<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 2000
REGISTRATION NO. 333-96315
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VIRAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 38-3171505
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
177 BOVET ROAD, SUITE 520
SAN MATEO, CALIFORNIA 94402
(650) 573-3210
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PAUL G. LEGO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VIRAGE, INC.
177 BOVET ROAD, SUITE 520
SAN MATEO, CALIFORNIA 94402
(650) 573-3210
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JAMES M. KOSHLAND, ESQ. MARK A. BERTELSEN, ESQ.
DAVID HUBB, ESQ. HERBERT P. FOCKLER, ESQ.
GRAY CARY WARE & FREIDENRICH LLP WILSON SONSINI GOODRICH & ROSATI
400 HAMILTON AVENUE PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA, 94301-1825 650 PAGE MILL ROAD
(650) 833-2000 PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") 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 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 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,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE REGISTRATION FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock ($0.001 par value).... 4,025,000 $12.00 $48,300,000 $16,698
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</TABLE>
(1) Includes 525,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(a) promulgated under the Securities Act.
(3) Previously paid.
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
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 MARCH 31, 2000
3,500,000 SHARES
[VIRAGE LOGO]
VIRAGE, INC.
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $10.00 and $12.00 per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "VRGE."
The underwriters have an option to purchase a maximum of 525,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 8.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS VIRAGE
------------- ------------- -------------
<S> <C> <C> <C>
Per
Share... $ $ $
Total... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or
about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
ROBERTSON STEPHENS
WIT SOUNDVIEW
The date of this prospectus is , 2000.
<PAGE> 3
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.............. 3
RISK FACTORS.................... 7
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS.... 19
USE OF PROCEEDS................. 20
DIVIDEND POLICY................. 20
CAPITALIZATION.................. 21
DILUTION........................ 23
SELECTED CONSOLIDATED FINANCIAL
DATA.......................... 25
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.................... 26
BUSINESS........................ 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT...................... 56
RELATED PARTY TRANSACTIONS...... 68
PRINCIPAL STOCKHOLDERS.......... 72
DESCRIPTION OF CAPITAL STOCK.... 75
SHARES ELIGIBLE FOR FUTURE
SALE.......................... 79
UNDERWRITING.................... 82
NOTICE TO CANADIAN
RESIDENTS..................... 85
LEGAL MATTERS................... 86
EXPERTS......................... 86
WHERE YOU CAN FIND MORE
INFORMATION................... 87
INDEX TO FINANCIAL
STATEMENTS.................... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying notes
appearing elsewhere in this prospectus.
VIRAGE, INC.
Virage is a leading provider of software products and application services
that enable media and entertainment companies, enterprises and consumers to
catalog, manage and distribute their video content over the Internet and
intranets.
We have a proprietary video indexing technology that breaks video into
discrete segments in real time by indexing visual scene changes, spoken words,
names and faces of recognized speakers, topics discussed within each segment and
other important information. This index is time synchronized with video files
that are encoded simultaneously with the indexing process. The indexing and
encoding capabilities of our technology transform video content into a
structured video database that enables content owners and Internet users to
rapidly search, locate and use video content. Our technology allows Internet
users of video content to find, view and share the portions of the video they
want, in a way that is familiar and comfortable to them. To adapt their video
content for these Internet users, owners of video content, including news,
entertainment, sports and educational content, can either license our
VideoLogger, AudioLogger and related products or use our Virage Interactive
application services to convert their video into interactive web content. For
example, a customer may use our application services to enable visitors to its
Internet site to find both articles and video segments on related topics
repurposed from its television programming, corporate or training video, or
other video content. We currently have over 100 customers including media and
entertainment companies, large corporations, educational institutions and
government entities.
Very few communication technologies have had as much of an impact on our
society as video and the Internet. Each of these communication mediums has
touched the lives of hundreds of millions of people and generated billions of
dollars in advertising and commerce revenues. We believe our products and
application services will enable the widespread adoption of video on the
Internet by helping content owners adapt their video content to the Internet and
intranets quickly and cost-effectively.
We enable Internet users to rapidly search, locate and use video content.
By improving the end users' video experience, we increase the value of video
content to content owners by enabling them to use their video in targeted
applications such as advertising and electronic commerce. The key benefits of
our products and services include:
- Improved access to video content. Our video index and search engine allow
users to search for and view desired parts of the video quickly and
easily. Our video database helps Internet site owners automatically
publish video segments throughout their Internet site, based on subject,
keyword or speaker.
- Enhanced user interaction and community building. Our technology
transforms video into indexed segments that Internet users can interact
with and share opinions and recommendations about. Our technology allows
users to email relevant video segments to other users, create personal
portfolios of favorite segments and assemble and share personal playlists
or highlight reels with others. These features enable community building
around video collections by allowing users who are interested in
particular video content to share and interact with other users
concerning this same video.
3
<PAGE> 5
- Greater personalization. The indexing and searching of video content
enable our customers to target video segments to particular users by
matching user profiles with information contained in their video
database, thereby providing a highly personalized viewing experience.
- Increased commerce opportunities. Our technology enables customers to
create commerce opportunities around specific video segments, such as
targeted advertising and purchase opportunities associated with a
particular person, object or topic within the video. For example, one
customer uses our Virage Interactive services to first enable Internet
users to search for and watch a video review of particular video games of
interest to the user, and then simultaneously display a banner
advertisement next to this video which the user can click on to purchase
the exact video game which is concurrently being reviewed.
- Expanded syndication abilities. Our technology allows customers to widely
distribute, or syndicate, their indexed video content to other Internet
sites with minimal incremental cost or effort. This syndication of
content provides significant incremental revenue opportunities for video
content owners by increasing the number of potential viewers of their
content. For example, one customer uses our Virage Interactive services
to syndicate a particular piece of its video content for redeployment on
over fifteen other websites which paid for the right to this syndicated
content and at the same time expanded the viewership of this content
through their websites.
Our goal is to strengthen our position as a leading provider of products
and application services in the Internet video infrastructure marketplace. To
achieve this objective, our business strategy includes the following key
components:
- Become the standard for deploying, managing and distributing video
content over the Internet and intranets.
- Generate multiple revenue streams through new products and services.
- Empower content providers without competing against them.
- Enhance and leverage our technical leadership position.
- Expand our international presence.
- Pursue strategic relationships and acquisitions.
On March 24, 2000, we entered into an agreement with Thomson Consumer
Electronics, Inc. to sell to it $10.0 million of common stock, with Akamai
Technologies, Inc. to sell to it $3.5 million of common stock, with
RealNetworks, Inc. to sell to it $3.0 million of common stock and with CNET,
Inc. to sell to it $2.5 million of common stock, each sale to be at the initial
public offering price in a private placement that will close concurrently with
this public offering. Although these shares are not being underwritten, each
purchaser will be granted registration rights to include their shares in any
future registered offerings filed by us. In addition, we also entered into
services agreements with Akamai Technologies and RealNetworks, and amended our
video cataloging services and license agreement with CNET.
We were incorporated in Michigan in April 1994 and reincorporated in
Delaware in March 1995 under the name Virage, Inc. Our principal offices are
located at 177 Bovet Road, Suite 520, San Mateo, California 94402. Our telephone
number is (650) 573-3210. Our website address is located at www.virage.com but
the information on our website does not constitute a part of this prospectus.
4
<PAGE> 6
THE OFFERING
Common stock offered by Virage.... 3,500,000 shares
Common stock to be outstanding.... 23,026,512 shares
Use of proceeds................... For general corporate purposes, capital
expenditures and working capital. See "Use of Proceeds" on page 21.
Proposed Nasdaq National Market
symbol.......................... VRGE
The number of shares of our common stock outstanding after the offering is
based on shares outstanding as of December 31, 1999 and does not include:
- 4,106,513 shares of common stock issuable upon exercise of outstanding
stock options under our equity incentive plans as of December 31, 1999 at
a weighted average exercise price of $1.9695;
- 3,958,843 shares of common stock reserved and available for issuance
under our equity incentive plans as of December 31, 1999;
- 1,100,000 shares of common stock authorized for our 2000 employee stock
purchase plan in March 2000; and
- 42,648 shares of common stock subject to warrants at a weighted average
exercise price of $0.9375.
VIRAGE(R), the Virage "V" Logo(R), PINPOINT(R), VIDEOLOGGER(TM),
AUDIOLOGGER(TM), MYLOGGER(TM) and "We make video searchable"(TM) are trademarks
or registered trademarks of Virage, Inc. This prospectus contains other trade
names, trademarks and service marks of Virage and of other companies.
Unless otherwise indicated, all information contained in this prospectus
assumes:
- no exercise of the underwriters' over-allotment option;
- a two-for-three reverse stock split in our common and preferred stock
which will occur prior to the consummation of this offering;
- the conversion of all outstanding preferred stock into common stock
immediately prior to the consummation of this offering;
- the cash exercise of warrants to purchase 125,986 shares of common stock
at a weighted-average exercise price of $4.92 per share;
- the expected issuance and cash exercise of a warrant to be issued
concurrently with this offering of 181,818 shares of common stock at an
assumed exercise price of $11.00 per share; and
- the expected sale via a private placement concurrent with this offering
of 1,727,270 shares of common stock to Akamai Technologies, CNET,
RealNetworks and Thomson Consumer Electronics at an assumed private
placement price of $11.00 per share.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenues............ $ -- $ 99 $ 1,445 $ 2,702 $ 3,350 $ 2,323 $ 3,887
Gross profit.............. -- 61 839 1,377 1,668 1,087 1,833
Total operating
expenses................ 551 1,607 2,472 5,496 7,960 5,578 9,628
Loss from operations...... (551) (1,546) (1,633) (4,119) (6,292) (4,491) (7,795)
Net loss applicable to
common stockholders..... (543) (1,469) (1,599) (4,100) (6,170) (4,378) (12,152)
Net loss per share
applicable to common
stockholders:
basic and diluted....... $ (0.32) $ (0.84) $ (1.07) $ (2.13) $ (2.76) $ (2.04) $ (4.27)
Weighted average shares:
basic and diluted....... 1,707 1,748 1,488 1,924 2,239 2,145 2,849
Pro forma net loss per
share applicable to
common stockholders:
basic and diluted....... $ (0.60) $ (0.88)
Weighted average shares:
basic and diluted....... 10,315 13,767
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents........................ $ 16,362 $ 16,982 $ 72,187
Total assets..................................... 21,718 22,338 77,543
Long-term liabilities............................ 115 115 115
Accumulated deficit.............................. (26,033) (26,033) (26,033)
Total stockholders' equity (net capital
deficiency).................................... (18,795) 18,820 74,025
</TABLE>
The pro forma data gives effect to the conversion of all of our outstanding
shares of preferred stock into common stock upon the closing of this offering
and the cash exercise of warrants to purchase 125,986 shares of common stock at
a weighted-average exercise price of $4.92 per share. The pro forma as adjusted
data gives effect to the foregoing and to the following:
- the sale of the 3,500,000 shares of common stock that we are offering
under this prospectus at an assumed initial public offering price of
$11.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses;
- the cash exercise of a warrant to be issued concurrently with the closing
of this offering to purchase 181,818 shares of common stock at an assumed
exercise price of $11.00 per share; and
- the sale of a total of 1,727,270 shares of common stock that are expected
to be sold in a private placement concurrent with the closing of this
offering to Akamai Technologies, CNET, RealNetworks and Thomson Consumer
Electronics at an assumed private placement price of $11.00 per share.
See "Capitalization" on page 21.
6
<PAGE> 8
RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks and uncertainties described below, together with all other
information in this prospectus, before buying shares in this offering.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE ONLY RECENTLY INTRODUCED OUR VIDEO SOFTWARE PRODUCTS AND
APPLICATION SERVICES, WE FACE A NUMBER OF RISKS WHICH MAY SERIOUSLY HARM OUR
BUSINESS.
We incorporated in April 1994 and to date we have generated only limited
revenues. Most of our revenues were generated in the last six quarters. We
introduced our first video software products in December 1997, and our
application services, named Virage Interactive, in May 1999. Because we have a
limited operating history with our video software products and application
services and because our revenue sources may continue to shift as our business
develops, you must consider the risks and difficulties that we may encounter
when making your investment decision. These risks include our ability to:
- expand our customer base;
- increase penetration into key customer accounts;
- maintain our pricing structure;
- develop new video products and application services; and
- adapt our products and services to meet changes in the Internet video
infrastructure marketplace.
If we do not successfully address these risks, our business will be seriously
harmed.
OUR BUSINESS MODEL IS UNPROVEN AND MAY FAIL, WHICH MAY DECREASE SIGNIFICANTLY
THE MARKET PRICE OF OUR COMMON STOCK.
We do not know whether our business model and strategy will be successful.
Our business model is based on the premise that content providers will use our
licensed products and application services to catalog, manage and distribute
their video content over the Internet and intranets. Our potential customers may
elect to rely on their internal resources or on lower priced products and
services that do not offer the full range of functionality offered by our
products and services. If the assumptions underlying our business model are not
valid or if we are unable to implement our business plan, our business will
suffer.
WE HAVE NOT BEEN PROFITABLE AND IF WE DO NOT ACHIEVE PROFITABILITY, OUR BUSINESS
MAY FAIL.
We incurred net losses of $1.6 million in fiscal 1997, $4.1 million in
fiscal 1998, $6.2 million in fiscal 1999 and $7.6 million in the nine months
ended December 31, 1999. As of December 31, 1999, our accumulated deficit was
$26.0 million. We expect to continue to incur increasing research and
development, sales and marketing and general and administrative expenses.
Accordingly, our failure to increase our revenues significantly or improve our
gross margins will harm our business. Even if we do achieve profitability, we
may not be able to sustain or increase profitability on a quarterly or annual
basis in the future. If our revenues grow more slowly than we anticipate, if our
gross margins do not
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<PAGE> 9
improve, or if our operating expenses exceed our expectations, our operating
results will suffer and our stock price may fall.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future. We believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of future performance. If securities analysts follow
our stock, our operating results will likely fall below their expectations in
some future quarter or quarters. Our failure to meet these expectations would
likely cause the market price of our common stock to decline.
Our quarterly revenues depend on a number of factors, many of which are
beyond our control and which makes it difficult for us to predict our revenues
going forward. We plan to increase our operating expenses and if our revenues
and gross margins do not increase, our business could be seriously harmed. We
plan to increase our operating expenses to expand our sales and marketing
operations, fund greater levels of research and development, expand our Virage
Interactive services and develop our internal organization. Many of these
expenditures are planned or committed in advance in anticipation of future
revenues, and if our revenues in a particular quarter are lower than we
anticipate, we may be unable to reduce spending in that quarter. As a result,
any shortfall in revenues or a failure to improve gross margins would likely
hurt our quarterly operating results.
THE FAILURE OF ANY SIGNIFICANT FUTURE CONTRACTS TO MEET OUR POLICIES FOR
RECOGNIZING REVENUE MAY PREVENT US FROM ACHIEVING OUR REVENUE OBJECTIVES FOR A
QUARTER OR A FISCAL YEAR, WHICH WOULD HURT OUR OPERATING RESULTS.
Our sales contracts are typically based upon standard agreements that meet
our revenue recognition policies. However, our future sales may include site
licenses or other transactions with customers who may negotiate special terms
and conditions that are not part of our standard sales contracts. If these
special terms and conditions cause sales under these contracts to not qualify
under our revenue recognition policies, we would defer revenues to future
periods, which may hurt our reported operating results and cause our stock price
to fall.
THE LENGTH OF OUR SALES AND DEPLOYMENT CYCLE IS UNCERTAIN, WHICH MAY CAUSE OUR
REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER.
During our sales cycle, we spend considerable time and expense providing
information to prospective customers about the use and benefits of our products
and services without generating corresponding revenue. Our expense levels are
relatively fixed in the short term and based in part on our expectations of
future revenues. Therefore, any delay in our sales cycle could cause significant
variations in our operating results, particularly because a relatively small
number of customer orders represents a large portion of our revenues.
Some of our largest sources of revenues are government entities and large
corporations that often require long testing and approval processes before
making a decision to license our products. In general, the process of entering
into a licensing arrangement with a potential customer may involve lengthy
negotiations. As a result, our sales cycle has been and may continue to be
unpredictable. In the past, our sales cycle has ranged from one to 12 months.
Our sales cycle is also subject to delays as a result of customer-specific
factors
8
<PAGE> 10
over which we have little or no control, including budgetary constraints and
internal acceptance procedures. In addition, because our technology must often
be integrated with the products and services of other vendors, there may be a
significant delay between the use of our software and services in a pilot system
and our customers' volume deployment of our products and services.
IF OUR CUSTOMERS FAIL TO GENERATE TRAFFIC ON THE VIDEO-RELATED SECTIONS OF THEIR
INTERNET SITES, OUR RECURRING REVENUES MAY DECREASE, WHICH MAY ADVERSELY AFFECT
OUR BUSINESS AND FINANCIAL RESULTS.
Our ability to achieve recurring revenues from our application services is
largely dependent upon the success of our customers in generating traffic on the
video-related sections of their Internet sites. Generally, we generate recurring
revenue from our application services whenever our customers add more hours of
video to an existing project and with each additional video query on a
customer's site. If our customers do not attract and maintain traffic on
video-related sections of their sites, video queries may decrease and customers
may decide not to add more hours of video to existing projects. This result
would cause revenues from our application services to decrease, which will
prevent us from growing our business.
IF WE FAIL TO INCREASE THE SIZE OF OUR CUSTOMER BASE OR INCREASE OUR REVENUES
WITH OUR EXISTING CUSTOMERS, OUR BUSINESS WILL SUFFER.
Increasing the size of our customer base and increasing the revenues we
generate from our customer base are critical to the success of our business. To
expand our customer base and the revenues we generate from our customers, we
must:
- generate additional revenues from different organizations within our
customers;
- conduct effective marketing and sales programs to acquire new customers;
and
- establish and maintain distribution relationships with value added
resellers and system integrators.
Our failure to achieve one or more of these objectives will hurt our business.
THE PRICES WE CHARGE FOR OUR PRODUCTS AND SERVICES MAY DECREASE, WHICH WOULD
REDUCE OUR REVENUES AND HARM OUR BUSINESS.
The prices we charge for our products and services may decrease as a result
of competitive pricing pressures, promotional programs and customers who
negotiate price reductions. For example, some of our competitors have provided
their services without charge in order to gain market share or new customers and
key accounts. The prices at which we sell and license our products and services
to our customers depend on many factors, including:
- purchase volumes;
- competitive pricing;
- the specific requirements of the order;
- the duration of the licensing arrangement; and
- the level of sales and service support.
If we are unable to sell our products or services at acceptable prices
relative to our costs, or if we fail to develop and introduce on a timely basis
new products and services from which we can derive additional revenues, our
financial results will suffer.
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<PAGE> 11
WE RELY ON, AND EXPECT TO CONTINUE TO RELY ON, A LIMITED NUMBER OF CUSTOMERS FOR
A SIGNIFICANT PORTION OF OUR REVENUES AND IF ANY OF THESE CUSTOMERS STOPS
LICENSING OUR SOFTWARE OR PURCHASING OUR PRODUCTS AND SERVICES, OUR OPERATING
RESULTS WILL SUFFER.
Historically, a limited number of customers has accounted for a significant
portion of our revenues. For the nine months ended December 31, 1999, Telecinco
accounted for 16% of our revenues and Oracle accounted for 15% of our revenues.
In addition, during that period several U.S. government agencies accounted for
22% of our revenues. We anticipate that our operating results in any given
period will continue to depend to a significant extent upon revenues from a
small number of customers. We do not have long-term contracts with our customers
obligating them to license our software or purchase our products or services. We
cannot be certain that we will retain our current customers or that we will be
able to recruit additional or replacement customers. If we were to lose one or
more customers, our operating results could be significantly harmed.
ANY FAILURE OF OUR NETWORK COULD LEAD TO SIGNIFICANT DISRUPTIONS IN OUR VIRAGE
INTERACTIVE SERVICES BUSINESS WHICH COULD DAMAGE OUR REPUTATION, REDUCE OUR
REVENUES OR OTHERWISE HARM OUR BUSINESS.
Our Virage Interactive services business is dependent upon providing our
customers with fast, efficient and reliable services. To meet our customers'
requirements, we must protect our network against damage from, among other
things:
- human error;
- physical or electronic security breaches;
- computer viruses;
- fire, earthquake, flood and other natural disasters;
- power loss;
- telecommunications failure; and
- sabotage and vandalism.
Our failure to protect our network against damage from any of these events will
hurt our business.
WE DEPEND ON AN OUTSIDE THIRD PARTY TO MAINTAIN OUR COMMUNICATIONS HARDWARE AND
PERFORM MOST OF OUR COMPUTER HARDWARE OPERATIONS AND IF THIS THIRD PARTY'S
HARDWARE AND OPERATIONS FAIL, OUR REPUTATION AND BUSINESS WILL SUFFER.
Substantially all of our communications hardware and most of our computer
hardware operations are located at Exodus Communications' facility in Santa
Clara, California. We do not have complete backup systems for these operations.
A problem with, or failure of, our communications hardware or operations could
result in interruptions or increases in response times on the Internet sites of
our customers. Furthermore, if Exodus fails to adequately maintain or operate
our communications hardware or does not perform our computer hardware operations
adequately, our services to our customers may not be available. We have
experienced system failures in the past. For example, in October 1999, one
outage at Exodus caused all of our application services to become unavailable
for approximately 90 minutes. In December 1999, a second outage at Exodus, which
slowed the response times of our application services, lasted 18 hours. Other
outages or system failures may occur. Any disruptions could damage our
reputation, reduce our revenues or otherwise harm our business. Our insurance
policies may not adequately compensate us for any losses that may occur due to
any failures or interruptions in our systems.
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<PAGE> 12
IF WE ARE UNABLE TO SCALE OUR CAPACITY SUFFICIENTLY AS DEMAND FOR OUR SERVICES
INCREASES, WE MAY LOSE CUSTOMERS WHICH WOULD BE DETRIMENTAL TO OUR BUSINESS.
We cannot be certain that if we increase our customers we will be able to
correspondingly increase our personnel and to perform our application services
at satisfactory levels. In addition, our application services may need to
accommodate an increasing volume of traffic. If we are not able to expand our
internal operations to accommodate such an increase in traffic, our customers'
Internet sites may in the future experience slower response times or outages. If
we cannot adequately handle a significant increase in customers or customers'
traffic, we may lose customers or fail to gain new ones, which may reduce our
revenues and harm our business.
IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES TO RESPOND TO RAPID
MARKET CHANGES DUE TO CHANGING TECHNOLOGY AND EVOLVING INDUSTRY STANDARDS, OUR
BUSINESS WILL BE HARMED.
The market for our products and services is characterized by rapidly
changing technology, evolving industry standards, frequent new product and
service introductions and changes in customer demands. The recent growth of
video on the Internet and intense competition in our industry exacerbate these
market characteristics. Our future success will depend to a substantial degree
on our ability to offer products and services that incorporate leading
technology, and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. To succeed, we
must anticipate and adapt to customer requirements in an effective and timely
manner, and offer products and services that meet customer demands. If we fail
to do so, our products and services will not achieve widespread market
acceptance, and we may not generate significant revenues to offset our
development costs, which will hurt our business.
The development of new or enhanced products and services is a complex and
uncertain process that requires the accurate anticipation of technological and
market trends. We may experience design, manufacturing, marketing and other
technological difficulties that could delay our ability to respond to
technological changes, evolving industry standards, competitive developments or
customer requirements. You should additionally be aware that:
- our technology or systems may become obsolete upon the introduction of
alternative technologies, such as products that better manage and search
video content;
- we could incur substantial costs if we need to modify our products and
services to respond to these alternative technologies;
- we may not have sufficient resources to develop or acquire new
technologies or to introduce new products or services capable of
competing with future technologies; and
- when introducing new or enhanced products or services, we may be unable
to manage effectively the transition from older products and services and
ensure that we can deliver products and services to meet anticipated
customer demand.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, AND THE LOSS OF OR OUR
INABILITY TO MAINTAIN THESE LICENSES COULD RESULT IN INCREASED COSTS OR DELAY
SALES OF OUR PRODUCTS.
We license technology from third parties, including software that is
integrated with internally-developed software and used in our products to
perform key functions. We anticipate that we will continue to license technology
from third parties in the future. This
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<PAGE> 13
software may not continue to be available on commercially reasonable terms, if
at all. Although we do not believe that we are substantially dependent on any
licensed technology, some of the software we license from third parties could be
difficult for us to replace. The loss of any of these technology licenses could
result in delays in the license of our products until equivalent technology, if
available, is developed or identified, licensed and integrated. The use of
additional third-party software would require us to negotiate license agreements
with other parties, which could result in higher royalty payments and a loss of
product differentiation. In addition, the effective implementation of our
products depends upon the successful operation of third-party licensed products
in conjunction with our products, and therefore any undetected errors in these
licensed products could prevent the implementation or impair the functionality
of our products, delay new product introductions and/or damage our reputation.
IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL, OUR BUSINESS MAY BE HARMED.
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, and particularly Paul
Lego, our chief executive officer. The loss of either this individual or other
key employees would likely have an adverse effect on our business. We do not
have employment agreements with most of our senior management team. If one or
more of our senior management team were to resign, the loss could result in loss
of sales, delays in new product development and diversion of management
resources.
BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN PERSONNEL, WHICH COULD IMPACT THE DEVELOPMENT AND ACCEPTANCE
OF OUR PRODUCTS AND SERVICES.
We expect that we will need to hire additional personnel in all functional
areas in the foreseeable future. Competition for personnel throughout our
industry is intense. We may be unable to attract or assimilate other
highly-qualified employees in the future. We have in the past experienced, and
we expect to continue to experience, difficulty in hiring highly-skilled
employees with appropriate qualifications. In addition, new hires frequently
require extensive training before they achieve desired levels of productivity.
Several members of our existing management team have been employed at Virage for
less than one year, including our chief financial officer. We may fail to
attract and retain qualified personnel, which could have a negative impact on
our business.
FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH WOULD BE DETRIMENTAL TO OUR
BUSINESS.
Any growth in our operations will place a significant strain on our
resources. As part of this growth, we will have to implement new operational and
financial systems, procedures and controls to expand, train and manage our
employee base and to maintain close coordination among our technical,
accounting, finance, marketing, sales and editorial staffs. We will also need to
continue to attract, retain and integrate personnel in all aspects of our
operations. To the extent we acquire other businesses, we will also need to
integrate and assimilate new operations, technologies and personnel. Failure to
manage our growth effectively could hurt our business.
DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR PRODUCTS WHICH
MAY CAUSE OUR STOCK PRICE TO FALL.
Our software products are complex and may contain errors that may be
detected at any point in the life of the product. We cannot assure you that,
despite testing by us and
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<PAGE> 14
our current and potential customers, errors will not be found in new products or
releases after shipment, resulting in loss of revenues, delay in market
acceptance and sales, diversion of development resources, injury to our
reputation or increased service and warranty costs. If any of these were to
occur, our business would be adversely affected and our stock price could fall.
Because our products are generally used in systems with other vendors'
products, they must integrate successfully with these existing systems. System
errors, whether caused by our products or those of another vendor, could
adversely affect the market acceptance of our products, and any necessary
revisions could cause us to incur significant expenses.
WE COULD BE SUBJECT TO LIABILITY CLAIMS AND NEGATIVE PUBLICITY IF OUR CUSTOMERS'
SYSTEMS, INFORMATION OR VIDEO CONTENT IS DAMAGED THROUGH THE USE OF OUR PRODUCTS
OR OUR APPLICATION SERVICES.
If our customers' systems, information or video content is damaged by
software errors, product design defects or use of our application services, our
business may be harmed. In addition, these errors or defects may cause severe
customer service and public relations problems. Errors, bugs, viruses or
misimplementation of our products or services may cause liability claims and
negative publicity ultimately resulting in the loss of market acceptance of our
products and services. Our agreements with customers that attempt to limit our
exposure to liability claims may not be enforceable in jurisdictions where we
operate.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME CONSUMING
AND EXPENSIVE FOR US TO DEFEND.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
conduct our business. These companies could assert, and it may be found, that
our technologies infringe their proprietary rights. We could incur substantial
costs to defend any litigation, and intellectual property litigation could force
us to do one or more of the following:
- cease using key aspects of our technology that incorporate the challenged
intellectual property;
- obtain a license from the holder of the infringed intellectual property
right; and
- redesign some or all of our products.
From time to time, we have received notices claiming that our technology
infringes patents held by third parties. In the event any such claim is
successful and we are unable to license the infringed technology on commercially
reasonable terms, our business and operating results would be significantly
harmed.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR COMPETITORS
MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE CUSTOMERS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. Our proprietary rights may not prove viable or of value in the
future since the validity, enforceability and type of protection of proprietary
rights in Internet-related industries are uncertain and still evolving.
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<PAGE> 15
Unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult, and while we are unable to determine the
extent to which piracy of our software or code exists, software piracy can be
expected to be a persistent problem. We license our proprietary rights to third
parties, and these licensees may not abide by our compliance and quality control
guidelines or they may take actions that would materially adversely affect us.
In addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States, and effective
patent, copyright, trademark and trade secret protection may not be available in
these foreign jurisdictions. To date, we have not sought protection of our
proprietary rights in any foreign jurisdiction. Our efforts to protect our
intellectual property rights through patent, copyright, trademark and trade
secret laws may not be effective to prevent misappropriation of our technology,
or may not prevent the development and design by others of products or
technologies similar to or competitive with those developed by us. Our failure
or inability to protect our proprietary rights could harm our business.
AS WE EXPAND OUR OPERATIONS INTERNATIONALLY, WE WILL FACE SIGNIFICANT RISKS IN
DOING BUSINESS IN FOREIGN COUNTRIES.
As we expand our operations internationally, we will be subject to a number
of risks associated with international business activities, including:
- costs of customizing our products and services for foreign countries,
including localization, translation and conversion to international and
other foreign technology standards;
- compliance with multiple, conflicting and changing governmental laws and
regulations, including changes in regulatory requirements that may limit
our ability to sell our products and services in particular countries;
- import and export restrictions, tariffs and greater difficulty in
collecting accounts receivable; and
- foreign currency-related risks if a significant portion of our revenues
become denominated in foreign currencies.
FAILURE TO INCREASE OUR BRAND AWARENESS AMONG CONTENT OWNERS COULD LIMIT OUR
ABILITY TO COMPETE EFFECTIVELY.
We believe that establishing and maintaining a strong brand name is
important to the success of our business. Competitive pressures may require us
to increase our expenses to promote our brand name, and the benefits associated
with brand creation may not outweigh the risks and costs associated with brand
name establishment. Our failure to develop a strong brand name or the incurrence
of excessive costs associated with establishing our brand name, may harm our
business.
WE MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR MARKET,
AND POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE.
Although we have no current plans to do so, we may acquire other businesses
in the future in order to remain competitive or to acquire new technologies. As
a result of these acquisitions, we may need to integrate products, technologies,
widely dispersed operations and distinct corporate cultures. The products,
services or technologies of the acquired
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<PAGE> 16
companies may need to be altered or redesigned in order to be made compatible
with our software products and services, or the software architecture of our
customers. These integration efforts may not succeed or may distract our
management from operating our existing business. Our failure to successfully
manage future acquisitions could seriously harm our operating results. In
addition, our stockholders would be diluted if we finance the acquisitions by
incurring convertible debt or issuing equity securities.
RISKS RELATING TO THE INTERNET VIDEO INFRASTRUCTURE MARKETPLACE
COMPETITION AMONG INTERNET VIDEO INFRASTRUCTURE COMPANIES IS INTENSE. IF WE ARE
UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS WILL FAIL.
Competition among Internet video infrastructure companies seeking to
attract new customers is intense and we expect this intensity of competition to
increase in the future. Our competitors vary in size and in the scope and
breadth of the products and services they offer and may have significantly
greater financial, technical and marketing resources. Our current direct
competitors include Excalibur Technologies and MediaSite. We may also compete
indirectly with system integrators to the extent they may embed or integrate
competing technologies into their product offerings, and in the future we may
compete with video service providers and searchable video portals. In addition,
we may compete with our current and potential customers who may contemplate
developing software or performing application services internally. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which will cause our business to suffer.
IF BROADBAND TECHNOLOGY IS NOT ADOPTED OR DEPLOYED AS QUICKLY AS WE EXPECT,
DEMAND FOR OUR PRODUCTS AND SERVICES MAY NOT GROW AS QUICKLY AS ANTICIPATED.
Broadband technology such as digital subscriber lines, commonly referred to
as DSL, and cable modems, which allows video content to be transmitted over the
Internet more quickly than current technologies, has only recently been
developed and is just beginning to be deployed. The growth of our business
depends in part on the broad market acceptance of broadband technology. If the
market does not adopt broadband technology, or adopts it more slowly than we
anticipate, demand for our products and services may not grow as quickly as we
anticipate, which will harm our business.
We depend on the efforts of third parties to develop and provide the
technology for broadband transmission. Even if broadband access becomes widely
available, heavy use of the Internet may negatively impact the quality of media
delivered through broadband connections. If these third parties experience
delays or difficulties establishing the technology to support widespread
broadband transmission, or if heavy usage limits the broadband experience, the
market may not accept our products and services.
Because the anticipated growth of our business depends in part on broadband
transmission infrastructure, we are subject to a number of risks, including:
- changes in content delivery methods and protocols;
- the need for continued development by our customers of compelling content
that takes advantage of broadband access and helps drive market
acceptance of our products and services;
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<PAGE> 17
- the emergence of new competitors, including traditional broadcast and
cable television companies, which have significant control over access to
content, substantial resources and established relationships with media
providers;
- the development of relationships by our competitors with companies that
have significant access to or control over the broadband transmission
technology or content; and
- the need to establish new relationships with non-PC based providers of
broadband access, such as providers of television set-top boxes and cable
television.
GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT OUR GROWTH.
We are not currently subject to direct regulation by any government agency,
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries may apply to
our products. While there are currently few laws or regulations that
specifically regulate communications or commerce on the Internet, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted in the U.S. and abroad in the near future
with particular applicability to the Internet. It is possible that governments
will enact legislation that may be applicable to us in areas such as content,
network security, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. The
adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our services, increase the cost of doing business or otherwise hurt
our business.
RISKS RELATED TO THE OFFERING AND OTHER RISKS
OUR SECURITIES HAVE NO PRIOR MARKET AND OUR STOCK PRICE MAY DECLINE AFTER THIS
OFFERING.
Before this offering, there has not been a public market for our common
stock and the trading 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. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
An active trading market may not develop and you may not be able to resell
the shares you purchase at or above the initial public offering price, or at
all. The trading price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
- quarterly declines in operating results;
- changes in financial estimates or recommendations by securities analysts;
- announcements by us or our competitors of financial results, new
services, significant technological innovations, contracts, acquisitions,
strategic partnerships, joint ventures, capital commitments or other
events;
- stock market price and volume fluctuations, which are particularly common
among securities of Internet-related companies;
- changes in market valuation; and
- losses in key personnel.
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<PAGE> 18
In recent years the stock market in general, and the market for shares of
small capitalization and technology stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. There can be no assurance that the market
price of our common stock will not experience significant fluctuations in the
future, including fluctuations unrelated to our performance. Such fluctuations
could materially adversely affect the market price of our common stock.
In addition, in the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price of
its securities. This risk is especially acute for us because the extreme
volatility of market share prices of technology companies has resulted in a
greater number of securities class action claims than companies in other
industries. Due to the potential volatility of our stock price, we may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources.
WE RECENTLY SOLD SHARES OF CONVERTIBLE PREFERRED STOCK AT A SUBSTANTIAL DISCOUNT
TO THE INITIAL PUBLIC OFFERING PRICE AND IT IS UNCERTAIN WHETHER THE INITIAL
PUBLIC OFFERING PRICE WILL PREVAIL IN THE MARKET.
In September 1999 and December 1999, we sold an aggregate of 4,044,934
shares of series E convertible preferred stock, which will convert into common
stock at a 1-to-1 ratio upon the closing of this offering, at $4.92 per share, a
price well below the assumed initial public offering price of $11.00 per share
for our common stock. No current public market existed for our stock, and
therefore the initial public offering price for the shares of common stock was
determined by negotiations between us and the representatives of the
underwriters. We cannot assure you that the price that prevails in the market
will not be less than the initial public offering price, particularly in light
of our recent sales of securities at a lower price.
WE HAVE NO SPECIFIC PLAN FOR ANY SIGNIFICANT PORTION OF THE NET PROCEEDS AND OUR
INVESTMENT OF THE NET PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
We plan to use the proceeds from this offering for working capital and
other general corporate purposes. We may use the proceeds in ways with which you
do not agree or that prove to be disadvantageous to our stockholders. We may not
be able to invest the proceeds of this offering in our operations or external
investments to yield a favorable return.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH IF AVAILABLE, MAY
NOT BE AVAILABLE ON FAVORABLE TERMS, AND WHICH MAY CAUSE DILUTION.
We may need to seek additional funding in the future. We do not know if we
will be able to obtain additional financing on favorable terms, if at all. If we
cannot raise funds on acceptable terms, if and when needed, we may not be able
to develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business. In addition, if we issue equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of existing holders of
common stock.
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<PAGE> 19
AFTER THIS OFFERING WE WILL CONTINUE TO BE CONTROLLED BY OUR EXECUTIVE OFFICERS,
DIRECTORS AND MAJOR STOCKHOLDERS WHOSE INTERESTS MAY CONFLICT WITH YOURS.
Upon completion of this offering, our executive officers, directors and
major stockholders will beneficially own approximately 51.4% of our outstanding
common stock. As a result, these stockholders will be able to exercise control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions, which could have
the effect of delaying or preventing a third party from acquiring control over
or merging with us. We also plan to reserve up to 10% of the shares offered in
this offering under a directed share program in which our executive officers,
directors, principal stockholders, employees, business associates and related
persons may be able to purchase shares in this offering at the initial public
offering price. This program may further increase the amount of stock held by
persons whose interests are closely aligned with management's interests.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. In addition, provisions of Delaware law may discourage, delay or
prevent someone from acquiring or merging with us. These provisions could limit
the price that investors might be willing to pay in the future for shares of our
common stock. For more information, see "Description of Capital Stock."
THERE ARE A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that sales may be made, could
cause the market price of our common stock to decline. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional equity securities. Based on shares outstanding as of February 29,
2000, following this offering, we will have 23,026,512 shares of common stock
outstanding or 23,551,512 shares if the underwriters' over-allotment is
exercised in full. Of these, 61,924 shares will be available for sale
immediately and another 16,419,982 shares will become available for sale 180
days following the date of this prospectus upon the expiration of lock-up
agreements, subject to the restrictions imposed by the federal securities laws
on sales by affiliates. Credit Suisse First Boston Corporation, however, may
waive these lock-up restrictions at its sole discretion without notice.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary, Risk Factors, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Business and elsewhere in this prospectus constitute forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as may,
will, should, expect, plan, intend, forecast, anticipate, believe, estimate,
predict, potential, continue or the negative of these terms or other comparable
terminology. The forward-looking statements contained in this prospectus involve
known and unknown risks, uncertainties and situations that may cause our or our
industry's actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These factors include
those listed under "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,500,000 shares of
common stock we are offering will be approximately $34.2 million, at an assumed
initial public offering price of $11.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $39.6 million. In addition, the net proceeds
expected to be received by us from the sale of a total of 1,727,270 shares of
common stock in a private placement to Akamai Technologies, CNET, RealNetworks
and Thomson Consumer Electronics at an assumed private placement price of $11.00
per share and the cash exercise of a warrant to purchase 181,818 shares of
common stock at a weighted-average exercise price of $11.00 per share are
estimated to be approximately $21.0 million.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock, to enhance our ability to
acquire other businesses, products or technologies, to invest in additional
research and development to expand sales and marketing initiatives, expand our
Virage Interactive services, and to facilitate future access to public equity
markets. We intend to use the proceeds for working capital, capital expenditures
and other general corporate purposes. We currently have no commitments or
agreements with respect to any acquisitions. Pending our use of the net
proceeds, we intend to invest them in cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all of our future earnings for use in
the development and expansion of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon our financial
condition, operating results and other factors as determined by our board of
directors. Additionally, we have entered into a loan agreement with a creditor
that restricts our ability to pay dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on the following three bases:
- On an actual basis;
- On a pro forma basis to reflect (1) the conversion of all outstanding
shares of our redeemable convertible preferred stock into 13,754,934
shares of common stock effective automatically upon the closing of this
offering, and (2) the cash exercise of warrants to purchase 125,986
shares of common stock at a weighted-average exercise price of $4.92 per
share; and
- On a pro forma as adjusted basis to reflect (1) the sale of 3,500,000
shares of common stock in this offering at an assumed initial public
offering price of $11.00 per share and the application of the net
proceeds, after deducting underwriting discounts and commissions and
estimated offering expenses, (2) the conversion of all outstanding shares
of our convertible preferred stock into 13,754,934 shares of common stock
effective automatically upon the closing of this offering, (3) the cash
exercise of warrants to purchase 125,986 shares of common stock at a
weighted-average exercise price of $4.92 per share, (4) the cash exercise
of a warrant that is expected to be issued concurrently with the closing
of this offering to purchase 181,818 shares of common stock at an assumed
exercise price of $11.00 per share, and (5) the sale of a total of
1,727,270 shares of common stock that is expected to be sold in a private
placement concurrent with the closing of this offering to Akamai
Technologies, CNET, RealNetworks and Thomson Consumer Electronics at an
assumed private placement price of $11.00 per share.
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This table should be read in conjunction with our consolidated financial
statements and the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term portion of borrowings under bank
equipment term loans............................ $ 115 $ 115 $ 115
Redeemable convertible preferred stock, $0.001 par
value, 14,728,269 shares authorized, 13,754,934
shares issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma or
pro forma as adjusted........................... 36,995 -- --
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value, no shares
authorized, issued or outstanding, actual;
2,000,000 shares authorized, no shares issued
or outstanding, pro forma and pro forma as
adjusted...................................... -- -- --
Common stock, $0.001 par value, 26,666,666
shares authorized, 3,736,504 shares issued and
outstanding, actual; 100,000,000 shares
authorized, 17,617,424 shares issued and
outstanding, pro forma; 100,000,000 shares
authorized, 23,026,512 shares issued and
outstanding, pro forma as adjusted............ 4 18 23
Additional paid-in capital...................... 16,739 54,340 109,540
Deferred compensation........................... (9,505) (9,505) (9,505)
Accumulated deficit............................. (26,033) (26,033) (26,033)
-------- -------- ---------
Total stockholders' equity (net capital
deficiency)................................ (18,795) 18,820 74,025
-------- -------- ---------
Total capitalization..................... $ 18,315 $ 18,935 $ 74,140
======== ======== =========
</TABLE>
The table excludes the following shares:
- 4,106,513 shares of common stock issuable upon exercise of outstanding
stock options under our equity incentive plans as of December 31, 1999 at
a weighted-average exercise price of $1.9695;
- 3,958,843 shares of common stock reserved and available for issuance
under our equity incentive plans as of December 31, 1999;
- 1,100,000 shares of common stock authorized for our 2000 employee stock
purchase plan in March 2000; and
- 42,648 shares of common stock subject to warrants at a weighted-average
exercise price of $0.9375.
22
<PAGE> 24
DILUTION
If you invest in our common stock, your interest will be diluted in an
amount equal to the difference between:
- the initial public offering price per share of our common stock; and
- the pro forma net tangible book value per share of our common stock after
this offering.
The pro forma net tangible book value per share after this offering equals:
- the net tangible book value, which is tangible assets less total
liabilities after giving effect to the assumed cash exercise of warrants
to purchase 125,986 shares of common stock at a weighted-average exercise
price of $4.92 per share, divided by
- the number of outstanding shares of common stock after the offering,
which will include 13,754,934 shares of common stock from the conversion
of preferred stock upon consummation of this offering and the cash
exercise of warrants to purchase 125,986 shares of common stock at a
weighted-average exercise price of $4.92 per share.
Our pro forma net tangible book value as of December 31, 1999 was
approximately $17.9 million or $1.01 per share of common stock.
The pro forma as adjusted net tangible book value per share takes into
account the foregoing and the following:
- the estimated net proceeds from this offering based upon an assumed
initial public offering price of $11.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses;
- the cash exercise of a warrant that is expected to be issued concurrently
with the closing of this offering to purchase 181,818 shares of common
stock at an assumed exercise price of $11.00 per share; and
- the sale of a total of 1,727,270 shares of common stock that is expected
to be sold in a private placement concurrent with the closing of this
offering to Akamai Technologies, CNET, RealNetworks and Thomson Consumer
Electronics at an assumed private placement price of $11.00 per share.
Our pro forma as adjusted net tangible book value as of December 31, 1999
would have been approximately $73.1 million, or $3.17 per share of common stock.
This represents an immediate increase in pro forma as adjusted net tangible book
value of $2.16 per share to existing stockholders and an immediate dilution of
$7.83 per share to investors purchasing common stock in this offering. The
following table illustrates the 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 December
31, 1999............................................... $1.01
Increase per share attributable to new investors.......... 2.16
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 3.17
------
Dilution per share to new investors......................... $ 7.83
======
</TABLE>
23
<PAGE> 25
The following table summarizes as of December 31, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders, by investors purchasing shares of common stock in this offering,
before deducting the estimated underwriting discounts and commissions and
estimated offering expenses, by investors in a private placement expected to
occur concurrently with this offering and by a warrantholder that is expected to
be exercised concurrently with this offering. Additionally, as detailed below,
new investors purchasing shares in this offering at the initial public offering
price will contribute 39% of the total consideration paid to us but will own
only 15% of our shares.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
----------- ------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 17,617,424 77% $38,863,218 40% $ 2.21
New investors............. 3,500,000 15% 38,500,000 39% 11.00
Private placement
investors............... 1,727,270 7% 18,999,970 19% 11.00
Warrantholder............. 181,818 1% 1,999,998 2% 11.00
----------- --- ----------- ---
Total................... 23,026,512 100% $98,363,186 100%
=========== === =========== ===
</TABLE>
Except as noted above, the foregoing discussion and tables assume no
exercise of any stock options or warrants outstanding at December 31, 1999. As
of December 31, 1999, there were options outstanding to purchase 4,106,513
shares of common stock at a weighted average exercise price of $1.97 and
warrants to purchase 42,648 shares of common stock at a weighted average
exercise price of $0.9375. In addition, 1,100,000 shares of common stock were
authorized for our 2000 employee stock purchase plan in March 2000. To the
extent that any of these options are exercised or shares are issued, there will
be further dilution to investors purchasing our common stock.
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and the
Notes thereto included elsewhere in this prospectus. The consolidated statements
of operations data for the fiscal years ended March 31, 1997, 1998 and 1999 and
for the nine months ended December 31, 1999 and the consolidated balance sheet
data at March 31, 1998 and 1999 and at December 31, 1999 are derived from, and
are qualified by reference to, the audited Consolidated Financial Statements and
Notes thereto appearing elsewhere in this prospectus. The statement of
operations data for the fiscal years ended March 31, 1995 and 1996 and the
balance sheet data as of March 31, 1995, 1996 and 1997 are derived from, and are
qualified by reference to, financial statements not appearing in this
prospectus. The consolidated statement of operations data for the nine months
ended December 31, 1998 is unaudited. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited nine months results when read in
conjunction with the audited Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this prospectus. Historical results are not
necessarily indicative of results that may be expected for any future period.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License revenues.......................... $ -- $ 35 $ 376 $ 1,438 $ 1,956 $ 1,303 $ 3,144
Service revenues.......................... -- -- 43 130 253 155 578
Other revenues............................ -- 64 1,026 1,134 1,141 865 165
------- ------- ------- ------- ------- ------- --------
Total revenues..................... -- 99 1,445 2,702 3,350 2,323 3,887
Cost of revenues:
License revenues.......................... -- -- -- 454 397 287 686
Service revenues.......................... -- -- 22 62 426 292 1,196
Other revenues............................ -- 38 584 809 859 657 172
------- ------- ------- ------- ------- ------- --------
Total cost of revenues............. -- 38 606 1,325 1,682 1,236 2,054
Gross profit................................ -- 61 839 1,377 1,668 1,087 1,833
Operating expenses:
Research and development.................. 401 969 758 1,751 2,325 1,700 2,654
Sales and marketing....................... 65 210 1,020 2,810 4,362 3,058 5,095
General and administrative................ 85 428 694 935 1,273 820 1,566
Stock-based compensation.................. -- -- -- -- -- -- 313
------- ------- ------- ------- ------- ------- --------
Total operating expenses........... 551 1,607 2,472 5,496 7,960 5,578 9,628
Loss from operations........................ (551) (1,546) (1,633) (4,119) (6,292) (4,491) (7,795)
Interest and other income, net.............. 9 78 34 19 122 113 223
------- ------- ------- ------- ------- ------- --------
Loss before income taxes.................... (542) (1,468) (1,599) (4,100) (6,170) (4,378) (7,572)
Provision for income taxes.................. (1) (1) -- -- -- -- (36)
------- ------- ------- ------- ------- ------- --------
Net loss.................................... (543) (1,469) (1,599) (4,100) (6,170) (4,378) (7,608)
Series E convertible preferred stock
dividend.................................. -- -- -- -- -- -- (4,544)
------- ------- ------- ------- ------- ------- --------
Net loss applicable to common
stockholders.............................. $ (543) $(1,469) $(1,599) $(4,100) $(6,170) $(4,378) $(12,152)
======= ======= ======= ======= ======= ======= ========
Basic and diluted net loss per share
applicable to common stockholders......... $ (0.32) $ (0.84) $ (1.07) $ (2.13) $ (2.76) $ (2.04) $ (4.27)
======= ======= ======= ======= ======= ======= ========
Shares used in computation of basic and
diluted net loss per share applicable to
common stockholders....................... 1,707 1,748 1,488 1,924 2,239 2,145 2,849
Pro forma basic and diluted net loss per
share applicable to common stockholders... $ (0.60) $ (0.88)
======= ========
Shares used to compute pro forma basic and
diluted net loss per share applicable to
common stockholders....................... 10,315 13,767
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999 1999
----- ------- ------- ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents...................... $ 1 $ 774 $ 2,387 $ 5,780 $ 4,357 $ 16,362
Working capital (deficit)...................... (298) 643 2,273 4,723 3,879 15,956
Total assets................................... 114 1,228 3,418 7,289 6,605 21,718
Long-term obligations, net of current
portion...................................... -- 46 163 311 241 115
Redeemable convertible preferred stock......... -- 2,449 5,823 12,472 17,936 36,995
Accumulated deficit............................ (543) (2,013) (3,612) (7,712) (13,881) (26,033)
Total stockholders' equity (net capital
deficiency).................................. (186) (1,642) (3,224) (7,257) (13,326) (18,795)
</TABLE>
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. In addition to historical information,
the discussion in this prospectus contains certain forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated by these forward-looking statements due to factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Virage is a leading provider of software products and application services
that enable owners of video content to catalog, manage and distribute their
video assets over the Internet and corporate intranets. Depending on their
particular needs and resources, these video content owners may elect either to
license our software products or to subscribe to our application services. Our
customers include media and entertainment companies, other corporations,
government agencies and educational institutions. As of December 31, 1999, over
100 customers had purchased our software products or application services.
During the period from our inception in April 1994 through February 1996,
we were a development stage enterprise and had no revenues. Our operating
activities during this period related primarily to developing products, building
our corporate operations and raising capital. In November 1995, we released our
first version of software for still image search. In December 1997, we started
shipping VideoLogger, the first of our video and audio indexing products. To
date, we have derived substantially all of our revenues from these product lines
and related services. In May 1999, we launched Virage Interactive services, an
application services offering which allows our customers to outsource the
deployment, management and distribution of their video content over the Internet
and intranets.
REVENUE RECOGNITION
We enter into arrangements for the sale of licenses of software products
and related maintenance contracts and Virage Interactive service offerings; and
we receive revenues under U.S. government agency research grants. Service
revenues include revenues from maintenance contracts and Virage Interactive
services. Other revenues are primarily U.S. government agency research grants.
Our revenue recognition policy is in accordance with Statement of Position
No. 97-2, or SOP 97-2, "Software Revenue Recognition", as amended by Statement
of Position No. 98-4, "Referral of the Effective Date of SOP 97-2, "Software
Revenue Recognition", or SOP 98-4, and Statement of Position No. 98-9,
"Modification of SOP No. 97-2 with Respect to Certain Transactions" or SOP 98-9.
For each arrangement, we determine whether evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collection is
probable. If any of these criteria are not met, revenue recognition is deferred
until such time as all of the criteria are met. We consider all arrangements
with payment terms extending beyond twelve months and other arrangements with
payment terms longer than normal not to be fixed or determinable. If
collectibility is not considered probable, revenue is recognized when the fee is
collected. No customer has the right of return.
26
<PAGE> 28
Arrangements consisting of license and maintenance only. For those
contracts that consist solely of license and maintenance, we recognize license
revenue based upon the residual method after all elements other than maintenance
have been delivered as prescribed by SOP 98-9. We recognize maintenance revenues
over the term of the maintenance contract as vendor specific objective evidence
of fair value for maintenance exists. In accordance with paragraph 10 of SOP
97-2, vendor specific objective evidence of fair value of maintenance is
determined by reference to the price the customer will be required to pay when
it is sold separately, that is, the renewal rate. Each license agreement offers
additional maintenance renewal periods at a stated price. Maintenance contracts
are typically one year in duration. Revenue is recognized on software that is
licensed on a per copy basis when each copy of the license requested by the
customer is delivered. Revenue is recognized on software that is licensed on a
per user or per server basis for a fixed fee when the product master is
delivered to the customer. There is no right of return or price protection for
sales to domestic and international distributors, system integrators and value
added resellers which are collectively referred to as resellers. In situations
where the reseller has a purchase order from the end user that is immediately
deliverable, we recognize revenue on shipment to the reseller, if other criteria
in SOP 97-2 are met, since we have no risk of concessions. We recognize royalty
revenues upon receipt of the quarterly reports from the vendors.
Virage Interactive services. Virage Interactive services revenues consist
of set-up fees, video processing fees and transaction fees. Set-up fees are
recognized ratably over the contract term, which is generally six to 18 months.
We generate video processing fees for each hour of video that a customer
deploys. Processing fees are recognized as encoding, indexing and editorial
services are performed and are based upon hourly rates per hour of video
content. We generate transaction fees with each video query on a customer's
site. Transaction fees are based on the number of video queries processed,
subject in some cases to monthly minimums and maximums. We recognize revenue on
transaction fees that are subject to monthly minimums based on the greater of
actual transaction fees or the monthly minimum, and monthly maximums based on
the lesser of actual transaction fees or the monthly maximum, since we have no
further obligations, the payment terms are normal and each month is a separate
measurement period.
Other revenues. Other revenues consist primarily of U.S. government agency
research grants that are best effort arrangements. The software-development
arrangements are within the scope of the FASB's Statement of Financial
Accounting Standards No. 68, "Research and Development Arrangements". As the
financial risks associated with the software-development arrangement rests
solely with the U.S. government agency, we are recognizing revenues as the
services are performed. The cost of these services are included in cost of other
revenues. Our contractual obligation is to provide the required level of effort
(hours), technical reports, and funds and man-hour expenditure reports.
Over 95% of cost of license revenues consists of royalty fees for
third-party software products integrated into our products. Our cost of service
revenues includes personnel expenses, related overhead, communication expenses
and capital depreciation costs for maintenance and support activities and Virage
Interactive services. Our cost of other revenues includes engineering personnel
expenses and related overhead for custom engineering and government projects.
We incurred net losses of approximately $1.6 million in fiscal 1997, $4.1
million in fiscal 1998, $6.2 million in fiscal 1999 and $7.6 million in the nine
months ended December 31, 1999. In addition, during the nine months ended
December 31, 1999, we
27
<PAGE> 29
recorded a $4.5 million dividend to the 28 accredited investors who purchased
our series E preferred stock in December 1999. This dividend represents the
difference between the purchase price and the deemed fair value of those shares
at the time of issuance. This deemed dividend brought the net loss applicable to
common stockholders for that period to $12.2 million. As of December 31, 1999,
we had an accumulated deficit of $26.0 million. We expect to continue to incur
operating losses for the foreseeable future. In view of the rapidly changing
nature of our market and our limited operating history, we believe that
period-to-period comparisons of our revenues and other operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Our historic revenue growth rates are not necessarily sustainable
or indicative of our future growth.
RESULTS OF OPERATIONS
The following table sets forth consolidated financial data for the periods
indicated, expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED ENDED
MARCH 31, DECEMBER 31,
-------------------- ------------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
License revenues...................... 26% 53% 58% 56% 81%
Service revenues...................... 3 5 8 7 15
Other revenues........................ 71 42 34 37 4
---- ---- ---- ---- ----
Total revenues................ 100 100 100 100 100
---- ---- ---- ---- ----
Cost of revenues:
License revenues...................... -- 17 12 12 18
Service revenues...................... 2 2 13 13 31
Other revenues........................ 40 30 26 28 4
---- ---- ---- ---- ----
Total cost of revenues........ 42 49 51 53 53
---- ---- ---- ---- ----
Gross profit............................ 58 51 49 47 47
Operating expenses:
Research and development.............. 52 65 69 73 69
Sales and marketing................... 71 104 130 132 131
General and administrative............ 48 35 38 35 40
Stock-based compensation.............. -- -- -- -- 8
---- ---- ---- ---- ----
Total operating expenses...... 171 204 237 240 248
---- ---- ---- ---- ----
Loss from operations.................... (113) (153) (188) (193) (201)
Interest and other income, net.......... 2 1 4 5 6
---- ---- ---- ---- ----
Loss before income taxes................ (111) (152) (184) (188) (195)
Provision for income taxes.............. -- -- -- -- (1)
---- ---- ---- ---- ----
Net loss................................ (111) (152) (184) (188) (196)
Series E convertible preferred stock
dividend.............................. -- -- -- -- (117)
---- ---- ---- ---- ----
Net loss applicable to common
stockholders.......................... (111)% (152)% (184)% (188)% (313)%
==== ==== ==== ==== ====
</TABLE>
28
<PAGE> 30
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999
Total Revenues. Total revenues increased from $2.3 million for the nine
months ended December 31, 1998 to $3.9 million for the nine months ended
December 31, 1999, an increase of $1.6 million. This increase was due to
increases in license and service revenues, offset by a decrease in other
revenues. International revenues increased from $253,000, or 11% of total
revenues, for the nine months ended December 31, 1998 to $1.0 million, or 27% of
total revenues, for the nine months ended December 31, 1999. Sales to our two
largest customers accounted for 17% and 13%, respectively, of total revenues for
the nine months ended December 31, 1998. In addition, sales to our two largest
customers accounted for 16% and 15%, respectively, of total revenues for the
nine months ended December 31, 1999. Sales to agencies of the U.S. government
accounted for 43% of total revenues for the nine months ended December 31, 1998
and 22% of total revenues for the comparable period in 1999. Sales of licenses
and services to agencies of the U.S. government, excluding other revenues,
accounted for 17% of total revenues for the nine months ended December 31, 1998
and 20% of total revenues for the comparable period in 1999.
License revenues increased from $1.3 million for the nine months ended
December 31, 1998 to $3.1 million for the nine months ended December 31, 1999,
an increase of $1.8 million. The increase was primarily due to the introduction
of new product lines, expansion of our domestic sales and marketing operations,
and the opening of a European sales office in November 1998.
Service revenues increased from $155,000 for the nine months ended December
31, 1998 to $578,000 for the nine months ended December 31, 1999, an increase of
$423,000. Approximately 60% of this growth was due to an increase in the number
of customers purchasing maintenance contracts, while the remainder was due to
the introduction of our Virage Interactive services in May 1999.
Other revenues decreased from $865,000 for the nine months ended December
31, 1998 to $165,000 for the nine months ended December 31, 1999, a decrease of
$700,000. Approximately two-thirds of this decrease was due to a decline in
government research grants and contract work, while the remainder was due to a
decline in the amount of engineering services we provided to customers.
Total Cost of Revenues. Total cost of revenues increased from $1.2 million,
or 53% of total revenues, for the nine months ended December 31, 1998 to $2.1
million, or 53% of total revenues, for the nine months ended December 31, 1999.
This increase in total cost of revenues was due to increases in cost of license
and service revenues, offset by a decrease in cost of other revenues.
Cost of license revenues increased from $287,000, or 22% of license
revenues, for the nine months ended December 31, 1998 to $686,000, or 22% of
license revenues, for the nine months ended December 31, 1999. This increase in
absolute dollars was due to royalty payments for new licensed technologies which
first became payable by us during the nine months ended December 31, 1999.
Cost of service revenues increased from $292,000, or 189% of service
revenues, for the nine months ended December 31, 1998 to $1.2 million, or 207%
of service revenues for the nine months ended December 31, 1999. Over 90% of
this increase was due to expenditures for Virage Interactive services, while the
remainder was due to increased support costs for a larger base of maintenance
customers. We expect the cost of service revenues to increase
29
<PAGE> 31
substantially, and margins on our service revenues to remain negative for the
foreseeable future as we expand our Virage Interactive services and worldwide
support capabilities.
Cost of other revenues decreased from $657,000, or 76% of other revenues,
for the nine months ended December 31, 1998 to $172,000, or 104% of other
revenues, for the nine months ended December 31, 1999. This decrease was due to
a reduction in other revenues.
Research and Development Expenses. Research and development expenses
consist primarily of personnel and related costs for our development efforts.
Research and development expenses increased from $1.7 million, or 73% of total
revenues, for the nine months ended December 31, 1998 to $2.7 million, or 69% of
total revenues, for the nine months ended December 31, 1999. The increase in
absolute dollars was due to an increase in our research and development staff
from 25 at December 31, 1998 to 43 at December 31, 1999. We expect research and
development expenses to increase substantially for the foreseeable future as we
believe that significant product development expenditures are essential for us
to maintain and enhance our market position. To date, we have not capitalized
any software development costs.
Sales and Marketing Expenses. Sales and marketing expenses consist of
personnel and related costs for our direct sales force, pre-sales support and
marketing staff, and marketing programs including trade shows and advertising.
Sales and marketing expenses increased from $3.1 million, or 132% of total
revenues, for the nine months ended December 31, 1998 to $5.1 million, or 131%
of total revenues, for the nine months ended December 31, 1999. Approximately
half of this increase in absolute dollars was due to growth in our sales and
marketing personnel, which increased from 21 at December 31, 1998 to 37 at
December 31, 1999, while the remainder was due to increased expenses incurred in
connection with trade shows and additional marketing programs. The increase in
our sales and marketing staff related to the opening of new sales offices in the
United States, a new sales office in Europe, and the launch of Virage
Interactive services. We expect sales and marketing expenses to increase
substantially for the foreseeable future as we hire additional sales and
marketing personnel, increase spending on advertising and marketing programs,
and expand our operations in North America and internationally.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, legal and human resources, facilities
and information system expenses not allocated to other departments, as well as
the costs of our external audit firm and our outside legal counsel. General and
administrative expenses increased from $820,000, or 35% of total revenues, for
the nine months ended December 31, 1998 to $1.6 million, or 40% of total
revenues, for the nine months ended December 31, 1999. Approximately 70% of this
increase was due to an increase in headcount, while the remainder was due to
increased external legal and audit costs. General and administrative headcount
increased from 8 at December 31, 1998 to 12 at December 31, 1999. We expect
general and administrative expenses to increase substantially for the
foreseeable future as we hire additional general and administrative personnel
and enhance our information systems to support our expected growth.
Stock-Based Compensation Expense. We recognized stock-based compensation
expense of $313,000 for the nine months ended December 31, 1999, in connection
with the granting of stock options to our employees. We did not recognize any
stock-based compensation expense for the nine months ended December 31, 1998.
Future compensa-
30
<PAGE> 32
tion expense from options granted to employees through February 17, 2000, is
estimated to be approximately $752,000 for the fourth quarter of fiscal 2000,
$3.0 million for fiscal 2001, and $3.0 million for fiscal 2002.
Interest and Other Income, Net. Interest and other income, net, includes
interest income from cash and cash equivalents offset by interest on capital
leases and bank debt. Interest and other income, net, increased from $113,000
for the nine months ended December 31, 1998 to $223,000 for the nine months
ended December 31, 1999, an increase of $110,000. The increase was due to
interest income from increased cash balances.
Provision for Income Taxes. We have not recorded a provision for federal
and state or foreign income taxes, except for immaterial current foreign and
state income taxes, because we have experienced net losses since inception which
have resulted in deferred tax assets. We have recorded a valuation allowance for
the entire deferred tax asset as a result of uncertainties regarding the
realization of the asset balance through future taxable profits.
FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Total Revenues. Total revenues increased from $1.4 million in fiscal 1997,
to $2.7 million in fiscal 1998, and to $3.4 million in fiscal 1999, representing
increases of $1.3 million from fiscal 1997 to fiscal 1998, and $648,000 from
fiscal 1998 to fiscal 1999. License revenues, as a percentage of total revenues,
increased from 26% in fiscal 1997, to 53% in fiscal 1998, and to 58% in fiscal
1999. Service revenues, as a percentage of total revenues, increased from 3% in
fiscal 1997, to 5% in fiscal 1998, and to 8% in fiscal 1999. Other revenues, as
a percentage of total revenues, decreased from 71% in fiscal 1997, to 42% in
fiscal 1998, and to 34% in fiscal 1999.
License revenues increased from $376,000 in fiscal 1997, to $1.4 million in
fiscal 1998, and to $2.0 million in fiscal 1999, representing increases of $1.1
million from fiscal 1997 to fiscal 1998, and $518,000 from fiscal 1998 to fiscal
1999. The increases in license revenues were due primarily to new product
introductions, increased sales and marketing activities, and increased market
acceptance of our products.
Service revenues increased from $43,000 in fiscal 1997, to $130,000 in
fiscal 1998, and to $253,000 in fiscal 1999, representing increases of $87,000
from fiscal 1997 to fiscal 1998, and $123,000 from fiscal 1998 to fiscal 1999.
The increases were due to a rise in the number of customers purchasing
maintenance and support contracts.
Other revenues increased slightly from $1.0 million in fiscal 1997 to $1.1
million in fiscal 1998, and to $1.1 million in fiscal 1999, representing
increases of $108,000 from fiscal 1997 to fiscal 1998, and $7,000 from fiscal
1998 to fiscal 1999.
Total Cost of Revenues. Total cost of revenues increased from $606,000 in
fiscal 1997, to $1.3 million in fiscal 1998, and to $1.7 million in fiscal 1999.
The total cost of revenues, as a percentage of total revenues, was 42% in fiscal
1997, 49% in fiscal 1998, and 51% in fiscal 1999.
Cost of license revenues changed from $454,000 in fiscal 1998 to $397,000
in fiscal 1999. The cost of license revenues, as a percentage of license
revenues, was 32% in fiscal 1998 and 20% in fiscal 1999. We began licensing
third party technologies in fiscal 1998.
31
<PAGE> 33
Cost of service revenues increased from $22,000 in fiscal 1997, to $62,000
in fiscal 1998, and to $426,000 in fiscal 1999. The cost of service revenues, as
a percentage of service revenues, was 50% in fiscal 1997, 48% in fiscal 1998,
and 168% in fiscal 1999. The increase in cost of service revenues from fiscal
1998 to fiscal 1999 was due to the establishment of an organization to provide
support to our customers 24 hours a day, seven days a week.
Cost of other revenues increased from $584,000 in fiscal 1997, to $809,000
in fiscal 1998, and to $859,000 in fiscal 1999. Cost of other revenues, as a
percentage of other revenues, was 57% in fiscal 1997, 71% in fiscal 1998 and 75%
in fiscal 1999.
Research and Development Expenses. Research and development expenses
increased from $758,000 in fiscal 1997, to $1.8 million in fiscal 1998, and to
$2.3 million in fiscal 1999. Research and development expenses, as a percentage
of total revenues, were 52% in fiscal 1997, 65% in fiscal 1998, and 69% in
fiscal 1999. The increases were due almost entirely to increased personnel for
new product introductions and enhancements and new versions of existing
products. Our research and development related headcount was 14 at March 31,
1997, 25 at March 31, 1998, and 26 at March 31, 1999, while contractors employed
in research and development totaled 1 at March 31, 1997, 4 at March 31, 1998 and
7 at March 31, 1999.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$1.0 million in fiscal 1997, to $2.8 million in fiscal 1998, and to $4.4 million
in fiscal 1999. Sales and marketing expenses, as a percentage of total revenues,
were 71% in fiscal 1997, 104% in fiscal 1998, and 130% in fiscal 1999.
Approximately two-thirds of the increases in both fiscal years were due to
increases in marketing spending for trade shows, promotional events, lead
generation and other marketing related programs, while the remainder was due to
increased personnel. Our sales and marketing headcount was 9 at March 31, 1997,
18 at March 31, 1998, and 26 at March 31, 1999.
General and Administrative Expenses. General and administrative expenses
increased from $694,000 in fiscal 1997, to $935,000 in fiscal 1998, and to $1.3
million in fiscal 1999. General and administrative expenses, as a percentage of
total revenues, were 48% for fiscal 1997, 35% for fiscal 1998, and 38% for
fiscal 1999. The dollar increases in each year were about one-half attributable
to increased staff and one-half attributable to increased legal and audit costs.
Our general and administrative headcount was 3 at March 31, 1997, 4 at March 31,
1998, and 8 at March 31, 1999.
Interest and Other Income, Net. Interest and other income, net was $34,000
in fiscal 1997, $19,000 in fiscal 1998 and $122,000 in fiscal 1999, reflecting
an increase in average cash balances in all fiscal years, offset in part in
fiscal 1998 by increased interest expense from higher average debt balances.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the seven
quarters in the period ended December 31, 1999. The information for each of
these quarters is unaudited and has been prepared on the same basis as the
audited consolidated financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results. You should read this section in conjunction with
our audited consolidated financial statements and notes thereto, appearing
elsewhere in this prospectus. Our quarterly results have in the past been, and
may in the future be, subject to significant fluctuations. As a result, we
believe that results of operations for interim periods should not be relied upon
as any indication of the results to be expected in any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
License revenues............. $ 386 $ 417 $ 500 $ 653 $ 1,009 $ 951 $ 1,184
Service revenues............. 37 56 62 98 88 199 291
Other revenues............... 277 428 160 276 61 31 73
------- ------- ------- ------- ------- ------- -------
Total revenues............. 700 901 722 1,027 1,158 1,181 1,548
------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License revenues............. 75 101 111 110 177 188 321
Service revenues............. 86 107 99 134 161 327 708
Other revenues............... 254 251 152 202 42 56 74
------- ------- ------- ------- ------- ------- -------
Total cost of revenues..... 415 459 362 446 380 571 1,103
------- ------- ------- ------- ------- ------- -------
Gross profit................... 285 442 360 581 778 610 445
Operating expenses:
Research and development..... 517 542 641 625 750 790 1,114
Sales and marketing.......... 1,042 949 1,067 1,304 1,814 1,375 1,906
General and administrative... 232 289 299 453 437 535 594
Stock-based compensation..... -- -- -- -- 41 53 219
------- ------- ------- ------- ------- ------- -------
Total operating expenses... 1,791 1,780 2,007 2,382 3,042 2,753 3,833
Loss from operations........... (1,506) (1,338) (1,647) (1,801) (2,264) (2,143) (3,388)
Interest and other income,
net.......................... 60 37 16 9 32 13 178
------- ------- ------- ------- ------- ------- -------
Loss before income taxes....... (1,446) (1,301) (1,631) (1,792) (2,232) (2,130) (3,210)
Provision for income taxes..... -- -- -- -- -- -- (36)
------- ------- ------- ------- ------- ------- -------
Net loss....................... (1,446) (1,301) (1,631) (1,792) (2,232) (2,130) (3,246)
Series E convertible preferred
stock dividend............... -- -- -- -- -- -- (4,544)
------- ------- ------- ------- ------- ------- -------
Net loss applicable to common
stockholders................. $(1,446) $(1,301) $(1,631) $(1,792) $(2,232) $(2,130) $(7,790)
======= ======= ======= ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues:
License revenues............. 55% 46% 70% 63% 87% 80% 76%
Service revenues............. 5 6 8 10 8 17 19
Other revenues............... 40 48 22 27 5 3 5
---- ---- ---- ---- ---- ---- ----
Total revenues............. 100 100 100 100 100 100 100
---- ---- ---- ---- ---- ---- ----
Cost of revenues:
License revenues............. 11 11 15 11 15 16 21
Service revenues............. 12 12 14 13 14 28 46
Other revenues............... 36 28 21 20 4 5 5
---- ---- ---- ---- ---- ---- ----
Total cost of revenues..... 59 51 50 44 33 49 72
---- ---- ---- ---- ---- ---- ----
Gross profit................... 41 49 50 56 67 51 28
Operating expenses:
Research and development..... 74 60 89 61 65 67 72
Sales and marketing.......... 149 105 148 127 157 116 123
General and administrative... 33 32 41 44 38 45 38
Stock-based compensation..... -- -- -- -- 3 4 14
---- ---- ---- ---- ---- ---- ----
Total operating expenses... 256 197 278 232 263 232 247
Loss from operations........... (215) (148) (228) (176) (196) (181) (219)
Interest and other income,
net.......................... 8 4 2 1 3 1 11
---- ---- ---- ---- ---- ---- ----
Loss before income taxes....... (207) (144) (226) (175) (193) (180) (208)
Provision for income taxes..... -- -- -- -- -- -- (2)
---- ---- ---- ---- ---- ---- ----
Net loss....................... (207) (144) (226) (175) (193) (180) (210)
Series E convertible preferred
stock dividend............... -- -- -- -- -- -- (293)
---- ---- ---- ---- ---- ---- ----
Net loss applicable to common
stockholders................. (207)% (144)% (226)% (175)% (193)% (180)% (503)%
==== ==== ==== ==== ==== ==== ====
</TABLE>
Total revenues have increased in each consecutive quarter presented,
exclusive of the quarter ended December 31, 1998, when other revenue declined by
$268,000, over the prior quarter due to the timing of government contract work.
License revenues increased in each consecutive quarter presented, exclusive of
the quarter ended September 30, 1999, when license revenues decreased 6% from
the prior quarter ended June 30, 1999. License revenues in the quarter ended
June 30, 1999 included a large license fee for our visual information retrieval,
or VIR, software from one customer. This large license fee made license revenues
for the quarter ended June 30, 1999 disproportionately large as compared to
other quarters presented. Service revenues increased in each consecutive quarter
presented, exclusive of the quarter ended June 30, 1999, when service revenues
decreased by 10% from the prior quarter, as the cumulative number of licenses we
have sold increased and as we launched Virage Interactive services.
Total cost of revenues declined 21% in the quarter ended December 31, 1998
from the prior quarter, and 15% in the quarter ended June 30, 1999 from the
prior quarter. These declines were due to the timing of government contract
work. Our costs can fluctuate each quarter based upon the level of related
revenues. In addition, fluctuations can occur due to our investments in new
services and expanded service capacity.
Operating expenses declined slightly in the quarter ended September 30,
1998, and 10% in the quarter ended September 30, 1999 primarily as a result of
decreases in sales and marketing expenses. Our marketing expenses include the
costs of marketing programs, trade shows and other marketing initiatives which
can fluctuate significantly from quarter
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<PAGE> 36
to quarter. For example, sales and marketing expenses generally increase in the
first quarter of our fiscal year as a result of our participation in a
significant trade show in that quarter.
Our quarterly operating results have varied significantly in the past and
we expect that they will vary significantly from quarter to quarter in the
future. These variations are caused by a number of factors, including demand for
and acceptance of our products and services, the timing of orders and deployment
of our products and services, the impact of our revenue recognition policies,
and changes in technology. As a result of these and other factors, we believe
that quarter-to-quarter comparisons of our total revenues and operating results
are not necessarily meaningful, and that these comparisons may not be accurate
indicators of future performance. Our staffing and operating expenses are based
in part on anticipated growth in total revenues. If we are unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall,
any significant shortfall in our total revenues would likely have an immediate
negative effect on our operating results. Moreover, if securities analysts
follow our stock, our operating results in one or more future quarters may fail
to meet their expectations. If this occurs, we would expect to experience an
immediate and significant decline in the trading price of our stock.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in April 1994, we have primarily financed our
operations through the sale of convertible preferred stock, resulting in net
cash proceeds of $37.0 million. To a lesser extent, we have financed our
operations through equipment financing and lending arrangements.
As of December 31, 1999, we had cash and cash equivalents of $16.4 million,
an increase of $12.0 million in cash and cash equivalents held as of March 31,
1999. Our working capital, defined as current assets less current liabilities,
at December 31, 1999 was $16 million, an increase of $12.1 million in working
capital from March 31, 1999. The increase in the working capital is attributable
to the increase in cash from the sales of our equity securities and the increase
in accounts receivable.
We have a $1.5 million senior line of credit facility with a bank that
bears interest at the bank's prime lending rate less 0.25% and expires in
November 2000. At December 31, 1999, no balance was outstanding under this line
of credit and we had available $730,000 at December 31, 1999 based on eligible
receivables. This line of credit is secured by accounts receivable and other
assets. We have two equipment term loans with a bank totaling $321,000 at
December 31, 1999 that bear interest at the bank's prime lending rate plus 0.5%
and are payable in monthly installments through November 1, 2001.
Our operating activities resulted in net cash outflows of $1.6 million in
fiscal 1997, $3.4 million in fiscal 1998, $6.0 million in fiscal 1999, and $6.2
million in the nine months ended December 31, 1999. The cash used in these
periods was primarily attributable to net losses of $1.6 million in fiscal 1997,
$4.1 million in fiscal 1998, $6.2 million in fiscal 1999, and $7.6 million in
the nine months ended December 31, 1999.
Investing activities resulted in cash outflows of $410,000 in fiscal 1997,
$559,000 in fiscal 1998, $554,000 in fiscal 1999, and $1.2 million in the nine
months ended December 31, 1999. These expenditures were primarily for computer
hardware and software and furniture and fixtures. We expect that capital
expenditures will continue to increase to the extent we increase our headcount
and expand our operations.
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Financing activities provided cash of $3.6 million in fiscal 1997, $7.4
million in fiscal 1998, $5.1 million in fiscal 1999, and $19.4 million in the
nine months ended December 31, 1999. These amounts were almost entirely proceeds
from the sale of preferred stock.
We currently anticipate that the net proceeds from this offering and the
proceeds from the concurrent private placement, together with our current cash,
cash equivalents and available credit facilities, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. However, we may need to raise additional funds in future
periods through public or private financings, or other sources, to fund our
operations and potential acquisitions, if any, until we achieve profitability,
if ever. We may not be able to obtain adequate or favorable financing at that
time. Failure to raise capital when needed could harm our business. If we raise
additional funds through the issuance of equity securities, the percentage of
ownership of our stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our common
stock.
YEAR 2000 READINESS DISCLOSURE
To date, we have not experienced any disruption in our products or services
as a result of, nor has any third-party vendor on which we depend been affected
by, the commencement of the year 2000. Although we do not anticipate that our
products and services will be affected by the year 2000, if we, or our
third-party providers, fail to remedy any year 2000 issues, the result could be
lost revenues, increased operating expenses, the loss of customers and other
business interruptions, any of which could harm our business. The failure to
adequately address year 2000 compliance issues in the delivery of products and
services to our customers could result in claims against us of breach of
contract and related litigation, any of which could be costly and time consuming
to defend.
In light of our experiences to date, we have not developed any specific
contingency plans for year 2000 issues. Our worst case scenario for year 2000
problems would be our inability to provide our products and services to our
customers and a resultant decline in our total revenues.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
We develop products in the United States. We license our products from the
United States and from our subsidiary in the United Kingdom. Substantially all
of our sales from the United States operation are denominated in U.S. dollars.
Our subsidiary based in the United Kingdom incurs most of its expenses in pounds
sterling and most of its sales are denominated in U.S. dollars. As a result, our
financial results could be affected adversely by various factors, including
foreign currency exchange rates or weak economic conditions in foreign markets.
Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required. At March 31, 1999 and December
31, 1999, our cash and cash equivalents consisted primarily of demand deposits,
money market funds and commercial paper.
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RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 is effective
for our fiscal year ending March 31, 2000. SOP 98-1 provides guidance on
accounting for computer software developed or obtained for internal use
including the requirement to capitalize and amortize specified costs. The
adoption of this standard did not have a material impact on our results of
operations, financial position or cash flows.
In April 1998, the AICPA issued Statement of Position No. 98-5, or SOP
98-5, Reporting on the Costs of Start-up Activities. SOP 98-5 requires that all
start-up costs related to new operations must be expensed as incurred. In
addition, all start-up costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. We implemented SOP 98-5 on January 1, 1999. The
adoption of SOP 98-5 did not have a material impact on our financial position or
results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standard,
or SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 133 will be effective for our fiscal
year ending March 31, 2001. We do not expect that the adoption of SFAS 133 will
have a material impact on our results of operations, financial position or cash
flows in the foreseeable future.
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<PAGE> 39
BUSINESS
OVERVIEW
Virage is a leading provider of software products and applications services
that enable media and entertainment companies, enterprises and consumers to
catalog, manage and distribute their video content over the Internet and
intranets. We have a proprietary video indexing technology that transforms
analog and digital video content into a structured video database that is
designed for use on Internet sites. Owners of video content can leverage our
technology either by licensing our products or by employing our application
services to outsource their needs. We currently have over 100 customers
including media and entertainment corporations such as ABC News, CNN and The
Walt Disney Co., corporations such as Boeing, CNET and Yahoo!, educational
institutions such as Harvard Business School and government entities such as the
FBI and the Library of Congress.
INDUSTRY BACKGROUND
THE CONVERGENCE OF VIDEO AND THE INTERNET
Very few communication technologies have had as much of an impact on our
society as video and the Internet. Both of these technologies have touched the
lives of hundreds of millions of people and generated billions of dollars in
advertising and commerce revenues. Due to high technical barriers, these two
technologies existed independently of each other until recently. Significant
investments in and improvements to technology are now driving these two
technologies toward convergence.
Video is one of the most ubiquitous and effective communication mediums
across media and entertainment, enterprise and consumer markets today.
Television and film production have generated millions of hours of video content
over the last twenty years. This content and the audience communities
surrounding it attract significant advertising and commerce dollars. According
to Veronis Suhler and Associates, a research and consulting firm, the total
amount spent on television advertising in the United States in 1998 was
approximately $49 billion. In addition, according to the Direct Marketing
Association, an independent interactive and database marketing trade
association, approximately $106 billion of goods and services were purchased
through direct response television programming and advertising in 1998.
Enterprises, including corporations, government entities and universities,
produce video for a variety of applications, such as sales and marketing,
training, education, decision support and employee and customer communications.
For example, Lockheed Martin Corporation maintains over 300,000 hours of video
in its corporate archive. Additionally, consumers use video to document and
record the important events of their lives.
The Internet has grown rapidly in recent years and, much like video, has
emerged as a mass-market communications medium, enabling millions of users to
obtain information, interact with each other and buy and sell goods and
services. This growth is being driven by an increasing number of users, fast and
inexpensive Internet access, advances in computer technology and improvements in
network technology. The Internet has evolved into an interactive and searchable
medium, offering a highly engaging experience and allowing users broad access to
a wide variety of content. Organizations are learning to take advantage of these
aspects of the Internet to improve communications with their customers and
increase revenue opportunities through electronic commerce.
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Until recently, video and the Internet had developed independently.
Technical limitations of broadcast, cable and satellite video distribution
resulted in one-way non-interactive delivery of information. Similarly,
bandwidth constraints prevented the effective transmission of video over the
Internet, resulting in a static environment of text-based web pages. Video and
the Internet are now converging, enabled by significant infrastructure
investment and technical trends including digital video compression and
playback, broadband Internet access and content caching and delivery
technologies. Many companies are leveraging these emerging technologies to
extend or refocus their businesses around the convergence of video and the
Internet. Of the top 10 news, information and entertainment Internet sites as
determined by Media Metrix in January 2000, eight were owned by or partnered
with a major media company. As a more recent example of this convergence,
America Online and Time Warner have announced their intention to merge.
CHALLENGES ASSOCIATED WITH VIDEO ON THE INTERNET
Even with significant improvements in networks and high-speed consumer
access, significant challenges remain that inhibit the mass adoption of video on
the Internet. Users have high expectations for interactivity, quality and ease
of use. Additionally, content providers require technologies that allow them to
control their distribution channels, leverage their production process by
enabling reuse of the digital video, and facilitate rapid time to market.
A primary use of the Internet is to search for information. Today, many
Internet sites are dedicated solely to search and directory functions for
people, places, products and other types of content. These sites have been
developed primarily to process text-based content and are not well equipped to
deal with the rapidly-growing amount of multimedia content on the Internet. More
specifically, very few Internet sites enable users to search for video at all.
And until recently, it has been impossible to search for and then play a
specific segment within a video. As the amount of and demand for video content
grows, finding relevant information will increasingly become a frustrating and
time-consuming experience.
In its native format, video does not lend itself to user interaction and
today is largely a one-way experience where the viewer is relegated to a passive
role. Video is not well suited to established Internet usage patterns that are
characterized by short, personalized exchanges of information and content.
Unlike text, video is an unstructured data type that is difficult to index,
manage and search. Video content is typically designed to be viewed from start
to finish and has no table of contents or index to allow users to find a
particular segment quickly and easily.
The lack of a structured video index prevents video content providers from
developing advanced capabilities such as personalization, interactivity,
sharing, community building, targeted advertising and commerce. All of these
capabilities rely on the ability to relate a particular video segment to other
information contained in a database and to target that segment to particular
users.
Current techniques for deploying video on the Internet are narrowly focused
on the digitization process and do not provide the indexing and management
capabilities necessary to deploy large video collections across multiple
Internet sites. Existing technologies therefore result in a diminished
navigation and viewing experience for site visitors and make it difficult for
content providers to effectively control and efficiently redistribute their
video content. A new solution is required that helps content owners deploy,
manage and
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distribute video content over the Internet and intranets while enhancing the
user's viewing experience.
THE VIRAGE SOLUTION
Virage is a leading provider of products and application services that
enable media and entertainment companies, enterprises and consumers to catalog,
manage and distribute their video content over the Internet and intranets. At
the same time, our solution enables Internet users of video content to find the
content they want, and then to interact with it in a way that is familiar and
comfortable to them. Additionally, we increase the value of video to content
owners by enabling them to use their video in targeted applications such as
advertising and electronic commerce.
We allow content owners to adapt their video content to the Internet and
intranets quickly and cost-effectively. Our products and application services
are based on a video indexing technology that transforms analog and digital
video content into a structured video database. Our technology breaks video into
discrete segments in real time by indexing visual scene changes, spoken words,
names and faces of recognized speakers, topics discussed within each segment and
other important information. Our software automatically creates a time
demarcated visual and textual summary of the video using proprietary image and
language processing techniques. This index is time synchronized with streaming
video files that are encoded simultaneously with the indexing process. These
capabilities enable both content owners and Internet users to rapidly search,
locate and use video content. This technology forms the core of our licensed
software products, and also enables our application services for customers who
wish to outsource their requirements.
The key benefits of our solutions include:
- IMPROVED ACCESS TO VIDEO CONTENT. Our video index allows Internet users
to search for and view any relevant part of a video at any time. Whether
users are looking for a particular speaker, topic or phrase, the video
search engine allows them to locate the desired part of the video quickly
and easily. In this manner, we transform video into a format that can be
viewed and experienced in a way that is familiar and comfortable to
Internet users. Our video database also helps Internet site owners
automatically publish video segments throughout their Internet site,
based on subject, keyword or speaker.
- ENHANCED USER INTERACTION AND COMMUNITY BUILDING. Our solutions transform
video into indexed segments that Internet users can interact with and
share opinions and recommendations about. Our technology allows users to
email relevant video segments to other users, create personal portfolios
of favorite segments and assemble and share personal playlists or
highlight reels with others. Our technology delivers these capabilities
without creating multiple copies of the underlying video content or
transferring large video files around the Internet. Collectively, these
features enable community building around video collections.
- GREATER PERSONALIZATION. The indexing and searching of video content
enables customers to target a video segment to particular users. Our
clients can deliver highly personalized viewing experiences to site
visitors by matching user profiles with the information contained in
their video database.
- INCREASED COMMERCE OPPORTUNITIES. Our technology creates the foundation
for video-enabled electronic commerce by enabling our customers to create
commerce
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opportunities around specific video segments. Each user interaction with
a particular video segment is a natural opportunity for advertising and
commerce related to that particular content. Commerce and advertising in
the form of banner advertisements or interstitial advertisements can be
associated with a person or object within the video or topic discussed.
By combining personalization with targeted video advertising, our
solutions provide customers with direct marketing opportunities.
- EXPANDED SYNDICATION ABILITIES. Our technology makes it cost-effective
for our customers to distribute, or syndicate, their indexed video
content to other Internet sites. Once video content has been indexed and
stored in a database for one Internet site, additional syndicated
Internet sites can be added with minimal incremental cost or effort. This
syndication of content provides significant incremental revenue
opportunities for video content owners.
BUSINESS STRATEGY
Our goal is to strengthen our position as a leading provider of products
and application services that enable owners of content to catalog, manage and
distribute their video content over the Internet and intranets. To achieve this
objective, our business strategy includes the following key components:
BECOME THE STANDARD FOR DEPLOYING, MANAGING AND DISTRIBUTING VIDEO CONTENT OVER
THE INTERNET AND INTRANETS
We intend to establish Virage as the standard for the deployment,
management and distribution of video content over the Internet and intranets. To
achieve this goal, we focus our direct and indirect selling and marketing
activities on industry leaders in the media and entertainment, enterprise and
consumer video markets. Many major media companies, broadcast networks and large
corporations already use Virage. These industry leaders offer multiple
independent opportunities for large-scale deployments of our products and
application services. For example, we have licensed our products to CNN for use
in its internal news organization and have leveraged this relationship into
sales of our application services to CNN Interactive. We expect to pursue
additional opportunities with other organizations at CNN, such as CNN Headline
News, CNNfn, CNN Sports, CNN Airport News, CNN Espanol, and CNN's extensive
corporate video archive. To achieve our objective of becoming the standard, we
will continue to leverage our experience and reputation across CNN and other
organizations like CNN. We will also leverage our relationships with such
industry leaders to sell to additional customers within their industries. In
December 1999, to help establish our position as the standard in the consumer
video market, we introduced a version of our VideoLogger product, called
MyLogger. MyLogger is a freely downloadable product that allows consumers,
including independent content producers, to create browseable and interactive
web pages from their own streaming video files.
GENERATE MULTIPLE REVENUE STREAMS THROUGH NEW PRODUCTS AND SERVICES
We intend to generate additional revenues by introducing new products and
services. We have added and we plan to continue to add to our licensed software
product offering. For example, in 1999, we added several new products including
the AudioLogger, Oracle and Informix database plug-ins, Oracle Java SDK and
Video Search Tools.
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In May 1999, we launched Virage Interactive, an application services
offering which complements our licensed software product offerings. This service
offering allows our customers to outsource the deployment, management and
distribution of their video content over the Internet and intranets. Our
application services currently include video Internet site design, video
encoding and indexing, editorial services and video index hosting. In addition
to set up fees, we generate recurring revenue from these services whenever a
customer adds more hours of video to an existing project, or with each
additional video query on a customer's site. We intend to offer new application
services, including services to help drive more traffic to our customers'
Internet sites, as well as services to allow community-building,
personalization, targeted advertising and electronic commerce related to the
video on our customers' Internet sites.
Our application services offering enables our customers to cost-effectively
syndicate their indexed video content to other Internet sites. For example, over
the last six months, we have syndicated a video database covering the U.S.
presidential campaign, originally created from C-SPAN video footage, to over 15
Internet sites such as CNN Interactive, iVillage, NBCi, Yahoo! and others. This
syndication of content provides significant incremental revenue opportunities
for both Virage and our customers with relatively little additional work.
EMPOWER CONTENT PROVIDERS WITHOUT COMPETING AGAINST THEM
Our licensed products and application services enable our customers to
retain control over their video content and brands. We allow our customers to
maintain a direct relationship with their user audience by distributing their
video content directly from their own Internet sites, as well as to extend the
reach of their content through syndication. We do not aggregate our customers'
video content on our own Internet site, and we do not depend on advertising and
commerce revenue streams from our own Internet site to drive our business. We
intend to maintain this business model, which supports content providers, as
well as to enhance this model by providing products and application services
that will drive more traffic to our customers' Internet sites.
ENHANCE AND LEVERAGE OUR TECHNICAL LEADERSHIP POSITION
We combine the use of our proprietary technologies with proven third-party
technologies to create technically advanced products and application services.
Our internal technologies include our video cataloging technologies, our
extensible track architecture and media analysis plug-in architecture, as well
as our keyframing engine and our visual information retrieval engine. We have
filed 14 U.S. patent applications and one additional provisional U.S. patent
application for these technologies. Of those patent applications, five have
resulted in issued patents, one additional patent has been allowed and the other
applications are under review. We will continue to aggressively develop and
protect our intellectual property.
We have designed our architecture and application programming interfaces to
enable both rapid integration and easy interchangeability of proven third-party
technologies into our products. We will continue to evaluate and integrate
multiple third-party technologies into our products, selecting and substituting
these technologies based on both technical superiority and favorable business
economics. We have also designed our architecture and application programming
interfaces to allow rapid integration of our products with the products of our
value-added resellers and system integrators. As a result, our products are
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currently integrated with products from over 20 other vendors. We will continue
to develop products that integrate easily with the products of other vendors in
our markets.
EXPAND OUR INTERNATIONAL PRESENCE
Potential customers for our products and services are located throughout
the world. We intend to develop local sales, technical support and application
services operations that can support these customers. In November 1998, we
established a European subsidiary, Virage Europe, in London, England. Since
establishing this subsidiary, we have made sales of our products and services to
several European customers including the British Broadcasting Corp., or the BBC,
Carlton Communications, Network Espana, Reuters, Swiss Radio-TV and Telecinco.
We intend to expand our European sales and marketing activities and service
operations, as well as to establish distribution of our products in Asia,
Australia and South America. We also intend to localize our products and
services in several European and Asian languages. In December 1999, we
introduced our first European localized product, a Spanish-language version of
AudioLogger.
PURSUE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We intend to pursue strategic relationships with and acquisitions of other
companies to, among other things, increase our customer base, expand our
products and services, and strengthen our management team. By developing
strategic relationships with leading technology providers, we believe we will be
able to proliferate our products and services and improve our access to our
target customer base. In addition, we may acquire companies to enhance our
product and service offerings, increase our workforce and broaden our market
opportunities.
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CUSTOMERS
We sell our products and services to customers worldwide. The following is
a list of our customers as of December 31, 1999 who have been the source of at
least $10,000 of our revenues since the beginning of fiscal 1999:
<TABLE>
<S> <C>
MEDIA/ENTERTAINMENT CORPORATE
ABC News Bell Atlantic
British Broadcasting Corp. (BBC) Boeing
Cable News Network (CNN) DaimlerChrysler
Carlton Communications Footage Now
CBS General Electric (GE)
Chalk.com Network General Motors (GM)
CNN Interactive GTE Laboratories
FOX Sports Heinle & Heinle
Getty Images The Image Bank
Lifetime Entertainment Lockheed Martin Corp.
Network Espana Morgan Stanley Dean Witter
Public Broadcasting System (PBS) New York Stock Exchange
Reuters Nippon Telegraph & Telephone (NTT)
Swiss Radio-TV PICs Retail Network
Telecinco Thomson
Turner Broadcasting Vidipax
TV1 Young & Rubicam
The Walt Disney Co. TECHNOLOGY/INTERNET
GOVERNMENT AltaVista
Centers for Disease Control (CDC) CNET Networks (CNET)
Defense Advanced Research Projects Compaq Computer
Agency IBM
Department of the Army IDG Conferences
Department of the Navy The Industry Standard
Federal Bureau of Investigation (FBI) Infoseek
Joint Combat Camera Center (JCCC) iXL
Library of Congress ON24
National Aeronautics and Space PowerBrief
Administration (NASA) SGI
National Imagery and Mapping Agency Singingfish.com
(NIMA) Streamedia Communications
EDUCATION Zuma Digital
Arizona State University
California State University at Los
Angeles
Harvard Business School (HBS)
Michigan State University
University of North Carolina
University of Pennsylvania
University of Quebec
</TABLE>
Several of our government customers are excluded from this list due to
confidentiality agreements.
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In addition, the following companies have signed a syndication affiliate
agreement with Virage as of December 31, 1999, as described in the C-SPAN
Syndication case study below:
<TABLE>
<S> <C>
ABC News Internet Ventures The New York Times Online
The Associated Press Politics.com
CNN Interactive Salon.com
FasTV SpeakOut.com
GovWorks.com StreamSearch.com
iVillage USAToday.com
Lifetime Entertainment Services Washingtonpost.Newsweek Interactive
NBCi Yahoo!
Netivation.com
</TABLE>
The terms of these syndication affiliate agreements include our
nonexclusive license to each affiliate of the indexed and searchable C-SPAN
election video content and our provision of site customization and hosting
services in return for upfront and recurring fees to us for a term of at least
one year.
CUSTOMER CASE STUDIES
CNET NETWORKS (CNET)
CNET Networks, or CNET, is a leading provider of technology news and
information on the Internet and a producer of television shows about technology.
CNET uses our application services to integrate its television programming with
its Internet content. Visitors to CNET's Internet site can find both articles
and video segments on related topics repurposed from CNET's aired television
programming. Video preview images, with headlines and descriptions, are
displayed among CNET's search results, enabling users to access specific
segments of a program quickly. Our application service offering allows CNET to
outsource the deployment, management and distribution of its video content while
maintaining its own brand identity and look-and-feel.
C-SPAN SYNDICATION
C-SPAN is a leading provider of televised programming devoted to U.S.
government proceedings. Virage and C-SPAN have jointly created a video search
engine dedicated to the year 2000 presidential elections, enabling Internet
users to search for video coverage by candidate, party, campaign issue or speech
venue. The Campaign 2000 Video Search Engine gives voters on-demand access to a
comprehensive online collection of campaign speeches, primary and general
election debates, press conferences, party fundraisers and other candidate
appearances on C-SPAN. Through our syndication program, this video database is
available on multiple Internet sites, helping C-SPAN fulfill its mission of
delivering unedited, balanced views of government and public policy forums, and
providing viewers with direct access to video content of elected officials,
decision-makers and journalists.
The Customers section contains a list of customers as of December 31, 1999
to whom we have syndicated the Campaign 2000 Video Search Engine.
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CABLE NEWS NETWORK (CNN)
Cable News Network, or CNN, is a leading television network recognized
worldwide for its timely news production and broadcast quality. CNN uses our
products to improve the process by which it produces the news. Prior to
licensing our software, CNN journalists and editors used tapes to handle
approximately 150 hours of incoming news a day. Using our software, CNN indexes
and digitizes in real time all of its 32 incoming news feeds and all of the
material edited for airing on CNN, CNN Headline News and CNN International.
Within seconds, more than 300 journalists can simultaneously view any video feed
and make edit decisions at their desktops. CNN confirms that production costs
have been cut significantly through the consolidation of editing resources.
Further savings have been realized through the reallocation of production
personnel from menial tape management tasks to direct news production
activities. Time-to-air, writing quality and story accuracy have improved as a
result of CNN's writers and producers having direct access to all current and
available news footage. CNN also uses our products and services to help produce
the CNN Interactive Internet site.
GENERAL MOTORS
General Motors, or GM, is the world's largest automotive company. GM uses
our products to improve their product development process. Before using our
software, market research analysts spent significant time reviewing consumer
focus group videos and compiling supporting segments in favor of design
recommendations. Now, GM analysts, designers and engineers can view and search
focus group videos at their desktops, improving the design decision process and
reducing overhead. GM expects that the use of video as a management
decision-making tool will substantially increase, now that it is easy to access
and use.
HARVARD BUSINESS SCHOOL
Harvard Business School, or HBS, is a leading graduate school of business
administration. HBS uses our products to enhance the educational process and to
disseminate information to students, alumni and faculty. HBS relies heavily on
video as an educational and research tool. Before using our software to convert
its vast video collection into a streamable and searchable video library,
valuable information went unseen and unused. Now students, teachers, researchers
and librarians can access video information, such as presentations by prominent
guest speakers and faculty members, through the Internet or the school's
intranet. HBS is also using our products to add video to its external Internet
site for use by alumni and the general public.
A substantial portion of our total revenues have generally been derived
from a relatively small number of customers. For the nine months ended December
31, 1998, sales to various U.S. government agencies totaled 43% of sales
including 17% to the Department of the Army. For the nine months ended December
31, 1999, sales to Telecinco, Oracle and various U.S. government agencies
totaled 16%, 15% and 22%, respectively. For the years ended March 31, 1997, 1998
and 1999, U.S. government agencies accounted for 17%, 12% and 40%, respectively,
of our total revenues including 14% to the Department of the Army for fiscal
1999. In fiscal 1997, Oracle and Informix accounted for 37% and 10%,
respectively, of our total revenues. In fiscal 1998, CNN and Sun Microsystems
each accounted for 11% of our total revenues. In fiscal 1999, Oracle accounted
for 14% of our total revenues.
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LICENSED SOFTWARE AND APPLICATION SERVICES
Our software products and application services allow video content owners
to adapt their video content to the Internet and intranets quickly and
cost-effectively. Depending on their particular needs and resources, these video
content owners may elect to either license our software products or use our
application services. A typical installation of our licensed products may
include multiple copies of our VideoLogger, each potentially with an
AudioLogger, and either one database plug-in per VideoLogger or an
appropriately-sized Video Search Tools license. Where content owners use our
application services, we integrate video and video search into their Internet
site, transparently host their video search index and report traffic data
statistics. Our application services facilitate the delivery of video content
collections to multiple Internet sites with a customized look, feel and
functionality on each site. In addition, our application services enable rapid
and flexible syndication of video content across a network of affiliate sites.
LICENSED SOFTWARE
VIDEOLOGGER 3.1. The VideoLogger 3.1 is a Windows NT-based application that
analyzes an analog or digital video input signal and creates a structured index
that can then be used to search the video content and locate a specific video
segment for playback. The VideoLogger analyzes the video in real time and
generates several kinds of index data from the video signal. This data may
include still-image snapshots of the video, called keyframes, which are captured
each time the picture changes significantly, as well as closed-captioned text
information, which is normally provided by television networks for the hearing
impaired. The VideoLogger also allows users to mark the beginning and end of
specific video segments, and to manually enter data about these segments as well
as the entire video. When the video analysis process is complete, the customer
has both a visual overview of the video and a data file of searchable keywords
linked to the associated points in the video that enable rapid browsing of its
contents. The VideoLogger can control the simultaneous encoding of one or more
digital video files in a variety of file formats, including RealVideo, Windows
Media Player, Quicktime and MPEG. The VideoLogger has application programming
interfaces that allow customers to integrate it with a variety of other
products.
AUDIOLOGGER 2.0. The AudioLogger 2.0 works in conjunction with the
VideoLogger. It analyzes the audio portion of a video signal and generates three
additional tracks of information, which are integrated into the index produced
by the VideoLogger. These tracks include data from speech recognition, speaker
identification and audio classification. The AudioLogger uses a combination of
our proprietary technology and third-party speech recognition, speaker
identification and audio classification technologies, which all operate in real
time. The AudioLogger currently has an extensive speaker-independent U.S.
English and Castilian Spanish vocabulary. Additional languages can be integrated
in a modular fashion. The user can also add additional custom vocabulary words
through a user interface. The speaker identification engine can identify a
speaker in the video from a library of speakers whose voice patterns and names
have been entered in the AudioLogger. The audio classification engine classifies
the audio content of a video signal as speech or music and also helps to improve
the accuracy of the speech recognition engine when analyzing mixed speech and
non-speech audio signals.
VIDEO SEARCH TOOLS 1.6. Video Search Tools 1.6 is an Internet-based video
search application. Through a browser, users enter search terms and receive the
matching video
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segments that correspond to these search terms. Users can then select the
relevant video segment to be streamed to their desktops. Video Search Tools is
designed to be rapidly customized and deployed by our customers.
DATABASE PLUG-INS. We offer several database plug-in products that allow
system integrators to build video management systems with the VideoLogger and
relational databases. Customers such as broadcasters and government agencies
also use these products in large-scale system deployments. Our current database
plug-ins for Oracle and Informix enable communication between our products and a
database server for indexed storage. Using these plug-ins, system integrators
can build custom video browsing applications, or can integrate our products into
various media asset management systems.
ORACLE JAVA SDK 1.0. The Oracle Java SDK 1.0 is a toolkit that provides
reusable Java application components that allow a software developer to access a
Virage index when stored in an Oracle database. This product simplifies the
building of Oracle applications that search and browse video databases.
VIDEOLOGGER SDK AND VIRAGE SOFTWARE DEVELOPER PROGRAM. The VideoLogger SDK
and Virage Software Developer Program enable third party access to our
underlying architecture. This access allows third parties to integrate the
VideoLogger into other products and technologies, thereby extending the
functionality of the VideoLogger. The VideoLogger SDK provides plug-in program
interfaces for multiple aspects of VideoLogger operation, including database
integration, file export, index access and conversion, remote control and video
encoding integration and control.
MYLOGGER 1.0. MyLogger 1.0 is a consumer version of our VideoLogger
product, and contains a subset of the VideoLogger features. MyLogger is a
Windows-based application for indexing digital video files and publishing
Internet-ready video indices. MyLogger analyzes a digital video signal in real
time, generates keyframes, and allows users to mark the beginning and end of
specific video segments and manually enter data about these segments. The
MyLogger keyframes and associated information are linked to specific points in
the original video that can be used to rapidly browse its contents. The MyLogger
video index can be published as an Internet page using customizable templates.
Consumers may download MyLogger from our web site without charge.
APPLICATION SERVICES AND SYNDICATION
Our hosted application services, called Virage Interactive, enable
customers to deploy, manage and distribute video on the Internet without
substantial investment in hardware, software or staffing. By integrating
Virage's core video indexing technology with other digital video services such
as encoding and hosting, we have created application services that enable rapid
deployment of Internet video databases. Virage Interactive's hosted application
services provide customers with multiple methods for integrating video assets
throughout their web site. In addition, Virage Interactive enables customers to
syndicate their video content to other web sites, allowing each site to be
served from the same content database, while retaining that site's unique look
and feel.
The main components of Virage Interactive services are:
- SETUP. For each new account, we collaborate with the customer to develop
a set of templates in hypertext mark up language, commonly referred to as
HTML, that defines the look and feel of the video content on that
particular customer's site. These templates define how the video content
will appear on the site including
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layout, graphics, colors, and fonts associated with the video search results and
video player pages. Customers can choose a variety of features to create a
function and look that is appropriate for their site.
- VIDEO PROCESSING. In this step, we automatically process the customer's
video using our VideoLogger and AudioLogger software to create a visual
and textual index and database of the content. We can process video from
a variety of sources, including tapes, live television or satellite
feeds, or previously encoded digital files. This process simultaneously
encodes the video into the formats and transmission rates that the
customer requests. Our software supports many video formats, including
RealNetworks, Windows Media, Quicktime and MPEG1. Additionally, our
customers may elect to employ our content editors to add custom
information to the video index database.
- APPLICATION HOSTING. After each video segment is processed, the index
file is uploaded to our datacenter and the encoded video files are
uploaded to the customer's selected video hosting servers. At this point,
the video content is available on the customer's web site. When a search
is initiated on the customer's site, the search request is processed on
our application servers, returning a list of matching results, each of
which may include a small preview image, a transcript of the video
segment and other information as appropriate. We provide search results
under our customers' own domain names in order to create a seamless
experience for site visitors. We provide daily, weekly and monthly
traffic reporting to our customers including the most popular search
terms and segments, traffic volume by time of day, referring web sites,
and the domains of users accessing the content. Our application services
can interoperate with many video hosting vendors. We also offer video
hosting to customers through third parties who specialize in content
distribution.
- CONTENT PUBLISHING AND ADMINISTRATION. We provide a browser-based content
publishing and administration application to each Virage Interactive
customer. Through this password-protected interface, customers can view
and edit their video database and HTML templates. For example, customers
can change the information or preview image associated with a particular
video segment, choose to show or hide particular segments on the public
web site, or delete segments from the database altogether. Customers can
also modify the HTML template files that define the look and feel of
their site. Content from the database can be published to the site in the
following ways:
- video search engine: an embedded search engine allows site visitors to
search across the entire video database by typing in keywords.
- auto-published clips: the customer's web producers can design web
pages to automatically include the most recent video clips associated
with a particular topic.
- ad-hoc clip access: site producers can search for and extract a
particular video clip in order to integrate that clip into a
particular web page.
- CONTENT SYNDICATION. Virage Interactive enables our customers to
cost-effectively syndicate their indexed video content to other Internet
sites without reprocessing or modifying the video database in any way.
Our architecture allows a variety of HTML templates to be applied to the
same video database so that each syndication
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site can retain a separate look and feel. For video content owners who
wish to license their content broadly on the Internet, Virage Interactive
services provide the necessary content processing and management
applications to enable syndication and repurposing of video collections.
TECHNOLOGY
The VideoLogger architecture is the basis of our indexing and search
technologies. This architecture uses the concept of tracks to represent
different types of information about the video, which we refer to as indexed
data or metadata, as shown in the figure below.
[Diagram titled VideoLogger Track-based Architecture depicts multiple metadata
tracks such as face id, speaker id, user annotation, speech to text, time code,
keyframes and video on the y axis versus time on the x axis.]
This track-based model provides an open architecture that permits easy
integration of additional metadata types. Each type of metadata, such as
keyframes, face identification, annotations and speech, is contained in its own
time-stamped track. Our video analysis engine has a plug-in architecture for
each type of metadata that allows us both to develop our own media analysis
algorithms as well as to select and integrate technology from third
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parties. "Plug-in modules" is the term that we use to describe additional
software functionality which can be easily added to our base VideoLogger
product.
We have incorporated various third party technologies into different
plug-in modules that operate in conjunction with our VideoLogger product,
including face recognition technology from Visionics, optical character
recognition technology from SRI International, speech and speaker recognition
technology from IBM, and text search technology from AltaVista. The terms of
each of these third party arrangements include a nonexclusive license to
distribute the third party technology within our plug-in modules in return for
royalty payments to them for a term of one or more years. We are not
substantially dependent on the technology we license from third parties in part
because we believe we could license similar technology from other parties.
Customers often require that our indexing technologies perform in real time
to match the real-time transmission of video broadcasts and live satellite
feeds. Our architecture addresses this real-time requirement by allowing
metadata tracks to be processed in parallel on separate computer processors.
Once the metadata has been captured during the indexing process, it must
then be stored in a format that can be easily searched and browsed by users. Our
architecture includes a set of open application programming interfaces, which
allow the metadata to be easily exported into various databases, media asset
management and Internet-search tools. For instance, metadata can be stored in
standard databases such as Oracle and Informix, stored into popular media asset
management systems, or exported to custom file formats such as HTML. Exported
metadata can also be searched using our Video Search Tools application.
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We emphasize reusable, plug-in components and open architecture in our
development process. All of our software is written in C++ or Java and employs
object-oriented design practices. In addition, each Virage product is designed
with open application programming interfaces, which allow easy integration with
third-party applications. The figure below illustrates the many open interfaces
surrounding the VideoLogger, which allow for feature extensions and systems
integration opportunities.
[Diagram titled VideoLogger Programming Interface shows Virage VideoLogger in
the center of a square diagram surrounded by various application programming
interfaces. On the top, the diagram shows video encoding interfaces such as
MPEG, RealVideo, MediaPlayer and Custom. On the right, the diagram shows file
export interfaces such as VDF, HTML and ALE, and database interfaces such as
Informix and Oracle. On the bottom, the diagram shows media analysis interfaces
such as face recognition, optical character recognition and audio analysis, and
remote control application programming interfaces. On the left, the diagram
shows digital media ingest interfaces such as RealVideo, QuickTime, MediaPlayer
and Custom.]
Access to each of the interfaces shown in the above figure is provided
through our software developers kit. This kit is a collection of these
application programming interfaces that allow developers to work in areas such
as database integration, video encoding, remote control and media analysis. The
software development kit also allows our products to be integrated with other
technologies.
RESEARCH AND DEVELOPMENT
We believe that our future success will depend in part on our ability to
continually develop new and enhanced products and services. Accordingly, we are
committed to the investment of significant resources in research and product
development activities. During fiscal 1998 and 1999 and the nine months ended
December 31, 1999, our research and development expenses were $1.8 million, $2.3
million and $2.7 million, respectively.
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SALES AND MARKETING
SALES AND DISTRIBUTION STRATEGY
We sell our products and application services through a direct sales force
and through indirect distribution channels. We currently target customers in
several markets including media and entertainment, enterprises such as
corporations, government entities and universities, and consumer markets. Our
sales strategy is to pursue multiple opportunities for large-scale deployments
within each customer account.
Through our direct sales force in Chicago, London, Los Angeles, New York,
San Francisco, Seattle, Tampa/St. Petersburg and Washington D.C., we focus on
larger customers in North America and Europe. Our field representatives sell our
products and services to customers who have been prequalified by our telesales
personnel. In addition, our direct sales force manages local relationships with
key resellers.
Our indirect distribution channels include domestic and international
distributors, system integrators and value-added resellers. As of December 31,
1999, we had entered into agreements with more than 15 non-exclusive
distributors and value-added resellers worldwide, including Artesia
Technologies, AVS Graphics, The Bulldog Group, DSMCi, eMotion, Informix, iXL,
Lockheed Martin Corporation, Magnifi, Professional Services for Web Business, or
PS Web, SAIC, StorNet Government Systems, ViewCast.com and WebWare. Together,
these distributors and value-added resellers accounted for over 40% of our total
revenues for the nine months ended December 31, 1999. The terms of these
agreements include a nonexclusive license to the distributors and value-added
resellers to distribute our products to end users in a specified territory under
our end user license agreement in return for fees to us equal to a discount off
of our list price for an initial term of up to two years.
MARKETING ACTIVITIES
Since our inception, we have invested a substantial percentage of our
revenues in a broad range of marketing activities to generate demand, gain
corporate brand identity and educate the market about our products and services.
These activities have focused primarily on direct marketing, direct mail and
email, public relations, co-marketing and branding with our major customer
accounts and strategic partners, targeted trade shows, conferences and speaking
engagements, and the provision of product information through print collateral
and our Internet site. In addition, we have created a developer relations
organization to encourage independent software developers to develop products
and solutions that are compatible with our products, application programming
interfaces and technologies. Today, our marketing strategy is focused primarily
on the North American and European markets but we intend to increase our
marketing activities in Asia, Australia and South America.
COMPETITION
The Internet video marketplace is new, rapidly evolving and intensely
competitive. As more companies begin to deploy searchable and interactive video
on the Internet, we expect competition to intensify.
We currently compete directly with other providers in the Internet video
infrastructure marketplace including Excalibur Technologies and MediaSite. We
may also compete indirectly with larger system integrators who embed or
integrate these directly competing
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technologies into their product offerings. It is possible that we may work with
these same larger companies on one customer bid and compete with them on
another. In the future, we may compete with other video services vendors and
searchable video portals. In addition, we may compete with our current and
potential customers who may develop software or perform application services
internally.
We believe that the principal competitive factors in our market are:
- audio and video cataloging functionality;
- ease of installation and use;
- real-time processing capability;
- reliability;
- pricing;
- 24-by-7 customer support;
- adoption by other customers; and
- number and strength of relationships with other Internet video providers.
We believe we compete favorably with our competitors based on these
factors. However, some of our competitors may have access to proprietary
technology from outside sources. This access to proprietary technology might
allow our competitors to bring new technologies to market faster than we can.
Furthermore, because our existing and potential competitors may have longer
operating histories, greater name recognition, larger customer bases and
substantially greater financial, technical, sales and marketing resources, they
may have access to more customers and a larger installed customer base than we
do. These competitors may be able to undertake more extensive marketing
campaigns and adopt more aggressive pricing policies than we can.
INTELLECTUAL PROPERTY
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of patent, trademark and copyright laws, as well as confidentiality
and license agreements with our employees and others.
Patents. We actively seek patent protection for our intellectual property.
We have filed 14 U.S. patent applications and one additional provisional U.S.
patent application in the following areas:
- visual information retrieval;
- indexing methods for image search;
- keyframe selection;
- visual dictionary; and
- video cataloger system.
Five patents have been issued and a sixth patent has been allowed by the Patent
and Trademark Office. Our remaining eight patent applications are currently
pending.
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In 1997, we entered into a five-year patent cross-licensing agreement with
IBM. The terms of this agreement include our nonexclusive license of IBM's
multimedia software patents in return for an annual fee and a license to IBM of
all of our current patents as described above and any patents that may be issued
to us in the future.
Trademarks. We have seven trademarks, three of which are registered.
We seek to avoid disclosure of our trade secrets by limiting access to our
proprietary technology and restricting access to our source code. Despite these
precautions, it may be possible for unauthorized third parties to copy
particular portions of our technology or reverse engineer or obtain and use
information that we regard as proprietary. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. Our means of protecting our proprietary rights in the United
States or abroad may not be adequate and competing companies may independently
develop similar technology.
EMPLOYEES
As of December 31, 1999, we had 118 employees, of which 26 were employed in
operations, 43 were employed in engineering, 37 were employed in sales and
marketing, and 12 were employed in general and administrative positions. None of
our employees is subject to a collective bargaining agreement, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
PROPERTIES
Our principal executive and administrative offices are located at 177 Bovet
Road, Suite 520, in San Mateo, California 94402 where we lease approximately
20,670 square feet, which lease expires on May 31, 2002. We have entered into an
agreement pursuant to which, in October 2000, we will lease new executive and
administrative offices located at 411 Borel Avenue, San Mateo, California 94402.
This lease, for approximately 48,000 square feet, will expire on September 30,
2006. In addition, we lease administrative and sales offices near London,
England and in New York, under leases expiring on February 27, 2002 and March
31, 2005, respectively. We believe that such existing facilities are adequate
for our current needs or that suitable additional or alternative space will be
available in the future on commercially reasonable terms.
LEGAL PROCEEDINGS
From time to time, we could become involved in litigation relating to
claims arising out of our ordinary course of business. We are not presently
involved in any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and their ages as of February 29, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul G. Lego........................... 41 President, Chief Executive Officer and
Chairman of the Board of Directors
Alfred J. Castino...................... 47 Chief Financial Officer
Weldon D. Bloom........................ 51 Vice President, Sales
David J. Girouard...................... 33 Vice President and General Manager,
Virage Interactive
Bradley J. Horowitz.................... 34 Chief Technology Officer
Andrew P. Langhoff..................... 38 Vice President, Business Development
Carlos O. Montalvo..................... 43 Vice President, Marketing
Frank H. Pao........................... 31 Vice President, Business Affairs and
General Counsel
Mark K. Rattley........................ 39 Vice President and General Manager,
European Operations
Gilbert C. Wai......................... 46 Vice President, Engineering
Philip W. Halperin(1).................. 36 Director
Ramesh Jain, PhD....................... 50 Director
Standish H. O'Grady(1)(2).............. 39 Director
Lawrence K. Orr(2)..................... 43 Director
C.K. Prahalad, D.B.A. ................. 58 Director
William H. Younger, Jr.(1)(2).......... 50 Director
</TABLE>
- -------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Paul G. Lego, president and chief executive officer, joined Virage in
January 1996. Mr. Lego also recently became chairman of our board of directors
in December 1999. From January 1995 to January 1996, Mr. Lego was an associate
at Sutter Hill Ventures, a venture capital firm. From June 1988 to December
1994, Mr. Lego was the chief operating officer at Digidesign, a manufacturer of
digital audio recording and editing systems which was acquired by Avid
Technology in January 1995. Mr. Lego has also held various marketing,
manufacturing and engineering positions with Pyramid Technology Corporation, the
General Electric Company and Digital Equipment Corporation. Mr. Lego holds a
B.S. in electrical engineering from Cornell University and an M.B.A. from
Harvard Business School.
Alfred J. Castino, chief financial officer, joined Virage in January 2000.
From September 1999 to January 2000, Mr. Castino was the chief financial officer
of RightPoint, a marketing software firm that was recently acquired by
E.piphany. From September 1997 to August 1999, Mr. Castino was employed at
PeopleSoft as vice president of finance and chief accounting officer, as senior
vice president of finance and administration, and chief financial officer. From
April 1996 to September 1997, Mr. Castino was vice president and corporate
controller at Chiron Corporation, a biotechnology company. From August 1989 to
March 1996, Mr. Castino held finance positions at Sun Microsystems, a computer
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<PAGE> 58
hardware company, including finance director of United States operations,
director of finance and planning for European operations, and assistant
corporate controller. Mr. Castino's prior experience also includes seven years
at Hewlett-Packard Company in various financial management positions. Mr.
Castino is a certified public accountant. Mr. Castino holds a B.A. in economics
from Holy Cross College and an M.B.A. from Stanford University.
Weldon D. Bloom, vice president, sales, joined Virage in October 1998. From
April 1996 to September 1998, Mr. Bloom was vice president of sales at Netcom
Online Communications, a leading Internet service provider that was acquired by
ICG Communications in October 1997. From April 1994 to April 1996, Mr. Bloom was
vice president of North American sales at Radius, a manufacturer of graphics
acceleration and video editing tools for the color publishing and digital video
markets. Mr. Bloom also has an additional 20 years of sales and sales management
experience at Apple Computer, Eastman Kodak Company and EO. Mr. Bloom holds a
B.S. in marketing from Western Illinois University.
David J. Girouard, vice president and general manager, Virage Interactive,
joined Virage in May 1997. Prior to becoming our vice president and general
manager, Virage Interactive, Mr. Girouard served as our director of product
marketing from November 1997 to May 1999. From December 1994 to April 1997, Mr.
Girouard was a product manager in the worldwide product marketing group at Apple
Computer. Mr. Girouard holds a B.A. in engineering sciences and a B.E. from
Dartmouth College. He also holds an M.B.A. from the University of Michigan.
Bradley J. Horowitz, chief technology officer, co-founded Virage in 1994.
From 1989 to April 1993, Mr. Horowitz was a consultant for various companies,
including Polaroid, TASC and Comtech Labs, in the area of digital image and
video understanding. Mr. Horowitz received a B.S. in computer science from the
University of Michigan and a M.S. in media science from the Media Lab at the
Massachusetts Institute of Technology.
Andrew P. Langhoff, vice president, business development, joined Virage in
January 2000. Prior to joining Virage, Mr. Langhoff held a number of positions
within the online operations of the Walt Disney Company, most recently as vice
president of broadband development for Go.com. From March 1998 to October 1999,
Mr. Langhoff was vice president, business development for the Buena Vista
Internet Group of Walt Disney Company where he was responsible for the strategic
partnerships of ABCNEWS.com, ABC.com, ESPN.com and other Disney websites. From
March 1997 to March 1998, Mr. Langhoff was vice president, business development
for ABCNEWS Internet Ventures. From February 1996 to March 1997, Mr. Langhoff
was vice president, business development for the ABC Multimedia Group. From 1992
to 1996, Mr. Langhoff was a general attorney at Capital Cities/ABC. Mr. Langhoff
received a B.A. from Tufts University and a J.D. from the University of Virginia
School of Law.
Carlos O. Montalvo, vice president, marketing, joined Virage in May 1998.
From March 1997 to April 1998, Mr. Montalvo served as vice president of
marketing at Cinebase, a provider of media asset management software. From March
1987 to March 1997, Mr. Montalvo held various product and regional marketing
positions and served as vice president of Apple Computer's interactive media
group. Mr. Montalvo studied political science and bioengineering at the
University of California at San Diego.
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<PAGE> 59
Frank H. Pao, vice president, business affairs and general counsel, joined
Virage in April 1997. From September 1994 to March 1997, Mr. Pao specialized in
intellectual property and licensing transactions at the law firm of Gray Cary
Ware & Freidenrich. He has also held various engineering positions at Advanced
Cardiovascular Systems and Lawrence Berkeley Laboratories. Mr. Pao holds a B.S.
in bioengineering from the University of California at Berkeley and a J.D. from
Boalt Hall School of Law at the University of California at Berkeley.
Mark K. Rattley, vice president and general manager, European operations,
will join Virage as a full-time employee in March 2000. From November 1998 to
the present, he has held the position of vice president of Protege Software, a
consulting firm, where he is responsible for developing our European operations.
Previously, he spent six years as a director and general manager of Sun
Microsystems UK where he was responsible for the enterprise and Internet
software business in Europe. Prior to Sun Microsystems, Mr. Rattley held senior
sales, product marketing, general management and director positions at Informix,
Software Publishing Corporation, Rapid Recall and Technitron Systems. Mr.
Rattley graduated in 1982 with a Higher National Certificate in advanced
electronic engineering and a business administration diploma, studied at Reading
College of Technology and Thames Valley University, England.
Gilbert C. Wai, vice president, engineering, joined Virage in July 1997.
From October 1994 to June 1997, Mr. Wai was senior vice president of product
development at Legato Systems, a publicly-held enterprise storage management
software company. From September 1987 to September 1994, Mr. Wai held various
marketing and engineering executive positions, most recently as vice president
of product management and development, at Informix Software, a publicly-held
database software company. Mr. Wai holds a B.S. in electrical engineering and
computer science from the University of California at Berkeley.
Philip W. Halperin has served as a director of Virage since September 1999.
Mr. Halperin has been a general partner of Weston Presidio Capital, a venture
capital firm, since October 1993. Mr. Halperin currently serves as a director of
several private companies. Mr. Halperin holds an A.B. in political science from
Stanford University and an M.B.A. from Harvard Business School.
Ramesh Jain, Ph.D. has served as a director of Virage since 1994 and was
chairman of the board of directors since he co-founded Virage in 1994 to
December 1999. Currently, he is the president and chief executive officer of
PRAJA, an Internet company that he co-founded in 1996. Dr. Jain was professor of
engineering and computer science at the University of California at San Diego
from January 1993 to June 1999 and at the University of Michigan at Ann Arbor
from 1982 to 1993. In January 1991, Dr. Jain founded Imageware, a software
company which provides software for surface modeling, reverse engineering, rapid
prototyping, and inspection.
Standish H. O'Grady has served as a director of Virage since April 1998.
Mr. O'Grady has been managing director of H&Q Venture Associates, L.L.C., a
venture capital firm, since its formation in July 1998. Mr. O'Grady previously
served in various positions with Hambrecht & Quist Group's venture capital
department since 1986, including managing director from 1994 to 1998. In
addition, he has been an investment manager for a series of Adobe Ventures
partnerships since their inception in 1994. Mr. O'Grady currently serves as a
director of Tumbleweed Communications, as well as a number of private companies.
He holds a B.S.E. in chemical engineering from Princeton
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University and an M.B.A. from the Amos Tuck School of Business Administration at
Dartmouth College.
Lawrence K. Orr has served as a director of Virage since April 1995. Mr.
Orr is a general partner of Trinity Ventures in Menlo Park, California, where he
has been a private equity technology investor specializing in software and
communications since 1989. Prior to Trinity, Mr. Orr worked at Bain and Company
and Hewlett-Packard, where he was a marketing manager in the Information
Networks Group, responsible for product management and field sales and support
programs for Hewlett-Packard's data communications product lines. Mr. Orr holds
an A.B. degree in mathematics from Harvard University and an M.B.A. from the
Stanford Graduate School of Business. He currently is a director of Extreme
Networks, as well as several private companies.
C.K. Prahalad, D.B.A. has served as a director of Virage since April 1995.
Dr. Prahalad is currently the Harvey C. Fruehauf Professor of Business
Administration at the University of Michigan where he has been a professor since
1986. Dr. Prahalad has also been a visiting research fellow at Harvard Business
School, a visiting professor at INSEAD and a professor at the Indian Institute
of Management, Ahmedabad. Dr. Prahalad currently is a board member of NCR
Corporation and consults for several public companies. Dr. Prahalad has a B.S.
in physics from Loyola College, University of Madras and a D.B.A. from Harvard
Business School.
William H. Younger, Jr. has served as a director of Virage since April
1995. Mr. Younger is currently a managing director of the general partner of
Sutter Hill Ventures, a venture capital management firm, which he joined in
1981. Mr. Younger currently serves as a director of Vitria Technology, as well
as several private companies. Mr. Younger holds a B.S.E.E. from the University
of Michigan and an M.B.A. from Stanford University.
BOARD COMPOSITION
Effective upon the closing of this offering, our certificate of
incorporation and bylaws will provide for a board of directors that is divided
into three classes:
- Class I, whose term will expire at the annual meeting of stockholders
expected to be held in June 2000;
- Class II, whose term will expire at the annual meeting of stockholders
expected to be held in June 2001; and
- Class III, whose term will expire at the annual meeting of stockholders
expected to be held in June 2002.
As a result, only one class of directors will be elected at each annual
meeting of stockholders, with the other classes continuing for the remainder of
their terms. Effective upon the closing of this offering, the following
individuals will serve as our directors:
- Paul G. Lego, Ramesh Jain and C.K. Prahalad will be our Class I
directors;
- Lawrence K. Orr and William H. Younger, Jr. will be our Class II
directors; and
- Philip W. Halperin and Standish H. O'Grady will be our Class III
directors.
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There are no family relationships among any of our directors, officers or
key employees.
BOARD COMMITTEES
Our board of directors has recently formed an audit committee and a
compensation committee.
Audit committee. The audit committee reviews the results and scope of the
annual audit and meets with our independent auditors to review our internal
accounting policies and procedures.
Compensation committee. The compensation committee reviews and makes
recommendations to our board of directors on our general and specific
compensation policies and practices and administers our 1995 stock option plan,
1997 stock option plan and 2000 employee stock purchase plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee has at any time since our
formation been one of our officers or employees. None of our executive officers
currently serves, or in the past has served, as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving on our board of directors or compensation committee. Before the
creation of our compensation committee, all compensation decisions were made by
our full board of directors.
EMPLOYMENT, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
We routinely deliver written offer letters containing provisions on salary,
bonuses, benefits and stock option grants to prospective members of management
and other employees. In addition, we have entered into agreements containing
employment and change-in-control provisions as described below.
The stock option agreements between Virage and Paul G. Lego, our president
and chief executive officer, in which Mr. Lego was granted options to purchase
803,333 shares of common stock, of which options for 549,110 shares have been
exercised, provide for full acceleration of vesting of all unvested options upon
a change-in-control event in which Mr. Lego is terminated or constructively
dismissed. The stock option agreement between Virage and Mr. Lego, in which Mr.
Lego was granted options to purchase 666,667 shares of common stock, provides
for 50% acceleration of vesting of all unvested options upon a change-in-control
event.
The stock option agreement between Virage and Alfred J. Castino, our chief
financial officer, provides for 50% acceleration of vesting of all unvested
options upon a change-in-control event and three months acceleration of vesting
of unvested options if he is terminated without cause. In addition, Mr. Castino
receives three months base salary if he is terminated without cause.
The stock option agreement between Virage and Andrew P. Langhoff, our vice
president, business development, provides for 50% acceleration of vesting of all
unvested options upon a change-in-control event in which Mr. Langhoff is
terminated or constructively dismissed and six months acceleration of vesting of
unvested options if he is
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terminated without cause. In addition, Mr. Langhoff receives six months base
salary if he is terminated without cause.
The stock option agreement between Virage and Mark K. Rattley, our vice
president and general manager, European operations, provides for 50%
acceleration of vesting of all unvested options upon a change-in-control event
in which Mr. Rattley is terminated or constructively dismissed and six months
acceleration of vesting of unvested options if he is terminated or
constructively dismissed without cause. In addition, Mr. Rattley receives six
months of his target earnings and benefits if he is terminated without cause.
The stock option agreements between Virage and each of Weldon D. Bloom,
Carlos O. Montalvo and Gilbert C. Wai provide for 50% acceleration of vesting of
all unvested options upon a change-in-control event in which the executive
officer is terminated or constructively dismissed. In addition, each of these
executive officers receive three months base salary if the executive is
terminated without cause.
The stock option agreements between Virage and each of Frank H. Pao and
David J. Girouard provide for 50% acceleration of vesting of all unvested
options upon a change-in-control event in which the executive officer is
terminated or constructively dismissed.
EXECUTIVE COMPENSATION
Our directors do not receive cash compensation for their services as
directors. Our directors receive cash compensation for their services as members
of committees of the board of directors. These directors receive $1,000 to
attend a committee meeting in person and $500 to attend a committee meeting by
telephone. We also reimburse directors for their reasonable expenses incurred in
attending meetings of the board of directors and of committees of the board.
Our outside directors receive an initial stock option grant of 40,000
shares. These option shares vest over a four-year period as follows: 25% upon
the first anniversary of the option grant date with the remainder vesting
ratably on a monthly basis for the 36 months beginning one year after the date
of grant. Each outside director is granted each year thereafter an option to
purchase 10,000 shares. These subsequent options vest ratably on a monthly basis
for 24 months beginning on the date of grant. The stock option agreements
between Virage and outside directors will provide for full acceleration of
vesting of all unvested options upon a change-in-control event.
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The following table presents information regarding compensation paid or
earned by our chief executive officer and our four other most highly compensated
executive officers whose total salary and bonus for the fiscal year ended March
31, 1999 exceeded $100,000. The total amount of personal benefits paid to the
executive officers during the fiscal year was less than the lesser of $50,000 or
10% of the executive officer's total reported salary and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM AND OTHER
COMPENSATION AWARDS
-------------------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
NAME AND ------------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
------------------ ---- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Paul G. Lego.................... 1999 $195,000 -- 133,333 --
President and Chief Executive
Officer
Bradley J. Horowitz............. 1999 $135,000 $25,000 133,333 --
Chief Technology Officer
Carlos O. Montalvo.............. 1999 $151,970 $17,000 277,500 --
Vice President, Marketing
Frank H. Pao.................... 1999 $124,830 $15,000 100,000 --
Vice President, Business Affairs
and General Counsel
Gilbert C. Wai.................. 1999 $168,000 $15,000 66,666 --
Vice President, Engineering
FORMER EXECUTIVE OFFICER:
Paul Roberge.................... 1999 $ 52,500 -- -- $68,190(1)
Vice President, Sales
</TABLE>
- -------------------------
(1) Represents amount paid to Mr. Roberge upon his departure in June 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table above
during the fiscal year ended March 31, 1999. All of these options were granted
under our 1997 stock option plan. Generally, these options vest ratably on a
monthly basis for 48 months beginning one month after the date of grant.
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The following table is based on the grant of options to purchase a total of
1,662,583 shares of our common stock during fiscal year 1999. All options were
granted at the fair market value of our common stock, as determined by the board
of directors on the date of grant. Potential realizable values are net of
exercise price, but before taxes associated with exercise. Amounts represent
hypothetical gains that could be achieved for the options if exercised at the
end of the option term. The assumed 5% and 10% rates of stock price appreciation
are required by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future common stock price. Unless
the market price of the common stock appreciates over the option term, no value
will be realized from the option grants made to executive officers. Actual
gains, if any, on stock option exercises will be dependent on the future
performance of our common stock. The assigned 5% and 10% rates of stock
appreciation are based on an assumed offering price of $11.00 per share.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS EXERCISE ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED TO OR BASE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ---------- ------------ --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul G. Lego......... 133,333 8.0% 0.24 4/23/08 $ 2,357,047 $ 3,772,084
Bradley J.
Horowitz........... 66,666 4.0% 0.24 4/23/08 1,178,515 1,886,028
66,666(1) 4.0% 0.75 2/24/09 1,144,515 1,852,028
Carlos O. Montalvo... 277,500 16.7% 0.24 5/21/08 4,905,617 7,850,669
Frank H. Pao......... 66,666 4.0% 0.24 4/23/08 1,178,515 1,886,028
33,333 2.0% 0.75 2/24/09 572,258 926,104
Gilbert C. Wai....... 66,666 4.0% 0.24 4/23/08 1,178,515 1,886,028
FORMER EXECUTIVE
OFFICER:
Paul Roberge......... -- -- -- -- -- --
</TABLE>
- -------------------------
(1) These options vest at the rate of one-half the total number of shares on the
one year anniversary from the date of grant and thereafter ratably on a
monthly basis for 12 months.
OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during fiscal 1999 and the number of
shares of common stock subject to exercisable and unexercisable options held as
of March 31, 1999 by each of the executive officers named in the Summary
Compensation Table above. Also presented are values of in-the-money options,
which represent the positive difference
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between the exercise price of each outstanding stock option and a fair market
value on March 31, 1999 of $0.75 per share.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND VALUES AT MARCH 31, 1999
<TABLE>
<CAPTION>
NUMBER NUMBER OF SECURITIES
OF SHARES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT 3/31/99 AT 3/31/99
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul G. Lego.......... 134,333 $37,782 164,333 227,333 $131,645 $217,388
Bradley J. Horowitz... -- -- 172,222 27,778 $ 83,375 $ 23,126
Carlos O. Montalvo.... -- -- 277,500 -- $212,288 --
Frank H. Pao.......... 14,000 $ 2,205 88,833 24,666 $ 42,548 $ 20,535
12,500 585 -- -- -- --
Gilbert C. Wai........ 66,666 $ 6,000 -- -- -- --
FORMER EXECUTIVE
OFFICER:
Paul Roberge.......... 7,946 $ 537 -- -- -- --
28,562 5,463 -- -- -- --
</TABLE>
STOCK OPTION PLANS
1995 STOCK OPTION PLAN
Our 1995 stock option plan was adopted by our board of directors and
approved by our stockholders in March 1995. Prior to the adoption of the 1997
stock option plan, a total of 2,740,480 shares of common stock were reserved for
issuance under the 1995 stock option plan. In December 1997, upon the adoption
of the 1997 stock option plan, our board of directors terminated the 1995 stock
option plan. While no additional options will be granted under this plan,
options to purchase 519,277 shares of common stock are outstanding as of
December 31, 1999 and remain subject to the provisions of the 1995 stock option
plan as of December 31, 1999. The plan is administered by the compensation
committee of the board of directors.
The 1995 stock option plan allowed the grant of incentive stock options,
within the meaning of section 422 of the Internal Revenue Code, to employees,
including officers and employee directors. In addition, it allowed grants of
nonstatutory options to employees, non-employee directors, and consultants. The
exercise price of nonstatutory stock options granted under the 1995 stock option
plan could not be less than 85% of the fair market value of a share of common
stock on the date of grant. In the case of incentive stock options, the exercise
price could not be less than the fair market value of a share of common stock on
the date of grant. With respect to any optionee who owned stock representing
more than 10% of the voting power of all classes of our outstanding capital
stock, the exercise price of any stock option had to be equal to at least 110%
of the fair market value of a share of the common stock on the date of grant,
and the term of the option could not exceed five years. The terms of all other
options could not exceed ten years. The aggregate fair market value, determined
as of the date of option grant, of the common stock for which an incentive stock
option could become exercisable for the first time could not exceed $100,000 in
any calendar year.
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The 1995 stock option plan provides that in the event of certain transfer
of control transactions involving the company, outstanding options will
terminate to the extent that they are neither exercised nor assumed or
substituted for by the acquiring corporation.
As of February 29, 2000, 1,380,403 shares of common stock had been issued
upon exercise of options under this plan and options to purchase 519,277 shares
of common stock with a weighted average exercise price of $0.1283 were
outstanding.
1997 STOCK OPTION PLAN
Our 1997 stock option plan was adopted by our board of directors in
December 1997 and approved by our stockholders in April 1998 and has been
amended from time to time.
The compensation committee of our board of directors currently administers
the 1997 stock option plan. The plan allows grants of incentive stock options,
within the meaning of section 422 of the Internal Revenue Code, to employees,
including officers and employee directors. In addition, it allows grants of
nonstatutory options to employees, non-employee directors and consultants.
Incentive stock options may not be granted after December 2007, although the
plan may be terminated sooner by the board of directors.
We are authorized to issue up to a maximum of 10,332,022 shares of common
stock under this plan, which consists of the sum of 8,628,663 shares, which are
new shares allocated to the 1997 stock option plan, and 1,703,359 shares that
were subject to options outstanding on December 4, 1997 granted pursuant to the
1995 stock option plan. However, the number of shares available for grant under
the 1997 stock option plan is reduced by the number of shares which remain
subject to such options or which are issued and outstanding as a result of the
exercise of such options. This number of shares will be increased on April 1,
2001 and each subsequent April 1 during the term of the plan by the lesser of 5%
of the number of shares of common stock issued and outstanding on the
immediately preceding March 31 or 1,000,000.
The exercise price of nonstatutory stock options granted under the 1997
stock option plan must not be less than 85% of the fair market value of a share
of common stock on the date of grant. In the case of incentive stock options,
the exercise price must not be less than the fair market value of a share of
common stock on the date of grant. With respect to any optionee who owns stock
representing more than 10% of the voting power of all classes of our outstanding
capital stock, the exercise price of any incentive stock option must be equal to
at least 110% of the fair market value of a share of the common stock on the
date of grant, and the term of the option may not exceed five years. The terms
of all other options may not exceed ten years. The aggregate fair market value,
determined as of the date of option grant, of the common stock for which an
incentive stock option may become exercisable for the first time may not exceed
$100,000 in any calendar year.
The compensation committee has discretion to determine vesting schedules
and exercise requirements, if any, of all options granted under the plan. In the
event of our merger with another corporation or another change in control event,
the acquiring corporation may assume outstanding options or substitute new
options of equivalent value. Any options not assumed by the acquiring
corporation or exercised prior to a change in control will terminate upon the
change in control.
As of February 29, 2000, 1,207,941 shares of common stock had been issued
upon exercise of options outstanding, options to purchase 4,317,812 shares of
common stock with
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a weighted average exercise price of $3.432 were outstanding, and 4,154,484
shares remained available for future grants.
2000 EMPLOYEE STOCK PURCHASE PLAN
A total of 1,100,000 shares of common stock have been reserved for issuance
under our 2000 employee stock purchase plan, none of which have been issued.
This number of shares will be increased cumulatively by the lesser of 400,000
shares or 2% of the number of issued and outstanding shares of common stock on
the immediately preceding March 31 on April 1, 2001 and each April 1 thereafter
through April 1, 2010. This plan is intended to qualify under section 423 of the
Internal Revenue Code and our compensation committee will be administer the
plan. Employees, including officers and employee directors, are eligible to
participate in the plan if they are employed by us for more than 20 hours per
week and more than five months per calendar year.
The plan will be implemented during sequential six-month offering periods.
The offering periods will generally commence on May 1 and November 1 of each
year and end on the last days of the following October and April, respectively.
Each offering period is comprised of a single purchase period. However, the
first offering period will commence on the effective date of this offering and
will end on the last day of April 2002. The initial offering period is comprised
of six-month purchase periods, with the first purchase period commencing on the
effective date of this offering and ending on October 31, 2000. The board of
directors may establish a different term for one or more offerings or different
commencement or ending dates for any offering period or purchase period,
provided that no offering period may exceed 27 months in duration.
The 2000 employee stock purchase plan permits eligible employees to
purchase shares of our common stock through payroll deductions, which may not
exceed 10% of the employee's base salary. Stock may be purchased under the plan
at a price equal to 85% of the fair market value of our common stock on either
the first or the last day of the offering period, whichever is lower. Employees
may end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of a participant's
employment with us. Participants may not purchase shares of common stock having
a value, measured at the beginning of the offering period, greater than $25,000
in any calendar year or more than a number of shares in any offering period
determined by dividing $25,000, or $12,500 with respect to a six-month offering
period, by the fair market value of a share of our common stock determined at
the beginning of the offering period. In addition, no participant may purchase
more than 2,500 shares on a purchase date.
401(k) PLAN
In 1995, we adopted an employee savings and retirement plan intended to be
tax-qualified under sections 401(a) and 401(k) of the Internal Revenue Code.
Employees who are at least 18 years old are generally eligible to participate
and may enter the plan as of the first day of any calendar quarter. Participants
may make pre-tax contributions to the plan of 2% to 20% of their eligible
compensation, subject to a statutorily prescribed annual limit, which is $10,500
in calendar year 2000. Each participant's contributions and investment earnings
on these contributions are fully vested at all times. Our 401(k) plan permits,
but does not require, matching contributions on behalf of participants. To date,
we have not made such contributions. Contributions to the 401(k) plan, and the
income earned on these contributions, are generally not taxable to the
participants until withdrawn.
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Contributions are generally deductible by us when made. The 401(k) plan assets
are held in trust. The trustee of the 401(k) plan invests the assets of the plan
in various investment options as directed by the participants.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation, which the
Delaware General Corporation Law permits, which provide that our directors shall
not be personally liable to us or our stockholders for monetary damages
resulting from a violation of the directors' duty to act with care and in the
best interests of the stockholders, except for liability:
- for acts or omissions that are not in good faith, are deliberately
improper or are known to be illegal;
- under Section 174 of the Delaware General Corporation Law relating to
improper dividends or distributions; or
- for any transaction from which the director obtained an improper personal
benefit.
This limitation of liability does not affect the availability of equitable
remedies, including injunctive relief or rescission.
Our bylaws authorize us to indemnify our officers, directors, employees and
agents to the extent permitted by the Delaware General Corporation Law. Section
145 of the Delaware General Corporation Law empowers us to enter into
indemnification agreements with our officers, directors, employees and agents.
Before the completion of this offering, we intend to enter into separate
indemnification agreements with each of our current directors and executive
officers which may, in some cases, be broader than the specific indemnification
provisions allowed by the Delaware General Corporation Law. The indemnification
agreements will require us to indemnify the executive officers and directors
against liabilities that may arise by reason of status or service as directors
or executive officers and to advance expenses they spend as a result of any
proceeding against them for which they could be indemnified to the fullest
extent permitted by the Delaware General Corporation Law.
We intend to obtain liability insurance for our directors and officers and
intend to obtain a rider to extend that coverage for public securities matters.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Virage where indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding that may 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 Virage,
we have been informed that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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RELATED PARTY TRANSACTIONS
Since April 1, 1996, there has not been, nor is there currently planned,
any transaction or series of similar transactions to which Virage was or is a
party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of Virage's capital stock or any
member of their immediate family had or will have a direct or indirect material
interest other than agreements which are described under the caption
"Management" and the transactions described below.
SALES OF STOCK TO INSIDERS
The following directors, executive officers, holders of more than 5% of a
class of voting securities and members of these persons' immediate families
purchased from us shares of our series B preferred stock, series C preferred
stock, series D preferred stock, series E preferred stock or common stock.
Immediately before the closing of this offering, all outstanding shares of
series B preferred stock, series C preferred stock, series D preferred stock and
series E preferred stock will automatically convert into shares of common stock
on a one-for-one basis.
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED COMMON
STOCKHOLDER STOCK STOCK STOCK STOCK STOCK
----------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Paul G. Lego, including:
Paul G. Lego..................... 7,998 29,140 23,256 93,496 549,110
Lego Family Partnership.......... -- -- -- 31,708 --
David and Elizabeth Sippin....... -- -- -- 4,064 --
Christopher and Deborah Sawch.... -- -- -- 4,064 --
Weldon D. Bloom.................... -- -- -- -- 266,666
Gilbert C. Wai, individual and
trustee:
Gilbert C. Wai................... -- -- -- -- 352,744
Wai Family Revocable Trust....... 23,333 -- -- -- --
Philip W. Halperin, including:
Weston Presidio Capital III, LLC... -- -- -- 1,839,335 --
Weston Presidio Capital
Entrepreneur Fund............. -- -- -- 91,558 --
Ramesh Jain, Ph.D. ................ 6,666 -- 13,566 -- 799,574
Standish H. O'Grady, including: --
Adobe Incentive Partners, L.P.... -- 951,492 48,137 67,258 --
H&Q Adobe Ventures Management II,
LLC........................... -- 167,910 8,494 11,506 --
H&Q Virage Investors, L.P........ -- 373,134 18,877 38,355 --
Lawrence K. Orr, including:
Trinity Ventures IV, L.P......... 387,376 442,415 96,645 130,908 --
Trinity IV Side-By-Side Fund,
L.P........................... 22,880 26,131 4,026 5,860 --
C.K. Prahalad, D.B.A............... 96,282 24,875 15,504 -- --
William H. Younger, Jr............. 36,262 41,698 8,960 11,978
</TABLE>
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<PAGE> 70
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED COMMON
STOCKHOLDER STOCK STOCK STOCK STOCK STOCK
----------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Sutter Hill Ventures, including:
Sutter Hill Ventures............. 199,578 226,364 48,636 66,962 --
Parties Affiliated with Sutter
Hill Ventures................. 189,332 229,483 49,307 65,704 --
AltaVista Company.................. -- -- 1,348,956 87,988 --
Media Technology Ventures,
including:
Media Technology Ventures,
L.P........................... 668,908 235,830 50,670 68,635 105,000
Media Technology Ventures
Entrepreneurs Fund............ 79,041 30,450 6,542 8,862 11,666
Reuters Holdings Switzerland SA.... -- -- -- 1,016,260 --
</TABLE>
Mr. Lego's brother, Michael Lego, is the managing partner of the Lego
Family Partnership. Mr. Lego disclaims beneficial ownership of these securities,
except to the extent of his pecuniary interest in the partnership. Ms. Sippin
and Ms. Sawch are sisters of Mr. Lego's wife. Mr. Lego disclaims beneficial
ownership of these securities.
The general partner of both Weston Presidio Capital III, LLC and Weston
Presidio Capital Entrepreneur Fund, L.P. is Weston Presidio Capital Management
III, LLC. The general partner of Adobe Incentive Partners, L.P. is Adobe Systems
Incorporated and the general partner of H&Q Virage Investors, L.P. is H&Q Virage
Investment Management, LLC. The general partner of both Trinity Ventures IV,
L.P. and Trinity IV Side-By-Side Fund, L.P. is Trinity TVL Partners, L.P. The
general partners of these entities exercise voting and investment power with
respect to all shares held of record by the named investment partnerships. Mr.
Halperin, Mr. O'Grady and Mr. Orr, respectively, disclaim beneficial ownership
of all shares except for their own pecuniary interest.
The following is a summary of sales of our preferred and common stock that
are presented in the table above:
Series B financing. On January 9, 1997, January 31, 1997, July 24, 1997 and
September 22, 1997, we sold a total of 2,031,385 shares of series B preferred
stock at a price of $1.95 per share.
Series C financing. On March 31, 1998 and April 27, 1998, we sold a total
of 2,985,075 shares of series C preferred stock at a price of $2.01 per share.
Series D financing. On January 27, 1999 and March 1, 1999, we sold a total
of 1,937,984 shares of series D preferred stock at a price of $2.58 per share.
Series E financing. On September 21, 1999 and December 17, 1999, we sold a
total of 4,044,934 shares of series E preferred stock at a price of $4.92 per
share.
Sales of Common Stock.
On October 21, 1996, Mr. Paul Lego exercised options to acquire 143,000
shares of common stock at an exercise price of $0.113 per share.
On November 21, 1997, Mr. Paul Lego exercised an option to acquire 134.333
shares of common stock at an exercise price of $0.113 per share.
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<PAGE> 71
On December 31, 1997, Mr. Gilbert Wai exercised an option to acquire
186,077 shares of common stock at an exercise price of $0.195 per share.
On June 30, 1998, Mr. Paul Roberge exercised options to acquire 7,946
shares of common stock at an exercise price of $0.195 per share and an option to
purchase 28,562 shares of common stock at an exercise price of $0.113 per share.
On December 3, 1998, Dr. Ramesh Jain exercised an option to acquire 249,526
shares of common stock at an exercise price of $0.124 per share.
On December 16, 1998, Mr. Paul Lego exercised an option to acquire 134,333
shares of common stock at an exercise price of $0.1125 per share. Mr. Gilbert
Wai exercised an option to acquire 66,666 shares of common stock at an exercise
price of $0.24 per share.
On February 17, 1999, Mr. Frank Pao exercised an option to acquire 14,000
shares of common stock at an exercise price of $0.195 per share and an option to
acquire 12,500 shares of common stock at an exercise price of $0.24 per share.
On September 1, 1999, Mr. Paul Lego exercised an option to acquire 44,444
shares of common stock at an exercise price of $0.24 per share. Mr. Frank Pao
exercised an option to acquire 9,722 shares of common stock at an exercise price
of $0.24 per share and an option to acquire 4,666 shares of common stock at an
exercise price of $0.195 per share.
On September 3, 1999, Mr. Gilbert Wai exercised an option to acquire
100,000 shares of common stock at an exercise price of $2.40 per share.
On September 6, 1999, Mr. Paul Lego exercised an option to acquire 93,000
shares of common stock at an exercise price of $0.113 per share.
On November 30, 1999, Mr. Frank Pao exercised an option to acquire 16,666
shares of common stock at an exercise price of $0.24 per share.
On January 6, 2000, Mr. Frank Pao exercised an option to acquire 18,750
shares of common stock at an exercise price of $0.75 per share.
On January 9, 2000, Mr. Frank Pao exercised an option to acquire 2,667
shares of common stock at an exercise price of $0.195 per share.
On January 30, 2000, Dr. Ramesh Jain exercised an option to acquire 79,394
shares of common stock at an exercise price of $0.124 per share.
LICENSE OF SOFTWARE AND RELATED INTELLECTUAL PROPERTY TO SCIMAGIX
In May 1998, former employees of Virage formed a new company called
Scimagix. Scimagix is a pharmaceutical-oriented company that utilizes Virage's
software and related intellectual property rights within markets in which we do
not operate. In September 1998, we purchased shares of Scimagix's series A
preferred stock representing 15% of Scimagix for $78,680. In addition, we
granted a worldwide license to Scimagix for software and related intellectual
property rights in exchange for recurring royalty fees.
LICENSE AGREEMENT WITH ALTAVISTA
In December 1998, we entered into a license agreement with AltaVista for a
three year term. Under this agreement, AltaVista granted us a nonexclusive
worldwide license to
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distribute its text search technology within our Video Search Tools product
suite in return for royalty payments and a prepaid royalty fee.
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with each of our
directors and officers. These agreements will require us to indemnify these
individuals to the fullest extent permitted by the Delaware General Corporation
Law.
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<PAGE> 73
PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial
ownership of the shares of our common stock as of February 29, 2000, and pro
forma as adjusted to reflect the sale of shares of common stock in this offering
assuming (a) 18,300,178 shares of common stock outstanding as of February 29,
2000 and 23,709,266 shares outstanding immediately following the completion of
this offering, (b) conversion of all of Virage's outstanding shares of
convertible preferred stock into common stock, and (c) no exercise of the
underwriters' over-allotment option by:
- each person we know to be the beneficial owner of 5% or more of the
outstanding shares of common stock;
- each of our executive officers listed on the Summary Compensation Table
above under "Management";
- each of our directors; and
- all executive officers and directors of Virage as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each stockholder identified in
the table possesses sole voting and investment power over all shares of common
stock shown as beneficially owned by the stockholder. Shares of common stock
subject to options that are currently exercisable or exercisable within 60 days
of February 29, 2000 are considered outstanding and beneficially owned by the
person holding the options for the purpose of computing the percentage ownership
of that person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
Generally, shares of common stock subject to options granted by us and
shares of common stock which were purchased by exercising options granted by us
are subject to a right of repurchase in favor of Virage which lapses as to one
eighth of the shares after six months of vesting and thereafter ratably on a
monthly basis for 48 months. Unless indicated below, the address of each
individual listed below is 177 Bovet Road, Suite 520, San Mateo, CA 94402.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF OUTSTANDING
SHARES -------------------------
BENEFICIALLY PRIOR TO THE AFTER THE
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ------------ ------------ ---------
<S> <C> <C> <C>
OTHER 5% STOCKHOLDERS
Entities affiliated with Trinity Ventures..... 2,227,356 12.2% 9.4%
3000 Sand Hill Road, Bldg. 1, Ste. 240
Menlo Park, CA 94025
Entities affiliated with Sutter Hill
Ventures(1)................................. 2,118,473 11.6 8.9
755 Page Mill Road, Ste. A-200
Palo Alto, CA 94304
Entities affiliated with Weston Presidio
Capital..................................... 1,930,894 10.6 8.1
343 Sansome Street, Suite 1210
San Francisco, CA 94104
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF OUTSTANDING
SHARES -------------------------
BENEFICIALLY PRIOR TO THE AFTER THE
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ------------ ------------ ---------
<S> <C> <C> <C>
Entities affiliated with Adobe Ventures/
Hambrecht & Quist........................... 1,670,326 9.1 7.0
One Bush Street
San Francisco, CA 94104
AltaVista Company............................. 1,436,945 7.9 6.1
529 Bryant Street
Palo Alto, CA 94301
Entities affiliated with Media Technology Ventures... 1,265,608 6.9 5.3
746 West Adams Blvd.
Los Angeles, CA 90089
Reuters Holdings Switzerland SA............... 1,016,260 5.6 4.3
153 route de Thonon
1245 Collonge-Bellerive
Switzerland
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
Paul G. Lego(2)............................... 2,136,950 11.2 8.6
Bradley J. Horowitz(3)........................ 297,461 1.6 1.2
Carlos O. Montalvo(4)......................... 302,933 1.6 1.3
Frank H. Pao(5)............................... 254,666 1.4 1.1
Gilbert C. Wai(6)............................. 376,077 2.1 1.6
Philip W. Halperin............................ 1,930,894 10.6 8.1
c/o Weston Presidio Capital
343 Sansome Street, Suite 1210
San Francisco, CA 94104
Ramesh Jain, PhD.(7).......................... 831,150 4.5 3.5
San Diego, California
Standish H. O'Grady........................... 1,670,326 9.1 7.0
c/o Adobe Ventures/Hambrecht & Quist
One Bush Street
San Francisco, CA 94104
Lawrence K. Orr............................... 2,227,356 12.2 9.4
c/o Trinity Ventures
3000 Sand Hill Road, Bldg. 1, Ste. 240
Menlo Park, CA 94025
C.K. Prahalad, D.B.A.......................... 452,240 2.5 1.9
William H. Younger, Jr.(8).................... 1,312,117 7.2 5.5
c/o Sutter Hill Ventures
755 Page Mill Road, Ste. A-200
Palo Alto, CA 94304
All executive officers and directors as a
group (16 persons)(9)....................... 13,782,172 75.3% 51.4%
</TABLE>
- -------------------------
For a detailed description of beneficial ownership of the above securities,
please see disclosure under "Sales of Stock to Insiders."
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<PAGE> 75
(1) Includes:
(a) 1,076,966 shares held by Sutter Hill Ventures;
(b) 1,041,507 shares held by parties affiliated with Sutter Hill Ventures.
Sutter Hill Ventures disclaims voting power and beneficial ownership of
the shares held by its affiliated parties.
(2) Includes immediately exercisable options to purchase 827,889 shares of
common stock that are subject to a right of repurchase which lapses over
time;
(3) Includes immediately exercisable options to purchase 176,666 shares of
common stock that are subject to a right of repurchase which lapses over
time.
(4) Includes immediately exercisable options to purchase 277,500 shares of
common stock that are subject to a right of repurchase which lapses over
time.
(5) Includes:
(a) 18,750 shares that are subject to a right of repurchase which lapses
over time; and
(b) immediately exercisable options to purchase 171,694 shares of common
stock that are subject to a right of repurchase which lapses over time.
(6) Includes:
(a) 213,548 shares that are subject to a right of repurchase which lapses
over time; and
(b) 23,333 shares held by Wai Family Revocable Trust, of which Mr. Wai is
trustee.
(7) Includes immediately exercisable options to purchase 11,342 shares of
common stock that are subject to a right of repurchase which lapses over
time.
(8) Includes:
(a) 153,086 shares held by William H. Younger, Jr., Trustee, the Younger
Living Trust;
(b) 44,444 shares held by retirement trust of William H. Younger, Jr.;
(c) 1,076,966 shares held by Sutter Hill Ventures; and
(d) 37,621 shares held by parties affiliated with Sutter Hill Ventures.
Mr. Younger is a general partner of Sutter Hill Ventures and disclaims
beneficial ownership of the shares held by these entities except to the
extent of his proportionate partnership interest therein.
(9) Includes an aggregate of:
(a) 438,687 shares that are subject to a right of repurchase which lapses
over time; and
(b) immediately exercisable options to purchase 3,121,760 shares of common
stock that are subject to a right of repurchase which lapses over time.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, Virage's authorized capital stock will
consist of 100,000,000 shares of common stock, $0.001 par value per share, and
2,000,000 shares of preferred stock, $0.001 par value per share. As of February
29, 2000, assuming the conversion of each share of outstanding preferred stock
into one share of common stock, there were 20,209,266 shares of common stock
outstanding held by 182 stockholders and options to purchase 4,317,812 shares of
common stock outstanding.
The following is a summary of the material terms of Virage's common stock
and preferred stock.
COMMON STOCK
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as our board of directors may from time to time
determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
No Preemptive or Similar Rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to Receive Liquidation Distributions. Upon our liquidation,
dissolution or winding-up, the assets legally available for distribution to our
stockholders are distributable ratably among the holders of our common stock and
any participating preferred stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of preferred
stock outstanding will be converted into one share of common stock. See note 5
to our consolidated financial statements for a description of the preferred
stock.
Following the offering, we will be authorized, subject to the limits
imposed by the Delaware General Corporation Law, to issue preferred stock in one
or more series, to establish from time to time the number of shares to be
included in each series, to fix the rights, preferences and privileges of the
shares of each wholly unissued series and any of its qualifications,
limitations, restrictions. Our board of directors can also increase or decrease
the number of shares of any series, but not below the number of shares of that
series then outstanding, without any further vote or action by the stockholders.
Our board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of our common stock. The issuance of preferred
stock, while providing flexibility in
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connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of Virage
and may cause the market price of our common stock to decline or impair the
voting and other rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
WARRANTS
As of March 31, 2000, we had issued:
- warrants to purchase 31,110 shares of common stock at a price per share
of $0.563 which expire in September 2005; and
- a warrant to purchase 11,538 shares of preferred stock at a price per
share of $1.95 which expires in May 2002.
- a warrant to purchase 181,818 shares of common stock at an assumed price
per share of $11.00 which expires at the end of the first day that our
stock begins trading on Nasdaq.
REGISTRATION RIGHTS
The holders of 13,754,934 shares of preferred stock have the right to
require us to register their shares with the Securities and Exchange Commission
so that those shares may be publicly resold or to include their shares in any
registration statement that we file. The underwriters of any underwritten
offering will have the right to limit the number of shares to be included in the
filed registration statement.
Demand registration rights
- At any time after the closing of this offering but not within three
months of the effective date of a registration statement on a form other
than Form S-4 or Form S-8, the former holders of at least 50% of the
shares of the preferred stock of Virage or 50% of the series E preferred
stock of Virage have the right to demand that we file a registration
statement on a form other than Form S-3, as long as the aggregate amount
of securities sold under the registration statement is at least 25% of
the shares held by the holders requesting registration or exceeds
$2,000,000.
- If we are eligible to file a registration statement on Form S-3, any
holder having registration rights has the right to demand that we file a
registration statement on Form S-3, as long as the amount of securities
to be sold under the registration statement exceeds $750,000.
Piggyback registration rights
If we register securities for public sale, stockholders with registration
rights will have the right to include their shares in the registration
statement. The underwriters of any underwritten offering will have the right to
limit the number of shares to be included in the registration statement.
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<PAGE> 78
Expenses of registration
We will pay all registration expenses, excluding underwriting discounts and
commissions, of all demand and piggyback registrations.
Expiration of registration rights
The demand registration rights on a form other than Form S-3 and piggyback
registration rights will expire ten years after the closing of the series E
preferred stock financing.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
The provisions of the Delaware General Corporation Law, our certificate of
incorporation and our bylaws described below may have the effect of delaying,
deferring or discouraging another person from acquiring control of us.
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents Delaware
corporations from engaging, under limited circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets, with any interested stockholder, which is a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of stockholders, for three years following the date
that the stockholder became an interested stockholder unless:
- the transaction is approved by the board before the date the interested
stockholder attained that status;
- upon the closing of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or after the date the business combination is approved by the board
and authorized at an annual or special meeting of stockholders by at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. This provision of the Delaware
General Corporation Law could prohibit or delay merger or other takeover or
change-in-control attempts and may discourage attempts to acquire us.
CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of our certificate of incorporation and bylaws, which will
become effective upon the closing of this offering, may have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of Virage. These provisions
could cause the price of our common stock to decrease. Some of these provisions
allow us to issue preferred stock without any vote or further action by the
stockholders, eliminate the right of stockholders to act by written consent
without a meeting and eliminate cumulative voting in the election of directors.
These provisions may make it more difficult for stockholders to take specific
corporate actions and could have an
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<PAGE> 79
effect of delaying or preventing a change in control of Virage. Upon the closing
of this offering, our certificate of incorporation will provide that the board
of directors will be divided into three classes of directors, with each class
serving a staggered three-year term. The classification system of electing
directors may discourage a third party from making a tender offer or otherwise
attempting to obtain control of us and may maintain the incumbency of the board
of directors, because the classification of the board of directors generally
increases the difficulty of replacing a majority of the directors.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
our certificate of incorporation and bylaws provide that we will indemnify our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law. Our bylaws will also provide that we will indemnify officers
and directors against losses that they may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. We intend to enter into separate
indemnification agreements with our directors and executive officers, which may
be more broad than the specific indemnification provisions contained in the
Delaware General Corporation Law. These provisions and agreements may have the
effect of preventing changes in our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company. The address of our transfer agent and registrar is 2
Broadway, New York, New York 10004, and its telephone number at this location is
212-509-4000.
LISTING
We have applied to list our common stock on the Nasdaq National Market
under the trading name "VRGE."
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SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock, including shares
issued upon exercise outstanding options and warrants, in the public markets
after this offering could adversely affect market prices prevailing from time to
time. As described below, no shares currently outstanding will be available for
sale immediately after this offering due to contractual and legal restrictions
on resale. Nevertheless, future sales of substantial amounts of our common stock
in the public market after the restrictions lapse, or the possibility of these
sales, could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have outstanding 23,709,266
shares of common stock, assuming the conversion of all outstanding preferred
stock and based on common stock outstanding as of February 29, 2000, assuming
the cash exercise or conversion of warrants to purchase 307,804 shares of common
stock, and assuming no exercise of the underwriters' over-allotment option or
exercise of outstanding options and warrants to purchase common stock. As of
February 29, 2000, there were options to purchase 4,317,812 shares of common
stock, and warrants to purchase 42,649 shares of common stock outstanding. Of
these shares, the shares to be sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except for
any shares purchased by affiliates of Virage, defined as persons who directly or
indirectly control or are controlled by or are under common control with Virage.
The remaining 19,901,462 shares held by our existing stockholders were
issued and sold by Virage in private transactions. These securities may be sold
in the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which are
summarized below. Sales of these restricted securities in the public market, or
the availability of these shares for sale, could adversely affect the trading
price of our common stock. They are eligible for public sale as follows:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF
DATE SHARES THAT MAY BE SOLD COMMENT
---- ----------------------- -------
<S> <C> <C>
Date of this prospectus 61,924 --
181 days after the date 16,419,982 A substantial number of these shares
of this prospectus will be subject to volume limitations
and restrictions under Rule 144
because they will have been held for
over one year but less than two years
or they are held by some of our
officers and directors.
September 21, 2000 3,049,030 These shares will be subject to volume
limitations and restrictions of Rule
144 at the expiration of a one year
holding period, which will occur on
September 21, 2000.
November 2, 2000 971,889 These shares will be subject to volume
limitations and restrictions of Rule
144 at the expiration of a one year
holding period, which will occur on
dates beginning on and after November
2, 2000.
</TABLE>
79
<PAGE> 81
LOCK-UP AGREEMENTS
All of our officers and directors and substantially all of our security
holders have signed lock-up agreements under which they agreed not to sell,
dispose of, loan, pledge or grant any rights to any shares of common stock or
any securities convertible into or exercisable or exchangeable for shares of
common stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus.
Credit Suisse First Boston Corporation may choose to release some of these
shares from these restrictions before the expiration of this 180-day period
without notice.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 237,092 shares immediately after this offering
assuming no exercise of the underwriters' over-allotment option; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for 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.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, shares that have been held by a non-affiliate for at least two years
may be sold in the open market immediately after the lock-up agreements expire.
RULE 701
Any employee, officer of director of, or consultant to, us who purchased
his shares under a written compensatory plan or contract may be entitled to sell
his shares in reliance on 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
these shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
All holders of Rule 701 shares are required to wait until 90 days after the date
of this prospectus before selling those shares. However, all shares issued under
Rule 701 are subject to lock-up agreements and will only become eligible for
sale when the 180-day lock-up agreements expire.
80
<PAGE> 82
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 15,482,204 shares of
common stock, or their transferees, may demand that we register their shares
under the Securities Act or, if we file another registration statement under the
Securities Act, may elect to include their shares in such registration. If these
shares are registered, they will be freely tradable without restriction under
the Securities Act.
STOCK OPTIONS
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register approximately 11,432,022 shares of common stock
issued under our stock option and employee stock purchase plans. These
registration statements are expected to be filed soon after the date of this
prospectus and will automatically become effective upon filing. Shares
registered under these registration statements will be available for sale in the
open market, unless the shares are subject to vesting restrictions with Virage
or the lock-up restrictions above. Substantially all shares issuable upon the
exercise of options to purchase our shares are subject to lock-up agreements and
will only become eligible for sale when the 180-day lock-up agreements expire.
81
<PAGE> 83
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
FleetBoston Robertson Stephens Inc. and SoundView Technology Group, Inc. are
acting as representatives, the following respective numbers of shares of common
stock:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation......................
FleetBoston Robertson Stephens Inc..........................
Wit SoundView Corporation...................................
Total..................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 525,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us... $ $ $ $
Expenses payable by us..... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the
82
<PAGE> 84
exercise of employee stock options outstanding on the date hereof or pursuant to
our dividend reinvestment plan.
Our officers and directors and substantially all of our stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days after
the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to 350,000 shares of the common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "VRGE."
In September 1999 and December 1999, we sold shares of our series E
preferred stock in a private placement at a purchase price of $4.92 per share.
In this private placement, FleetBoston Robertson Stephens Inc. and some of its
employees and affiliated entities purchased 97,498 shares. FleetBoston Robertson
Stephens Inc. purchased these shares of series E preferred stock on the same
terms as the other investors in the private placement.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information set forth in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
83
<PAGE> 85
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
A prospectus in electronic format will be made available on websites
maintained by one or more of the underwriters participating in this offering,
including Wit SoundView's affiliate, Wit Capital Corporation. In addition, other
dealers purchasing shares from Wit SoundView in this offering have agreed to
make a prospectus in electronic format available on websites maintained by each
of these dealers. The representatives may agree to allocate a number of shares
to Wit Capital and other underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the representatives of the
underwriters on the same basis as other allocations.
84
<PAGE> 86
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
- such purchaser is entitled under applicable provincial securities laws to
purchase such common stock without the benefit of a prospectus qualified
under such securities laws,
- where required by law, that such purchaser is purchasing as principal and
not as agent, and
- such purchaser has reviewed the text above under "Release Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions of
the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgement against the issuer or such person in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act British Columbia,
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such
85
<PAGE> 87
purchaser pursuant to this offering. Such report must be in the form attached to
British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which
may be obtained from us. Only one such report must be filed in respect of common
stock acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. As of December 31,
1999, an investment partnership and individual attorneys at Gray Cary owned an
aggregate of 20,324 shares of Virage preferred stock. Various legal matters
relating to the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, PC, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at March 31, 1998 and 1999, and December 31,
1999 and for each of the three years in the period ended March 31, 1999, and the
nine months ended December 31, 1999, as set forth in their report. We've
included our financial statements and schedule in the prospectus and elsewhere
in the registration statement in reliance on Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
86
<PAGE> 88
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of our common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about us and our capital
stock. The rules and regulations of the SEC allow us to omit various information
included in the registration statement from this document.
In addition, upon completion of this offering, we will become subject to
the reporting and information requirements of the Exchange Act and, as a result,
will file periodic reports, proxy statements and other information with the SEC.
You may read and copy this information at the following public reference rooms
of the SEC:
<TABLE>
<S> <C> <C>
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison
Room 1024 Suite 1300 Street
Washington, DC 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the public
reference section of the SEC, 450 Fifth Street, N.W. Room 1024, Washington, DC
20549, at prescribed rates. You may obtain information on the operation of the
public reference rooms by calling the SEC at 1-(800) SEC-0330.
The SEC also maintains an Internet website that contains reports, proxy
statements and other information about issuers, like Virage, who file
electronically with the SEC. The address of that website is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements, and make available to our stockholders quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
87
<PAGE> 89
VIRAGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 90
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Virage, Inc.
We have audited the accompanying consolidated balance sheets of Virage,
Inc. as of March 31, 1998 and 1999 and December 31, 1999, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (net capital deficiency), and cash flows for each of the
three years in the period ended March 31, 1999, and the nine months ended
December 31, 1999. These financial statements are the responsibility of Virage
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Virage, Inc. at
March 31, 1998 and 1999 and December 31, 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1999 and for the nine months ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
January 17, 2000 except for the last
paragraph of Note 12, as to which
the date is March 14, 2000
F-2
<PAGE> 91
VIRAGE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY
-------------------------- DECEMBER 31, DECEMBER 31,
1998 1999 1999 1999
----------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 5,780,320 $ 4,356,541 $ 16,361,574
Accounts receivable, net of allowance for doubtful
accounts of $37,337 at March 31, 1998, $133,756 at
March 31, 1999, and $388,872 at December 31, 1999.... 616,252 959,594 1,791,348
Prepaid expenses and other current assets.............. 89,333 316,921 425,805
Deferred advertising costs............................. -- -- 780,501
----------- ------------ ------------
Total current assets............................... 6,485,905 5,633,056 19,359,228
Property and equipment:
Computer equipment and software........................ 808,428 1,182,863 2,044,340
Furniture.............................................. 154,664 229,101 471,564
Leasehold improvements................................. 161,478 187,439 308,817
----------- ------------ ------------
1,124,570 1,599,403 2,824,721
Accumulated depreciation............................... 452,049 856,143 1,086,110
----------- ------------ ------------
672,521 743,260 1,738,611
Other assets............................................. 130,201 228,424 619,797
----------- ------------ ------------
Total assets....................................... $ 7,288,627 $ 6,604,740 $ 21,717,636
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable....................................... $ 132,831 $ 183,834 $ 369,477
Accrued payroll and related expenses................... 404,204 636,230 409,494
Accrued expenses....................................... 441,740 214,240 1,210,719
Deferred revenue....................................... 147,767 438,800 1,206,232
Current portion of borrowings under bank equipment term
loans................................................ 488,903 238,654 206,914
Current portion of capital lease obligations........... 147,571 42,629 --
----------- ------------ ------------
Total current liabilities.......................... 1,763,016 1,754,387 3,402,836
Long-term portion of borrowings under bank equipment term
loans.................................................. 261,097 240,705 114,583
Long-term portion of capital lease obligations........... 49,568 -- --
Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value:
Authorized shares -- 14,728,269
Issued and outstanding shares -- 7,527,743 at March 31,
1998, 9,710,000 at March 31, 1999, and 13,754,934 at
December 31, 1999, and none pro forma (liquidation
preference of $37,962,276)........................... 12,472,354 17,935,913 36,994,999 $ --
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value
Authorized shares -- none, actual; 2,000,000 pro
forma.............................................. -- -- -- --
Common stock, $0.001 par value:
Authorized shares -- 26,666,666 actual; 100,000,000
pro forma
Issued and outstanding shares -- 2,432,601 at March
31, 1998, 3,097,845 at March 31, 1999, and
3,736,504 at December 31, 1999, and 17,491,438 pro
forma.............................................. 2,433 3,098 3,737 17,491
Additional paid-in capital............................. 452,081 950,767 16,739,520 53,720,765
Deferred compensation.................................. -- (398,675) (9,504,729) (9,504,729)
Accumulated deficit.................................... (7,711,922) (13,881,455) (26,033,310) (26,033,310)
----------- ------------ ------------ ------------
Total stockholders' equity (net capital
deficiency)...................................... (7,257,408) (13,326,265) (18,794,782) $ 18,200,217
----------- ------------ ------------ ============
Total liabilities and stockholders' equity
(net capital deficiency)......................... $ 7,288,627 $ 6,604,740 $ 21,717,636
=========== ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 92
VIRAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
--------------------------------------- --------------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License revenues............................ $ 375,919 $ 1,437,635 $ 1,955,509 $1,303,510 $ 3,143,545
Service revenues............................ 43,541 130,446 253,497 154,629 578,367
Other revenues.............................. 1,025,906 1,133,629 1,141,203 865,063 165,137
----------- ----------- ----------- ----------- ------------
Total revenues............................ 1,445,366 2,701,710 3,350,209 2,323,202 3,887,049
Cost of revenues:
License revenues............................ -- 454,117 396,932 287,267 686,269
Service revenues(1)......................... 21,705 61,928 426,258 292,122 1,196,225
Other revenues.............................. 584,634 809,060 859,156 656,810 171,505
----------- ----------- ----------- ----------- ------------
Total cost of revenues.................... 606,339 1,325,105 1,682,346 1,236,199 2,053,999
----------- ----------- ----------- ----------- ------------
Gross profit.................................. 839,027 1,376,605 1,667,863 1,087,003 1,833,050
Operating expenses:
Research and development(2)................. 758,564 1,751,533 2,325,194 1,699,874 2,654,158
Sales and marketing(3)...................... 1,020,072 2,809,815 4,361,536 3,057,611 5,094,457
General and administrative(4)............... 693,598 935,019 1,272,635 819,871 1,565,762
Stock-based compensation.................... -- -- -- -- 313,443
----------- ----------- ----------- ----------- ------------
Total operating expenses.................. 2,472,234 5,496,367 7,959,365 5,577,356 9,627,820
----------- ----------- ----------- ----------- ------------
Loss from operations.......................... (1,633,207) (4,119,762) (6,291,502) (4,490,353) (7,794,770)
Interest and other income..................... 53,231 61,954 134,524 112,557 249,926
Interest expense.............................. (18,858) (42,115) (12,555) (58) (26,975)
----------- ----------- ----------- ----------- ------------
Loss before income taxes...................... (1,598,834) (4,099,923) (6,169,533) (4,377,854) (7,571,819)
Provision for income taxes.................... -- -- -- -- (36,000)
----------- ----------- ----------- ----------- ------------
Net loss...................................... $(1,598,834) $(4,099,923) $(6,169,533) $(4,377,854) $ (7,607,819)
Series E convertible preferred stock
dividend.................................... -- -- -- -- (4,544,036)
----------- ----------- ----------- ----------- ------------
Net loss applicable to common stockholders.... $(1,598,834) $(4,099,923) $(6,169,533) $(4,377,854) $(12,151,855)
=========== =========== =========== =========== ============
Basic and diluted net loss per share
applicable to common stockholders........... $ (1.07) $ (2.13) $ (2.76) $ (2.04) $ (4.27)
=========== =========== =========== =========== ============
Shares used in computation of basic and
diluted net loss per share applicable to
common stockholders......................... 1,488,286 1,924,216 2,239,204 2,144,695 2,849,123
=========== =========== =========== =========== ============
Pro forma basic and diluted net loss per share
applicable to common stockholders........... $ (0.60) $ (0.88)
=========== ============
Shares used to compute pro forma basic and
diluted net loss per share applicable to
common stockholders......................... 10,314,939 13,766,612
=========== ============
</TABLE>
- ---------------
(1) Excluding $20,944 in amortization of deferred stock-based compensation for
the nine months ended December 31, 1999.
(2) Excluding $75,435 in amortization of deferred stock-based compensation for
the nine months ended December 31, 1999.
(3) Excluding $119,550 in amortization of deferred stock-based compensation for
the nine months ended December 31, 1999.
(4) Excluding $97,514 in amortization of deferred stock-based compensation for
the nine months ended December 31, 1999.
See accompanying notes.
F-4
<PAGE> 93
VIRAGE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
--------------------------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ----------- --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996........ 2,222,222 $ 2,448,788 1,856,396 $1,856 $ 369,086 $ -- $ (2,013,165)
Issuance of shares of Series A
preferred stock.............. 533,334 600,000 -- -- -- -- --
Issuance of shares of Series B
preferred stock, net of
issuance costs............... 1,435,898 2,773,835 -- -- -- -- --
Exercise of stock options...... -- -- 151,833 152 16,929 -- --
Net loss....................... -- -- -- -- -- -- (1,598,834)
---------- ----------- --------- ------ ----------- ----------- ------------
Balance at March 31, 1997........ 4,191,454 5,822,623 2,008,229 2,008 386,015 -- (3,611,999)
Issuance of shares of Series B
preferred stock, net of
issuance costs............... 595,487 1,150,606 -- -- -- -- --
Issuance of shares of Series C
preferred stock, net of
issuance costs............... 2,740,802 5,499,125 -- -- -- -- --
Issuance of common stock....... -- -- 5,133 5 996 -- --
Exercise of stock options by
employees.................... -- -- 417,906 418 64,752 -- --
Exercise of stock options by
consultants.................. -- -- 1,333 2 318 -- --
Net loss....................... -- -- -- -- -- -- (4,099,923)
---------- ----------- --------- ------ ----------- ----------- ------------
Balance at March 31, 1998........ 7,527,743 12,472,354 2,432,601 2,433 452,081 -- (7,711,922)
Issuance of shares of Series C
preferred stock, net of
issuance costs............... 244,273 478,806 -- -- -- -- --
Issuance of shares of Series D
preferred stock, net of
issuance costs............... 1,937,984 4,984,753 -- -- -- -- --
Issuance of common stock....... -- -- 22,847 23 10,267 -- --
Exercise of stock options by
employees.................... -- -- 642,397 642 89,744 -- --
Deferred compensation related
to grant of stock options.... -- -- -- -- 398,675 (398,675) --
Net loss....................... -- -- -- -- -- -- (6,169,533)
---------- ----------- --------- ------ ----------- ----------- ------------
Balance at March 31, 1999........ 9,710,000 17,935,913 3,097,845 3,098 950,767 (398,675) (13,881,455)
Issuance of Series E preferred
stock, net of issuance
costs........................ 4,044,934 19,059,086 -- -- -- -- --
Deemed dividend on Series E
preferred stock.............. -- -- -- -- 4,544,036 -- (4,544,036)
Issuance of common stock....... -- -- 59,445 59 184,942 -- --
Exercise of stock options by
employees.................... -- -- 575,447 576 353,430 -- --
Exercise of stock options by
consultants.................. -- -- 4,100 4 3,071 -- --
Repurchase of common stock..... -- -- (333) -- (38) -- --
Deferred compensation related
to grant of stock options.... -- -- -- -- 9,737,594 (9,737,594) --
Amortization of deferred
compensation................. -- -- -- -- -- 631,540 --
Issuance of warrants in
consideration for
advertising.................. -- -- -- -- 780,501 -- --
Issuance of warrants in
consideration for technology
right........................ -- -- -- -- 185,217 -- --
Net loss and comprehensive net
loss......................... -- -- -- -- -- -- (7,607,819)
---------- ----------- --------- ------ ----------- ----------- ------------
Balance at December 31, 1999..... 13,754,934 $36,994,999 3,736,504 $3,737 $16,739,520 $(9,504,729) $(26,033,310)
========== =========== ========= ====== =========== =========== ============
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
-------------
TOTAL
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
-------------
<S> <C>
Balance at March 31, 1996........ $ (1,642,223)
Issuance of shares of Series A
preferred stock.............. --
Issuance of shares of Series B
preferred stock, net of
issuance costs............... --
Exercise of stock options...... 17,081
Net loss....................... (1,598,834)
------------
Balance at March 31, 1997........ (3,223,976)
Issuance of shares of Series B
preferred stock, net of
issuance costs............... --
Issuance of shares of Series C
preferred stock, net of
issuance costs............... --
Issuance of common stock....... 1,001
Exercise of stock options by
employees.................... 65,170
Exercise of stock options by
consultants.................. 320
Net loss....................... (4,099,923)
------------
Balance at March 31, 1998........ (7,257,408)
Issuance of shares of Series C
preferred stock, net of
issuance costs............... --
Issuance of shares of Series D
preferred stock, net of
issuance costs............... --
Issuance of common stock....... 10,290
Exercise of stock options by
employees.................... 90,386
Deferred compensation related
to grant of stock options.... --
Net loss....................... (6,169,533)
------------
Balance at March 31, 1999........ (13,326,265)
Issuance of Series E preferred
stock, net of issuance
costs........................ --
Deemed dividend on Series E
preferred stock.............. --
Issuance of common stock....... 185,001
Exercise of stock options by
employees.................... 354,006
Exercise of stock options by
consultants.................. 3,075
Repurchase of common stock..... (38)
Deferred compensation related
to grant of stock options.... --
Amortization of deferred
compensation................. 631,540
Issuance of warrants in
consideration for
advertising.................. 780,501
Issuance of warrants in
consideration for technology
right........................ 185,217
Net loss and comprehensive net
loss......................... (7,607,819)
------------
Balance at December 31, 1999..... $(18,794,782)
============
</TABLE>
See accompanying notes.
F-5
<PAGE> 94
VIRAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
--------------------------------------- -------------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(1,598,834) $(4,099,923) $(6,169,533) $(4,377,854) $(7,607,819)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock issued to consultants for services..... -- -- 10,290 -- --
Depreciation and amortization....................... 129,571 267,984 404,094 306,858 229,967
Amortization of deferred compensation related to
employee stock options............................ -- -- -- -- 313,443
Amortization of deferred compensation related to
consultants' stock options........................ -- -- -- -- 318,097
Amortization of technology right.................... -- -- -- -- 4,646
Write-off of investment in Scimagix................. -- -- -- -- 78,680
Changes in operating assets and liabilities:
Accounts receivable............................... (336,654) (87,270) (343,342) (437,246) (831,754)
Prepaid expenses and other current assets......... 38,606 (76,121) (227,588) (46,161) (108,884)
Other assets...................................... 1,100 (23,080) (19,543) (4,200) (316,887)
Accounts payable and accrued expenses............. 188,213 596,653 55,529 (142,842) 955,386
Deferred revenue.................................. (21,501) 11,596 291,033 239,798 767,432
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities................. (1,599,499) (3,410,161) (5,999,060) (4,461,647) (6,197,693)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (409,635) (545,425) (474,833) (325,534) (1,225,318)
Investment in Scimagix................................ -- -- (78,680) (78,680) --
Decrease (increase) in restricted investments......... -- (13,805) -- -- 27,405
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities................. (409,635) (559,230) (553,513) (404,214) (1,197,913)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan financing.......................... -- 750,000 250,000 234,796 --
Proceeds from bank equipment term loans............... 305,028 -- -- -- --
Principal payments on loans........................... -- -- (520,641) (471,492) (157,862)
Principal payments on capital leases.................. (73,671) (103,602) (154,510) (141,716) (42,629)
Proceeds from issuance of common stock, net of
repurchases......................................... 17,081 66,491 90,386 88,604 542,044
Proceeds from issuance of preferred stock............. 3,373,835 6,649,731 5,463,559 478,807 19,059,086
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities............. 3,622,273 7,362,620 5,128,794 188,999 19,400,639
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 1,613,139 3,393,229 (1,423,779) (4,676,862) 12,005,033
Cash and cash equivalents at beginning of period...... 773,952 2,387,091 5,780,320 5,780,320 4,356,541
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 2,387,091 $ 5,780,320 $ 4,356,541 $ 1,103,458 $16,361,574
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest................................ $ 18,463 $ 42,115 $ 12,554 $ 58 $ 25,977
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Series E convertible preferred stock dividend......... $ -- $ -- $ -- $ -- $ 4,544,036
Deferred advertising costs............................ $ -- $ -- $ -- $ -- $ 780,501
Deferred technology right............................. $ -- $ -- $ -- $ -- $ 185,217
</TABLE>
See accompanying notes.
F-6
<PAGE> 95
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Virage, Inc. ("Virage" or "the Company") is a provider of software products
and application services that enable owners of video content to catalog, manage
and distribute their video assets over the Internet and corporate intranets.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Virage and
its wholly owned subsidiary, Virage Europe, Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements for
the nine months ended December 31, 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, the accompanying unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments necessary for fair presentation of Virage's results of
operations for the nine months ended December 31, 1998.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid financial
instruments, primarily money market funds and commercial paper with
insignificant interest rate risk that are readily convertible to cash and have
maturities of three months or less from the date of purchase. The fair market
value, based on quoted market prices, of cash equivalents is substantially equal
to their carrying value at March 31, 1998 and 1999, and at December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated for financial reporting purposes using
the straight-line method over the estimated useful lives of three to seven years
or, in the case of property under capital leases, over the lesser of the useful
life of the assets or lease term.
RESTRICTED INVESTMENTS
As of December 31, 1999, Virage holds $73,096 in a bank certificate of
deposit that matures October 1, 2000, $39,000 of which is subject to withdrawal
restrictions as set forth in Virage's office lease that was entered into in
February 1996 (see Note 4). Virage also holds a $12,400 bank certificate of
deposit, payable to the State Board of Equalization. This restricted deposit has
a ninety-day maturity cycle and carries interest at 5.5%.
F-7
<PAGE> 96
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
REVENUE RECOGNITION
The Company enters into arrangements for the sale of 1) licenses of
software products and related maintenance contracts; and 2) Virage Interactive
service offerings; and receives revenues under 3) U.S. government agency
research grants. Service revenues include revenues from maintenance contracts
and Virage Interactive services. Other revenues are primarily U.S. government
agency research grants.
The Company's revenue recognition policy is in accordance with Statement of
Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition", as amended by
Statement of Position No. 98-4, "Referral of the Effective Date of SOP 97-2,
"Software Revenue Recognition" ("SOP 98-4"), and Statement of Position No. 98-9,
"Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP
98-9"). For each arrangement, the Company determines whether evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collection is probable. If any of these criteria are not met, revenue
recognition is deferred until such time as all of the criteria are met. The
Company considers all arrangements with payment terms extending beyond twelve
months and other arrangements with payment terms longer than normal not to be
fixed or determinable. If collectibility is not considered probable, revenue is
recognized when the fee is collected. No customer has the right of return.
Arrangements consisting of license and maintenance only. For those
contracts that consist solely of license and maintenance, the Company recognizes
license revenue based upon the residual method after all elements other than
maintenance have been delivered as prescribed by SOP 98-9. The Company
recognizes maintenance revenues over the term of the maintenance contract as
vendor specific objective evidence of fair value for maintenance exists. In
accordance with paragraph 10 of SOP 97-2, vendor specific objective evidence of
fair value of maintenance is determined by reference to the price the customer
will be required to pay when it is sold separately (that is, the renewal rate).
Each license agreement offers additional maintenance renewal periods at a stated
price. Maintenance contracts are typically one year in duration. Revenue is
recognized on software that is licensed on a per copy basis when each copy of
the license requested by the customer is delivered. Revenue is recognized on
software that is licensed on a per user or per server basis for a fixed fee when
the product master is delivered to the customer. There is no right of return or
price protection for sales to domestic and international distributors, system
integrators, and value added resellers (collectively, "resellers"). In
situations where the reseller has a purchase order from the end user that is
immediately deliverable, the Company recognizes revenue on shipment to the
reseller, if other criteria in SOP 97-2 are met, since the Company has no risk
of concessions. The Company defers revenue on shipments to resellers if the
reseller does not have a purchase order from an end user that is immediately
deliverable or other criteria in SOP 97-2 are not met. The Company recognizes
royalty revenues upon receipt of the quarterly reports from the vendors.
Virage Interactive services. Virage Interactive services revenues consist
of set-up fees, video processing fees and transaction fees. Set-up fees are
recognized ratably over the
F-8
<PAGE> 97
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
contract term, which is generally six to 18 months. The Company generates video
processing fees for each hour of video that a customer deploys. Processing fees
are recognized as encoding, indexing and editorial services are performed and
are based upon hourly rates per hour of video content. The Company generates
transaction fees with each video query on a customer's site. Transaction fees
are based on the number of video queries processed, subject in some cases to
monthly minimums and maximums. The Company recognizes revenue on transaction
fees that are subject to monthly minimums based on the greater of actual
transaction fees or the monthly minimum, and monthly maximums based on the
lesser of actual transaction fees or the monthly maximum, since we have no
further obligations, the payment terms are normal and each month is a separate
measurement period.
Other revenues. Other revenues consist primarily of U.S. government agency
research grants that are best effort arrangements. The software-development
arrangements are within the scope of the FASB's Statement of Financial
Accounting Standards No. 68, "Research and Development Arrangements". As the
financial risks associated with the software-development arrangement rests
solely with the U.S. government agency, the Company is recognizing revenues as
the services are performed. The cost of these services are included in cost of
other revenues. The Company's contractual obligation is to provide the required
level of effort (hours), technical reports, and funds and man-hour expenditure
reports.
CONCENTRATION OF REVENUES AND CREDIT RISK
Virage performs ongoing credit evaluations of its customers and maintains
reserves for potential credit losses, and such losses have been within
management's expectations. Virage generally requires no collateral from its
customers.
Major customers (non-federal government agencies). For the nine months
ended December 31, 1999, two customers accounted for 16% and 15% of total
revenues. During the year ended March 31, 1999, one customer accounted for 13%
of total revenues. In fiscal 1997, two customers accounted for 37% and 16% of
total revenues. In fiscal 1998, two customers each accounted for 11% of total
revenues.
As of December 31, 1999, European customers accounted for approximately 21%
of the balance of accounts receivable. One customer located in Spain accounted
for approximately 11% of the balance of accounts receivable at December 31,
1999. If this customer failed to meet its obligation, Virage would incur a loss
of approximately $202,000.
Federal Government Agencies. Direct and indirect sales to federal
government agencies collectively accounted for 43% and 22% of total revenues for
the nine months ended December 31, 1998 and 1999, respectively. For the years
ended March 31, 1997, 1998, and 1999, federal government agencies accounted for
17%, 12%, and 40%, respectively, of total revenues.
No federal government agency accounted for more than 10% of total revenues
in fiscal 1998 or for the nine months ended December 31, 1999. For the nine
months ended
F-9
<PAGE> 98
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
December 31, 1998, two federal government agencies accounted for 17% and 13% of
total revenues. During the year ended March 31, 1999, two federal government
agencies accounted for 17% and 14% of total revenues. In fiscal 1997, one
federal government agency accounted for 17% of total revenues.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Internet advertising costs,
which relate to the issuance of warrants to purchase 100,580 shares of Series E
preferred stock to an Internet portal company, are deferred and will be
amortized on a straight-line basis over the contract period.
Advertising expense in each of the three years ended March 31, 1999 and for
the nine-months ended December 31, 1998 and 1999 was immaterial.
COMPREHENSIVE NET LOSS
The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
establishes standards for the reporting and display of comprehensive income
(loss) and its components in a full set of general purpose financial statements.
To date, Virage has had no other comprehensive income (loss), and consequently,
net loss equals total comprehensive net loss.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the Company's
consolidated financial statements and accompanying notes. Actual results could
differ materially from those estimates.
NET LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS
Basic and diluted net loss per share applicable to common stockholders is
presented in conformity with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS 128"), for all periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of Virage's initial public
offering must be included in the calculation of basic and diluted net loss per
share applicable to common stockholders as if they had been outstanding for all
periods presented. No shares were issued for nominal consideration through
December 31, 1999.
In accordance with FAS 128, basic and diluted net loss per share applicable
to common stockholders have been computed using the weighted-average number of
shares of common stock outstanding during the period, less shares subject to
repurchase. Pro forma basic and diluted net loss per share applicable to common
stockholders, as presented in the
F-10
<PAGE> 99
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
consolidated statements of operations, have been computed as described above and
also give effect, under Securities and Exchange Commission guidance, to the
conversion of the convertible preferred stock (using the if-converted method)
from the original date of issuance.
The following table presents the computation of basic and diluted and pro
forma basic and diluted net loss per share applicable to common stockholders:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
----------------------------------------- ---------------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
stockholders................... $(1,598,834) $(4,099,923) $(6,169,533) $(4,377,854) $(12,151,855)
=========== =========== =========== =========== ============
Weighted-average shares of common
stock outstanding.............. 1,922,936 2,133,697 2,697,811 2,574,627 3,391,027
Less weighted-average shares of
common stock subject to
repurchase..................... (434,650) (209,481) (458,607) (429,932) (541,904)
----------- ----------- ----------- ----------- ------------
Weighted-average shares used in
computation of basic and
diluted net loss per share
applicable to common
stockholders................... 1,488,286 1,924,216 2,239,204 2,144,695 2,849,123
=========== =========== =========== =========== ============
Basic and diluted net loss per
share applicable to common
stockholders................... $ (1.07) $ (2.13) $ (2.76) $ (2.04) $ (4.27)
=========== =========== =========== =========== ============
Shares used in computation of
basic and diluted net loss per
share applicable to common
stockholders................... 2,239,204 2,849,123
Pro forma adjustment to reflect
weighted-average effect of the
assumed conversion of
convertible preferred stock.... 8,075,735 10,917,489
----------- ------------
Shares used in computing pro
forma basic and diluted net
loss per share applicable to
common stockholders............ 10,314,939 13,766,612
=========== ============
Pro forma basic and diluted net
loss per share applicable to
common stockholders............ $ (0.60) $ (0.88)
=========== ============
</TABLE>
Virage has excluded all outstanding stock options, warrants and shares
subject to repurchase from the calculation of basic and diluted net loss per
share applicable to common stockholders because these securities are
antidilutive for all periods presented. Options and warrants to purchase
1,822,740, 2,142,901, 2,684,920, and 4,275,147 shares of common stock were
outstanding at March 31, 1997, 1998, and 1999, and December 31, 1999,
respectively. Such securities, had they been dilutive, would have been included
in the computation of diluted net loss per share applicable to common
stockholders using the treasury stock method.
Unaudited basic and diluted pro forma net loss per share applicable to
common stockholders, as presented above and in the consolidated statements of
operations, has been computed using the weighted-average number of common shares
outstanding, adjusted to
F-11
<PAGE> 100
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
include the pro forma effects of the conversion of the convertible preferred
stock to common stock as if such conversion had occurred on April 1, 1998 for
the year ended March 31, 1999 and on April 1, 1999 for the nine months ended
December 31, 1999, or at the date of original issuance, if later.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial
instruments. The amounts reported for cash and cash equivalents, accounts
receivable, including the Scimagix receivable with extended payment terms,
restricted investments, accounts payable, bank equipment term loans and capital
lease obligations approximate their carrying values due to short-term maturities
of these instruments and the relatively stable interest rate environment.
SEGMENT INFORMATION
The Company has adopted the FASB's Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" which establishes standards for reporting information about
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker or group in deciding
how to allocate resources and in assessing performance. The Company's segment
information is presented in Note 11.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, each share
of convertible preferred stock outstanding will automatically be converted into
one share of common stock. Unaudited pro forma stockholders' equity at December
31, 1999, as adjusted for the assumed conversion of convertible preferred stock
based on the shares of convertible preferred stock outstanding at December 31,
1999, is disclosed on the Company's consolidated balance sheet.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted the FASB's Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which requires
impairment losses to be recorded for long-lived assets used in operations, such
as property, equipment and improvements, and intangible assets, when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of the assets.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1").
F-12
<PAGE> 101
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
SOP 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. SOP 98-1 is effective for years
beginning after December 15, 1998. The Company has adopted SOP 98-1 for the
fiscal year ending March 31, 2000. The adoption of SOP 98-1 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that all
start-up costs related to new operations must be expensed as incurred. In
addition, all start-up costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. Virage implemented SOP 98-5 on January 1, 1999.
The adoption of SOP 98-5 did not have a material impact on its financial
position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Virage will be required to
implement FAS 133 at the beginning of fiscal 2002. Because Virage does not
currently hold any derivative instruments and does not engage in hedging
activities, Virage does not expect that the adoption of FAS 133 will have a
material impact on its financial position, results of operations or cash flows.
2. CASH EQUIVALENTS
Cash equivalents as of March 31, 1998 and 1999, and December 31, 1999
consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------- DECEMBER 31,
1998 1999 1999
-------- ---------- ------------
<S> <C> <C> <C>
Money market fund................. $191,690 $3,427,511 $ 3,570,707
Bankers acceptance................ -- 669,755 --
Commercial paper.................. -- -- 11,951,129
-------- ---------- -----------
Total........................... $191,690 $4,097,266 $15,521,836
======== ========== ===========
</TABLE>
F-13
<PAGE> 102
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1998 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Technology right, net of
amortization of $4,646........... $ -- $ -- $180,571
Restricted investments............. 78,805 78,805 51,400
Offering costs..................... -- -- 269,000
Deposits........................... 32,021 59,501 108,612
Investment in Scimagix............. -- 78,680 --
Other.............................. 19,375 11,438 10,214
-------- -------- --------
$130,201 $228,424 $619,797
======== ======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LINE OF CREDIT AND EQUIPMENT TERM LOANS
In December 1999, the Company renewed existing credit facilities with a
bank, under which it may borrow up to a maximum of $1,500,000 under a line of
credit, based on 80% of eligible accounts receivable. The line of credit
provides for interest at a rate of prime less 0.25% per annum (8.25% at December
31, 1999) and matures on November 1, 2000. At December 31, 1999, there were no
outstanding borrowings under the line of credit and approximately $730,000 was
available. In addition, the Company has a $250,000 equipment term loan under the
credit facilities with the same bank for the purpose of buying equipment. At
December 31, 1999, the Company had $239,583 of debt outstanding under the
equipment term loan. The equipment term loan provides for interest at prime plus
0.5% per annum (9% at December 31, 1999). Under a separate equipment term loan
with the same bank, the Company had outstanding debt of $81,914 at December 31,
1999, with an interest rate of prime plus 0.5% per annum (9% at December 31,
1999).
Under the provisions of the credit facilities, Virage is required to
maintain certain financial and nonfinancial covenants. Virage is also prohibited
from declaring dividends or redeeming stock other than redemptions of stock for
departed employees.
The following is a schedule of maturities for the equipment term loans for
the following calendar years ended December 31:
<TABLE>
<S> <C>
2000......................................... $206,914
2001......................................... 114,583
--------
$321,497
========
</TABLE>
F-14
<PAGE> 103
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
LEASES
In February 1996, Virage entered into a lease agreement for office space in
California for its corporate offices. In connection with this lease, Virage is
required to hold a letter of credit with a commercial bank in the amount of
$39,000 at December 31, 1999.
Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Year ended March 31,
2000 (3 months)....................... $ 144,069
2001.................................. 678,047
2002.................................. 740,103
2003.................................. 299,409
2004.................................. 215,923
2005.................................. 222,401
----------
Total minimum payments..................... $2,299,952
==========
</TABLE>
Rental expense was $122,728, $229,933, $354,530, and $409,285 for the years
ended March 31, 1997, 1998, 1999, and the nine months ended December 31, 1999.
Virage has an option to renew its lease for its corporate offices in
California for an additional five-year term commencing June 2002 at prevailing
market prices.
LITIGATION
Virage is subject to various claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on the financial position, results of
operations or cash flows of Virage.
F-15
<PAGE> 104
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock at March 31, 1998 and 1999, and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED AND OUTSTANDING
DESIGNATED --------------------------------------
AT MARCH 31,
DECEMBER 31, ----------------------- DECEMBER 31,
1999 1998 1999 1999
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Series A.............. 2,755,556 2,755,556 2,755,556 2,755,556
Series B.............. 2,042,923 2,031,385 2,031,385 2,031,385
Series C.............. 2,985,075 2,740,802 2,985,075 2,985,075
Series D.............. 2,000,000 -- 1,937,984 1,937,984
Series E.............. 4,944,715 -- -- 4,044,934
---------- ---------- ---------- ----------
Total redeemable
convertible
preferred
stock............ 14,728,269 7,527,743 9,710,000 13,754,934
========== ========== ========== ==========
</TABLE>
Series A, B, C, D, and E preferred stock is convertible into common stock
at the option of the holder on a one-for-one basis, subject to certain
adjustments. Each series of preferred stock will automatically convert upon (i)
the closing date of an underwritten public offering of our common stock with
aggregate gross proceeds of more than $20,000,000 and a per share price of not
less than $8.364 or (ii) the election of holders of at least 83% of the
outstanding preferred stock.
Proportional adjustments of the Series A, B, C, D, and E preferred stock
conversion rates will be made for splits, combinations, stock dividends,
recapitalizations, and the like. The conversion rate for a particular series of
the preferred stock will be subject to adjustment in the event that the Company
issues additional equity securities at less than the conversion price for that
series of preferred stock (other than shares of common stock issued or issuable
to employees, consultants, and directors under plans and agreements approved by
the Company's Board of Directors as well as the other exceptions currently set
forth in the Company's Certificate of Incorporation); provided, however, that if
any holder of preferred stock does not purchase its pro rata amount, such holder
will have those shares as to which his pro rata rights were not exercised
converted into a new series of preferred stock that has no antidilution
protection, except that the Series E preferred stock will not be converted into
such new series of preferred stock unless the issuance of additional equity
securities is made at a price per share that is less than the conversion price
of the Series D preferred stock.
The holders of redeemable convertible preferred stock are entitled to one
vote for each share of common stock into which such shares may be converted.
Each share of Series A, B, C, D, and E preferred stock entitles the holder to
receive annual noncumulative cash dividends in preference to holders of common
shares if and when declared by the Company's Board of Directors. Dividends may
be declared at an annual rate of $0.09,
F-16
<PAGE> 105
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
$0.156, $0.1608, $0.2064, and $0.3936 per share of Series A, B, C, D, and E
preferred stock, respectively. As of December 31, 1999, no dividends have been
declared.
Series A, B, C, D, and E preferred stock can be redeemed at any time on or
after October 9, 2006 upon the affirmative vote of at least 67% of all preferred
stockholders. The stock can be redeemed at prices of $1.125, $1.95, $2.01,
$2.58, and $4.92 per share of Series A, B, C, D, and E preferred stock,
respectively, plus any and all declared but unpaid dividends.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of redeemable convertible preferred stock shall be entitled to
receive in preference to the holders of common stock the amount of $1.125 per
share of Series A preferred stock, $1.95 per share of Series B preferred stock,
$2.01 per share of Series C preferred stock, $2.58 per share of Series D
preferred stock, and $4.92 per share of Series E preferred stock. If the funds
to be distributed to the holders of the redeemable convertible preferred stock
are not sufficient to permit payment in full of the foregoing liquidation
preference, then all available funds shall be distributed ratably among the
holders of the preferred stock in proportion to the preferential amount each
holder is otherwise entitled to receive. After payment of such sum, the holders
of common stock and of Series A, B, C, and E shall receive the remaining
proceeds on a pro rata (assuming conversion of all shares of preferred stock)
basis; provided, however, that Series E shall not receive proceeds after they
have received total payments of $8.364 per share.
On September 21, 1999, Virage, Inc. issued 3,132,477 shares of Series E
redeemable convertible preferred stock at a price of $4.92 per share for a total
purchase price of $15,411,785, before issuance costs. The issuance price of
$4.92 was considered to be equal to the fair value at the time of issuance.
On December 17, 1999, Virage issued 912,457 additional shares of Series E
redeemable convertible preferred stock at a price of $4.92 per share for a total
purchase price of $4,489,290. The fair value of the shares at the time of
issuance was estimated to be $9.90 per share. The difference between the fair
value of $9.90 per share and issue price of $4.92 per share has been accounted
for as a deemed dividend totalling $4,544,036.
6. STOCKHOLDERS' EQUITY
WARRANTS
In September 1995, in connection with a capital lease agreement, the
Company issued warrants to purchase 22,222 shares of common stock at an exercise
price of $0.5625 per share, subject to certain adjustments. The warrants expire
on the earlier of September 2005 or five years after the effective date of an
underwritten public offering of the Company's common stock. Interest expense
related to the fair value of the warrants was insignificant. The fair value of
the warrants was calculated using the Black-Scholes option pricing model
assuming a fair value of common stock of $0.5625, risk-free interest rate of
6.5%, volatility factor of 40%, and a life of 10 years.
F-17
<PAGE> 106
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
In October 1996, in connection with a capital lease agreement, Virage
issued warrants to purchase 8,888 shares of common stock at an exercise price of
$0.5625 per share, subject to certain adjustments. The warrants expire on the
earlier of 2006 or five years after the effective date of a firm underwritten
public offering of the Company's common stock. Interest expense related to the
fair value of the warrants was insignificant. The fair value of the warrants was
calculated using the Black-Scholes option pricing model assuming a fair value of
common stock of $0.5625, risk-free interest rate of 6.5%, volatility factor of
40%, and a life of 10 years.
In May 1997, in connection with a credit facility agreement, Virage issued
warrants to purchase 11,538 shares of Series B preferred stock at an exercise
price of $1.95 per share. The warrants expire in May 2002. Interest expense
related to the fair value of the warrants was insignificant. The fair value of
the warrants was calculated using the Black-Scholes option pricing model
assuming a fair value of Series B preferred stock of $1.95, risk-free interest
rate of 6.5%, volatility factor of 40%, and a life of 5 years.
In November 1999, the Company entered into a software development and
distribution agreement with SRI, International that provides the Company with a
non-exclusive license from SRI, International to embed and distribute SRI's
optical character recognition technology as a plug-in module to the Company's
VideoLogger product. The Company is required to pay SRI, International cash
royalty payments, subject to a minimum of $100,000 over the term of the
agreement, based upon annual license copy volumes as are defined within the
agreement. The Company also issued immediately exercisable, nonforfeitable
warrants to purchase 25,406 shares of Series E preferred stock at an exercise
price of $4.92 per share, subject to certain adjustments. The warrants expire on
October 15, 2002 or immediately prior to the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement,
covering the offer and sale of common stock of the Company at a price per share
of not less than $8.364 and resulting in the receipt of aggregate gross sales
proceeds of at least $20,000,000. The Company determined the fair value of the
warrants ($185,217) using the Black-Scholes valuation model assuming a fair
value of the Series E preferred stock of $9.90, a risk-free interest rate of
5.9%, a volatility factor of 90%, and a life of 3 years. The fair value of the
warrants has been recorded as a technology right and will be amortized to cost
of goods sold over the life of the agreement, which expires on December 31,
2004. Amortization expense of $4,646 was recorded through December 31, 1999.
On December 28, 1999, the Company issued a warrant to purchase 100,580
shares of Series E preferred stock in consideration for advertising provided by
an Internet portal company. The warrants are immediately exercisable at an
exercise price of $4.92 per share and terminate on the earlier of December 28,
2003 or immediately prior to the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement, covering the
offer and sale of common stock of the Company at a price per share of not less
than $8.364 and resulting in the receipt of aggregate gross sales proceeds of at
least $20,000,000. The Company determined the fair value of the warrant using
the Black-Scholes valuation model assuming a fair value of the Series E
preferred stock of $9.90, risk-free interest rate of 6.1%, volatility factor of
90%, and a life of 4 years. The fair
F-18
<PAGE> 107
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
value of the warrant ($780,501) has been recorded as deferred advertising costs
and will be amortized into sales and marketing expense on a straight-line basis
over 12 months, commencing January 31, 2000, which corresponds with the
advertising program.
STOCK OPTION PLAN
In December 1997, the Company's stockholders agreed to terminate the
Virage, Inc. 1995 Stock Option Plan (the 1995 Plan) and to introduce the Virage,
Inc. 1997 Stock Option Plan (the 1997 Plan). All options issued under the 1995
Plan remained outstanding under that plan and did not become outstanding under
the 1997 Plan. The 1997 Plan provides for the granting of incentive stock
options and nonqualified stock options to employees, directors, and consultants.
Under the 1997 Plan, the Board of Directors determines the term of each award
and the award price. In the case of incentive stock options, the exercise price
may be established at an amount not less than the fair market value at the date
of grant, while nonstatutory options may have exercise prices not less than 85%
of the fair market value as of the date of grant. Options granted to any person
owning stock possessing more than 10% of the total combined voting power must
have exercise prices of at least 110% of the fair market value at the date of
grant. Options generally vest ratably over a four-year period commencing with
the grant date and expire no later than ten years from the date of grant.
Options granted under the 1995 Plan are not exercisable until they are
fully vested. Options granted under the 1997 Plan are immediately exercisable,
but shares so purchased that are not yet vested may be repurchased by Virage
upon termination of employment at the exercise price.
All shares subject to options outstanding under the 1995 Plan that expired
or were terminated, canceled, or repurchased were added to the number of shares
authorized and reserved for issuance under the 1997 Plan.
Virage has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under the
FASB's Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), requires use of option valuation models
that were not developed for use in valuing employee stock options.
F-19
<PAGE> 108
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
A summary of the Company's stock option activity and related information
for the years ended is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------- --------- --------------
<S> <C> <C> <C>
Balance at March 31, 1996................ 272,305 1,622,267 $0.11
Options authorized..................... 333,333 - -
Options granted........................ (331,613) 331,613 $0.13
Options exercised...................... - (151,833) $0.11
Options canceled....................... 10,417 (10,417) $0.11
---------- ---------
Balance at March 31, 1997................ 284,442 1,791,630 $0.12
Options authorized..................... 3,436,693 - -
Options granted........................ (796,883) 796,883 $0.20
Options exercised...................... - (419,239) $0.16
Options canceled....................... 47,155 (69,021) $0.14
---------- ---------
Balance at March 31, 1998................ 2,971,407 2,100,253 $0.14
Options granted........................ (1,662,583) 1,662,583 $0.34
Options exercised...................... - (642,397) $0.14
Options canceled....................... 293,807 (478,167) $0.18
---------- ---------
Balance at March 31, 1999................ 1,602,631 2,642,272 $0.26
Options authorized..................... 4,400,000 - -
Options granted........................ (2,174,631) 2,174,631 $3.62
Options exercised...................... - (579,547) $0.61
Options canceled....................... 130,843 (130,843) $0.65
---------- ---------
Balance at December 31, 1999............. 3,958,843 4,106,513 $1.97
========== =========
</TABLE>
There were 309,427 stock options exercised to date that were not fully
vested. These shares are subject to repurchase solely at the option of Virage at
the original grant price.
Options canceled during the years ended March 31, 1998 and 1999 of 69,021
and 478,167, respectively, included options issued under both the 1995 and 1997
Plans. Options cancelled that were issued under the 1995 Plan of 21,866 and
184,360, respectively, were not returned to the 1997 Plan. Therefore, options
made available for grant as a result of cancellations are less than options
cancelled by 21,866 and 184,360, respectively, for the years ended March 31,
1998 and 1999.
F-20
<PAGE> 109
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.11 - $0.11 470,490 5.89 $0.11 313,008 $0.11
$0.12 - $0.19 306,572 6.86 $0.17 232,447 $0.17
$0.24 - $0.24 971,353 8.44 $0.24 971,353 $0.24
$0.30 - $1.27 372,667 9.12 $0.75 372,667 $0.75
$1.87 - $1.87 217,014 9.38 $1.87 217,014 $1.87
$2.25 - $2.25 76,667 9.46 $2.25 76,667 $2.25
$2.40 - $2.40 164,417 9.59 $2.40 164,417 $2.40
$2.55 - $2.55 64,933 9.69 $2.55 64,933 $2.55
$3.00 - $3.00 167,600 9.79 $3.00 167,600 $3.00
$4.50 - $4.50 1,294,800 9.92 $4.50 1,294,800 $4.50
--------- ---------
$0.11 - $4.50 4,106,513 8.72 $1.97 3,874,906 $2.08
========= ==== ===== ========= =====
</TABLE>
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if Virage had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method. The fair value for these options was estimated at the date of
grant using the minimum value method with the following weighted average
assumptions for fiscal 1997, 1998, and 1999, and the nine months ended December
31, 1999: risk-free interest rates of 5.9%, 5.7%, 5.5%, and 5.6%, respectively,
no dividend yield, and an expected life of the options of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected price volatility.
Because Virage's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in Virage's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted average
fair value of options granted during the years ended March 31, 1997, 1998, and
1999 and the nine months ended December 31, 1999 was $0.024, $0.048, $0.131, and
$1.59.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
net loss applicable to common stockholders would have been $1,600,834,
$4,109,923, $6,215,533 and $12,417,582 or $(1.08), $(2.13), $(2.78) and $(4.36)
per share for the years ended March 31, 1997, 1998 and 1999 and the nine months
ended December 31, 1999, respectively.
F-21
<PAGE> 110
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
DEFERRED COMPENSATION
During the nine months ended December 31, 1999, Virage recorded aggregate
deferred compensation of $9,737,594 representing the difference between the
exercise price of stock options granted and the then deemed fair value of
Virage's common stock. The amortization of deferred compensation is charged to
operations over the vesting period of the options using the straight-line
method, which is typically four years. For the nine months ended December 31,
1999, Virage amortized $631,540 of deferred compensation of which $313,443
related to stock options issued to employees, (presented separately in the
Company's statement of operations) and $318,097 related to stock options issued
to consultants.
OPTIONS ISSUED TO CONSULTANTS
As of December 31, 1999, Virage had granted options to purchase 381,764
shares of common stock to consultants at exercise prices ranging from $0.75 to
$4.50 per share. The options were granted in exchange for consulting services to
be rendered and vest over periods ranging from immediately to four years. Virage
valued these options at $2,846,770 being their fair value estimated using a
Black-Scholes valuation model assuming fair values of common stock ranging from
$1.52 to $9.90 per share, risk-free interest rates ranging from 4.75% to 6.13%,
volatility factor of 90% and a life of 4 years. The Company recorded a charge to
operations of $318,097 for the nine months ended December 31, 1999 related to
these options.
The options issued to consultants have been and will be marked-to-market
using the estimate of fair value at the end of each accounting period pursuant
to the FASB's Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling, Goods or Services."
7. SHARES RESERVED
At December 31, 1999, common stock reserved for future issuance was as
follows:
<TABLE>
<S> <C>
Conversion of Series A preferred stock..................... 2,755,556
Conversion of Series B preferred stock..................... 2,031,385
Conversion of Series C preferred stock..................... 2,985,075
Conversion of Series D preferred stock..................... 1,937,984
Conversion of Series E preferred stock..................... 4,044,934
Series E preferred stock warrants.......................... 125,986
Series B preferred stock warrants.......................... 11,538
Common stock warrants...................................... 31,110
Stock option plan.......................................... 8,065,356
----------
21,988,924
==========
</TABLE>
F-22
<PAGE> 111
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
8. SAVINGS PLAN
Virage maintains a savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, employees may defer certain amounts of their
pretax salaries but not more than statutory limits. Virage may make
discretionary contributions to the plan as determined by the Board of Directors.
Virage has not contributed to the plan through December 31, 1999.
9. INCOME TAXES
The provision for income taxes of approximately $36,000 for the nine months
ended December 31, 1999 consists of current foreign taxes and state income
taxes. Due to operating losses and the Company's inability to recognize an
income tax benefit from current losses, there is no provision or benefit for
income taxes for each of the three years ended March 31, 1999 or for the nine
months ended December 31, 1998.
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
taxes is explained below:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
MARCH 31, ENDED
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at Federal statutory rate (34%).... $(1,394) $(2,047) $(2,623)
Loss for which no tax benefit is currently
recognizable................................. 1,394 2,047 2,623
State income tax............................... - - 6
Foreign tax.................................... - - 30
------- ------- -------
Total provision.............................. $ - $ - $ 36
======= ======= =======
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------- DECEMBER 31,
1998 1999 1999
------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $2,514 $4,608 $6,356
Tax credit carryforwards....................... 337 372 610
Capitalized R&D................................ 244 337 389
Accruals and reserves not currently
deductible.................................. 125 274 940
------ ------ ------
Total deferred tax assets................... 3,220 5,591 8,295
Valuation allowance.............................. (3,220) (5,591) (8,295)
------ ------ ------
Net deferred tax assets.......................... $ - $ - $ -
====== ====== ======
</TABLE>
FAS 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes
F-23
<PAGE> 112
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
the Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.
The valuation allowance increased by $1,600,000, $2,371,000, and $2,704,000
during the years ended March 31, 1998 and 1999 and the nine months ended
December 31, 1999, respectively.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $17,776,000 and $5,356,000, respectively. As
of December 31, 1999, the Company also had federal and state research and
development tax credit carryforwards of approximately $425,000 and $295,000,
respectively. The net operating loss and tax credit carryforwards will expire at
various dates beginning in 2003, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credit carryforwards before utilization.
10. RELATED PARTY TRANSACTIONS
Virage purchased 15% of Scimagix for $78,680 in September 1998. The
investment is accounted for using the cost method. The cost of the investment
was written-off during the nine months ended December 31, 1999 as Scimagix is in
the development stage. In addition, Virage granted Scimagix a worldwide,
perpetual license to certain Virage software within certain markets for license
fees. During the fiscal year ended March 31, 1999 and the nine months ended
December 31, 1999, Virage recognized $125,000 and $127,500 of such fees as
license revenue based on cash receipts.
11. SEGMENT AND GEOGRAPHIC INFORMATION
Through March 31, 1999, the Company operated within one business
segment -- the sale of software and related software support services. For the
nine months ended December 31, 1999, the Company had two reportable segments:
the sale of software and related software support services including revenues
from U.S. government agencies ("software") and the sale of its Virage
Interactive services which includes set-up fees, video processing fees, and
transaction fees ("VI"). The Company's Chief Operating Decision Maker ("CODM")
is the Company's Chief Executive Officer who evaluates performance and allocates
resources based upon total revenues and gross margin (loss). Discreet financial
information for each segment's profit and loss and each segment's total assets
is not provided to the Company's CODM, nor is it tracked by the Company. The
accounting policies for the reportable segments are consistent with those
described in the summary of significant accounting policies. Total revenues for
the Company's software segment were $3,729,720 and total revenues for the
Company's VI segment were $157,329 for the nine months ended December 31, 1999.
Total cost of revenues for the Company's software segment were $1,222,058 and
total cost of revenues for the Company's VI
F-24
<PAGE> 113
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
segment were $831,941 for the nine months ended December 31, 1999. Gross profit
for the Company's software segment was $2,507,662 and gross loss for the
Company's VI segment was $674,612 for the nine months ended December 31, 1999.
Total revenues to customers located outside of the United States were
approximately $253,000 and $1,039,000 for the nine months ended December 31,
1998 and 1999, respectively, and were $358,000 for the year ended March 31,
1999. The Company's European subsidiary, Virage Europe, Ltd., which was
established in November 1998, accounted for $898,361 of the Company's total
revenues for the nine months ended December 31, 1999 (insignificant for the nine
months ended December 31, 1998).
12. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING (UNAUDITED)
In January 2000, the Board of Directors approved the filing of a
Registration Statement with the Securities and Exchange Commission permitting
Virage to sell common stock to the public. Upon completion of the initial public
offering ("IPO"), Virage's Certificate of Incorporation will be amended to
reduce the number of authorized preferred stock from 14,728,269 shares to
2,000,000 shares and increase authorized common stock to 100,000,000 shares.
The Board of Directors has the authority, without action by the
stockholders, to designate and issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and related restrictions,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of the series.
OPTIONS GRANTED SUBSEQUENT TO DECEMBER 31, 1999 (UNAUDITED)
From January through March 2000, the Company granted a total of 2,961,266
common stock options at prices ranging between $6.00 - $9.00. The deferred
compensation related to these stock option grants is approximately $6,200,000
which will be amortized over four years which represents the vesting period of
the stock option grants.
VIRAGE 2000 EMPLOYEE STOCK PURCHASE PLAN (UNAUDITED)
In March 2000, the Company's board of directors adopted the Virage 2000
Employee Stock Purchase Plan and authorized 1,100,000 shares of the Company's
common stock to be allocated to the plan.
SIGNIFICANT AGREEMENTS AND COMMITMENTS (UNAUDITED)
In February 2000, the Company entered into a six-year operating lease
agreement on a new building. The lease commitment calls for rental payments
totaling approximately $15,851,000 over the lease term. In addition, the Company
is required to maintain a $2,000,000 letter of credit. In conjunction with the
lease agreement, the Company will
F-25
<PAGE> 114
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
issue a warrant to the landlord to purchase $2,000,000 of the Company's common
stock. The warrant will be issued concurrent with the pricing of the Company's
IPO and will have an exercise price equal to the offering price to the public
set forth in the Company's final prospectus and will be non-forfeitable and
immediately exercisable for a number of shares of the Company's common stock
determined as the quotient of $2,000,000 divided by the Company's IPO price. If
not exercised, the warrant will expire at the end of the first day that the
Company's stock begins trading on Nasdaq. The Company will account for the
warrant according to the Financial Accounting Standards Board's Emerging Issue
Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued
to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." Preliminarily, the Company has estimated that the value of the
warrant at the time of issue will be approximately $72,000 using a Black-Scholes
model with the following assumptions: assumed IPO price of $11.00 as the deemed
fair value, a risk-free interest rate of 6.1%, a volatility factor of 90%, and
an expected life of one day (based upon the foregoing explanation of the
warrant's short contractual life). The value of the warrant will be amortized as
rent expense over the term of the six-year lease agreement.
In March 2000, the Company entered into a one-year services agreement with
Akamai Technologies, Inc. ("Akamai"). The agreement stipulates that Akamai and
the Company will resell each other's products and services and that the Company
guarantees to purchase or resell a minimum of $250,000 of Akamai products and
services during the first year of the services agreement. To the extent that the
Company is unable to meet its minimum sales requirement of Akamai products and
services to third parties, the Company is required to pay Akamai and will offset
any revenues received from Akamai by the amount paid. In addition, the Company
entered into a stock purchase agreement with Akamai whereby Akamai has agreed to
purchase $3,500,000 of the Company's common stock at the IPO price in a private
placement concurrent with, and contingent upon, the closing of the Company's
IPO.
In March 2000, the Company entered into a one-year services agreement with
RealNetworks, Inc. ("RealNetworks"). The agreement provides for RealNetworks to
license and use certain Company technology within RealNetworks' websites and
video player for which the Company is to receive certain fees, subject to
certain minimums, as defined within the agreement. The agreement also stipulates
that the Company is to provide $240,000 of credit to customers of RealNetworks
that can be applied toward Virage Interactive services set-up fees and indexing
and encoding services (based upon Virage standard pricing). In addition, at the
Company's option, the Company will provide an additional $300,000 of set-up fees
and indexing and encoding services (based upon Virage cost incurred) to
RealNetworks' customers during the term of the agreement or, to the extent not
provided, purchase the difference in the form of RealNetworks' advertising
services over the subsequent twelve month period. The Company will reduce its
revenues received from RealNetworks to the extent that the Company provides the
aforementioned service credits to RealNetworks customers or purchases
RealNetworks' advertisements. Finally, the Company entered into a stock purchase
agreement with RealNetworks whereby RealNetworks has agreed to purchase
$3,000,000 of the Company's common
F-26
<PAGE> 115
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
stock at the IPO price in a private placement concurrent with, and contingent
upon, the closing of the Company's IPO.
In March 2000, the Company amended a video cataloging services and license
agreement with CNET, Inc. ("CNET"). The amendment provides for CNET to pay
certain minimum fees as defined within the amendment for the use and syndication
of certain CNET content via the use of Virage Interactive services in return for
certain discounts to ongoing fees. The Company and CNET also entered into a
stock purchase agreement whereby CNET has agreed to purchase $2,500,000 of the
Company's common stock at the IPO price in a private placement concurrent with,
and contingent upon, the closing of the Company's IPO.
In March 2000, the Company entered into a stock purchase agreement with
Thomson Consumer Electronics, Inc. ("Thomson") whereby Thomson has agreed to
purchase $10,000,000 of the Company's common stock at the IPO price in a private
placement with, and contingent upon, the closing of the Company's IPO.
REVERSE STOCK SPLIT
On March 14, 2000, the Company's stockholders approved a 2-for-3 reverse
stock split of the Company's preferred and common stock. All share data
information has been restated to reflect the reverse stock split.
F-27
<PAGE> 116
Description of Graphics
Inside front cover of gatefold open
- -----------------------------------
[Graphic depiction of Virage operations and process flow of Virage Interactive
services.]
Inside front cover of gatefold closed
- -------------------------------------
[Screen shots of Virage VideoLogger and selected customer website.]
<PAGE> 117
[VIRAGE LOGO]
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions payable by the Registrant in connection
with the sale and distribution of the common stock being registered. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market application
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........ $ 16,698
NASD filing fee............................................ 7,400
Nasdaq National Market application fee..................... 95,000
Blue sky qualification fees and expenses................... 6,000
Printing and engraving expenses............................ 180,000
Legal fees and expenses.................................... 400,000
Accounting fees and expenses............................... 450,000
Director and officer liability insurance................... 400,000
Transfer agent and registrar fees.......................... 10,000
Miscellaneous expenses..................................... 34,902
----------
Total................................................. $1,600,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements (Exhibit
10.1) with its directors and officers which would require the Registrant, among
other things, to indemnify them against certain liabilities which may arise by
reason of their status or service (other than liabilities arising from willful
misconduct of a culpable nature). The Registrant also intends to maintain
director and officer liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreements may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since January 1, 1997, Virage has issued and sold the following
unregistered securities:
1. From January 1, 1997 through December 31 1997, Virage granted
options to purchase an aggregate of 158,767 shares of common stock under
its 1995 stock option
II-1
<PAGE> 119
plan to employees, consultants and outside directors, of which 181,828 have
been exercised.
2. From December 1, 1997 through December 31, 1999, Virage granted
options to purchase an aggregate of 4,561,996 shares of common stock under
its 1997 stock option plan to employees, consultants and outside directors,
of which 667,692 have been exercised.
3. In January 1997 and July 1997, Virage sold 2,031,384 shares of
series B preferred stock to 27 accredited investors and 5 sophisticated
investors at a purchase price of $1.95 per share for a total purchase price
of $5,941,800.15.
4. In December 1997, Virage sold 5,133 shares of common stock to Susan
Shay, a consultant, at a purchase price of $0.20 per share for a total
purchase price of $1,501.50.
5. In May 1997, Virage issued a warrant, which will expire in May 29,
2002, to purchase 11,538 shares of series B preferred stock at a price per
share of $1.95 for a total purchase price of $33,750.60 to an accredited
investor.
6. In March 1998 and April 1998, Virage sold 2,985,074 shares of its
series C preferred stock to 19 accredited investors and 2 sophisticated
investors at a purchase price of $2.01 per share for a total purchase price
of $9,000,000.12.
7. In May 1998, Virage sold 15,384 shares of common stock to Paul L.
Gomory, Jr., a consultant, at a purchase price of $0.24 per share for a
total purchase price of $5,538.48.
8. In January 1999 and March 1999, Virage sold 1,937,984 shares of its
series D preferred stock to 28 accredited investors and 1 sophisticated
investor at a purchase price of $1.72 per share for a total purchase price
of $7,502,580.66
9. In March 1999, Virage sold 5,796 shares of common stock to Stephen
Combs, a consultant, at a purchase price of $0.75 per share for a total
purchase price of $6,520.50, payable to Virage by past consulting services
rendered.
10. In March 1999, Virage sold 1,666 shares of common stock to
Christina Gomez, a consultant, at a purchase price of $0.75 per share for a
total purchase price of $1,875.00, payable to Virage by past consulting
services rendered.
11. In September 1999 and December 1999, Virage sold 4,044,934 shares
of its series E preferred stock to 53 accredited investors and 8
sophisticated investors at a purchase price of $4.92 per share for a total
purchase price of $29,851,612.50.
12. In October 1999, Virage issued a warrant, which will terminate
immediately prior to the closing of this offering, to purchase 25,406
shares of series E preferred stock at a price per share of $4.92 for a
total purchase price of $187,501.20 to an accredited investor.
13. In November 1999, Virage sold 55,000 shares of common stock to
Protege Software Limited, a consultant, at a purchase price of $3.00 per
share for a total purchase price of $247,500.
14. In December 1999, Virage sold 4,444 shares of common stock to Lynn
Dwigans, a consultant, at a purchase price of $4.00 per share for a total
purchase price of $30,001.50, payable to Virage by past consulting services
rendered.
II-2
<PAGE> 120
15. In December 1999, Virage issued a warrant, which will terminate
immediately prior to the closing of this offering, to purchase 100,580
shares of series E preferred stock at a price per share of $4.92 for a
total purchase price of $742,280.40 to an accredited investor.
16. In March 2000, Virage issued a warrant, which will expire at the
end of the first day that the company's stock begins trading on Nasdaq, to
purchase 181,818 shares of common stock at an assumed price per share of
$11.00 for a total purchase price of $1,999,998 to an accredited investor.
17. In March 2000, Virage entered into agreements with Akamai
Technologies, CNET, RealNetworks and Thomson Consumer Electronics to sell a
total of 1,727,270 shares of common stock concurrent with the closing of
this offering, at an assumed private placement price of $11.00 per share
for a total purchase price of $18,999,970.
There were no underwriters employed in connection with any of the
transactions set forth in this Item 15.
For additional information concerning these equity investment transactions,
see the section entitled "Related Party Transactions" in the prospectus.
The issuances described in Items 15(a)(3) through 15(a)(15) were deemed
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Item 15(a)(1) and 15(a)(2) were deemed exempt
from registration under the Securities Act in reliance on Section 4(2) or Rule
701 promulgated thereunder as transactions pursuant to compensatory benefit
plans and contracts relating to compensation. The recipients of securities in
each such transaction represented their intention 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 other instruments issued in such transactions. All recipients
either received adequate information about Virage, Inc. or had access, through
employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Fifth Amended and Restated Certificate of Incorporation of
Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
3.3+ Form of Sixth Amended and Restated Certificate of
Incorporation of Registrant to be filed immediately prior to
the effective date of the offering.
4.1+ Second Amended and Restated Rights Agreement, dated
September 21, 1999, between Registrant and certain
stockholders.
4.2 Specimen certificate representing the common stock.
4.3 Amendment No. 1 to Second Amended and Restated Rights
Agreement, dated September 21, 1999, between Registrant and
certain stockholders.
5.1+ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1+ Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.
10.2+ 1995 Stock Option Plan.
</TABLE>
II-3
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.3+ 1997 Stock Option Plan.
10.4+ 2000 Employee Stock Purchase Plan.
10.5+ Lease Agreement, dated January 17, 1996, as amended, between
Casiopea Venture Corporation and Registrant.
10.6+ Standard Form of Office Lease, dated November 15, 1999, as
amended, between 1995 CAM LP and Registrant.
10.7+ License Agreement, dated September 27, 1999, between Office
Dynamics Limited, Protege Property and Registrant.
10.8+ Security and Loan Agreement, dated November 2, 1998, as
amended, between Imperial Bank and Registrant.
10.9 Office Lease, dated February 17, 2000, between Jim Joseph,
Trustee, Jim Joseph Revocable Trust, dated January 19, 1990,
and Registrant.
10.10 Agreement, dated February 28, 2000, between Pinewood Studios
Limited and Registrant.
23.1 Consent of Ernst & Young LLP, independent public auditors.
23.2+ Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
23.3+ Consent of Veronis, Suhler & Associates dated February 4,
2000.
23.4+ Consent of Direct Marketing Association, Inc., dated
February 4, 2000.
24.1+ Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Account
All other schedules are 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 Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities 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 hereunder, 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
II-4
<PAGE> 122
such indemnification by it is against public policy as expressed in the
Securities 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, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
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; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in San Mateo, State of
California, on March 31, 2000.
VIRAGE, INC.
By: /s/ PAUL G. LEGO
-----------------------------------
Paul G. Lego
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ PAUL G. LEGO President and Chief March 31, 2000
- --------------------------------------------------- Executive Officer
Paul G. Lego (Principal Executive
Officer)
/s/ ALFRED J. CASTINO* Chief Financial March 31, 2000
- --------------------------------------------------- Officer (Principal
Alfred J. Castino Financial and
Accounting Officer)
/s/ RAMESH JAIN* Director March 31, 2000
- ---------------------------------------------------
Ramesh Jain
/s/ STANDISH H. O'GRADY* Director March 31, 2000
- ---------------------------------------------------
Standish H. O'Grady
/s/ C.K. PRAHALAD* Director March 31, 2000
- ---------------------------------------------------
C.K. Prahalad
/s/ WILLIAM H. YOUNGER, JR.* Director March 31, 2000
- ---------------------------------------------------
William H. Younger, Jr.
/s/ PHILIP W. HALPERIN* Director March 31, 2000
- ---------------------------------------------------
Philip W. Halperin
/s/ LAWRENCE K. ORR* Director March 31, 2000
- ---------------------------------------------------
Lawrence K. Orr
*By: /s/ PAUL G. LEGO
----------------------------------------------
Paul G. Lego
(Attorney-in-fact)
</TABLE>
II-6
<PAGE> 124
VIRAGE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED BALANCE
AS OF TO AS OF
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts... $ -- $ -- $ -- $ --
Year ended March 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts... $ -- $ 37,337 $ -- $ 37,337
Year ended March 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts... $ 37,337 $ 96,419 $ -- $133,756
Nine months ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts... $133,756 $255,116 $ -- $388,872
</TABLE>
S-1
<PAGE> 125
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Fifth Amended and Restated Certificate of Incorporation of
Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
3.3+ Form of Sixth Amended and Restated Certificate of
Incorporation of Registrant to be filed immediately prior to
the effective date of the offering.
4.1+ Second Amended and Restated Rights Agreement, dated
September 21, 1999, between Registrant and certain
stockholders.
4.2 Specimen certificate representing the common stock.
4.3 Amendment No. 1 to Second Amended and Restated Rights
Agreement, dated September 21, 1999, between Registrant and
certain stockholders.
5.1+ Opinion of Gray Cary Ware & Freidenrich LLP.
10.1+ Form of Indemnification Agreement between Registrant and
Registrant's directors and officers.
10.2+ 1995 Stock Option Plan.
10.3+ 1997 Stock Option Plan.
10.4+ 2000 Employee Stock Purchase Plan.
10.5+ Lease Agreement, dated January 17, 1996, as amended, between
Casiopea Venture Corporation and Registrant.
10.6+ Standard Form of Office Lease, dated November 15, 1999, as
amended, between 1995 CAM LP and Registrant.
10.7+ License Agreement, dated September 27, 1999, between Office
Dynamics Limited, Protege Property and Registrant.
10.8+ Security and Loan Agreement, dated November 2, 1998, as
amended, between Imperial Bank and Registrant.
10.9 Office Lease, dated February 17, 2000, between Jim Joseph,
Trustee, Jim Joseph Revocable Trust, dated January 19, 1990,
and Registrant.
10.10 Agreement, dated February 28, 2000, between Pinewood Studios
Limited and Registrant.
23.1 Consent of Ernst & Young LLP, independent public auditors.
23.2+ Consent of Gray Cary Ware & Freidenrich LLP (included in
Exhibit 5.1).
23.3+ Consent of Veronis, Suhler & Associates dated February 4,
2000.
23.4+ Consent of Direct Marketing Association, Inc., dated
February 4, 2000.
24.1+ Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
27.4 Financial Data Schedule.
</TABLE>
- -------------------------
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
_________ SHARES
VIRAGE, INC.
COMMON STOCK, PAR VALUE $0.001 PER SHARE
UNDERWRITING AGREEMENT
[____________], 2000
CREDIT SUISSE FIRST BOSTON CORPORATION
FLEETBOSTON ROBERTSON STEPHENS, INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Virage, Inc., a Delaware corporation ("Company"),
proposes to issue and sell [________] shares ("Firm Securities") of its Common
Stock, par value $0.001 per share ("Securities") and also proposes to issue and
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than [________] additional shares ("Optional Securities") of its Securities
as set forth below. The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities." As part of the offering
contemplated by this Agreement, [____________________] (the "Designated
Underwriter") has agreed to reserve out of the Firm Securities purchased by it
under this Agreement, up to [_________________] shares, for sale to the
Company's directors, officers, employees and other parties associated with the
Company (collectively, "Participants"), as set forth in the Prospectus (as
defined herein) under the heading "Underwriters" (the "Directed Share Program").
The Firm Securities to be sold by the Designated Underwriter pursuant to the
Directed Share Program (the "Directed Shares") will be sold by the Designated
Underwriter pursuant to this Agreement at the public offering price. Any
Directed Shares not orally confirmed for purchase by a Participant by the end of
the business day on which this Agreement is executed will be offered to the
public by the Underwriters as set forth in the Prospectus. The Company hereby
agrees with the several Underwriters named in Schedule A hereto ("Underwriters")
as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-______) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 (the "Act") and is not
proposed to be amended or (ii) is proposed to be amended by amendment or
post-effective amendment. If such registration statement (the "initial
registration statement") has been declared effective, either (A) an additional
registration statement (the "additional registration statement") relating to the
Offered Securities may have been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon
filing pursuant to such Rule and the Offered Securities all have been duly
registered under the Act pursuant to the initial registration statement and, if
applicable, the additional registration statement or (B) such an additional
registration statement is proposed to be filed with the Commission pursuant to
Rule 462(b) and will become effective upon filing pursuant to such Rule and upon
such filing the Offered Securities will all have been duly registered under the
Act pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the initial
registration statement or if an additional registration statement has been filed
and the Company does not propose to amend it, and if any post-effective
amendment to either
-1-
<PAGE> 2
such registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent amendment (if any) to
each such registration statement has been declared effective by the Commission
or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)")
under the Act or, in the case of the additional registration statement, Rule
462(b). For purposes of this Agreement, "Effective Time" with respect to the
initial registration statement or, if filed prior to the execution and delivery
of this Agreement, the additional registration statement means (A) if the
Company has advised the Representatives that it does not propose to amend such
registration statement, the date and time as of which such registration
statement, or the most recent post-effective amendment thereto (if any) filed
prior to the execution and delivery of this Agreement, was declared effective by
the Commission or has become effective upon filing pursuant to Rule 462(c), or
(B) if the Company has advised the Representatives that it proposes to file an
amendment or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such amendment
or post-effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed prior to
the execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect to
such additional registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule 462(b).
"Effective Date" with respect to the initial registration statement or the
additional registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its Effective Time,
including all information contained in the additional registration statement (if
any) and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the contents
of the initial registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule 430A(b), is
hereinafter referred to as the "Additional Registration Statement". The Initial
Registration Statement and the Additional Registration Statement are hereinafter
referred to collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "Prospectus". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement, the Initial Registration Statement
conformed in all respects to the requirements of the Act and the rules and
regulations of the Commission ("Rules and Regulations") and did not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
(B) on the Effective Date of the Additional Registration Statement (if any),
each Registration Statement conformed, or will conform, in all respects to the
requirements of the Act and the Rules and Regulations and did not include, or
will not include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) on the date of
this Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and delivery of
this Agreement, the Additional Registration Statement each conforms, and at the
time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing
is required) at the Effective Date of the Additional Registration Statement in
which the Prospectus is included, each Registration Statement and the Prospectus
will conform, in all respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the Effective
Date of the Initial Registration Statement, the Initial Registration Statement
and the Prospectus will conform in all respects to the requirements of the Act
and
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<PAGE> 3
the Rules and Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only such
information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business requires
such qualification.
(d) The Company has no "significant subsidiaries," as defined in
paragraph (w) of Rule 1.02 of Regulation S-X promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(e) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and each
subsidiary of the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its ownership
or lease of property or the conduct of its business requires such qualification;
all of the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the Company,
directly or through subsidiaries, is owned free from liens, encumbrances and
defects.
(f) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding shares
of capital stock of the Company are, and, when the Offered Securities have been
delivered and paid for in accordance with this Agreement on each Closing Date
(as defined below), such Offered Securities will have been, validly issued,
fully paid and nonassessable and will conform to the description thereof
contained in the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Securities.
(g) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with this
offering.
(h) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the Company
to file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(i) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market, subject to notice of issuance.
(j) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the issuance and sale of the Offered Securities by the
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<PAGE> 4
Company, except such as have been obtained and made under the Act and such as
may be required under state securities laws.
(k) The execution, delivery and performance of this Agreement,
and the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental agency or
body or any court, domestic or foreign, having jurisdiction over the Company or
any subsidiary of the Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a party or by which
the Company or any such subsidiary is bound or to which any of the properties of
the Company or any such subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated by this
Agreement.
(l) This Agreement has been duly authorized, executed and
delivered by the Company.
(m) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all other
properties and assets owned by them, in each case free from liens, encumbrances
and defects that would materially affect the value thereof or materially
interfere with the use made or to be made thereof by them; and except as
disclosed in the Prospectus, the Company and its subsidiaries hold any leased
real or personal property under valid and enforceable leases with no exceptions
that would materially interfere with the use made or to be made thereof by them.
(n) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental agencies
or bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or modification of
any such certificate, authority or permit that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate have
a material adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries taken as
a whole ("Material Adverse Effect").
(o) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that might
have a Material Adverse Effect.
(p) The Company and its subsidiaries own, possess or can acquire
on reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and other
intellectual property, including applications licensed directly from third
parties (collectively, "intellectual property rights") necessary to conduct the
business now operated by them, or presently employed by them, and have not
received any notice of, and are not aware of, any infringement of or conflict
with asserted rights of others with respect to any intellectual property rights
that, if determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect. The
discoveries, inventions, products or processes of the Company referred to in the
Prospectus do not, to the Company's knowledge, infringe or conflict with any
intellectual property right of any third party.
(q) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, "environmental
laws"), owns or operates any real property contaminated with any substance that
is subject to any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any claim
relating to any environmental laws, which violation, contamination, liability or
claim would individually or in the
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<PAGE> 5
aggregate have a Material Adverse Effect; and the Company is not aware of any
pending investigation which might lead to such a claim.
(r) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, or any of its
subsidiaries or any of their respective properties that, if determined adversely
to the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect, or would materially and adversely
affect the ability of the Company to perform its obligations under this
Agreement, or which are otherwise material in the context of the sale of the
Offered Securities; and no such actions, suits or proceedings are threatened or,
to the Company's knowledge, contemplated.
(s) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis and the
schedules included in each Registration Statement present fairly the information
required to be stated therein and the assumptions used in preparing the pro
forma financial statements included in each Registration Statement and the
Prospectus provide a reasonable basis for presenting the significant effects
directly attributable to the transactions or events described therein, the
related pro forma adjustments give appropriate effect to those assumptions, and
the pro forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statement amounts.
(t) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has been no
material adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries taken as
a whole, and, except as disclosed in or contemplated by the Prospectus, there
has been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(u) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as defined
in the Investment Company Act of 1940.
(v) The Company (i) has notified each holder of a currently
outstanding option issued under the Company's 1995 Stock Option Plan and 1997
Stock Option Plan (the "Option Plans"), and each person who has acquired
Securities pursuant to the exercise of any option granted under such option
plans that pursuant to the terms of such option plans, none of such options or
shares may be sold or otherwise transferred or disposed of for a period of 180
days after the date of the initial public offering of the Offered Securities and
(ii) has imposed a stop-transfer instruction with the Company's transfer agent
in order to enforce the foregoing lock-up provision imposed pursuant to the
Option Plans.
(w) Except as disclosed in the Prospectus, all outstanding
Securities, and all securities convertible into or exercisable or exchangeable
for Securities, are subject to valid and binding agreements (collectively,
"Lock-up Agreements") that restrict the holders thereof from selling, making any
short sale of, granting any option for the purchase of, or otherwise
transferring or disposing of, any of such Securities, or any such securities
convertible into or exercisable or exchangeable for Securities, for a period of
180 days after the date of the Prospectus without the prior written consent of
Credit Suisse First Boston Corporation ("CSFBC").
(x) The Company (i) has notified each stockholder who is party to
the Second Amended and Restated Rights Agreement dated September 21, 1999 (the
"Rights Agreement"), that pursuant to the terms of the Rights Agreement, none of
the shares of the Company's capital stock held by such stockholder may be sold
or otherwise transferred or disposed of for a period of 180 days after the date
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<PAGE> 6
of the initial public offering of the Offered Securities and (ii) has imposed a
stop-transfer instruction with the Company's transfer agent in order to enforce
the foregoing lock-up provision imposed pursuant to the Rights Agreement.
(y) The Company has not offered, or caused the Underwriters to
offer, any offered Securities to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or type of
business with the Company or (ii) a trade journalist or publication to write or
publish favorable information about the Company or its products.
Furthermore, the Company represents and warrants to the Underwriters
that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is necessary under the securities
law and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $[____] per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, at the office of CSFBC, Eleven Madison Avenue,
New York, New York, against payment of the purchase price in Federal (same day)
funds by official bank check or checks or wire transfer to an account at a bank
acceptable to CSFBC drawn to the order of the Company at the office of Gray Cary
Ware & Freldenrich LLP ("GCWF"), 400 Hamilton Avenue, Palo Alto, California, at
10:00 A.M., New York time, on [__________________], 2000 or at such other time
not later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "First Closing Date." For
purposes of Rule 15c6-1 under the Exchange Act, the First Closing Date (if later
than the otherwise applicable settlement date) shall be the settlement date for
payment of funds and delivery of securities for all the Offered Securities sold
pursuant to the offering. The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the above office of CSFBC in New York at least 24 hours prior to
the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
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<PAGE> 7
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date," which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the above
office of CSFBC in New York, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Company at the
above office of GCWF in Palo Alto, California. The certificates for the Optional
Securities being purchased on each Optional Closing Date will be in definitive
form, in such denominations and registered in such names as CSFBC requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the above office of CSFBC in New York at a
reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement, the Company will file
the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph
(4)) of Rule 424(b) not later than the earlier of (A) the second business day
following the execution and delivery of this Agreement or (B) the fifteenth
business day after the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Prospectus is printed and distributed to any Underwriter, or
will make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without CSFBC's consent; and the Company will
also advise CSFBC promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best efforts
to prevent the issuance of any such stop order and to obtain as soon as possible
its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither
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<PAGE> 8
CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or
supplement shall constitute a waiver of any of the conditions set forth in
Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (five of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M.,
New York time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial Registration
Statement. All other documents shall be so furnished as soon as available. The
Company will pay the expenses of printing and distributing to the Underwriters
all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC designates and
will continue such qualifications in effect so long as required for the
distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Exchange Act or mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, for any filing fees and other expenses
(including fees and disbursements of counsel) incurred in connection with
qualification of the Offered Securities for sale under the laws of such
jurisdictions as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. of the Offered Securities,
for any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except issuances of
Securities pursuant to the conversion or exchange of convertible or exchangeable
securities or the exercise of warrants and options, in each case outstanding on
the date hereof, grants of employee stock options pursuant to the terms of a
plan in effect on the date hereof, issuances of Securities pursuant to the
exercise of such options or the exercise of any other employee stock options
outstanding on the date hereof.
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<PAGE> 9
(j) The Company agrees to use its best efforts to cause (i) each
of its directors, officers and shareholders and (ii) each person who acquires
Securities of the Company pursuant to the exercise of any option or right
granted under the Option Plan to sign an agreement that restricts such person
from selling, making any short sale of, granting any option for the purchase of,
or otherwise transferring or disposing of, any of such Securities, or any such
securities convertible into or exercisable or exchangeable for Securities, for a
period of 180 days after the date of the Prospectus without the prior written
consent of CSFBC; and the Company will (i) enforce the terms of each such
agreement and (ii) issue and impose a stop-transfer instruction with the
Company's transfer agent in order to enforce the foregoing lock-up agreements.
(k) The Company will (i) enforce the terms of each Lock-up
Agreement, and (ii) issue stop-transfer instructions to the transfer agent for
the Securities with respect to any transaction or contemplated transaction that
would constitute a breach of or default under the applicable Lock-up Agreement.
In addition, except with the prior written consent of CSFBC, the Company agrees
(i) not to amend or terminate, or waive any right under, any Lock-up Agreement,
or take any other action that would directly or indirectly have the same effect
as an amendment or termination, or waiver of any right under any Lock-up
Agreement, that would permit any holder of Securities, or any securities
convertible into, or exercisable or exchangeable for, Securities, to make any
short sale of, grant any option for the purchase of, or otherwise transfer or
dispose of, any such Securities or other securities, prior to the expiration of
the 180 days after the date of the Prospectus and (ii) not to consent to any
sale, short sale, grant of an option for the purchase of, or other disposition
or transfer of shares of Securities, or securities convertible into or
exercisable or exchangeable for Securities, subject to a Lock-up Agreement.
(l) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of the effectiveness of the Registration
Statement. The Designated Underwriter will notify the Company as to which
Participants will need to be so restricted. The Company will direct the transfer
agent to place stop transfer instructions upon such securities for such period
of time.
(m) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred by the
underwriters in connection with the Directed Share Program.
Furthermore, the Company covenants with the Underwriters that the
Company will comply with all applicable securities and other applicable laws,
rules and regulations in each foreign jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement,
shall be on or prior to the date of this Agreement (but in no event earlier than
the Effective Time) or, if the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement, shall
be prior to the filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective Time), of
Ernst & Young LLP confirming that they are independent public accountants within
the meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
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<PAGE> 10
(i) in their opinion the financial statements and
schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in Statement
of Auditing Standards No. 71, Interim Financial Information, on
the unaudited financial statements included in the Registration
Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company, inquiries of officials of
the Company who have responsibility for financial and accounting
matters and other specified procedures, nothing came to their
attention that caused them to believe that:
(A) the unaudited financial statements included in
the Registration Statements do not comply as to form in
all material respects with the applicable accounting
requirements of the Act and the related published Rules
and Regulations or any material modifications should be
made to such unaudited financial statements for them to
be in conformity with generally accepted accounting
principles;
(B) at the date of the latest available balance
sheet read by such accountants, or at a subsequent
specified date not more than three business days prior
to the date of such letter, there was any change in the
capital stock or deferred revenue or any increase in
long-term debt, total or current liabilities or
stockholders' deficit, or any decrease in current assets
or total assets of the Company and its consolidated
subsidiaries, as compared with amounts shown on the
latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the
latest statement of operations included in the
Prospectus to a specified date not more than three
business days prior to the date of such letter, there
were any decreases, as compared with the corresponding
period of the previous year and with the period of
corresponding length in the previous quarter, in total
revenues, or increases in loss from operations,
comprehensive loss or the total or per share amounts of
basic net loss;
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred or may occur
or which are described in such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each
case to the extent that such dollar amounts, percentages and
other financial and statistical information are derived from the
general accounting records of the Company and its subsidiaries
subject to the internal controls of the Company's accounting
system or are derived directly from such records by analysis or
computation) with the results obtained from inquiries, a reading
of such general accounting records and other procedures specified
in such letter and have found such dollar amounts, percentages
and other financial and statistical information to be in
agreement with such results, except as otherwise specified in
such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and delivery of
this Agreement, "Registration Statements" shall mean the
-10-
<PAGE> 11
initial registration statement as proposed to be amended by the amendment or
post-effective amendment to be filed shortly prior to its Effective Time, (ii)
if the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and the
additional registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to its
Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the
Registration Statements.
(b) The Company shall have received from Ernst & Young LLP (and
furnished to the Representatives) an examination report with respect to
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company for the three fiscal years ending March 31, 1999 in
accordance with Statement on Standards for Attestation Engagement No. 8 issued
by the Auditing Standards Board of the American Institute of Certified Public
Accountants, and such examination report shall be included in the Registration
Statement.
(c) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by CSFBC.
If the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission.
(d) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other), business,
properties or results of operations of the Company or its subsidiaries taken as
one enterprise which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public offering or
the sale of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company (other
than an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the Company on any
exchange or in the over-the-counter market; (iv) any banking moratorium declared
by U.S. Federal or New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any declaration of war
by Congress or any other substantial national or international calamity or
emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment for
the Offered Securities.
(e) The Representatives shall have received an opinion, dated
such Closing Date, of GCWF, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with corporate
-11-
<PAGE> 12
power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its
business requires such qualification;
(ii) The Offered Securities delivered on such Closing
Date and all other outstanding shares of the capital stock of the
Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the description thereof
contained in the Prospectus; and the stockholders of the Company
have no preemptive rights with respect to the Securities;
(iii) Except as disclosed in the Prospectus, there are
no contracts, agreements or understandings known to such counsel
between the Company and any person granting such person the right
to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company
under the Act;
(iv) The Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in the
Investment Company Act of 1940.
(v) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by
this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required under
state securities laws;
(vi) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or
any court having jurisdiction over the Company or any subsidiary
of the Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to
which any of the properties of the Company or any such subsidiary
is subject, or the charter or by-laws of the Company or any such
subsidiary, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated
by this Agreement;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any) was
filed and became effective under the Act as of the date and time
(if determinable) specified in such opinion, the Prospectus
either was filed with the Commission pursuant to the
subparagraph of Rule 424(b) specified in such opinion on the
date specified therein or was included in the Initial
Registration Statement or the Additional Registration Statement
(as the case may be), and, to the best of the knowledge of such
counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and
no proceedings for that purpose have been instituted or are
pending or contemplated under the Act, and each Registration
Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the
requirements
-12-
<PAGE> 13
of the Act and the Rules and Regulations; such counsel
have no reason to believe that any part of a Registration
Statement or any amendment thereto, as of its effective date or
as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading; the descriptions in the Registration
Statements and Prospectus of statutes, legal and governmental
proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; and such
counsel do not know of any legal or governmental proceedings
required to be described in a Registration Statement or the
Prospectus which are not described as required or of any
contracts or documents of a character required to be described in
a Registration Statement or the Prospectus or to be filed as
exhibits to a Registration Statement which are not described and
filed as required; it being understood that such counsel need
express no opinion as to the financial statements or other
financial data contained in the Registration Statements or the
Prospectus;
(viii) This Agreement has been duly authorized, executed
and delivered by the Company;
(ix) The execution and delivery of the Merger Agreement,
effecting the reincorporation of the California Corporation under
the laws of the State of Delaware, was duly authorized by all
necessary corporate action on the part of each of the California
Corporation and the Company;
(f) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to the
best of their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of subsection
(a) of this Section, except that the specified date referred to in such
subsection will be a date not more than three days prior to such Closing Date
for the purposes of this subsection.
-13-
<PAGE> 14
The Company will furnish the Representatives with such conformed copies
of such opinions, certificates, letters and documents as the Representatives
reasonably request. CSFBC may in its sole discretion waive on behalf of the
Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "Designated Entities"), from and against all and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase, or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person, if any
who controls the Company within the meaning of Section 15 of the Act, against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting".
-14-
<PAGE> 15
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a) or (b) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (b) above. In case any such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to the
last paragraph in Section 7(a) hereof in respect of such action or proceeding,
then in addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses of not
more than one separate firm (in addition to any local counsel) for the
Designated Underwriter for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control the Designated Underwriter within the meaning of the either Section
15 of the Act of Section 20 of the Exchange Act. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement (i) includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act by
or on behalf of an indemnified party.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i) 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 Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
-15-
<PAGE> 16
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 501 Second Street, Suite
114, San Francisco, California 94107, Attention: [____________________];
provided, however, that any notice to an
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<PAGE> 17
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
-17-
<PAGE> 18
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
VIRAGE, INC.
------------------------------------
By:
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
FLEETBOSTON ROBERTSON STEPHENS, INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
Acting on behalf of themselves and
as the Representatives of the
several Underwriters
By: CREDIT SUISSE FIRST BOSTON
CORPORATION
By:
---------------------------------
Title: Managing Director
-----------------------------
-18-
<PAGE> 19
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SECURITIES
----------- ---------------
<S> <C>
Credit Suisse First Boston Corporation.........................
-----------
Total....................................
===========
</TABLE>
-19-
<PAGE> 1
EXHIBIT 4.2
[VIRAGE LOGO]
NUMBER SHARES
VRG V I R A G E (R)
COMMON STOCK
INCORPORATED UNDER THE LAWS CUSIP 92763Q 10 6
OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT
is the owner of
fully paid and non-assessable shares, $.001 par value, of the COMMON STOCK of
VIRAGE, INC.
(hereinafter called the "Corporation"), transferable on the books of the
Corporation in person, or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate is not valid until
countersigned by a Transfer Agent and registered by a Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[CORPORATION SEAL]
[Signature Illegible] VIRAGE, INC. [Signature Illegible]
- ------------------------- INCORPORATED -------------------------
SECRETARY MARCH 9, 1995 PRESIDENT AND CHIEF
DELAWARE EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription of the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- __________ Custodian __________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________________
in common (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 ________________________________
_______________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER
Signature Guaranteed:
_______________________________________________________
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, GUARANTOR MEDALLION PROGRAM)
PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE> 1
EXHIBIT 4.3
AMENDMENT NO. 1
TO SECOND AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Amendment No. 1 to the Second Amended and Restated Registration Rights
Agreement (the "Amendment") is made as of March 24, 2000, by and among Virage,
Inc., a Delaware corporation ("Company"), the purchasers listed on Exhibit A
attached hereto (the "New Purchasers"), and the holders of shares of at least
67% of the Underlying Common Stock as such term is defined in the Second Amended
and Restated Registration Rights Agreement (the "Investors").
WHEREAS, the Company and the Investors previously entered into the Second
Amended and Restated Registration Rights Agreement dated September 21, 1999 (the
"Rights Agreement").
WHEREAS, in order to induce the New Purchasers to enter into the Common
Stock Purchase Agreement by and among the Company and the New Purchasers of even
date herewith (the "Purchase Agreement"), the Company and Investors desire to
amend the Rights Agreement in order to grant the New Purchasers the registration
rights that have been granted to the Investors under the Rights Agreement.
Capitalized terms as used herein have the meanings defined for them in the
Rights Agreement, unless otherwise defined herein.
NOW, THEREFORE, for the consideration and mutual covenants set forth
herein, the parties hereby agree as follows:
1. DEFINITION OF UNDERLYING COMMON STOCK. Section 1(b) of the Rights
Agreement entitled, "Underlying Common Stock," is hereby amended in its entirety
to read as follows:
"Underlying Common Stock" shall mean (i) the shares of Common Stock issued
upon conversion of the Series A, Series B, Series C, Series D and Series E
Preferred, (ii) the shares of Common Stock remaining issuable upon
conversion of the outstanding Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred, and (iii)
the shares of Common Stock issued pursuant to the Common Stock Purchase
Agreement dated as of March 24, 2000 (the "Purchase Agreement") by and
among the Company and the purchasers listed on Exhibit A hereto (the "New
Purchasers), together with all shares of Common Stock and other securities
issued or issuable in respect of the Common Stock referred to in clauses
(i), (ii) and (iii) by reason of stock splits, stock dividends,
combinations, mergers, exchanges or other reclassifications or
recapitalizations, provided that the term "Underlying Common Stock" shall
exclude all shares of Common Stock sold by an Investor in an offering
registered under the Securities Act or Rule 144 thereunder."
<PAGE> 2
2. DEFINITION OF PURCHASER. Section 1(g) of the Rights Agreement
entitled, "Purchaser," is hereby amended in its entirety to read as follows:
"Purchaser" shall mean a purchaser of the Series E Preferred and the New
Purchasers and each of their permitted transferees.
3. By its signature hereto, the New Purchasers become a party to the
Rights Agreement, as amended by this Amendment.
This Amendment may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument.
VIRAGE, INC.
By:
-----------------------------
Paul Lego, President
- --------------------------------
(Name of Entity)
By:
-----------------------------
Name:
---------------------------
Its:
---------------------------
2
<PAGE> 3
EXHIBIT A
New Purchasers
Akamai Technologies, Inc.
CNET Investments, Inc.
RealNetworks, Inc.
Thomson Consumer Electronics, Inc.
3
<PAGE> 1
EXHIBIT 10.9
================================================================================
OFFICE LEASE
BETWEEN
JIM JOSEPH
Trustee, Jim Joseph Revocable Trust, dated January 19, 1990,
AND
Virage, Inc.
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Paragraph
<S> <C> <C>
ALTERATIONS ................................... 7 13
ARBITRATION ................................... 15 30
ASSIGNMENT AND SUBLETTING ..................... 8 20
ATTORNEY FEES ................................. 15 29
BUILDING PLANNING ............................. 7 14
COMPLIANCE WITH REGULATIONS ................... 8 17
CONDEMNATION .................................. 13 24
DAMAGE TO THE PREMISES ........................ 12 23
DEFAULT ....................................... 14 28
DIRECT OPERATING EXPENSES ..................... 10 21
ENTRY BY LANDLORD ............................. 6 10
ESTOPPEL CERTIFICATE .......................... 13 26
HAZARDOUS SUBSTANCES .......................... 16 33
HOLDING OVER .................................. 14 27
IMPROVEMENT OF THE PREMISES ................... 3 4
INSURANCE ..................................... 6 11
LETTER OF CREDIT .............................. 17 35
LIENS ......................................... 7 16
NON-LIABILITY OF LANDLORD ..................... 7 12
NOTICES ....................................... 16 34
OPTION TO RENEW ............................... 17 36
PARKING ....................................... 5 6
PERSONAL PROPERTY TAXES ....................... 8 18
REAL ESTATE TAXES AND ASSESSMENTS ............. 11 22
RENT .......................................... 2 2
REPAIRS AND MAINTENANCE BY TENANT ............. 5 7
REPAIRS BY LANDLORD ........................... 6 9
RULES AND REGULATIONS ......................... 8 19
SECURITY DEPOSIT .............................. 2 3
SIGNS/SIGNAGE ................................. 7 15
SUBORDINATION AND ATTORNMENT .................. 13 25
SUCCESSORS AND ASSIGNS ........................ 15 32
TERM .......................................... 1 1
USE OF THE PREMISES ........................... 4 5
UTILITIES AND SERVICES ........................ 5 8
WAIVER ........................................ 15 31
</TABLE>
OFFICE LEASE
<PAGE> 2
THIS LEASE, executed this _________ day of ____________________, _____, by and
between Jim Joseph, trustee, Jim Joseph Revocable Trust, dated January 19, 1990,
(hereinafter referred to as "Landlord"), and Virage, Inc. , a Delaware
Corporation, (hereinafter referred to as "Tenant");
WITNESSETH
WHEREAS, Landlord is owner of a leasehold interest in that certain real property
on which an office building designated as Interland's Borel Place on the site
plan attached hereto as Exhibit A hereto (hereinafter referred to as the
"Building") and certain appurtenant improvements (including, without limitation,
the parking area and landscaping) have been constructed, the address of which is
411 Borel Avenue, City and County of San Mateo, California, 94402;
WHEREAS, all office space as shown on Exhibit A hereto shall be deemed to be the
"Office Park"; and
WHEREAS, Landlord desires to lease to Tenant, and Tenant desires to lease from
Landlord, that portion of the First and Third ( 1st and 3rd ) Floors of the
Building delineated on the floor plan attached as Exhibit B hereto (hereinafter
referred to as the "Premises"),also known as Suites 100 and 300 , consisting of
approximately 48,000 rentable square feet. Premise shall be remeasured and
recalculated by a qualified architect using current BOMA standards and rentable
square feet will be agreed upon by Landlord and Tenant prior to effective date.
NOW, THEREAFTER, Landlord hereby leases the Premises to Tenant, and Tenant
hereby leases the Premises from Landlord, for the term, at the rent, and upon
and subject to the terms and conditions hereinafter set forth.
1. TERM (a) The term of this Lease shall be the period of Six ( 6 ) years,
commencing on the 1st day of October, 2000 , and ending on the 30th day of
September of 2006 , unless sooner terminated as hereinafter provided.
(b) Landlord may permit Tenant and Tenant's agents or contractors to enter
the Premises prior to the Commencement Date specified in the Lease in
order that Tenant may do other approved work or alterations as may be
required by Tenant to make the Premises ready for Tenant's use and
occupancy. The request and permission must be in writing. If Landlord
permits such prior entry, then such license shall be subject to the
condition that Tenant and Tenant's agents, contractors, workman,
mechanics, suppliers, and invitees shall work in harmony and not interfere
with Landlord and its agents and contractors in doing their work in the
Premises or with other tenants and occupants of the above building. If at
any time such entry shall cause or threaten to cause such disharmony or
interference, Landlord, in its sole discretion, shall have the right to
withdraw and cancel such license upon twenty-four (24) hours written
notice to Tenant and any further prior entry shall be prohibited. Tenant
agrees that any entry into and any occupation of the Premises shall be
deemed to be under all of the terms, covenants, conditions and provisions
of the Lease, except as to the covenant to pay rent, and further agrees
that to the extent permitted by law, Landlord and its principals,
employees and agents shall not be liable in any way for any injury or
death to any person or persons, loss or damage to any of Tenant's work and
installations made in the Premises, or loss or damage to property placed
therein, the same being at Tenant's sole risk. Tenant agrees to protect,
defend, indemnify, and save harmless Landlord and its principals,
employees and agents from all liabilities, costs, damages, fees and
expenses (including reasonable attorneys' fees and expenses) arising out
of or connected with the activities of Tenant or its agents, contractors,
workmen, mechanics, suppliers and invitees in or about the Premises or the
above building.
-1-
<PAGE> 3
In addition to any other conditions or limitations on such license to
enter the Premises prior to the said occupancy date, Tenant expressly
agrees that none of its agents, contractors, workmen, mechanics,
suppliers, or invitees shall enter the Premises prior to such occupancy
date unless and until each of them shall furnish such assurances to
Landlord, including but not limited to, insurance coverage, waivers of
lien, surety company performance bonds and personal guaranties of
individuals of substance, as Landlord shall require to protect Landlord
against any loss, casualty, liability, liens or claims. Nothing contained
in this Paragraph 1(b) shall be deemed to extend the date for the
commencement of the payment of rent by Tenant beyond October 1, 2000, as
hereinafter set forth in Paragraph 2 below.
2. RENT (a) Tenant shall pay to Landlord, as rent for the Premises during the
term of this lease, the sums hereinafter set forth per month, payable in advance
on or before the first day of each month during the term hereof. Said rent shall
be subject to adjustment and shall be in addition to all other amounts
(including, without limitation, tax and cost increases) required to be paid by
Tenant pursuant to the provisions of this Lease. The rent will be paid per the
following schedule:
<TABLE>
<CAPTION>
MONTH LEASE RATE/ MONTH BASE RENT/ MONTH *
----- ----------------- ------------------
<S> <C> <C>
1-12 $ 4.20 psf, full service $ 201,600.00
13-24 $ 4.35 psf, full service $ 208,800.00
25-36 $ 4.50 psf, full service $ 216,000.00
37-48 $ 4.66 psf, full service $ 223,680.00
49-60 $ 4.82 psf, full service $ 231,360.00
61-72 $ 4.99 psf, full service $ 239,520.00
</TABLE>
* based on 48,000 rsf and subject to adjustment after calculation of the
size of the Premises
(b) If the term of this Lease commences on a date other than the first day
of a calendar month, rent for the period from the date of commencement of
the term hereof through the last day of the calendar month in which such
term commences shall be prorated on the basis of a thirty-day month, and
rent for the first full and fractional month of fifteen days or less of
the term of this Lease shall be payable on the date Tenant submits signed
Lease; if the first month is fractional and is more than fifteen days,
only the prorated rent for this portion of the first month shall be
payable on the date Tenant submits signed Lease. In the event the term of
this Lease ends on a day other than the last day of the calendar month,
rent for the period from the first day of the last calendar month of such
term to the end of such term shall be prorated on the basis of a
thirty-day month.
(c) The installments of rent specified herein shall be paid, without
deduction or offset, and without prior notice or demand, to Landlord at
411 Borel Avenue, San Mateo, California 94402, or at such other address as
Landlord may from time to time specify by written notice to Tenant. All
amounts of money payable by Tenant to Landlord hereunder, if not paid when
due, shall bear interest from the due date until paid at the rate of ten
percent (10%) per annum.
3. SECURITY DEPOSIT. Concurrently with the execution hereof, Tenant has paid to
Landlord the sum of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED TWENTY AND
NO/100 DOLLARS ($ 239,520.00), (the "Security Deposit"), which sum shall be held
by Landlord as security for the performance by Tenant of the obligations to be
performed by Tenant hereunder. In the event Tenant fully performs all
obligations to be performed by Tenant hereunder, Landlord shall, upon expiration
of the term of this Lease or the earlier termination hereof pursuant to the
provisions of Paragraph 23 or Paragraph 24 hereof, remit to Tenant the amount of
the Security Deposit. If, at any time during the term of this Lease, Tenant
shall default in the performances
-2-
<PAGE> 4
of any obligation to be performed by Tenant hereunder, Landlord may, at its
option, apply the Security Deposit or so much thereof as may be necessary to
compensate Landlord for any expense, loss or damage sustained by Landlord as a
result of said default. In the event of any such application by Landlord, Tenant
shall, upon written demand of Landlord, forthwith deposit with Landlord a
sufficient amount of cash to restore the Security Deposit to the original amount
thereof, and Tenant's failure to do so within ten (10) days after receipt of
such demand from Landlord shall carry with it the same consequences as failure
to pay any installment of rent due under this Lease. In the event that this
Lease should be terminated for any reason other than default on the part of
Landlord or damage or destruction to the demised Premises as provided for in
Paragraph 23 hereof, or a taking of the demised Premises for public use by right
of eminent domain as provided for in Paragraph 24 hereof (in any of which events
the Security Deposit, less any portion thereof which may have been utilized by
Landlord to cure any default or applied to any damages suffered by Landlord as a
result of Tenant's default, shall be refunded to Tenant), Landlord shall have
the right to retain the Security Deposit until the expiration of the term of
this Lease by lapse of time (whether or not this Lease has been earlier
terminated) so that the full damages of Landlord may be ascertained. At the
expiration of the term of this Lease by lapse of time, provided Tenant has paid
all of the rental herein called for and fully performed all of the covenants and
conditions on its part agreed to be performed, Landlord shall return to Tenant
the Security Deposit less any portion thereof which may have been utilized by
Landlord to cure any default or applied to any damages suffered by Landlord. It
is understood and agreed by Landlord and Tenant that the provisions of this
Paragraph 3 shall not operate as a limitation upon the amount of damages to
which Landlord may be entitled by virtue of any default hereunder by Tenant.
Tenant shall provide Landlord with a Letter of Credit as an additional security
deposit per the provisions of Paragraph 35.
4. IMPROVEMENT OF THE PREMISES. As promptly as practicable after the date of
execution of this Lease, Landlord shall undertake to prepare the Premises for
occupancy by Tenant in accordance with the provisions of the Work Letter and/or
Space Plan executed between Landlord and Tenant concurrently herewith. If the
improvements and alterations specified in said Work Letter and/or Space Plan are
not substantially completed prior to the commencement date of the terms of this
Lease set forth in Paragraph l hereof, and the failure or inability of Landlord
to complete the Premises was caused otherwise than by reason of delays
occasioned by Tenant, this Lease shall remain in full force and effect, however,
the term of this Lease and the obligation of Tenant to pay the installments of
rent specified in Paragraph 2 hereof, and all other charges in the nature of
additional rent, shall not commence until said improvements and alterations are
substantially completed and the Premises suitable for occupancy by Tenant and
the term of the Lease shall run for the full period of SIX (6 ) years ; and in
no event whatsoever shall Landlord be liable for any damages caused by any delay
in completion for whatever reason nor shall this Lease be void or voidable
except, in case of Tenant's delay, at Landlord's election. If Tenant fails to
deliver fully executed working drawings and standards to Landlord on or before
June 1, 2000, Landlord shall not be liable in damages to Tenant for any delay in
delivery of possession of the Premises regardless of the cause of such delay and
rent for the premises shall commence in accordance with Paragraph 1. If Tenant
makes any selections that vary from the building standards or require
improvements in excess of the standard allowances, and if the cost of such
different or additional materials of Tenant's selection exceeds Landlord's cost
of building standard work, Tenant shall pay to Landlord, as hereafter provided,
the difference between the cost of such different and/or additional materials
and the cost established by Landlord for standard building allowances. No
changes shall be made in any building standard work materials until Landlord has
submitted an estimate to Tenant in writing of the increased cost thereof, and
Landlord and Tenant have agreed in writing on the increased cost of such
different new materials and installation in excess of the cost of building
standard work. All amounts payable by Tenant to Landlord pursuant to this
Paragraph 4 shall be paid by Tenant to Landlord within thirty (30) days after
the rendering of bills therefore by Landlord or its contractor to Tenant, it
being understood that such bills may be rendered during the progress of the
performance of the work and/or the furnishing and installation of the materials
to which such bills relate. All improvements shall be surrendered by Tenant to
Landlord at the end of the initial or other expiration of the term of the Lease.
No credit shall be granted for the omission of materials where no replacement in
kind is made.
-3-
<PAGE> 5
Landlord will provide a Tenant Improvement Allowance of up to $ 504,000.00 *
(including architectural/ space planning fees) for improvements to the premises,
subject to improvements being building standard work materials (or better) and
improvements not being removable, decorator or convenience items. Landlord and
Tenant will jointly control the scope of work and allocation of the allowance.
Costs exceeding $ 504,000.00 * will be paid by Tenant or Tenant will have the
option to modify the scope of work prior to work commencement. Tenant's written
approval will be required on engineering drawings and construction expenses
prior to construction commencement; drawings and expenses shall not be alterable
without written approval of Landlord and Tenant. In the event Tenant does not
use the entire Tenant Improvement Allowance for its initial improvement of the
Premises, Landlord shall reserve any unused portion and permit the same to be
used by Tenant for later improvements to the Premises, subject to and upon the
same terms of this Paragraph 4.
During the term, Tenant shall, subject to Landlord's approval of the location
thereof, have the right to install and maintain up to four (4) satellite dish
antennas, related receiving equipment and related cable and communication
equipment (collectively, the "Satellite Dish Equipment"), as Tenant may
reasonably require in connection with Tenant's communications and data
transmission network, on the roof of the Building. All such Satellite Dish
Equipment shall be installed in the equipment well of the Building in locations
mutually acceptable to Landlord and Tenant. Landlord shall have the right, at
Tenant's expense, to have the proposed location and installation method for all
such equipment reviewed by Landlord's structural engineer. Tenant, prior to the
execution of this Lease, shall provide Landlord with a detailed listing of all
of the Satellite Dish Equipment, including, without limitation, all size and
weight specifications Tenant proposes to put on the roof.
All of Tenant's Satellite Dish Equipment to be installed on the roof shall be
installed by Tenant, at Tenant's sole cost and expense, in accordance with plans
approved in writing by Landlord and in accordance with all applicable
governmental approvals and permits. Tenant shall repair any damage to the roof
in connection with the installation of such Satellite Dish Equipment. Tenant's
antenna shall not interfere with any other antennas currently on the roof. All
such repairs of the roof shall be made by a contractor approved by Landlord and
in accordance with Landlord's specifications.
Tenant shall pay to Landlord an administrative fee for each installation in the
amount of $500.00 per installation. After the initial installation, Tenant, at
Tenant's sole cost and expense, shall maintain all of Tenant's Satellite Dish
Equipment placed on the roof. Roof access shall be permitted for antenna
installation and regularly scheduled maintenance only. Tenant shall be
responsible for any repairs and maintenance necessary to the roof on account of
Tenant's Satellite Dish Equipment or Tenant's maintenance thereof.
* Based on an allowance of $15.00 per RSF for 24,000 RSF on the 1st floor; and
an allowance of $6.00 per RSF for 24,000 RSF on the 3rd floor, subject to
adjustment after calculation of the size of the Premises.
5. USE OF THE PREMISES. Tenant shall use the Premises for general office use,
sales or administrative purposes, and for no other use or purpose without the
prior written consent of Landlord. No use shall be made of the Premises which
will increase the existing rate of insurance on the Building or cause the
cancellation of any insurance policy covering the Building. Tenant shall not
commit or suffer to be committed any waste upon the Premises or any public or
private nuisance or any other act or thing which may disturb the quiet enjoyment
of any other tenant in the Building, and shall not use the Premises for any
purpose or use that is in violation of any of the laws, ordinances, regulations
or rules of any public authority.
Tenant's personnel occupancy of the Premises shall be limited to 260 people.
Personnel occupancy beyond 260 people is subject to Landlord's prior approval,
and such approval shall not be unreasonably withheld subject to Tenant's
agreement to pay for reasonable building operating costs associated with
personnel loading in excess of 260 people.
-4-
<PAGE> 6
6. PARKING. In accordance with the City of San Mateo Code, Landlord will provide
Tenant with a maximum of (160) non-exclusive parking spaces, as shown on the
site plan attached as Exhibit A hereto, during normal business hours. Landlord
has no actual knowledge, without independent investigation or inquiry, of any
laws, statutes, ordinances, regulations or rules of any Governmental agency that
requires or may require in the future a fee be charged for parking by Tenant or
other tenants of the building. Should, however, there be any such charges
required in the future by any Governmental agency, these charges will be shared
by the Tenant and all other tenants of the building in proportion to the space
of the building occupied by each. Tenant and its employees shall comply with all
reasonable rules and regulations promulgated from time to time by Landlord
relating to the use of the parking area. Landlord agrees to use good faith
efforts to reasonably accommodate Tenant's request for additional parking spaces
as needed.
7. REPAIRS AND MAINTENANCE BY TENANT -- NO OBLIGATION OF LANDLORD. Tenant agrees
at its expense to maintain the Premises in good condition and repair throughout
the term of this Lease, reasonable wear and tear excepted, and except for
matters which are the responsibility of Landlord hereunder, and damage by fire
or other casualty.
Landlord has no obligation and has made no promise to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof, except as specified
in Paragraph 4 above; no representations respecting the condition of the
Premises or the Building have been made by Landlord to Tenant, except as
specifically herein set forth.
8. UTILITIES AND SERVICES. Provided Tenant is not in default under any provision
of this Lease, Landlord shall furnish to the Premises, between the hours of 8:00
a.m. and 6:00 p.m. on Monday through Friday of each calendar week during the
term of this Lease, legal holidays excepted, the following services and
utilities:
(a) Heat and air conditioning for the Premises;
(b) 110 volt/60 cycle electric current in the amounts sufficient for
lighting the Premises and powering customary business machines used
thereon. In the event Tenant utilizes the services and utilities
described in Paragraph (8)(a) & (b) at times and for purposes other
than designated above, then Tenant shall pay the cost of said
services and utilities.
(c) Janitorial and maintenance service, including sweeping, washing or
vacuuming of floors and floor coverings, window cleaning and
replacement of light bulbs and fluorescent tubes in all light
fixtures installed in the Premises by Landlord. Generally,
janitorial services are provided during hours other than 8:00 a.m.
to 6:00 p.m. Monday through Friday.
Landlord shall also maintain the common entrances/exits, stairways and lavatory
facilities in the Building, and the parking area adjacent to the Building and
the access ways thereto, in a clean and orderly condition. Landlord shall not be
liable, however, for either the failure, or delay, to furnish any of the
services or utilities specified in this Paragraph 8, or the curtailment of such
services or utilities, where such failure or curtailment is caused by conditions
beyond the reasonable control of Landlord or by accidents, strikes, repairs, or
improvements to Premises, or the Building, nor shall any such failure constitute
a constructive eviction of Tenant, entitle Tenant to the abatement of rent,
relieve Tenant from observing and performing any of the provisions of this
Lease, or any other claims against Landlord.
Whenever heat generating equipment or lighting other than building standard
lights are used in the Premises by Tenant which affect the temperature otherwise
maintained by the air conditioning system, Landlord shall have the right, after
notice to Tenant, to install supplementary air conditioning facilities in the
Premises or otherwise modify the ventilating and air conditioning system serving
the Premises, and the cost of such facilities and modifications shall be borne
by Tenant. Tenant shall pay concurrently with the rent the cost of providing all
cooling energy to the Premises in excess of that furnished for normal office use
or during hours requested by Tenant when air conditioning is not otherwise to be
furnished by Landlord. If Tenant requires power in excess of that provided for
normal office use in the Building or if
-5-
<PAGE> 7
Tenant installs equipment requiring power in excess of that provided for normal
desk-top office equipment or normal copying equipment, Tenant shall pay for the
cost of such excess power, together with the cost of installing any additional
risers or other facilities that may be necessary to furnish such excess power to
the Premises. Nothing contained in the prior sentence shall limit the obligation
of Tenant to pay for power and other utilities under normal use as set forth in
Paragraph 21(b) below, as opposed to power and other utilities of Tenant's
particular use of the Premises. Failure to make timely payment shall carry the
same consequences as the failure to make timely payment of rent.
Landlord may impose a reasonable charge for any utilities and services,
including, without limitation, air conditioning, electricity, and water,
provided by Landlord by reason of: (i) any use of the Premises at any time other
than the hours set forth above; (ii) any use beyond what Landlord agrees herein
to furnish; (iii) special electrical, cooling and ventilating needs created by
Tenant's telephone equipment, computers, electronic data processing equipment
and other similar equipment or uses; or (iv) additional electrical consumption
resulting from the use by Tenant of high voltage desk or floor lamps. Landlord,
at its option, may require installation of metering devices, at Tenant's
expense, for the purpose of metering Tenant's utility consumption. After hours
utilities will be available for Tenant at Tenant's sole cost and expense.
9. REPAIRS BY LANDLORD. Except as otherwise provided in Paragraph 23 hereof,
Landlord agrees at its expense to maintain in good condition and repair
throughout the term of this Lease the roof, exterior walls and common areas of
the Building (including the parking lot and landscaping), and to repair or
replace all or any part of the plumbing, gas lines, electric wiring, and heating
and ventilating ducts located in the Building when such repair or replacement is
necessitated otherwise than through the fault of Tenant. Landlord shall not be
responsible for damage to, or destruction of, property located on the Premises
by reason of defects in those portions of the Premises which Landlord is
obligated to maintain or replace. To the best of Landlord's knowledge, without
duty of investigation or inquiry, the building is in good condition and repair.
The Building, to the best of Landlord's knowledge, is in conformance with all
applicable codes. Any expenses to meet future code requirements will be
allocated to the operating expenses of the building with all capital
improvements amortized over their useful life.
10. ENTRY BY LANDLORD. Tenant agrees to permit Landlord to enter the Premises at
reasonable times and upon giving reasonable notice, (except in the case of
emergency), for the purpose of inspecting the same, showing the Premises to
prospective purchasers, mortgagees, or tenants, making any necessary repairs or
additions to the Premises, the Premises of another tenant or to the Building and
performing any work therein that may be necessary to comply with any laws,
ordinances, rules, regulations or requirements of any public authority or of the
Board of Fire Underwriters or any similar body, or that Landlord may deem
necessary to prevent waste or deterioration in connection with the Premises,
including without limitation any repairs or other work which Tenant is obligated
to make or perform under the terms of this Lease and which Tenant has failed or
neglected to make or perform after receipt of written demand by Landlord that
the same be made or performed. In the event Landlord performs any work which
Tenant is obligated to perform under the terms of this Lease, Tenant shall pay
to Landlord, within five (5) business days from the date of receipt by Tenant of
a statement therefor, the cost incurred by Landlord in performing the same.
Nothing herein shall imply any duty on the part of Landlord to do any such work
which, under any provision of this Lease, Tenant may be required to perform and
the performance thereof by Landlord shall not constitute a waiver of any default
by Tenant in failing to perform the same. Landlord may, during the progress of
any work in the Premises, keep and store in a reasonable manner upon the
Premises all necessary materials, tools, and equipment. Landlord shall not in
any event be liable for inconvenience, annoyance, disturbance, loss of business
or other damage to Tenant by reason of making repairs or the performance of any
work in the Premises, or on account of bringing materials, supplies and
equipment to or through the Premises during the course thereof, and the
obligation of Tenant under this Lease shall not thereby be affected in any
manner whatsoever.
11. INSURANCE. At all times during the term of this Lease, Tenant shall maintain
in force, at its sole cost and expense, public liability insurance with coverage
in the amount of Two Million Dollars ($2,000,000) for property damage, Two
Million Dollars ($2,000,000) for bodily injury to or death of any one person,
and Two Million Dollars ($2,000,000) for bodily injury or death as a result of
any single accident or occurrence, occurring on or about the Premises. Such
policy or policies of insurance shall be with insurers and in such form as
Landlord may
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reasonably approve and each such policy shall name Landlord as an additional
insured, thereunder. Each such policy shall contain a waiver by the insurer
thereunder of its right of subrogation against Landlord, and shall provide that
it may not be cancelled or the limits of coverage materially changed, without at
least ten (10) days prior written notice to Landlord. Tenant shall promptly
deliver a copy of each such policy or certificates of insurance manifesting the
required coverage to Landlord.
12. NON-LIABILITY OF LANDLORD. Tenant shall defend, indemnify, hold and save
Landlord free and harmless from any and all liability or damage of every kind or
character caused to property or to persons in or about the Premises for any
reason whatsoever except for liability or damage caused by negligence of
Landlord or Landlord's authorized agents or contractors, or liability for a
breach of this Lease by Landlord. Landlord shall not be liable for any damage,
loss or injury to the property of Tenant, or any other person, suffered on, in
or about the Premises by reason of the condition of the Premises, by reason of
fire, earthquake, action of the elements, or any other casualty, or by reason of
the act of Tenant, its agents or employees, or third persons.
13. ALTERATIONS. Tenant shall not make or permit to be made any alterations,
changes or additions in or to the Premises without the prior written consent of
Landlord and such consent will not be unreasonably withheld. Any such approved
changes or additions shall be done either by or under the direction of Landlord
at the cost of Tenant, shall become immediately the property of Landlord, and
shall remain upon and be surrendered with the Premises upon expiration or
earlier termination of the term of this Lease. Any movable furniture remaining
on the Premises at the end of the term hereof shall be removed by Tenant or if
not so removed shall, at the option of Landlord, become the property of
Landlord. The Landlord will work with Tenant in accordance with this Paragraph
to ensure any and all approved alterations are accomplished in a timely manner.
14. BUILDING PLANNING. In the event Landlord requires the Premises for use in
conjunction with another suite or for other reasons connected with the building
planning program, Landlord, upon notifying Tenant in writing, shall have the
right to move Tenant to space in the Building of which the Premises form a part,
at Landlord's sole cost and expense, and the terms and conditions of the
original lease shall remain in full force and effect, save and excepting that
the Premises shall be in a new location with equal or greater square footage and
similar office configuration. However, if the new space does not meet with
Tenant's approval, Tenant shall have the right to cancel said Lease upon giving
Landlord ninety (90) days written notice within ten (10) days of receipt of
Landlord's notification.
15. SIGNS/SIGNAGE Tenant shall not place or affix any sign in, on or about the
Premises or the Building which is visible from the exterior of the Premises,
without the prior written consent of Landlord. Building standard signage (suite
door, floor lobby and main building directory) will be provided by Landlord.
16. LIENS. Tenant shall keep the Premises and the Building free from any and all
liens and claims arising out of any work performed, materials furnished or
obligations incurred by Tenant, and shall indemnify, defend and hold Landlord
harmless from and against any liens and encumbrances arising out of any work
performed or materials furnished by or at the request of Tenant. In the event
that Tenant shall not, within twenty (20) days following the imposition of any
such lien, cause such lien to be released of record by payment or posting of a
proper bond, Landlord shall have, in addition to all other remedies provided
herein and by law, the right, but not the obligation, to cause the same to be
released by such means as it shall deem proper, including payment of the claim
giving rise to the lien. All such sums paid by Landlord and all expenses
incurred by Landlord in connection therewith, including, without limitation,
attorney's fees and court costs, shall be payable by Tenant to Landlord on
demand with interest at the rate of ten percent (10%) per annum from the date of
payment by Landlord. Landlord shall have the right at all times to post and keep
posted on the Premises any notices permitted or required by law, or which
Landlord shall deem proper, for the protection of Landlord and the Premises, and
any other party having an interest therein, from mechanics' and materialmen's
liens, and Tenant
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shall give to Landlord at least ten (10) business days prior written notice of
the expected date of commencement of any work relating to additions or
alterations of the Premises to the extent same may be approved by Landlord in
accordance with Paragraph 13 above.
17. COMPLIANCE WITH REGULATIONS. At all times during the term of this Lease,
Tenant shall comply with and conform to all laws, ordinances, regulations,
requirements and orders of all municipal and governmental bodies which relate in
any manner to the use or occupancy of the Premises. The judgment of any court of
competent jurisdiction or the admission by Tenant in any action or proceeding
against Tenant, whether Landlord be a party thereto or not, that Tenant has
violated any such law, ordinance, requirement or order in the use of the
Premises, shall be conclusive of that fact as between Landlord and Tenant.
18. PERSONAL PROPERTY TAXES. Tenant agrees to pay, before delinquency, any and
all taxes levied or assessed against the equipment, furniture, trade fixtures
and other personal property of Tenant located on or about the Premises at any
time during the term of this Lease.
19. RULES AND REGULATIONS. At all times during the term of this Lease, Tenant
shall comply with the rules and regulations for the Building which are attached
as Exhibit C and incorporated herein by reference. Tenant agrees that Landlord
shall have the right to amend said rules and regulations and to promulgate new
rules and regulations applicable to all tenants in the Building which relate to
their use and occupancy thereof. Landlord will provide said Amendments to Tenant
in writing and any amended rule or regulation shall be reasonable. Landlord
shall not be responsible to Tenant for the nonperformance by any other tenant or
occupant of any of said rules and regulations.
20. ASSIGNMENT AND SUBLETTING. Tenant for itself, its successors and assigns,
expressly covenants that it shall not by operation of law or otherwise assign,
sublet, hypothecate, encumber or mortgage this Lease, or any part thereof, or
permit the Premises to be used by others without the prior written consent of
Landlord in each instance but which, in the case of a proposed sublet by Tenant
shall not be unreasonably withheld. Any attempt by Tenant to assign, sublet,
encumber or mortgage this Lease shall be null and void. The consent by Landlord
to any assignment, mortgage, hypothecation, encumbrance, subletting or use of
the Premises by others, shall not constitute a waiver of Landlord's right to
withhold its consent to any other or further assignment, subletting, mortgage,
encumbrance or use of the Premises by others. Without the prior written consent
of Landlord, this Lease and the interest therein of any assignee of Tenant
herein, shall not pass by operation of law or otherwise, and shall not be
subject to garnishment or sale under execution in any suit or proceeding which
may be brought against or by Tenant or any assignee of Tenant. The absolute and
unconditional prohibitions contained in this Paragraph 20 and Tenant's agreement
thereto are material inducements to Landlord to enter into this Lease with
Tenant and any breach thereof shall constitute a material default hereunder
permitting Landlord to exercise all remedies provided for herein or by law or in
equity on a default of Tenant. If Tenant requests Landlord's consent to an
assignment of this Lease or subletting of all or any part of the Premises,
Tenant shall submit to Landlord: (1) the name of the proposed assignee or
subtenant; (2) the terms of the proposed assignment or subletting together with
a conformed or photostatic copy of the proposed assignment or sublease; (3) the
nature of business of the proposed assignee or subtenant's business and its
proposed use of the Premises; (4) such information as to its financial
responsibility and general reputation as Landlord may require; and (5) a summary
of plans and specifications for revising the floor layout of the Premises.
Tenant will reimburse Landlord for any reasonable legal fees or for any other
expenses incurred as a consequence of each assignment and subletting.
Upon the receipt of such information from Tenant, Landlord shall have the
option, to be exercised in writing within thirty (30) days after such receipt,
to cancel and terminate this Lease if the request is to assign this Lease or to
sublet all of the Premises or, if the request is to sublet a portion of the
Premises only, to cancel and terminate this Lease with respect to such portion,
in each case as of the date set forth in Landlord's notice of exercise of such
option. Landlord will not have the option to cancel and terminate this Lease
within the first eighteen (18) months of the Lease Term for reasons specified in
this paragraph.
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If Landlord shall cancel this Lease, Tenant shall surrender possession of the
Premises, or the portion of the Premises which is the subject of the request, as
the case may be, on the date set forth in such notice. If this Lease shall be
canceled as to a portion of the Premises only, the Monthly Base Rent and all
additional rent payable by Tenant hereunder shall be abated proportionately
according to the ratio that the number of square feet in the portion of space
surrendered (as computed by Landlord) bears to the rentable area of the
Premises.
If Landlord shall fail to exercise its option to cancel and terminate this Lease
with respect to all or part of the Premises as above provided, Landlord shall
not thereby be deemed to have consented to the proposed assignment or
subletting.
If Landlord shall consent to a sublease or an assignment pursuant to the request
from Tenant, Tenant shall cause to be executed by its assignee or subtenant an
agreement to perform faithfully and to assume and be bound by all of the terms,
covenants, conditions, provisions and agreements of this Lease for the period
covered by the assignment or sublease and to the extent of the space sublet or
assigned. An executed counterpart of each sublease or assignment and assumption
of performance by the sublessee or assignee, in form and substance approved by
Landlord, shall be delivered to Landlord within five (5) days prior to the
commencement of occupancy set forth no such assignment or sublease; shall be
binding on Landlord until Landlord has received such counterpart as required
herein.
If Landlord shall give its consent to any assignment of this Lease or to any
sublease, Tenant shall in consideration therefore pay to Landlord as additional
rent fifty percent (50%) of the following amounts with reasonable deductions for
brokerage fees and legal costs only for expenses incurred by Tenant in
connection with such assignment or subletting including but not limited to legal
fees, brokerage commissions and costs of making alterations, as the case may be:
(i) In the case of a sublease, any rents, additional charge or other
consideration payable under the sublease to Tenant by the subtenant
which is in excess of the Monthly Base Rent and all additional rent
accruing during the term of the sublease in respect of the
subleased space (at the rate per square foot payable by Tenant
hereunder) pursuant to the terms hereof (including, but not limited
to, sums paid for the sale or rental of Tenant's fixtures,
leasehold improvements, equipment, furniture, furnishings or other
personal property, less the then net unamortized or undepreciated
cost thereof determined on the basis of Tenant's federal income tax
returns); and
(ii) In the case of an assignment, an amount equal to all sums and other
considerations paid to Tenant by the assignee for or by reason of
such assignment (including, but not limited to, sums paid for the
sale of Tenant's fixtures, leasehold improvements, equipment,
furniture, furnishings or other personal property less the then net
unamortized or undepreciated cost thereof determined on the basis
of Tenant's federal income tax returns).
The sums payable as set forth above shall be paid to Landlord as additional rent
as and when paid by the assignee or subtenant to Tenant.
In no event shall any assignment or subletting to which Landlord may consent,
release or relieve Tenant from its obligations to fully observe or perform all
of the terms, covenants and conditions of this Lease on its part to be observed
or performed.
The provisions of Paragraph 20 shall not apply to transactions with a
corporation into or with which Tenant is merged or consolidated or to which
substantially all of Tenant's assets are transferred so long as (i) such
transfer was made for a legitimate independent business purpose and not for the
purpose of transferring this Lease, (ii) the successor to Tenant has a net worth
computed in accordance with generally accepted accounting principles at least
equal to the greater of (1) the net worth of Tenant immediately prior to such
merger, consolidation or transfer, and (2) the net worth of the original Tenant
on the date of this Lease, and (iii) proof satisfactory to Landlord of such net
worth is delivered to Landlord at least 10 days prior to the effective date of
any such transaction. Tenant may also, upon prior notice to and with the consent
of Landlord, which consent shall not be unreasonably withheld, permit any
corporation or other business entity which controls, is controlled by, or is
under common control with the original Tenant (a "Related Corporation") to
sublet all or part of the Premises for any Permitted Use, provided the Related
Corporation is in Landlord's reasonable judgment of a character and engaged in a
business which is in keeping with the standards for the Building and the
occupancy thereof.
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Such sublease shall not be deemed to vest in any such Related Corporation any
right or interest in this Lease or the Premises nor shall it relieve, release,
impair or discharge any of Tenant's obligations hereunder. For the purposes
hereof, "control" shall be deemed to mean ownership of not less than 50 percent
of all of the voting stock of such corporation or not less than 50 percent of
all of the legal and equitable interest in any other business entity if Tenant
is not a corporation. Notwithstanding the foregoing, Tenant shall have no right
to assign this Lease or sublease all or any portion of the Premises without
Landlord's consent pursuant to this Section if Tenant is not the initial Tenant
herein named or a person or entity who acquired Tenant's interest in this Lease
in a transaction approved by Landlord."
21. DIRECT OPERATING EXPENSES. In addition to the rent specified in Paragraph 2
hereof, Tenant and Landlord agree that an annual adjustment in the rent shall be
made as hereinafter provided:
(a) Landlord and Tenant covenant and agree that the rent provided for
herein is subject to annual review and adjustment in order that the Tenant
shall pay for its individual share of any increase of the Direct Operating
Expenses (as hereinafter defined) of the Office Park. Such review and
adjustment shall be made as of the first day of the first full calendar
month of each Lease Year (as hereinafter defined) during the term of this
Lease. For the purpose of this Lease, the term "Lease Year" shall mean
each consecutive twelve (12) calendar month period during the term of this
Lease commencing on the first day of the first full calendar month during
or after the calendar month Tenant commences to pay rent pursuant to
Paragraph 2 above. The Base Year with which all future year comparisons
shall be made is 2000. Any future year increase over the Base Year shall
be paid on a prorata basis by Tenant, in the following manner:
Prior to the commencement of the second and each subsequent Lease Year (or
as soon thereafter as is reasonably practicable), Landlord shall estimate
the Direct Operating Expenses for the Office Park for such Lease Year. In
the event that for any Lease Year, Landlord's estimated Direct Operating
Expenses for the Office Park shall exceed the Direct Operating Expenses
for the Base Year, Tenant shall pay monthly as additional rent,
concurrently with Tenant's monthly rental payment during said Lease Year,
an amount equal to one-twelfth (1/12) of such excess, divided by the
amount of square feet contained in the Office Park, times the amount of
square footage in the demised Premises. For the purposes of this Paragraph
21, the amount of square footage in the demised Premises shall be deemed
to be FORTY-TWO THOUSAND SIX HUNDRED SIXTY-SEVEN (42,667) useable square
feet (useable square footage in the demised Premise to be adjusted as per
the new BOMA calculation following BOMA re-measurement identified on Page
1 of this Lease) and the amount of square footage in the Office Park shall
be deemed to be One Hundred Twenty Six Thousand (126,000) square feet.
(b) "Direct Operating Expenses" as used herein shall include all costs of
administration, operation and maintenance of the Office Park and the real
property on which said Office Park is situated, together with the
landscaping and parking areas for the Office Park as determined in
accordance with generally accepted accounting practices consistently
applied, including, without limitation, the following:
Property and public liability insurance premiums; the cost of labor,
materials and services for the operation and maintenance of the Office
Park, including, without limitation, water and sewer use charges, garbage
and waste disposal, license, permit and inspection fees (except for any
new construction or alterations attributable to a specific Tenant or
Office Park expansion), heat, light, power and other utilities under
normal use, air conditioning and ventilation, elevator service, plumbing
service, janitorial and cleaning service, costs of maintenance contracts,
watchmen, guards and personnel to the extent engaged in administration,
operation and maintenance of the Office Park and its surrounding real
property, together with payroll taxes and employee benefits applicable
thereto; supplies, materials, salaries of foremen and supervisory
employees whose duties directly concern the management and operation of
the Office Park; the cost of maintaining and repairing the roadways,
sidewalks, curbs, gutters and parking surfaces located upon the real
property on which the Office Park is situated; and in providing cleaning
and gardening services to said real property; the cost of repairs and
general maintenance, exclusive of expenses such as the alteration of
Premises for the accommodation of a specific tenant or tenants, and
exclusive also of expenditures made for capital investments or
improvements, except that
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in the event Landlord eliminates or reduces Direct Operating Expenses as a
result of a capital investment of labor-saving devices, then the cost of
the capital investment or labor-saving devices will be amortized over the
useful life of such improvements, but in such a manner so as not to exceed
the cost that would otherwise have been billed to Tenant prior to the
installation of such equipment or labor-saving devices.
(c) As soon as reasonably practicable after the first day of the first
full calendar month of each Lease Year during the term hereunder, Landlord
shall prepare and deliver to Tenant a statement of the actual Office Park
Direct Operating Expenses incurred during the Lease Year. The statement
shall further compare the Direct Operating Expenses to those of the Base
Year, and shall indicate Tenant's prorata share of the excess, if any.
If such statement shows an amount that is more than the previously
estimated share of Tenant of Direct Operating Expenses for the Office Park
for said Lease Year, Tenant shall pay the deficiency to Landlord within
thirty (30) days after delivery of the statement. Failure to make timely
payment shall carry the same consequences as the failure to make timely
payment of rent.
If such statement shows that Tenant has overpaid Tenant's share of Direct
Operating Expenses, then the difference shall be satisfied by a deduction
from Tenant's next monthly rental payment(s) or, if at the end of the
Lease, with a cash payment from Landlord to Tenant.
During a period of thirty (30) days after receipt of such statement,
Tenant shall have the right to inspect the books and any other pertinent
records of Landlord, during normal business hours, for the purpose of
verifying such statement. Tenant may contest the Landlord's computation of
the amount of increase or decrease, either in whole or in part, by paying
any undisputed portion when giving Landlord written notice stating its
objections and provided that such notice is received by Landlord not later
than five (5) days after the expiration of said thirty (30) day period.
(d) If for any reason, other than the default of Tenant, this Lease shall
terminate on a day other than the last day of the Lease Year, the amount
of adjustment, if any, in rent payable by Tenant applicable to the Lease
Year in which such termination shall occur, shall be prorated on the basis
which the number of days from the commencement of such Lease Year to and
including such termination date bears to Three Hundred Sixty Five (365).
22. REAL ESTATE TAXES AND ASSESSMENTS. In addition to the rent specified in
Paragraph 2 hereof, Tenant and Landlord agree that an annual adjustment in the
rent shall be made as hereinafter provided:
(a) Landlord and Tenant covenant and agree that the rent provided for
herein is subject to annual review and adjustment in order that Tenant
shall pay for his individual share of any increase in the amount of real
estate taxes and assessments levied or assessed against the Office Park or
the income derived from the Office Park, exclusive of Federal and State
Income Taxes. "Office Park" as used in this Lease shall include the real
property on which the Building is situated, together with all of the real
property described in Exhibit A hereto.
Such review and adjustment shall be made as of the first full calendar
month of each Lease Year during the term of this Lease. The Base Year with
which all future year comparisons shall be made is 2000.
Any future year increase over the Base Year shall be paid on a prorata
basis by Tenant, in the following manner:
Prior to the commencement of the second and each subsequent Lease Year (or
as soon thereafter as is reasonably practicable), Landlord shall estimate
the amount of taxes and assessments for the Office Park for such Lease
Year. In the event that for any Lease Year Landlord's estimate for the
amount of taxes and assessments for the Office Park shall exceed the taxes
and assessments for the Base Year, Tenant shall pay monthly as additional
rent, concurrently with Tenant's monthly rental payment during said Lease
Year, an amount equal to one-twelfth (1/12) of the excess, divided by the
amount of square feet contained in the Office Park, times the amount of
square footage in the demised Premises. For the purposes of this Paragraph
22, the amount of square footage in the demised
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Premises shall be deemed to be Forty-Two Thousand Six Hundred Sixty-Seven
(42,667) useable square feet, (useable square footage in the demised
Premise to be adjusted as per the new BOMA calculation following BOMA
re-measurement identified on Page 1 of this Lease) and the amount of
square footage in the Office Park shall be deemed to be One Hundred Twenty
Six Thousand (126,000) square feet.
(b) As soon as reasonably practicable after the first day of the first
full calendar month of each Lease Year during the term hereunder, Landlord
shall prepare and deliver to Tenant a statement of the actual taxes and
assessments levied or assessed during said Lease Year. The statement shall
further compare the actual taxes and assessments to those of the Base Year
and shall indicate Tenant's prorata share of the excess, if any.
If such statement shows an amount that is more than the previously
estimated share of Tenant taxes and assessments for the Office Park for
said Lease Year, Tenant shall pay the deficiency to Landlord within thirty
(30) days after delivery of the statement. Failure to make timely payment
shall carry the same consequences as the failure to make payment of rent.
If such statement shows that Tenant has overpaid Tenant's share of taxes
and assessments, then the difference shall be satisfied by a deduction
from Tenant's next monthly rental payment(s) or, if at the end of the
Lease, with a cash payment to the Tenant from Landlord.
During a period of thirty (30) days after receipt of such statement,
Tenant shall have the right to inspect the books and any other pertinent
records of Landlord, during normal business hours, for the purpose of
verifying such statement. Tenant may contest the Landlord's computation of
the amount of increase or decrease, either in whole or in part, by paying
any undisputed portion when giving Landlord written notice stating its
objections and provided that such notice is received by Landlord not later
than five (5) business days after the expiration of said thirty (30) day
period.
(c) If for any reason, other than the default of Tenant, this Lease shall
terminate on a day other than the last day of the Lease Year, the amount
of adjustment, if any, in rent payable by Tenant applicable to the Lease
Year in which such termination shall occur, shall be prorated on the basis
which the number of days from the commencement of such Lease Year to and
including such termination date bears to three hundred and sixty-five
(365).
23. DAMAGE TO THE PREMISES.
(a) In the event any portion of the Premises is damaged by fire,
earthquake, action of the elements or any other casualty, and such damage
can be repaired and the Premises restored to their former condition within
ninety (90) days from the date of such damage, then, unless otherwise
provided in Paragraph 23(b) hereof, Landlord shall, at its expense proceed
immediately to make such repairs, provided that any mortgagee or lender of
Landlord shall have made available to Landlord for such repairs any and
all insurance proceeds otherwise payable to Landlord. If such insurance
proceeds are not made available to Landlord, Landlord shall have the
option either (i) to pay any shortfall from his own funds and complete
such repairs as aforesaid, or (ii) terminate this Lease. However,
Landlord's obligation to repair shall be limited to those items that
Landlord was obliged to build at its own expense. Notwithstanding the
foregoing, in the event that there are insufficient insurance proceeds to
cover the cost of repairs, Tenant may avoid a termination of this Lease by
depositing sufficient funds to cover any shortfall in an escrow account
with a depository mutually satisfactory to Landlord and Tenant, such funds
to be held and disbursed by such depository pursuant to written escrow
instructions executed by both Landlord and Tenant. Such partial
destruction shall not serve to terminate this Lease, but Tenant shall be
entitled to a proportionate abatement of the installments of rent and all
other charges in the nature of additional rent payable during the period
commencing on the date of such partial destruction and ending upon
completion of all such repairs, which abatement shall be based upon the
portion of the Premises rendered unsuitable for use by Tenant during such
period.
(b) In the event (i) any portion of the Premises is damaged by fire,
earthquake, action of the elements or any other casualty, and such damage
cannot be repaired and the Premises restored to their former condition
within ninety (90) days from the date of such damage, or
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(ii) the Building is damaged by any such casualty and the cost of
repairing such damage will exceed thirty percent (30%) of the replacement
cost (exclusive of foundations) of the Building, Landlord may, at its
option, elect to terminate this Lease as of the date of the occurrence of
such damage. In the event Landlord fails to exercise said option to
terminate by written notice to Tenant within thirty (30) days from the
date of occurrence of such damage, Landlord shall promptly undertake to
restore the Premises and the Building to their former condition. Tenant
shall be entitled to a proportionate abatement of the installments of rent
and all charges in the nature of additional rent payable during the period
commencing on the date of such damage and ending upon completion of all
such repairs, which abatement shall be based upon the portion of the
Premises rendered unsuitable for use by Tenant during such period.
(c) Notwithstanding the provisions of Subparagraph (a) of this Paragraph
23, in the event any portion of the Premises is damaged by fire,
earthquake, action of the elements or any other casualty, and such damage
cannot be repaired and the Premises restored to their former condition
within one hundred eighty (180) days from the date of such damage, this
Lease shall terminate as of the date of occurrence of such damage.
24. CONDEMNATION. In the event all or a substantial portion of the Premises
shall be taken or condemned under power of eminent domain, or by purchase in
lieu thereof, this Lease shall terminate as of the date possession of that
portion of the Premises so taken, condemned or purchased is surrendered to the
condemning or purchasing authority or body. All compensation awarded or paid
upon such condemnation or purchase shall belong to and be the sole property of
Landlord; provided, however, that any portion of the compensation awarded or
paid for or on account of any loss of business by Tenant or for damage to, or
the cost of removal or relocation of, the furniture, trade fixtures and
equipment of Tenant, shall be paid to and retained by Tenant.
25. SUBORDINATION AND ATTORNMENT. Tenant agrees that it shall, promptly upon the
request of Landlord at any time or times during the term of this Lease, execute
and deliver such documents and other instruments as Landlord may reasonably
require to cause this Lease to be and become subject and subordinate to any
mortgage or deed of trust, and any renewal, extension, replacement or
modification thereof, covering the real property on which the Building is
located, provided that such mortgage or deed of trust shall contain provisions
to the effect that so long as Tenant shall not be in default in the performance
of any obligations to be performed by Tenant hereunder, the mortgagee, trustee
or beneficiary, as the case may be, shall not terminate this Lease or the
interest of Tenant in the Premises through foreclosure of such mortgage or deed
of trust, and shall not disturb the possession and use of the Premises by
Tenant. Tenant agrees that in the event of the enforcement, by judicial
foreclosure, exercise of the power of sale, or otherwise, of any mortgage or
deed of trust covering the real property on which the Building is located by the
mortgagee, trustee or beneficiary thereunder or thereof, as the case may be,
Tenant shall automatically become the lessee of any successor in interest in
title to said real property as a result of such enforcement, without change in
the terms of this Lease. Tenant further agrees that upon request of any such
successor in interest, Tenant will execute and deliver to such successor in
interest an instrument or instruments confirming such attornment.
26. ESTOPPEL CERTIFICATE. Tenant agrees that it shall, from time to time at the
request of Landlord, and within ten (10) days after such request, execute,
acknowledge and deliver to Landlord a statement in writing certifying, if such
be the case, that this Lease is unmodified and in full force and effect or, if
this Lease has been modified, that it is in full force and effect as so
modified, the date of commencement of the term of this Lease, the due date of
the last installment of rent paid by Tenant to Landlord, and such other
information as Landlord may reasonably request. Tenant understands that any such
statement may be delivered by the Landlord to, and relied upon by, prospective
purchasers of the Building and by existing or prospective mortgagees or
beneficiaries under mortgages or deeds of trust covering the Building in which
the Premises are located.
-13-
<PAGE> 15
27. HOLDING OVER. If Tenant remains in possession of all or any part of the
Premises after the expiration of the term hereof, with or without the express
consent of Landlord, such tenancy shall be from month-to-month only, and not a
renewal hereof or an extension for any further term, and in such case, rent and
other monetary sums due hereunder shall be payable at a rate equal to one
hundred twenty five percent (125%) of the rent in effect just prior to such
holdover thereafter for the first 30 days and one hundred fifty percent (150%)
of the rent in effect just prior to such holdover for every month thereafter,
and if such holding over is without the express consent of Landlord, Tenant
shall be liable to Landlord for all reasonable costs and damages caused to
Landlord by such holding over. Such month-to-month tenancy shall be subject to
every other term, covenant and agreement contained herein. In the event Landlord
fails to deliver the Premises on the Commencement Date because the previous
occupant of the Premises is holding over, or for any other cause beyond
Landlord's control, Landlord shall not be liable to Tenant for any damages as a
result of Landlord's delay in delivering the Premises, nor shall any delay
affect the validity of this Lease, and the Commencement Date of this Lease shall
be postponed until the Premises can be delivered by Landlord. Notwithstanding
the foregoing, if Landlord fails to deliver the Premises within one hundred
twenty (120) days after the Commencement Date, this Lease shall be voidable
without further obligation or liability of either party, at the option of
Tenant, upon written notice to Landlord within five (5) days after the
expiration of said one hundred twenty (120) day period. In the event of any
postponement of the Commencement Date as provided in this Paragraph 27, the
Lease Term shall remain the same, but the Expiration Date shall be extended for
the same number of days the Commencement date was postponed.
28. DEFAULT. In the event that:
(a) Tenant shall default in the payment of rent or any other amounts
required hereby to be paid by Tenant to Landlord hereunder, when the same
shall become due, and such default shall continue for a period of ten (10)
consecutive days; or
(b) Tenant shall abandon or vacate the Premises for a period of thirty
(30) consecutive days; or
(c) Tenant shall default in the performance of any obligation required to
be performed by Tenant under this Lease (other than abandonment or the
payment of rent or any other amounts required hereby to be paid by Tenant
hereunder) and shall fail, for a period of twenty (20) days after written
notice from Landlord specifying such default, to cure said default (unless
such default cannot be cured within twenty (20) days, in which case Tenant
shall commence to cure said default within said twenty (20) days and shall
cure the same with all reasonable dispatch); or
(d) Tenant shall be adjudicated bankrupt, or a petition by or against
Tenant for reorganization or adjustment of its obligations under the
Bankruptcy Act or any other existing or future insolvency or bankruptcy
statute shall be approved, or Tenant shall make a general assignment of
its property for the benefit of creditors, or a receiver or trustee shall
be appointed to take control of the business or assets of Tenant;
then and in each such case Landlord may, at its option, terminate this Lease, or
without terminating this Lease re-enter the Premises and for the account of
Tenant relet the same or any portion or portions thereof for all or any part of
the unexpired term of this Lease upon such terms and conditions as Landlord may
elect. In the event of any such termination of this Lease by Landlord, Landlord
shall be entitled to recover from Tenant (i) the worth at the time of award of
the unpaid rent which had been earned at the time of termination; (ii) the worth
at the time of award of the amount by which the unpaid rent which would have
been earned after termination until the time of award exceeds the amount of such
rental loss that Tenant proves could have been reasonably avoided; (iii) the
worth at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such rental
loss that Tenant proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Landlord for all detriment proximately caused by
Tenant's failure to perform Tenant's obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom.
-14-
<PAGE> 16
Efforts by Landlord to mitigate the damages caused by Tenant's breach of this
Lease shall not constitute a waiver by Landlord of its right to recover damages
hereunder. In the event of such reletting without terminating this Lease,
Landlord shall be entitled to recover from Tenant monthly the difference between
the monthly installments of rent and such other amounts as may be payable by
Tenant to Landlord pursuant to the provisions hereof over the total monthly
rental received by Landlord upon such reletting, after first deducting therefrom
all expenses reasonably incurred by Landlord in such reletting and in repairing,
renovating, remodeling and altering the Premises for the purpose of such
reletting. Landlord shall not be deemed to have elected to terminate this Lease
or the liability of Tenant to pay rent thereafter to accrue or its liability for
damages under any of the provisions hereof by any such re-entry or by any action
in unlawful detainer or otherwise to obtain possession of the Premises, unless
Landlord shall have notified Tenant in writing that it has so elected to
terminate this Lease. For purposes of this Paragraph 28, the following shall not
constitute termination of Tenant's right to possession: (A) acts of maintenance
or preservation or efforts to relet the Premises; or (B) the appointment of a
receiver upon initiative of Landlord to protect the Landlord's interest under
this Lease. Nothing herein contained shall be construed as obligating Landlord
to relet the whole or any part of the Premises. In the event of any entry or
taking possession of the Premises, Landlord shall have the right, but not the
obligation, to remove therefrom all or any part of the personal property located
therein and may place the same in storage at a public warehouse selected by
Landlord at the expense and risk of the owner or owners thereof. The remedies
provided Landlord hereunder shall be cumulative and shall be in addition and
supplemental to all other rights or remedies which Landlord may lawfully pursue
in the event of any breach or threatened breach by Tenant of any of the
provisions of this Lease.
29. ATTORNEYS FEES. In the event any action or proceeding is instituted at any
time by either party hereto against the other for the purpose of determining or
enforcing the rights of either party, the party prevailing in such action shall
be entitled to recover from the other party all costs reasonably incurred by the
prevailing party in connection with such action or proceeding, including the
reasonable fees of its attorneys as determined by the court.
30. ARBITRATION. At the option of Landlord, any controversy or dispute arising
under the terms or provisions of this Lease shall be determined by arbitration.
Such arbitration shall be conducted pursuant to the provisions of the laws of
the State of California then in force applicable to such proceedings and, to the
extent not inconsistent therewith, the rules of the American Arbitration
Association.
31. WAIVER. No waiver of any default of Tenant or Landlord, as the case may be,
hereunder shall be implied from any omission by Landlord or Tenant,
respectively, to take any action on account of such default, and no express
waiver shall affect any default other than the default specified in the express
waiver. Any waiver of any covenant, term or condition of this Lease by Landlord
or Tenant shall not be construed as a waiver of any subsequent breach by Tenant
or Landlord, respectively, of the same covenant, term or condition. The consent
or approval by Landlord or Tenant to any act by Tenant or Landlord,
respectively, requiring the consent or approval of Landlord or Tenant shall not
be deemed to waive or render unnecessary the consent or approval of Landlord or
Tenant to any subsequent similar acts of Tenant or Landlord. The acceptance of
rent hereunder by Landlord shall not be a waiver of any preceding breach by
Tenant or Landlord of any provision hereof, other than the failure of Tenant to
pay the particular rent so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such rent.
32. SUCCESSORS AND ASSIGNS. Subject to the provisions of Paragraph 20 hereof,
this Lease and all of the provisions hereof shall bind and inure to the benefit
of the successors and assigns of each of Landlord and Tenant.
-15-
<PAGE> 17
33. HAZARDOUS SUBSTANCES.
(a) The term "Hazardous Substances", as used in this Lease shall include,
without limitation, flammables, explosives, radioactive materials,
asbestos, polychlorinated biphenyls (PCBs), chemicals known to cause
cancer or reproductive toxicity, pollutants, contaminants, hazardous
wastes, toxic substances or related materials, petroleum and petroleum
products, and substances declared to be hazardous or toxic under any law
or regulation now or hereafter enacted or promulgated by any governmental
authority.
(b) Tenant shall not cause or permit to occur any violation of any
federal, state or local law, ordinance, or regulation now or hereafter
enacted, related to environmental conditions on, under, or about the
Premises, arising from Tenant's use or occupancy of the Premises,
included, but not limited to, soil and ground water conditions.
(c) Tenant shall not cause or permit to occur the use, generation,
release, manufacture, refining, production, processing, storage, or
disposal of any Hazardous Substance on, under, or about the Premises, or
the transportation to or from the Premises of any Hazardous Substance.
(d) Tenant shall indemnify, defend, and hold Landlord harmless from all
fines, suits, procedures, claims, and actions of every kind, and all costs
associated herewith (including attorneys' and consultants' fees) arising
out of or in any way connected with any deposit, spill, discharge, or
other release of Hazardous Substances that occurs during the term of this
Lease, at or from the Premises, or which arises at any time from Tenant's
use or occupancy of the Premises, from Tenant's failure to provide all
information, make all submissions, and take all steps required by all
Authorities under the Laws and all other environmental laws.
(e) Tenant's obligations and liabilities under this Paragraph 33 shall
survive the expiration of this Lease.
(f) Tenant shall not be liable for any damage due to hazardous materials
that occurred prior to the commencement of Tenant's lease or after its
termination, unless damage is caused by Tenant during Tenant's occupancy.
34. NOTICES. Any notice or other written instrument relating to this Lease may
be delivered personally to the party to whom such notice is addressed (delivery
to the president, a vice president, or the secretary of such party to constitute
personal delivery to such party), or may be mailed by registered or certified
mail to such party at the following address or at such other address as such
party from time to time may designate by written notice:
TO LANDLORD:
JIM JOSEPH
------------------------------
411 BOREL AVENUE, SUITE 600
------------------------------
SAN MATEO, CA 94402
------------------------------
TO TENANT:
VIRAGE, INC.
------------------------------
411 BOREL AVENUE, SUITE 100
------------------------------
SAN MATEO, CA 94402
------------------------------
Any notice or other written instrument mailed as above provided shall be
effective at the expiration of seventy-two (72) hours after deposit of the same,
postage prepaid, in the United States mail at any place within the State of
California.
-16-
<PAGE> 18
35. LETTER OF CREDIT. Tenant shall deliver to Landlord, upon execution of this
Lease, a clean, irrevocable, non-documentary and unconditional letter of credit
(the "Letter of Credit") issued by and drawable upon any commercial bank, trust
company, national banking association or savings and loan association with
offices for banking purposes in the State of California (the "Issuing Bank"),
which has outstanding unsecured, uninsured and unguaranteed indebtedness, or
shall have issued a letter of credit or other credit facility that constitutes
the primary security for any outstanding indebtedness (which is otherwise
uninsured and unguaranteed), that is then rated, without regard to qualification
of such rating by symbols such as "+" or "-" or numerical notation, "Aa" or
better by Moody's Investors Service and "AA" or better by Standard & Poor's
Rating Service, and has combined capital, surplus and undivided profits of not
less than $ 500,000,000. Such Letter of Credit shall (a) name Landlord as
beneficiary, (b) be in the amount of $ 2,000,000.00 for the entire term of the
Lease (c) permit multiple drawings, (d) be fully transferable by Landlord
without the payment of any fees or charges by Landlord, and (e) otherwise be in
form and content satisfactory to Landlord. If upon any transfer of the Letter of
Credit, any fees or charges shall be so imposed, then such fees or charges shall
be payable solely by Tenant and the Letter of Credit shall so specify. The
Letter of Credit shall provide that it shall be deemed automatically renewed,
without amendment, for consecutive periods of one year each thereafter during
the Term unless the Issuing Bank sends a notice (the "Non-Renewal Notice") to
Landlord by certified mail, return receipt requested, not less than 45 days next
preceding the then expiration date of the Letter of Credit stating that the
Issuing Bank has elected not to renew the Letter of Credit. Landlord shall have
the right, upon receipt of the Non-Renewal Notice, to draw the full amount of
the Letter of Credit, by sight draft on the Issuing Bank, and shall thereafter
hold or apply the cash proceeds of the Letter of Credit pursuant to the terms of
this Article. The issuing Bank shall agree with all drawers, endorsers and bona
fide holders that drafts drawn under and in compliance with the terms of the
Letter of Credit will be duly honored upon presentation to the Issuing Bank at
an office location in San Francisco, California. The Letter of Credit shall be
subject in all respects to the Uniform Customs and Practice for Documentary
Credits (1993 revision), International Chamber of Commerce Publication No. 500.
36. OPTION TO RENEW: Tenant, providing Tenant is not otherwise in default, shall
have one option to renew the Office Lease for a period of five (5) years, upon
giving Landlord written notice no later than January 1, 2006 of Tenant's intent
to renew. This option is subject to all terms, conditions and covenants herein
contained wherein Base Rent for the renewal term shall be based on the greater
of: (a) 100% of fair market value for comparable office buildings in the San
Mateo office market, or (b) September 1, 2006 monthly rent.
A. "Fair Market Rental" shall mean the rate being charged to tenants for
comparable space in similar buildings in San Mateo, California, with
similar amenities, taking into consideration size, location, "free
rent", allowance, floor level, proposed term of the lease, extent of
services to be provided and the time that the particular rate under
consideration became or is to become effective and any other relevant
consideration. Fair Market Rental as of October 1, 2006 (the "Adjustment
Date") shall be determined by Landlord with written notice (the
"Notice") given to Tenant not later than thirty (30) days after receipt
of the Option Notice, subject to Tenant's right to arbitration as
hereinafter provided. Failure on the part of Tenant to demand
arbitration within forty-five (45) days after receipt of the Notice from
Landlord shall bind Tenant to the Fair Market Rental as determined by
Landlord. Should Tenant elect to arbitrate and should the arbitration
not have been concluded prior to the Adjustment Date, Tenant shall pay
the prior year's Rent to Landlord after the Adjustment Date. If the
amount of the Fair Market Rental as determined by arbitration is greater
or less than Landlord's determination, then any adjustment required to
adjust the amount previously paid shall be made by payment by the
appropriate party within ten (10) days after such determination of Fair
Market Rental.
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<PAGE> 19
B. If Tenant disputes the amount claimed by Landlord as Fair Market
Rental, Tenant may require that Landlord submit the dispute to
arbitration. The arbitration shall be conducted and determined in the
City of San Francisco, California in accordance with the then prevailing
rules of the American Arbitration Association or its successor for
arbitration of commercial disputes, except that the procedures mandated
by such rules shall be modified as follows:
(1) Tenant shall make demand for arbitration in writing within thirty
(30) days after service of the Notice, specifying therein the
name and address of the person to act as the arbitrator on
Tenant's behalf. The arbitrator shall be a real estate appraiser
with at least five (5) years' full-time commercial appraisal
experience who is familiar with the Fair Market Rental of
first-class commercial office space in San Mateo, California.
Failure on the part of Tenant to make the timely and proper
demand for such arbitration shall constitute a waiver of the
right thereto. Within ten (10) business days after the service of
the demand for arbitration, Landlord shall give notice to Tenant
specifying the name and address of the person designated by
Landlord to act as arbitrator on its behalf, which arbitrator
shall be similarly qualified. If Landlord fails to notify Tenant
of the appointment of its arbitrator, within or by the time
specified, then the arbitrator appointed by Tenant shall be the
arbitrator to determine the Fair Market Rental for the Premises.
(2) If two arbitrators are chosen pursuant to Paragraph (B)(1) above,
the arbitrators so chosen shall meet within ten (10) business
days after the second arbitrator is appointed and shall appoint a
third arbitrator, who shall be a competent and impartial person
with qualifications similar to those required of the first two
arbitrators pursuant to Paragraph (B)(1) above. If they are
unable to agree upon such appointment within five (5) business
days after expiration of such ten (10) day period, the third
arbitrator shall be selected by the parties themselves. If the
parties do not agree on the third arbitrator within five (5)
business days after expiration of the foregoing five (5) business
day period, then either party, on behalf of both, may request
appointment of such a qualified person by the then president of
the San Francisco Real Estate Board. The three arbitrators shall
decide the dispute, if it has not been previously resolved, by
following the procedures set forth in Paragraph (B)(3) below.
Each party shall pay the fees and expenses of its respective
arbitrator and both shall share the fees and expenses of the
third arbitrator. Attorneys' fees and expenses of counsel and of
witnesses for the respective parties shall be paid by the
respective party engaging such counsel or calling such witnesses.
(3) The Fair Market Rental shall be fixed by the three arbitrators in
accordance with the following procedures. Each of the arbitrators
selected by the parties shall state, in writing, his or her
determination of the Fair Market Rental supported by the reasons
therefor and shall make counterpart copies for each of the other
arbitrators. The arbitrators shall arrange for a simultaneous
exchange of such proposed resolutions within ten (10) business
days after appointment of the third arbitrator. If either
arbitrator fails to deliver to the other arbitrators his or her
determination within such ten (10) business day period, then the
determination of the other arbitrator shall be final and binding
upon the parties. The role of the third arbitrator shall be to
select which of the two proposed resolutions most closely
approximates his or her determination of Fair Market Rental. The
third arbitrator shall have no right to propose a middle ground
or any modification of either of the two proposed resolutions.
The resolution he or she chooses as that most closely
approximating his or her determination of the Fair Market Rental
shall constitute the decision of the arbitrators and shall be
final and binding upon the parties. If either party fails to pay
its share of the fees of the third arbitrator with five (5)
business days after receipt of an invoice, or fails to execute
and deliver any documents reasonably required by the third
arbitrator within five (5) business days after receipt thereof,
then the Fair Market Rental shall be determined solely by the
arbitrator selected by the other party.
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<PAGE> 20
(4) In the event of a failure, refusal or inability of any arbitrator
to act, his or her successor shall be appointed by him or her,
but in the case of the third arbitrator, his or her successor
shall be appointed in the same manner as that set forth herein
with respect to the appointment of the original third arbitrator.
The arbitrators shall attempt to decide the issue within ten (10)
business days after the appointment of the third arbitrator. Any
decision in which the arbitrator appointed by Landlord and the
arbitrator appointed by Tenant concur shall be binding and
conclusive upon the parties, except that such arbitrators shall
not attempt by themselves to mutually ascertain the Fair Market
Rental and any such determination, in a manner other than that
provided for in Paragraph (B)(3) hereof, shall not be binding on
the parties.
(5) The arbitrators shall have the right to consult experts and
competent authorities for factual information or evidence
pertaining to a determination of Fair Market Rental, but any such
consultation shall be made in the presence of both parties with
full right on their part to cross-examine. The arbitrators shall
render the decision and award in writing with counterpart copies
to each party. The arbitrators shall have no power to modify the
provisions of this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the date
first above written.
LANDLORD:
-----------------------------------------
JIM JOSEPH
Trustee, Jim Joseph Revocable Trust,
dated January 19, 1990,
TENANT:
VIRAGE, INC.
-----------------------------------------
By:
--------------------------------------
Its:
-------------------------------------
EXHIBITS
EXHIBIT "A" - Site Plan
EXHIBIT "B" - Floor Plans
EXHIBIT "C" - Rules and Regulations
-19-
<PAGE> 21
RULES AND REGULATIONS
1. Tenant movements into and out of the building, wherein the extent of the
move exceeds a small amount of hand carried goods, shall be coordinated in
advance with Landlord and shall be conducted generally during the periods
7:00pm and 7:00am, Monday through Friday, and Saturday through Sunday (all
day). Landlord will provide Tenant specific written guidelines for moves
upon being informed by Tenant of desired movement dates. In no event will
Landlord be responsible for any loss or damage to such freight, furniture
and fixtures or personal property from any cause.
2. The sidewalks, entrances, lobby, elevators, stairways, and public
corridors shall be used only as a means of ingress and egress and shall
remain unobstructed at all times. The entrance and exit doors of all
suites are to be kept closed at all times except as required for orderly
passage to and from a suite. Loitering in any part of the Building or
obstruction of any means of ingress or egress shall not be permitted.
Doors and windows shall not be covered or obstructed. Overnight parking,
including legal holidays and weekends, shall not be permitted without
prior written consent of the Landlord.
3. Plumbing fixtures shall not be used for any purposes other than those for
which they were constructed and no rubbish, newspapers, trash or other
substances of any kind shall be deposited therein. The use of electrical
current shall not exceed safety standards established in the applicable
building code. Walls, floors and ceilings shall not be defaced in any way
and no tenant shall be permitted to mark, nail, screw or drill into paint
or in any way mar any building surface, except that pictures,
certificates, licenses and similar items normally used in Tenant's
business may be carefully attached to the walls by Tenant in a manner to
be prescribed by Landlord. Upon removal of such items by Tenant, any
damage to the walls or other surfaces shall be repaired by Tenant.
4. No awning, shade, sign, advertisement or notice shall be inscribed,
painted or affixed on or to any part of the outside or inside of the
Building. All tenant identification on public corridor doors or walls will
be installed by Landlord for Tenant. No lettering or signs other than the
name of the Tenant will be permitted on public corridor doors or walls
with the size and type of the letters to be prescribed by Landlord. The
bulletin board or directory of the Building will be provided exclusively
for the display of the name and location of tenants thereof, and Landlord
reserves the right to exclude all other names therefrom. Landlord reserves
the right to approve all listing requests.
5. The weight, size, position and installation of all safes and other
unusually heavy objects used or placed in the Building shall be prescribed
by Landlord. All mechanical equipment and office machines which are placed
in the Building shall be installed in sittings which, in the judgment of
the Landlord, shall be sufficient to prevent noise, vibration and
annoyance. The repair of any damage done to the Building or property
therein by installing or removing or maintaining such safes or other
unusually heavy objects shall be paid for by Tenant.
6. The storage of goods, wares or merchandise on the premises will not be
permitted except in areas specifically designated by Landlord for storage.
No sale or auction, public or private, will be permitted on the premises.
7. All keys to the premises and the Building shall be obtained from Landlord
and all keys shall be returned to Landlord upon the termination of this
Lease. Tenant shall not change the locks or install other locks on the
doors.
EXHIBIT C
PAGE 1
<PAGE> 22
8. Tenant or any employee or invitee of Tenant using the premises after
regular business hours or on non-business days shall lock any entrance
doors to the Building used by him immediately after entering of leaving
the Building. Tenant, its employees and invitees and other persons
entering or leaving the Building when it is so locked, may be required to
sign the Building register when so doing, and any security personnel of
Landlord may refuse to admit Tenant or any of Tenant's employees, invitees
or any other person to the Building while it is so locked, without a pass
previously arranged or other satisfactory identification showing such
person's right to access to the Building. At such time, Landlord assumes
no responsibility whatsoever in connection therewith and shall not be
liable for any damage resulting from any error in regard to any such pass
or identification or from the admission of any unauthorized person to the
Building.
9. Tenant shall not permit any cooking to take place in the premises, nor
shall Tenant install therein any vending machines without Landlord's
written consent.
10. Landlord reserves the right at any time to change or rescind any one or
more of these Rules or Regulations or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from time
to time be necessary for the management, safety, care and cleanliness of
the Building, for the preservation of good order therein, and for the
convenience of other occupants and tenants therein. Landlord shall not be
responsible to Tenant or to any other person for the nonobservance or
violation of the Rules or Regulations by any other tenant or other person.
11. Except for animals aiding a disabled person, Tenant agrees not to keep or
permit to be kept on said premises or in said Office Park, any pet,
including but not limited to dogs, cats, birds, rodents or reptiles of any
nature without the express written consent of Landlord.
12. In accordance with City Ordinance # 1993-03, smoking is not permitted in
the building.
EXHIBIT C
PAGE 2
<PAGE> 1
EXHIBIT 10.10
Dated ____________
(1) PINEWOOD STUDIOS LIMITED
(2) VIRAGE EUROPE LIMITED
-----------------------------------------------------------------------
AGREEMENT
RELATING TO BUSINESS OF
PROVIDER OF SOFTWARE PRODUCTS AND APPLICATION SERVICES FOR MEDIA COMPANIES
AT
PINEWOOD STUDIOS IVER HEATH BUCKINGHAMSHIRE SL0 0NH
-----------------------------------------------------------------------
P Jones
Charsley Harrison
Riding Court
Riding Court Road
Datchet
Slough SL3 DLF
<PAGE> 2
AN AGREEMENT made the ___ day of _____________, Two thousand
1. Particulars
In this Agreement the following expressions shall have the following
meanings:
<TABLE>
<CAPTION>
<S> <C> <C>
1.1 the Studios Pinewood Studios, Iver Heath,
Bucks SL0 0NH.
1.2 the Owner Pinewood Studios Limited
whose registered office is at
6 Connaught Place, London W2
3EZ.
1.3 The Occupier Virage Europe Ltd. whose
registered address is at 235
Old Marylebone Road, London
NW1 5QT.
1.4 The Premises all that area including the
owner's fixtures and
fittings at the Studios known
as Office Nos. 206 - 218 on
the second floor of the
Property building subject
always to clause 2.2.
1.5 Term the period of two years from
28 February, 2000 to
27 February 2002.
1.6 Occupation Fee Pound Sterling 100,000 per
annum for the first year of
the Term. For the second
year an increase shall be
applied equivalent to the
latest annual increase in the
retail price index as
published by 28th
February 2001. If there is
no increase or a reduction to
the index the annual rate of
Pound Sterling 100,000 shall
apply.
1.7 The Business provider of software products
and application services for
media companies
1.8 The Prescribed Rate 4% above the bank base
lending rate from time to
time of National Westminster
Bank P/c.
</TABLE>
1
<PAGE> 3
2. Right of Occupation
2.1 Subject to the provisions of subclauses 2.2 and 2.3 and as further
provided in this agreement, the Owner gives the Occupier the exclusive right to
use the Premises during the Term for the purpose of the Business. The Occupier
is granted by the Owner the further right to part up to 50 motor vehicles in the
non-reserved car parks in the Studios and utilize all roads paths corridors
staircases and all other access ways which are necessarily/or reasonably
required to afford access to and egress from the Premises either on foot or with
vehicles as appropriate.
2.1.1 It is hereby agreed that the Owner may on giving not less than
90 days prior written notice to the Occupier transfer the occupier from the
Premises to suitable comparable alternative premises at the Studios and which
shall be no less commodious than the Premises ("the alternate premises") and
such transfer will in no way disrupt the day to day operations of the Occupier
and will not in any way obstruct the Occupier from conducting its business and
customer level agreements and subject as aforesaid the Occupier shall not be
entitled to any compensation whatsoever in respect thereof nor make any claim
for loss of profit or disturbance arising from such transfer except that the
owner shall be responsible for and pay to the Occupier on demand all reasonable
direct costs arising from such transfer provided that the Owner shall indemnify
the Occupier in respect of any proper costs incurred by the occupier arising in
any way out of such transfer.
2.1.2 The Owner shall on the transfer of the Occupier to the
alternate premises immediately and at its own cost grant to the Occupier a
further tenancy on the same terms (other than the amount of rent) as this
Agreement mutatis mutandis for the residue then unexpired of the term of this
Agreement but excluding provisions having the same effect as clauses 2.2 and 2.3
of this Agreement.
2.2 The Occupier further agrees that the Owner may at its absolute
discretion close the Studios or any part thereof at any time and for such
periods as it thinks fit and the Occupier shall not be entitled to any
compensation whatsoever in respect thereof nor make any claim against the Owner
for loss of profits, disturbance or otherwise save that the owner shall
reimburse the Occupier in respect of any part of the Occupation Fee paid by the
Occupier relating to such period of the closure as falls within the Term and the
Occupier's payment obligation under clause 3 shall be suspended until the
Studios may be re-opened. Provided that throughout any such period the Owner
shall use all reasonable endeavors to ensure that adequate access to and egress
from the Premises is at all times available to the Occupier to enable it to
continue its uninterrupted use of the Premises.
3. Occupation Fee
3.1 In each year of the Term the Occupier shall pay to the Owner the
Occupation Fee by four equal installments in advance on the 28th day of
February, May, August and November without any deduction or set-off whatsoever.
The first payment (or a duly apportioned part of it) to be made on the date
hereof.
3.2 For the year commencing 28th February 2000 the Occupation Fee shall
be Pound Sterling100,000. For the year commencing 28th February 2001 an increase
shall be applied equivalent
2
<PAGE> 4
to the latest annual increase in the retail price index as published by 28th
February 2001. If there is no increase or a reduction to the index then the
annual rate of Pound Sterling 100,000 shall apply.
3.3 The Occupation Fee shall include:
- nondomestic rates
- electricity and heating fuel
- light cleaning to normal standards for office purposes
- building insurance but not contents insurance nor any insurance
that is required under Clause 4.9.2.
- structural building maintenance
- all works carried out by and services provided at the Owner's
discretion in relation to the Premises acting in the interests of
good estate management at all times.
3.4 Value Added Tax will be payable by the Occupier on the Occupation
Fee at the appropriate rate from time to time.
3.5 The Occupier will pay interest at the Prescribed Rate from the due
date or 21 days following receipt of invoice, whichever is the later, until
payment has been received in full.
4. Occupier's Further Undertakings
The occupier further agrees and undertakes:
4.1 to insure with an insurance company of repute any property
whatsoever of the Occupier located at the Studios against loss or damage
howsoever caused and not to make any claim against the Owner or its employees in
respect of such damage or loss save where this is caused by the negligence or
willful act of the Owner or its employees.
4.2 not to bring any furniture equipment goods or chattels onto the
Premises without the consent of the Owner which shall not be unreasonably
withheld save as may be necessary for the exercise of the rights given in clause
2.
4.3 to keep the Premises in good decorative condition and clean and tidy
and clear of rubbish and to leave the same clean and tidy and in as good a state
or repair and condition as at the date of occupation as evidenced by the
schedule of conditions annexed hereto and free of the Occupier's furniture
equipment goods and chattels at the end of the Term.
4.4 not to effect any structural or other alteration to the Premises
without the prior written consent of the Owner not to be unreasonably withheld
or delayed.
4.5 to ensure compliance by its staff at all times with such reasonable
rules and regulations as the Owner may make from time to time governing the use
of the Premises and the
3
<PAGE> 5
Studios and to remove immediately (or within a time limit allowed by the
Management of the Studios) from the Studios any employee who has failed to
comply with such rules and regulations after invoking the Occupier's
disciplinary procedures.
4.6 not to display any signs or notices at the Premises without the
prior written consent of the Owner not to be unreasonably withheld or delayed
provided that the Occupier may display a sign at the entrance to the premises
showing its name and business.
4.7 not to carry on any offensive or noisy trade or businesses nor to
permit any person to sleep or reside at the Premises nor to do anything therein
which in the reasonable opinion of the Owner causes or might cause nuisance or
annoyance to the Owner or occupiers or users of the Studio.
4.8 to comply in all respect with all laws (including but not by way of
limitation the Health and Safety at Work Act) relating to the operation of the
Occupier's business and not to do any act, matter or thing which would or might
constitute a breach of any statutory requirement affecting the Premises or which
would or might vitiate in whole or in part any insurance effected in respect of
the Premises (either by the Owner or the Occupier) from time to time. In
particular the Occupier shall not cause risk to the health and safety of any
person by neglect or misuse of any buildings or structure in the Studios,
fixtures and fittings or areas used for access and services (electricity gas and
water).
4.9 to be responsible for and keep the Owner indemnified from and
against:
4.9.1 all properly incurred costs, claims, losses (including
consequential losses), charges, damages and expenses arising from the death or
injury of any person or the destruction of or damage to the Premises of the
Studios or any part thereof or loss of or damage to any chattel which is caused
in whole or in part by any act neglect or default of the Occupier or the
employees, agents or licensees of the Occupier.
4.9.2 all loss or damage to any vehicle or its contents owned by or
under the care, custody or control of the Occupier whilst at the Studios except
to the extent that the same shall have been caused by the act, neglect or
default of the Owner.
4.10 immediately to effect and thereafter maintain throughout the Term
policies of insurance approved by the Owner in respect of both Public Liability
and the indemnity under clause 4.9.1 (the insurance for such indemnity being
joint and several) in a sum of not less than Pound Sterling5,000,000 for any one
claim and upon demand to produce to the Owner the policies and receipts for the
premiums paid thereof.
4.11 to give all reasonable assistance and facilities to officers
servants or agents of the Owner in the alteration at any time of the layout
decoration or equipment of or on the Premises provided that such alterations
shall not interfere or disrupt in any way the Occupier or the Business.
4.12 not to use the Premises other than for the Business.
4
<PAGE> 6
4.13 to report any damage or defect to the Premises or the Studios
discovered by the Occupier or its servants or agents to the relevant management
of the Studios as soon as possible upon such discovery.
4.14 to pay all outgoings payable in respect of the Premises or its
occupation save as included under Clause 3.3.
5. Termination. The rights granted in clause 2 shall determine (without
prejudice to the Owner's rights in respect of any breach of clause 3 or the
undertakings contained in clause 4) immediately:
5.1 on notice given by the Owner at any time following any material
breach by the Occupier of its obligations or undertakings under this agreement.
5.2 where the Occupier is a company, if a resolution, proposed
application or petition or order is made in respect of winding up, dissolution,
appointment of an administrator or a voluntary arrangement with creditors or if
a receiver or manager of any of the Occupier's assets is appointed.
5.3 where the Occupier is an individual, if a proposed application or
order is made in respect of the individual for a voluntary arrangement with
creditors, an interim order for a moratorium, or bankruptcy.
5.4 where the Occupier is a partnership, if any of the circumstances
mentioned in clauses 5.2 or 5.3 above should occur which apply to partnerships.
5.5 in any case where an encumbrancer takes possession of the Occupier's
assets or if the Occupier suffers any distress or execution to be levied upon
any of its assets.
6. General.
6.1 The benefit of this agreement is personal to the Occupier and not
assignable and the rights given in clause 2 may only be exercised by the
Occupier and its employees save in circumstances which involve the sale or
substantial sale of the Occupier's assets, a corporate reorganization, an
initial public offering or a merger.
6.2 The Owner gives no warranty that the Premises are legally or
physically fit for the purpose specified in clause 2.
6.3 To the extent permitted by English Law the Owner shall not be liable
for the death of or injury to or for damage to any property of or for any
losses, claims, demands, actions, proceedings, damages, costs or expenses or
other liability incurred by the Occupier or its employees in the exercise or
purported exercise of the rights granted by clause 2 save for any death or
injury caused by the negligence of the Owner or its employees.
6.4 The provisions of Sections 24 to 28 of the Landlord and Tenant Act
1954 (as amended by Section 5 of the Law of Property Act 1969) are excluded from
this Agreement by Order of the Uxbridge County Court No. _______ dated the
______________.
5
<PAGE> 7
6.5 All notices given by either party pursuant to the provisions of this
agreement shall be in writing and shall be sufficiently served if delivered by
hand or sent by recorded delivery to the other party at its registered office or
last known address.
6.6 This agreement contains the entire understanding between the parties
regarding its subject matter and supersedes all previous agreements whether oral
or written between the parties in this regard and may only be varied by
signature of the Occupier (if an individual) or of a director of the Occupier
(if a company) and of a director of the Owner.
AS WITNESS the hands of a duly authorized officer of the respective
parties hereto the day and year first before written.
For and on behalf of For and on behalf of
PINEWOOD STUDIOS LIMITED VIRAGE EUROPE LTD
- ----------------------------------- -------------------------------------
Director Director
6
<PAGE> 8
PINEWOOD STUDIOS LIMITED
To: Date:
Virage Europe Limited
235 Old Marylebone Road
London NW1 5QT
Dear Sirs
PINEWOOD STUDIOS IVER HEATH BUCKS SLO ONH (THE "PREMISES")
We refer to an agreement made on today's date between ourselves and
yourselves relating to the premises (the "Agreement").
In consideration of you entering into the Agreement, we as the Owner (as
defined in the Agreement) hereby agree to allow you to:
1. underlet 50% or less of the Premises at any time after 28th
November 2000 subject to obtaining our consent (such consent not
to be unreasonably withheld or delayed), such underletting to be
on similar terms to those contained in the Agreement and any such
underlease shall reserve an occupation fee no greater than the
Occupier is contracted to pay to the Owner for the time being of
the Premises (or a proper proportion thereof in the case of an
underletting of part); and
2. at any time after 28 November 2001 to have the right to terminate
the Term created by the Agreement at any time thereafter by
service of not less than three months' prior written notice to us
at our registered office and on the expiry of such notice the
Term of the Agreement shall determine (provided that any such
termination shall be without prejudice to any antecedent breach
of claim by either party).
Please confirm your acceptance of the terms of this letter by signing
and returning the enclosed duplicate.
Yours faithfully
----------------------------
for and on behalf of
Pinewood Studios Limited
7
<PAGE> 9
We hereby confirm acceptance of the terms and conditions set out in the
letter dated [_______________] 2000 of which this is a duplicate.
-------------------------------
For and on behalf of
Virage Europe Limited
This _________ day of ______________ 2000
8
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 17, 2000 (except for the last paragraph of
Note 12, as to which the date is March 14, 2000) in Amendment No. 2 to the
Registration Statement (Form S-1) and related Prospectus of Virage, Inc. for the
registration of shares of its common stock.
Our audits also included the financial statement schedule listed in Item
16(b) of this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
--------------------------------------
San Jose, California
March 30, 2000
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