal to purchase its Pro
Rata Portion of any New Securities (as defined in subsection 2.1(b)) which the
Company may, from time to time, propose to sell and issue. A Major Investor's
"Pro Rata Portion" for purposes of this Section 2.1 is the ratio that (x) the
- -----------------
sum of shares of the Company's Common Stock issued or issuable upon conversion
of the Preferred Stock held by such Major Investor bears to (y) the sum of the
total number of shares of the Company's Common Stock then-outstanding and the
number of shares of the Company's Common Stock issuable upon conversion of the
then-outstanding Preferred Stock.
(b) Definition of New Securities. Except as set forth below, "New
---------------------------- ---
Securities" shall mean any shares of capital stock of the Company, including
- ----------
Common Stock and Preferred Stock, whether authorized or not, and rights, options
or warrants to purchase said shares of Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible into said
shares of Common Stock or Preferred Stock. Notwithstanding the foregoing, "New
---
Securities" does not include (i) the Preferred Shares or the Conversion Shares,
- ----------
(ii) securities offered to the public generally pursuant to a registration
statement under the Securities Act, (iii) securities issued pursuant to the
acquisition of patents or other intellectual property or assets of another
corporation, or the acquisition of another corporation by this corporation by
merger, purchase of all or substantially all of the assets or shares or other
reorganization or strategic transaction whereby this corporation or its
stockholders own not less than a majority of the voting power of the surviving
or successor corporation, (iv) shares of the Company's Common Stock or related
options convertible into or exercisable for such Common Stock issued to
employees, officers and directors of, and consultants, customers, and vendors
to, the Company, pursuant to any arrangement approved by the Board of Directors
of the Company, (v) shares of the Company's Common Stock or related options
convertible into or exercisable for such Common Stock issued to banks,
commercial lenders, lessors and other financial institutions
-12-
<PAGE>
in connection with the borrowing of money or the leasing of equipment by the
Company, (vi) stock issued pursuant to any rights or agreements, including,
without limitation, convertible securities, options and warrants, provided that
the Company shall have complied with the rights of participation established by
this Section 2.1 with respect to the initial sale or grant by the Company of
such rights or agreements, or (vii) stock issued in connection with any stock
split, stock dividend or recapitalization by the Company.
(c) Notice of Right. In the event the Company proposes to undertake
---------------
an issuance of New Securities, it shall give each Major Investor written notice
of its intention, describing the type of New Securities and the price and terms
upon which the Company proposes to issue the same. The Major Investors shall
have ten (10) days from the date of receipt of any such notice to agree to
purchase shares of such New Securities (up to the amount referred to in
subsection 2.1(a)), for the price and upon the terms specified in the notice, by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.
(d) Exercise of Right. If any Major Investor exercises its right of
-----------------
participation under this Agreement, the closing of the purchase of the New
Securities with respect to which such right has been exercised shall take place
within ninety (90) calendar days after the Major Investor gives notice of such
exercise, which period of time shall be extended in order to comply with
applicable laws and regulations. Upon exercise of such right of first refusal,
the Company and the Major Investor shall be legally obligated to consummate the
purchase contemplated thereby and shall use their best efforts to secure any
approvals required in connection therewith.
(e) Lapse and Reinstatement of Right. In the event a Major Investor
--------------------------------
fails to exercise the right of participation provided in this Section 2.1 within
said ten (10) day period, the Company shall offer the securities subject to the
participation right to the Major Investors who have subscribed for their full
pro rata amounts, pro rata based upon such Major Investors' subscriptions for a
period of three (3) days. Thereafter the Company shall have sixty (60) days to
sell or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within sixty (60) days from the date
of said agreement) to sell the New Securities not elected to be purchased by
such Major Investor at the price and upon the terms no more favorable to the
purchasers of such securities than specified in the Company's notice. In the
event the Company has not sold the New Securities or entered into an agreement
to sell the New Securities within said sixty (60) day period (or sold and issued
New Securities in accordance with the foregoing within sixty (60) days from the
date of said agreement), the Company shall not thereafter issue or sell any New
Securities without first offering such securities to the Investors in the manner
provided above.
(f) Assignment. The right of the Major Investors to purchase any part
----------
of the New Securities may be assigned in whole or in part to any partner,
subsidiary, affiliate or stockholder of an Investor, or other persons or
organizations who acquire the lesser of (i) 100,000 or more shares of Restricted
Securities (as adjusted for stock splits and the like) or (ii) all of the
Restricted Securities then owned by such Investor.
-13-
<PAGE>
2.2 Termination of Right of Participation; Waiver. The right of
---------------------------------------------
participation granted under Section 2.1 of this Agreement shall terminate on and
be of no further force or effect upon the earlier of (i) the consummation of the
Company's sale of its Common Stock in an underwritten public offering pursuant
to an effective registration statement filed under the Securities Act
immediately subsequent to which the Company shall be obligated to file annual
and quarterly reports with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act or (ii) the registration by the Company of a class of its equity
securities under Section 12(b) or 12(g) of the Exchange Act. The holders of a
majority in interest of the Major Investors, acting together as a separate
class, may waive, on behalf of holders of the Major Investors otherwise eligible
to participate, the foregoing right of participation.
2.3 Waiver of Prior Right of Participation. Pursuant to Section 2.2 of
--------------------------------------
the Prior Agreement, a majority in interest of the Major Investors under the
Prior Agreement hereby waive on behalf of all Major Investors any rights they
may have pursuant to Section 2.1 of the Prior Agreement, including the right to
receive notice of the sale by the Company of its Series G Preferred Stock and
notes convertible into its Series G Preferred Stock and to purchase shares of
its Series G Preferred Stock and notes convertible into its Series G Preferred
Stock.
SECTION 3
Miscellaneous; Covenant
-----------------------
3.1 Assignment. Except as otherwise provided in this Agreement, the terms
----------
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective successors and assigns of the parties to this Agreement.
3.2 Third Parties. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any party, other than the parties to this Agreement, and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
3.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California without giving effect to applicable
principles of conflicts of law.
3.4 Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
3.5 Notices. Any notice required or permitted by this Agreement shall be
-------
in writing and shall be sent by prepaid registered or certified mail, return
receipt requested, or otherwise delivered by hand or by messenger addressed to
the other party at the address shown below or at such other address for which
such party gives notice under this Agreement. Such notice shall be deemed to
have been given when delivered if delivered personally, or, if sent by mail, at
the earlier of its receipt or three (3) days after deposit in the mail.
-14-
<PAGE>
3.6 Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
3.7 Amendment and Waiver. Except as otherwise provided herein, any
--------------------
provision of this Agreement may be amended or waived with the written consent of
the Company and the holders of a majority of the Company's Preferred Stock,
acting together as a single class. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each Holder of Registrable
Securities and the Company. In addition, the Company may waive performance of
any obligation owing to it, as to some or all of the Holders of Registrable
Securities, or agree to accept alternatives to such performance, without
obtaining the consent of any Holder of Registrable Securities. In the event
that an underwriting agreement is entered into between the Company and any
Holder, and such underwriting agreement contains terms differing from this
Agreement, as to any such Holder the terms of such underwriting agreement shall
govern. Notwithstanding anything in this Agreement to the contrary, the Company
may amend this Agreement solely to add Investors who purchase shares of the
Company's Series F Preferred Stock.
3.8 Rights of Holders. Each holder of Registrable Securities shall have
-----------------
the absolute right to exercise or refrain from exercising any right or rights
that such holder may have by reason of this Agreement, including, without
limitation, the right to consent to the waiver or modification of any obligation
under this Agreement, and such holder shall not incur any liability to any other
holder of any securities of the Company as a result of exercising or refraining
from exercising any such right or rights.
3.9 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies,
either under this Agreement, or by law or otherwise afforded to any holder,
shall be cumulative and not alternative.
-15-
<PAGE>
3.10 Confidentiality. Each of the Holders agrees to keep confidential and
---------------
not to disclose to persons other than his, her or its employees, professional
consultants and advisors any information concerning the Company which is
confidential or proprietary, including, without limitation, the provisions of
this Agreement or any information disclosed pursuant to this Agreement
("Confidential Information"), except as otherwise required by law or as deemed
------------------------
necessary by a Holder to be disclosed to his, her or its own general or limited
partners. No Confidential Information shall be used or disclosed by a Holder
for any purpose except in connection with the transactions contemplated
hereunder and in the enforcement of rights hereunder. Each Holder shall use the
same level of care with the Confidential Information as he, she or it uses with
his, her or its own confidential information. Notwithstanding the foregoing,
the restrictions set forth in this Section 3.10 shall not be applicable to any
information that is publicly available, any information independently developed
by a Holder or his, her or its professional consultants or advisors, any
information known to a Holder or his, her or its professional consultants or
advisors before the disclosure thereof by the Company, or any information
disclosed to a Holder by a person without any confidentiality duty to the
Company.
(Signature Page Follows)
-16-
<PAGE>
The parties hereto have executed this Second Amended and Restated Rights
Agreement as of the day and year first above written.
COMPANY:
PREVIEW SYSTEMS, INC.
By: /s/ Vincent Pluvinage
----------------------------------------
Name: Vincent Pluvinage
---------------------------------------
(print)
Title: President and Chief Executive Officer
--------------------------------------
Address:
1601 S. De Anza Blvd., Suite 100
Cupertino, CA 95014
INVESTORS:
Each Investor listed on Exhibit A
--------------------------------------------
(Print Name of Investor)
By: /s/ Each Investor listed on Exhibit A
-----------------------------------------
(Signature)
Name: Each Investor listed on Exhibit A
---------------------------------------
(Name of Person Signing)
Title:______________________________________
(Print Title, If Applicable)
E-mail Address:_____________________________
Address:
PLEASE RETURN THIS SIGNATURE PAGE VIA FACSIMILE TO
THE ATTENTION OF LYNNE MATHENY AT VENTURE LAW GROUP AT 650/233-8386
SIGNATURE PAGE TO PREVIEW SYSTEMS,INC.SECOND AMENDED AND
RESTATED RIGHTS AGREEMENT
<PAGE>
EXHIBIT 10.8(b)
PREVIEW SYSTEMS, INC.
AMENDMENT TO SECOND AMENDED AND
RESTATED RIGHTS AGREEMENT
This Amendment (the "Amendment") is made as of September 14, 1999 to the
---------
Second Amended and Restated Rights Agreement dated as of July 2, 1999 (the
"Rights Agreement"), by and among Preview Systems, Inc., a Delaware corporation
----------------
(the "Company") and the persons and entities listed on Exhibit A thereto (the
-------
"Investors"). Unless otherwise defined herein, the capitalized terms herein
---------
shall have the same meanings given them in the Rights Agreement.
RECITALS
A. The Company and the Investors are parties to the Rights Agreement,
pursuant to which the Company granted to the Investors certain rights with
respect to shares of the Company's stock.
B. The Company and the Investors wish to amend certain provisions in the
Rights Agreement in connection with the proposed initial public offering of the
Company's Common Stock.
C. Section 3.7 of the Investors' Rights Agreement provides that such
Agreement may be amended by a written instrument signed by the Company and
holders of at least a majority of the Company's Preferred Stock, acting together
as a single class.
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto agree as follows:
1. Section 1.6 of the Rights Agreement is hereby amended to add the
following Section 1.6(c):
"(c) Notwithstanding any other provision of this Section 1.6, if the
Company files a registration statement for an initial public offering on or
before December 31, 1999, the Company shall not be required to give notice of
such initial public offering to each Holder and it shall not be required to
include any shares other than the primary shares of the Company in such
registration."
2. Except as specifically amended herein, the Rights Agreement shall
remain in full force and effect.
3. This Amendment may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Pages Follow]
<PAGE>
The parties hereto have executed this Amendment to the Rights Agreement as
of the day and year above first written.
COMPANY:
PREVIEW SYSTEMS, INC.
By: /s/ Vincent Pluvinage
-----------------------------
Vincent Pluvinage, President
[SIGNATURE PAGE TO AMENDMENT TO RIGHTS AGREEMENT]
<PAGE>
The parties hereto have executed this Amendment to the Rights Agreement as
of the day and year above first written.
INVESTORS:
CHARLES W. JENNINGS INNOVACOM
By: By: /s/ Chadre Nois
--------------------- ---------------------
Name: Name: /s/ Chadre Nois
--------------------- ---------------------
Title: Title: Managing Director
--------------------- ---------------------
DISCOVERY VENTURES II, LLC. INVESTAR BURGEON VENTURE
CAPITAL INC.
By: /s/ Arnold Silverman
--------------------- By: /s/ Kandie Hsieh
---------------------
Name: Arnold Silverman
--------------------- Name: Kandie Hsieh
---------------------
Title: Manager
--------------------- Title: Controller
---------------------
DONALD L. LUCAS, SUCC TTEE
DONALD L. LUCAS PROFIT
SHARING TRUST DTD 1/1/84 KARL HIRSCH
By: /s/ Donald L. Lucas By: /s/ Karl Hirsch
--------------------- -------------------------
Name: Donald L. Lucas Name: Karl Hirsch
--------------------- -------------------------
Title: Successor Trustee Title: _________________________
---------------------
ENCOMPASS GROUP, INC. OLYMPIC VENTURE PARTNERS III, LP
By: /s/ Shozo Okuda By: /s/ Gerard H. Langelar
--------------------- --------------------------
Name: Shozo Okuda Name: Gerard H. Langelar
--------------------- --------------------------
Title: Chairman Title: General Partner
--------------------- --------------------------
[SIGNATURE PAGE TO AMENDMENT TO RIGHTS AGREEMENT]
<PAGE>
OVP III ENTREPRENEURS FUND SOFTBANK TECHNOLOGY ADVISORS
FUND LP
By: /s/ Gerard Langeler
------------------------- By: /s/ Jo Ann Heidi Roizen
----------------------------
Name: Gerard Langeler
------------------------- Name: Jo Ann Heidi Roizen
-----------------------------
Title: General Partner
------------------------- Title:_____________________________
R. DOUGLAS RIVERS
SOFTBANK TECHNOLOGY VENTURES
By: /s/ R. Douglas Rivers IV, LP
-------------------------
By: /s/ Jo Ann Heidi Roizen
Name: R. Douglas Rivers -----------------------------
-------------------------
Name: Jo Ann Heidi Roizen
----------------------------
Title: _________________________
Title: ----------------------------
RWI GROUP II, L.P. TELOS VENTURE PARTNERS, LP
By: /s/ Donald A. Lucas By: /s/ Bruce R. Bourbon
------------------------- ----------------------------
Name: Donald A. Lucas Name: Bruce R. Bourbon
------------------------- ----------------------------
Title: General Partner Title: Managing General Partner
------------------------- ----------------------------
RWI GROUP III, L.P. TETON CAPITAL COMPANY
By: /s/ Donald A. Lucas By: /s/ Donald L. Lucas
------------------------- ----------------------------
Name: Donald A. Lucas Name: Donald L. Lucas
------------------------- ----------------------------
Title: General Partner Title: General Partner
------------------------- ----------------------------
SAND HILL FINANCIAL COMPANY
By: /s/ Donald L. Lucas
--------------------------
Name: Donald L. Lucas
--------------------------
Title: Partner
--------------------------
[SIGNATURE PAGE TO AMENDMENT TO RIGHTS AGREEMENT]
<PAGE>
THE PHOENIX PARTNERS III LIMITED WHITING & COMPANY
PARTNER
By:_______________________
By: /s/ David B. Johnston
------------------------- Name:_____________________
Name: David B. Johnston
------------------------- Title:____________________
Title: General Partner
-------------------------
VAN WAGONER CAPITAL
THE PHOENIX PARTNERS IV LIMITED MANAGEMENT
PARTNER
By: /s/ G R Van Wagoner
By: /s/ David B. Johnston -------------------
------------------------- Name: Garrett Van Wagoner
Name: David B. Johnston -------------------
------------------------- Title: President
Title: Managing Partner -------------------
-------------------------
VINCENT PLUVINAGE
By:/s/ Vincent Pluvinage
-----------------------------
Name: Vincent Pluvinage
---------------------------
Title:__________________________
VLGI 1999
By: /s/ Elias J. Blawie
-------------------------
Name: Elias J. Blawie
-------------------------
Title: Managing Partner
-------------------------
[SIGNATURE PAGE TO AMENDMENT TO RIGHTS AGREEMENT]
<PAGE>
EXHIBIT 10.14
-------------
ZipLock ESD System License Agreement
DATED: June 30, 1999 ("Effective Date")
AMONG: Preview Systems, Inc., with offices at 1000 SW Broadway, Suite 1850,
Portland, OR 97205, and 1601 S. De Ana Blvd., Suite 100, Cooperation, CA
95014.
("Preview")
Contact Person: Contracts Administrator [*]
AND: Ingram Micro Inc. , with an office located at 1600 E. St. Andrew Place,
Santa Ana, CA 92705
("Licensee")
Contact Person: [*]
Preview has developed the ZipLock ESD System (the "System"), a software system
that employs encryption and decryption functionality for the secure electronic
distribution of software. Licensee wishes to license and use the System for the
distribution of software through Internet points of contacts ("Storefronts").
Preview wishes to license the System to Licensee for such purposes under the
terms of this License Agreement ("Agreement"). The parties agree as follows:
1. System Description and Delivery. The System components are described in
Exhibit A, and are hereafter collectively referred to as the "System". Preview
will deliver the System to Licensee after execution of this Agreement according
to the schedule set forth in Exhibit A.
2. Grant of License. Subject to the terms and conditions of this Agreement,
including all exhibits hereto, Preview hereby grants to Licensee, and Licensee
hereby accepts, a nonexclusive, nontransferable, license to use one copy of the
System per Site to encrypt and decrypt software, and distribute such software
via Storefronts and various distribution mediums including CD, disk, OEM
hardware, and DVD. The license entitles Licensee to use the System in the
territory set forth in Exhibit A (subject to the export restrictions set forth
in Section 13) with the following rights and restrictions.
2.1 Sublicense Rights and Restrictions. Licensee may not sublicense the
System or transfer the System to any third party. All Business Partners of
Licensee, selling products from Licensee's server may, however, license the
right to use the ESD Gateway Interface in the territory for sublicense set forth
in Exhibit A, provided that each such Business Partner first receives, accepts,
and returns to Preview the ZipLock ESD Gateway End User License Agreement (see
Exhibit C). Licensee must take commercially reasonable measures to ensure that
such Business Partners comply with such agreements, and Licensee agrees that
Preview shall deliver all Gateways to such Business Partners within 2 working
days of notification from Ingram Micro.
2.2 Distribution Rights and Limitations. Licensee may distribute software
through Business Partners under the following conditions: (i)such Business
Partners must have entered into the ZipLock ESD Gateway End-user License
Agreement (ii) Licensee must have written agreements with all Business Partners
who distribute Licensee-encrypted software. Such agreements must substantially
incorporate the obligations and restrictions set forth in Sections 2.2
(distribution rights), 2.4 (general restrictions), 4 (fees), and 13 (compliance
with laws); and (iii) Licensee must take commercially reasonable measures to
ensure that Business Partners comply with all such agreements.
2.3 Multiple Sites. Licensee may obtain multiple licenses for the System,
subject to payment of all fees listed in Exhibit B for each Site, and within the
Territory set forth in Exhibit A. A "Site" is defined as a three-mile (or five
kilometer) radius of a System owned by Licensee [*]. A group of ZipLock Servers
that are configured as a logical site, e.g. fail over, redundant and warm backup
are considered as a single site. Preview shall deliver each System to each Site
upon receipt of valid Purchase Order from Licensee, and upon receipt of any
required export license (see Section 13).
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
2.4 General Restrictions. Licensee may make a reasonable number of back-up
or archival copies of the System, consistent with good commercial practices.
Licensee may not change, modify, alter, adapt, translate, disassemble,
decompile, or in any way reverse engineer, reverse compile or create derivative
works from, the System.
3. Maintenance and Support. Only Preview or its designees may provide System
maintenance and support. Maintenance and support is required, and provides
Licensee with access to phone and email customer support (refer to Exhibit B),
as well as upgrades, patches, bug-fixes, and enhancements (collectively
"Upgrades") that are generally made available on a no-cost basis to valid
Preview System Licensees who receive maintenance and support. Upgrades shall
not include new products of Licensor, even if based on the ZipLock System. The
provision of maintenance and support does not warrant the error-free operation
of the System. Preview's warranty obligations are only the ones set forth in
Section 7. Preview's standard rates for maintenance and support services on the
Effective Date are set forth in Exhibit B. All changes are to be submitted in
writing at [*] with [*] advance notice. Any such changes will not apply
retroactively.
4. Fee and Payment. Licensee will pay license fees, maintenance fees,
installation fees, monthly transaction fees, Gateway license fees, and any other
fee applicable to the licenses or transactions described in this Agreement.
Preview's fees in effect on the Effective Date are listed in Exhibit B. All
fees are due and payable as set forth in Exhibit B and Exhibit F. All charges
and fees are exclusive of any sales taxes, duties or similar charges and fees,
and all such charges, except for taxes on the net income of Preview, are payable
solely by Licensee in addition to the price and will be added to the invoice.
5. Required Reports. Licensee will provide Preview with [*] written reports
that document the accrual and payment to Preview of the Transaction fees
described in Exhibit B for each Site. Licensee will provide such information in
the format required by Preview, which shall be commercially reasonable (see
example in Exhibit D). Licensee agrees to issue these reports and deliver them
to Preview, beginning in the first reporting period after Effective Date.
Failure to produce the reports after [*], required hereunder constitutes a
material breach of this Agreement that will entitle Preview to terminate this
Agreement pursuant to section 6.2
6. Term and Termination
6.1 Term. This Agreement will become effective on the Effective Date and
shall remain in effect for one (1) year unless earlier terminated for reasons
set forth below. Preview will provide Ingram Micro with 60 days advance written
notice of the applicable renewal date. The terms and conditions of this
agreement will automatically renew for an additional one (1) year term unless
either party terminates the agreement in writing. Such written termination will
be provided to the other party at least 45 days prior to the expiration of the
agreement.
6.2 Material Breach. This Agreement may be terminated by either party for
material breach of its terms, following written notice and 30 days' opportunity
to cure from the date of the notice, except that if the breach relates to a
party's breach of confidentiality obligations or failure to pay monies due, the
non-breaching party may terminate the Agreement following written notice and a
ten (10) day opportunity to cure from the date of the notice.
6.3 Result of Termination. Upon termination, Licensee will return System to
Preview and destroy any backup copies made, and the rights and responsibilities
of each party under this Agreement shall cease except that the following
provisions will survive termination according to their terms: Sections 7
(warranty), 8 (liability limitations), 9 (ownership), 10 (confidentiality), 11
(indemnity), 12 (notice) and 16 (general matters). In addition, all obligations
to pay moneys due shall survive until all such monies have been paid.
7. Limited Warranty.
7.1 Software warranty. Preview warrants that the System will
substantially conform to Preview's published specifications,
(http://www.previewsystems.com/products/ziplock/index.html) for a
period of 30 Days from installation.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
7.2 Year 2000 warranty. Preview warrants that the system will properly
(a) record, store, process, calculate or present calendar dates
falling on and after (and if applicable, spans of time including)
January 1, 2000 as a result of the occurrence, or use of data
consisting of, such dates, and (b) calculate any information dependent
on or relating to the dates on or after January 1, 2000 in the same
manner, and with the same functionality, data integrity and
performance, such as software records, stores, processes, calculates,
and presents calendar dates on or before December 31, 1999, or
information dependent on or related to such dates. This warranty
shall not apply to any date data that is incorrect or ambiguous as to
century.
7.3 Virus and Harmful Code Warranty. Preview warrants that the System has
been tested and found virus-free by a reputable, commercially
available virus checking software package. In addition, Preview
warrants that it has not intentionally included any "harmful code" in
the System at the time of delivery. "Harmful code" means any computer
code, programming instruction or set of instructions that is intended
to damage, interfere with or otherwise adversely affect computer
programs, data files or hardware without the consent or intent of the
computer user.
7.4 Limitations on Warranties. These warranties shall not apply to any
modification of the System made by any party other than Preview or to
combination of the System with any hardware or software not supplied
by Preview where such modification or combination is responsible for
the non-compliance with the warranty. Licensee's sole and exclusive
remedy and Preview's sole and exclusive liability in connection with
any such non-compliance is for Preview to repair or replace the System
or to terminate the Agreement and refund any fees paid by Licensee
(except for transaction fees that have already accrued or been paid).
In addition, Licensee may choose to terminate the Agreement without
any refund. Except as provided in this Section 7, and subject to
Preview's maintenance and support obligations under Section 3, the
System is provided "as is" and Preview makes no other representation
or warranty, express or implied, of any kind with respect to the
System, including, without limitation, warranties of merchantability,
fitness for a Particular use or Non-Infringement. Licensee recognizes
that there may be security breaches in the general field of electronic
commerce and agrees NOT to hold Preview RESPONSIBLE FOR OR IN any such
security breaches affecting the System.
8. Limitation on Liability. Unless expressly provided for herein, neither
party shall be liable to the other for any indirect, special or consequential
damages, including without limitation loss of data or use, lost profits, or
interruption of business. Except with respect to its indemnity obligations
under Section 11, in no event shall Preview's liability under this Agreement
exceed the total paid by Licensee to Preview.
9. Intellectual Property Ownership. Title, ownership rights, and all
intellectual property rights in and to the System, including without limitation
patent rights, copyrights, trademark rights, and trade secrets rights, are and
shall remain in Preview or its licensors. Preview gives no ownership rights in
the System to Licensee, and confers upon Licensee only such other rights as are
expressly set forth herein for the term of this Agreement only. To the extent
that Preview creates for Licensee certain modifications to the System that are
identified in a mutually-agreed to and signed document as "Proprietary"
modifications, Preview hereby [*] intellectual property rights in such
Proprietary modifications [*]. Preview shall retain ownership of all
modifications identified as "Generic" and in any portion of the Proprietary
modifications that are pre-existing or are also part of any Generic
modification. In addition, Preview reserves the right to create works similar
to the Proprietary modifications in the future.
10. Confidential Information. Information and materials concerning each
party's business, plans, methodology, technology, and/or software ("Confidential
Information") are valuable trade secrets to such party. Neither party will
disclose, or permit to be disclosed, the other party's Confidential Information
to any third party without the disclosing party's prior written consent, except
under order of court or government agency, and then only if the receiving party
gives reasonable notice of such order to the disclosing party. Each party
agrees to exercise reasonable care in protecting the Confidential Information of
the other party from unauthorized use and disclosure. Confidential Information
shall not include information that is (i) publicly available, (ii) in receiving
party's lawful possession prior to the Effective Date and
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
not subject to disclosure restrictions, (iii) obtained by the receiving party
from third parties without disclosure restrictions, or (iv) independently
developed by the receiving party without reference to the disclosing party's
Confidential Information. This obligation will expire three (3) years after
termination of the Agreement.
11. Indemnity.
11.1 Preview Indemnity. Preview shall indemnify, hold harmless, and
defend Licensee, from and against any and all claims, damages, liabilities, and
costs or other expenses (collectively "Claims"), that the System infringes any
U.S. patent, copyright or violates any trade secret of a third party or (b) use
of the system violates any confidentiality or other contractual rights of third
parties, but only if Licensee gives Preview reasonable notice of any such Claim,
provides reasonable assistance to Preview in the defense of the Claim, and
allows Preview sole control over the litigation or settlement of such Claim;
provided, however, that Preview shall not discontinue or settle such Claim in a
manner that does not unconditionally release Licensee without Licensee's prior
written consent. Notwithstanding the foregoing, Preview is not liable to the
extent that the infringement arises from either (i) Licensee's change or
alteration of the System, or (ii) Licensee's combination of the System with non-
Preview products or data, if such combination is the sole cause of the
infringement. In addition, Preview is not liable for violation of third party
rights to the extent that such a violation is caused by Licensee's violation of
the terms of this agreement.
11.2 Licensee Indemnity. Licensee shall indemnify, hold harmless,
and defend Preview from and against any and all Claims related to (i) any
warranties of Licensee, that are inconsistent with the limited warranties given
to Licensee hereunder or (ii) Licensee's negligent acts or omissions or willful
misconduct. Licensee shall not be liable hereunder unless Preview provides
reasonable notice of any such Claim, provides reasonable assistance to Licensee
in the defense of the Claim, and allows Licensee sole control over the
litigation or settlement of such Claim; provided, however, that Licensee shall
not discontinue or settle such Claim in a manner that does not unconditionally
release Preview with out Preview's prior written consent.
12. Notices. All notices shall be in writing and shall be sent to each party's
contact person and at each party's address as set forth in the first page of
this Agreement. The parties may change their contact person or notice address
by notice. Notices shall be effective when actually received in paper form by
the contact person, except that a notice sent certified or registered mail,
postage prepaid, return receipt requested, is effective on the date the return
receipt shows the notice was accepted, refused, or returned undeliverable.
13. Compliance with Laws. Each party shall comply with all applicable laws,
rules and regulations, including without limitation, regulations regarding use
of the System, and the Export Administration Act and Regulations of the United
States Department of Commerce. Licensee Is Hereby Advised That The Bureau Of
Export Administration Requires A Specific License For The Export Or Reexport Of
The ZipLock Builder Component Of The System, And Licensee Will Not Export Or
Reexport The ZipLock Builder Component Of System Before Such License Is Issued.
If The Territory In Exhibit A So Allows, Preview Will Reasonably Assist Licensee
In Securing Such License, But Licensee Will Be Solely Responsible For Abiding By
The Terms Of The License, And Will Indemnify And Hold Preview Harmless Against
Licensee's Failure To So Abide By The Terms Of The License.
14. Dispute Resolution - section deleted
15. Audit Rights. Licensee will allow Preview or its accountants to inspect
Licensee's books and records containing information related to all fee-
generating events under this Agreement during business hours and at Licensee's
site, if Preview requests to undertake such inspection by written notice
delivered to Licensee at least three business days prior to the inspection.
Preview shall pay for the costs of such inspection unless the inspection reveals
an underpayment by Licensee in excess of [*]% of the amount that should have
been paid, in which case Licensee shall pay for such inspection.
16. General Matters. Each clause of this Agreement is severable. If any
clause is ruled void or unenforceable, the balance of the Agreement shall
nonetheless remain in effect. A waiver of one or more breaches of any clause of
this Agreement shall not act to waive any other breach, whether of the same or
different clauses. Neither party may assign this
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
Agreement without the written consent of the other party, except that either
party may assign this Agreement to a purchaser of all or substantially all of
such party's assets or stock or to the surviving entity of a merger transaction.
This Agreement, including all exhibits attached hereto, is the complete
agreement between the parties as of the date hereof, and supersedes all prior
agreements, written or oral as to its subject matter. It may be modified only in
writing signed by the original parties hereto, or by their successors in office.
This Agreement shall be governed by the laws of California, excluding the
conflict of laws provisions and the United Nations Convention on the
International Sale of Goods.
Preview Systems: Licensee:
Name: Name: Gary L. Wingo
------------------------- -------------------------------
(Print) (Print)
Signature: Signature: /s/ Gary L. Wingo
-------------------- ------------------------
Title: Title: VP eSolutions
------------------------ ----------------------------
Date: Date: June 30, 1999
------------------------- -----------------------------
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT A
page 1 of 1
System Description
Standard Components:
ZipLock ESD Server
ZipLock ESD Gateway Interfaces
ZipLock Builder
ZipLock Merchandizer
Vbox Builder
Functionality description of each System component is available upon request
from Preview, and is also available on Preview's Internet Web site at
http://www.previewsystems.com.
Territory for Usage: "Territory for Usage: System components, as listed above,
to be licensed for Sites worldwide, except Japan, Cuba, Iran, Iraq, Libya, North
Korea, Syria, and Sudan, unless separately agreed to in writing by the parties.
Territory for License of ESD Gateway Interfaces: Sublicenses may be granted for
use worldwide except Japan, Cuba, Iran, Iraq, Libya, North Korea, Syria, and
Sudan, unless separately agreed to in writing by the parties.
Delivery Schedule: Within 10 days of Effective Date, via ZipLock protected
electronic download or as otherwise agreed between the parties.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT B
Page 1 of 2
Revenue Transaction Fee Schedule
ZipLock ESD System Annual License Fee $[*] /Year /Site
- -------------------------------------
. Non-refundable. [*]
. Transaction fees are calculated based on a percentage of gross revenues
(minus returns) earned on licenses issued and products unlocked via the
Licensee's Server, and via third party servers connected to Licensee's
Server. This includes licenses and keys issued by Licensee Server, as well as
licenses and keys requested from other ZipLock Servers. The transaction fee
is a percentage of the price at which the product is sold to the reseller.
. Transaction fees apply to total product revenues (minus returns) achieved at
each Site. Rate is [*]% on annual product revenue (minus returns) amounts
greater that $[*]. When gross revenues minus returns exceed $[*], the excess
transaction fees generated in any given month shall be due at the end of the
following month. The System may automatically generate and send daily
transaction reports to Preview.
. Transaction fees for digital goods distributed on CD Media are the greater of
[*]% of gross revenue (minus returns) or $[*] per key request or unlock.
ZipLock Software Maintenance and Support Fee (see EXHIBIT G)
- --------------------------------------------
Expanded Software Maintenance and Support $[*]/Year /Site
provides 24-hour Technical Support via
telephone and email Subsequent year's fees
shall not exceed the fees of the immediately
previous year's fees by more than [*]%.
ZipLock ESD System Initial Installation and Training $[*]/On-Site Class
- ----------------------------------------------------
An on-site class is defined as a two-day training session where students will
learn the operations administration and customer support aspects of ZipLock
Server. Various modules are presented during the two days and are applicable to
different students. Maximum for each module is [*] Students On-site classes are
ordered via purchase order, or written request in the case of pre-paid classes,
with a minimum of 14 days advance notice for scheduling dates. Both parties
agree to complete general services and development terms for additional services
Preview will supply to Licensee during term of this AGREEMENT within 30 days of
EFFECTIVE date.
Consulting & Custom Training Development $[*]/Day
- ----------------------------------------
Consulting and Custom Training Development is defined as tasks that are mutually
agreed to in writing by both parties that tailor the Standard ZipLock System to
Ingram Requirements. Each proposal will have schedule and a list of
deliverables mutually agreed upon before any work is done. Both parties agree to
complete general services and development terms for additional services Preview
will supply to Licensee during term of this AGREEMENT within 30 days of
EFFECTIVE date.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT B
Page 2 of 2
Upon receipt of Ingram Purchase Order, or a written request in the case of a
pre-paid ESD Gateway, Preview shall drop ship a Gateway to Sublicensors as
directed by Ingram Micro, and invoice Ingram Micro for any Gateways where fees
are due Preview Systems. Shipment will occur after receipt of signed Gateway
End User License
. Gateway Delivery, Installation, Integration Consulting*, and Training fees
Quantity [*]
Quantity Discount is subject to the following conditions
1. A purchase order is placed [*].
2. The order is non-refundable[*]
Includes software installation, up to two days of integration
consulting/support and one day of training (to take place at Ingram Micro or
Preview) within 30 days of gateway installation. Preview shall work directly
with Sublicensors. Any further time required shall be contracted separately
with Ingram or Sublicensee according to the Preview Technology Support Options
listed below. Since every reseller has at least some unique integration
requirements, Preview Systems cannot guarantee that two days of consulting
will be sufficient to bring a reseller live. A statement of work will be
delivered to each reseller after the one day planning session (included in the
two days of Integration Consulting)In addition, Ingram Micro will make its
best effort to suggest that each storefront connected to the server display a
small "Powered by Preview" icon on all pages that offer downloadable products.
This logo will be provided to the Sublicensee by Preview Systems.
. Gateway Annual Maintenance and Support fees Quantity [*]/ year
Subsequent year's fees shall not exceed the
fees of the immediately previous year's fees
by more than [*]%.
Quantity Discount is subject to the following
conditions
1. A purchase order is placed [*].
2. The order is non-refundable[*]
Sublicensors may contact Preview directly for standard technical support
provided all maintenance fees have been paid. Preview shall deliver and
support Gateway updates to Sublicensors corresponding to updates made to
Ingram ESD System provided all maintenance fees have been paid by Ingram
All fees are shown in U.S. Dollars.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT C
Page 1 of 2
ZipLock ESD Gateway End User License Agreement
The ZipLock ESD Gateway software that accompanies this license (the "Software")
is the property of Preview Systems, Inc. ("Preview") and is protected by
copyright and trade secret laws. While Preview continues to own the Software,
you will have certain rights to use the Software upon your acceptance of this
license. Except as may be modified by a fees addendum which accompanies this
license, your rights and obligations with respect to the use of this Software
are as follows:
You may:
(i) use one copy of the Software on a single computer;
(ii) make one copy of the Software for archival purposes, or copy the
software onto the hard disk of your computer and retain the original
for archival purposes;
(iii) after written permission of Preview Systems, transfer the Software on a
permanent basis to another person or entity, provided that you retain
no copies of the Software and the transferee agrees to the terms of
this agreement; and
You may not:
(i) copy the documentation which accompanies the Software;
(ii) sublicense, rent or lease any portion of the Software;
(iii) reverse engineer, decompile, disassemble, modify, translate, make any
attempt to discover the source code of the Software, or create
derivative works from the Software;
(iv) use a previous version or copy of the Software after have received an
upgraded version as a replacement of the prior version. Upon upgrading
the Software, all copies of the prior version must be destroyed; or
(v) use the Software or documentation in any illegal manner or for any
illegal purpose, or export or re-export the Software.
(vi) use the Software except in connection with sales of software programs
using Ingram's ZipLock server
You will indemnify and hold Preview and Ingram harmless against any violation of
this Agreement.
Disclaimer of Warranty:
THE SOFTWARE IS PROVIDED "AS IS". LICENSOR AND SUBLICENSOR PROVIDE NO WARRANTY,
EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND SPECIFICALLY DISCLAIM ANY WARRANTY
OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT, WITH
RESPECT TO THE SOFTWARE AND RELATED DOCUMENTATION. LICENSOR DOES NOT WARRANT
THAT THE ENCRYPTION AND/OR OTHER SECURITY MECHANISMS USED BY THE SOFTWARE OR THE
CLIENT ARE UNBREAKABLE BY THIRD PARTIES.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT C
Page 2 of 2
ZipLock ESD Gateway End User License Agreement
Disclaimer of Damages:
REGARDLESS OF WHETHER ANY REMEDY SET FORTH HEREIN FAILS OF ITS ESSENTIAL
PURPOSE, IN NO EVENT WILL PREVIEW OR INGRAM BE LIABLE TO YOU FOR ANY SPECIAL,
CONSEQUENTIAL, INDIRECT OR SIMILAR DAMAGES, INCLUDING ANY LOST PROFITS OR LOST
DATA ARISING OUT OF THE USE OR INABILITY TO USE THE SOFTWARE EVEN IF PREVIEW HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
IN NO CASE SHALL PREVIEW'S OR INGRAM'S LIABILITY EXCEED THE PURCHASE PRICE FOR
THE SOFTWARE. The disclaimers and limitations set forth above will apply
regardless of whether you accept the Software.
General:
This Agreement is governed by the laws of the State of California, excluding the
conflict of laws provisions and the United Nations Convention on the
International Sale of Goods. This Agreement may only be modified by a license
fee addendum accompanying this license or by a written document which has been
signed by both you and Preview. Should you have any questions concerning this
Agreement, or if you desire to contact Preview for any reason, please write:
Preview Systems, Inc., Customer Support, 1000 SW Broadway, Suite 1850, Portland,
OR 97205.
Accepted by:
Signature:________________________________________
Printed Name:____________________________________ Date: ____________
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT D
page 1 of 1
Transaction Report for ZipLock System
Period Beginning: __________________ Date Prepared: ______________
Period Ending: _____________________ Prepared By: ________________
Phone/email: ______________
<TABLE>
<CAPTION>
Total Revenues
- --------------------------------------------------------------------------
<C> <S> <C>
1. Gross Revenues of ESD Sales this period: $
- --------------------------------------------------------------------------
2. Less Gross Revenues of ESD Returns this period: ($ )
- --------------------------------------------------------------------------
3. Subtotal Adjusted Gross Revenues this period: $
- --------------------------------------------------------------------------
4. Apply Transaction Rate of [*]% to Revenue [*]: x [*] =
- --------------------------------------------------------------------------
5. CD Unlock Fees if applicable X $[*] =
- --------------------------------------------------------------------------
6. Total Fees due this period: $
- --------------------------------------------------------------------------
7. Balance of Prepaid Transaction Fees carried
forward and applied: $
- --------------------------------------------------------------------------
Total Fees now due, or, Remaining Prepay Balance: $
- --------------------------------------------------------------------------
</TABLE>
Note: Transaction fees are taken on the total gross revenues earned on the
following product sales:
1. product licenses issued from Licensee's ZipLock Server,
2. products unlocked with keys requested from Licensee's ZipLock Server,
3. product licenses requested from another ZipLock Server, and
4. product licenses unlocked with keys requested from another ZipLock
Server.
Gross revenue is the price at which the product was sold to the reseller, or
other Business Partner.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
EXHIBIT E
page 1 of 1
Custom Project Summary
Each of the projects can be done in parallel and many of the projects will have
multiple engineers working on them.
A detailed project plan with intermediate milestones for each project will be
produced after the proposal is accepted and P.O. is issued.
<TABLE>
<CAPTION>
<C> <S> <C>
1. Automated Inventory Creation [*] [*] Days
2. Integrated Inventory Management [*] [*] Days
3. Licensing and Fulfillment [*] [*] Days
4. Order submission through ZipLock[*] [*] Days
5. Reporting and Reconciliation [*] [*] Days
6. Customer Service & Refund Processing
API for off site customer support [*] [*] Days
7. Test Network [*] [*] Days
[*]
[*]
</TABLE>
Total calendar time can be collapsed to [*] Days if Preview has access to
necessary Ingram technical resources and software.
Estimates include project management, design, development and deployment of each
application. Work is billable by Preview in daily increments as work is
completed.
Total Estimate: [*] days @ [*]/day = $[*]
Accepted by Customer ___________________ Date ______________________
Name and Title ___________________ Purchase Order # _______________
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT F
page 1 of 1
Two Year Cost Breakdown
<TABLE>
<CAPTION>
<C> <S> <C>
1. Annual License fee defined in Exhibit B $[*]
2. [*] On-site ZipLock ESD classes defined in Exhibit B $[*]
3. 7x24 Annual Maintenance and support defined in Exhibit B $[*]*
4. Custom Consulting Projects defined in Exhibit E $[*]
5. Qty [*] Reseller Integrations defined in Exhibit B $[*]
6. Qty [*] Reseller Gateway Maintenance defined in Exhibit B $[*]*
- -----------------------------------------------------------------------------
Total $[*]
</TABLE>
* - Subsequent year's fees shall not exceed the fees of the immediately
previous year's fees by more than [*]%.
Excess payments for [*] of Gross Revenue in each year are due with regularly
scheduled payment reports.
Payment terms for the license and maintenance fees are net 30 days from the date
of execution of this Agreement [*].
Payment terms for all other invoices are net 30 days from receipt of invoice.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT G
page 1 of 3
Extended Customer Support
Preview Systems provides extended customer support to provide 7x24 access to
technical reviewers and engineering resources. Extended customer support is an
annual fee-based program.
. Telephone and e-mail technical support
. Pager support for non-business hours
. Software updates and patches
. Release notes and FAQ's
. Optional remote access diagnostics
Telephone and Email Technical Support
Technical support provides information and guidance with operational issues,
software issues and enhancement requests. An operational issue is defined as a
question relating to the functionality of the ZipLock ESD System installation,
general configuration and implementation of the system. A software issue is
defined as an error within the software that is determined to not be a result of
a misconfigured system, or a result of user operation.
Preview Systems has defined the following severity level classifications for any
problems that may be encountered:
Critical: A critical level defect is an issue with the ZipLock System that
disallows normal production operation, and a "work-around" is either not
available, or if available is unacceptable to the customer. The problem
may also be corrupting or permanently destroying data, repeatedly failing
catastrophically, or requires repeated reboots of the system.
Serious: A serious level defect is one in which one or more ZipLock System
components does not function according to specification but a work-around
is available to keep the production environment operational. The work-
around is not sufficient for long term use and a patch or upgrade is
required.
Minor: Minor level defects include all other problems other than those
falling within the categories above. This would include errors in product
documentation and instances when the product does not operate strictly
according to specifications.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT G
page 2 of 3
Extended Customer Support
Engineering Response Times
Critical: Engineering resources will be applied immediately to work toward
a resolution to the problem. The problem is escalated to the highest
priority for the engineering team. The goal is to resolve the problem or
produce a work-around within [*] hours, if possible, of the initial report.
Best engineering efforts will be applied to resolve the issue as quickly as
possible, but Preview Systems cannot guarantee that all issues can be
resolved within [*] hours.
Serious: Engineering resources will be applied as necessary to produce a
permanent workaround or a solution within [*] business days of the initial
report.
Minor: The problem will be tracked and resolved in the next product
release or upgrade.
Standard Support Problem Resolution Process
1. The issue is assigned a Severity Level.
2. The issue is entered into Preview Systems problem tracking database.
3. The issue is assigned to a customer support engineer.
4. The assigned customer support engineer:
. Determines whether or not the issue represents an actual problem.
. Reproduces the problem, or works with the customer to fully understand
the problem.
. Determines if the problem is known and if work-around exists.
. Tries to produce a work-around for newly reported problems.
. Informs the customer of the status of the submitted issue, and notifies
them of available work-arounds.
. Escalates all previously unknown problems to engineering for permanent
resolution.
Pager Support for Non-business Hours
For all non-business hours, 5:00 PM Pacific to 8:00 AM Pacific, Preview Systems
will provide a pager number for support purposes. A customer support engineer
will return any pages within 1 hour of contact.
Software Updates and Patches
Software updates and patches are sent automatically to our customers. These are
typically in the form of Internet downloadable software packages and are sent
via the preferred customer email address unless otherwise specified.
Application of these updates should be coordinated with customer support to
ensure proper installation.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
ZipLock ESD System License Agreement
EXHIBIT G
page 3 of 3
Extended Customer Support
Release Notes and FAQ's
Customer support provides release note documentation containing information on
new and updated features, as well as known limitations to the software. These
documents will be sent to the preferred customer email address, unless otherwise
specified. Also, FAQ's for the ZipLock System are available from customer
support.
Optional Remote Diagnosis
If desired, customer support can provide hands-on support through the use of
remote access tools. These are not required and are mentioned as alternative
ways to support the product in times of need or uncertainty.
Windows NT - Norton pcANYWHERE from Symantec Corporation.
UNIX - Telnet
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
EXHIBIT 10.15
LICENSE AGREEMENT
This License Agreement (this "Agreement") is entered into as of this twenty-
ninth (29th) day of September, 1998 (the "Effective Date"), by, and between
Preview Systems, Inc., a Delaware corporation having its principal place of
business at 1601 S. De Anza Blvd., Suite 100, Cupertino, CA 95014, USA ("PSI"),
and Sony Marketing (Japan), Inc., a Japanese corporation having its registered
place of business at 41018 Tanakawa, Minato-ku, Tokyo, 1080074, Japan ("SMOJ").
RECITALS
WHEREAS, PSI has proprietary rights to certain computer software known as the
ZipLock Electronic Software Distribution (ESD) System:
WHEREAS, PSI is willing to grant to SMOJ, and SMJI is willing to accept, certain
license rights in Japan with respect to such software, as more fully described
herein and in accordance with the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants and other
consideration contained herein, the parties agree to the following terms and
conditions, which set forth the rights, duties, and obligations of the parties:
AGREEMENT
1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the following
meanings:
1.1 "Affiliate" shall mean, with respect to any a party, any corporation or
other. entity, that is directly or indirectly controlling, controlled by or
under common control with such party. For the purpose of this definition,
"control" shall mean the direct or indirect ownership of more than fifty percent
(50%) of the shares of the subject entity entitled to vote in the election of
directors (or, in the case of an entity that is not a corporation, for the
election of the corresponding managing authority). For purposes of
clarification, any entity that is owned or controlled directly or indirectly by,
Sony Corporation shall be deemed an Affiliate of SMOJ.
1.2. "Business" means (i) the marketing, distribution and support of the
Localized Software in the Territory by SMOJ in accordance with the terms and
conditions of this Agreement and (ii) the provision of electronic commerce
services (including, without limitation, electronic software distribution and/or
digital rights/goods distribution services) in the Territory using the Localized
Software.
1.3. "Business Unit" means the independent profit center within SMOJ which
shall be responsible for the operation of the Business.
1.4. "Confidential Information" means any information and/or material disclosed
hereunder by a party to the other party (whether in writing, oral, graphic.
electronic or in any other form) that is marked as (or provided under
circumstances reasonably indicating it is) confidential or proprietary, or if
disclosed orally or in other intangible form, that is identified as (or provided
under circumstances reasonably indicating it is) confidential at the time of
disclosure and summarized in a writing transmitted to the other party within
thirty (30) days of such disclosure. Confidential Information, includes,
without limitation, the terms and conditions of this Agreement; and all trade
secrets, know-how, inventions (whether or not patentable), business plans,
technical data, product ideas, techniques, processes, programs, methodologies,
algorithms, analytical routines, schematics, testing procedures, software design
and architecture, computer code, internal documentation, design and function
specifications, product requirements, personnel, contracts and other technical
or financial information or materials of the disclosing party and/or its
employees, consultants, investors, Affiliates, licensors, suppliers, vendors,
customers, clients and other persons.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
1.5. "Derivative Work" shall mean, with respect to any work, any revision,
modification, translation, abridgment, condensation or expansion of the work (or
any portion thereof), or any form in which the work (or any portion thereof) may
be recast, transferred or adapted, which, if prepared without the consent of the
owner of the work, would infringe or misappropriate any intellectual property
rights (including, without limitation, any copyright, patent, trademark or trade
secret) in the work. or would constitute unauthorized use or disclosure of any
Confidential Information with respect to the work.
1.6. "Distributor" means any third party (including, without limitation, any
Affiliate of SMOJ) located in the Territory and properly sublicensed hereunder
by SMOJ to distribute the Localized Software to End Users in accordance with the
terms hereof.
1.7. "Distributor Agreement" means an enforceable written agreement entered
into by SMOJ and any Distributor for the distribution of the Localized Software
by Distributor to End Users, which agreement contains terms and conditions not
materially inconsistent with and not materially less restrictive than those set
forth in this Agreement, and expressly names PSI as an intended third party
beneficiary with the right to rely on and directly enforce the terms thereof and
the form of which has been approved in advance in writing by PSI, which approval
will not be unreasonably withheld. This agreement may be in Japanese, will be
based on Japanese law, and will be consistent with similar Japanese business
practices.
1.8. "Documentation" means, with respect to any PSI product or service, PSI's
standard user documentation and related materials generally provided by PSI for
use with such product or service (including, without limitation, user manuals,
reference manuals, installation guides and other user materials), together with
all Fixes and Enhancements relating thereto.
1.9. "End User" means any third party (including, without limitation, any
Affiliate of SMOJ) located in the Territory that is properly licensed hereunder
by SMOJ to use, but not to distribute further, the Localized Software in
accordance with the End User License Agreement.
1.10. "End User License Agreement" means SMOJ's standard End User license
agreement for the Localized Software, which agreement contains terms and
conditions not materially inconsistent with and not materially less restrictive
than those set forth in this Agreement and PSI's then-current standard end user
license agreement for the non-localized version of the Localized Software, and
expressly names PSI as an intended third party beneficiary with the right to
rely on and directly enforce the terms thereof, and which agreement has been
approved in advance in writing by PSI, which approval will not be unreasonably
withheld. This agreement may be in Japanese, will be based on Japanese law, and
will be consistent with similar Japanese business practices.
1.11. "Enhancements" means, with respect to any work, any enhancements,
improvements, revisions, plug-ins, upgrades, updates, new versions, new releases
and/or other modifications (other than Fixes) to such work that are designated
as subsequent numbered releases of the same work and that may be provided by PSI
to SMOJ hereunder. Enhancements do not include any New Products.
1.12. "Fiscal Year" means any fiscal year of the Business Unit, which shall be
the twelve (12) month period beginning on April 1st and ending on the following
March 31st.
1.13. "Fixes" means, with respect to any work, any bug fixes, patches, work-
arounds and/or other error corrections to such work (other than Enhancements)
that may be provided by PSI to SMOJ hereunder.
1.14. "Gross Revenues" means, with respect to any product or service, any and
all gross amounts (including. without limitation, the fair market value of any
non-cash consideration) accrued to a party from the sale, license, distribution
and/or other transfer of the product or service, less any and all amounts paid
or credited for returns, rebates, exchanges, bad debt and/or discounts.
1.15. "Initial Term" means the initial term of this Agreement, beginning on the
Effective Date and ending on March 31, 2002.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
1.16. "License Term" means the period of time in which this Agreement is in
effect, which shall include the Initial Term, and if this Agreement is renewed
in accordance with this Agreement, any Renewal Term.
1.17. "Localized Software" means the Japanese-localized version of the ZipLock
ESD System and any New Product provided hereunder to SMOJ by PSI, which will be
marketed and distributed hereunder by SMOJ, and which includes, without
limitation, any Documentation, Fixes and Enhancements relating thereto that may
be provided hereunder in accordance with this Agreement.
1.18. "New Products" means any new products which are developed and generally
distributed by PSI during the License Term.
1.19. "Performance Criteria" means the annual minimum Gross Revenue and royalty
performance levels required for the Business Unit as set forth in Section 4 or
as otherwise determined by the parties in accordance with this Agreement.
1.20. "PSI Marks" means any trademarks, trade names, service marks and service
names of PSI relating to the Localized Software (including, without. limitation,
any New Product).
1.21. "Renewal Term" means any three-(3)-year renewal term of this Agreement
subsequent to the Initial Term, which renewal term is entered into in accordance
with the terms and conditions of this Agreement.
1.22. "Territory" means Japan.
1.23. "Warranty Period" shall mean the one (l)-year period following the date
that the Localized Software is first shipped to SMOJ.
1.24. "ZipLock ESD System" means PSI's proprietary "ZipLock ESD System"
integrated software package, which includes, without limitation, PSI's
proprietary "ZipLock Server", "ZipLock Gateway" and "ZipLock Builder" software
programs, together with all Documentation relating to the foregoing.
2. LICENSE GRANT
2.1. License Grant. Subject to the terms and conditions of this
Agreement, PSI hereby grants to SMOJ, in the Territory during the License Term,
a royalty-bearing, non-transferable and non-sublicensable (except to the extent
expressly set forth herein) license, under all of PSI's intellectual property
rights in the ZipLock ESD System and any New Product, to: (i) use the Localized
Software internally to distribute SMOJ's software products electronically to
customers in the Territory and to provide electronic commerce services to
customers located in the Territory; (ii) to reproduce, market (including all
activities normally involved in marketing a product or service, including
advertising, promotion, demonstration, etc.) and distribute (directly or
indirectly through Distributors located in the Territory) the Localized Software
to End Users, and to grant sublicenses to use the Localized Software to such End
Users pursuant to End User License Agreements; (iii) with PSI's prior written
consent, to develop Japanese-localized versions of Enhancements to the Localized
Software (including, without limitation, any New Products), provided the parties
have first agreed in writing upon applicable terms and conditions relating to
such localization of such Enhancements; and (iv) to maintain and support the
Localized Software, including, without limitation, any such localized
Enhancements. During the final year of the Initial Term or any Renewal Terms,
SMOJ will have the right to enter into one-year Distributor Agreements and End
User License Agreements, even if PSI and SMOJ have not yet agreed that this
License will be renewed. Except as expressly set forth in Sections 2.1, 2.2 or
2.3, no other right or license of any kind, whether express or implied, is
granted by PSI to SMOJ hereunder with respect to the ZipLock ESD System, the
Localized Software (including, without limitation, any New Products), or any
Enhancements to any of the foregoing; and all rights not expressly granted
herein are retained by PSI.
2.2. Exclusivity and Non-competition with Business.
2.2.1. Exclusivity. The foregoing license granted by PSI to SMOJ in
Section 2.1 shall be exclusive to SMOJ during the License Term, unless Such
exclusivity is earlier terminated in accordance with this
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
Agreement. The exclusive nature of such license means that, for so long as such
license remains in effect on an exclusive basis, PSI shall not grant another
entity the right to exercise in the Territory any of the rights granted to SMOJ
pursuant to Section 2.1.
2.2.2. Non-competition with Business. During the License Term, for
so long as the license granted in Section 2.1 remains in effect on an exclusive
basis, neither party shall offer, or participate in the management of another
entity offering, any electronic software distribution and/or digital
rights/goods distribution services or products in the Territory which are
similar to those services or products which are offered through or as part of
the Localized Software. Notwithstanding the foregoing, the restrictions set
forth in the preceding sentence shall not apply to (i) preclude Sony Corporation
or Affiliates of SMOJ from developing and offering any electronic software
distribution and/or digital rights/goods distribution services or products in
the Territory which are similar to those services or products which are offered
through or as part of the Localized Software and (ii) an entity acquired by PSI
where a portion of such entity's business relates to electronic software
distribution and/or digital rights/goods distribution services or products in
the Territory, provided that PSI shall neither expand further such distribution
relationship or renew it beyond its then-current term.
2.2.3. Termination of Exclusivity and Non-competition.
(i) If Sony Corporation or an Affiliate of SMOJ develops a
product or service which is similar to any product or service offered by SMOJ
through or as part of the Localized Software and SMOJ wishes to offer and/or
distribute such product and/or service, then SMOJ, upon one hundred eighty (180)
days' prior written notice to PSI, shall have the option to offer and/or
distribute such product or service in the Territory; provided, however, in such
event, (a) PSI shall have the option to terminate immediately, the exclusive
nature of the license rights granted to SMOJ in Section 2.1 and to market, offer
and distribute the Localized Software and any of PSI's products and services in
the Territory through any third party, and (b) the non-competition provisions of
Section 2.2.2 shall no longer apply. In such event, SMOJ shall have the right to
continue to distribute the Localized Software on a nonexclusive basis for the
remainder of the then-current term, subject to SMOJ's payment of applicable
running royalties as set forth in Section 4.2 of this Agreement.
(ii) In the event that the Business Unit's actual Gross
Revenues do not meet the applicable minimum targets for Fiscal Year 1999, or
subsequently do not meet the applicable minimum targets for the first year
during a Renewal Term, SMOJ shall pay to PSI the difference between the Minimum
Running Royalty required for that Fiscal Year and the actual Running Royalty
paid to PSI during such Fiscal Year, pursuant to Section 4.3 hereof. In the
event that the Business Unit's actual Gross Revenues do not meet the applicable
minimum targets for Fiscal Years 1999 and 2000, or subsequently do not meet the
applicable minimum targets for the first two (2) years during a Renewal Term,
SMOJ shall have the option to continue the exclusive nature of the license
granted hereunder for one (1) additional year by paying to PSI the amount which
is equal to the difference between the Minimum Running Royalty required for
Fiscal Year 2000 (or for the second year during the Renewal Term, as applicable)
and the actual Running Royalty paid to PSI during such Fiscal Year, pursuant to
Section 4.3 hereof.
(iii) In the event that (1) the Business Unit's actual Gross
Revenues do not meet the applicable minimum targets for Fiscal Years 1999 and
2000, or subsequently do not meet the applicable minimum targets for the first
two (2) years during a Renewal Term, and SMOJ does not elect to continue the
exclusive nature of the license for a third year by paying to PSI the royalty
shortfall for that second year, pursuant to Section 2.2.3(ii) above; or in the
event that (2) the Business Unit's actual Gross Revenues do not meet the
applicable minimum targets for Fiscal Years 1999, 2000, and 2001, then (a) PSI
shall have the option to terminate immediately the exclusive nature of the
license rights granted to SMOJ in Section 2.1 and to market, offer and
distribute the Localized Software and any of PSI's products and services in the
Territory through any third party, and (b) the non-competition provisions of
Section 2.2.2 shall no longer apply. In such event, SMOJ shall have the right to
continue to distribute the Localized Software on a non-exclusive basis for the
remainder of the then-current term, subject to SMOJ's payment of applicable
running royalties as set forth in Section 4.2 of this Agreement.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
2.3. Trademark License.
2.3.1. License Grant. Subject to the terms and conditions of this
Agreement, PSI hereby grants to SMOJ, in the Territory during the License Term,
a non-exclusive, non-transferable license to use the PSI Marks in connection
with any advertising, packaging, marketing, technical, support, instructional or
other materials related to the Localized Software. SMOJ may sublicense to any
Distributor the foregoing right to use the PSI Marks in accordance with this
Agreement. The Localized Software and any such related materials shall bear, in
a reasonably conspicuous and standard fashion, the PSI Marks.
2.3.2. Use of PSI Marks. SMOJ's and any such Distributor's use of
the PSI Marks shall be in accordance with the provisions of this section 2.3 and
PSI's then-current trademark guidelines, if any, as provided, and updated from
time to time, by PSI. SMOJ and any such Distributor shall use the PSI Marks in
a manner that does not derogate from PSI's rights in the PSI Marks, and shall
take no action that would interfere with or diminish those rights. SMOJ agrees,
and shall require any such Distributor to agree, to use the appropriate
trademark, product descriptor and trademark symbol (either "(TM)" or "(R)") as
designated by PSI, and to clearly indicate PSI's ownership of the PSI Marks on
the first occasion whenever any of the PSI Marks is first mentioned in any
advertisement, brochure, documentation or other material, or in any other manner
in connection with the Localized Software or the Business. Upon PSI's request
from time to time, SMOJ agrees, and shall require any such Distributor to agree,
to provide PSI with copies of goods and materials bearing the PSI Marks so that
PSI can verify that the quality of SMOJ's and any Such Distributor's use of such
PSI Marks is comparable to that of PSI's use thereof. In addition, as part of
the annual process to develop the Annual Operating Plan, or at any other time
following reasonable written notice from PSI, SMOJ and any such Distributor
shall provide PSI with a sample of any advertisement, packaging, brochure or
other publicly distributed documentation or material bearing a PSI Mark. SMOJ
and any such Distributor shall immediately suspend use of the PSI Marks if the
quality of the use of the PSI Marks is reasonably deemed interior by PSI until
SMOJ and/or such Distributor has taken such steps as PSI may reasonably require
to solve the quality deficiencies.
2.3.3. Additional Restrictions. SMOJ and any such Distributor shall
not reproduce or use the PSI Marks in any manner whatsoever other than as
expressly authorized by this Agreement or permitted by applicable law without a
license. SMOJ and any such Distributor shall not use as its own any mark, word
or design confusingly similar to any PSI Mark. SMOJ agrees, and shall require
any such Distributor to agree, that (i) all use of the PSI Marks by SMOJ will
inure to the benefit of PSI, (ii) SMOJ and any such Distributor shall not
register any PSI Marks without PSI's express prior written consent. and (iii)
PSI shall retain the exclusive right to apply for and obtain registrations for
the PSI Marks throughout the world.
2.4. Territory. The Localized Software may be installed and operated on]y
in the Territory. If SMOJ introduces any Japanese customers to PSI who install
any Localized Software outside of the Territory pursuant to a license agreement
with PSI, PSI shall pay SMOJ a referral fee equal to [*] Percent ([*]%) of the
Gross Revenues that accrue to PSI from such customers during the License Term.
2.5. Restrictions. SMOJ, its Distributors and any End User shall not,.
without the prior written consent of PSI: (1) decompile, disassemble or
otherwise reverse engineer (except to the extent expressly permitted by,
applicable law, notwithstanding a contractual obligation to the contrary) the
Localized Software or any portion thereof; (ii) modify, translate or create any
Derivative Works based upon the Localized Software; (iii) remove any copyright,
trademark or other proprietary rights notices contained on or in the Localized
Software; (iv) perform, or release the results of, benchmark tests or other
comparisons of the Localized Software with any other programs; (v) incorporate
the Localized Software or any portion thereof into any other program or product;
or (vi) use the Localized Software for any purpose other than in accordance with
the terms and conditions of this Agreement or the applicable Distributor
Agreement or End User Agreement.
3. ADDITIONAL COVENANTS
3.1. Localization and Delivery. PSI shall. [*]. localize the ZipLock ESD
System for the Territory and deliver the initial version of the Localized
Software to SMOJ by a date to be mutually agreed upon by the parties as part of
the Initial Operating Plan described in Section 3.3. In addition, during the
License Term PSI shall, [*], deliver to SMOJ [*] other than as provided in this
Agreement (i) a Japanese-localized version of the initial release
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
version of each New Product, including Documentation, and (ii) a non-localized
version of any Enhancement for the Localized Software, including, without
limitation, any New Products and (iii) PSI's standard distributor agreement as
well as PSI's standard end user license agreement for the non-localized version
of the Localized Software for purposes of SMOJ's preparation of the Distributor
Agreement and the End User License Agreement. SMOJ and PSI will agree in writing
on the optimal technical responsibilities for, and other applicable terms and
conditions relating to, localization of such Enhancements for the Territory,
provided that SMOJ shall be responsible for the actual cost of such localization
with the specific optimal mechanics to be determined as part of the Annual
Operating Plan. If PSI performs the localization of such Enhancements for SMOJ,
it will charge SMOJ [*]. The parties agree that, in general, they do not want to
make changes to the Localized Software which are unique and customized to the
Japanese market or customers. However, SMOJ may request PSI to make specific
changes to the Localized Software for the unique needs of the Japanese Market
and/or customers. If both parties feel that there is compelling strategic and/or
financial justification for the customization, PSI will work with SMOJ to create
a written specification and architecture for the requested customization, and
will provide an estimate of the cost of such customization to SMOJ and/or its
customer. SMOJ or its customers shall be responsible for the cost of any such
customization. If PSI performs the customization for SMOJ, PSI will charge [*].
3.2. Independent Business Unit. SMOJ shall establish the Business Unit as
an independent profit center with SMOJ and shall operate the Business through
the Business Unit. The Business Unit shall not engage in any business activity
other than the development and operation of the Business. SMOJ shall devote
appropriate resources to aggressively develop the Business, and shall have the
right to retain all profits earned by the Business Unit in connection with the
Business; provided that the foregoing shall in no way limit SMOJ's obligation to
pay the amounts due to PSI under this Agreement. SMOJ shall use commercially
reasonable efforts to establish the Business Unit and launch the Business on or
before October 31, 1998, and in any event no later than December 15, 1998. The
initial staffing for the Business Unit shall be as set forth in the Initial
Operating Plan described in Section 3.3. SMOJ shall seek the comments of PSI in
advance regarding the manager to be appointed for the Business Unit,. but SMOJ
will have final authority for the decision on all staffing for the Business
Unit. In order to ensure appropriate access to SMOJ senior management, the
Business Unit's manager will report directly to an SMOJ General Manager or a
more senior executive.
3.3. Initial and Annual Operating Plan and Process. Within thirty (30)
days after the execution of this Agreement, the parties shall agree upon an
Initial Operating Plan for the Business Unit, which plan (a) shall set forth the
launch plan; the marketing, sales, and distribution plan; and the technical
support and training plans for the Business Unit and the Localized Software and
(b) shall cover the period from the Effective Date through March 31, 1999 (the
"Initial Operating Plan"). The current draft of the Initial Operating Plan is
set forth in attached Appendix 1 and shall include, without limitation, those
elements set forth in attached Appendix 1. Beginning in 1998, and no later than
December 31st of each year during the Term, the parties shall agree upon an
Annual Operating Plan for the Business Unit for the immediately following Fiscal
Year (an "Annual Operating Plan"). The Annual Operating Plan should include,
without limitation, product development, technical and customer support,
marketing, sales and distribution plans for developing the market for the
Localized Software, as well as target, minimum, and incentive revenue to be
earned by the Business Unit and royalty payments to be paid PSI. As part of the
annual process of developing the Annual Operating Plan, the parties (i) shall
discuss the current market, competitive, product, and distribution situation in
Japan, the US, and the rest of the world,] and (ii) [shall review in good faith
the required Performance Criteria for the Business Unit for the following Fiscal
Year.] [If there is expected to be a revenue shortfall in any Fiscal Year due
to adverse economic conditions outside of SMOJ's control, and if SMOJ continues
to aggressively market the Localized Software and develop the Business during
such Fiscal Year, then PSI will consider, in good faith, a reduction in the
Performance Criteria for such Fiscal Year. If, in connection with the
development of any Annual Operating Plan for any Fiscal Year in the Initial
Term, the parties are unable to agree upon Performance Criteria for the
immediately following Fiscal Year in the Initial Term, then the [Performance
Criteria] for such immediately following Fiscal Year will be as set forth in
Section 4.3 below.
3.4. Marketing and Distribution.
3.4.1. Marketing Efforts. SMOJ shall market and distribute the
Localized Software in the Territory in accordance with the Initial and Annual
Operating Plans and this Agreement. SMOJ will have the right to determine the
pricing of the Localized Software in the Territory.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
3.4.2. Distributor Agreement.
(i) Prior to the distribution of any Localized Software by
SMOJ to any Distributor, SMOJ and such Distributor shall enter into a
Distributor Agreement. SMOJ shall not alter the material terms of such
Distributor Agreement without the prior written approval of PSI, which approval
will not be unreasonably withheld.
(ii) SMOJ shall use commercially reasonable efforts to enforce
the terms of each Distributor Agreement with at least the same degree of
diligence that SMOJ uses to enforce similar agreements for SMOJ's products
and/or services. SMOJ shall immediately notify PSI of any breach of any material
term of any such Distributor Agreement and shall cooperate with PSI in any
action to prevent or stop unauthorized use, reproduction, distribution and/or
disclosure of the Localized Software.
3.4.3. End User License Agreement.
(i) Any distribution of the Localized Software by SMOJ in the
Territory during the License Term shall be pursuant to an End User License
Agreement. SMOJ shall not alter the material terms of such End User License
Agreement without the prior written approval of PSI, which approval will not be
unreasonably withheld.
(ii) SMOJ shall use commercially reasonable efforts to enforce
the terms of each End User License Agreement with at least the same degree of
diligence that SMOJ uses to enforce similar agreements for SMOJ's products
and/or services. SMOJ shall immediately notify PSI of any breach of any material
term of any such End User License Agreement and shall cooperate with PSI in any
action to prevent or stop unauthorized use, reproduction, distribution and/or
disclosure of the Localized Software.
3.4.4. Proper Licensing of Localized Software. SMOJ shall not
distribute or provide to, or allow any entity (including Sony Corporation or any
Affiliate of SMOJ) to use the Localized Software unless that entity has signed
and agreed to be bound by a Distributor Agreement or End User License Agreement.
3.5. Compliance With Applicable Laws. SMOJ shall (i) comply with all
laws, regulations and other legal requirements that apply to this Agreement; the
exercise of SMOJ's rights or the performance of SMOJ's duties hereunder
(including, without limitation, any rights or obligations of any Distributor or
End User); or the operation of the Business, including, without limitation, all
applicable filings, registrations, reports, licenses, permits and authorizations
(collectively, "Authorizations"); export and import control laws; and tax and
foreign exchange legislation; and (ii) advise PSI of any legislation, rule,
regulation or other law (including but not limited to any customs, tax, trade,
intellectual property or tariff law) which is in effect or which may come into
effect in the Territory after the Effective Date of this Agreement, which SMOJ
becomes aware of and considers material to the Business and which affects the
importation of the Localized Software into, or the use and the protection of the
Localized Software and the intellectual property rights within. the Territory,
or which has a material effect on any provision of this Agreement. SMOJ shall
provide PSI with the assurances and official documents that PSI periodically may
request to verify SMOJ's compliance with this Section. In the event that the
issuance of any Authorization is conditioned upon an amendment or modification
to this Agreement which is unacceptable to PSI, PSI shall have the right to
terminate this Agreement without liability or further obligation whatsoever to
SMOJ.
3.6. Training and Support. PSI shall, [*] provide to the Business Unit
personnel (i) reasonable technical, marketing and sales and business development
training (including, without limitation, maintenance service training and system
integration support training) which are necessary for SMOJ to establish the
Business and (ii) reasonable ongoing business development support. In addition,
if desired by SMOJ, PSI shall provide additional support or other services at an
agreed upon fee ([*]). The level and nature of the support which PSI will
provide [*], and the level, nature, and cost of the additional support or
services which SMOJ may desire PSI to provide at SMOJ's expense, will be agreed
to as part of the Initial and Annual Operating Plans, as determined in
accordance with Section 3.3. SMOJ shall be responsible for all engineering work
related to the installation, integration and technical support of the Localized
Software in the Territory.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
3.7. Publicity. Promptly following the execution of this Agreement, the
parties shall issue a mutually agreeable, press release inside the Territory,
and PSI shall issue a mutually agreeable worldwide press release, regarding this
Agreement. Thereafter during the Term, the parties shall reasonably cooperate
to promote the Business publicly on a regular basis. PSI may reasonably use
SMOJ's name and a description of SMOJ's use of the Localized Software on PSI's
web site and in PSI's advertising and promotional literature subject to
obtaining the prior written consent of SMOJ (which shall not be unreasonably
withheld).
3.8. Formation of Joint Venture. The parties agree to consider forming a
joint venture at the end of the Initial Term for the operation of the Business,
with the equity ownership, capitalization. and other terms to be mutually
determined at that point, if the parties decide to form such joint venture.
However, if at any time prior to the end of the Initial Term, SMOJ reasonably
requests that the ongoing running royalty rate payable to PSI hereunder (as set
forth in Section 4.2 below) be reduced from [*] percent ([*]%), then (i) the
parties shall meet to discuss an appropriate resolution, and PSI shall consider
in good faith any such request by SMOJ; and (ii) in connection with such
discussions, PSI will have the option to request that SMOJ form a joint !venture
with PSI for the operation of the Business, with the terms, equity ownership,
and capitalization to be determined at that point, and SMOJ shall consider on
good faith any such request by PSI.
3.9. Joint New Product Development and Marketing. The parties agree that
they may jointly develop new products or services, and may jointly market and
distribute those products and services outside the Territory. All rights and
responsibilities, including royalties due to PSI and SMOJ and intellectual
property rights for such products or services, will be covered by a separate
written agreement.
4. PAYMENT
4.1. Up-Front License Fee. In consideration of the licenses granted and
services provided hereunder, SMOJ shall pay to PSI (i) a non-refundable, non-
creditable, non-recoupable up-front license fee of [*] (US$[*]) and (ii) a non-
refundable, non-creditable, non-recoupable up-front payment of [*] (US$[*]) for
training and consulting services provided by PSI in connection with the launch
of the Business, in each case payable within thirty (30) days after the
Effective Date.
4.2. Running Royalties. In further consideration of the licenses granted
hereunder, SMOJ shall pay to PSI an additional running royalty ("Running
Royalty") equal to [*] Percent ([*]%) of any and all Gross Revenues received by
SMOJ in connection with (i) any distribution of any Localized Software to any
Distributor or End User (including, without limitation, any Affiliate of SMOJ),
(ii) the provision of any service offered by SMOJ through or by using the
Localized Software; (iii) any joint venture, or any service operated by SMOJ,
with any third party, including, without limitation, any other Affiliate of
SMOJ; or (iv) the operation of the Business; provided that, for any products or
services developed jointly by PSI and SMOJ pursuant to a mutually acceptable
separate written agreement as set forth in Section 3.9 above, a Running Royalty
(payable to both PSI and SMOJ) will be agreed to by the parties which reflects
the contribution of each party to the market value of such jointly developed
product or service. If any Localized Software is distributed (or any service
offered through or by using any Localized Software) to any Affiliate of SMOJ at
a price which is (or for other consideration, the fair market value of which is)
below the then-current price generally offered by SMOJ to non-Affiliated third
parties for such Localized Software or service ("Current Market Price"), then
for purposes of calculating the Running Royalty due to PSI, SMOJ shall be deemed
to have received from such Affiliate of SMOJ such Current Market Price for such
Localized Software or service.
4.3. Performance Criteria. Unless otherwise agreed by the parties, the
annual minimum Gross Revenue for the Business and Running Royalty Performance
Criteria levels for the Initial Term will be as follows:
<TABLE>
<CAPTION>
Fiscal Year Beginning April 1 1999 2000 2001
----------------------------- ---- ---- ----
<S> <C> <C> <C>
Gross Revenue $[*] $[*] $[*]
Minimum Running Royalty $[*] $[*] $[*]
</TABLE>
Any renewal of this Agreement, as set forth in Section 10.1 shall be subject to
the prior written agreement of the parties regarding appropriate Performance
Criteria for the immediately following three-(3)-year Renewal Term.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
4.4. Incentive Performance Criteria. The parties agree that SMOJ should
be incentivized with a reduced royalty rate for aggressively developing the
Business. Therefore, the Running Royalty payable to PSI in any given Fiscal
Year will be reduced to [*] Percent ([*]%) of any Gross Revenues actually
received by SMOJ hereunder during such Fiscal Year, which are in excess of the
following incentive revenue levels earned in that given Fiscal Year:
<TABLE>
<CAPTION>
Fiscal year Beginning April 1 1999 2000 2001
----------------------------- ---- ---- ----
<S> <C> <C> <C>
Incentive Gross Revenue $[*] $[*] $[*]
</TABLE>
For example, if during Fiscal Year 1999, the Business Unit receives [*]
(US$[*]) in Gross Revenues, the Running Royalty paid to PSI for Fiscal Year 1999
shall total [*] (US$[*]) (i.e., [*]).
4.5. Payment. All Running Royalties required hereunder shall be paid on a
[*] basis, with payment due [*] ([*]) days after the receipt of invoice from PSI
which may be issued at the end of each [*]. All sums to be paid by SMOJ
hereunder shall be paid in U.S. Dollars and shall be remitted on or before the
applicable due date, by wire transfer to any account specified by PSI. Late
payments shall accrue interest charges from the due date through the date of
payment in full at a rate which is the lower of [*] ([*]%) per month or the
highest rate allowed by applicable law on the amount due; provided that PSI's
right to receive such interest (i) shall not constitute a forbearance or waiver
by PSI and (ii) shall not affect PSI's other rights and remedies (whether under
this Agreement or otherwise) with respect to any lateness in payment or failure
to pay. Except for any tax withheld by SMOJ on behalf of PSI as set forth in
Section 4.6 of this Agreement, no amounts shall be deducted from any Running
Royalties payable by PSI to cover returns, rebates, discounts, price protection,
or bad debts, or any costs incurred in the marketing or distribution of the
Localized Software or the operation of the Business. If the total Running
Royalty actually paid to PSI during any Fiscal Year does not equal or exceed the
annual minimum Running Royalty due to PSI for Such Fiscal Year pursuant to
Section 4.3, then SMOJ shall pay to PSI, within [*] ([*]) days after the receipt
of an invoice from PSI dated the end of such Fiscal Year, an amount equal to the
difference between the minimum Running Royalty required for such Fiscal Year and
the actual Running Royalty paid to PSI during such Fiscal Year, except in the
event that the Business Unit's actual Gross Revenues have not met the applicable
minimum targets for the first two (2) years during the Initial Term or a Renewal
Term and SMOJ elects not to continue the exclusive nature of the license granted
hereunder for one (1) additional year by paying to PSI the royalty shortfall for
the second Fiscal Year. as set forth in Section 2.2.3. If Such royalty
shortfall occurs in the third Fiscal Year of the Initial Term or any Renewal
Term, and if SMOJ pays the difference between the minimum Running Royalty
required for such Fiscal Year and the actual Running Royalty paid to PSI during
such Fiscal Year, and if the parties have agreed on the renewal conditions
described in Section 10.1,. then the license rights granted to SMOJ pursuant to
Section 2.1 shall continue on an exclusive basis for the following three (3)
year Renewal Term. As part of the Initial and Annual Operating Plan preparation
process described in Section 3.32, SMOJ and PSI will agree on the exchange rate
for payment of the Running Royalties in U.S. Dollars to PSI.
4.6. Taxes. SMOJ shall pay, and indemnify and hold PSI harmless, from.
all sales, use, value added or other duties, customs fees, levies, governmental
charges or taxes of any nature (other than taxes on PSI's net income), including
penalties and interest, and all government permit or license fees assessed upon
or with respect to the Localized Software, the Business and/or any services
rendered to SMOJ hereunder. If SMOJ is required by law to pay any tax, to make
any deduction or to withhold any amount from any sum payable to PSI by SMOJ on
behalf of PSI hereunder, SMOJ shall be and is hereby authorized to remit such
amounts to the appropriate taxing authorities and promptly furnish PSI with tax
receipts evidencing the payments of such amounts.
4.7. [*] Reports. Within [*] ([*]) days after the end of each [*], SMOJ
shall provide PSI with a written royalty report, which shall set forth the basis
for the calculation of the Running Royalty amount paid, including, without
limitation, the following information: the number of units of the Localized
Software (on a product by product basis) licensed during such [*]; a description
of the type of Localized Software (on a product by product basis) acquired by
each End User; the names of each End User and each Distributor; the gross amount
received for any use or licensing of the Localized Software; any amounts paid or
credited for returns, rebates, exchanges, bad debt and/or discounts; and any
other information reasonably requested by PSI. In addition. SMOJ shall provide
PSI with a [*] report at a reasonable level of detail (including an English
executive summary) on the technical and customer support, marketing, promotion,
distribution and other activities taken by the Business unit
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
during such prior [*] in connection with developing the Business, which report
shall include, without limitation, an explanation for any differences between
the planned activities as agreed upon in the then-current Annual Operating Plan
and the actual activities undertaken by the Business Unit during such prior
fiscal quarter. Within [*] ([*]) days after the end of each [*], PSI shall
provide SMOJ with a written referral fee report, which shall set forth the basis
for the calculation of the referral fees due SMOJ for those Japanese customers
whom SMOJ introduces to PSI and who install any Localized Software outside of
the Territory pursuant to Section 2.4 of this Agreement, including the following
information: the number of units of the Localized Software (on a product by
product basis) licensed during such [*]; a description of the type of Localized
Software (on a product by product basis) acquired by each End User; the name of
each End User; the gross amount received for any use or licensing of the
Localized Software; any amounts paid or credited for returns, rebates,
exchanges, bad debt and/or discounts.
4.8. Audit Rights. SMOJ shall keep and maintain (and shall require, as
reasonably consistent with SMOJ's normal practices for its Distributors, each of
its Distributors to maintain) full, true, and accurate books and records
containing all data reasonably required for verification of SMOJ's (and any such
Distributor's) compliance with the terms of this Agreement, including without
limitation, the quantity of Localized Software distributed (on a product by
product basis), the Gross Revenues received by the Business Unit, and the
amounts to be paid hereunder. PSI shall have the right, during normal business
hours upon at least fourteen (14) days prior notice, to audit and analyze the
relevant records of SMOJ (and any such Distributor) to verify compliance with
the provisions of this Agreement. The audit shall be conducted at PSI's expense
unless there is inadequate record keeping or the results of such audit establish
that inaccuracies have resulted in underpayment to PSI of more than [*] percent
([*]%) of the amount actually due, in which case SMOJ shall, in addition to
paying promptly all amounts due bear the expenses of the audit.
5. PROPRIETARY RIGHTS
As between PSI and SMOJ, PSI retains and shall exclusively own all right, title
and interest (including, without limitation, all patent rights, copyrights,
trademarks, trade secrets and any other intellectual property rights) in and to
the ZipLock ESD System and the Localized Software (including, without
limitation, any New Product) and any copy, Fix, Enhancement or other Derivative
Work of the any of the foregoing or any portion thereof, and SMOJ hereby assigns
to PSI all right, title and interest in and to any Enhancements or other
Derivative Works of any of the foregoing that may be developed by SMOJ unless
otherwise mutually agreed. SMOJ agrees to cooperate reasonably with PSI, [*],
in any action to evidence, maintain, enforce or defend PSI's rights in the
foregoing items. SMOJ shall not take any action to jeopardize, limit or
interfere in any manner with PSI's ownership of and rights with respect to any
of the foregoing items.
6. CONFIDENTIAL INFORMATION
6.1. Restrictions on Use and Disclosure. A party receiving any
Confidential Information ("Recipient") from the other party ("Discloser") (i)
shall hold all such Confidential Information in strict confidence, shall use and
reproduce such information only to the extent reasonably required to exercise
Recipient's rights and/or fulfill Recipient's obligations hereunder, and shall
not use such Confidential Information for any purpose other than the purposes
contemplated by this Agreement; and (ii) shall not disclose or otherwise make
available directly or indirectly, any of Discloser's Confidential Information to
any third party (including, without limitation, Sony Corporation or any other
Affiliate of SMOJ) without the prior written permission of Discloser.
Recipient, however, may disclose Discloser's Confidential Information in
confidence only to Recipient's employees and agents who have a need to know such
Confidential Information, and who are each obligated by a written agreement to
comply with confidentiality and nondisclosure obligations substantially similar
to those set forth in this Section 6, and/or to Recipient's lawyers,
accountants, banks and financing sources, who each owe a legal and binding duty
of confidentiality to Recipient. Recipient shall take all reasonable measures,
and in any event no less than the same degree of care that it uses to protect
its own confidential and proprietary information of similar nature and
importance (but no less than reasonable care), to protect the confidentiality
and avoid the unauthorized use, disclosure, publication, or dissemination of
Discloser's Confidential Information. SMOJ acknowledges and agrees that the
Localized Software constitutes and contains valuable Confidential Information
and trade secrets of PSI and its licensors, and embodies substantial creative
efforts and Confidential Information, ideas and expressions. All Confidential
Information of a Discloser shall remain the sole property of such Discloser.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
6.2. Exclusions. The foregoing restrictions on disclosure and use set
forth in Section 6.1 shall not apply with respect to any Confidential
Information to the extent which such Confidential Information: (i) is now or
later becomes publicly known through no act or omission of Recipient; (ii) was
known by Recipient prior to receipt from Discloser; (iii) becomes known to
Recipient without confidential or proprietary restriction from a source other
than Discloser that does not owe a duty of confidentiality to Discloser with
respect to such Confidential Information or without breach of any obligation to
Discloser; or (iv) is independently developed by Recipient without the use of
the Confidential Information of Discloser. In addition, Recipient may use or
disclose Confidential Information to the extent (a) approved in advance in
writing by Discloser and/or (b) Recipient is legally compelled to disclose such
Confidential Information, provided, however, that prior to any such compelled
disclosure, Recipient shall cooperate reasonably with Discloser in protecting
against any such disclosure and/or obtaining a protective order narrowing the
scope of such disclosure and/or use of the Confidential Information.
6.3. Return of Confidential Information. Upon termination of this
Agreement, Recipient shall deliver immediately to Discloser all intellectual
property, including the Localized Software, belonging to Discloser and all
written information and material containing or constituting Confidential
Information of Discloser, including, without limitation, any copies in
Recipient's possession or control, whether prepared by Recipient or by others.
Upon Discloser's request, Recipient shall immediately deliver to Discloser all
Confidential Information of Discloser, including without limitation any copies
in Recipient's possession or control, whether prepared by Recipient or others.
Upon Discloser's request, Recipient shall promptly provide an affidavit signed
by an officer of Recipient certifying that such delivery has been made.
6.4. Remedies. Recipient acknowledges and agrees (i) that due to the
unique nature of Discloser's Confidential Information, there can be no adequate
remedy at law for any breach of Recipient's obligations hereunder, (ii) that any
such breach may allow Recipient or third parties to unfairly compete with
Discloser resulting in irreparable harm and significant injury to Discloser,
which will be difficult to estimate and ascertain; and therefore, (iii) that
upon any such breach or any threatened breach thereof, Discloser shall be
entitled to seek all immediate injunction, temporary restraining order,
attachment, and/or other appropriate equitable relief, in addition to whatever
remedies it might have at law, without the necessity of posting any bond or
security. Recipient shall notify Discloser in writing immediately upon the
occurrence (or reasonably anticipated occurrence) of any such unauthorized
release or other breach of the obligations of this Section 6.
7. WARRANTY
7.1. Warranty by PSI.
7.1.1. Limited Warranty. PSI represents and warrants only to SMOJ
that (i) PSI has full corporate power and authority to enter into this Agreement
and to perform its obligations hereunder; (ii) during the Warranty Period, the
Localized Software (including, without limitation, any New Products or
Enhancements provided by PSI to SMOJ hereunder), in the form provided by PSI to
SMOJ and when properly installed and used, will materially conform to the
applicable functional specifications for such software in effect when such
Localized Software is shipped to SMOJ; and (iii) to PSI's knowledge, the
Localized Software does not infringe on any third party U.S. or Japanese patent,
U.S. or Japanese copyright, U.S. or Japanese trademark, or U.S. or Japanese
trade secret. All warranty claims in connection with clause (ii) of the
immediately preceding sentence which are not made in writing or not received by
PSI within the Warranty Period shall be deemed waived. PSI's warranty and
obligation is solely for the benefit of SMOJ, who has no authority to extend
this warranty to any other person or entity.
7.1.2. Export Approval. The parties recognize that PSI's ability to
export its technology to SMOJ is a fundamental basis for this Agreement. PSI
has a mass market exemption from United States government export restrictions
for all elements of the ZipLock ESD System, with the exception of the ZipLock
Builder. The ZipLock Builder is subject to United States government export
restrictions. Export approval is required on a customer by customer basis, for
a specific use. Approval is based on an applicant's agreement to responsible
use and control of the encryption technology, and limits the use of the
technology to ESD, the sale and distribution of other digital goods, and related
information (such as manuals, guides, CD's, etc.). To date, PSI has received
export approval from the United States government for the ZipLock Builder for
every applicant. PSI shall use commercially reasonable efforts to obtain such
export approval from United States government for the ZipLock
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
Builder and/or other ZipLock ESD System and any New Product, if necessary, for
SMOJ, its Distributors and its End Users in accordance with the requests made by
SMOJ from time to time at PSI's cost and responsibility. SMOJ agrees to
reasonably cooperate with PSI in obtaining such approvals and to bear a portion
of the costs and application fees actually paid by PSI, provided, however, that
in no event shall the portion of the application fees which SMOJ bears exceed
$[495] for each application. The parties will cooperate with each other in
-----
obtaining export licenses for the ZipLock Builder and/or other ZipLock ESD
System and any New Product, if necessary, for SMOJ, its Distributors and its End
Users, as appropriate. While PSI does not anticipate any undue difficulty in
obtaining export approval for the ZipLock Builder and/or other ZipLock ESD
System and any New Product, if applicable, for SMOJ, its Distributors or its End
Users, the parties recognize that United States government policies and laws are
subject to change. If the United States export laws on this matter do change,
the parties agree to work together to meet the new export requirements.
7.1.3. Disclaimer. The express warranty set forth in Section 7.1.1
constitutes the only warranty made by PSI with respect to the Localized Software
and this Agreement. PSI makes no other representation or warranty or condition
of any kind, whether express or implied (either in fact or by operation of law),
with respect to the Localized Software or this Agreement. PSI expressly
disclaims all other representations or warranties, including, without
limitation, all warranties of merchantability or fitness for a particular
purpose. PSI does not warrant that the Localized Software will be error-free or
that operation of the localized software will be uninterrupted, and hereby
disclaims any and all liability on account thereof. There is also no implied
warranty of non-infringement, the sole remedy for infringement is provided in
Section 8. This Section 7.1.3 shall be enforceable to the maximum extent allowed
by applicable law.
7.1.4. Defects Not Covered by Warranties. PSI shall leave no
obligations or liability under the warranty provisions set forth in Section
7.1.1 for: (i) any use of other than the then-current, unaltered version of the
Localized Software; (ii) any enhancement or other modification of the Localized
Software except as authorized or performed by PSI; (iii) any accident,
transportation, neglect or misuse of the Localized Software; or (iv) failure to
provide a suitable installation environment, or use of the Localized Software on
any systems other than the specified hardware platform and software programs for
the Localized Software as set forth in the Documentation therefor.
7.1.5. Exclusive Remedy. If SMOJ finds what it believes to be a
material breach of the warranty set forth in Section 7.1.1. and provides PSI
with a written report during the Warranty Period that describes such material
breach in sufficient detail for PSI to be able to respond, PSI will, [*]. The
foregoing is SMOJ's sole and exclusive remedy, and PSI's sole and exclusive
liability, for any breach of any express or implied warranties hereunder. PSI
MAKES NO WARRANTY THAT ALL ERRORS, FAILURES OR DEFECTS WILL BE CORRECTED.
7.2. Warranty by SMOJ. SMOJ represents and warrants only to PSI that SMOJ
has full corporate power and authority to enter into this Agreement and to
perform its obligations hereunder.
8. INDEMNIFICATION
8.1. Indemnification by PSI. PSI agrees to indemnify, hold harmless and
defend SMOJ and its directors, officers, employees and agents from and against
any and all third party claims, suits, actions or proceedings and all damages,
costs, expenses, judgements, awards, settlements and other liabilities relating
thereto (including reasonable attorneys' fees and costs) to the extent arising
from or relating to any third party claim that SMOJ's use or possession of the
Localized Software, or the license granted hereunder, infringes or violates any
U.S. or Japanese patent, U.S. or Japanese copyright, U.S. or Japanese trademark
or U.S. or Japanese trade secret of any third party. Should any of the
Localized Software herein become or, in PSI's opinion, be likely to become
subject to such a claim, (i) PSI shall, [*] (a) [*] or (b) [*]; and (ii) pending
such [*], SMOJ shall cooperate reasonably with PSI to initiate any damages
relating to such claim, including, without limitation, limiting further
distribution of the Localized Software. In the latter case, PSI and SMOJ shall
modify the Minimum Performance Criteria set forth in Section 4.3 of this
Agreement to fairly reflect the impact of SMOJ's limitation of distribution,
pursuant to PSI's request. PSI shall leave no liability for (a) any
modification of the Localized Software other than as authorized or performed by
PSI, (b) any use of other than the then-current, unaltered version of the
Localized Software; or (c) any use, operation or combination of the Localized
Software with other non-PSI programs, data, equipment or documentation if such
liability would have been avoided but for such use, operation or combination.
This Section
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
8.1 states the entire liability of PSI and the exclusive remedy of PSI with
respect to infringement of any intellectual property rights, whether under
theory of warranty, indemnity or otherwise.
8.2. Indemnity by SMOJ. SMOJ shall indemnify, hold harmless and defend
PSI and its directors. officers, employees, and agents from and against any and
all claims, suits, actions or proceedings and all damages, costs, expenses,
judgements, awards, settlements and other liabilities relating thereto
(including reasonable attorneys' fees and costs) arising from or relating to any
marketing, distribution, support or other use of the Localized Software by SMOJ
or the operation of the Business; provided that SMOJ shall not be liable under
this Section 8.2 for any claim, suit, action or proceeding to the extent for
which PSI has liability under Section 8.1.
8.3. Notice; Cooperation; Control. A party ("Indemnifying Party") shall
not be obligated to indemnify, hold harmless and defend the other party
("Indemnified Party") hereunder unless (and only to the extent) the Indemnified
Party (i) promptly notifies the indemnifying Party of any claim, suit, action or
proceeding for which indemnification is sought (provided that any failure to
provide such notice shall not diminish the Indemnifying Party's obligations
under this Section 8 unless. and only to the extent that. the Indemnifying Party
is materially prejudiced as a result of any such failure to provide such prompt
notice): (ii) provides reasonable cooperation to the Indemnifying Party at the
Indemnifying Party's expense: and (iii) allows the Indemnifying Party to control
the defense and any settlement of such claim, suit, action or proceeding,
provided that (a) the Indemnified Party may, at its option and expense,
participate and appear with the Indemnifying Party in such claim, suit, action
or proceeding and (b) neither party may settle any such claim, suit, action or
proceeding without the other party's prior written approval, which will not be
unreasonably withheld or delayed.
9. LIMITATION OF LIABILITY
NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY OR THE FAILURE
OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY: (I) IN NO EVENT SHALL EITHER PARTY
OR ITS SUPPLIERS BE LIABLE UNDER ANY LEGAL THEORY FOR ANY LOSS OF PROFITS OR
SAVINGS, LOSS OF BUSINESS, LOSS OF USE OR DATA, INTERRUPTION OF BUSINESS, OR ANY
INDIRECT. SPECIAL, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES OF ANY KIND
ARISING OUT OF OR RELATING TO THIS AGREEMENT, EVEN IF THAT PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, HOWEVER CAUSED; AND (II) IN NO EVENT
SHALL PSI'S AGGREGATE LIABILITY RELATED TO THIS AGREEMENT UNDER ANY LEGAL THEORY
EXCEED THE AMOUNTS ACTUALLY RECEIVED BY PSI HEREUNDER DURING THE PREVIOUS TWELVE
(12) MONTHS FOR THE APPLICABLE LOCALIZED SOFTWARE GIVING RISE TO SUCH LIABILITY.
10. TERM AND TERMINATION
10.1. Term; Renewal. This Agreement shall commence on the Effective Date
and, unless sooner terminated in accordance with this Agreement, shall continue
in full force and effect for the Initial Term. Thereafter, this Agreement may
be renewed by SMOJ for up to three (3) additional, successive Renewal Terms of
three (3) years each: provided that (i) SMOJ provides PSI with written notice of
SMOJ's election to renew this Agreement for all additional Renewal Term within
One hundred eighty (180) days prior to the end of the Initial Term or then-
current Renewal Term and (ii) the parties have first agreed in writing on
appropriate Performance Criteria for the immediately following Renewal Term.
10.2. Termination for Breach of Performance. If either party defaults in
the performance of any material provision of this Agreement, then the non-
defaulting party may give written notice to the defaulting party describing the
default and stating that if the default is not cured within thirty (30) days the
Agreement will be terminated. If the non-defaulting party gives such notice and
the default is not cured during the thirty (30) day period, then the non-
defaulting party may terminate this Agreement at the end of such period by
providing written notice thereof to the defaulting party. If PSI is the
defaulting party during the Initial Term of this Agreement, and does not cure
such default as provided herein, and SMOJ therefore terminates this Agreement,
then PSI shall return to SMOJ a pro rata portion of the $[*] up-front license
and service fee paid pursuant to Section 4.1 of this Agreement, where the pro
rata portion will be determined as the balance of the number of days remaining
in the Initial Term from the date of termination divided by the total number of
days in the Initial Term as contemplated by this agreement.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
10.3. Termination for Bankruptcy. Either party may terminate this Agreement
immediately upon written notice if at any time the other party (a) becomes
insolvent; (b) fails to pay its debts or perform its obligations in the ordinary
course of business as they mature: (c) is declared insolvent or admits in
writing its insolvency or inability to pay its debts or perform its obligations
as they mature; or (d) becomes the subject of any voluntary or involuntary
proceeding in bankruptcy, liquidation, dissolution, receivership, attachment or
composition or general assignment for the benefit of creditors, provided that,
in the case of an involuntary proceeding, the proceeding is not dismissed with
prejudice within sixty (60) days after the institution thereof.
10.4. Effect of Termination. Upon any expiration or termination of this
Agreement, all licenses granted to SMOJ hereunder (and all sublicenses granted
in accordance with this Agreement) shall immediately terminate; provided that
any Distributor Agreements and/or End User License Agreements entered into by
SMOJ in accordance with this Agreement prior to the effective date of such
termination (i) shall survive for the time period set forth in the applicable
Distributor Agreement and/or End User License Agreement, provided that, and for
so long as, such Distributor or End User, as applicable, is in compliance with
the terms and conditions of such Distributor Agreement and/or End User License
Agreement and (ii) SMOJ hereby assigns all such Distributor Agreements and End
User License Agreements (including. without limitation, all of SMOJ's rights
therein) to PSI upon the effective date of any expiration or termination of this
Agreement. Within five days after expiration or any termination of this
Agreement, SMOJ shall return to PSI the original copies of the Localized
Software and all PSI Confidential Information, and shall return and account for
all copies and extracts of the foregoing, and PSI shall return to SMOJ the
original copies of all SMOJ Confidential Information and shall return and
account for all copies and extracts of the foregoing. Upon each party's
request, the other party shall provide the requesting party with a written
statement signed by an officer of the other party certifying that such return or
destruction has occurred. Termination of this Agreement by either party shall
not act as a waiver of any breach of this Agreement and shall not act as a
release of either party from any liability for breach of such party's
obligations under this Agreement. Neither party will be liable to the other for
damages of any kind which arise solely as a result of terminating this Agreement
in accordance with its terms, and termination of this Agreement by a party will
be without prejudice to any other right or remedy such party under this
Agreement or applicable law.
10.5. Survival. Sections 1, 2.3.3, 2.5, 4.2(ii), 3.4.3(ii), 4, 5, 6,
7.1.1, 7.1.4, 7.1.5, 8, 9, 10.4, 10.5, and 11 shall survive any expiration or
termination of this Agreement.
11. GENERAL PROVISIONS
11.1. Notices. Any notice, request, demand, or other communication
required or permitted hereunder shall be in writing, shall reference this
Agreement and shall be deemed to be properly given: (i) when delivered
personally; (ii) when sent by facsimile, with written confirmation of receipt;
(iii) seven (7) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or (iv) five (5) business days after
deposit with a private industry express courier, with written confirmation of
receipt. All notices shall be sent to the address set forth below (or to such
other address as may be designated by a party by giving written notice to the
other party pursuant to this Section 11.1):
If to SMOJ: If to PSI:
Sony Marketing (Japan), Inc. Preview Systems, Inc.
4-10-18 Tanakawa 1601 S. De Anza Blvd., Suite 100
Minato-ku Cupertino, CA 95014
Tokyo, 108-0074 U. S. A.
Japan Attn: [*]
Attn: [*] Fax: [*]
Fax: [*] Phone: [*]
Phone: [*]
11.2. Assignment. This Agreement may not be assigned or otherwise
transferred, in whole or in part, whether voluntarily, by operation of law or
otherwise, by either party without the prior written consent of the other party,
provided however that if the other party refuses to so consent with respect to
the acquisition of the first party,
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
the requesting party may elect to terminate this Agreement. Subject to the
preceding sentence, the rights and liabilities of the parties hereto will bind,
and inure to the benefit of, their respective assignees and successors and is
binding on the parties and their successors and assigns. Any attempted
assignment or other transfer other than in accordance with this Section 11.2
shall be null and void.
11.3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, U.S.A., without reference
to California's conflicts of law provisions.
11.4. Arbitration. The parties agree that, should any dispute of any
nature arise between them during the term of this Agreement, they shall first
attempt in good faith to resolve any such dispute amicably through discussion
and negotiation. If a dispute cannot be resolved informally, the parties will
exchange their views in writing and will meet and confer in person or by
telephone and attempt in good faith to resolve the dispute prior to commencing
any legal action. If the foregoing process fails, any controversy or claim
arising out of or relating to this Agreement shall be settled by arbitration in
San Francisco, California, in accordance with the then-prevailing commercial
arbitration rules of the American Arbitration Association (or such other body
mutually agreeable to the parties), and applying California law and/or U.S.
federal law, if applicable. Unless otherwise agreed by the parties, the
arbitration shall be conducted in English, and all documents submitted by the
parties must be in English. Sections 11.1 (Notices) and 11.3 (Governing Law)
are incorporated herein by reference. The arbitrator(s) shall have the power to
grant injunctive or other equitable relief. Notwithstanding the foregoing, (i)
either party may seek in injunctive or other equitable relief in a court of
competent jurisdiction pending the outcome of such arbitration, and (ii) any
judgment against a party upon the decision rendered by such arbitration, and/or
any injunctive or other equitable relief granted by such arbitration, may be
entered in any court having competent jurisdiction over the party or its assets.
11.5. Attorneys' Fees. If any legal action, including, without
limitation, an action for arbitration or injunctive relief is brought relating
to this Agreement or the breach hereof, the prevailing party in any final
judgment or arbitration award, or the non-dismissing party in the event of a
dismissal without prejudice, shall be entitled to the full amount of all
reasonable expenses, including all court costs, arbitration fees and actual
attorney fees paid or incurred in good faith.
11.6. Expenses. Except as otherwise provided herein, each party will bear
its own costs and expenses relating to the negotiation of this Agreement and the
exercise of its rights and the performance of its duties hereunder, including,
without limitation, any fees and expenses of attorneys, accountants, investment
bankers, consultants and other representatives retained or used by such party.
11.7. Waiver. The waiver by either party of a breach of or a default
under any provision of this Agreement, shall be in writing and shall not be
construed as a waiver of any subsequent breach of or default under the same or
any other provision of this Agreement, nor shall any delay or omission on the
part of either party to exercise or avail itself of any right or remedy that it
has or may have hereunder operate as a waiver of any right or remedy.
11.8. Severability. If the application of any provision of this Agreement
to any particular facts of circumstances shall be held to be invalid or
unenforceable by an arbitration panel or a court of competent jurisdiction, then
(i) the validity and enforceability of such provision as applied to any other
particular facts or circumstances and the validity of other provisions of this
Agreement shall not in any way be affected or impaired thereby and (ii) such
provision shall be enforced to the maximum extent possible so as to effect the
intent of the parties and reformed without further action by the parties to the
extent necessary to make Such provision valid and enforceable.
11.9. Relationship of the Parties. Nothing contained in this Agreement
shall be deemed or construed as creating joint venture, partnership, agency,
employment or fiduciary relationship between the parties. Neither party nor its
agents by virtue of this Agreement shall have any authority of any kind to bind
the other party in any respect whatsoever, and the relationship of the parties
is, and at all times shall continue to be, that of independent contractors.
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
11.10. Cumulative Remedies. The rights and remedies of either party as
set forth in this Agreement are not exclusive and are in addition to any other
rights and remedies now or hereafter provided by law or at equity.
11.11. Force Majeure. Except for the payment of monies due hereunder,
neither party shall be responsible for its failure to perform to the extent due
to unforeseen circumstances or causes beyond its control, such as acts of God,
wars, riots, embargoes, government actions, acts of civil or military
authorities, fires, floods, earthquakes, accidents, or strikes, provided that
(i) such party gives the other party prompt written notice of the failure to
perform and the reason therefor and uses its reasonable efforts to limit the
resulting delay in its performance and (ii) in no event will a failure to
perform be excused for a period of more than sixty (60) days, unless otherwise
agreed by the parties.
11.12. Construction. This Agreement has been negotiated by the parties
and shall be interpreted fairly in accordance with its terms and without any
construction in favor of or against either party.
11.13. Captions and Section Headings. The captions and section and
paragraph headings used in this Agreement are inserted for convenience only and
shall not affect the meaning or interpretation of this Agreement.
11.14. Counterparts. This Agreement may be executed (including, without
limitation, by facsimile signature) in one or more counterparts, with the same
effect as if the parties had signed the same document. Each counterpart so
executed shall be deemed to be an original, and all such counterparts shall be
construed together and shall constitute one Agreement.
11.15. Entire Agreement; Amendment. This Agreement, including the
Exhibit(s) attached hereto which are incorporated herein by this reference,
constitutes the entire agreement between the parties concerning the subject
matter hereof and supersedes all prior or contemporaneous representations,
discussions, proposals, negotiations, conditions, agreements and communications,
whether oral or written, between the parties relating to the subject matter of
this Agreement and all past courses of dealing or industry custom. No amendment
or modification of any provision of this Agreement shall be effective unless in
writing and signed by a duly authorized signatory of each of the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by duly authorized representatives of the parties as of the Effective Date.
"SMOJ" "PSI"
SONY MARKETING (JAPAN), INC. PREVIEW SYSTEMS, INC.
By: /s/ Toshiharu Sawada By: /s/ Edward Wholihan
-- ----------------------- -------------------------
Signature Signature
Name: Toshiharu Sawada Name: Edward Wholihan
------------------------ -----------------------
Print or Type Print or Type
Title: Senior Managing Director Title: Chief Financial Officer
------------------------ -----------------------
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
Appendix 1: Initial Operating Plan
[Attach Current Draft Of Initial Operating Plan]
1. Launch date: October 31, 1998
2. Fulltime personnel employed by SMOJ at launch of business:
- [*]
- [*]
- [*]
3. Delivery of initial Localized Software: To be determined by mutual
agreement of the parties
4. Other Business elements to be developed:
a. Sales, partner, and distribution plans
b. Marketing and promotion plans
c. Technical support plans
d. Training plans
CONFIDENTIAL TREATMENT REQUESTED
[*] PORTIONS REDACTED FROM EDGAR VERSION
<PAGE>
Exhibit 10.21
SUBLEASE
THIS SUBLEASE ("Sublease"), dated September 1, 1999, for reference purposes
only, is entered into by and between Virtual Integration Technology, a
California corporation ("Sublandlord"), and Preview Systems, Inc., a Delaware
corporation ("Subtenant").
RECITALS
A. Sublandlord leases certain premises consisting of approximately 3,476
square feet of rentable area commonly known as Suite 250 (the "Premises") in the
building commonly known as 20195 Stevens Creek Boulevard in Cupertino,
California (the "Building"), pursuant to that certain Office Lease Agreement
(the "Master Lease") between Sublandlord, as tenant, and WDT-Cupertino; as
landlord ("Landlord"), dated July 24, 1998. Capitalized terms herein not
otherwise defined herein shall have the same meanings as provided in the Master
Lease.
B. Sublandlord desires to sublease the Premises to Subtenant, and
Subtenant desires to sublease the Premises from Sublandlord, upon the terms and
conditions provided for herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, Sublandlord and Subtenant covenant and agree as follows:
AGREEMENT
1. Premises. Sublandlord hereby leases the Premises to Subtenant, and
Subtenant hereby leases the Premises from Sublandlord upon and subject to the
terms and conditions set forth herein, together with the non-exclusive use of
the unallocated parking spaces leased to Sublandlord pursuant to the Master
Lease.
Term.
-----
. The term of this Lease shall commence on the date (the "Commencement
Date") which is the later of (i) September 15, 1999, and (ii) the date on which
consent to this Sublease is given by the Landlord.
Notwithstanding Paragraph 2(a) above, if for any reason Sublandlord cannot
deliver possession of the Premises to Subtenant on the Commencement Date,
Sublandlord shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Sublease or the obligations of Subtenant
hereunder (except as hereinafter provided) or extend the term hereof, but in
such case Subtenant shall not be obligated to pay Rent until possession of the
Premises is tendered to Subtenant. Notwithstanding the foregoing, if, as a
result of any act or omission of Sublandlord (and not as the result of any delay
on the part of Subtenant), Sublandlord is
<PAGE>
unable to deliver possession of the Premises on or before October 15, 1999,
Subtenant shall have the right to terminate this Sublease by delivering written
notice thereof to Sublandlord within ten (10) days of such date. Unless
exercised prior thereto, Subtenant's right of termination hereunder shall expire
upon the earlier of (i) delivery of the Premises to Subtenant and (ii) the
expiration of such ten (10) day period.
The term of this Sublease shall end on March 15, 2000; provided,
however, that, subject to Paragraph 10 of this Sublease, the term of this
Sublease shall terminate earlier in the event of the earlier termination of the
Master Lease for any cause whatsoever.
Rent. The rent payable by Subtenant for the Premises shall consist of
-----
basic rental ("Basic Rent") plus certain additional rental ("Additional Rent"),
all as provided below. Basic Rent, Additional Rent, and any other charges due
under this Sublease are hereinafter referred to collectively as "Rent."
Subtenant shall pay to Sublandlord in advance, on or before the first
day of each month of the term of this Sublease and without deduction or offset,
monthly Basic Rent in the amount of $11,470.80 per month;
Subtenant also shall pay, as Additional Rent, the proportionate share
of the increase rental adjustments as defined in Section 3 (C) ("Operating
Expenses") of the Master Lease beginning in January, 2000. The Operating
Expenses are subject to reconciliation and adjustment as provided in the Master
Lease.
To the extent that Additional Rent due under the Master Lease is
payable on a monthly basis pursuant to the Master Lease, such Additional Rent
shall be paid to Sublandlord as and when Basic Rent is paid. To the extent that
Additional Rent is billed from time to time to Sublandlord by Landlord, such
Additional Rent shall be paid by Subtenant to Sublandlord within seven (7) days
after Subtenant's receipt of an invoice therefor. All Rent shall be paid to
Sublandlord at the address specified for Sublandlord below, or to such other
person or to such other place as Sublandlord may from time to time designate in
writing. To the extent that Additional Rent is payable on an estimated basis
pursuant to the Master Lease, the Additional Rent due hereunder shall be
adjusted between the parties (with appropriate reimbursements or additional
payments) within twenty (20) days after the actual Additional Rent due under the
Master Lease has been determined and notice thereof has been delivered to
Subtenant.
Sublandlord shall pay all fixed rent, additional rent and other
monetary amounts required to be paid under the Master Lease (collectively,
"Underlying Rent") on or before such amounts become due and payable thereunder.
If Sublandlord fails to make any payment of Underlying Rent as and when required
under the Master Lease, Subtenant shall have the right, but not the obligation,
to make such payments on behalf of Sublandlord, in which event Subtenant shall
have the right to offset any amounts so paid against Rent payable under this
Sublease.
-2-
<PAGE>
In the event of any casualty or condemnation affecting the Premises,
Rent payable by Subtenant shall be proportionately abated, but only as to the
portion of the Premises damaged or taken; and only to the extent that Underlying
Rent payable under the Master Lease is abated. Subtenant shall have no right to
terminate the Sublease in connection with any casualty or condemnation except to
the extent that the Master Lease is also terminated as to the Premises or any
portion thereof.
Securtity Deposit Subtenant shall deposit with Sublessor upon the
execution hereof the sum of Twenty Two Thousand Nine Hundred Forty One and
60/100 Dollars ($22,941.60) as security for Subtenant's faithful performance of
Subtenant's obligations hereunder. If Subtenant fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Subtenant's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Subtenant shall within fifteen (15) days after written
demand therefor deposit cash with Sublessor in an amount sufficient to restore
said deposit to the full amount herein above stated and Subtenant's failure to
do so shall be a breach of this Sublease, and Sublessor may at his option
terminate this Sublease. Sublessor shall not be required to keep said deposit
separate from its general accounts.
Said deposit or so much thereof as had not theretofore been applied by Sublessor
shall be returned without payment of interest for its use, to Subtenant within
ten (10) days after the expiration of the term hereof (or earlier termination of
the Sublease if Subtenant does not have any remaining contractual obligations to
Sublessor), or after Subtenant has vacated the Premises, whichever is later
provided that the Premises and cubicle furniture systems are returned in the
same condition as of the Commencement Date, normal wear and tear excepted.
As-Is. Except as otherwise expressly provided herein, Sublandlord
-----
subleases the Premises to Subtenant strictly in their present "as-is" and "with
all faults" condition, including the existing cubicle systems, and Subtenant by
acceptance of possession of the Premises, acknowledges the same to be in good
order and repair and in a tenantable condition. To Sublandlord's actual
knowledge (but without duty of inquiry), as of the date of this Sublease, the
structural components of the Building and all building systems (including the
HVAC equipment) serving the Premises are in good condition and repair.
Master Lease. This Sublease shall be subject and subordinate to all
------------
of the terms, covenants and conditions of the Master Lease, and Landlord shall
have all rights in respect of the Master Lease and the Premises as set forth
therein. Except for payments and rent under Section 3 (A) of the Master Lease
(which payments shall be made by Sublandlord), and, except as otherwise provided
in Paragraph 6 hereof, Subtenant hereby
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<PAGE>
assumes and agrees to perform for Sublandlord's benefit, during the term of this
Sublease, all of Sublandlord's obligations under the Master Lease (the "Assumed
Obligations"), which accrue during the term of this Sublease.
Incorporation of Master Lease. Subject to the exclusions, limitations
------------------------------
and modifications set forth in this Sublease, the terms, covenants and
conditions of the Master Lease are incorporated in this Sublease by reference so
that, except to the extent that they are excluded, limited or otherwise modified
by the provisions of this Sublease for the purpose of incorporation by
reference, each and every term, covenant and condition of the Master Lease
binding or inuring to the benefit of the Landlord thereunder shall, in respect
of this Sublease, bind or inure to the benefit of Sublandlord, and each and
every term, covenant and condition of the Master Lease binding or inuring to the
benefit of the Tenant thereunder shall, in respect of this Sublease, bind or
inure to the benefit of Subtenant, with the same force and effect as if such
terms, covenants and conditions were completely set forth in this Sublease, and
as if the words "Landlord" and "Tenant," or words of similar import, wherever
the same appear in the Master Lease, were construed to mean, respectively,
"Sublandlord" and "Subtenant" in this Sublease, and as if the word "Lease," or
words of similar import, wherever the same appear in the Master Lease, were
construed to mean this "Sublease." Subtenant represents that it has examined,
read and is thoroughly familiar with the terms, covenants and conditions of the
Master Lease, and accepts those terms, covenants and conditions and obligations
thereof which have been incorporated herein.
The following sections of the Master Lease are not incorporated as a
part of this Sublease and are expressly excluded herefrom (except insofar as the
same may be referenced elsewhere in this Sublease for purposes of identification
or definition of certain matters): Section 1 (Commencement and Termination); 2
(Occupancy of Premises); 22 (Assignment and Subletting
The following limitations shall apply to the interpretation and
enforcement of the incorporated terms, covenants and conditions of the Master
Lease:
The time limits contained in the Master Lease for the giving
of notices, making of demands or performing of any act, condition or covenant on
the part of the Tenant thereunder, or for the exercise by the Tenant thereunder
of any right, remedy or option, are changed for the purposes of incorporation
herein by reference by shortening the same in each instance by two (2) business
days, so that in each instance Subtenant shall have two (2) business days less
time to observe or perform hereunder than Sublandlord has as the Tenant under
the Master Lease.
Any non-liability, release, indemnity or hold harmless
provision, and any provisions pertaining to waiver of subrogation rights and or
the naming of a party under an insurance policy, in the Master Lease for the
benefit of the Landlord which is incorporated herein by reference, shall be
deemed to inure to the benefit of Sublandlord and Landlord, for the purpose of
incorporation by reference in this Sublease.
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<PAGE>
Any right of the Landlord for access or inspection and any
right of the Landlord under the Master Lease to do work in the Premises or in
the Building or in the Common Area, and any right of the Landlord in respect of
rules and regulations, shall be deemed to inure to the benefit of Sublandlord
and the Landlord, for the purpose of incorporation by reference in this
Sublease.
If any of the express provisions of this Sublease shall
conflict with any of the provisions incorporated by reference, such conflict
shall be resolved in every instance in favor of the express provisions of this
Sublease. If any incorporated provision of the Master Lease cross-references a
provision of the Master Lease which is not incorporated in this Sublease, such
cross-referenced Master Lease provision shall be disregarded except to the
extent required for a fair and equitable interpretation of the incorporated
Master Lease provision.
Any obligation of Sublandlord which is contained in this
Sublease by the incorporation by reference of the provisions of the Master Lease
shall be observed or performed by Sublandlord using reasonable good faith
efforts to cause the Landlord under the Master Lease to observe and/or perform
the same, and Sublandlord shall have a reasonable time do so after written
notice from Subtenant specifying with reasonable particularity the deficiency in
Landlord's performance under the Master Lease. Sublandlord shall not be required
to furnish, supply, install, maintain or repair anything under any provision of
the Master Lease. Subtenant shall not in any event have any rights in respect of
the Premises greater than Sublandlord's rights under the Master Lease, and
notwithstanding any provision to the contrary, as to obligations that pertain to
the Premises and Common Area, and are part of this Sublease by the incorporation
by reference of provisions of the Master Lease, Sublandlord shall not be
required to make any payment or to perform any obligation, and Sublandlord shall
have no liability to Subtenant for any matter whatsoever, except for
Sublandlord's obligation to pay the Underlying Rent and to use reasonable good
faith efforts, upon request of Subtenant, to cause the Landlord to observe
and/or perform Landlord's obligations under the Master Lease. Sublandlord shall
not be responsible for any failure or interruption, for any reason whatsoever,
of the services or facilities that may be appurtenant to or supplied at the
Building by Landlord. Subtenant hereby expressly waives the provisions of any
statute, ordinance or judicial decision which would give Subtenant rights to
make repairs at the expense of Sublandlord.
With respect to any approval or consent required to be
obtained from Landlord under the Master Lease, such approval or consent must be
obtained from both Landlord and Sublandlord. Any approval or consent required of
Sublandlord conclusively shall be deemed reasonably withheld if approval or
consent also is required of the Landlord, and Landlord withholds Landlord's
approval or consent.
Subtenant shall fully perform all of the Assumed Obligations
and shall indemnify, defend, protect, and hold harmless Sublandlord from any and
all
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<PAGE>
liability, damages, liabilities, claims proceedings, actions, demands and costs
(including reasonable attorneys' fees) resulting, directly or indirectly, from
Subtenant's failure to perform the Assumed Obligations.
Without limiting the generality of the foregoing, for
purposes of incorporating the terms, covenants and conditions of the Master
Lease into this Sublease, the following provisions of the Master Lease are
amended as follows:
Under Par 3 of the Master Lease, Sublandlord shall be
entitled to rely on any statement or estimate from Landlord regarding the
calculation and payment of Additional Rent and shall be under no duty to verify
the same.
Under Par 3 (C), Par 4 and Par 18 of the Master Lease,
Sublandlord shall only be required, after written request by Subtenant, to use
reasonable good faith efforts to cause Landlord to maintain the insurance
required of Landlord.
Under Par 11 and Par 19 of the Master Lease,
Sublandlord shall only be required, after written request by Subtenant, to use
reasonable good faith efforts to cause Landlord to perform the maintenance and
repair obligations thereunder.
Under Par 14 of the Master Lease, Sublandlord shall
only be required, after written request by Subtenant, to use reasonable good
faith efforts to cause Landlord to furnish the utilities and services called for
thereunder.
Under Par 22 of the Master Lease, all profit or
additional consideration from any assignment or sublease shall be paid to
Sublandlord.
Under Par 11 of the Master Lease, upon surrender of the
Premises at the expiration or earlier termination of this Sublease, Subtenant
shall return the Premises to Sublandlord in the same condition as existed upon
delivery of the Premises to Subtenant, prior to the construction of any
alterations or improvements as may be made by Subtenant; provided, however, that
Subtenant shall not be required to remove such any alterations or improvements
if Landlord shall agree in writing to waive its right to require Sublandlord to
remove such any alterations or improvements upon surrender of the Premises to
Landlord.
Under Par 3 (G) and Par 5 of the Master Lease,
Sublandlord's notice address shall be as provided adjacent to Sublandlord's
signature below, or at such other address as Sublandlord may from time to time
designate in writing; and Subtenant's notice address shall be as provided
adjacent to Subtenant's signature below, provided that after Subtenant takes
occupancy of
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<PAGE>
the Premises, notices shall be sent to Subtenant at the address of the Premises.
Any notice required or permitted under this Sublease shall be deemed to have
been delivered upon actual receipt or upon refusal of delivery. Notices under
this Sublease shall be permitted to be transmitted by overnight courier service
or by facsimile, in addition to the other methods permitted under the Master
Lease. Notices sent by facsimile shall be followed by a mailed copy to the
recipient's notice address and shall be effective (a) on the date received if
transmission is made on a business day and received before 5:00 p.m. that same
day, or (b) in all other cases, on the business day next following receipt of
the facsimile transmission.
Assignment and Subletting. Subtenant shall not assign this Sublease
-------------------------
or sublet all or any part of the Premises, or hypothecate or otherwise encumber
its interest under this Sublease, or allow any other person or entity to use or
occupy all or any part of the Premises, any and all of which are expressly
prohibited and void. Notwithstanding the foregoing, Subtenant shall have the
right to assign or sublet any part or all of the Premises to an entity directly
controlling, controlled by, or under common control with, Subtenant, provided
that prior thereto Landlord has granted its unconditional consent to such
assignment or sublease in writing.
Brokerage. Each party warrants and represents to the other that such
party has not retained the services of any real estate broker, finder or any
other person whose services would form the basis for any claim for any
commission or fee in connection with this Sublease or the transactions
contemplated hereby other than The Staubach Company. Each party agrees to save,
defend, indemnify and hold the other party free and harmless from any breach of
its warranty and representation as set forth in the preceding sentence,
including the other party's attorneys' fees.
Sublandlord's Obligations. Except as expressly otherwise provided
-------------------------
herein, Sublandlord shall have no obligations to Subtenant with respect to the
Premises or the performance by Landlord of any obligations of Landlord under the
Master Lease.
Early Termination of Master Lease. If, without the fault of
---------------------------------
Sublandlord hereunder the Master Lease should terminate prior to the expiration
of this Sublease, Sublandlord shall have no liability to Subtenant. To the
extent that the Master Lease grants Sublandlord any discretionary right to
terminate the Master Lease, whether due to casualty, condemnation, or otherwise,
Sublandlord shall be entitled to exercise or not exercise such right in its sole
and absolute discretion.
Consent of Landlord. If Sublease desires to take any action which
-------------------
requires the consent of Landlord pursuant to the terms of the Master Lease,
including, without limitation, the making of any alterations, then,
notwithstanding anything to the contrary herein, (a) Sublandlord, independently,
shall have the same rights of approval or disapproval as Landlord has under the
Master Lease, (b) Subtenant shall not take any such action until it obtains the
consent of both Sublandlord (whose consent shall not be unreasonably withheld)
and Landlord, and (c) Subtenant shall request that Sublandlord
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<PAGE>
obtain Landlord's consent on Subtenant's behalf and Sublandlord shall use
commercially reasonable efforts to obtain such consent, unless Sublandlord and
Landlord agree that Subtenant may contact Landlord directly with respect to the
specific action for which Landlord's consent is required.
No Third Party Rights. Except as otherwise expressly provided herein,
---------------------
the benefit of the provisions of this Sublease is limited to Sublandlord and
Subtenant and (subject to Paragraph 7 hereof) to their successors and assigns.
No third party shall be construed to have any rights as a third party
beneficiary with respect to any of the provisions of this Sublease; provided,
however, that Landlord shall be entitled to the benefit of (a) Subtenant's
assumption of the Assumed Obligations pursuant to Paragraph 5 above, (b)
Subtenant's indemnities under this Sublease and (c) Subtenant's waivers and
covenants to hold harmless under this Sublease.
Landlord Consent. This Sublease is subject to the consent of the
----------------
Landlord. Sublandlord agrees to use commercially reasonable efforts to obtain
the consent of Landlord to this Sublease as soon as reasonably possible
following execution of this Sublease by Subtenant and Sublandlord, and shall
provide Subtenant with notice of Sublandlord's submittal of this Sublease to
Landlord for approval. In the event that Landlord's consent is not obtained
within five (5) days following the submittal of this Sublease by Sublandlord to
Landlord for consent, each of Sublandlord and Subtenant shall have the right to
terminate this Sublease by providing written notice of termination to the other
party within five (5) days after the expiration of such five (5) day period.
Unless exercised prior thereto, this right of termination hereunder shall expire
upon the delivery to Subtenant of Landlord's consent. For purposes of this
paragraph, Landlord's consent shall be deemed to have been given as of the date
when Landlord's unconditional consent to this Sublease has been obtained, or, in
the event such consent is conditional, the date upon which such conditions have
been fully satisfied or waived by Landlord.
Counterparts. This Sublease may be executed in any number of
------------
counterparts, each of which counterparts shall be deemed to be an original, and
all of which together shall constitute one and the same instrument.
Status of Lease. Sublandlord hereby represents and warrants to
---------------
Subtenant that (i) the Lease attached hereto as Exhibit A has been executed and
delivered by Master Landlord and Sublandlord and constitutes the entire
agreement of the parties thereto relating to the lease of the Premises, (ii) no
default or breach by Sublandlord or, to the best of Sublandlord's knowledge, by
Landlord, exists under the Lease, (iii) no event has occurred that, with the
passage of time, the giving of notice, or both, would constitute a default or
breach by Sublandlord or, to the best of Sublandlord's knowledge, by Landlord
under the Lease, and (iv) subject to receipt of Landlord's written consent
hereto, Sublandlord has the right and power to execute and deliver this Sublease
and to perform its obligations hereunder. Sublandlord shall not modify the
Master Lease in such a manner as to materially increase the obligations of
Subtenant hereunder or under the
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<PAGE>
Master Lease, without the prior written consent of Subtenant, which shall not be
unreasonably withheld or delayed.
Execution of Sublease. In the event that Subtenant shall not execute
---------------------
this Sublease on or before October 1, 1999, Sublandlord shall thereafter have
the right, or its sole and absolute discretion, to negotiate a sublease for the
Premises with any party other than Subtenant, as Subtenant, on the any terms and
conditions as it sees fit, or to modify any terms and conditions of this
Sublease prior to execution by Subtenant.
IN WITNESS WHEREOF, the parties have executed this Sublease as of the date
first written above.
SUBTENANT:
PREVIEW SYSTEMS, INC.
a Delaware corporation
By: /s/ Brad Solso
--------------------------
Title: Chief Financial Officer
--------------------------
Date:
--------------------------
SUBLANDLORD:
VIRTUAL INTEGRATION TECHNOLOGY
a California corporation
By: /s/ illegible
--------------------------
Title:___________________________
Date:____________________________
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<PAGE>
Exhibit 10.22
PREVIEW SYSTEMS, INC.
1999 EXECUTIVE STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this 1999 Executive Stock
--------------------
Option Plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to
Officers of the Company and its Subsidiaries and to promote the success of the
Company's business. Options granted under the Plan may be incentive stock
options (as defined under Section 422 of the Code) or nonstatutory stock
options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code, as
amended, and the regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary in which the
---------
Company owns an equity interest or which, together with the Company, is under
common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any stock exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with Section 4(a) of the Plan.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means Preview Systems, Inc., a Delaware corporation.
-------
(i) "Continuous Status as an Officer" means the absence of any
-------------------------------
interruption or termination of service as an Officer. Continuous Status as an
Officer shall not be considered interrupted in the case of: (i) sick leave;
(ii) military leave; (iii) any other leave of absence approved by the
Administrator, provided that such leave is for a period of not more than
ninety (90) days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute, or unless provided otherwise pursuant to
Company policy adopted from time
<PAGE>
to time; or (iv) in the case of transfers between locations of the Company or
between the Company, its Subsidiaries or their respective successors.
(j) "Director" means a member of the Board of Directors of the
--------
Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(n) "Listed Security" means any security of the Company that is listed
---------------
or approved for listing on a national securities exchange or designated or
approved for designation as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
(o) "Named Executive" means any individual who, on the last day of the
---------------
Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(p) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
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<PAGE>
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder, or such other officer of the Company so designated by
the Board of Directors.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(t) "Optionee" means an Officer who receives an Option.
--------
(u) "Parent" means a "parent corporation," whether now or hereafter
------ ------------------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(v) "Plan" means this 1999 Equity Incentive Stock Option Plan.
----
(w) "Reporting Person" means an officer, director, or greater than ten
----------------
percent shareholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(x) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
(y) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(z) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(aa) "Subsidiary" means a "subsidiary corporation," whether now or
---------- ----------------------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(bb) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of shares that may be optioned and sold
under the Plan is 862,500 shares of Common Stock (on a post-split basis). The
shares may be authorized, but unissued, or reacquired Common Stock. If an
Option should expire or become unexercisable for any reason without having been
exercised in full, the unpurchased Shares that were subject thereto shall,
unless the Plan shall have been terminated, become available for future grant
under the Plan. In addition, any shares of Common Stock which are retained by
the Company upon exercise of an Option in order to satisfy the exercise or
purchase price for such Option or any withholding taxes due with respect to such
exercise shall be treated as not issued and shall continue to be available under
the Plan. Shares repurchased by the Company pursuant to any repurchase right
which the Company may have shall not be available for future grant under the
Plan.
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<PAGE>
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Optionees and, if permitted by the Applicable Laws, the Board may
authorize one or more officers (who may (but need not) be Officers) to grant
Options to Officers.
(b) Administration With Respect to Reporting Persons. With respect to
------------------------------------------------
Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed pursuant
---------------------
to this Section 4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan pursuant
to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and
Section 162(m) of the Code.
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(n) of the Plan;
(ii) to select the Officers to whom Options may from time to
time be granted hereunder;
(iii) to determine whether and to what extent Options or any
combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any option granted hereunder;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 10(g) instead of Common Stock;
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<PAGE>
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to construe and interpret the terms of the Plan and
Options granted under the Plan; and
(x) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options to participants who are foreign
nationals or employed outside of the United States in order to recognize
differences in local law, tax policies or customs.
(e) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Incentive
--------------------
Stock Options may be granted to Officers, provided however that Officers of an
Affiliate shall not be eligible to receive Incentive Stock Options. An Officer
who has been granted an Option may, if he or she is otherwise eligible, be
granted additional Options.
(b) Type of Option. Each Option shall be designated in the written
--------------
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Options
designated as Incentive Stock Options are exercisable for the first time by any
Optionee during any calendar year (under all plans of the Company or any Parent
or Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) Employment Relationship. The Plan shall not confer upon any
-----------------------
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with such
Optionee's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is
-5-
<PAGE>
granted, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Option Agreement.
8. Limitation on Grants to Officers. Subject to adjustment as provided
--------------------------------
in Section 13 below, the maximum number of Shares which may be subject to
Options granted to any one Officer under this Plan for any fiscal year of the
Company shall be 250,000 Shares.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Officer who, at the time of the grant of
such Incentive Stock Option, is a Ten Percent Holder, the per Share exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of grant.
(B) granted to any other Officer, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security, to a person who, at the time of the grant of
such Option, is a Ten Percent Holder, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of the grant.
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive of the Company, the per share Exercise Price
shall be no less than 100% of the Fair Market Value on the date of grant if such
Option is intended to qualify as performance-based compensation under Section
162(m) of the Code; or
(C) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to any person other than a Named Executive or a
Ten Percent Holder, the per Share exercise price shall be no less than 85% of
the Fair Market Value per Share on the date of grant if required by the
Applicable Laws and, if not so required, shall be such price as is determined by
the Administrator.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
-6-
<PAGE>
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender or such other period as may be required
to avoid a charge to the Company's earnings, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to
retain from the total number of Shares as to which the Option is exercised that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise price for the total number of Shares as to which the Option is
exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price and any applicable
income or employment taxes, (7) delivery of an irrevocable subscription
agreement for the Shares that irrevocably obligates the option holder to take
and pay for the Shares not more than twelve months after the date of delivery of
the subscription agreement, (8) any combination of the foregoing methods of
payment, or (9) such other consideration and method of payment for the issuance
of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan; provided, however, that if required by the Applicable Laws, any
Option granted prior to the date, if any, upon which the Common Stock becomes a
Listed Security shall become exercisable at the rate of at least 20% per year
over five years from the date the Option is granted. In the event that any of
the Shares issued upon exercise of an Option (which exercise occurs prior to the
date, if any, upon which the Common Stock becomes a Listed Security) should be
subject to a right of repurchase in the Company's favor, such repurchase right
shall, if required by the Applicable Laws, lapse at the rate of at least 20% per
year over five years from the date the Option is granted. Notwithstanding the
above, in the case of an Option granted to an officer (including but not limited
to Officers), Director or Consultant of the Company or any Parent or Subsidiary
of the Company, the Option may become fully exercisable, and a repurchase right,
if any, in favor of the Company shall lapse, at any time or during any period
established by the Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to
-7-
<PAGE>
which the Option is exercised. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section 9(b)
of the Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, not withstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such stock certificate promptly upon exercise of
the Option. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. In the
----------------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee or
Consultant with the Company, such Optionee may, but only within three (3) months
(or such other period of time not less than thirty (30) days as is determined by
the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option and not exceeding three (3)
months) after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that the Optionee was
entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 10(b) above, in the event of
termination of an Optionee's Continuous Status as an Officer as a result of his
or her total and permanent disability (within the meaning of Section 22(e)(3) of
the Code), Optionee may, but only within twelve (12) months from the date of
such termination (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), exercise the Option to the
extent otherwise entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Officer as a result of a disability which does not fall within the
meaning of total and permanent disability (as set forth in Section 22(e)(3) of
the Code), Optionee may, but only within six (6) months from the date of such
termination (but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), exercise the Option to the extent
otherwise entitled to exercise it at the date of such termination. However, to
the extent that such Optionee fails to exercise an Option which is an Incentive
Stock Option ("ISO") (within the
---
-8-
<PAGE>
meaning of Section 422 of the Code) within three (3) months of the date of such
termination, the Option will not qualify for ISO treatment under the Code. To
the extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within six months (6) from the date of termination, the Option shall
terminate.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Status as an Officer since the date of grant of
the Option, or within thirty (30) days following termination of Optionee's
Continuous Status as an Employee or Consultant, the Option may be exercised, at
any time within six (6) months following the date of death (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), by Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of death or, if earlier, the date
of termination of Optionee's Continuous Status as an Employee or Consultant. To
the extent that Optionee was not entitled to exercise the Option at the date of
death or termination, as the case may be, or if Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Status as
an Officer from the periods set forth in Sections 10(b), 10(c) and 10(d) above
or in the Option Agreement to such greater time as the Board shall deem
appropriate, provided that in no event shall such Option be exercisable later
than the date of expiration of the term of such Option as set forth in the
Option Agreement.
(f) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(g) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Taxes.
-----
(a) As a condition of the exercise of an Option granted under the
Plan, the Participant (or in the case of the Participant's death, the person
exercising the Option) shall make such arrangements as the Administrator may
require for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the exercise of
Option and the issuance of Shares. The Company shall not be required to issue
any Shares under the Plan until such obligations are satisfied.
(b) In the case of an Officer and in the absence of any other
arrangement, the Officer shall be deemed to have directed the Company to
withhold or collect from his or her
-9-
<PAGE>
compensation an amount sufficient to satisfy such tax obligations from the next
payroll payment otherwise payable after the date of an exercise of the Option.
(c) This Section 11(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of Participant
other than an Officer (or in the case of an Officer where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option that number of Shares having a Fair Market Value
determined as of the applicable Tax Date (as defined below) equal to the amount
required to be withheld. For purposes of this Section 11, the Fair Market Value
of the Shares to be withheld shall be determined on the date that the amount of
tax to be withheld is to be determined under the Applicable Laws (the "Tax
---
Date").
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Participant for more than six (6) months on the date of surrender, and (ii)
have a Fair Market Value determined as of the applicable Tax Date equal to the
amount required to be withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 11(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 11(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option is exercised but such
Participant shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the applicable Tax Date.
12. Adjustments Upon Changes in Capitalization, Merger or Certain Other
-------------------------------------------------------------------
Transactions.
- ------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or that have been returned to the Plan upon cancellation or expiration
of an Option, and the numbers of shares set forth in Section 3(a)(i) and 8
above, as well as the price per share of Common Stock covered by each such
outstanding Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination, recapitalization or
reclassification of the Common Stock, or any
-10-
<PAGE>
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale of all
------------------------
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's shareholders, each outstanding Option shall be assumed or an
equivalent option or right shall be substituted by such successor corporation or
a parent or subsidiary of such successor corporation, unless the successor
corporation does not agree to assume the Option or to substitute an equivalent
option, in which case such Option shall terminate upon the consummation of the
merger or sale of assets.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
13. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution provided that, after the date, if
any, upon which the Common Stock becomes a Listed Security, the Administrator
may in its discretion grant transferable Nonstatutory Stock Options pursuant to
Option Agreements specifying (i) the manner in which such Nonstatutory Stock
Options are transferable and (ii) that any such transfer shall be subject to the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option may be exercised, during the lifetime of the
holder of Option, only by such holder or a transferee permitted by this Section
13.
14. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board; provided
however that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the
determination shall be
-11-
<PAGE>
given to each Officer to whom an Option is so granted within a reasonable time
after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with the Applicable Laws, the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Administrator shall approve from time to time.
19. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company
within twelve (12) months before or after the date the Plan, or an amendment to
the Plan, is adopted. Such stockholder approval shall be obtained in the degree
and manner required under the Applicable Laws. All Options issued under the
Plan shall become void in the event such approval is not obtained.
-12-
<PAGE>
20. Information and Documents to Optionees. Prior to the date, if any, on
--------------------------------------
which the Common Stock becomes a Listed Security and if required by the
Applicable Laws, the Company shall provide financial statements at least
annually to each Optionee during the period such Optionee has one or more
Options outstanding, and in the case of an individual who acquired Shares
pursuant to the Plan, during the period such individual owns such Shares. The
Company shall not be required to provide such information if the issuance of
Options under the Plan is limited to key employees whose duties in connection
with the Company assure their access to equivalent information. In addition, at
the time of issuance of any securities under the Plan, the Company shall provide
to the Optionee a copy of the Plan and a copy of any agreement(s) pursuant to
which securities under the Plan are issued.
-13-
<PAGE>
PREVIEW SYSTEMS, INC.
1999 EXECUTIVE STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
((Optionee))
_____________________
_____________________
You have been granted an option to purchase Common Stock "Common Stock" of
------------
Preview Systems, Inc. (the "Company") as follows:
-------
<TABLE>
<S> <C>
Board Approval Date: ((BoardApprovalDate))
Date of Grant (Later of Board
Approval Date or Commencement
of Employment/Consulting): ((GrantDate))
Vesting Commencement Date: ((VestingCommencementDate))
Exercise Price per Share: $((ExercisePrice))
Total Number of Shares Granted: ((NoofShares))
Total Exercise Price: $((TotalExercisePrice))
Type of Option: ((NoSharesISO)) Incentive Stock Option
---------------
((NoSharesNSO)) Nonstatutory Stock Option
---------------
Term/Expiration Date: ((ExpirDate))
Vesting Schedule: This Option may be exercised, in whole or in part, in
accordance with the following schedule:
((VestingSchedule))
Termination Period: This Option may be exercised for 90 days after
termination of employment or consulting
relationship except as set out in Sections 6 and 7
of the Stock Option Agreement (but in no event
later than the Expiration Date).
</TABLE>
<PAGE>
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and
governed by the terms and conditions of the 1999 Executive Stock Option Plan
and the Stock Option Agreement, both of which are attached and made a part of
this document.
((Optionee)): Preview Systems, Inc.
______________________ By: ___________________________
Signature
______________________ _______________________________
Print Name Print Name and Title
<PAGE>
PREVIEW SYSTEMS, INC.
1999 EXECUTIVE STOCK OPTION PLAN
STOCK OPTION AGREEMENT
----------------------
1. Grant of Option. Preview Systems, Inc., a Delaware corporation (the
---------------
"Company"), hereby grants to ((Optionee)) ("Optionee"), an option (the "Option")
------- -------- ------
to purchase a total number of shares of Common Stock (the "Shares") set forth in
------
the Notice of Stock Option Grant, at the exercise price per share set forth in
the Notice of Stock Option Grant (the "Exercise Price") subject to the terms,
--------------
definitions and provisions of the Preview Systems, Inc. 1999 Executive Stock
Option Plan (the "Plan") adopted by the Company, which is incorporated herein
----
by reference. Unless otherwise defined herein, the terms defined in the Plan
shall have the same defined meanings in this Option.
If designated an Incentive Stock Option, this Option is intended to qualify as
an Incentive Stock Option as defined in Section 422 of the Code.
2. Exercise of Option. This Option shall be exercisable during its Term
------------------
in accordance with the Vesting Schedule set out in the Notice of Stock Option
Grant and with the provisions of Section 9 of the Plan as follows:
(a) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 5, 6 and 7 below, subject to the limitation contained in Section
2(a)(i).
(iii) In no event may this Option be exercised after the
Expiration Date of this Option as set forth in the Notice of Stock Option Grant.
(b) Method of Exercise. This Option shall be exercisable by
------------------
execution and delivery of the Exercise Notice and Restricted Stock Purchase
Agreement attached hereto as Exhibit A (the "Exercise Agreement") or of any
--------- ------------------
other form of written notice approved for such purpose by the Company which
shall state the election to exercise the Option, the number of Shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by Optionee and shall be delivered in
person or by certified mail to the Secretary of the Company. The written notice
shall be accompanied
<PAGE>
by payment of the Exercise Price. This Option shall be deemed to be exercised
upon receipt by the Company of such written notice accompanied by the Exercise
Price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of
applicable law and the requirements of any stock exchange upon which the Shares
may then be listed. Assuming such compliance, for income tax purposes the
Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
3. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination thereof, at the election of Optionee:
(a) cash or check;
(b) cancellation of outstanding indebtedness;
(c) surrender of other shares of Common Stock of the Company which
(i) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by Optionee for more than six months on the date of surrender,
and (ii) have a Fair Market Value on the date of surrender equal to the Exercise
Price of the Shares as to which the Option is being exercised; or
(d) if there is a public market for the Shares and they are
registered under the Exchange Act, delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the Exercise
Price.
4. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
5. Termination of Relationship. In the event of termination of
---------------------------
Optionee's Continuous Status as an Officer, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period set forth in the Notice of
Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at such Termination Date, or if Optionee does not exercise this
Option within the Termination Period, the Option shall terminate.
-2-
<PAGE>
6. Disability of Optionee.
----------------------
(a) Notwithstanding the provisions of Section 5 above, in the event
of termination of Optionee's Continuous Status as an Officer as a result of
Optionee's total and permanent disability (as defined in Section 22(e)(3) of the
Code), Optionee may, but only within twelve months from the Termination Date
(but in no event later than the Expiration Date set forth in the Notice of Stock
Option Grant), exercise this Option to the extent Optionee was entitled to
exercise it as of such Termination Date. To the extent that Optionee was not
entitled to exercise the Option as of the Termination Date, or if Optionee does
not exercise such Option (to the extent so entitled) within the time specified
in this Section 6(a), the Option shall terminate.
(b) Notwithstanding the provisions of Section 5 above, in the event
of termination of Optionee's consulting relationship or Continuous Status as an
Officer as a result of disability not constituting a total and permanent
disability (as set forth in Section 22(e)(3) of the Code), Optionee may, but
only within six months from the Termination Date (but in no event later than the
Expiration Date set forth in the Notice of Stock Option Grant), exercise the
Option to the extent Optionee was entitled to exercise it as of such Termination
Date; provided, however, that if this is an Incentive Stock Option and Optionee
fails to exercise this Incentive Stock Option within three months from the
Termination Date, this Option will cease to qualify as an Incentive Stock Option
(as defined in Section 422 of the Code) and Optionee will be treated for federal
income tax purposes as having received ordinary income at the time of such
exercise in an amount generally measured by the difference between the Exercise
Price for the Shares and the Fair Market Value of the Shares on the date of
exercise. To the extent that Optionee was not entitled to exercise the Option at
the Termination Date, or if Optionee does not exercise such Option to the extent
so entitled within the time specified in this Section 6(b), the Option shall
terminate.
7. Death of Optionee. In the event of the death of Optionee (a) during
-----------------
the Term of this Option and while an Officer of the Company and having been in
Continuous Status as an Officer since the date of grant of the Option, or (b)
within 30 days after Optionee's Termination Date, the Option may be exercised at
any time within six months following the date of death (but in no event later
than the Expiration Date set forth in the Notice of Stock Option Grant), by
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the Termination Date.
8. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him or her. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of Optionee.
-3-
<PAGE>
9. Term of Option. This Option may be exercised only within the Term set
--------------
forth in the Notice of Stock Option Grant, subject to the limitations set forth
in Section 7 of the Plan.
10. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of certain of the federal and California tax consequences of
exercise of this Option and disposition of the Shares under the laws in effect
as of the Date of Grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of Incentive Stock Option. If this Option qualifies as
----------------------------------
an Incentive Stock Option, there will be no regular federal or California income
tax liability upon the exercise of the Option, although the excess, if any, of
the Fair Market Value of the Shares on the date of exercise over the Exercise
Price will be treated as an adjustment to the alternative minimum tax for
federal tax purposes and may subject Optionee to the alternative minimum tax in
the year of exercise.
(b) Exercise of Nonstatutory Stock Option. If this Option does not
-------------------------------------
qualify as an Incentive Stock Option, there may be a regular federal income tax
liability and a California income tax liability upon the exercise of the Option.
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is
an employee, the Company will be required to withhold from Optionee's
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
(c) Disposition of Shares. In the case of a Nonstatutory Stock
---------------------
Option, if Shares are held for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
and California income tax purposes. In the case of an Incentive Stock Option,
if Shares transferred pursuant to the Option are held for at least one year
after exercise and are disposed of at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal and California income tax purposes. In either case,
the long-term capital gain will be taxed for federal income tax and alternative
minimum tax purposes at a maximum rate of 28% if the Shares are held more than
one year but less than 18 months after exercise and at 20% if the Shares are
held more than 18 months after exercise. If Shares purchased under an Incentive
Stock Option are disposed of within one year after exercise or within two years
after the Date of Grant, any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (i) the Fair Market
Value of the Shares on the date of exercise, or (ii) the sale price of the
Shares.
-4-
<PAGE>
(d) Notice of Disqualifying Disposition of Incentive Stock Option
-------------------------------------------------------------
Shares. If the Option granted to Optionee herein is an Incentive Stock Option,
- ------
and if Optionee sells or otherwise disposes of any of the Shares acquired
pursuant to the Incentive Stock Option on or before the later of (i) the date
two years after the Date of Grant, or (ii) the date one year after the date of
exercise, Optionee shall immediately notify the Company in writing of such
disposition. Optionee acknowledges and agrees that he or she may be subject to
income tax withholding by the Company on the compensation income recognized by
Optionee from the early disposition by payment in cash or out of the current
earnings paid to Optionee.
11. Withholding Tax Obligations. Optionee understands that, upon
---------------------------
exercising a Nonstatutory Stock Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then Fair Market Value of the
Shares over the Exercise Price. However, the timing of this income recognition
may be deferred for up to six months if Optionee is subject to Section 16 of the
Exchange Act. If Optionee is an employee, the Company will be required to
withhold from Optionee's compensation, or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income. Additionally, Optionee may at some point be required to
satisfy tax withholding obligations with respect to the disqualifying
disposition of an Incentive Stock Option. Optionee shall satisfy his or her tax
withholding obligation arising upon the exercise of this Option by one or some
combination of the following methods: (a) by cash payment, (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares which (i) in the case of
Shares previously acquired from the Company, have been owned by Optionee for
more than six months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to or greater than Optionee's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option that number of
Shares having a Fair Market Value equal to the amount required to be withheld.
For this purpose, the Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
--------
If Optionee is subject to Section 16 of the Exchange Act (an "Insider"),
-------
any surrender of previously owned Shares to satisfy tax withholding obligations
arising upon exercise of this Option must comply with the applicable provisions
of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3").
----------
All elections by Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
-5-
<PAGE>
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
12. Market Standoff Agreement. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Optionee agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any securities of the Company (other
than those included in the registration) without the prior written consent of
the Company or such underwriters, as the case may be, for such period of time
(not to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing as may be requested by the underwriters at
the time of the Company's initial public offering.
[Signature page follows]
-6-
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one
document.
Preview Systems, Inc.
By: _________________________________
_________________________________
(Print name and title)
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Dated: ________________________ ______________________________
((Optionee))
-7-
<PAGE>
EXHIBIT A
---------
PREVIEW SYSTEMS, INC.
1999 EXECUTIVE STOCK OPTION PLAN
EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT
-------------------------------------------------------
This Agreement ("Agreement") is made as of ______________, by and between
---------
Preview Systems, Inc., a Delaware corporation (the "Company"), and ((Optionee))
-------
("Purchaser"). To the extent any capitalized terms used in this Agreement are
---------
not defined, they shall have the meaning ascribed to them in the 1999 Executive
Stock Option Plan.
1. Exercise of Option. Subject to the terms and conditions hereof,
------------------
Purchaser hereby elects to exercise his or her option to purchase __________
shares of the Common Stock (the "Shares") of the Company under and pursuant to
------
the Company's 1999 Executive Stock Option Plan (the "Plan") and the Stock Option
----
Agreement dated ______________, (the "Option Agreement"). The purchase price
----------------
for the Shares shall be $((ExercisePrice)) per Share for a total purchase
price of $_______________. The term "Shares" refers to the purchased Shares and
------
all securities received in replacement of the Shares or as stock dividends or
splits, all securities received in replacement of the Shares in a
recapitalization, merger, reorganization, exchange or the like, and all new,
substituted or additional securities or other properties to which Purchaser is
entitled by reason of Purchaser's ownership of the Shares.
2. Time and Place of Exercise. The purchase and sale of the Shares under
--------------------------
this Agreement shall occur at the principal office of the Company simultaneously
with the execution and delivery of this Agreement in accordance with the
provisions of Section 2(b) of the Option Agreement. On such date, the Company
will deliver to Purchaser a certificate representing the Shares to be purchased
by Purchaser (which shall be issued in Purchaser's name) against payment of the
exercise price therefor by Purchaser by (a) check made payable to the Company,
(b) cancellation of indebtedness of the Company to Purchaser, (c) delivery of
shares of the Common Stock of the Company in accordance with Section 3 of the
Option Agreement, or (d) a combination of the foregoing.
3. Limitations on Transfer. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares except in compliance with the
provisions below and applicable securities laws.
(a) Right of First Refusal. Before any Shares held by Purchaser or
----------------------
any transferee of Purchaser (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
------
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section 3(a) (the "Right of First Refusal").
----------------------
(i) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
------
Holder's bona fide
<PAGE>
intention to sell or otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number
-------------------
of Shares to be transferred to each Proposed Transferee; and (iv) the terms and
conditions of each proposed sale or transfer. The Holder shall offer the Shares
at the same price (the "Offered Price") and upon the same terms (or terms as
-------------
similar as reasonably possible) to the Company or its assignee(s).
(ii) Exercise of Right of First Refusal. At any time within 30 days
----------------------------------
after receipt of the Notice, the Company and/or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection
(iii) below.
(iii) Purchase Price. The purchase price ("Purchase Price") for the
-------------- --------------
Shares purchased by the Company or its assignee(s) under this Section 3(a) shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(iv) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(v) Holder's Right to Transfer. If all of the Shares proposed in
--------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section 3(a), then the
Holder may sell or otherwise transfer such Shares to that Proposed Transferee at
the Offered Price or at a higher price, provided that such sale or other
transfer is consummated within 60 days after the date of the Notice and provided
further that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section 3 shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, or if the Holder
proposes to change the price or other terms to make them more favorable to the
Proposed Transferee, a new Notice shall be given to the Company, and the Company
and/or its assignees shall again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
(vi) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section 3(a) notwithstanding, the transfer of any or all of
the Shares during Purchaser's lifetime or on Purchaser's death by will or
intestacy to Purchaser's Immediate Family (as defined below) or a trust for the
benefit of Purchaser's Immediate Family shall be exempt from the provisions of
this Section 3(a). "Immediate Family" as used herein shall mean spouse, lineal
----------------
descendant or antecedent, father, mother, brother or sister. In such case, the
transferee or other recipient shall receive and hold the Shares so transferred
subject to the
-2-
<PAGE>
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section 3.
(b) Involuntary Transfer.
--------------------
(i) Company's Right to Purchase upon Involuntary Transfer. In
-----------------------------------------------------
the event, at any time after the date of this Agreement, of any transfer by
operation of law or other involuntary transfer (including divorce or death, but
excluding, in the event of death, a transfer to Immediate Family as set forth in
Section 3(a)(vi) above) of all or a portion of the Shares by the record holder
thereof, the Company shall have the right to purchase all of the Shares
transferred at the greater of the purchase price paid by Purchaser pursuant to
this Agreement or the Fair Market Value of the Shares on the date of transfer.
Upon such a transfer, the person acquiring the Shares shall promptly notify the
Secretary of the Company of such transfer. The right to purchase such Shares
shall be provided to the Company for a period of 30 days following receipt by
the Company of written notice by the person acquiring the Shares.
(ii) Price for Involuntary Transfer. With respect to any stock
------------------------------
to be transferred pursuant to Section 3(b)(i), the price per Share shall be a
price set by the Board of Directors of the Company that will reflect the current
value of the stock in terms of present earnings and future prospects of the
Company. The Company shall notify Purchaser or his or her executor of the price
so determined within 30 days after receipt by it of written notice of the
transfer or proposed transfer of Shares. However, if the Purchaser does not
agree with the valuation as determined by the Board of Directors of the Company,
the Purchaser shall be entitled to have the valuation determined by an
independent appraiser to be mutually agreed upon by the Company and the
Purchaser and whose fees shall be borne equally by the Company and the
Purchaser.
(c) Assignment. The right of the Company to purchase any part of the
----------
Shares may be assigned in whole or in part to any stockholder or stockholders of
the Company or other persons or organizations; provided, however, that an
assignee, other than a corporation that is the Parent or a 100% owned Subsidiary
of the Company, must pay the Company, upon assignment of such right, cash equal
to the difference between the original purchase price and Fair Market Value, if
the original purchase price is less than the Fair Market Value of the Shares
subject to the assignment.
(d) Restrictions Binding on Transferees. All transferees of Shares
-----------------------------------
or any interest therein will receive and hold such Shares or interest subject to
the provisions of this Agreement. Any sale or transfer of the Shares shall be
void unless the provisions of this Agreement are satisfied.
(e) Termination of Rights. The Right of First Refusal and the
---------------------
Company's right to repurchase the Shares in the event of an involuntary transfer
pursuant to Section 3(b) above shall terminate upon the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act").
--------------
-3-
<PAGE>
(f) Market Standoff Agreement. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any securities of the Company (other
than those included in the registration) without the prior written consent of
the Company or such underwriters, as the case may be, for such period of time
(not to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing as may be requested by the underwriters at
the time of the Company's initial public offering.
4. Investment and Taxation Representations. In connection with the
---------------------------------------
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser is
purchasing the Shares for investment for his or her own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act.
(b) Purchaser understands that the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted securities"
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Purchaser must hold the Shares indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser's purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted any tax consultants Purchaser
deems advisable in connection with the purchase or disposition of the Shares and
that Purchaser is not relying on the Company for any tax advice.
5. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. The certificate or certificates representing the Shares
-------
shall bear the following legends (as well as any legends required by applicable
state and federal corporate and securities laws):
-4-
<PAGE>
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
(b) Stop-Transfer Notices. Purchaser agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
(d) Removal of Legend. When all of the following events have
-----------------
occurred, the Shares then held by Purchaser will no longer be subject to the
legend referred to in Section 5(a)(ii): (i) the termination of the Right of
First Refusal; and (ii) the expiration or termination of the market standoff
provisions of Section 3(f) (and of any agreement entered pursuant to Section
3(f)). After such time, and upon Purchaser's request, a new certificate or
certificates representing the Shares not repurchased shall be issued without the
legend referred to in Section 5(a)(ii), and delivered to Purchaser.
6. No Employment Rights. Nothing in this Agreement shall affect in any
--------------------
manner whatsoever the right or power of the Company, or a Parent or Subsidiary
of the Company, to terminate Purchaser's employment or consulting relationship,
for any reason, with or without cause.
-5-
<PAGE>
7. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(d) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient when delivered personally or sent
by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address as set forth below or as subsequently
modified by written notice.
(f) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) Successors and Assigns. The rights and benefits of this Agreement
----------------------
shall inure to the benefit of, and be enforceable by the Company's successors
and assigns. The rights and obligations of Purchaser under this Agreement may
only be assigned with the prior written consent of the Company.
[Signature Page Follows]
-6-
<PAGE>
The parties have executed this Exercise Notice and Restricted Stock
Purchase Agreement as of the date first set forth above.
COMPANY:
Preview Systems, Inc.
By: ___________________________________
Name: _________________________________
(print)
Title:_________________________________
1601 S. DeAnza Blvd., Suite 100
Cupertino, CA 95014
PURCHASER:
((Optionee))
_______________________________________
(Signature)
_______________________________________
(Print Name)
Address:
_______________________________________
_______________________________________
I, ______________________, spouse of ((Optionee)), have read and hereby approve
the foregoing Agreement. In consideration of the Company's granting my spouse
the right to purchase the Shares as set forth in the Agreement, I hereby agree
to be bound irrevocably by the Agreement and further agree that any community
property or similar interest that I may have in the Shares shall hereby be
similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-
fact with respect to any amendment or exercise of any rights under the
Agreement.
______________________________________
Spouse of ((Optionee))
-7-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 2, 1999 of Preview Systems, Inc. (and to all references to
our firm) included in or made part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon
October 22, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Portland Software, Inc.:
We consent to the inclusion of our report dated February 20, 1998 with
respect to the balance sheets of Portland Software, Inc. as of December 31,
1996 and 1997 and related statements of operations, shareholders' equity, and
cash flows for the years then ended, which report appears in the Form S-1 of
Preview Systems, Inc. dated on or about October 22, 1999, and to the reference
to our firm under the heading "Experts".
/s/ KPMG LLP
Portland, Oregon
October 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,551
<SECURITIES> 0
<RECEIVABLES> 2,059
<ALLOWANCES> 75
<INVENTORY> 0
<CURRENT-ASSETS> 23,457
<PP&E> 2,132
<DEPRECIATION> 1,021
<TOTAL-ASSETS> 29,117
<CURRENT-LIABILITIES> 3,636
<BONDS> 704
0
0
<COMMON> 0
<OTHER-SE> 24,022
<TOTAL-LIABILITY-AND-EQUITY> 29,117
<SALES> 0
<TOTAL-REVENUES> 2,264
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,033
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (11,520)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,520)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,520)
<EPS-BASIC> (3.95)
<EPS-DILUTED> (3.95)
</TABLE>
