<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 2000
REGISTRATION NO. 333-96315
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
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
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<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).... 4,205,000 $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 14, 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 7.
<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
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PAGE
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<S> <C>
PROSPECTUS SUMMARY.............. 3
RISK FACTORS.................... 7
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS.... 20
USE OF PROCEEDS................. 21
DIVIDEND POLICY................. 21
CAPITALIZATION.................. 22
DILUTION........................ 23
SELECTED CONSOLIDATED FINANCIAL
DATA.......................... 24
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.................... 25
BUSINESS........................ 37
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT...................... 55
RELATED PARTY TRANSACTIONS...... 67
PRINCIPAL STOCKHOLDERS.......... 71
DESCRIPTION OF CAPITAL STOCK.... 74
SHARES ELIGIBLE FOR FUTURE
SALE.......................... 78
UNDERWRITING.................... 81
NOTICE TO CANADIAN
RESIDENTS..................... 84
LEGAL MATTERS................... 85
EXPERTS......................... 85
WHERE YOU CAN FIND MORE
INFORMATION................... 86
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 provide the infrastructure for 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. 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, CNET Networks uses our application services to enable visitors to
CNET's Internet site to find both articles and video segments on related topics
repurposed from CNET's aired television programming. We currently have over 100
customers including media and entertainment companies, Fortune 1000
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, enabling community
building around video collections.
- 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.
3
<PAGE> 5
- 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.
- 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.
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.
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.... 21,800,178 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;
- 5,254,484 shares of common stock reserved and available for issuance
under our equity incentive plans as of December 31, 1999; 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.
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 $ 51,187
Total assets..................................... 21,718 22,338 56,543
Long-term liabilities............................ 115 115 115
Accumulated deficit.............................. (26,033) (26,033) (26,033)
Total stockholders' equity (net capital
deficiency).................................... (18,795) 18,820 53,025
</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 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. See "Capitalization"
on page 22.
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
OUR NEWLY INTRODUCED VIDEO SOFTWARE PRODUCTS AND APPLICATION SERVICES MAKE IT
DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS.
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 video and digital
media infrastructure marketplace.
If we do not successfully address these risks, our business will be seriously
harmed.
OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT BE SUCCESSFUL.
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 MAY NOT EVER BE ABLE TO ACHIEVE PROFITABILITY.
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
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<PAGE> 9
future. If our revenues grow more slowly than we anticipate, if our gross
margins do not 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 infrastructure. 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 OUR CONTRACTS TO MEET OUR STANDARDS FOR RECOGNIZING REVENUE MAY
PREVENT US FROM RECOGNIZING REVENUE AS WE EXPECT, WHICH WILL HURT OUR OPERATING
RESULTS.
If, as a result of negotiations with a significant customer, our contract
fails to meet our standards for recognizing revenue, we may not be able to
recognize revenue from that contract as we originally expected. Any delay in our
ability to recognize revenue may hurt our 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 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
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<PAGE> 10
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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WE RELY ON, AND EXPECT TO CONTINUE TO RELY ON, A LIMITED NUMBER OF CUSTOMERS FOR
A SIGNIFICANT PORTION OF OUR REVENUES.
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 INFRASTRUCTURE 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 infrastructure 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 infrastructure 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.
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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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 infrastructure 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 infrastructure 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.
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<PAGE> 13
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 software may not continue to be available
on commercially reasonable terms, if at all. 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
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<PAGE> 14
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.
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 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.
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<PAGE> 15
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.
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.
A key component to our business strategy is to expand our existing sales
and marketing activities and service operations internationally, particularly in
Europe and Asia. If our efforts are successful, 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
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<PAGE> 16
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 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.
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<PAGE> 17
We depend on the efforts of third parties to develop and provide the
infrastructure 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 a widespread broadband transmission
infrastructure, 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;
- 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
infrastructure 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
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<PAGE> 18
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.
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.
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<PAGE> 19
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.
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 52.7% 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
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<PAGE> 20
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 21,800,178 shares of common stock outstanding or 22,325,178 shares if the
underwriters' over-allotment is exercised in full. Of these, 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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<PAGE> 21
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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<PAGE> 22
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.
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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<PAGE> 23
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, and (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.
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, 21,117,424 shares issued and
outstanding, pro forma as adjusted............ 3 18 21
Additional paid-in capital...................... 15,959 53,559 87,761
Deferred compensation........................... (8,724) (8,724) (8,724)
Accumulated deficit............................. (26,033) (26,033) (26,033)
-------- -------- --------
Total stockholders' equity (net capital
deficiency)................................ (18,795) 18,820 53,025
-------- -------- --------
Total capitalization..................... $ 18,315 $ 18,935 $ 53,140
======== ======== ========
</TABLE>
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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 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, our pro forma as adjusted net
tangible book value as of December 31, 1999 would have been approximately $52.1
million, or $2.47 per share. This represents an immediate increase in pro forma
as adjusted net tangible book value of $1.46 per share to existing stockholders
and an immediate dilution of $8.53 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.......... 1.46
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 2.47
------
Dilution per share to new investors......................... $ 8.53
======
</TABLE>
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 and by investors purchasing shares of common stock in this
offering, before deducting the estimated underwriting discounts and commissions
and estimated offering expenses. Additionally, as detailed below, new investors
purchasing shares in this offering at the initial public offering price will
contribute 50% of the total consideration paid to us but will own only 17% 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 83% $38,863,218 50% $ 2.21
New investors........................... 3,500,000 17% 38,500,000 50% 11.00
----------- --- ----------- ---
Total................................. 21,117,424 100% $77,363,218 100%
=========== === =========== ===
</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. To the extent that any of these options are
exercised, there will be further dilution to investors purchasing our common
stock.
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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>
24
<PAGE> 26
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 provide the infrastructure for 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 infrastructure 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 1) licenses of software products
and related maintenance contracts; and 2) Virage Interactive service offerings;
and receive 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.
Our 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, 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.
25
<PAGE> 27
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. Revenue through our indirect distribution channels,
which include domestic and international distributors, system integrators and
value-added resellers (collectively, "resellers"), is recognized on shipment, if
other criteria in SOP 97-2 are met, since there is no right of return or price
protection and the reseller has identified a valid end-user for the product. 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 recorded a $4.5 million dividend to the 28 accredited
investors who purchased our series E
26
<PAGE> 28
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>
27
<PAGE> 29
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
28
<PAGE> 30
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-
29
<PAGE> 31
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.
30
<PAGE> 32
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.
31
<PAGE> 33
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>
32
<PAGE> 34
<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> 35
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, 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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BUSINESS
OVERVIEW
Virage is a leading provider of software products and applications services
that provide the infrastructure for 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
infrastructure investments and technology improvements 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 infrastructure. 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 this emerging technical
infrastructure 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 network infrastructure 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
provide the infrastructure for 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
infrastructure 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 provide the infrastructure for 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
Fortune 1000 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 infrastructure 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.
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 layout, graphics, colors, and fonts
associated with the video search results and video
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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 site can retain a separate
look and feel. For video content owners who wish to
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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 parties.
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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.
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, 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
marketplace including Excalibur Technologies and MediaSite. We may also compete
indirectly with larger system integrators who embed or integrate these directly
competing technologies into
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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. In addition, we lease
administrative and sales offices near London, England and in New York, under
leases expiring on March 31, 2000 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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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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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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<PAGE> 59
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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<PAGE> 60
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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<PAGE> 61
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 or members of committees of the board of directors. We do reimburse
directors for their reasonable expenses incurred in attending meetings of the
board of directors.
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<PAGE> 62
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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<PAGE> 63
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 $ 5,327,352 $ 8,511,350
Bradley J.
Horowitz........... 66,666 4.0% 0.24 4/23/08 2,663,676 4,255,676
66,666(1) 4.0% 0.75 2/24/09 2,612,676 4,204,676
Carlos O. Montalvo... 277,500 16.7% 0.24 5/21/08 11,087,552 17,714,247
Frank H. Pao......... 66,666 4.0% 0.24 4/23/08 2,663,676 4,255,676
33,333 2.0% 0.75 2/24/09 1,306,338 2,102,337
Gilbert C. Wai....... 66,666 4.0% 0.24 4/23/08 2,663,676 4,255,676
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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<PAGE> 64
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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<PAGE> 65
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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<PAGE> 66
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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<PAGE> 67
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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<PAGE> 68
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 and Related Parties(1)
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 and Related
Entities(2)
Gilbert C. Wai................... -- -- -- -- 352,744
Wai Family Revocable Trust....... 23,333 -- -- -- --
Philip W. Halperin and Related
Entities(3)
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 and Related
Entities(4) --
Adobe Ventures II, L.P........... -- 1,119,403 56,632 100,887 --
H&Q Virage Investors, L.P........ -- 373,134 18,877 -- --
Hambrecht & Quist Employee Fund,
L.P. II....................... -- -- -- 1,392 --
Lawrence K. Orr and Related
Entities(5)
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> 69
<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 and Related
Entities(6)
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 and
Related Parties
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>
- -------------------------
(1) 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.
(2) Mr. Wai is trustee of the Wai Family Revocable Trust.
(3) 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. In this capacity, Weston Presidio Capital Management
III, LLC, through an executive committee, exercises sole voting and
investment power with respect to all shares held of record by the named
investment partnerships; individually, no stockholder, director or officer
of Weston Presidio Capital Management III, LLC has or shares such voting or
investment power. Mr. Halperin disclaims beneficial ownership of all shares
except for his own pecuniary interest.
(4) The general partner of Adobe Ventures II, L.P. is H&Q Adobe Ventures
Management II, LLC, the general partner of H&Q Virage Investors, L.P. is H&Q
Virage Investment Management, LLC and the general partner of Hambrecht &
Quist Employee Fund, L.P. is H&Q Venture Management LLC. The general
partner, through an executive committee, exercises sole voting and
investment power with respect to all shares held of record by the named
investment partnerships; individually, no stockholder, director or officer
of the investment fund has or shares such voting or investment power. Mr.
O'Grady disclaims beneficial ownership of all shares except for his own
pecuniary interest.
(5) 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. In this capacity,
Trinity TVL Partners, L.P., through an executive committee, exercises sole
voting and investment power with respect to all shares held of record by the
named investment partnerships; individually, no stockholder, director of
officer of Trinity TVL Partners, L.P. has or shares such voting or
investment power. Mr. Orr disclaims beneficial ownership of all shares
except for his own pecuniary interest.
(6) Sutter Hill Ventures disclaims voting power and beneficial ownership of the
shares held by its affiliated parties.
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<PAGE> 70
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.
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.
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<PAGE> 71
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.
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> 72
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 21,800,178 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% 10.2%
3000 Sand Hill Road, Bldg. 1, Ste. 240
Menlo Park, CA 94025
Entities affiliated with Sutter Hill
Ventures(1)................................. 2,118,473 11.6 9.7
755 Page Mill Road, Ste. A-200
Palo Alto, CA 94304
Entities affiliated with Weston Presidio
Capital..................................... 1,930,894 10.6 8.9
343 Sansome Street, Suite 1210
San Francisco, CA 94104
</TABLE>
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<PAGE> 73
<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 7.7
One Bush Street
San Francisco, CA 94104
AltaVista Company............................. 1,436,945 7.9 6.6
529 Bryant Street
Palo Alto, CA 94301
Entities affiliated with Media Technology Ventures... 1,265,608 6.9 5.8
746 West Adams Blvd.
Los Angeles, CA 90089
Reuters Holdings Switzerland SA............... 1,016,260 5.6 4.7
153 route de Thonon
1245 Collonge-Bellerive
Switzerland
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
Paul G. Lego(2)............................... 2,136,950 11.2 9.4
Bradley J. Horowitz(3)........................ 297,461 1.6 1.4
Carlos O. Montalvo(4)......................... 302,933 1.6 1.4
Frank H. Pao(5)............................... 254,666 1.4 1.2
Gilbert C. Wai(6)............................. 376,077 2.1 1.7
Philip W. Halperin............................ 1,930,894 10.6 8.9
c/o Weston Presidio Capital
343 Sansome Street, Suite 1210
San Francisco, CA 94104
Ramesh Jain, PhD.(7).......................... 831,150 4.5 3.8
San Diego, California
Standish H. O'Grady........................... 1,670,326 9.1 7.7
c/o Adobe Ventures/Hambrecht & Quist
One Bush Street
San Francisco, CA 94104
Lawrence K. Orr............................... 2,227,356 12.2 10.2
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 2.1
William H. Younger, Jr.(8).................... 1,312,117 7.2 6.0
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)....................... 12,392,172 61.9% 52.7%
</TABLE>
- -------------------------
For a detailed description of beneficial ownership of the above securities,
please see footnotes to "Related Party Transactions."
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<PAGE> 74
(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 1,731,760 shares of common
stock that are subject to a right of repurchase which lapses over time.
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<PAGE> 75
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 18,174,192 shares of common stock
outstanding held by 177 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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<PAGE> 76
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 February 29, 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.
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.
Expenses of registration
We will pay all registration expenses, excluding underwriting discounts and
commissions, of all demand and piggyback registrations.
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<PAGE> 77
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 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
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<PAGE> 78
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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<PAGE> 79
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 21,800,178
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 125,986 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 18,174,192 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>
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<PAGE> 80
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 218,002 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.
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<PAGE> 81
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 13,754,934 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.
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<PAGE> 82
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..........................
SoundView Technology Group, Inc.............................
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
81
<PAGE> 83
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.
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.
Other than the prospectus in electronic format, the information contained
on Wit Capital's or any other underwriter's website and any information
contained on any other website maintained by an underwriter is not part of this
prospectus or the registration statement of which this prospectus forms a part,
has not been approved or endorsed by us or any underwriter in its capacity as an
underwriter and should not be relied upon by investors.
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.
82
<PAGE> 84
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
- 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.
83
<PAGE> 85
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
84
<PAGE> 86
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.
85
<PAGE> 87
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.
86
<PAGE> 88
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> 89
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> 90
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 15,959,019 52,940,264
Deferred compensation.................................. -- (398,675) (8,724,228) (8,724,228)
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> 91
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> 92
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 $15,959,019 $(8,724,228) $(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> 93
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> 94
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 provide the infrastructure for 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> 95
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. Revenue through the Company's
indirect distribution channels, which include domestic and international
distributors, system integrators and value-added resellers (collectively,
"resellers"), is recognized on shipment, if other criteria in SOP 97-2 are met,
since there is no right of return or price protection and the reseller has
identified a valid end-user for the product. 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 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
F-8
<PAGE> 96
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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 10% 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 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
F-9
<PAGE> 97
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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 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
F-10
<PAGE> 98
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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 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
F-11
<PAGE> 99
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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.
FINANCIAL INSTRUMENTS
Virage's financial instruments consist of cash and cash equivalents,
accounts receivable, restricted investments, accounts payable, bank equipment
term loans and capital lease obligations. The fair values of these instruments
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"). 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
F-12
<PAGE> 100
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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........................... $861,445 $3,427,511 $15,521,836
======== ========== ===========
</TABLE>
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>
F-13
<PAGE> 101
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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>
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>
F-14
<PAGE> 102
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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.
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
F-15
<PAGE> 103
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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, $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.
F-16
<PAGE> 104
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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.
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
F-17
<PAGE> 105
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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 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
F-18
<PAGE> 106
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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.
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-19
<PAGE> 107
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-20
<PAGE> 108
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-21
<PAGE> 109
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-22
<PAGE> 110
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 December 31, 1999, the Company has operated primarily within one
segment -- the sale of software and related software support services. 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, Virage's
F-23
<PAGE> 111
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 IS UNAUDITED)
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)
In January and February 2000, the Company granted a total of 1,395,667
common stock options at prices ranging between $6.00 - $8.10. The deferred
compensation related to these stock option grants is approximately $4,900,000
which will be amortized over four years which represents the vesting period of
the stock option grants.
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-24
<PAGE> 112
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> 113
[VIRAGE LOGO]
<PAGE> 114
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> 115
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 .
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 28 accredited investors and 7
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 accredited investors.
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> 116
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.
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.
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.
</TABLE>
II-3
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
* To be filed by amendment.
(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 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
II-4
<PAGE> 118
(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> 119
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in San Mateo, State of
California, on March 14, 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. 1 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 14, 2000
- --------------------------------------------------- Executive Officer
Paul G. Lego (Principal Executive
Officer)
/s/ ALFRED J. CASTINO* Chief Financial March 14, 2000
- --------------------------------------------------- Officer (Principal
Alfred J. Castino Financial and
Accounting Officer)
/s/ RAMESH JAIN* Director March 14, 2000
- ---------------------------------------------------
Ramesh Jain
/s/ STANDISH H. O'GRADY* Director March 14, 2000
- ---------------------------------------------------
Standish H. O'Grady
/s/ C.K. PRAHALAD* Director March 14, 2000
- ---------------------------------------------------
C.K. Prahalad
/s/ WILLIAM H. YOUNGER, JR.* Director March 14, 2000
- ---------------------------------------------------
William H. Younger, Jr.
/s/ PHILIP W. HALPERIN* Director March 14, 2000
- ---------------------------------------------------
Philip W. Halperin
/s/ LAWRENCE K. ORR* Director March 14, 2000
- ---------------------------------------------------
Lawrence K. Orr
*By: /s/ PAUL G. LEGO
----------------------------------------------
Paul G. Lego
(Attorney-in-fact)
</TABLE>
II-6
<PAGE> 120
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> 121
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.
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.
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.
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.3
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VIRAGE, INC.
Pursuant to Sections 242 and 245
of the General Corporation Law of
the State of Delaware
Virage, Inc. (hereinafter called the "Corporation"), organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
At a meeting of the Board of Directors of the Corporation a resolution
was duly adopted, pursuant to Sections 242 and 245 of the General Corporation
Law of the State of Delaware, setting forth a Sixth Amended and Restated
Certificate of Incorporation of the Corporation and declaring said Sixth Amended
and Restated Certificate of Incorporation to be advisable. The stockholders of
the Corporation duly approved said proposed Sixth Amended and Restated
Certificate of Incorporation by written consent in accordance with Sections 228,
242 and 245 of the General Corporation Law of the State of Delaware, and written
notice of such consent has been given to all stockholders who have not consented
in writing to said amendment. The resolution setting forth the Sixth Amended and
Restated Certificate of Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation,
which was originally filed with the Secretary of State of the State of Delaware
on March 29, 1995, be and hereby is amended and restated in its entirety so that
the same shall read as follows:
FIRST: The name of the Corporation is Virage, Inc.
SECOND: The address of its registered office in the State of Delaware is 15 East
North Street in the City of Dover, County of Kent. The name of its
registered agent at such address is Incorporating Services, Ltd.
1
<PAGE> 2
THIRD: The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the Corporation
shall have authority to issue is (i)_________________ shares of Common Stock,
$0.001 par value per share ("Common Stock") and (ii)__________ shares of
Preferred Stock, $0.001 par value per share ("Preferred Stock"), of which
__________ shares of such Preferred Stock are designated Series A Convertible
Preferred Stock, __________ shares of such Preferred Stock are designated Series
B Convertible Preferred Stock, __________ shares of such Preferred Stock are
designated Series C Convertible Preferred Stock, __________ shares of such
Preferred Stock are designated Series D Convertible Preferred Stock and
__________ shares of such Preferred Stock are designated Series E Convertible
Preferred Stock. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of shares of
Preferred Stock in series and, by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereon. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the certificate or certificates establishing the series of
Preferred Stock.
For purposes of this Article the following definitions shall apply:
(a) "Junior Stock" shall mean all Common Stock and any other
capital stock of this corporation other than the Preferred Stock.
(b) "Subsidiary" shall mean any corporation at least 50% of whose
outstanding voting shares shall at the time be owned by this corporation or by
one or more of such subsidiaries.
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of Preferred Stock of the Corporation.
A. SERIES A, SERIES B, SERIES C, SERIES D AND SERIES E CONVERTIBLE
PREFERRED STOCK.
________(_____) shares of the authorized and issued Preferred Stock of
the Corporation are hereby designated "Series A Convertible Preferred Stock"
(the "Series A Preferred"), ________(_____) shares of the authorized and issued
Preferred Stock of the Corporation are hereby designated "Series B Convertible
Preferred Stock" (the "Series B Preferred"), ________(_____) shares of the
authorized and issued Preferred Stock of the Corporation are hereby designated
"Series C Convertible Preferred Stock" (the "Series C Preferred"),
________(_____) shares of the authorized and issued Preferred Stock of the
Corporation are hereby designated "Series D Convertible Preferred Stock" (the
"Series D Preferred") and ________(_____) shares of the authorized and unissued
Preferred Stock of
2
<PAGE> 3
the Corporation are hereby designated "Series E Convertible Preferred Stock"
(the "Series E Preferred") with the following rights, preferences, powers,
privileges and restrictions, qualifications and limitations. Effective upon the
filing of this Sixth Amended and Restated Certificate of Incorporation, each
outstanding three (3) shares of Common Stock, Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred is
combined into two (2) shares of stock of the same class and series.
1. Dividends.
(a) Dividend Rate. The Series A Preferred will be entitled to a
current dividend preference as described herein at a rate of $0.09 per share per
annum (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares). The Series B
Preferred will be entitled to a current dividend preference as described herein
at a rate of $0.156 per share per annum (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares). The Series C Preferred will be entitled to a current dividend
preference as described herein at a rate of $0.1608 per share per annum (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares). The Series D Preferred will be entitled
to a current dividend preference as described herein at a rate of $0.2064 per
share per annum (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares). The Series E
Preferred will be entitled to a current dividend preference as described herein
at a rate of $0.3936 per share per annum (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares).
(b) Dividend Priority. The corporation shall make no distribution
to the holders of the Junior Stock except as permitted by this Section.
"Distribution" in this Section means the transfer of cash or property without
consideration, whether by payment of a dividend or otherwise (except a dividend
in shares of the corporation), or the purchase or redemption of shares of the
corporation for cash or property, but does not include repurchase of shares from
a terminated employee or consultant of the corporation within the terms of an
agreement applicable to such an employee or consultant providing for such
repurchase. The corporation shall make no distributions to the holders of the
Junior Stock in any fiscal year unless and until dividends have been declared
and paid on the Series A Preferred, the Series B Preferred, the Series C
Preferred, the Series D Preferred and the Series E Preferred at the rate
specified in Section 1(a) for the entire fiscal year. In addition, the holders
of any Series of Preferred Stock other than the Series A Preferred, the Series B
Preferred, the Series C Preferred, the Series D Preferred and the Series E
Preferred shall be entitled to dividends if and only if all holders of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred receive dividends pro rata based on the dividend rate per share of
each such respective series as set forth in Section 1(a). If the corporation has
paid the holders of the Series A Preferred, the Series B Preferred, the Series C
Preferred, the Series D Preferred and the Series E Preferred the full amounts as
described in the preceding sentences and shall elect to declare additional
dividends in any fiscal year out of funds legally available therefor, any
remaining dividends shall be declared and paid on the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred, Series E Preferred and
Common Stock, with each share of Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred receiving the same
dividend as that paid on the number of shares of Common Stock
3
<PAGE> 4
(including fractions of a share) into which such share of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred is then convertible.
(c) Dividends on Conversion. Upon conversion of a share of Series
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or
Series E Preferred into Common Stock, all declared but unpaid dividends on each
share of Preferred Stock so converted, shall be payable by the corporation to
the holder of such share based on the dividend price per share of each such
respective series as set forth above.
2. Liquidation.
(a) Liquidation Preference.
(i) In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary, then the holders
of the Preferred Stock shall be entitled to receive, prior and in preference to
any distribution of any assets of the corporation to the holders of Junior Stock
by reason of their ownership thereof, the amount of $1.125 for each share of
Series A Preferred (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares), the amount of $1.95
for each share of Series B Preferred (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares), the amount of $2.01 for each share of Series C Preferred (as adjusted
for any stock dividends, combinations, splits, recapitalizations and the like
with respect to such shares), the amount of $2.58 for each share of Series D
Preferred (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares), and the amount of
$4.92 for each share of Series E Preferred (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares), respectively, plus an amount equal to the total of all declared but
unpaid dividends on the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred, respectively. If upon
occurrence of such event, the assets thus distributed among the holders of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred as set forth above shall be insufficient to permit the
payment to such holders of the full preferential amount, then the entire assets
of the corporation legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred according to the
respective amounts which would be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to said shares
were paid in full.
(ii) After payment has been made to the holders of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred of the full preferential amount to which they shall be
entitled as aforesaid, the holders of Common Stock, the holders of Series A
Preferred, the holders of Series B Preferred, the holders of Series C Preferred
and the holders of Series E Preferred shall be entitled to receive all remaining
assets of the corporation available for distribution, pro rata based on the
number of shares of Common Stock held by each (assuming conversion of all shares
of Preferred Stock), until the holders of Series E Preferred shall have received
with respect to each share of Series E Preferred total payments under this
Section 2, including payments made pursuant to Section (a)(i) above,
4
<PAGE> 5
in an amount equal to $8.364 per share (as adjusted for stock splits, stock
dividends, recapitalizations and the like).
(iii) After payment has been made to the holders of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred of the full preferential amounts to which they shall be
entitled as aforesaid, the holders of Common Stock, the holders of Series A
Preferred, the holders of Series B Preferred and the holders of Series C
Preferred shall be entitled to receive all remaining assets of the corporation
available for distribution, pro rata based on the number of shares of Common
Stock held by each (assuming conversion of all shares of Preferred Stock).
(b) Liquidation Events. For purposes of this Section 2, a
liquidation, dissolution, or winding up of the corporation shall be deemed to
include, (i) the corporation's sale of all or substantially all its assets, (ii)
the merger or consolidation of the corporation into or with any other
corporation if the holders of the outstanding shares of the corporation prior to
such merger or consolidation do not retain a majority of the voting power of the
surviving corporation or, (iii) the sale or transfer by the shareholders of the
corporation in a single transaction or series of related transactions of
securities representing a majority of the voting power of the corporation. For
purposes of clause (ii) above, the exchange of securities of the surviving
corporation for securities of the corporation shall be deemed to constitute the
distribution of assets of the corporation upon liquidation, dissolution or
winding up. Nothing contained in this subsection (b) shall limit the right of a
holder of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred to convert such shares into Common Stock prior
to the effective date of any such transaction.
(c) Determination of Value. The fair value of the assets to be
distributed or exchanged in such event shall be determined by the Board of
Directors of the corporation, in good faith provided that any securities to be
delivered to the holders of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred or Common Stock under Section
2(a) above shall be valued as follows:
(A) Securities that do not constitute "restricted stock,"
as such term is defined in Rule 144 promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended:
(i) If traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 30-day period ending three (3) days prior to the closing;
(ii) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) days prior to the closing;
(iii) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
corporation and the holders of not less than a majority of the then outstanding
shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred voting together as a single class;
5
<PAGE> 6
(iv) If fair market value cannot be determined
pursuant to clause (iii) as set forth above, the corporation and the holders of
not less than a majority of the then outstanding shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred, voting together as a single class, shall each appoint one (1)
independent third party and such persons shall in turn select a third person
which group of three persons shall then determine the fair market value thereof.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as set forth above in
clauses (i) or (ii) to reflect the appropriate fair market value thereof, as
mutually determined by the corporation and the holders of a majority of the then
outstanding shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred voting together as a single
class or if applicable, shall be in accordance with clauses (iii) or (iv),
giving appropriate weight to such restriction.
3. Redemption.
(a) Redemption Rights. At any time on or after October 9, 2006,
the holders of at least 67% of the then outstanding shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred voting together as a single class may request in writing the
redemption of all outstanding shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred and the
corporation shall redeem such shares pursuant to the schedule set forth below.
In the event such notice of redemption is given, during each calendar quarter
commencing with the first calendar quarter which begins after such request is
made, the corporation shall redeem during each such quarter 1/12th of the shares
of the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred, respectively, which were outstanding on the
first day of the first calendar quarter in which the redemptions of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred, respectively, are required. After the holders give the notice
requiring redemption, they shall continue to be entitled to all rights as
holders of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred, respectively, until such shares are redeemed
in accordance with the procedures specified below.
(b) Availability of Funds. Notwithstanding the provisions of
subsection (a), the corporation will not be required to redeem shares in any
quarter to the extent funds are not legally available. If funds are not legally
available to consummate a redemption under subsection (a), the corporation shall
redeem the maximum number of shares for which funds are legally available and
will continue to do so each calendar quarter thereafter until the total number
of shares of Series A Preferred, Series B Preferred. Series C Preferred, Series
D Preferred and Series E Preferred that it has redeemed is equal to the total
number of shares that it would have redeemed at such time as if it had redeemed
in accordance with the provisions of subsection (a).
(c) Redemption Price and Allocation. The redemption price per
share for the Series A Preferred shall be $1.125 in cash per share (as adjusted
for any stock dividends, combinations, splits, recapitalizations and the like
with respect to such shares), plus an amount equal to all declared but unpaid
dividends on the shares being redeemed. The redemption price per share for the
Series B Preferred shall be $1.95 in cash per share (as adjusted for any stock
dividends,
6
<PAGE> 7
combinations, splits, recapitalizations and the like with respect to such
shares), plus an amount equal to all declared but unpaid dividends on the shares
being redeemed. The redemption price per share for the Series C Preferred shall
be $2.01 in cash per share (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like with respect to such shares, plus an
amount equal to all declared but unpaid dividends on the shares being redeemed).
The redemption price per share for the Series D Preferred shall be $2.58 in cash
per share (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares), plus an amount
equal to all declared but unpaid dividends on the shares being redeemed. The
redemption price per share for the Series E Preferred shall be $4.92 in cash per
share (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares), plus an amount
equal to all declared but unpaid dividends on the shares being redeemed.
Redemption of less than all of the then outstanding shares of Series A Preferred
shall be pro rata among the holders of Series A Preferred (as to the number of
shares held on the date of redemption) so that each holder has redeemed the same
percentage of the total shares of Series A Preferred held by it. Redemption of
less than all of the then outstanding shares of Series B Preferred shall be pro
rata among the holders of Series B Preferred (as to the number of shares held on
the date of redemption) so that each holder has redeemed the same percentage of
the total shares of Series B Preferred held by it. Redemption of less than all
of the then outstanding shares of Series C Preferred shall be pro rata among the
holders of Series C Preferred (as to the number of shares held on the date of
redemption) so that each holder has redeemed the same percentage of the total
shares of Series C Preferred held by it. Redemption of less than all of the then
outstanding shares of Series D Preferred shall be pro rata among the holders of
Series D Preferred (as to the number of shares held on the date of redemption)
so that each holder has redeemed the same percentage of the total shares of
Series D Preferred held by it. Redemption of less than all of the then
outstanding shares of Series E Preferred shall be pro rata among the holders of
Series E Preferred (as to the number of shares held on the date of redemption)
so that each holder has redeemed the same percentage of the total shares of
Series E Preferred held by it.
(d) Redemption Procedures. The corporation shall give notice by
certified mail, postage prepaid, return receipt requested, to the holders of
record of the Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred and/or Series E Preferred being redeemed of any redemption, such
notice to be addressed to each holder at the address shown in the corporation's
records which notice shall specify the date of redemption, the number of shares
of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and/or Series E Preferred of the holder to be redeemed and the date on
which conversion rights terminate. Such notice shall be given no more than sixty
(60) but no less than thirty (30) days prior to the date fixed for redemption.
On or after the date of redemption as specified in such notice, each holder
shall surrender his certificate (or comply with applicable lost certificate
provisions) for the number of shares to be redeemed as stated in the notice
(except that such number of shares shall be reduced by the number of shares
which have been converted pursuant to Section 4 hereof between the date of
notice and the date on which conversion rights terminate) to this corporation at
the place specified in such notice. If less than all of the shares represented
by such certificate are redeemed, a new certificate shall forthwith be issued
for the unredeemed shares. Provided such notice is duly given, and provided that
on the redemption date specified there shall be a source of funds legally
available for such redemption and funds necessary for the redemption shall have
been deposited in a bank or trust company ten business days prior to the
redemption date as hereinafter provided, then all rights with respect to such
shares shall, after the specified redemption date, terminate, whether or not
said
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<PAGE> 8
certificates have been surrendered, excepting only in the latter instance the
right of the holder to receive the redemption price thereof, without interest,
upon such surrender (or compliance with lost certificate provisions).
(e) Bank Deposit. On or prior to the close of business on the
tenth business day preceding the date of redemption, the corporation shall
deposit the redemption price of all shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred
designated for redemption in said notice and not yet converted with a bank or
trust company having aggregate capital and surplus in excess of $100,000,000 as
a trust fund for the benefit of the respective holders of the shares designated
for redemption and not yet converted with irrevocable instructions and authority
to the bank or trust company to pay, on or promptly after the redemption date,
the redemption price to the respective holders upon surrender of their stock
certificates. Contemporaneously, the corporation shall furnish such holders
evidence of such deposit and instructions. Any monies deposited by the
corporation pursuant hereto for the redemption of shares thereafter converted
into shares of Common Stock pursuant to Section 4 hereof no later than the last
business day preceding the date of redemption, shall be returned to the
corporation forthwith upon such conversion. The balance of any monies deposited
by the corporation pursuant hereto remaining unclaimed at the expiration of one
(1) year following the date of redemption shall thereafter be returned to the
corporation upon its request expressed in a resolution of its Board of
Directors. The holders of the Preferred Stock shall have the right to
specifically enforce the corporation's obligations under this Section 3.
4. Conversion. The holders of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred shall have
conversion rights as follows ("Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share, at the office of the corporation or any transfer
agent for the Series A Preferred, into such number of fully paid and
nonassessable shares of Common Stock, as is determined by dividing $1.125 by the
Conversion Price for the Series A Preferred determined as hereinafter provided
in effect at the time of conversion, by dividing $1.95 by the Conversion Price
for the Series B Preferred determined as hereinafter provided in effect of the
time of conversion, by dividing $2.01 by the Conversion Price for the Series C
Preferred determined as hereinafter provided in effect at the time of
conversion, by dividing $2.58 by the Conversion Price for the Series D Preferred
determined as hereinafter provided in effect at the time of conversion, and by
dividing $4.92 by the Conversion Price for the Series E Preferred determined as
hereinafter provided in effect at the time of conversion, respectively. The
initial Conversion Price shall be $1.125 per share for Series A Preferred, $1.95
for Series B Preferred, $2.01 for Series C Preferred, $2.58 for Series D
Preferred and $4.92 for Series E Preferred. The Conversion Price shall be
subject to adjustment as hereinafter provided. In the event of a notice of
redemption of any shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred pursuant to Section 3
hereof, the Conversion Rights shall terminate as to the shares designated for
redemption at the close of business on the last business day preceding the date
of redemption, unless the corporation has failed in any way to comply with its
obligations under Section 3, in which case the notice of redemption shall be
deemed to have been revoked and the corporation shall be required to give a new
notice of redemption.
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<PAGE> 9
(b) Mechanics of Conversion. Before any holder of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred shall be entitled to convert the same into shares of Common Stock,
he shall surrender the certificate or certificates therefor (or comply with
applicable lost certificate provisions) at the office of the corporation or of
any transfer agent for the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred and shall give written
notice to the corporation at such office that he elects to convert the same. The
corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and, if less than all the shares of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred represented by such certificate are converted, a certificate
representing the shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred not converted. In the event
of any conversion at the election of a holder of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred, such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred
to be converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
(c) Adjustments to Conversion Price for Diluting Issues.
(A) Special Definitions. For purposes of Section 3 and
Section 4(c), the following definitions shall apply:
(i) "Options" shall mean rights, options, or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(ii) "Original Issue Date" shall mean the date the
first share of Series E Preferred is issued.
(iii) "Convertible Securities" shall mean any
securities convertible into or exchangeable for Common Stock, including any
evidences of indebtedness, any capital stock of the corporation or other
securities convertible into or exchangeable for Common Stock, but shall exclude
the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred authorized herein;
(iv) "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued (or, pursuant to Section 4(c)(C), deemed to be
issued) by the corporation after the Original Issue Date, other than shares of
Common Stock issued or issuable at any time:
(1) upon conversion of shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred;
(2) in an aggregate amount of up to 799,800
shares of Common Stock from and after the Original Issue Date of the Series E
Preferred (and/or Options
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<PAGE> 10
to purchase such Common Stock outstanding on or issued from and after the
Original Issue Date) to officers, directors, employees and consultants of the
corporation, together with such additional shares of Common Stock (and/or
Options therefor) as may be approved for issuance to such persons by action of
the Board of Directors of the corporation provided that the Director designated
by the holders of Series C Preferred and the Director designated by the holders
of Series E Preferred vote to approve such issuance; provided that any Option
issued under this clause (2) to the extent that it expires without being
exercised will be treated as never having been issued for purposes of this
clause (2) (the number set forth in this clause (2) to be subject to
proportionate adjustment in the case of recapitalizations, stock splits, stock
dividends or combinations of shares);
(3) as a dividend or distribution on the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
or Series E Preferred;
(4) shares of Common Stock or Preferred
Stock or options or warrants exercisable for Common Stock or Preferred Stock
issued to banks, savings and loan associations, equipment lessors or other
similar entities in connection with such entities providing debt or equipment
lease financing to the corporation; or
(5) any issuance of securities approved in
writing by the holders of at least 83% of the outstanding shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred, voting together as a single class.
(B) No Adjustment of Conversion Price. Except in the case
of a combination of outstanding shares of Common Stock (for which the Conversion
Price for Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and/or Series E Preferred shall be adjusted pursuant to Section
4(c)(D)), no adjustment in the Conversion Price of a particular class of stock
shall be made in respect of the issuance of Additional Shares of Common Stock
unless the consideration per share for an Additional Share of Common Stock
issued or deemed to be issued pursuant to the provisions of Section 4(c)(C) by
the corporation is less than the Conversion Price in effect for such class of
stock immediately prior to such issuance.
(C) Deemed Issue of Additional Shares of Common Stock. In
the event the corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities, then the maximum
number of shares of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional Shares
of Common Stock issued as of the time of such issue, provided that if such
Options or Convertible Securities by their terms provide, with the passage of
time or otherwise, for any change in the minimum amount of consideration payable
to the corporation, or change in the maximum number of shares of Common Stock
issuable, upon the exercise, conversion, or exchange thereof other than changes
which may occur as a result of antidilution provisions (for which the Conversion
Price shall be readjusted based on the provisions of this Section when each such
change is effective), the consideration per share (determined pursuant to
Section 4(c)(E) hereof) for Common Stock issuable pursuant to such Options or
Convertible Securities shall be the minimum consideration per share provided for
therein, taking into consideration all
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<PAGE> 11
subsequent changes in the minimum amount of consideration payable to the
corporation and/or in the maximum number of shares of Common Stock issuable upon
the exercise, conversion, or exchange; and provided further that Additional
Shares of Common Stock shall not be deemed to have been issued with respect to
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
or Series E Preferred unless the consideration per share of such Additional
Shares of Common Stock would be less than the Conversion Price in effect
immediately prior to such issue.
(i) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(ii) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
thereof, and any subsequent adjustments based thereon, shall, upon such
expiration, as the case may be, be recomputed (provided that recomputation shall
not affect any Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred converted or tendered for conversion
prior to such exercise or expiration) as if:
(1) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
corporation for the issue of all such Options which were actually exercised,
plus the consideration actually received by the corporation upon such exercise,
or for the issue of all such Convertible Securities which were actually
converted or exchanged, plus the additional consideration, if any, actually
received by the corporation upon such conversion or exchange, and
(2) in the case of Options for Convertible
Securities, only the Convertible Securities or Common Stock into which such
Convertible Securities may be converted, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the corporation for the issue of all such Options which were actually exercised,
plus the consideration deemed to have been received by the corporation upon the
issue of the Convertible Securities with respect to which such Options were
actually exercised;
(iii) no readjustment pursuant to clause (ii) above
shall have the effect of increasing a Conversion Price to an amount which
exceeds such Conversion Price in effect immediately prior to the original
adjustment. If Additional Shares of Common Stock were issued between the
original adjustment date and the readjustment date (other than Common Stock
issued upon exercise of the Options or conversion of the Convertible Securities
that are the subject of the readjustment) the Conversion Price on the
readjustment date shall be recomputed (but only if a lower Conversion Price
results therefrom) by treating the readjusted Conversion Price as the Conversion
Price in effect on the original adjustment date and adjusting such
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<PAGE> 12
Conversion Price for all issuances of Additional Shares of Common Stock (other
than Common Stock issued upon exercise of the Options or conversion or exchange
of the Convertible Securities that are the subject of the readjustment)
occurring between the original adjustment date and the readjustment date.
(D) Adjustment of Conversion Price.
(i) For Stock Dividends, Subdivisions and
Combinations. In the event the corporation at any time or from time to time
after the Original Issue Date shall declare or pay any dividend on the Common
Stock payable in Common Stock, or effect a subdivision or combination of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in Common Stock), then and in any such event, the
Conversion Price shall be proportionally decreased in the case of a stock
dividend or subdivision and proportionately increased in the case of a
combination of shares, effective in the case of such dividend, immediately after
the close of business on the record date for the determination of holders of
Common Stock entitled to receive such dividend, or in the case of a subdivision
or combination, at the close of business immediately prior to the date upon
which such corporate action becomes effective.
(ii) Upon Issuance of Additional Shares of Common
Stock. In the event the corporation shall issue Additional Shares of Common
Stock (including Additional Shares of Common Stock deemed to be issued pursuant
to Section 4(c)(C)) without consideration or for a consideration per share less
than the Conversion Price for the affected series in effect on the date of and
immediately prior to such issue, then and in each such event, the Conversion
Price shall be reduced concurrently with such issue of shares to the price
determined as follows: (a) the number of shares of Common Stock outstanding
immediately prior to the issuance that results in the adjustment, (b) shall be
multiplied by the Conversion Price in effect immediately prior to such issuance,
(c) the result of (b) shall be added to the actual consideration received for
the Additional Shares of Common Stock, (d) the resulting total shall be divided
by the sum of (i) the number of shares of Common Stock outstanding immediately
prior to the issuance that results in the adjustment and (ii) the number of
Additional Shares of Common Stock resulting in the adjustment; (e) if the
quotient thus obtained is less than the Conversion Price theretofore in effect,
such quotient shall be the adjusted Conversion Price until further adjusted as
provided herein; provided that, for purposes of clauses (a) and (d)(i) above,
all shares of Common Stock issuable upon conversion of the outstanding shares of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred shall be treated as outstanding but the only shares of Common Stock
issuable upon exercise, conversion or exchange of outstanding Convertible
Securities that will be treated as outstanding are those issuable upon exercise
or conversion of Convertible Securities without any consideration other than the
surrender of the Convertible Security.
(E) Determination of Consideration. For purposes of this
Section 4(c), the consideration received by the corporation for the issuance of
any Additional Shares of Common Stock shall be computed as follows:
(i) Cash and Property. Such consideration shall:
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(1) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(2) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors of the corporation, including
at least one of the Directors designated by the Series C Preferred or Series E
Preferred, respectively; and
(3) in the event Additional Shares of Common
Stock are issued together with other shares of securities or other assets of the
corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board of Directors of the corporation, including
at least one of the Directors designated by the Series C Preferred or Series E
Preferred, respectively.
(ii) Other Options and Convertible Securities. For
the purpose of computing the initial adjustment of the Conversion Price pursuant
to Section 4(c)(C) (but not for the readjustment pursuant to subsection (ii) of
that Section or upon any adjustment based on antidilution provisions), the
consideration per share received by the corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 4(c)(C) shall be
determined by dividing:
(1) the total amount, if any, received or
receivable by the corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instrument relating thereto, without regard
to any provision contained therein designed to protect against dilution) payable
to the corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities, by
(2) the maximum number of shares of Common
Stock (as set forth in the instrument relating thereto, without regard to any
provision contained therein designed to protect against dilution) issuable upon
the exercise of such Options or the conversion or exchange of such Convertible
Securities (without taking effect of any change in the conversion ratio caused
by such issuance).
(iii) Adjustments for Other Dividends and
Distributions. In the event the corporation at any time or from time to time
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in capital stock of
the corporation other than shares of Common Stock, then and in each such event
provision shall be made so that the holders of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the corporation which
they would have received had their Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred been converted
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<PAGE> 14
into Common Stock on the record date of such event and had they thereafter,
during the period from the record date of such event to and including the date
of conversion, retained such securities receivable by them as aforesaid during
such period, subject to all other adjustments called for during such period
under this Section 4 with respect to the rights of the holders of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred, respectively.
(d) No Impairment. The corporation will not, by amendment of its
Fifth Amended and Restated Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the corporation but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred against
impairment.
(e) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section 4,
the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and/or Series E Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The corporation shall, upon the written request at any
time of any holder of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred , furnish or cause to be
furnished to such holder a like certificate setting forth (i) such adjustments
and readjustments, (ii) the Conversion Price at the time in effect, and (iii)
the number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred.
(f) Reservation of Stock Issuable Upon Conversion. The
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and/or Series E Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect a conversion of
all outstanding shares of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred and of any shares of Series
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred issuable upon exercise or conversion of outstanding options,
warrants or convertible securities, and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred and of
the shares of Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred and Series E Preferred issuable upon exercise of outstanding
Options, the corporation shall promptly use its best efforts to take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
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(g) Payment of Taxes. The corporation shall pay all issue taxes
and other governmental charges (other than income or other taxes imposed upon
profits realized by the recipient) that may be imposed in respect of the issue
or delivery of shares of Common Stock or other securities or property upon
conversion of shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred; provided, however, that
the corporation shall not be obligated to pay any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock or other securities in any name other than that in which the shares
of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and/or Series E Preferred were registered.
(h) No Reissue. Any shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred that are
converted by the holder shall not be reissued and the certificates representing
such shares shall be appropriately canceled on the books of the corporation and
the authorized number of the shares of the series of Preferred Stock converted
shall be automatically reduced by the number of shares of such series converted.
(i) Reclassification; Recapitalization. In the event of any
reclassification of the Common Stock or recapitalization involving Common Stock
(other than a change in par value or as a result of a stock dividend,
subdivision, or combination of shares or any event which is treated as a
liquidation under Section 2), each holder of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred shall
thereafter be entitled to receive and provisions shall be made therefor, in an
agreement relating to the reclassification or recapitalization, upon conversion
of the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred , the kind and number of shares of Common Stock
or other securities or property (including cash) of the corporation, to which
such holder of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred would have been entitled if he had held
the number of shares of Common Stock of the corporation into which the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred was convertible immediately prior to such reclassification or
recapitalization; and in any such case appropriate adjustment shall be made in
the application of the provisions herein set forth with respect to the rights
and interests thereafter of the holders of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred, to the
end that the provisions set forth herein (including the specific changes and
other adjustments to the Conversion Price), shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares, other securities, or
property thereafter receivable upon conversion of the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred and Series E Preferred.
(j) Notices of Record Date. In the event that this corporation
shall propose at any time:
(A) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(B) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock of any class or
series or other rights;
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<PAGE> 16
(C) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common Stock; or
(D) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each event, this corporation shall send to the holders
of the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred.
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in (C) and (D) above;
(ii) in the case of the matters referred to in (C)
and (D) above, at least twenty (20) days' prior written notice of the date when
the same shall take place (and specifying the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event or such earlier
date, if any, on which a record shall be taken of the holders of Common Stock
who shall be entitled to exchange their Common Stock).
(k) Manner of Notice. Any notice required by this Section 4 shall
be deemed given if given by certified mail, postage prepaid, return receipt
requested, addressed to the holders of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred at the address for
each such holder as shown on the books of this corporation and shall not be
deemed received until actually delivered.
(l) Fractional Shares. No fractional share shall be issued upon
the conversion of any share or shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred or Series E Preferred by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
corporation shall, in lieu of issuing any fractional share, if funds are legally
available therefor, pay the holder otherwise entitled to such fraction a sum in
cash equal to the fair market value of such fraction on the date of conversion
(as determined in good faith by the Board of Directors of the corporation).
(m) Automatic Conversion. Each share of Series A Preferred,
Series B Preferred. Series C Preferred, Series D Preferred and Series E
Preferred shall automatically be converted into shares of Common Stock at the
then applicable Conversion Price immediately prior to the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of this corporation to the public at a
price per share (prior to the deduction of underwriting commissions and
expenses) of not less than $8.364 (subject to
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<PAGE> 17
proportionate adjustment in the case of recapitalizations, stock splits, stock
dividends, combinations of shares and the like) and resulting in the receipt of
aggregate gross sales proceeds of at least $20,000,000. In the event of such
offering, the person(s) entitled to receive the Common Stock issuable upon such
conversion of Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the effectiveness of such
registration statement, except that any such person may specify an earlier time
for conversion in accordance with Sections 4(a) and 4(b).
(n) Election to Require Conversion. The holders of at least 83%
of the outstanding shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred voting together as a single
class may, by written notice to the corporation, elect to have all outstanding
shares of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and/or Series E Preferred, respectively, converted into Common Stock
as of the date specified in the notice or as of the date of the notice if no
date is specified. Upon the delivery of such notice signed by the requisite
number of holders, all outstanding shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and/or Series E Preferred
shall automatically be converted into shares of Common Stock at the Conversion
Price in effect on the effective date of such conversion.
(o) Special Mandatory Conversion.
(A) If there is a Dilutive Financing (as defined below) as
to the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred, any holder of shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred
who does not purchase at least such holder's Pro Rata Amount (as defined below),
will have the Diluted Portion (as defined below) of the shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred owned by such holder, automatically and without further action on
the part of the corporation or such holder, converted into a New Series (as
defined below) (and the authorized number of shares of the series of Preferred
Stock converted shall be automatically reduced accordingly), subject to and
effective concurrently with the consummation of the Dilutive Financing ("Special
Mandatory Conversion"); provided, however, that this Section 4(o) shall not
apply to the Series E Preferred unless the Dilutive Financing is made at a price
per share that is less than the then-applicable Conversion Price of the Series D
Preferred. Upon any conversion pursuant to this Section 4(o), the shares of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
or Series E Preferred so converted shall be canceled and not subject to
reissuance. As used herein, the following terms shall have the following
meanings:
(i) "Dilutive Financing" means an equity financing of the
corporation which satisfies all of the following: (i) the financing would result
in a reduction of the Conversion Price for the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E. Preferred (as
then in effect), (ii) the corporation and the holders of at least 67% of the
outstanding shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred taken together as a single
class have agreed to the dollar amount of securities ("Investment Amount") to be
offered to all holders of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred in such Dilutive Financing,
and (iii) each holder of Series A Preferred, Series B Preferred, Series C
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<PAGE> 18
Preferred, Series D Preferred and Series E Preferred has been given at least 10
days' prior written notice which sets forth the holder's Pro Rata Amount, offers
to such holder an opportunity to purchase such holder's Pro Rata Amount of the
equity securities to be sold by the corporation in such Dilutive Financing (such
offer will not be deemed to have been made by the corporation to a holder if
such holder accepts the offer in whole or in part and the corporation does not
sell the offered securities to such holder for any reason whatsoever other than
as a result of a default by such holder) and includes forms of all agreements
that will be entered into in connection with such sale. Notwithstanding the
first sentence of this subsection (o)(A)(i), in the event of a financing which
would result in a reduction of the Conversion Price for the Series B Preferred
but not the Series A Preferred, such financing will be deemed a "Dilutive
Financing" with respect to the Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred only if the corporation and holders of 67% of
the outstanding shares of Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred, voting together as a single class, agree to
the Investment Amount to be offered to all holders of Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred in such financing and
(iii) of the previous sentence has been satisfied. In addition, notwithstanding
the first sentence of this subsection (o)(A)(i), in the event of a financing
which would result in a reduction of the Conversion Price for the Series C
Preferred but not the Series B Preferred, such financing will be deemed a
"Dilutive Financing" with respect to the Series C Preferred, Series D Preferred
and Series E Preferred only if the Corporation and holders of 67% of the
outstanding shares of Series C Preferred, Series D Preferred and Series E
Preferred, voting together as a single class, agree to the Investment Amount to
be offered to all holders of Series C Preferred, Series D Preferred and Series E
Preferred in such financing and (iii) of the first sentence in this subsection
(o)(A)(i) has been satisfied. In addition, notwithstanding the first sentence of
this subsection (o)(A)(i), in the event of a financing which would result in a
reduction of the Conversion Price for the Series D Preferred but not the Series
C Preferred, such financing will be deemed a "Dilutive Financing" with respect
to the Series D Preferred and the Series E Preferred only if the Corporation and
holders of 67% of the outstanding shares of Series D Preferred and Series E
Preferred, voting together as a single class, agree to the Investment Amount to
be offered to all holders of Series D Preferred and Series E Preferred in such
financing and (iii) of the first sentence in this subsection (o)(A)(i) has been
satisfied.
(ii) "Pro Rata Amount" means a holder's share of
the Investment Amount determined by multiplying the Investment Amount by the
number of shares of Common Stock into which such holder's shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred held by such holder are convertible at the time of such offer and
dividing the result by the total number of shares of Common Stock into which the
total number of outstanding shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred, are convertible at
the time of such offer, respectively.
(iii) "Diluted Portion" means the number of shares
of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred held by a holder determined by multiplying the
total number of shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred held by such holder by the
percentage of such holder's Pro Rata Amount that such holder did not purchase in
the Dilutive Financing. Notwithstanding the foregoing, no shares of Series A
Preferred Stock, Series B
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<PAGE> 19
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, for which
the financing is not a Dilutive Financing shall be included in the calculation
of the Dilution Portion.
(B) Although a Special Mandatory Conversion will occur
upon consummation of a Dilutive Financing without any action on the part of the
holder, each holder of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred converted pursuant to this
Section 4(o) agrees to promptly deliver to the corporation during regular
business hours at the office of the corporation, the certificate or certificates
for the shares so converted, duly endorsed or assigned in blank or to the
corporation. The corporation will then promptly issue and deliver to such
holder, at the place designated by such holder, a certificate or certificates
for the full number of shares of the New Series to which such holder is
entitled.
(C) Prior to each Special Mandatory Conversion under this
subsection (o), the corporation shall create a new series of preferred stock
(each such series being a "New Series") having powers, preferences, rights,
qualifications, limitations and restrictions which are identical to the powers,
preferences, rights, qualifications, limitations and restrictions of the shares
of the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and/or Series E Preferred being converted upon such Special Mandatory
Conversion, except that the initial Conversion Price of such New Series will be
the Conversion Price for the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and/or Series E Preferred in effect immediately
prior to the Dilutive Financing which results in such Special Mandatory
Conversion, and such Conversion Price shall not be subject to future adjustment
under Section 4(c)(D)(ii) above (Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock), but shall be subject to all other
adjustments of the Conversion Price set forth in Section 4. The corporation and
the holders of stock of the corporation that is issued after this provision is
inserted in the Company's Certificate of Incorporation, by the acceptance of
such stock, each agrees to take all action within its control (including, but
not limited to, voting all securities held by it) necessary to amend the
corporation's Fifth Amended and Restated Certificate of Incorporation to create
any New Series when and as required hereunder and to effect any Special
Mandatory Conversions.
(D) Notwithstanding anything to the contrary herein, if
there is a Dilutive Financing that would result in a reduction of the Conversion
Price of the Series B Preferred but not the Series A Preferred, the Special
Mandatory Conversion shall take place only with respect to the appropriate
Diluted Portion of the shares of Series B Preferred, Series C Preferred, Series
D Preferred and Series E Preferred as set forth above. In addition,
notwithstanding anything to the contrary herein, if there is a Dilutive
Financing that would result in a reduction of the Conversion Price of the Series
C Preferred but not the Series B Preferred, the Special Mandatory Conversion
shall take place only with respect to the appropriate Diluted Portion of the
shares of Series C Preferred, Series D Preferred and Series E Preferred as set
forth above. In addition, notwithstanding anything to the contrary herein, if
there is a Dilutive Financing that would result in a reduction of the Conversion
Price of the Series D Preferred but not the Series C Preferred, the Special
Mandatory Conversion shall take place only with respect to the appropriate
Diluted Portion of the shares of Series D Preferred and Series E Preferred as
set forth above. In addition, notwithstanding anything to the contrary herein,
if there is a
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<PAGE> 20
Dilutive Financing that would result in a reduction of the Conversion Price of
the Series E Preferred but not the Series D Preferred, the Special Mandatory
Conversion shall not take place.
5. Voting Rights. Except as otherwise required by law, the holders of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred and the holders of Common Stock shall be entitled to notice
of any shareholders' meeting and to vote together as one class upon any matter
submitted to the shareholders for a vote on the following basis:
(a) Common Stock Vote. Each share of Common Stock issued and
outstanding shall have one vote.
(b) Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred Vote. Each holder of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred shall have a number of votes equal to the number of shares of Common
Stock into which the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred, respectively, held by such holder is
then convertible, as adjusted from time to time under Section 4 hereof.
(c) Quorum. For matters to be voted on by the Preferred Stock and
Common Stock together as one class, a quorum shall consist of a majority of the
votes attributable to the Common Stock and Preferred Stock as set forth in
Sections 5(a)(i) and 5(a)(ii).
6. Covenants.
(a) In addition to any other rights provided by law or agreement
and notwithstanding any other provision in the corporation's Fifth Amended and
Restated Certificate of Incorporation, so long as any Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred shall
be outstanding, this corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of at least 83% of the
outstanding shares of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred voting together as a single
class on an as-converted basis:
(i) amend or repeal any provision of, or add any provision
to, this corporation's Fifth Amended and Restated Certificate of Incorporation
(including, but not limited to, the designation of any series of Preferred Stock
by a Certificate of Designation) or Bylaws if such action would change the
powers, preferences, and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred, or increase the number of shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred
authorized hereby;
(ii) authorize, designate (including, but not limited to,
the designation of any series of Preferred Stock by a Certificate of
Designation) or issue shares of any class or series of stock having any
preference or priority as to voting powers, dividends, conversion or assets
superior to or on a parity with any such preference or priority of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred, issue any shares of Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred or Series E
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<PAGE> 21
Preferred or authorize, designate (including, but not limited to, the
designation of any series of Preferred Stock by a Certificate of Designation) or
issue shares of stock of any class or any bonds, debentures, notes or other
obligations convertible into or exchangeable for, or having options or other
rights to purchase, any shares of Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred or Series E Preferred or other stock of this
corporation having any preference or priority as to voting powers, dividends,
conversion or assets superior to or on a parity with any such preference or
priority of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred;
(iii) reclassify any class or series of stock into, or
exchange any class or series of stock for, shares having any preference or
priority as to voting powers, dividends or assets superior to or on a parity
with any such preference or priority of any series of Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred;
(iv) reclassify or cancel shares of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred;
(v) redeem, repurchase, pay dividends or make other
distributions with respect to Junior Stock (except for acquisitions of Common
Stock by the Corporation pursuant to agreements which permit the Corporation to
repurchase such shares upon termination of services to the Corporation or in
exercise of the Corporation's right of first refusal upon a proposed transfer);
(vi) increase or decrease the authorized number of members
of the Corporation's Board of Directors;
(vii) increase the number of authorized shares of
Preferred Stock; or
(viii) amend or repeal any provision of this Section 6.
(b) In addition to any other rights provided by law or agreement
and notwithstanding any other provision in the corporation's Fifth Amended and
Restated Certificate of Incorporation, so long as any Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred shall
be outstanding, this corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of at least 67% of the
outstanding shares of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred voting together as a single
class on an as-converted basis:
(i) merge into, or consolidate with, any corporation or
other entity or sell or lease (as lessor) more than five percent of the
corporation's total consolidated assets in any twelve-month period (other than
mortgages, deeds of trust, pledges or other hypothecations of real or personal
property approved by the corporation's board of directors and other than sales
or other dispositions of inventory in the normal course of business), or
liquidate, dissolve or recapitalize or reorganize in any form of transaction.
(c) Notwithstanding the provisions of Section 6(a), so long as
any Series A Preferred remains outstanding, this corporation shall not, without
first obtaining the affirmative
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<PAGE> 22
vote or written consent of the holders of at least a majority of the outstanding
shares of the Series A Preferred:
(i) increase or decrease (other than by redemption or
conversion) the authorized number of shares of Series A Preferred; or
(ii) take any action that would alter or change the
rights, preferences or privileges of the Series A Preferred.
(d) Notwithstanding the provisions of Section 6(a), so long as
any Series B Preferred remains outstanding, this corporation shall not, without
first obtaining the affirmative vote or written consent of the holders of at
least a majority of the outstanding shares of the Series B Preferred:
(i) increase or decrease (other than by redemption or
conversion) the authorized number of shares of Series B Preferred; or
(ii) take any action that would alter or change the
rights, preferences or privileges of the Series B Preferred.
(e) Notwithstanding the provisions of Section 6(a), so long as
any Series C Preferred remains outstanding, this corporation shall not, without
first obtaining the affirmative vote or written consent of the holders of at
least a majority of the outstanding shares of the Series C Preferred:
(i) increase or decrease (other than by redemption or
conversion) the authorized number of shares of Series C Preferred; or
(ii) take any action that would alter or change the
rights, preferences or privileges of the Series C Preferred.
(f) Notwithstanding the provisions of Section 6(a), so long as
any Series D Preferred remains outstanding, this corporation shall not, without
first obtaining the affirmative vote or written consent of the holders of at
least a majority of the outstanding shares of the Series D Preferred:
(i) increase or decrease (other than by redemption or
conversion) the authorized number of shares of Series D Preferred; or
(ii) take any action that would alter or change the
rights, preferences or privileges of the Series D Preferred.
(g) Notwithstanding the provisions of Section 6(a), so long as
any Series E Preferred remains outstanding, this corporation shall not, without
first obtaining the affirmative vote or written consent of the holders of at
least a majority of the outstanding shares of the Series E Preferred:
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<PAGE> 23
(i) increase or decrease (other than by redemption or
conversion) the authorized number of shares of Series E Preferred; or
(ii) take any action that would alter or change the
rights, preferences or privileges of the Series E Preferred.
Notwithstanding the provisions of Sections 6(a) and 6(b) (but subject to the
provisions of Sections 6(c) through 6(g)), any performance required by the
corporation under the corporation's Fifth Amended and Restated Certificate of
Incorporation may be waived with the affirmative vote or written consent of the
holders of at least 83% of the outstanding shares of Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred and Series E Preferred
voting together as a class on an as-converted basis.
7. Election of Board of Directors. The number of members of the
Corporation's Board of Directors shall be seven (7). The holders of Series C
Preferred Stock, voting as a separate class, shall be entitled to elect one (1)
member of the Corporation's Board of Directors at each meeting or pursuant to
each consent of the Corporation's stockholders for the election of directors,
and to remove from office such director and to fill any vacancy caused by the
resignation, death or removal of such director. The holders of Series E
Preferred Stock, voting as a separate class, shall be entitled to elect one (1)
member of the Corporation's Board of Directors at each meeting or pursuant to
each consent of the Corporation's stockholders for the election of directors,
and to remove from office such director and to fill any vacancy caused by the
resignation, death or removal of such director. The holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Common Stock, voting together as a
class, shall be entitled to elect all remaining members of the Corporation's
Board of Directors at each meeting or pursuant to each consent of the
Corporation's stockholders for the election of directors, and to remove from
office such directors and to fill any vacancy caused by the resignation death or
removal of such directors.
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FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to
the powers and authority expressly conferred upon them by
statute or by this Certificate of Incorporation or the Bylaws of
the Corporation, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be
exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Effective upon the closing of the Corporation's initial public
offering of its common stock, any action required or permitted
to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders. At all times prior to
the closing of the Corporation's initial public offering of its
common stock, any action which may be taken at any annual or
special meeting of stockholders may be taken without a meeting
and without prior notice, if a consent in writing, setting forth
the actions so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes which
would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and
voted. All such consents shall be filed with the Secretary of
the Corporation and shall be maintained in the corporate
records. Prompt notice of the taking of a corporate action
without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in
writing.
D. Special meetings of stockholders of the Corporation may be
called only by either the Board of Directors, the Chairman of
the Board of Directors or the President and Chief Executive
Officer.
SIXTH: A. The number of directors shall initially be seven (7) and
thereafter shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to
the Board of Directors for adoption). Effective upon the closing
of the closing of the Corporation's initial public offering of
its common stock, the Board of Directors shall be divided into
three classes with the term of office of the first class to
expire at the first annual meeting of the stockholders following
the Effective Date, the term of office of the second class to
expire at the second annual meeting of stockholders held
following the Effective Date, the term of office of the third
class to expire at the third annual meeting of
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<PAGE> 25
stockholders following the Effective Date, and thereafter for
each such term to expire at each third succeeding annual meeting
of stockholders after such election. All directors shall hold
office until the expiration of the term for which elected, and
until their respective successors are elected, except in the
case of the death, resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting
from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death,
resignation or other cause (including removal from office by a
vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, or
by the sole remaining director, and directors so chosen shall
hold office for a term expiring at the next annual meeting of
stockholders at which the term of office of the class to which
they have been elected expires, and until their respective
successors are elected, except in the case of the death,
resignation, or removal of any director.
C. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at
least a majority of the voting power of all of the then
outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors, voting together
as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
repeal Bylaws of the Corporation. The stockholders shall also have
power to adopt, amend or repeal the Bylaws of the Corporation. Any
adoption, amendment or repeal of Bylaws of the Corporation by the
stockholders shall require, in addition to any vote of the holders of
any class or series of stock of the Corporation required by law or by
this Certificate of Incorporation, the affirmative vote of the holders
of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involved intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
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<PAGE> 26
Any repeal or modification of the foregoing provisions of this Article
EIGHTH by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights
conferred upon stockholders are granted subject to this reservation;
provided, however, that, notwithstanding any other provision of this
Certificate of Incorporation or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any vote
of the holders of any class or series of the stock of this Corporation
required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 66-2/3% of the voting
power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to
amend or repeal this Article NINTH, Article FIFTH, Article SIXTH,
Article SEVENTH or Article EIGHTH.
[THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Sixth Amended and Restated Certificate of Incorporation
to be signed by its President and attested by its Secretary this ________ day of
____________ 2000.
VIRAGE, INC.
By:
------------------------------------
Paul Lego, President
ATTEST:
- --------------------------------------
Frank Pao, Secretary
<PAGE> 1
EXHIBIT 5.1
[GRAY CARY WARE & FREIDENRICH LLP LETTERHEAD]
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: VIRAGE, INC.
REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
As counsel to Virage, Inc. (the "Company"), we are rendering this
opinion in connection with a proposed sale of those certain shares of the
Company's newly-issued Common Stock as set forth in the Registration Statement
on Form S-1 to which this opinion is being filed as Exhibit 5.1 (the "Shares").
We have examined all instruments, documents and records which we deemed relevant
and necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the Shares
identified in the above-referenced Registration Statement will be, upon
effectiveness of the Registration Statement and receipt by the Company of
payment therefor, validly authorized, legally issued, fully paid, and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
------------------------------------
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
EXHIBIT 10.4
VIRAGE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Virage, Inc. 2000 Employee Stock Purchase
Plan (the "PLAN") is hereby established effective as of the effective date of
the initial registration by the Company of its Stock under Section 12 of the
Securities Exchange Act of 1934, as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of Company and its stockholders by providing an incentive to attract and retain
Eligible Employees of the Participating Company Group and by motivating such
persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly
appointed to administer the Plan and having such powers as specified by the
Board. Unless the powers of the Committee have been specifically limited, the
Committee shall have all of the powers of the Board granted herein, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.
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(d) "COMPANY" means Virage, Inc., a Delaware corporation,
or any successor corporation thereto.
(e) "COMPENSATION" means, with respect to any Offering
Period, base wages or salary, overtime pay, bonuses, commissions, shift
differentials, payments for paid time off, payments in lieu of notice, and any
of such compensation deferred under any program or plan established by a
Participating Company, including, without limitation, pursuant to Section 401(k)
or Section 125 of the Code. Compensation shall be limited to amounts actually
payable in cash directly to the Participant or deferred by the Participant
during the Offering Period. However, notwithstanding the foregoing, Compensation
shall not include sign-on bonuses, payments pursuant to a severance agreement,
termination pay, reimbursements of expenses, allowances, disability pay,
workers' compensation or any amount deemed received without the actual transfer
of cash or any amounts directly or indirectly paid pursuant to the Plan or any
other stock purchase or stock option plan, or any other compensation not
included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while on any military
leave, sick leave, or other bona fide leave of absence approved by the Company
of ninety (90) days or less. If an individual's leave of absence exceeds ninety
(90) days, the individual shall be deemed to have ceased to be an Employee on
the ninety-first (91st) day of such leave unless the individual's right to
reemployment with the Participating Company Group is guaranteed either by
statute or by contract. The Company shall determine in good faith and in the
exercise of its discretion whether an individual has become or has ceased to be
an Employee and the effective date of such individual's employment or
termination of employment, as the case may be. For purposes of an individual's
participation in or other rights, if any, under the Plan as of the time of the
Company's determination, all such determinations by the Company shall be final,
binding and conclusive, notwithstanding that the Company or any governmental
agency subsequently makes a contrary determination.
(h) "ENTRY DATE" means (i) the Offering Date of an
Offering Period, or (ii) with respect to persons who first become Eligible
Employees after the commencement of the Initial Offering Period (as defined in
Section 6.1 below) but prior to the commencement of the final Purchase Period of
the Initial Offering Period, or did not previously elect to participate in the
Initial Offering Period, the first day of the Purchase Period following the date
on which such person becomes an Eligible Employee, or elects to enroll in the
Initial Offering Period, respectively. Notwithstanding the foregoing, in the
event that the Fair Market Value of a share of Stock on the first, second or
third Purchase Date of the Initial Offering Period is less than the Fair Market
Value of a share of Stock on the Entry Date for a Participant who was
participating in the Offering as of such Purchase Date, the Entry Date for such
Participant for the remainder of
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the Offering shall be the first day of the next Purchase Period immediately
following such Purchase Date.
(i) "FAIR MARKET VALUE" means, as of any date:
(i) If the Stock is then listed on a national or
regional securities exchange or market system or is regularly quoted by a
recognized securities dealer, the closing sale price of a share of Stock (or the
mean of the closing bid and asked prices if the Stock is so quoted instead) as
quoted on the Nasdaq National Market, the Nasdaq SmallCap Market or such other
national or regional securities exchange or market system constituting the
primary market for the Stock, or by such recognized securities dealer, as
reported in The Wall Street Journal or such other source as the Company deems
reliable. If the relevant date does not fall on a day on which the Stock has
traded on such securities exchange or market system or has been quoted by such
securities dealer, the date on which the Fair Market Value is established shall
be the last day on which the Stock was so traded or quoted prior to the relevant
date, or such other appropriate day as determined by the Board, in its
discretion.
(ii) If, on the relevant date, the Stock is not
then listed on a national or regional securities exchange or market system or
regularly quoted by a recognized securities dealer, the Fair Market Value of a
share of Stock shall be as determined in good faith by the Board.
(iii) Notwithstanding the foregoing, the Fair
Market Value of a share of Stock on the Effective Date shall be deemed to be the
public offering price set forth in the final prospectus filed with the
Securities and Exchange Commission in connection with the Company's initial
public offering of the Stock.
(j) "OFFERING" means an offering of Stock as provided in
Section 6.
(k) "OFFERING DATE" means, for any Offering, the first day
of the Offering Period.
(l) "OFFERING PERIOD" means a period established in
accordance with Section 6.1.
(m) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee who has
become a participant in an Offering Period in accordance with Section 7 and
remains a participant in accordance with the Plan.
(o) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and
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absolute discretion to determine from time to time which Parent Corporations or
Subsidiary Corporations shall be Participating Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in
time, the Company and all other corporations collectively which are then
Participating Companies.
(q) "PURCHASE DATE" means, for any Purchase Period, the
last day of such period.
(r) "PURCHASE PERIOD" means a period established in
accordance with Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of
Stock may be purchased under the Plan, as determined in accordance with Section
9.
(t) "PURCHASE RIGHT" means an option granted to a
Participant pursuant to the Plan to purchase such shares of Stock as provided in
Section 8, which the Participant may or may not exercise during the Offering
Period in which such option is outstanding. Such option arises from the right of
a Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(u) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(v) "SUBSCRIPTION AGREEMENT" means a written agreement in
such form as specified by the Company, stating an Employee's election to
participate in the Plan and authorizing payroll deductions under the Plan from
the Employee's Compensation.
(w) "SUBSCRIPTION DATE" means the last business day prior
to an Entry Date or such other date as the Company shall establish.
(x) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the administration of the
Plan, or of any Purchase Right shall be
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determined by the Board and shall be final and binding upon all persons having
an interest in the Plan or the Purchase Right. Subject to the provisions of the
Plan, the Board shall determine all of the relevant terms and conditions of
Purchase Rights; provided, however, that all Participants granted Purchase
Rights pursuant to an Offering shall have the same rights and privileges within
the meaning of Section 423(b)(5) of the Code. All expenses incurred in
connection with the administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
3.4 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
4. SHARES SUBJECT TO PLAN.
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4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be 1,100,000, cumulatively increased on April
1, 2001 and each April 1 thereafter until and including April 1, 2010 (the
"ANNUAL INCREASE") by the lesser of (a) 2% of the shares of issued and
outstanding Stock on the immediately preceding March 31, (b) 400,000 shares, or
(c) such lesser number of shares determined by the Board, and shall consist of
authorized but unissued or reacquired shares of Stock, or any combination
thereof. If an outstanding Purchase Right for any reason expires or is
terminated or canceled, the shares of Stock allocable to the unexercised portion
of that Purchase Right shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan, the Annual Increase,
the limit on the shares which may be purchased by any Participant on a Purchase
Date (as described in Section 8.1) and each Purchase Right, and in the Purchase
Price. If a majority of the shares of the same class as the shares subject to
outstanding Purchase Rights are exchanged for, converted into, or otherwise
become (whether or not pursuant to an Ownership Change Event) shares of another
corporation (the "NEW SHARES"), the Board may unilaterally amend the outstanding
Purchase Rights to provide that such Purchase Rights are exercisable for New
Shares. In the event of any such amendment, the number of shares subject to, and
the Purchase Price of, the outstanding Purchase Rights shall be adjusted in a
fair and equitable manner, as determined by the Board, in its discretion.
Notwithstanding the foregoing, any fractional share resulting from an adjustment
pursuant to this Section 4.2 shall be rounded down to the nearest whole number,
and in no event may the Purchase Price be decreased to an amount less than the
par value, if any, of the stock subject to the Purchase Right. The adjustments
determined by the Board pursuant to this Section 4.2 shall be final, binding and
conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except any Employee who is either: (a) customarily
employed by the Participating Company Group for twenty (20) hours or less per
week or (b) customarily employed by the Participating Company Group for not more
than five (5) months in any calendar year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any
provision of the Plan to the contrary, no Employee shall be granted a Purchase
Right under the Plan if, immediately after such grant, the Employee would own or
hold options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this
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Section 5.2, the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS.
(a) INITIAL OFFERING PERIOD. The Plan shall be implemented
by sequential Offerings (an "OFFERING PERIOD"). The first Offering Period shall
commence on the Effective Date and end on the last day of April, 2002 (the
"INITIAL OFFERING PERIOD").
(b) SUBSEQUENT OFFERING PERIODS. After the completion of
the Initial Offering Period, subsequent Offerings shall commence on the first
day of May and November of each year and end on the last day of October and
April, respectively, occurring thereafter, and will have a duration of
approximately six (6) months.
6.2 PURCHASE PERIODS. The Initial Offering Period shall consist
of four (4) consecutive Purchase Periods of approximately six (6) months
duration. Purchase Periods shall commence on the Effective Date, November 1,
2000, May 1, 2001 and November 1, 2001. Purchase Periods beginning on the first
day of May and November shall end on the last day of October and April,
respectively, occurring thereafter. The Purchase Period commencing on the
Effective Date shall end on October 31, 2000.
6.3 DISCRETION TO VARY DURATION. Notwithstanding the foregoing,
the Board may establish a different duration for one or more Offering Periods or
Purchase Periods or different commencing or ending dates for such periods;
provided, however, that no Offering Period may have a duration exceeding
twenty-seven (27) months. If the first or last day of an Offering Period or a
Purchase Period is not a day on which the national securities exchanges or
Nasdaq Stock Market are open for trading, the Company shall specify the trading
day that will be deemed the first or last day, as the case may be, of the
period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for the applicable Entry Date. An Eligible Employee who does not
deliver a properly completed Subscription Agreement to the Company's designated
office on or before the Subscription Date for an Entry Date shall not
participate in the Plan for that Offering Period or for any subsequent Offering
Period unless the Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for a subsequent Entry Date. An Employee who becomes an
Eligible Employee after the Offering Date of an Offering Period (other than the
Initial Offering Period) shall not be eligible to participate in that Offering
Period but may participate in any subsequent Offering Period provided the
Employee is still an Eligible Employee as of the Offering Date of such
subsequent Offering Period.
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7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that the Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 12.1 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below (or
otherwise specified by the Board prior to the Offering Date), on the Offering
Date of each Offering Period, each Participant in such Offering Period shall be
granted automatically, on his or her Entry Date, a Purchase Right consisting of
an option to purchase, on each Purchase Date within such Offering Period, that
number of whole shares of Stock determined by dividing the aggregate payroll
deductions collected from the Participant by the applicable Purchase Price on
such Purchase Date; provided, however, that no Participant may purchase more
than 2,500 shares of Stock on any Purchase Date.
8.2 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Offering Date for such Offering
Period. The limitation described in this Section shall be applied in conformance
with applicable regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired
in an Offering Period upon the exercise of all or any portion of a Purchase
Right shall be established by the Board; provided, however, that the Purchase
Price on each Purchase Date shall not be less than eighty-five percent (85%) of
the lesser of (a) the Fair Market Value of a share of Stock on the Participant's
Entry Date of the Offering Period or (b) the Fair Market Value of a share of
Stock on the Purchase Date. Unless otherwise provided by the Board prior to the
commencement of an Offering Period, the Purchase Price on each Purchase Date
during that Offering Period shall be eighty-five percent (85%) of the lesser of
(a) the Fair Market Value of a share of Stock on the
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Participant's Entry Date of the Offering Period, or (b) the Fair Market Value of
a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set forth
the percentage of the Participant's Compensation to be deducted on each payday
during an Offering Period in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions) or more than ten percent (10%). The Board may change the foregoing
limits on payroll deductions effective as of any Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company's
designated office an amended Subscription Agreement authorizing such change on
or before the Change Notice Date, as defined below. A Participant may elect,
after the first payday of an Offering Period, to decrease the rate of his or her
payroll deductions to zero percent (0%), and shall nevertheless remain a
Participant in the current Offering Period unless such Participant withdraws
from the Plan as provided in Section 12.1. The "CHANGE NOTICE DATE" shall be the
day immediately prior to the beginning of the first pay period for which such
election is to be effective, unless a different date is established by the
Company and announced to the Participants.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company deems advisable to avoid accumulating payroll deductions
in excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted (a) under the Participant's Purchase
Right or (b) during a calendar year under the limit set forth in Section 8.2.
Payroll deductions shall be resumed at the rate specified in the Participant's
then effective Subscription Agreement at the beginning, respectively, of (a) the
next Offering Period, provided that the individual is a Participant in such
Offering Period or (b) the next Purchase Period the Purchase Date of which falls
in the following calendar year, unless the Participant has either withdrawn from
the Plan as provided in Section 12.1 or has ceased to be an Eligible Employee.
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10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall
be maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums
deducted from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company's designated office a written notice on a form
provided by the Company for such purpose. A Participant who withdraws the entire
remaining balance credited to his or her Plan account shall be deemed to have
withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn shall
be returned to the Participant as soon as practicable after the Company's
receipt of the notice of withdrawal and may not be applied to the purchase of
shares in any Offering under the Plan. The Company may from time to time
establish or change limitations on the frequency of withdrawals permitted under
this Section, establish a minimum dollar amount that must be retained in the
Participant's Plan account, or terminate the withdrawal right provided by this
Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date, each
Participant who has not withdrawn from the Plan and whose participation in the
Offering has not otherwise terminated before such Purchase Date shall
automatically acquire pursuant to the exercise of the Participant's Purchase
Right the number of whole shares of Stock determined by dividing (a) the total
amount of the Participant's payroll deductions accumulated in the Participant's
Plan account during the Offering Period and not previously applied toward the
purchase of Stock by (b) the Purchase Price. However, in no event shall the
number of shares purchased by the Participant during an Offering Period exceed
the number of shares subject to the Participant's Purchase Right. No shares of
Stock shall be purchased on a Purchase Date on behalf of a Participant whose
participation in the Offering or the Plan has terminated before such Purchase
Date.
11.2 PRO RATA ALLOCATION OF SHARES. If the number of shares of
Stock which might be purchased by all Participants in the Plan on a Purchase
Date exceeds the number of shares of Stock available in the Plan as provided in
Section 4.1, the Company shall make a pro rata allocation of the remaining
shares in as uniform a manner as practicable and as the Company determines to be
equitable. Any fractional share resulting from such pro rata allocation to any
Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant of a
certificate representing the shares acquired by the Participant on such Purchase
Date; provided that the Company may deliver such shares to a broker designated
by the Company that will hold such shares for the
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benefit of the Participant. Shares to be delivered to a Participant under the
Plan shall be registered in the name of the Participant, or, if requested by the
Participant, in the name of the Participant and his or her spouse, or, if
applicable, in the names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash balance to be returned to a Participant pursuant to the preceding sentence
is less than the amount that would have been necessary to purchase an additional
whole share of Stock on such Purchase Date, the Company may retain the cash
balance in the Participant's Plan account to be applied toward the purchase of
shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right
is exercised, in whole or in part, or at the time a Participant disposes of some
or all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the federal, state, local and foreign tax
withholding obligations, if any, of the Participating Company Group which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 PROVISION OF REPORTS AND STOCKHOLDER INFORMATION TO
PARTICIPANTS. Each Participant who has exercised all or part of his or her
Purchase Right shall receive, as soon as practicable after the Purchase Date, a
report of such Participant's Plan account setting forth the total payroll
deductions accumulated prior to such exercise, the number of shares of Stock
purchased, the Purchase Price for such shares, the date of purchase and the cash
balance, if any, remaining immediately after such purchase that is to be
refunded or retained in the Participant's Plan account pursuant to Section 11.4.
The report required by this Section may be delivered in such form and by such
means, including by electronic transmission, as the Company may determine. In
addition, each Participant shall be provided information concerning the Company
equivalent to that information provided generally to the Company's common
stockholders.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL. A Participant may withdraw from the
Plan by signing and delivering to the Company's designated office a written
notice of withdrawal on a form provided by the Company for this purpose. Such
withdrawal may be elected at any time prior to the end of an Offering Period;
provided, however, that if a Participant withdraws from the Plan after a
Purchase Date, the withdrawal shall not affect shares of Stock acquired by the
Participant on such Purchase Date. A Participant who voluntarily withdraws from
the Plan or an Offering is prohibited from resuming participation in the Plan in
the same Offering from which he or she withdrew, but may participate in any
subsequent Offering by again satisfying the requirements of Sections 5 and 7.1.
The Company may impose, from time to time, a requirement
11
<PAGE> 12
that the notice of withdrawal be on file with the Company's designated office
for a reasonable period prior to the effectiveness of the Participant's
withdrawal.
12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Sections 12.1, the Participant's
accumulated payroll deductions which have not been applied toward the purchase
of shares of Stock shall be refunded to the Participant as soon as practicable
after the withdrawal, without the payment of any interest, and the Participant's
interest in the Plan or the Offering, as applicable, shall terminate. Such
accumulated payroll deductions to be refunded in accordance with this Section
may not be applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or upon the failure of a Participant to remain
an Eligible Employee, the Participant's participation in the Plan shall
terminate immediately. In such event, the Participant's accumulated payroll
deductions which have not been applied toward the purchase of shares shall, as
soon as practicable, be returned to the Participant or, in the case of the
Participant's death, to the Participant's beneficiary designated in accordance
with Section 20, if any, or legal representative, and all of the Participant's
rights under the Plan shall terminate. Interest shall not be paid on sums
returned pursuant to this Section 13. A Participant whose participation has been
so terminated may again become eligible to participate in the Plan by satisfying
the requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without
12
<PAGE> 13
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one or
more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event
of a Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Purchase Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
Neither payroll deductions credited to a Participant's Plan
account nor a Participant's Purchase Right may be assigned, transferred, pledged
or otherwise disposed of in any manner other than as provided by the Plan or by
will or the laws of descent and distribution. (A beneficiary designation
pursuant to Section 20 shall not be treated as a disposition for this purpose.)
Any such attempted assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw from the Plan as provided in Section 12.1. A Purchase Right shall be
exercisable during the lifetime of the Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if the
issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any securities exchange or market system upon which the
Stock may then be listed. In addition, no Purchase Right may be exercised unless
(a) a registration statement under the Securities Act of 1933, as amended, shall
at the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares
13
<PAGE> 14
as to which such requisite authority shall not have been obtained. As a
condition to the exercise of a Purchase Right, the Company may require the
Participant to satisfy any qualifications that may be necessary or appropriate,
to evidence compliance with any applicable law or regulation, and to make any
representation or warranty with respect thereto as may be requested by the
Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue of
the Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present to
the Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
19. NOTIFICATION OF DISPOSITION OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares acquired by exercise of a Purchase
Right. The Company may require that until such time as a Participant disposes of
shares acquired upon exercise of a Purchase Right, the Participant shall hold
all such shares in the Participant's name (or, if elected by the Participant, in
the name of the Participant and his or her spouse but not in the name of any
14
<PAGE> 15
nominee) until the later of two years after the date of grant of such Purchase
Right or one year after the date of exercise of such Purchase Right. The Company
may direct that the certificates evidencing shares acquired by exercise of a
Purchase Right refer to such requirement to give prompt notice of disposition.
20. DESIGNATION OF BENEFICIARY.
20.1 DESIGNATION PROCEDURE. A Participant may file a written
designation of a beneficiary who is to receive (a) shares and cash, if any, from
the Participant's Plan account if the Participant dies subsequent to a Purchase
Date but prior to delivery to the Participant of such shares and cash or (b)
cash, if any, from the Participant's Plan account if the Participant dies prior
to the exercise of the Participant's Purchase Right. If a married Participant
designates a beneficiary other than the Participant's spouse, the effectiveness
of such designation shall be subject to the consent of the Participant's spouse.
A Participant may change his or her beneficiary designation at any time by
written notice to the Company.
20.2 ABSENCE OF BENEFICIARY DESIGNATION. If a Participant dies
without an effective designation pursuant to Section 20.1 of a beneficiary who
is living at the time of the Participant's death, the Company shall deliver any
shares or cash credited to the Participant's Plan account to the Participant's
legal representative.
21. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except
that (a) no such amendment or termination shall affect Purchase Rights
previously granted under the Plan unless expressly provided by the Board and (b)
no such amendment or termination may adversely affect a Purchase Right
previously granted under the Plan without the consent of the Participant, except
to the extent permitted by the Plan or as may be necessary to qualify the Plan
as an employee stock purchase plan pursuant to Section 423 of the Code or to
comply with any applicable law, regulation or rule. In addition, an amendment to
the Plan must be approved by the stockholders of the Company within twelve (12)
months of the adoption of such amendment if such amendment would authorize the
sale of more shares than are then authorized for issuance under the Plan or
would change the definition of the corporations that may be designated by the
Board as Participating Companies.
15
<PAGE> 16
VIRAGE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print):
------------------------------------------------------------
(Last) (First) (Middle)
[ ] Original application for the Offering Period beginning (date):
[ ] Change in payroll deduction rate effective with the pay period ending
(date):
[ ] Change of beneficiary.
I. SUBSCRIPTION
I elect to participate in the 2000 Employee Stock Purchase Plan (the
"PLAN") of Virage, Inc. (the "COMPANY") and to subscribe to purchase shares of
the Company's Common Stock in accordance with this Subscription Agreement and
the Plan.
I authorize payroll deductions of __________ percent (in whole
percentages not less than 1%, unless an election to stop deductions is being
made, or more than 10%) of my "COMPENSATION" on each payday throughout the
"OFFERING PERIOD" in accordance with the Plan. I understand that these payroll
deductions will be accumulated for the purchase of shares of Common Stock at the
applicable purchase price determined in accordance with the Plan. Except as
otherwise provided by the Plan, I will automatically purchase shares on each
"PURCHASE DATE" unless I withdraw from the Offering or the Plan by giving
written notice on a form provided by the Company or unless my eligibility or
employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my eligibility or employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set
forth below. (Shares may be issued in the participant's name alone or together
with the participant's spouse as community property or in joint tenancy.)
NAME(S) (please print):
-------------------------------------------------
ADDRESS:
----------------------------------------------------------------
MY SOCIAL SECURITY NUMBER:
----------------------------------------------
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which arise upon my purchase of
shares under the Plan and/or my disposition of shares. The Company may withhold
from my compensation the amount necessary to meet such withholding obligations.
I agree that, unless otherwise permitted by the Company, until I dispose
of shares I purchase under the Plan, I will hold such shares in the name(s)
entered above (and not in the name of any nominee) until the later of (i) two
years after the first day of the Offering Period in which I purchased the shares
and (ii) one year after the Purchase Date on which I purchased the shares. This
restriction only applies to the name(s) in which shares are held and does not
affect my ability to dispose of Plan shares.
I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF
ANY KIND PRIOR TO THE END OF THE PERIODS
1
<PAGE> 17
REFERRED TO IN THE PRECEDING PARAGRAPH (A "DISQUALIFYING DISPOSITION") OF ANY
SHARES I PURCHASED UNDER THE PLAN. IF I DO NOT RESPOND WITHIN 30 DAYS OF THE
DATE OF A DISQUALIFYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL,
THE COMPANY IS AUTHORIZED TO TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF
A DISQUALIFYING DISPOSITION AND TO COMPUTE AND REPORT TO THE INTERNAL REVENUE
SERVICE THE ORDINARY INCOME I MUST RECOGNIZE UPON SUCH DISQUALIFYING
DISPOSITION.
II. BENEFICIARY DESIGNATION
In the event of my death, I designate the following as my beneficiary to
receive all payments and shares then due me under the Plan:
BENEFICIARY'S NAME (please print):
--------------------------------------
(First) (Middle) (Last)
RELATIONSHIP: SOC. SEC. NO.:
---------------------- ---------------
ADDRESS:
----------------------------------------------------------------
If you are married and your beneficiary is someone other than your
spouse, then your spouse must sign and date this form as indicated below. If you
are not married when you designate a beneficiary and you later become married,
or if you later become married to a different person, the beneficiary
designation previously made will be automatically revoked. Payments and shares
then due you upon your death will be delivered to your legal representative
unless you have completed a new beneficiary designation and it is consented to
by your then spouse.
III. CONSENT OF SPOUSE
I am the spouse of _______________________. I consent to the above
designation of a beneficiary other than me of payments and shares due my spouse
under the Plan.
Date:
-------------------------- ------------------------------------
Signature of Participant's Spouse
IV. PARTICIPANT DECLARATION
Any election I have made on this form revokes all prior elections with
regard to this form.
I am familiar with the provisions of the Plan and agree to participate
in the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan and is subject to the
provisions of the Plan.
Date:
-------------------------- ------------------------------------
Signature of Participant
2
<PAGE> 18
VIRAGE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print):
------------------------------------------------------------
(Last) (First) (Middle)
[ ] Withdrawal from Plan in full.
[ ] Partial withdrawal of payroll deductions from Plan account.
I. WITHDRAWAL IN FULL
I elect to withdraw from the Virage, Inc. 2000 Employee Stock Purchase
Plan (the "PLAN") and the Offering which began on (date) ____________________
and in which I am participating (the "CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
[ ] A. IMMEDIATE TERMINATION. I elect to terminate immediately my
participation in the Current Offering and the Plan. I request that
the Company cease all further payroll deductions under the Plan
(provided I have given sufficient notice before the next payday).
My payroll deductions not previously used to purchase shares
should not be used to purchase shares in the Current --- Offering.
Instead, I request that all such amounts be paid to me as soon as
practicable. I understand that this election immediately
terminates my interest in the Current Offering and in the Plan.
[ ] B. TERMINATION AFTER NEXT PURCHASE. I elect to terminate my
participation in the Plan following my purchase of shares on the
next Purchase Date of the Current Offering. I request that the
Company cease all further payroll deductions under the Plan
(provided I have given sufficient notice before the next payday).
All payroll deductions credited to my Plan account should be used
to purchase shares on the next Purchase Date of the Current
Offering to the extent permitted by the Plan. I understand that
this election will terminate my interest in the Plan immediately
following such purchase. I request that any cash balance remaining
in my Plan account after my purchase of shares be paid to me as
soon as practicable.
I understand that I am terminating my interest in the Plan and that no
further payroll deductions will be made (provided I have given sufficient notice
before the next payday), unless I elect to become a participant in another
Offering by filing a new Subscription Agreement with the Company. I understand
that I will receive no interest on the amounts paid to me from my Plan account,
and that I may not apply such amounts to any other Offering under the Plan or
any other employee stock purchase plan of the Company.
II. PARTIAL WITHDRAWAL OF PAYROLL DEDUCTIONS
Amount of withdrawal requested: $
I request that the above amount not previously used to purchase shares
under the Plan be withdrawn from my Plan account and paid to me as soon as
practicable. If the amount requested constitutes the entire balance of my Plan
account, I understand that I will be treated as having elected to withdraw in
full from the Plan in accordance with alternative A above. I understand that I
will receive no interest on the amounts paid to me from my Plan account and that
I may not apply such amounts to any other Offering under the Plan or any other
employee stock purchase plan of the Company.
Date: Signature:
-------------------------- --------------------------
<PAGE> 1
EXHIBIT 23.3
VERONIS, SUHLER & ASSOCIATES, INC.
350 Park Avenue
New York, NY 10022
Phone 212-935-4990
Fax 212-935-0877
February 4, 2000
Mr. Doug Chu
Credit Suisse First Boston Technology Group
2400 Hanover Street
Palo Alto, CA 94304
Dear Mr. Chu,
We consent to the use of the below fact within SEC documentation. If you have
further questions regarding this research, please fell free to contact me at the
above numbers.
"According to Veronis, Suhler and Associates, the total amount spent on
television and cable advertising in the United States in 1998 was approximately
$49 billion."
Sincerely,
/s/ Veronis Buhler
-----------------------------------
Veronis Buhler
<PAGE> 1
EXHIBIT 23.4
Direct Marketing Association, Inc.
1120 Avenue of the Americas
New York, NY 10036-6700
Tel: 212 768 7277
Fax: 212 302 6714
http://www.thedma.org
February 4, 2000
Mr. Doug Chu
Credit Suisse First Boston Technology Group
2400 Hanover Street
Palo Alto, CA 94304
Dear Mr. Chu,
We consent to the use of the below facts within SEC documentation. If you have
further questions regarding this research, please feel free to contact me at the
above numbers.
"In addition, the Direct Marketing Association estimates that approximately
$105.8 billion of goods and services were purchased through direct response
television programming and advertising in 1999. (Reprinted from Economic Impact:
US Direct and Interactive Marketing Today 1999 with permission from the Direct
Marketing Association, Inc.)"
Sincerely,
/s/ Theresa R. Bartlett
-------------------------------------
Theresa R. Bartlett
Director, Library and Resource Center
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