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Filed Pursuant to rule 424(b)(4)
Registration No. 333-96315
3,500,000 SHARES
[VIRAGE LOGO]
VIRAGE, INC.
Common Stock
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This is our initial public offering. The initial public offering price of
our common stock is $11.00 per share. Our common stock has been approved for
quotation 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.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS VIRAGE
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Per
Share... $11.00 $0.77 $10.23
Total... $38,500,000 $2,695,000 $35,805,000
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Delivery of the shares of common stock will be made on or about July 5,
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 June 28, 2000.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.............. 3
RISK FACTORS.................... 7
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS.... 20
USE OF PROCEEDS................. 21
DIVIDEND POLICY................. 21
CAPITALIZATION.................. 22
DILUTION........................ 24
SELECTED CONSOLIDATED FINANCIAL
DATA.......................... 26
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.................... 27
BUSINESS........................ 39
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MANAGEMENT...................... 57
RELATED PARTY TRANSACTIONS...... 69
PRINCIPAL STOCKHOLDERS.......... 73
DESCRIPTION OF CAPITAL STOCK.... 76
SHARES ELIGIBLE FOR FUTURE
SALE.......................... 80
UNDERWRITING.................... 83
NOTICE TO CANADIAN
RESIDENTS..................... 86
LEGAL MATTERS................... 87
EXPERTS......................... 87
WHERE YOU CAN FIND MORE
INFORMATION................... 88
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.................... F-1
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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 JULY 24, 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.
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PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying notes
appearing elsewhere in this prospectus.
VIRAGE, INC.
Virage is a leading provider of software products and application services
that enable media and entertainment companies, enterprises and consumers to
catalog, manage and distribute their video content over the Internet and
intranets.
We have a proprietary video indexing technology that breaks video into
discrete segments in real time by indexing visual scene changes, spoken words,
names and faces of recognized speakers, topics discussed within each segment and
other important information. This index is time synchronized with video files
that are encoded simultaneously with the indexing process. The indexing and
encoding capabilities of our technology transform video content into a
structured video database that enables content owners and Internet users to
rapidly search, locate and use video content. Our technology allows Internet
users of video content to find, view and share the portions of the video they
want, in a way that is familiar and comfortable to them. To adapt their video
content for these Internet users, owners of video content, including news,
entertainment, sports and educational content, can either license our
VideoLogger, AudioLogger and related products or use our Virage Interactive
application services to convert their video into interactive web content. For
example, a customer may use our application services to enable visitors to its
Internet site to find both articles and video segments on related topics
repurposed from its television programming, corporate or training video, or
other video content. We currently have over 100 customers including media and
entertainment companies, large corporations, educational institutions and
government entities.
Very few communication technologies have had as much of an impact on our
society as video and the Internet. Each of these communication mediums has
touched the lives of hundreds of millions of people and generated billions of
dollars in advertising and commerce revenues. We believe our products and
application services will enable the widespread adoption of video on the
Internet by helping content owners adapt their video content to the Internet and
intranets quickly and cost-effectively.
We enable Internet users to rapidly search, locate and use video content.
By improving the end users' video experience, we increase the value of video
content to content owners by enabling them to use their video in targeted
applications such as advertising and electronic commerce. The key benefits of
our products and services include:
- Improved access to video content. Our video index and search engine allow
users to search for and view desired parts of the video quickly and
easily. Our video database helps Internet site owners automatically
publish video segments throughout their Internet site, based on subject,
keyword or speaker.
- Enhanced user interaction and community building. Our technology
transforms video into indexed segments that Internet users can interact
with and share opinions and recommendations about. Our technology allows
users to email relevant video segments to other users, create personal
portfolios of favorite segments and assemble and share personal playlists
or highlight reels with others. These features enable community building
around video collections by allowing users who are interested in
particular video content to share and interact with other users
concerning this same video.
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- Greater personalization. The indexing and searching of video content
enable our customers to target video segments to particular users by
matching user profiles with information contained in their video
database, thereby providing a highly personalized viewing experience.
- Increased commerce opportunities. Our technology enables customers to
create commerce opportunities around specific video segments, such as
targeted advertising and purchase opportunities associated with a
particular person, object or topic within the video. For example, one
customer uses our Virage Interactive services to first enable Internet
users to search for and watch a video review of particular video games of
interest to the user, and then simultaneously display a banner
advertisement next to this video which the user can click on to purchase
the exact video game which is concurrently being reviewed.
- Expanded syndication abilities. Our technology allows customers to widely
distribute, or syndicate, their indexed video content to other Internet
sites with minimal incremental cost or effort. This syndication of
content provides significant incremental revenue opportunities for video
content owners by increasing the number of potential viewers of their
content. For example, one customer uses our Virage Interactive services
to syndicate a particular piece of its video content for redeployment on
over 20 other websites which paid for the right to this syndicated
content and at the same time expanded the viewership of this content
through their websites.
Our goal is to strengthen our position as a leading provider of products
and application services in the Internet video infrastructure marketplace. To
achieve this objective, our business strategy includes the following key
components:
- Become the standard for deploying, managing and distributing video
content over the Internet and intranets.
- Generate multiple revenue streams through new products and services.
- Empower content providers without competing against them.
- Enhance and leverage our technical leadership position.
- Expand our international presence.
- Pursue strategic relationships and acquisitions.
On March 24, 2000, we entered into an agreement with Thomson Consumer
Electronics, Inc. to sell to it $10.0 million of common stock, with Akamai
Technologies, Inc. to sell to it $3.5 million of common stock, with
RealNetworks, Inc. to sell to it $3.0 million of common stock and with CNET,
Inc. to sell to it $1.5 million of common stock, each sale to be at the initial
public offering price in a private placement that will close concurrently with
this public offering, provided this offering has closed on or before July 23,
2000. Although these shares are not being underwritten, each purchaser will be
granted registration rights to include their shares in any future registered
offerings filed by us. In addition, we also entered into services agreements
with Akamai Technologies and RealNetworks, and amended our video cataloging
services and license agreement with CNET.
We were incorporated in Michigan in April 1994 and reincorporated in
Delaware in March 1995 under the name Virage, Inc. Our principal offices are
located at 177 Bovet Road, Suite 520, San Mateo, California 94402. Our telephone
number is (650) 573-3210. Our website address is located at www.virage.com but
the information on our website does not constitute a part of this prospectus.
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THE OFFERING
Common stock offered by Virage.... 3,500,000 shares
Common stock to be outstanding.... 19,332,524 shares
Use of proceeds................... For general corporate purposes, capital
expenditures and working capital. See "Use of Proceeds" on page 21.
Nasdaq National Market symbol..... VRGE
The number of shares of our common stock outstanding after the offering is
based on shares outstanding as of March 31, 2000 and does not include:
- 3,653,514 shares of common stock issuable upon exercise of outstanding
stock options under our equity incentive plans as of March 31, 2000 at a
weighted-average exercise price of $6.00;
- 3,199,734 shares of common stock reserved and available for issuance
under our equity incentive plans as of March 31, 2000;
- 1,100,000 shares of common stock authorized for our 2000 employee stock
purchase plan; and
- 126,476 shares of common stock subject to warrants at a weighted-average
exercise price of $5.217.
VIRAGE(R), the Virage "V" Logo(R), PINPOINT(R), VIDEOLOGGER(TM),
AUDIOLOGGER(TM), MYLOGGER(TM), VIRAGE INTERACTIVE(TM) and INTERNET VIDEO
GUIDE(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 one-for-two 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 a warrant issued concurrently with this offering of
181,818 shares of common stock at an exercise price of $11.00 per share;
and
- the sale via a private placement concurrent with this offering of
1,636,361 shares of common stock to Akamai Technologies, CNET,
RealNetworks and Thomson Consumer Electronics at a private placement
price of $11.00 per share.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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FISCAL YEARS ENDED MARCH 31,
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1996 1997 1998 1999 2000
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues............................. $ 99 $ 1,445 $ 2,702 $ 3,350 $ 5,561
Gross profit............................... 61 839 1,377 1,668 2,031
Total operating expenses................... 1,607 2,472 5,496 7,960 16,254
Loss from operations....................... (1,546) (1,633) (4,119) (6,292) (14,223)
Net loss applicable to common
stockholders............................. (1,469) (1,599) (4,100) (6,170) (18,419)
Net loss per share applicable to common
stockholders:
basic and diluted........................ $ (1.12) $ (1.44) $ (2.84) $ (3.67) $ (8.06)
Weighted average shares: basic and
diluted.................................. 1,311 1,116 1,443 1,679 2,286
Pro forma net loss per share applicable to
common stockholders:
basic and diluted........................ $ (1.67)
Weighted average shares: basic and
diluted.................................. 11,006
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MARCH 31, 2000
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents........................ $ 10,107 $ 10,107 $ 63,912
Total assets..................................... 18,872 18,872 72,677
Long-term liabilities............................ 83 83 83
Accumulated deficit.............................. (32,300) (32,300) (32,300)
Total stockholders' equity (net capital
deficiency).................................... (23,221) 13,774 67,579
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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.
The pro forma as adjusted data gives effect to the foregoing and to the
following:
- the sale of the 3,500,000 shares of common stock that we are offering
under this prospectus at an initial public offering price of $11.00 per
share and after deducting the underwriting discounts and commissions and
estimated offering expenses;
- the cash exercise of a warrant issued concurrently with the closing of
this offering to purchase 181,818 shares of common stock at an exercise
price of $11.00 per share; and
- the sale of a total of 1,636,361 shares of common stock in a private
placement concurrent with the closing of this offering to Akamai
Technologies, CNET, RealNetworks and Thomson Consumer Electronics at a
private placement price of $11.00 per share.
See "Capitalization" on page 22.
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RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks and uncertainties described below, together with all other
information in this prospectus, before buying shares in this offering.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE ONLY RECENTLY INTRODUCED OUR VIDEO SOFTWARE PRODUCTS AND
APPLICATION SERVICES, WE FACE A NUMBER OF RISKS WHICH MAY SERIOUSLY HARM OUR
BUSINESS.
We incorporated in April 1994 and to date we have generated only limited
revenues. Most of our revenues were generated in the last six quarters. We
introduced our first video software products in December 1997, and our
application services, named Virage Interactive, in May 1999. Because we have a
limited operating history with our video software products and application
services and because our revenue sources may continue to shift as our business
develops, you must consider the risks and difficulties that we may encounter
when making your investment decision. These risks include our ability to:
- expand our customer base;
- increase penetration into key customer accounts;
- maintain our pricing structure;
- develop new video products and application services; and
- adapt our products and services to meet changes in the Internet video
infrastructure marketplace.
If we do not successfully address these risks, our business will be seriously
harmed.
OUR BUSINESS MODEL IS UNPROVEN AND MAY FAIL, WHICH MAY DECREASE SIGNIFICANTLY
THE MARKET PRICE OF OUR COMMON STOCK.
We do not know whether our business model and strategy will be successful.
Our business model is based on the premise that content providers will use our
licensed products and application services to catalog, manage and distribute
their video content over the Internet and intranets. Our potential customers may
elect to rely on their internal resources or on lower priced products and
services that do not offer the full range of functionality offered by our
products and services. If the assumptions underlying our business model are not
valid or if we are unable to implement our business plan, our business will
suffer.
WE HAVE NOT BEEN PROFITABLE AND IF WE DO NOT ACHIEVE PROFITABILITY, OUR BUSINESS
MAY FAIL.
We incurred net losses of $4.1 million in fiscal 1998, $6.2 million in
fiscal 1999 and $13.9 million in fiscal 2000. As of March 31, 2000, our
accumulated deficit was $32.3 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
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on a quarterly or annual basis in the 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 internal organization. Many of these
expenditures are planned or committed in advance in anticipation of future
revenues, and if our revenues in a particular quarter are lower than we
anticipate, we may be unable to reduce spending in that quarter. As a result,
any shortfall in revenues or a failure to improve gross margins would likely
hurt our quarterly operating results.
THE FAILURE OF ANY SIGNIFICANT FUTURE CONTRACTS TO MEET OUR POLICIES FOR
RECOGNIZING REVENUE MAY PREVENT US FROM ACHIEVING OUR REVENUE OBJECTIVES FOR A
QUARTER OR A FISCAL YEAR, WHICH WOULD HURT OUR OPERATING RESULTS.
Our sales contracts are typically based upon standard agreements that meet
our revenue recognition policies. However, our future sales may include site
licenses or other transactions with customers who may negotiate special terms
and conditions that are not part of our standard sales contracts. If these
special terms and conditions cause sales under these contracts to not qualify
under our revenue recognition policies, we would defer revenues to future
periods, which may hurt our reported operating results and cause our stock price
to fall.
THE LENGTH OF OUR SALES AND DEPLOYMENT CYCLE IS UNCERTAIN, WHICH MAY CAUSE OUR
REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER.
During our sales cycle, we spend considerable time and expense providing
information to prospective customers about the use and benefits of our products
and services without generating corresponding revenue. Our expense levels are
relatively fixed in the short term and based in part on our expectations of
future revenues. Therefore, any delay in our sales cycle could cause significant
variations in our operating results, particularly because a relatively small
number of customer orders represents a large portion of our revenues.
Some of our largest sources of revenues are government entities and large
corporations that often require long testing and approval processes before
making a decision to license our products. In general, the process of entering
into a licensing arrangement with a
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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 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.
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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.
WE RELY ON, AND EXPECT TO CONTINUE TO RELY ON, A LIMITED NUMBER OF CUSTOMERS FOR
A SIGNIFICANT PORTION OF OUR REVENUES AND IF ANY OF THESE CUSTOMERS STOPS
LICENSING OUR SOFTWARE OR PURCHASING OUR PRODUCTS AND SERVICES, OUR OPERATING
RESULTS WILL SUFFER.
Historically, a limited number of customers has accounted for a significant
portion of our revenues. For fiscal 2000, Telecinco accounted for 13% of our
revenues and Oracle accounted for 10% of our revenues. In addition, during that
period several U.S. government agencies accounted for 12% of our revenues. We
anticipate that our operating results in any given period will continue to
depend to a significant extent upon revenues from a small number of customers.
We do not have long-term contracts with our customers obligating them to license
our software or purchase our products or services. We cannot be certain that we
will retain our current customers or that we will be able to recruit additional
or replacement customers. If we were to lose one or more customers, our
operating results could be significantly harmed.
ANY FAILURE OF OUR NETWORK COULD LEAD TO SIGNIFICANT DISRUPTIONS IN OUR VIRAGE
INTERACTIVE SERVICES BUSINESS WHICH COULD DAMAGE OUR REPUTATION, REDUCE OUR
REVENUES OR OTHERWISE HARM OUR BUSINESS.
Our Virage Interactive services business is dependent upon providing our
customers with fast, efficient and reliable services. To meet our customers'
requirements, we must protect our network against damage from, among other
things:
- human error;
- physical or electronic security breaches;
- computer viruses;
- fire, earthquake, flood and other natural disasters;
- power loss;
- telecommunications failure; and
- sabotage and vandalism.
Our failure to protect our network against damage from any of these events will
hurt our business.
WE DEPEND ON AN OUTSIDE THIRD PARTY TO MAINTAIN OUR COMMUNICATIONS HARDWARE AND
PERFORM MOST OF OUR COMPUTER HARDWARE OPERATIONS AND IF THIS THIRD PARTY'S
HARDWARE AND OPERATIONS FAIL, OUR REPUTATION AND BUSINESS WILL SUFFER.
Substantially all of our communications hardware and most of our computer
hardware operations are located at Exodus Communications' facility in Santa
Clara, California. We do not have complete backup systems for these operations.
A problem with, or failure of, our communications hardware or operations could
result in interruptions or increases in response times on the Internet sites of
our customers. Furthermore, if Exodus fails to adequately maintain or operate
our communications hardware or does not perform our computer hardware operations
adequately, our services to our customers may not be available. We have
experienced system failures in the past. For example, in October 1999,
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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.
IF WE ARE UNABLE TO SCALE OUR CAPACITY SUFFICIENTLY AS DEMAND FOR OUR SERVICES
INCREASES, WE MAY LOSE CUSTOMERS WHICH WOULD BE DETRIMENTAL TO OUR BUSINESS.
We cannot be certain that if we increase our customers we will be able to
correspondingly increase our personnel and to perform our application services
at satisfactory levels. In addition, our application services may need to
accommodate an increasing volume of traffic. If we are not able to expand our
internal operations to accommodate such an increase in traffic, our customers'
Internet sites may in the future experience slower response times or outages. If
we cannot adequately handle a significant increase in customers or customers'
traffic, we may lose customers or fail to gain new ones, which may reduce our
revenues and harm our business.
IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES TO RESPOND TO RAPID
MARKET CHANGES DUE TO CHANGING TECHNOLOGY AND EVOLVING INDUSTRY STANDARDS, OUR
BUSINESS WILL BE HARMED.
The market for our products and services is characterized by rapidly
changing technology, evolving industry standards, frequent new product and
service introductions and changes in customer demands. The recent growth of
video on the Internet and intense competition in our industry exacerbate these
market characteristics. Our future success will depend to a substantial degree
on our ability to offer products and services that incorporate leading
technology, and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. To succeed, we
must anticipate and adapt to customer requirements in an effective and timely
manner, and offer products and services that meet customer demands. If we fail
to do so, our products and services will not achieve widespread market
acceptance, and we may not generate significant revenues to offset our
development costs, which will hurt our business.
The development of new or enhanced products and services is a complex and
uncertain process that requires the accurate anticipation of technological and
market trends. We may experience design, manufacturing, marketing and other
technological difficulties that could delay our ability to respond to
technological changes, evolving industry standards, competitive developments or
customer requirements. You should additionally be aware that:
- our technology or systems may become obsolete upon the introduction of
alternative technologies, such as products that better manage and search
video content;
- we could incur substantial costs if we need to modify our products and
services to respond to these alternative technologies;
- we may not have sufficient resources to develop or acquire new
technologies or to introduce new products or services capable of
competing with future technologies; and
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- when introducing new or enhanced products or services, we may be unable
to manage effectively the transition from older products and services and
ensure that we can deliver products and services to meet anticipated
customer demand.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, AND THE LOSS OF OR OUR
INABILITY TO MAINTAIN THESE LICENSES COULD RESULT IN INCREASED COSTS OR DELAY
SALES OF OUR PRODUCTS.
We license technology from third parties, including software that is
integrated with internally-developed software and used in our products to
perform key functions. We anticipate that we will continue to license technology
from third parties in the future. This software may not continue to be available
on commercially reasonable terms, if at all. Although we do not believe that we
are substantially dependent on any licensed technology, some of the software we
license from third parties could be difficult for us to replace. The loss of any
of these technology licenses could result in delays in the license of our
products until equivalent technology, if available, is developed or identified,
licensed and integrated. The use of additional third-party software would
require us to negotiate license agreements with other parties, which could
result in higher royalty payments and a loss of product differentiation. In
addition, the effective implementation of our products depends upon the
successful operation of third-party licensed products in conjunction with our
products, and therefore any undetected errors in these licensed products could
prevent the implementation or impair the functionality of our products, delay
new product introductions and/or damage our reputation.
IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL, OUR BUSINESS MAY BE HARMED.
Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, and particularly Paul
Lego, our chief executive officer. The loss of either this individual or other
key employees would likely have an adverse effect on our business. We do not
have employment agreements with most of our senior management team. If one or
more of our senior management team were to resign, the loss could result in loss
of sales, delays in new product development and diversion of management
resources.
BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN PERSONNEL, WHICH COULD IMPACT THE DEVELOPMENT AND ACCEPTANCE
OF OUR PRODUCTS AND SERVICES.
We expect that we will need to hire additional personnel in all functional
areas in the foreseeable future. Competition for personnel throughout our
industry is intense. We may be unable to attract or assimilate other
highly-qualified employees in the future. We have in the past experienced, and
we expect to continue to experience, difficulty in hiring highly-skilled
employees with appropriate qualifications. In addition, new hires frequently
require extensive training before they achieve desired levels of productivity.
Several members of our existing management team have been employed at Virage for
less than one year, including our chief financial officer. We may fail to
attract and retain qualified personnel, which could have a negative impact on
our business.
FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH WOULD BE DETRIMENTAL TO OUR
BUSINESS.
Any growth in our operations will place a significant strain on our
resources. As part of this growth, we will have to implement new operational and
financial systems,
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<PAGE> 13
procedures and controls to expand, train and manage our employee base and to
maintain close coordination among our technical, accounting, finance, marketing,
sales and editorial staffs. We will also need to continue to attract, retain and
integrate personnel in all aspects of our operations. To the extent we acquire
other businesses, we will also need to integrate and assimilate new operations,
technologies and personnel. Failure to manage our growth effectively could hurt
our business.
DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR PRODUCTS WHICH
MAY CAUSE OUR STOCK PRICE TO FALL.
Our software products are complex and may contain errors that may be
detected at any point in the life of the product. We cannot assure you that,
despite testing by us and 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
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<PAGE> 14
license the infringed technology on commercially reasonable terms, our business
and operating results would be significantly harmed.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR COMPETITORS
MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE CUSTOMERS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. Our proprietary rights may not prove viable or of value in the
future since the validity, enforceability and type of protection of proprietary
rights in Internet-related industries are uncertain and still evolving.
Unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult, and while we are unable to determine the
extent to which piracy of our software or code exists, software piracy can be
expected to be a persistent problem. We license our proprietary rights to third
parties, and these licensees may not abide by our compliance and quality control
guidelines or they may take actions that would materially adversely affect us.
In addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States, and effective
patent, copyright, trademark and trade secret protection may not be available in
these foreign jurisdictions. To date, we have not sought protection of our
proprietary rights in any foreign jurisdiction. Our efforts to protect our
intellectual property rights through patent, copyright, trademark and trade
secret laws may not be effective to prevent misappropriation of our technology,
or may not prevent the development and design by others of products or
technologies similar to or competitive with those developed by us. Our failure
or inability to protect our proprietary rights could harm our business.
AS WE EXPAND OUR OPERATIONS INTERNATIONALLY, WE WILL FACE SIGNIFICANT RISKS IN
DOING BUSINESS IN FOREIGN COUNTRIES.
As we expand our operations internationally, we will be subject to a number
of risks associated with international business activities, including:
- costs of customizing our products and services for foreign countries,
including localization, translation and conversion to international and
other foreign technology standards;
- compliance with multiple, conflicting and changing governmental laws and
regulations, including changes in regulatory requirements that may limit
our ability to sell our products and services in particular countries;
- import and export restrictions, tariffs and greater difficulty in
collecting accounts receivable; and
- foreign currency-related risks if a significant portion of our revenues
become denominated in foreign currencies.
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<PAGE> 15
FAILURE TO INCREASE OUR BRAND AWARENESS AMONG CONTENT OWNERS COULD LIMIT OUR
ABILITY TO COMPETE EFFECTIVELY.
We believe that establishing and maintaining a strong brand name is
important to the success of our business. Competitive pressures may require us
to increase our expenses to promote our brand name, and the benefits associated
with brand creation may not outweigh the risks and costs associated with brand
name establishment. Our failure to develop a strong brand name or the incurrence
of excessive costs associated with establishing our brand name, may harm our
business.
WE MAY NEED TO MAKE ACQUISITIONS IN ORDER TO REMAIN COMPETITIVE IN OUR MARKET,
AND POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE.
Although we have no current plans to do so, we may acquire other businesses
in the future in order to remain competitive or to acquire new technologies. As
a result of these acquisitions, we may need to integrate products, technologies,
widely dispersed operations and distinct corporate cultures. The products,
services or technologies of the acquired 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. In May 2000, Intel and
Excalibur announced a relationship pursuant to which Excalibur and a division of
Intel will merge to form a new entity that will focus on providing Internet
video infrastructure. 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
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<PAGE> 16
quickly than current technologies, has only recently been developed and is just
beginning to be deployed. The growth of our business depends in part on the
broad market acceptance of broadband technology. If the market does not adopt
broadband technology, or adopts it more slowly than we anticipate, demand for
our products and services may not grow as quickly as we anticipate, which will
harm our business.
We depend on the efforts of third parties to develop and provide the
technology for broadband transmission. Even if broadband access becomes widely
available, heavy use of the Internet may negatively impact the quality of media
delivered through broadband connections. If these third parties experience
delays or difficulties establishing the technology to support widespread
broadband transmission, or if heavy usage limits the broadband experience, the
market may not accept our products and services.
Because the anticipated growth of our business depends in part on broadband
transmission infrastructure, we are subject to a number of risks, including:
- changes in content delivery methods and protocols;
- the need for continued development by our customers of compelling content
that takes advantage of broadband access and helps drive market
acceptance of our products and services;
- the emergence of new competitors, including traditional broadcast and
cable television companies, which have significant control over access to
content, substantial resources and established relationships with media
providers;
- the development of relationships by our competitors with companies that
have significant access to or control over the broadband transmission
technology or content; and
- the need to establish new relationships with non-PC based providers of
broadband access, such as providers of television set-top boxes and cable
television.
GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT OUR GROWTH.
We are not currently subject to direct regulation by any government agency,
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries may apply to
our products. While there are currently few laws or regulations that
specifically regulate communications or commerce on the Internet, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted in the U.S. and abroad in the near future
with particular applicability to the Internet. It is possible that governments
will enact legislation that may be applicable to us in areas such as content,
network security, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. The
adoption of new laws or the adaptation of existing laws to the Internet may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our services, increase the cost of doing business or otherwise hurt
our business.
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<PAGE> 17
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 was determined by
negotiations between us and the representatives of the underwriters. See
"Underwriting" for a discussion of the factors 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 3,033,700
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 $6.56 per share, a
price well below the 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
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<PAGE> 18
cannot assure you that the price that prevails in the market will not be less
than the initial public offering price, particularly in light of our recent
sales of securities at a lower price.
WE HAVE NO SPECIFIC PLAN FOR ANY SIGNIFICANT PORTION OF THE NET PROCEEDS AND OUR
INVESTMENT OF THE NET PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
We plan to use the proceeds from this offering for working capital and
other general corporate purposes. We may use the proceeds in ways with which you
do not agree or that prove to be disadvantageous to our stockholders. We may not
be able to invest the proceeds of this offering in our operations or external
investments to yield a favorable return.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH IF AVAILABLE, MAY
NOT BE AVAILABLE ON FAVORABLE TERMS, AND WHICH MAY CAUSE DILUTION.
We may need to seek additional funding in the future. We do not know if we
will be able to obtain additional financing on favorable terms, if at all. If we
cannot raise funds on acceptable terms, if and when needed, we may not be able
to develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business. In addition, if we issue equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of existing holders of
common stock.
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 47.3% 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."
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<PAGE> 19
THERE ARE A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that sales may be made, could
cause the market price of our common stock to decline. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional equity securities. Based on shares outstanding as of March 31, 2000,
following this offering, we will have 19,332,524 shares of common stock
outstanding or 19,857,524 shares if the underwriters' over-allotment is
exercised in full. Of these, the 3,500,000 shares sold in this offering and an
additional 84,000 shares will be available for sale immediately and another
13,326,610 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> 20
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> 21
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 $33.8 million, at an 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 $39.2 million. In addition, the net proceeds expected to
be received by us from the sale of a total of 1,636,361 shares of common stock
in a private placement to Akamai Technologies, CNET, RealNetworks and Thomson
Consumer Electronics at a private placement price of $11.00 per share and the
cash exercise of a warrant to purchase 181,818 shares of common stock at an
exercise price of $11.00 per share are estimated to be approximately $20.0
million.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock, to enhance our ability to
acquire other businesses, products or technologies, to invest in additional
research and development to expand sales and marketing initiatives, expand our
Virage Interactive services, and to facilitate future access to public equity
markets. We intend to use the proceeds for working capital, capital expenditures
and other general corporate purposes. We currently have no commitments or
agreements with respect to any acquisitions. Pending our use of the net
proceeds, we intend to invest them in cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all of our future earnings for use in
the development and expansion of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon our financial
condition, operating results and other factors as determined by our board of
directors. Additionally, we have entered into a loan agreement with a creditor
that restricts our ability to pay dividends.
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<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000 on
the following three bases:
- On an actual basis;
- On a pro forma basis to reflect the conversion of all outstanding shares
of our redeemable convertible preferred stock into 10,316,199 shares of
common stock effective automatically upon the closing of this offering;
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 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 10,316,199 shares of common stock effective
automatically upon the closing of this offering, (3) the cash exercise of
a warrant issued concurrently with the closing of this offering to
purchase 181,818 shares of common stock at an exercise price of $11.00
per share, and (4) the sale of a total of 1,636,361 shares of common
stock in a private placement concurrent with the closing of this offering
to Akamai Technologies, CNET, RealNetworks and Thomson Consumer
Electronics at a private placement price of $11.00 per share.
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<PAGE> 23
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>
MARCH 31, 2000
------------------------------------
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............................ $ 83 $ 83 $ 83
Redeemable convertible preferred stock, $0.001 par
value, 11,046,201 shares authorized, 10,316,199
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, 20,000,000
shares authorized, 3,698,146 shares issued and
outstanding, actual; 100,000,000 shares
authorized, 14,014,345 shares issued and
outstanding, pro forma; 100,000,000 shares
authorized, 19,332,524 shares issued and
outstanding, pro forma as adjusted............ 3 14 19
Additional paid-in capital...................... 23,671 60,655 114,455
Deferred compensation........................... (14,595) (14,595) (14,595)
Accumulated deficit............................. (32,300) (32,300) (32,300)
-------- -------- ---------
Total stockholders' equity (net capital
deficiency)................................ (23,221) 13,774 67,579
-------- -------- ---------
Total capitalization..................... $ 13,857 $ 13,857 $ 67,662
======== ======== =========
</TABLE>
The table excludes the following shares:
- 3,653,514 shares of common stock issuable upon exercise of outstanding
stock options under our equity incentive plans as of March 31, 2000 at a
weighted-average exercise price of $6.00;
- 3,199,734 shares of common stock reserved and available for issuance
under our equity incentive plans as of March 31, 2000;
- 1,100,000 shares of common stock authorized for our 2000 employee stock
purchase plan; and
- 126,476 shares of common stock subject to warrants at a weighted-average
exercise price of $5.217.
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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, divided by
- the number of outstanding shares of common stock after the offering,
which will include 10,316,199 shares of common stock from the conversion
of preferred stock upon consummation of this offering.
Our pro forma net tangible book value as of March 31, 2000 was
approximately $13.0 million or $0.93 per share of common stock.
The pro forma as adjusted net tangible book value per share takes into
account the foregoing and the following:
- the estimated net proceeds from this offering based upon an initial
public offering price of $11.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses;
- the cash exercise of a warrant issued concurrently with the closing of
this offering to purchase 181,818 shares of common stock at an exercise
price of $11.00 per share; and
- the sale of a total of 1,636,361 shares of common stock in a private
placement concurrent with the closing of this offering to Akamai
Technologies, CNET, RealNetworks and Thomson Consumer Electronics at a
private placement price of $11.00 per share.
Our pro forma as adjusted net tangible book value as of March 31, 2000
would have been approximately $66.8 million, or $3.46 per share of common stock.
This represents an immediate increase in pro forma as adjusted net tangible book
value of $2.53 per share to existing stockholders and an immediate dilution of
$7.54 per share to investors purchasing common stock in this offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $11.00
Pro forma net tangible book value per share as of March
31, 2000............................................... $0.93
Increase per share attributable to new investors.......... 2.53
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................ 3.46
------
Dilution per share to new investors......................... $ 7.54
======
</TABLE>
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The following table summarizes as of March 31, 2000, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by existing
stockholders, by investors purchasing shares of common stock in this offering,
before deducting the estimated underwriting discounts and commissions and
estimated offering expenses, by investors in a private placement that occurred
concurrently with this offering and by a warrantholder that was exercised
concurrently with this offering. Additionally, as detailed below, new investors
purchasing shares in this offering at the initial public offering price will
contribute 39% of the total consideration paid to us but will own only 18% 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..... 14,014,345 73% $39,842,263 41% $ 2.84
New investors............. 3,500,000 18% 38,500,000 39% 11.00
Private placement
investors............... 1,636,361 8% 17,999,971 18% 11.00
Warrantholder............. 181,818 1% 1,999,998 2% 11.00
----------- --- ----------- ---
Total................... 19,332,524 100% $98,342,232 100%
=========== === =========== ===
</TABLE>
Except as noted above, the foregoing discussion and tables assume no
exercise of any stock options or warrants outstanding at March 31, 2000. As of
March 31, 2000, there were options outstanding to purchase 3,653,514 shares of
common stock at a weighted-average exercise price of $6.00 and warrants to
purchase 126,476 shares of common stock at a weighted average exercise price of
$5.217. In addition, 1,100,000 shares of common stock are authorized for our
2000 employee stock purchase plan. To the extent that any of these options are
exercised or shares are issued, there will be further dilution to investors
purchasing our common stock.
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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, 1998, 1999 and 2000 and
the consolidated balance sheet data at March 31, 1999 and 2000 are derived from,
and are qualified by reference to, the audited Consolidated Financial Statements
and Notes thereto appearing elsewhere in this prospectus. The statements of
operations data for the fiscal years ended March 31, 1996 and 1997 and the
balance sheet data as of March 31, 1996, 1997 and 1998 are derived from, and are
qualified by reference to, financial statements not appearing in this
prospectus. Historical results are not necessarily indicative of results that
may be expected for any future period.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
MARCH 31,
------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License revenues.......................................... $ 35 $ 376 $ 1,438 $ 1,956 $ 4,188
Service revenues.......................................... -- 43 130 253 1,102
Other revenues............................................ 64 1,026 1,134 1,141 271
------- ------- ------- ------- --------
Total revenues..................................... 99 1,445 2,702 3,350 5,561
Cost of revenues:
License revenues.......................................... -- -- 454 397 870
Service revenues.......................................... -- 22 62 426 2,400
Other revenues............................................ 38 584 809 859 260
------- ------- ------- ------- --------
Total cost of revenues............................. 38 606 1,325 1,682 3,530
Gross profit................................................ 61 839 1,377 1,668 2,031
Operating expenses:
Research and development.................................. 969 758 1,751 2,325 4,182
Sales and marketing....................................... 210 1,020 2,810 4,362 8,349
General and administrative................................ 428 694 935 1,273 2,653
Stock-based compensation.................................. -- -- -- -- 1,070
------- ------- ------- ------- --------
Total operating expenses........................... 1,607 2,472 5,496 7,960 16,254
Loss from operations........................................ (1,546) (1,633) (4,119) (6,292) (14,223)
Interest and other income, net.............................. 78 34 19 122 384
------- ------- ------- ------- --------
Loss before income taxes.................................... (1,468) (1,599) (4,100) (6,170) (13,839)
Provision for income taxes.................................. (1) -- -- -- (36)
------- ------- ------- ------- --------
Net loss.................................................... (1,469) (1,599) (4,100) (6,170) (13,875)
Series E convertible preferred stock dividend............... -- -- -- -- (4,544)
------- ------- ------- ------- --------
Net loss applicable to common stockholders.................. $(1,469) $(1,599) $(4,100) $(6,170) $(18,419)
======= ======= ======= ======= ========
Basic and diluted net loss per share applicable to common
stockholders.............................................. $ (1.12) $ (1.44) $ (2.84) $ (3.67) $ (8.06)
======= ======= ======= ======= ========
Shares used in computation of basic and diluted net loss per
share applicable to common stockholders................... 1,311 1,116 1,443 1,679 2,286
Pro forma basic and diluted net loss per share applicable to
common stockholders....................................... $ (1.67)
========
Shares used to compute pro forma basic and diluted net loss
per share applicable to common stockholders............... 11,006
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................... $ 774 $ 2,387 $ 5,780 $ 4,357 $ 10,107
Working capital............................................. 643 2,273 4,723 3,879 8,101
Total assets................................................ 1,228 3,418 7,289 6,605 18,872
Long-term obligations, net of current portion............... 46 163 311 241 83
Redeemable convertible preferred stock...................... 2,449 5,823 12,472 17,936 36,995
Accumulated deficit......................................... (2,013) (3,612) (7,712) (13,881) (32,300)
Total stockholders' equity (net capital deficiency)......... (1,642) (3,224) (7,257) (13,326) (23,221)
</TABLE>
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes
included elsewhere in this prospectus. In addition to historical information,
the discussion in this prospectus contains certain forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated by these forward-looking statements due to factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Virage is a leading provider of software products and application services
that enable owners of video content to catalog, manage and distribute their
video assets over the Internet and corporate intranets. Depending on their
particular needs and resources, these video content owners may elect either to
license our software products or to subscribe to our application services. Our
customers include media and entertainment companies, other corporations,
government agencies and educational institutions. As of March 31, 2000, over 100
customers had purchased our software products or application services.
During the period from our inception in April 1994 through February 1996,
we were a development stage enterprise and had no revenues. Our operating
activities during this period related primarily to developing products, building
our corporate operations and raising capital. In November 1995, we released our
first version of software for still image search. In December 1997, we started
shipping VideoLogger, the first of our video and audio indexing products. To
date, we have derived substantially all of our revenues from these product lines
and related services. In May 1999, we launched Virage Interactive services, an
application services offering which allows our customers to outsource the
deployment, management and distribution of their video content over the Internet
and intranets.
REVENUE RECOGNITION
We enter into arrangements for the sale of licenses of software products
and related maintenance contracts and Virage Interactive service offerings; and
we receive revenues under U.S. government agency research grants. Service
revenues include revenues from maintenance contracts and Virage Interactive
services. Other revenues are primarily U.S. government agency research grants.
Our revenue recognition policy is in accordance with the American Institute
of Certified Public Accountants, or AICPA's, Statement of Position No. 97-2, or
SOP 97-2, "Software Revenue Recognition," as amended by Statement of Position
No. 98-4, "Deferral of the Effective Date of SOP 97-2, "Software Revenue
Recognition," " or SOP 98-4, and Statement of Position No. 98-9, "Modification
of SOP No. 97-2 with Respect to Certain Transactions" or SOP 98-9. For each
arrangement, we determine whether evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable, and collection is probable. If
any of these criteria are not met, revenue recognition is deferred until such
time as all of the criteria are met. We consider all arrangements with payment
terms extending beyond twelve months and other arrangements with payment terms
longer
27
<PAGE> 28
than normal not to be fixed or determinable. If collectibility is not considered
probable, revenue is recognized when the fee is collected provided all other
criteria are met. No customer has the right of return.
Arrangements consisting of license and maintenance. For those contracts
that consist solely of license and maintenance, we recognize license revenues
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 ten 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 a per copy basis for
licensed software when each copy of the license requested by the customer is
delivered. Revenue is recognized on licensed software on a per user or per
server basis for a fixed fee when the product master is delivered to the
customer. There is no right of return or price protection for sales to domestic
and international distributors, system integrators, or value added resellers. In
situations where the distributor, integrator or reseller has a purchase order
from the end user that is immediately deliverable, we recognize revenue on
shipment to the distributor, integrator or reseller, if other criteria in SOP
97-2 are met, since we have no risk of concessions. We defer revenues on
shipments to distributors, integrators or resellers if the party does not have a
purchase order from an end user that is immediately deliverable or if other
criteria in SOP 97-2 are not met. 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 revenues 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 each 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.
Cost of license revenues consist primarily 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
28
<PAGE> 29
revenues includes engineering personnel expenses and related overhead for custom
engineering and government projects.
We incurred net losses of approximately $4.1 million in fiscal 1998, $6.2
million in fiscal 1999 and $13.9 million in fiscal 2000. In addition, during the
year ended March 31, 2000, we recorded a $4.5 million dividend to the 28
accredited investors who purchased our series E preferred stock in December
1999. This dividend represents the difference between the purchase price and the
deemed fair value of those shares at the time of issuance. This deemed dividend
brought the net loss applicable to common stockholders in fiscal 2000 to $18.4
million. As of March 31, 2000, we had an accumulated deficit of $32.3 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>
FISCAL YEARS ENDED
MARCH 31,
--------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenues:
License revenues.............................. 53% 58% 75%
Service revenues.............................. 5 8 20
Other revenues................................ 42 34 5
---- ---- ----
Total revenues........................ 100 100 100
---- ---- ----
Cost of revenues:
License revenues.............................. 17 12 16
Service revenues.............................. 2 13 43
Other revenues................................ 30 26 5
---- ---- ----
Total cost of revenues................ 49 51 64
---- ---- ----
Gross profit.................................... 51 49 36
Operating expenses:
Research and development...................... 65 69 75
Sales and marketing........................... 104 130 150
General and administrative.................... 35 38 48
Stock-based compensation...................... -- -- 19
---- ---- ----
Total operating expenses.............. 204 237 292
---- ---- ----
Loss from operations............................ (153) (188) (256)
Interest and other income, net.................. 1 4 7
---- ---- ----
Loss before income taxes........................ (152) (184) (249)
Provision for income taxes...................... -- -- --
---- ---- ----
Net loss........................................ (152) (184) (249)
Series E convertible preferred stock dividend... -- -- (82)
---- ---- ----
Net loss applicable to common stockholders...... (152)% (184)% (331)%
==== ==== ====
</TABLE>
29
<PAGE> 30
FISCAL YEARS ENDED MARCH 31, 1999 AND 2000
Total Revenues. Total revenues increased from $3.4 million in fiscal 1999
to $5.6 million in fiscal 2000, an increase of $2.2 million. This increase was
due to increases in license and service revenues, offset by a decrease in other
revenues. International revenues increased from $358,000, or 11% of total
revenues, in fiscal 1999 to $1.2 million, or 22% of total revenues, in fiscal
2000. Sales to our largest customer accounted for 13% of total revenues in
fiscal 1999. In addition, sales to our two largest customers accounted for 13%
and 10%, respectively, of total revenues in fiscal 2000. Sales to agencies of
the U.S. government accounted for 40% of total revenues in fiscal 1999 and 12%
of total revenues in fiscal 2000. Sales of licenses and services to agencies of
the U.S. government, excluding other revenues, accounted for 27% of total
revenues in fiscal 1999 and 8% of total revenues in fiscal 2000.
License revenues increased from $2.0 million in fiscal 1999 to $4.2 million
in fiscal 2000, an increase of $2.2 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 $253,000 in fiscal 1999 to $1.1 million in
fiscal 2000, an increase of $849,000. Approximately 46% 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 $1.1 million in fiscal 1999 to $271,000 in
fiscal 2000, a decrease of $870,000. The majority of this decrease was
attributable to the level of engineering services performed for the federal
government with the remainder of the decrease being attributable to a lower
amount of engineering services performed for customers.
Total Cost of Revenues. Total cost of revenues increased from $1.7 million,
or 51% of total revenues, in fiscal 1999 to $3.5 million, or 64% of total
revenues, in fiscal 2000. 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 $397,000, or 20% of license
revenues, in fiscal 1999 to $870,000, or 21% of license revenues, in fiscal
2000. This increase in absolute dollars was due to royalty payments for new
licensed technologies which first became payable by us during fiscal 2000.
Cost of service revenues increased from $426,000, or 168% of service
revenues, in fiscal 1999 to $2.4 million, or 218% of service revenues in fiscal
2000. Over 95% 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, and margins on our service revenues to remain negative for the next
several quarters as we expand our Virage Interactive services.
Cost of other revenues decreased from $859,000, or 75% of other revenues,
in fiscal 1999 to $260,000, or 96% of other revenues, in fiscal 2000. 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 $2.3 million, or 69% of total
revenues, in fiscal 1999
30
<PAGE> 31
to $4.2 million, or 75% of total revenues, in fiscal 2000. The increase in
absolute dollars was due to an increase in our research and development staff.
We expect research and development expenses to increase 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 as they have been insignificant.
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 $4.4 million, or 130% of total
revenues, in fiscal 1999 to $8.3 million, or 150% of total revenues, in fiscal
2000. Approximately half of this increase in absolute dollars was due to growth
in our sales and marketing personnel 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 our Virage Interactive services offering in May 1999. We expect sales
and marketing expenses to increase 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, 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 $1.3 million, or 38% of total revenues,
in fiscal 1999 to $2.7 million, or 48% of total revenues, in fiscal 2000. The
significant majority of this increase was due to an increase in headcount, with
the remainder due to increased external legal and audit costs. We expect general
and administrative expenses to increase 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. Stock-based compensation expense
represents the amortization of deferred compensation, calculated as the
difference between the exercise price of stock options granted to our employees
and the then deemed fair value of our common stock, for stock options granted to
our employees. We recognized stock-based compensation expense of $1.1 million in
fiscal 2000 in connection with the granting of stock options to our employees.
We did not recognize any stock-based compensation expense in fiscal 1999.
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 $122,000 in
fiscal 1999 to $384,000 in fiscal 2000, an increase of $262,000. 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
31
<PAGE> 32
result of uncertainties regarding the realization of the asset balance through
future taxable profits.
FISCAL YEARS ENDED MARCH 31, 1998 AND 1999
Total Revenues. Total revenues increased from $2.7 million in fiscal 1998
to $3.4 million in fiscal 1999, representing an increase of $648,000. License
revenues, as a percentage of total revenues, increased from 53% in fiscal 1998
to 58% in fiscal 1999. Service revenues, as a percentage of total revenues,
increased from 5% in fiscal 1998 to 8% in fiscal 1999. Other revenues, as a
percentage of total revenues, decreased from 42% in fiscal 1998 to 34% in fiscal
1999.
License revenues increased from $1.4 million in fiscal 1998 to $2.0 million
in fiscal 1999, representing an increase of $518,000. 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 $130,000 in fiscal 1998 to $253,000 in
fiscal 1999, representing an increase of $123,000. The increases were due to a
rise in the number of customers purchasing maintenance and support contracts.
Other revenues remained relatively constant at $1.1 million in fiscal 1998
and fiscal 1999 due to a relatively consistent amount of government contract
work during these periods.
Total Cost of Revenues. Total cost of revenues increased from $1.3 million
in fiscal 1998 to $1.7 million in fiscal 1999. The total cost of revenues, as a
percentage of total revenues, was 49% in fiscal 1998 and 51% in fiscal 1999.
Cost of license revenues decreased 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.
Cost of service revenues increased from $62,000 in fiscal 1998 to $426,000
in fiscal 1999. The cost of service revenues, as a percentage of service
revenues, was 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 $809,000 in fiscal 1998 to $859,000
in fiscal 1999. Cost of other revenues, as a percentage of other revenues, was
71% in fiscal 1998 and 75% in fiscal 1999.
Research and Development Expenses. Research and development expenses
increased from $1.8 million in fiscal 1998 to $2.3 million in fiscal 1999.
Research and development expenses, as a percentage of total revenues, were 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.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$2.8 million in fiscal 1998 to $4.4 million in fiscal 1999. Sales and marketing
expenses, as a percentage of total revenues, were 104% in fiscal 1998 and 130%
in fiscal 1999. Approximately two-thirds of the increase was due to an increase
in marketing spending for
32
<PAGE> 33
trade shows, promotional events, lead generation and other marketing related
programs, while the remainder was due to increased personnel.
General and Administrative Expenses. General and administrative expenses
increased from $935,000 in fiscal 1998 to $1.3 million in fiscal 1999. General
and administrative expenses, as a percentage of total revenues, were 35% for
fiscal 1998 and 38% for fiscal 1999. The absolute dollar increase was about
one-half attributable to increased staff and one-half attributable to increased
legal and audit costs.
Interest and Other Income, Net. Interest and other income, net was $19,000
in fiscal 1998 and $122,000 in fiscal 1999, reflecting an increase in average
cash balances during fiscal 1999.
33
<PAGE> 34
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the eight
quarters in the period ended March 31, 2000. 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, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
License revenues.......... $ 386 $ 417 $ 500 $ 653 $ 1,009 $ 951 $ 1,184 $ 1,044
Service revenues.......... 37 56 62 98 88 199 291 524
Other revenues............ 277 428 160 276 61 31 73 106
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.......... 700 901 722 1,027 1,158 1,181 1,548 1,674
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License revenues.......... 75 101 111 110 177 188 321 184
Service revenues.......... 86 107 99 134 161 327 708 1,204
Other revenues............ 254 251 152 202 42 56 74 88
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 415 459 362 446 380 571 1,103 1,476
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ 285 442 360 581 778 610 445 198
Operating expenses:
Research and
development............. 517 542 641 625 750 790 1,114 1,528
Sales and marketing....... 1,042 949 1,067 1,304 1,814 1,375 1,906 3,254
General and
administrative.......... 232 289 299 453 437 535 594 1,087
Stock-based
compensation............ -- -- -- -- 41 53 219 757
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,791 1,780 2,007 2,382 3,042 2,753 3,833 6,626
Loss from operations........ (1,506) (1,338) (1,647) (1,801) (2,264) (2,143) (3,388) (6,428)
Interest and other income,
net....................... 60 37 16 9 32 13 178 161
------- ------- ------- ------- ------- ------- ------- -------
Loss before income taxes.... (1,446) (1,301) (1,631) (1,792) (2,232) (2,130) (3,210) (6,267)
Provision for income
taxes..................... -- -- -- -- -- -- (36) --
------- ------- ------- ------- ------- ------- ------- -------
Net loss.................... (1,446) (1,301) (1,631) (1,792) (2,232) (2,130) (3,246) (6,267)
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) $(6,267)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL
REVENUES:
Revenues:
License revenues.......... 55% 46% 70% 63% 87% 80% 76% 63%
Service revenues.......... 5 6 8 10 8 17 19 31
Other revenues............ 40 48 22 27 5 3 5 6
---- ---- ---- ---- ---- ---- ---- ----
Total revenues.......... 100 100 100 100 100 100 100 100
---- ---- ---- ---- ---- ---- ---- ----
Cost of revenues:
License revenues.......... 11 11 15 11 15 16 21 11
Service revenues.......... 12 12 14 13 14 28 46 72
Other revenues............ 36 28 21 20 4 5 5 5
---- ---- ---- ---- ---- ---- ---- ----
Total cost of
revenues.............. 59 51 50 44 33 49 72 88
---- ---- ---- ---- ---- ---- ---- ----
Gross profit................ 41 49 50 56 67 51 28 12
Operating expenses:
Research and
development............. 74 60 89 61 65 67 72 91
Sales and marketing....... 149 105 148 127 157 116 123 195
General and
administrative.......... 33 32 41 44 38 45 38 65
Stock-based
compensation............ -- -- -- -- 3 4 14 45
---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses.............. 256 197 278 232 263 232 247 396
Loss from operations........ (215) (148) (228) (176) (196) (181) (219) (384)
Interest and other income,
net....................... 8 4 2 1 3 1 11 10
---- ---- ---- ---- ---- ---- ---- ----
Loss before income taxes.... (207) (144) (226) (175) (193) (180) (208) (374)
Provision for income
taxes..................... -- -- -- -- -- -- (2) --
---- ---- ---- ---- ---- ---- ---- ----
Net loss.................... (207) (144) (226) (175) (193) (180) (210) (374)
Series E convertible
preferred stock
dividend.................. -- -- -- -- -- -- (293) --
---- ---- ---- ---- ---- ---- ---- ----
Net loss applicable to
common stockholders....... (207)% (144)% (226)% (175)% (193)% (180)% (503)% (374)%
==== ==== ==== ==== ==== ==== ==== ====
</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 quarters ended September 30, 1999 and March 31, 2000, when license revenues
decreased 6% and 12% from the prior quarters ended June 30, 1999 and December
31, 1999, respectively. License revenues in the quarter ended June 30, 1999
included large license fees for our visual information retrieval, or VIR,
software from one customer. License revenues in the quarter ended December 31,
1999 included large license fees for certain database plug-in modules sold to
customers to enhance our VideoLogger product's functionality, none of which were
sold during the quarter ended March 31, 2000. These large license fees made
license revenues for the quarters ended June 30, 1999 and December 31, 1999
larger than each respective quarter that followed. 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 cost of service revenues significantly increased both in actual
dollars and as a percentage of total revenues beginning in the quarter ended
September 30, 1999 as a result of the introduction of our Virage Interactive
services offering in May 1999. We expect our cost of service revenues to
35
<PAGE> 36
increase and margins on our service revenues to remain negative for the next
several quarters as we expand our Virage Interactive services. In addition, our
costs can fluctuate each quarter based upon the level of related revenues and
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 that
can fluctuate significantly from quarter 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 March 31, 2000, we had cash and cash equivalents of $10.1 million, an
increase of $5.8 million in cash and cash equivalents held as of March 31, 1999.
Our working capital, defined as current assets less current liabilities, at
March 31, 2000 was $8.1 million, an increase of $4.2 million in working capital
from March 31, 1999. The increase in our working capital is attributable to the
increase in cash from the sales of our equity securities and the increase in our
accounts receivable balance resulting from higher total revenues both in the
three months and in the year ended March 31, 2000 in comparison to the
comparable fiscal 1999 periods, respectively. For the year ended March 31, 2000,
we had used cash of $10.3 million in our operating activities. Management
believes that, to the extent existing resources and anticipated total revenues
are insufficient to fund our planned activities, additional debt or equity
financing will be available from existing investors and other parties.
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 March 31, 2000, no balance was outstanding under this line of
credit and we had available $1.3 million based on eligible receivables. In May
2000, we withdrew approximately $806,000 under the senior line of credit
facility. This line of credit is secured by accounts
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receivable and other assets. We have two equipment term loans with a bank
totaling $241,000 at March 31, 2000 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 $3.4 million in
fiscal 1998, $6.0 million in fiscal 1999 and $10.3 million in fiscal 2000. The
cash used in these periods was primarily attributable to net losses of $4.1
million in fiscal 1998, $6.2 million in fiscal 1999, and $13.9 million in fiscal
2000.
Investing activities resulted in cash outflows of $559,000 in fiscal 1998,
$554,000 in fiscal 1999, and $4.0 million in fiscal 2000. With the exception of
an increase in restricted investments of $2.0 million during fiscal 2000, 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.
Financing activities provided cash of $7.4 million in fiscal 1998, $5.1
million in fiscal 1999, and $20.1 million in fiscal 2000. These amounts were
almost entirely proceeds from the sales of preferred and common stock.
We currently anticipate that the net proceeds from this offering and the
proceeds from the concurrent private placement, together with our current cash,
cash equivalents and available credit facilities, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. However, we may need to raise additional funds in future
periods through public or private financings, or other sources, to fund our
operations and potential acquisitions, if any, until we achieve profitability,
if ever. We may not be able to obtain adequate or favorable financing at that
time. Failure to raise capital when needed could harm our business. If we raise
additional funds through the issuance of equity securities, the percentage of
ownership of our stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our common
stock.
YEAR 2000 READINESS DISCLOSURE
To date, we have not experienced any disruption in our products or services
as a result of, nor has any third-party vendor on which we depend been affected
by, the commencement of the year 2000. Although we do not anticipate that our
products and services will be affected by the year 2000, if we, or our
third-party providers, fail to remedy any year 2000 issues, the result could be
lost revenues, increased operating expenses, the loss of customers and other
business interruptions, any of which could harm our business. The failure to
adequately address year 2000 compliance issues in the delivery of products and
services to our customers could result in claims against us of breach of
contract and related litigation, any of which could be costly and time consuming
to defend.
In light of our experiences to date, we have not developed any specific
contingency plans for year 2000 issues. Our worst case scenario for year 2000
problems would be our inability to provide our products and services to our
customers and a resultant decline in our total revenues.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
We develop products in the United States. We license our products from the
United States and from our subsidiary in the United Kingdom. Substantially all
of our sales from
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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 2000, our
cash and cash equivalents consisted primarily of demand deposits, money market
funds and commercial paper.
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, 2002. 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
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BUSINESS
OVERVIEW
Virage is a leading provider of software products and application services
that enable media and entertainment companies, enterprises and consumers to
catalog, manage and distribute their video content over the Internet and
intranets. We have a proprietary video indexing technology that transforms
analog and digital video content into a structured video database that is
designed for use on Internet sites. Owners of video content can leverage our
technology either by licensing our products or by employing our application
services to outsource their needs. We currently have over 100 customers
including media and entertainment corporations such as ABC News, CNN and The
Walt Disney Co., corporations such as Boeing, CNET and Yahoo!, educational
institutions such as Harvard Business School and government entities such as the
FBI and the Library of Congress.
INDUSTRY BACKGROUND
THE CONVERGENCE OF VIDEO AND THE INTERNET
Very few communication technologies have had as much of an impact on our
society as video and the Internet. Both of these technologies have touched the
lives of hundreds of millions of people and generated billions of dollars in
advertising and commerce revenues. Due to high technical barriers, these two
technologies existed independently of each other until recently. Significant
investments in and improvements to technology are now driving these two
technologies toward convergence.
Video is one of the most ubiquitous and effective communication mediums
across media and entertainment, enterprise and consumer markets today.
Television and film production have generated millions of hours of video content
over the last twenty years. This content and the audience communities
surrounding it attract significant advertising and commerce dollars. According
to Veronis Suhler and Associates, a research and consulting firm, the total
amount spent on television advertising in the United States in 1998 was
approximately $49 billion. In addition, according to the Direct Marketing
Association, an independent interactive and database marketing trade
association, approximately $106 billion of goods and services were purchased
through direct response television programming and advertising in 1998.
Enterprises, including corporations, government entities and universities,
produce video for a variety of applications, such as sales and marketing,
training, education, decision support and employee and customer communications.
For example, Lockheed Martin Corporation maintains over 300,000 hours of video
in its corporate archive. Additionally, consumers use video to document and
record the important events of their lives.
The Internet has grown rapidly in recent years and, much like video, has
emerged as a mass-market communications medium, enabling millions of users to
obtain information, interact with each other and buy and sell goods and
services. This growth is being driven by an increasing number of users, fast and
inexpensive Internet access, advances in computer technology and improvements in
network technology. The Internet has evolved into an interactive and searchable
medium, offering a highly engaging experience and allowing users broad access to
a wide variety of content. Organizations are learning to take advantage of these
aspects of the Internet to improve communications with their customers and
increase revenue opportunities through electronic commerce.
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Until recently, video and the Internet had developed independently.
Technical limitations of broadcast, cable and satellite video distribution
resulted in one-way non-interactive delivery of information. Similarly,
bandwidth constraints prevented the effective transmission of video over the
Internet, resulting in a static environment of text-based web pages. Video and
the Internet are now converging, enabled by significant investment and technical
trends including digital video compression and playback, broadband Internet
access and content caching and delivery technologies. Many companies are
leveraging these emerging technologies to extend or refocus their businesses
around the convergence of video and the Internet. Of the top 10 news,
information and entertainment Internet sites as determined by Media Metrix in
January 2000, eight were owned by or partnered with a major media company. As a
more recent example of this convergence, America Online and Time Warner have
announced their intention to merge.
CHALLENGES ASSOCIATED WITH VIDEO ON THE INTERNET
Even with significant improvements in networks and high-speed consumer
access, significant challenges remain that inhibit the mass adoption of video on
the Internet. Users have high expectations for interactivity, quality and ease
of use. Additionally, content providers require technologies that allow them to
control their distribution channels, leverage their production process by
enabling reuse of the digital video, and facilitate rapid time to market.
A primary use of the Internet is to search for information. Today, many
Internet sites are dedicated solely to search and directory functions for
people, places, products and other types of content. These sites have been
developed primarily to process text-based content and are not well equipped to
deal with the rapidly-growing amount of multimedia content on the Internet. More
specifically, very few Internet sites enable users to search for video at all.
And until recently, it has been impossible to search for and then play a
specific segment within a video. As the amount of and demand for video content
grows, finding relevant information will increasingly become a frustrating and
time-consuming experience.
In its native format, video does not lend itself to user interaction and
today is largely a one-way experience where the viewer is relegated to a passive
role. Video is not well suited to established Internet usage patterns that are
characterized by short, personalized exchanges of information and content.
Unlike text, video is an unstructured data type that is difficult to index,
manage and search. Video content is typically designed to be viewed from start
to finish and has no table of contents or index to allow users to find a
particular segment quickly and easily.
The lack of a structured video index prevents video content providers from
developing advanced capabilities such as personalization, interactivity,
sharing, community building, targeted advertising and commerce. All of these
capabilities rely on the ability to relate a particular video segment to other
information contained in a database and to target that segment to particular
users.
Current techniques for deploying video on the Internet are narrowly focused
on the digitization process and do not provide the indexing and management
capabilities necessary to deploy large video collections across multiple
Internet sites. Existing technologies therefore result in a diminished
navigation and viewing experience for site visitors and make it difficult for
content providers to effectively control and efficiently redistribute their
video content. A new solution is required that helps content owners deploy,
manage and
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distribute video content over the Internet and intranets while enhancing the
user's viewing experience.
THE VIRAGE SOLUTION
Virage is a leading provider of products and application services that
enable media and entertainment companies, enterprises and consumers to catalog,
manage and distribute their video content over the Internet and intranets. At
the same time, our solution enables Internet users of video content to find the
content they want, and then to interact with it in a way that is familiar and
comfortable to them. Additionally, we increase the value of video to content
owners by enabling them to use their video in targeted applications such as
advertising and electronic commerce.
We allow content owners to adapt their video content to the Internet and
intranets quickly and cost-effectively. Our products and application services
are based on a video indexing technology that transforms analog and digital
video content into a structured video database. Our technology breaks video into
discrete segments in real time by indexing visual scene changes, spoken words,
names and faces of recognized speakers, topics discussed within each segment and
other important information. Our software automatically creates a time
demarcated visual and textual summary of the video using proprietary image and
language processing techniques. This index is time synchronized with streaming
video files that are encoded simultaneously with the indexing process. These
capabilities enable both content owners and Internet users to rapidly search,
locate and use video content. This technology forms the core of our licensed
software products, and also enables our application services for customers who
wish to outsource their requirements.
The key benefits of our solutions include:
- IMPROVED ACCESS TO VIDEO CONTENT. Our video index allows Internet users
to search for and view any relevant part of a video at any time. Whether
users are looking for a particular speaker, topic or phrase, the video
search engine allows them to locate the desired part of the video quickly
and easily. In this manner, we transform video into a format that can be
viewed and experienced in a way that is familiar and comfortable to
Internet users. Our video database also helps Internet site owners
automatically publish video segments throughout their Internet site,
based on subject, keyword or speaker.
- ENHANCED USER INTERACTION AND COMMUNITY BUILDING. Our solutions transform
video into indexed segments that Internet users can interact with and
share opinions and recommendations about. Our technology allows users to
email relevant video segments to other users, create personal portfolios
of favorite segments and assemble and share personal playlists or
highlight reels with others. Our technology delivers these capabilities
without creating multiple copies of the underlying video content or
transferring large video files around the Internet. Collectively, these
features enable community building around video collections.
- GREATER PERSONALIZATION. The indexing and searching of video content
enables customers to target a video segment to particular users. Our
clients can deliver highly personalized viewing experiences to site
visitors by matching user profiles with the information contained in
their video database.
- INCREASED COMMERCE OPPORTUNITIES. Our technology creates the foundation
for video-enabled electronic commerce by enabling our customers to create
commerce
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opportunities around specific video segments. Each user interaction with
a particular video segment is a natural opportunity for advertising and
commerce related to that particular content. Commerce and advertising in
the form of banner advertisements or interstitial advertisements can be
associated with a person or object within the video or topic discussed.
By combining personalization with targeted video advertising, our
solutions provide customers with direct marketing opportunities.
- EXPANDED SYNDICATION ABILITIES. Our technology makes it cost-effective
for our customers to distribute, or syndicate, their indexed video
content to other Internet sites. Once video content has been indexed and
stored in a database for one Internet site, additional syndicated
Internet sites can be added with minimal incremental cost or effort. This
syndication of content provides significant incremental revenue
opportunities for video content owners.
BUSINESS STRATEGY
Our goal is to strengthen our position as a leading provider of products
and application services that enable owners of content to catalog, manage and
distribute their video content over the Internet and intranets. To achieve this
objective, our business strategy includes the following key components:
BECOME THE STANDARD FOR DEPLOYING, MANAGING AND DISTRIBUTING VIDEO CONTENT OVER
THE INTERNET AND INTRANETS
We intend to establish Virage as the standard for the deployment,
management and distribution of video content over the Internet and intranets. To
achieve this goal, we focus our direct and indirect selling and marketing
activities on industry leaders in the media and entertainment, enterprise and
consumer video markets. Many major media companies, broadcast networks and large
corporations already use Virage. These industry leaders offer multiple
independent opportunities for large-scale deployments of our products and
application services. For example, we have licensed our products to CNN for use
in its internal news organization and have leveraged this relationship into
sales of our application services to CNN Interactive. We expect to pursue
additional opportunities with other organizations at CNN, such as CNN Headline
News, CNNfn, CNN Sports, CNN Airport News, CNN Espanol, and CNN's extensive
corporate video archive. To achieve our objective of becoming the standard, we
will continue to leverage our experience and reputation across CNN and other
organizations like CNN. We will also leverage our relationships with such
industry leaders to sell to additional customers within their industries. In
December 1999, to help establish our position as the standard in the consumer
video market, we introduced a version of our VideoLogger product, called
MyLogger. MyLogger is a freely downloadable product that allows consumers,
including independent content producers, to create browseable and interactive
web pages from their own streaming video files.
GENERATE MULTIPLE REVENUE STREAMS THROUGH NEW PRODUCTS AND SERVICES
We intend to generate additional revenues by introducing new products and
services. We have added and we plan to continue to add to our licensed software
product offering. For example, in 1999, we added several new products including
the AudioLogger, Oracle and Informix database plug-ins, Oracle Java SDK and
Video Search Tools.
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In May 1999, we launched Virage Interactive, an application services
offering which complements our licensed software product offerings. This service
offering allows our customers to outsource the deployment, management and
distribution of their video content over the Internet and intranets. Our
application services currently include video Internet site design, video
encoding and indexing, editorial services and video index hosting. In addition
to set up fees, we generate recurring revenue from these services whenever a
customer adds more hours of video to an existing project, or with each
additional video query on a customer's site. We intend to offer new application
services, including services to help drive more traffic to our customers'
Internet sites, as well as services to allow community-building,
personalization, targeted advertising and electronic commerce related to the
video on our customers' Internet sites.
Our application services offering enables our customers to cost-effectively
syndicate their indexed video content to other Internet sites. For example, over
the last nine months, we have syndicated a video database covering the U.S.
presidential campaign, originally created from C-SPAN video footage, to over 20
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 15 U.S. patent applications and five additional provisional U.S. patent
applications for these technologies. Of those patent applications, five have
resulted in issued patents, one additional patent has been allowed and the other
applications are under review. We will continue to aggressively develop and
protect our intellectual property.
We have designed our architecture and application programming interfaces to
enable both rapid integration and easy interchangeability of proven third-party
technologies into our products. We will continue to evaluate and integrate
multiple third-party technologies into our products, selecting and substituting
these technologies based on both technical superiority and favorable business
economics. We have also designed our architecture and application programming
interfaces to allow rapid integration of our products with the products of our
value-added resellers and system integrators. As a result, our products are
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currently integrated with products from over 20 other vendors. We will continue
to develop products that integrate easily with the products of other vendors in
our markets.
EXPAND OUR INTERNATIONAL PRESENCE
Potential customers for our products and services are located throughout
the world. We intend to develop local sales, technical support and application
services operations that can support these customers. In November 1998, we
established a European subsidiary, Virage Europe, in London, England. Since
establishing this subsidiary, we have made sales of our products and services to
several European customers including the British Broadcasting Corp., or the BBC,
Carlton Communications, Network Espana, Reuters, Swiss Radio-TV and Telecinco.
We intend to expand our European sales and marketing activities and service
operations, as well as to establish distribution of our products in Asia,
Australia and South America. We also intend to localize our products and
services in several European and Asian languages. In December 1999, we
introduced our first European localized product, a Spanish-language version of
AudioLogger.
PURSUE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We intend to pursue strategic relationships with and acquisitions of other
companies to, among other things, increase our customer base, expand our
products and services, and strengthen our management team. By developing
strategic relationships with leading technology providers, we believe we will be
able to proliferate our products and services and improve our access to our
target customer base. In addition, we may acquire companies to enhance our
product and service offerings, increase our workforce and broaden our market
opportunities.
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CUSTOMERS
We sell our products and services to customers worldwide. The following is
a list of our customers as of March 31, 2000 who have been the source of at
least $10,000 of our revenues since the beginning of fiscal 1999:
<TABLE>
<S> <C>
MEDIA/ENTERTAINMENT
ABC News
British Broadcasting Corp. (BBC)
Cable News Network (CNN)
Carlton Communications
CBS
Chalk.com Network
CNN Interactive
Discovery Communications
FOX Sports
Getty Images
Lifetime Entertainment
Network Espana
Paramount Pictures
Public Broadcasting System (PBS)
Red Herring
Reuters
Sony
Swiss Radio-TV
Telecinco
Turner Broadcasting
TV1
The Walt Disney Co.
The Washington Post
GOVERNMENT
Centers for Disease Control (CDC)
Defense Advanced Research Projects
Agency
Department of the Army
Department of the Navy
Federal Bureau of Investigation (FBI)
Joint Combat Camera Center (JCCC)
Library of Congress
National Aeronautics and Space
Administration (NASA)
National Imagery and Mapping Agency
(NIMA)
EDUCATION
California State University at Los Angeles
Harvard Business School (HBS)
Michigan State University
University of Arizona
University of North Carolina
University of Pennsylvania
University of Quebec
University of Wisconsin
CORPORATE
Bear Stearns
Bell Atlantic
Boeing
DaimlerChrysler
Footage Now
Gedas North America
General Electric (GE)
General Motors (GM)
GTE Laboratories
Heinle & Heinle
Hung Chang Products Co.
The Image Bank
Lockheed Martin Corp.
Merrill Lynch
Morgan Stanley Dean Witter
New York Stock Exchange
Nippon Telegraph & Telephone (NTT)
PICs Retail Network
Thomson
Vidipax
Young & Rubicam
TECHNOLOGY/INTERNET
AltaVista
Chalk.com Network
CNET Networks (CNET)
Compaq Computer
IBM
IDG Conferences
The Industry Standard
Infoseek
iXL
ON24
On2.com
Power Brief
SGI
Singingfish.com
Space.com
Streamedia Communications
21E Web Network
Zuma Digital
</TABLE>
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Several of our government customers are excluded from this list due to
confidentiality agreements.
In addition, the following companies have signed a syndication affiliate
agreement with Virage as of March 31, 2000, as described in the C-SPAN
Syndication case study below:
<TABLE>
<S> <C>
ABC News Internet Ventures Netivation.com
Akoo.com The New York Times Online
The Associated Press Politics.com
CNN Interactive Salon.com
GoVote.com SpeakOut.com
GovWorks.com StreamSearch.com
iVillage USAToday.com
Lifetime Entertainment Services Voter.com
Myway.com Washingtonpost.Newsweek Interactive
NBC Yahoo!
NBCi Zatso.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 generally
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 March 31, 2000 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 years ended March 31, 1998,
1999 and 2000, U.S. government agencies accounted for 12%, 40% and 12%,
respectively, of our total revenues including 14% to the Department of the Army
for fiscal 1999. In fiscal 1998, CNN and Sun Microsystems each accounted for 11%
of our total revenues. In fiscal 1999, Oracle accounted for 13% of our total
revenues. In fiscal 2000, Telecinco and Oracle accounted for 13% and 10%,
respectively, of our total revenues.
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
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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 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
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databases. Customers such as broadcasters and government agencies also use these
products in large-scale system deployments. Our current database plug-ins for
Oracle and Informix enable communication between our products and a database
server for indexed storage. Using these plug-ins, system integrators can build
custom video browsing applications, or can integrate our products into various
media asset management systems.
ORACLE JAVA SDK 1.0. The Oracle Java SDK 1.0 is a toolkit that provides
reusable Java application components that allow a software developer to access a
Virage index when stored in an Oracle database. This product simplifies the
building of Oracle applications that search and browse video databases.
VIDEOLOGGER SDK AND VIRAGE SOFTWARE DEVELOPER PROGRAM. The VideoLogger SDK
and Virage Software Developer Program enable third party access to our
underlying architecture. This access allows third parties to integrate the
VideoLogger into other products and technologies, thereby extending the
functionality of the VideoLogger. The VideoLogger SDK provides plug-in program
interfaces for multiple aspects of VideoLogger operation, including database
integration, file export, index access and conversion, remote control and video
encoding integration and control.
MYLOGGER 1.0. MyLogger 1.0 is a consumer version of our VideoLogger
product, and contains a subset of the VideoLogger features. MyLogger is a
Windows-based application for indexing digital video files and publishing
Internet-ready video indices. MyLogger analyzes a digital video signal in real
time, generates keyframes, and allows users to mark the beginning and end of
specific video segments and manually enter data about these segments. The
MyLogger keyframes and associated information are linked to specific points in
the original video that can be used to rapidly browse its contents. The MyLogger
video index can be published as an Internet page using customizable templates.
Consumers may download MyLogger from our web site without charge.
APPLICATION SERVICES AND SYNDICATION
Our hosted application services, called Virage Interactive, enable
customers to deploy, manage and distribute video on the Internet without
substantial investment in hardware, software or staffing. By integrating
Virage's core video indexing technology with other digital video services such
as encoding and hosting, we have created application services that enable rapid
deployment of Internet video databases. Virage Interactive's hosted application
services provide customers with multiple methods for integrating video assets
throughout their web site. In addition, Virage Interactive enables customers to
syndicate their video content to other web sites, allowing each site to be
served from the same content database, while retaining that site's unique look
and feel.
The main components of Virage Interactive services are:
- SETUP. For each new account, we collaborate with the customer to develop
a set of templates in hypertext mark up language, commonly referred to as
HTML, that defines the look and feel of the video content on that
particular customer's site. These templates define how the video content
will appear on the site including layout, graphics, colors, and fonts
associated with the video search results and video player pages.
Customers can choose a variety of features to create a function and look
that is appropriate for their site.
- VIDEO PROCESSING. In this step, we automatically process the customer's
video using our VideoLogger and AudioLogger software to create a visual
and textual index and
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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 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.
- INTERNET VIDEO GUIDE. The Virage Internet Video Guide is a search engine
and directory for video on the Internet which we customize through our
services for web
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portals, Internet service providers and other websites. The Internet
Video Guide, based on a visual and textual database that describes
streaming video across the Internet, is updated on a daily basis. The
database includes video index data from our Virage Interactive services
customers as well as data which we extract from websites through an
automated spidering, or web-crawling process. By searching via the
Internet Video Guide, users can find video clips based on the content
that is actually in the video, not simply by filenames or text
surrounding video on a web page. The Internet Video Guide therefore
enables websites to offer their users the ability to search for relevant
video content across the Internet.
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.
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[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.
"Plug-in modules" is the term that we use to describe additional software
functionality which can be easily added to our base VideoLogger product.
We have incorporated various third party technologies into different
plug-in modules that operate in conjunction with our VideoLogger product,
including face recognition technology from Visionics, optical character
recognition technology from SRI International, speech and speaker recognition
technology from IBM, and text search technology from AltaVista. The terms of
each of these third party arrangements include a nonexclusive license to
distribute the third party technology within our plug-in modules in return for
royalty payments to them for a term of one or more years. We are not
substantially dependent on the technology we license from third parties in part
because we believe we could license similar technology from other parties.
Customers often require that our indexing technologies perform in real time
to match the real-time transmission of video broadcasts and live satellite
feeds. Our architecture addresses this real-time requirement by allowing
metadata tracks to be processed in parallel on separate computer processors.
Once the metadata has been captured during the indexing process, it must
then be stored in a format that can be easily searched and browsed by users. Our
architecture includes a set of open application programming interfaces, which
allow the metadata to be easily exported into various databases, media asset
management and Internet-search tools. For instance, metadata can be stored in
standard databases such as Oracle and Informix, stored into popular media asset
management systems, or exported to custom file formats such as HTML. Exported
metadata can also be searched using our Video Search Tools application.
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We emphasize reusable, plug-in components and open architecture in our
development process. All of our software is written in C++ or Java and employs
object-oriented design practices. In addition, each Virage product is designed
with open application programming interfaces, which allow easy integration with
third-party applications. The figure below illustrates the many open interfaces
surrounding the VideoLogger, which allow for feature extensions and systems
integration opportunities.
[Diagram titled VideoLogger Programming Interface shows Virage VideoLogger in
the center of a square diagram surrounded by various application programming
interfaces. On the top, the diagram shows video encoding interfaces such as
MPEG, RealVideo, MediaPlayer and Custom. On the right, the diagram shows file
export interfaces such as VDF, HTML and ALE, and database interfaces such as
Informix and Oracle. On the bottom, the diagram shows media analysis interfaces
such as face recognition, optical character recognition and audio analysis, and
remote control application programming interfaces. On the left, the diagram
shows digital media ingest interfaces such as RealVideo, QuickTime, MediaPlayer
and Custom.]
Access to each of the interfaces shown in the above figure is provided
through our software developers kit. This kit is a collection of these
application programming interfaces that allow developers to work in areas such
as database integration, video encoding, remote control and media analysis. The
software development kit also allows our products to be integrated with other
technologies.
RESEARCH AND DEVELOPMENT
We believe that our future success will depend in part on our ability to
continually develop new and enhanced products and services. Accordingly, we are
committed to the investment of significant resources in research and product
development activities. During fiscal 1998, 1999 and 2000, our research and
development expenses were $1.8 million, $2.3 million and $4.2 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, Munich, New
York, San Francisco, Seattle, Tampa/St. Petersburg and Washington D.C., we focus
on larger customers in North America and Europe. Our field representatives sell
our products and services to customers who have been prequalified by our
telesales personnel. In addition, our direct sales force manages local
relationships with key resellers.
Our indirect distribution channels include domestic and international
distributors, system integrators and value-added resellers. As of March 31,
2000, we had entered into agreements with more than 40 non-exclusive
distributors and value-added resellers worldwide, including Artesia
Technologies, AVS Graphics, The Bulldog Group, DSMCi, eMotion, Informix, ISID,
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 49% of our total
revenues for fiscal 2000. The terms of these agreements include a nonexclusive
license to the distributors and value-added resellers to distribute our products
to end users in a specified territory under our end user license agreement in
return for fees to us equal to a discount off of our list price for an initial
term of up to two years.
MARKETING ACTIVITIES
Since our inception, we have invested a substantial percentage of our
revenues in a broad range of marketing activities to generate demand, gain
corporate brand identity and educate the market about our products and services.
These activities have focused primarily on direct marketing, direct mail and
email, public relations, co-marketing and branding with our major customer
accounts and strategic partners, targeted trade shows, conferences and speaking
engagements, and the provision of product information through print collateral
and our Internet site. In addition, we have created a developer relations
organization to encourage independent software developers to develop products
and solutions that are compatible with our products, application programming
interfaces and technologies. Today, our marketing strategy is focused primarily
on the North American and European markets but we intend to increase our
marketing activities in Asia, Australia and South America.
COMPETITION
The Internet video marketplace is new, rapidly evolving and intensely
competitive. As more companies begin to deploy searchable and interactive video
on the Internet, we expect competition to intensify.
We currently compete directly with other providers in the Internet video
infrastructure marketplace including Excalibur Technologies and MediaSite. In
May 2000, Intel and Excalibur announced a relationship pursuant to which
Excalibur and a division of Intel will merge to form a new entity that will
focus on providing Internet video infrastructure. We
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may also compete indirectly with larger system integrators who embed or
integrate these directly competing technologies into their product offerings. It
is possible that we may work with these same larger companies on one customer
bid and compete with them on another. In the future, we may compete with other
video services vendors and searchable video portals. In addition, we may compete
with our current and potential customers who may develop software or perform
application services internally.
We believe that the principal competitive factors in our market are:
- audio and video cataloging functionality;
- ease of installation and use;
- real-time processing capability;
- reliability;
- pricing;
- 24-by-7 customer support;
- adoption by other customers; and
- number and strength of relationships with other Internet video providers.
We believe we compete favorably with our competitors based on these
factors. However, some of our competitors may have access to proprietary
technology from outside sources. This access to proprietary technology might
allow our competitors to bring new technologies to market faster than we can.
Furthermore, because our existing and potential competitors may have longer
operating histories, greater name recognition, larger customer bases and
substantially greater financial, technical, sales and marketing resources, they
may have access to more customers and a larger installed customer base than we
do. These competitors may be able to undertake more extensive marketing
campaigns and adopt more aggressive pricing policies than we can.
INTELLECTUAL PROPERTY
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of patent, trademark and copyright laws, as well as confidentiality
and license agreements with our employees and others.
Patents. We actively seek patent protection for our intellectual property.
We have filed 15 U.S. patent applications and five additional provisional U.S.
patent applications 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 nine 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 eight 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 March 31, 2000, we had 163 employees, of which 39 were employed in
operations, 57 were employed in engineering, 49 were employed in sales and
marketing, and 18 were employed in general and administrative positions. None of
our employees is subject to a collective bargaining agreement, and we have never
experienced a work stoppage. We believe our relations with our employees are
good.
PROPERTIES
Our principal executive and administrative offices are located at 177 Bovet
Road, Suite 520, in San Mateo, California 94402 where we lease approximately
20,670 square feet, which lease expires on May 31, 2002. We have entered into an
agreement pursuant to which, in October 2000, we will lease new executive and
administrative offices located at 411 Borel Avenue, San Mateo, California 94402.
This lease, for approximately 48,000 square feet, will expire on September 30,
2006. In addition, we lease administrative and sales offices near London,
England and Chicago and in New York, under leases expiring on February 27, 2002,
September 1, 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 March 31, 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...................... 34 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,
joined Virage as a full-time employee in March 2000. From November 1998 to March
2000, he held the position of vice president of Protege Software, a consulting
firm, where he was responsible for developing our European operations.
Previously, he spent six years as a director and general manager of Sun
Microsystems UK where he was responsible for the enterprise and Internet
software business in Europe. Prior to Sun Microsystems, Mr. Rattley held senior
sales, product marketing, general management and director positions at Informix,
Software Publishing Corporation, Rapid Recall and Technitron Systems. Mr.
Rattley graduated in 1982 with a Higher National Certificate in advanced
electronic engineering and a business administration diploma, studied at Reading
College of Technology and Thames Valley University, England.
Gilbert C. Wai, vice president, engineering, joined Virage in July 1997.
From October 1994 to June 1997, Mr. Wai was senior vice president of product
development at Legato Systems, a publicly-held enterprise storage management
software company. From September 1987 to September 1994, Mr. Wai held various
marketing and engineering executive positions, most recently as vice president
of product management and development, at Informix Software, a publicly-held
database software company. Mr. Wai holds a B.S. in electrical engineering and
computer science from the University of California at Berkeley.
Philip W. Halperin has served as a director of Virage since September 1999.
Mr. Halperin has been a general partner of Weston Presidio Capital, a venture
capital firm, since October 1993. Mr. Halperin currently serves as a director of
several private companies. Mr. Halperin holds an A.B. in political science from
Stanford University and an M.B.A. from Harvard Business School.
Ramesh Jain, Ph.D. has served as a director of Virage since 1994 and was
chairman of the board of directors since he co-founded Virage in 1994 to
December 1999. Currently, he is the president and chief executive officer of
PRAJA, an Internet company that he co-founded in 1996. Dr. Jain was professor of
engineering and computer science at the University of California at San Diego
from January 1993 to June 1999 and at the University of Michigan at Ann Arbor
from 1982 to 1993. In January 1991, Dr. Jain founded Imageware, a software
company which provides software for surface modeling, reverse engineering, rapid
prototyping, and inspection.
Standish H. O'Grady has served as a director of Virage since April 1998.
Mr. O'Grady has been managing director of H&Q Venture Associates, L.L.C., a
venture capital firm, since its formation in July 1998. Mr. O'Grady previously
served in various positions with Hambrecht & Quist Group's venture capital
department since 1986, including managing director from 1994 to 1998. In
addition, he has been an investment manager for a series of Adobe Ventures
partnerships since their inception in 1994. Mr. O'Grady currently serves as a
director of Tumbleweed Communications, as well as a number of private companies.
He holds a B.S.E. in chemical engineering from Princeton
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University and an M.B.A. from the Amos Tuck School of Business Administration at
Dartmouth College.
Lawrence K. Orr has served as a director of Virage since April 1995. Mr.
Orr is a general partner of Trinity Ventures in Menlo Park, California, where he
has been a private equity technology investor specializing in software and
communications since 1989. Prior to Trinity, Mr. Orr worked at Bain and Company
and Hewlett-Packard, where he was a marketing manager in the Information
Networks Group, responsible for product management and field sales and support
programs for Hewlett-Packard's data communications product lines. Mr. Orr holds
an A.B. degree in mathematics from Harvard University and an M.B.A. from the
Stanford Graduate School of Business. He currently is a director of Extreme
Networks, as well as several private companies.
C.K. Prahalad, D.B.A. has served as a director of Virage since April 1995.
Dr. Prahalad is currently the Harvey C. Fruehauf Professor of Business
Administration at the University of Michigan where he has been a professor since
1986. Dr. Prahalad has also been a visiting research fellow at Harvard Business
School, a visiting professor at INSEAD and a professor at the Indian Institute
of Management, Ahmedabad. Dr. Prahalad currently is the chairman of Praja Inc.,
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 September 2001;
- Class II, whose term will expire at the annual meeting of stockholders
expected to be held in September 2002; and
- Class III, whose term will expire at the annual meeting of stockholders
expected to be held in September 2003.
As a result, only one class of directors will be elected at each annual
meeting of stockholders, with the other classes continuing for the remainder of
their terms. Effective upon the closing of this offering, the following
individuals will serve as our directors:
- Paul G. Lego, Ramesh Jain and C.K. Prahalad will be our Class I
directors;
- Lawrence K. Orr and William H. Younger, Jr. will be our Class II
directors; and
- Philip W. Halperin and Standish H. O'Grady will be our Class III
directors.
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There are no family relationships among any of our directors, officers or
key employees.
BOARD COMMITTEES
Our board of directors has recently formed an audit committee and a
compensation committee.
Audit committee. The audit committee reviews the results and scope of the
annual audit and meets with our independent auditors to review our internal
accounting policies and procedures.
Compensation committee. The compensation committee reviews and makes
recommendations to our board of directors on our general and specific
compensation policies and practices and administers our 1995 stock option plan,
1997 stock option plan and 2000 employee stock purchase plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee has at any time since our
formation been one of our officers or employees. None of our executive officers
currently serves, or in the past has served, as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving on our board of directors or compensation committee. Before the
creation of our compensation committee, all compensation decisions were made by
our full board of directors.
EMPLOYMENT, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
We routinely deliver written offer letters containing provisions on salary,
bonuses, benefits and stock option grants to prospective members of management
and other employees. In addition, we have entered into agreements containing
employment and change-in-control provisions as described below.
The stock option agreements between Virage and Paul G. Lego, our president
and chief executive officer, in which Mr. Lego was granted options to purchase
602,500 shares of common stock, of which options for 411,833 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 500,000 shares of common stock, provides
for 50% acceleration of vesting of all unvested options upon a change-in-control
event.
The stock option agreement between Virage and Alfred J. Castino, our chief
financial officer, provides for 50% acceleration of vesting of all unvested
options upon a change-in-control event and three months acceleration of vesting
of unvested options if he is terminated without cause. In addition, Mr. Castino
receives three months base salary if he is terminated without cause.
The stock option agreement between Virage and Andrew P. Langhoff, our vice
president, business development, provides for 50% acceleration of vesting of all
unvested options upon a change-in-control event in which Mr. Langhoff is
terminated or constructively dismissed and six months acceleration of vesting of
unvested options if he is
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terminated without cause. In addition, Mr. Langhoff receives six months base
salary if he is terminated without cause.
The stock option agreement between Virage and Mark K. Rattley, our vice
president and general manager, European operations, provides for 50%
acceleration of vesting of all unvested options upon a change-in-control event
in which Mr. Rattley is terminated or constructively dismissed and six months
acceleration of vesting of unvested options if he is terminated or
constructively dismissed without cause. In addition, Mr. Rattley receives six
months of his target earnings and benefits if he is terminated without cause.
The stock option agreements between Virage and each of Weldon D. Bloom,
Carlos O. Montalvo and Gilbert C. Wai provide for 50% acceleration of vesting of
all unvested options upon a change-in-control event in which the executive
officer is terminated or constructively dismissed. In addition, each of these
executive officers receive three months base salary if the executive is
terminated without cause.
The stock option agreements between Virage and each of Frank H. Pao and
David J. Girouard provide for 50% acceleration of vesting of all unvested
options upon a change-in-control event in which the executive officer is
terminated or constructively dismissed.
EXECUTIVE COMPENSATION
Our directors do not receive cash compensation for their services as
directors. Our directors receive cash compensation for their services as members
of committees of the board of directors. These directors receive $1,000 to
attend a committee meeting in person and $500 to attend a committee meeting by
telephone. We also reimburse directors for their reasonable expenses incurred in
attending meetings of the board of directors and of committees of the board.
Our outside directors receive an initial stock option grant of 40,000
shares. These option shares vest over a four-year period as follows: 25% upon
the first anniversary of the option grant date with the remainder vesting
ratably on a monthly basis for the 36 months beginning one year after the date
of grant. Each outside director is granted each year thereafter an option to
purchase 10,000 shares. These subsequent options vest ratably on a monthly basis
for 24 months beginning on the date of grant. The stock option agreements
between Virage and outside directors will provide for full acceleration of
vesting of all unvested options upon a change-in-control event.
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<PAGE> 63
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, 2000 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>
ANNUAL COMPENSATION
NAME AND -------------------------- NUMBER OF SECURITIES
PRINCIPAL POSITION YEAR SALARY BONUS(1) UNDERLYING OPTIONS
------------------ ---- -------- -------- --------------------
<S> <C> <C> <C> <C>
Paul G. Lego........................ 2000 $210,000 -- 500,000
President and Chief Executive
Officer
Weldon D. Bloom..................... 2000 $175,000 -- --
Vice President, Sales
David J. Girouard................... 2000 $160,000 -- 175,000
Vice President and General Manager,
Virage Interactive
Carlos O. Montalvo.................. 2000 $180,000 -- --
Vice President, Marketing
Gilbert C. Wai...................... 2000 $180,000 -- 75,000
Vice President, Engineering
</TABLE>
-------------------------
(1) Bonus amounts for fiscal year 2000 will not be determined until late June
2000.
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, 2000. All of these options were granted
under our 1997 stock option plan. Generally, these options vest ratably on a
monthly basis for 48 months beginning one month after the date of grant.
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The following table is based on the grant of options to purchase a total of
3,121,423 shares of our common stock during fiscal year 2000. 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 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......... 500,000 16.0% $6.00 12/01/09 $5,958,920 $11,265,584
Weldon D. Bloom...... -- -- -- -- -- --
David J. Girouard.... 75,000 2.4% 2.50 5/20/09 1,156,338 1,952,338
100,000 3.2% 6.00 12/01/09 1,191,784 2,253,117
Carlos O. Montalvo... -- -- -- -- -- --
Gilbert C. Wai....... 75,000 2.4% 3.20 8/04/09 1,103,838 1,899,838
</TABLE>
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 2000 and the number of
shares of common stock subject to exercisable and unexercisable options held as
of March 31, 2000 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> 65
between the exercise price of each outstanding stock option and a fair market
value on March 31, 2000 of $12.00 per share.
AGGREGATE OPTION EXERCISES IN FISCAL 2000 AND VALUES AT MARCH 31, 2000
<TABLE>
<CAPTION>
NUMBER NUMBER OF SECURITIES
OF SHARES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON VALUE AT 3/31/00 AT 3/31/00
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul G. Lego.......... 69,750 $ 212,738 613,167 77,500 $4,329,684 $905,200
33,333 95,999 -- -- -- --
Weldon D. Bloom....... 200,000 $1,536,000 -- -- -- --
David J. Girouard..... 5,000 $ 18,700 200,000 -- $1,587,500 --
30,000 232,200 -- -- -- --
15,000 115,200 -- -- -- --
Carlos O. Montalvo.... 86,718 $ 319,122 121,406 -- $1,418,022 --
Gilbert C. Wai........ 75,000 $ -- -- -- -- --
</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 2,055,360 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 246,017 shares of common stock are outstanding as of March
31, 2000 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.
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.
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<PAGE> 66
As of March 31, 2000, 1,178,743 shares of common stock had been issued upon
exercise of options under this plan and options to purchase 246,017 shares of
common stock with a weighted average exercise price of $0.172 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 7,749,017 shares of common
stock under this plan, which consists of the sum of 6,471,497 shares, which are
new shares allocated to the 1997 stock option plan, and 1,277,519 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 March 31, 2000, 1,146,218 shares of common stock had been issued upon
exercise of options outstanding, options to purchase 3,407,494 shares of common
stock with a weighted average exercise price of $6.42 were outstanding, and
3,199,734 shares remained available for future grants.
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<PAGE> 67
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. 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.
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LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation, which the
Delaware General Corporation Law permits, which provide that our directors shall
not be personally liable to us or our stockholders for monetary damages
resulting from a violation of the directors' duty to act with care and in the
best interests of the stockholders, except for liability:
- for acts or omissions that are not in good faith, are deliberately
improper or are known to be illegal;
- under Section 174 of the Delaware General Corporation Law relating to
improper dividends or distributions; or
- for any transaction from which the director obtained an improper personal
benefit.
This limitation of liability does not affect the availability of equitable
remedies, including injunctive relief or rescission.
Our bylaws authorize us to indemnify our officers, directors, employees and
agents to the extent permitted by the Delaware General Corporation Law. Section
145 of the Delaware General Corporation Law empowers us to enter into
indemnification agreements with our officers, directors, employees and agents.
Before the completion of this offering, we intend to enter into separate
indemnification agreements with each of our current directors and executive
officers which may, in some cases, be broader than the specific indemnification
provisions allowed by the Delaware General Corporation Law. The indemnification
agreements will require us to indemnify the executive officers and directors
against liabilities that may arise by reason of status or service as directors
or executive officers and to advance expenses they spend as a result of any
proceeding against them for which they could be indemnified to the fullest
extent permitted by the Delaware General Corporation Law.
We intend to obtain liability insurance for our directors and officers and
intend to obtain a rider to extend that coverage for public securities matters.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Virage where indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers or persons controlling Virage,
we have been informed that in the opinion of the Securities and Exchange
Commission this indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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RELATED PARTY TRANSACTIONS
Since April 1, 1997, there has not been, nor is there currently planned,
any transaction or series of similar transactions to which Virage was or is a
party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of Virage's capital stock or any
member of their immediate family had or will have a direct or indirect material
interest other than agreements which are described under the caption
"Management" and the transactions described below.
SALES OF STOCK TO INSIDERS
The following directors, executive officers, holders of more than 5% of a
class of voting securities and members of these persons' immediate families
purchased from us shares of our series B preferred stock, series C preferred
stock, series D preferred stock, series E preferred stock or common stock.
Immediately before the closing of this offering, all outstanding shares of
series B preferred stock, series C preferred stock, series D preferred stock and
series E preferred stock will automatically convert into shares of common stock
on a one-for-one basis.
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED COMMON
STOCKHOLDER STOCK STOCK STOCK STOCK STOCK
----------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Paul G. Lego, including:
Paul G. Lego..................... 5,998 21,855 17,442 70,122 304,582
Lego Family Partnership.......... -- -- -- 23,780 --
David and Elizabeth Sippin....... -- -- -- 3,048 --
Christopher and Deborah Sawch.... -- -- -- 3,048 --
Weldon D. Bloom.................... -- -- -- -- 200,000
Carlos O. Montalvo................. -- 19,075 -- -- 86,718
Gilbert C. Wai, individual and
trustee:
Gilbert C. Wai................... -- -- -- -- 264,558
Wai Family Revocable Trust....... 17,500 -- -- -- --
Philip W. Halperin, including:
Weston Presidio Capital III, LLC... -- -- -- 1,379,501 --
Weston Presidio Capital
Entrepreneur Fund............. -- -- -- 68,669 --
Ramesh Jain, Ph.D., including:
Ramesh Jain, Ph.D................ 5,000 -- 10,174 -- 239,190
Smriti Jain...................... -- -- -- -- 2,500
Swati Jain....................... -- -- -- -- 2,500
Ramesh Jain, custodian for
Neilesh Jain.................. -- -- -- -- 2,500
Standish H. O'Grady, including:
Adobe Incentive Partners, L.P.... -- 713,619 36,103 48,902 --
H&Q Adobe Ventures Management II,
LLC........................... -- 125,933 6,371 8,630 --
H&Q Virage Investors, L.P........ -- 279,851 14,158 19,177 --
Lawrence K. Orr, including:
Trinity Ventures IV, L.P......... 290,532 331,811 72,484 98,181 --
Trinity IV Side-By-Side Fund,
L.P........................... 17,160 19,598 3,020 4,395 --
C.K. Prahalad, D.B.A............... 72,212 18,656 11,628 -- --
William H. Younger, Jr............. 27,196 31,273 6,720 8,983 --
</TABLE>
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<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED COMMON
STOCKHOLDER STOCK STOCK STOCK STOCK STOCK
----------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Sutter Hill Ventures, including:
Sutter Hill Ventures............. 149,683 169,773 36,477 50,221 --
Parties Affiliated with Sutter
Hill Ventures................. 151,749 172,112 36,980 49,278 --
AltaVista Company.................. -- -- 1,011,717 65,991 --
Media Technology Ventures,
including:
Media Technology Ventures,
L.P........................... 501,681 176,873 38,003 51,476 78,750
Media Technology Ventures
Entrepreneurs Fund............ 59,281 22,838 4,907 6,646 8,750
Reuters Holdings Switzerland SA.... -- -- -- 762,195 --
</TABLE>
Mr. Lego's brother, Michael Lego, is the managing partner of the Lego
Family Partnership. Mr. Lego disclaims beneficial ownership of these securities,
except to the extent of his pecuniary interest in the partnership. Ms. Sippin
and Ms. Sawch are sisters of Mr. Lego's wife. Mr. Lego disclaims beneficial
ownership of these securities.
Smriti Jain, Swati Jain and Neilesh Jain are the children of Dr. Jain. Dr.
Jain disclaims beneficial ownership of these securities.
The general partner of both Weston Presidio Capital III, LLC and Weston
Presidio Capital Entrepreneur Fund, L.P. is Weston Presidio Capital Management
III, LLC, the members of which are Philip Halperin, Michael Cronin, Michael
Lazarus, James McElwee, Carlo Von Schroeter, Kevin Hayes, Tom Patterson and Mark
Bono. The general partner of Adobe Incentive Partners, L.P. is Adobe Systems
Incorporated, and the general partner of H&Q Virage Investors, L.P. is H&Q
Virage Investment Management, LLC, the members of which are Standish O'Grady and
Christopher B. Hollenbeck. The general partner of both Trinity Ventures IV, L.P.
and Trinity IV Side-By-Side Fund, L.P. is Trinity TVL Partners, L.P., the
members of which are Lawrence K. Orr, Noel J. Fenton, James G. Shennan, Jr., and
David Nierenberg. The general partner of Sutter Hill Ventures is Sutter Hill
Ventures LLC, the managing directors of which are David Anderson, G. Leonard
Baker, William Younger, Jr., Tench Coxe and Gregory Sands. The general partner
of both Media Technology Ventures, L.P. and Media Technology Ventures
Entrepreneurs Fund is Media Tech Management LLC, the members of which are Robert
R. Ackerman, Jr., Jonathan E. Funk and AVI Management Partners III, L.P. The
general partners of AVI Management Partners III, L.P. are Barry M. Weinman,
Peter L. Wolken and Brian J. Grossi. The general partners of these entities
exercise voting and investment power with respect to all shares held of record
by the named investment partnerships. Mr. Halperin, Mr. O'Grady, Mr. Orr and Mr.
Younger, respectively, disclaim beneficial ownership of all shares except for
their own pecuniary interest.
The following is a summary of sales of our preferred and common stock that
are presented in the table above:
Series B financing. On January 9, 1997, January 31, 1997, July 24, 1997 and
September 22, 1997, we sold a total of 1,523,538 shares of series B preferred
stock at a price of $2.60 per share.
Series C financing. On March 31, 1998 and April 27, 1998, we sold a total
of 2,238,806 shares of series C preferred stock at a price of $2.68 per share.
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<PAGE> 71
Series D financing. On January 27, 1999 and March 1, 1999, we sold a total
of 1,453,488 shares of series D preferred stock at a price of $3.44 per share.
Series E financing. On September 21, 1999 and December 17, 1999, we sold a
total of 3,033,700 shares of series E preferred stock at a price of $6.56 per
share.
Sales of Common Stock.
On November 21, 1997, Mr. Paul Lego exercised an option to acquire 100,750
shares of common stock at an exercise price of $0.15 per share.
On December 31, 1997, Mr. Gilbert Wai exercised an option to acquire
139,558 shares of common stock at an exercise price of $0.26 per share.
On December 3, 1998, Dr. Ramesh Jain exercised an option to acquire 187,145
shares of common stock at an exercise price of $0.165 per share.
On December 16, 1998, Mr. Paul Lego exercised an option to acquire 100,750
shares of common stock at an exercise price of $0.15 per share. Mr. Gilbert Wai
exercised an option to acquire 50,000 shares of common stock at an exercise
price of $0.32 per share.
On September 1, 1999, Mr. Paul Lego exercised an option to acquire 33,333
shares of common stock at an exercise price of $0.32 per share.
On September 3, 1999, Mr. Gilbert Wai exercised an option to acquire 75,000
shares of common stock at an exercise price of $3.20 per share.
On September 6, 1999, Mr. Paul Lego exercised an option to acquire 69,750
shares of common stock at an exercise price of $0.15 per share.
On January 30, 2000, Dr. Ramesh Jain exercised an option to acquire 59,546
shares of common stock at an exercise price of $0.165 per share.
On February 8, 2000, Mr. Carlos Montalvo exercised an option to acquire
86,718 shares of common stock at an exercise price of $0.32 per share.
On February 16, 2000, Mr. Weldon Bloom exercised an option to acquire
200,000 shares of common stock at an exercise price of $0.32 per share.
LICENSE OF SOFTWARE AND RELATED INTELLECTUAL PROPERTY TO SCIMAGIX
In May 1998, former employees of Virage formed a new company called
Scimagix. Scimagix is a pharmaceutical-oriented company that utilizes Virage's
software and related intellectual property rights within markets in which we do
not operate. In September 1998, we purchased shares of Scimagix's series A
preferred stock representing 15% of Scimagix for $78,680. In addition, we
granted a worldwide license to Scimagix for software and related intellectual
property rights in exchange for recurring royalty fees.
LICENSE AGREEMENT WITH ALTAVISTA
In December 1998, we entered into a license agreement with AltaVista for a
three year term. Under this agreement, AltaVista granted us a nonexclusive
worldwide license to distribute its text search technology within our Video
Search Tools product suite in return for royalty payments and a prepaid royalty
fee.
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<PAGE> 72
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with each of our
directors and officers. These agreements will require us to indemnify these
individuals to the fullest extent permitted by the Delaware General Corporation
Law.
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<PAGE> 73
PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial
ownership of the shares of our common stock as of March 31, 2000, and pro forma
as adjusted to reflect the sale of shares of common stock in this offering
assuming (a) 14,014,345 shares of common stock outstanding as of March 31, 2000
and 19,332,524 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 March 31, 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 ratably on
a monthly basis for 48 months beginning one month after the date of grant.
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..... 1,670,517 11.9% 8.6%
3000 Sand Hill Road, Bldg. 1, Ste. 240
Menlo Park, CA 94025
Entities affiliated with Sutter Hill
Ventures(1)................................. 1,624,943 11.6 8.4
755 Page Mill Road, Ste. A-200
Palo Alto, CA 94304
Entities affiliated with Weston Presidio
Capital..................................... 1,448,170 10.3 7.5
343 Sansome Street, Suite 1210
San Francisco, CA 94104
</TABLE>
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<PAGE> 74
<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........................... 1,252,744 8.9 6.5
One Bush Street
San Francisco, CA 94104
AltaVista Company............................. 1,077,708 7.7 5.6
529 Bryant Street
Palo Alto, CA 94301
Entities affiliated with Media Technology
Ventures.................................... 949,206 6.8 4.9
746 West Adams Blvd.
Los Angeles, CA 90089
Reuters Holdings Switzerland SA............... 762,195 5.4 3.9
153 route de Thonon
1245 Collonge-Bellerive
Switzerland
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
Paul G. Lego(2)............................... 1,610,462 11.0 8.1
Weldon D. Bloom(3)............................ 200,000 1.4 1.0
David J. Girouard(4).......................... 250,000 1.8 1.3
Carlos O. Montalvo(5)......................... 227,200 1.6 1.2
Gilbert C. Wai(6)............................. 282,058 2.0 1.5
Philip W. Halperin............................ 1,448,170 10.3 7.5
c/o Weston Presidio Capital
343 Sansome Street, Suite 1210
San Francisco, CA 94104
Ramesh Jain, PhD. ............................ 623,362 4.4 3.2
San Diego, California
Standish H. O'Grady........................... 1,252,744 8.9 6.5
c/o Adobe Ventures/Hambrecht & Quist
One Bush Street
San Francisco, CA 94104
Lawrence K. Orr............................... 1,670,517 11.9 8.6
c/o Trinity Ventures
3000 Sand Hill Road, Bldg. 1, Ste. 240
Menlo Park, CA 94025
C.K. Prahalad, D.B.A.......................... 339,180 2.4 1.8
William H. Younger, Jr.(7).................... 984,087 7.0 5.1
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)(8)....................... 10,073,209 63.1% 47.3%
</TABLE>
-------------------------
For a detailed description of beneficial ownership of the above securities,
please see disclosure under "Sales of Stock to Insiders."
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<PAGE> 75
(1) Includes:
(a) 807,724 shares held by Sutter Hill Ventures; and
(b) 781,130 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 628,666 shares of
common stock that are subject to a right of repurchase which lapses over
time.
(3) Includes 125,000 shares that are subject to a right of repurchase which
lapses over time.
(4) Includes:
(a) 24,729 shares that are subject to a right of repurchase which lapses
over time; and
(b) immediately exercisable options to purchase 200,000 shares of common
stock that are subject to a right of repurchase which lapses over time.
(5) Includes immediately exercisable options to purchase 121,406 shares of
common stock that are subject to a right of repurchase which lapses over
time.
(6) Includes:
(a) 155,231 shares that are subject to a right of repurchase which lapses
over time; and
(b) 17,500 shares held by Wai Family Revocable Trust, of which Mr. Wai is
trustee.
(7) Includes:
(a) 114,814 shares held by William H. Younger, Jr., Trustee, the Younger
Living Trust;
(b) 33,333 shares held by retirement trust of William H. Younger, Jr.;
(c) 807,724 shares held by Sutter Hill Ventures; and
(d) 28,215 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.
(8) Includes an aggregate of:
(a) 317,460 shares that are subject to a right of repurchase which lapses
over time; and
(b) immediately exercisable options to purchase 1,949,726 shares of common
stock that are subject to a right of repurchase which lapses over time.
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<PAGE> 76
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 March 31,
2000, assuming the conversion of each share of outstanding preferred stock into
one share of common stock, there were 14,014,345 shares of common stock
outstanding held by 204 stockholders and options to purchase 3,653,514 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> 77
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of Virage
and may cause the market price of our common stock to decline or impair the
voting and other rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
WARRANTS
As of March 31, 2000, we had issued:
- warrants to purchase 23,332 shares of common stock at a price per share
of $0.75 which expire in September 2005;
- a warrant to purchase 8,654 shares of preferred stock at a price per
share of $2.60 which expires in May 2002;
- a warrant to purchase 19,055 and 75,435 shares of preferred stock at a
price per share of $6.56 which expire in October 2002 and December 2003,
respectively; and
- a warrant to purchase 181,818 shares of common stock at a price per share
of $11.00 which expires at the end of the first day that our stock begins
trading on Nasdaq.
REGISTRATION RIGHTS
The holders of 10,316,199 shares of preferred stock have the right to
require us to register their shares with the Securities and Exchange Commission
so that those shares may be publicly resold or to include their shares in any
registration statement that we file. The underwriters of any underwritten
offering will have the right to limit the number of shares to be included in the
filed registration statement.
Demand registration rights
- At any time after the closing of this offering but not within three
months of the effective date of a registration statement on a form other
than Form S-4 or Form S-8, the former holders of at least 50% of the
shares of the preferred stock of Virage or 50% of the series E preferred
stock of Virage have the right to demand that we file a registration
statement on a form other than Form S-3, as long as the aggregate amount
of securities sold under the registration statement is at least 25% of
the shares held by the holders requesting registration or exceeds
$2,000,000.
- If we are eligible to file a registration statement on Form S-3, any
holder having registration rights has the right to demand that we file a
registration statement on Form S-3, as long as the amount of securities
to be sold under the registration statement exceeds $750,000.
Piggyback registration rights
If we register securities for public sale, stockholders with registration
rights will have the right to include their shares in the registration
statement. The underwriters of any underwritten offering will have the right to
limit the number of shares to be included in the registration statement.
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<PAGE> 78
Expenses of registration
We will pay all registration expenses, excluding underwriting discounts and
commissions, of all demand and piggyback registrations.
Expiration of registration rights
The demand registration rights on a form other than Form S-3 and piggyback
registration rights will expire ten years after the closing of the series E
preferred stock financing.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
The provisions of the Delaware General Corporation Law, our certificate of
incorporation and our bylaws described below may have the effect of delaying,
deferring or discouraging another person from acquiring control of us.
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents Delaware
corporations from engaging, under limited circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets, with any interested stockholder, which is a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of stockholders, for three years following the date
that the stockholder became an interested stockholder unless:
- the transaction is approved by the board before the date the interested
stockholder attained that status;
- upon the closing of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or after the date the business combination is approved by the board
and authorized at an annual or special meeting of stockholders by at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. This provision of the Delaware
General Corporation Law could prohibit or delay merger or other takeover or
change-in-control attempts and may discourage attempts to acquire us.
CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of our certificate of incorporation and bylaws, which will
become effective upon the closing of this offering, may have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of Virage. These provisions
could cause the price of our common stock to decrease. Some of these provisions
allow us to issue preferred stock without any vote or further action by the
stockholders, eliminate the right of stockholders to act by written consent
without a meeting and eliminate cumulative voting in the election of directors.
These provisions may make it more difficult for stockholders to take specific
corporate actions and could have an
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<PAGE> 79
effect of delaying or preventing a change in control of Virage. Upon the closing
of this offering, our certificate of incorporation will provide that the board
of directors will be divided into three classes of directors, with each class
serving a staggered three-year term. The classification system of electing
directors may discourage a third party from making a tender offer or otherwise
attempting to obtain control of us and may maintain the incumbency of the board
of directors, because the classification of the board of directors generally
increases the difficulty of replacing a majority of the directors.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
our certificate of incorporation and bylaws provide that we will indemnify our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law. Our bylaws will also provide that we will indemnify officers
and directors against losses that they may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. We intend to enter into separate
indemnification agreements with our directors and executive officers, which may
be more broad than the specific indemnification provisions contained in the
Delaware General Corporation Law. These provisions and agreements may have the
effect of preventing changes in our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company. The address of our transfer agent and registrar is 2
Broadway, New York, New York 10004, and its telephone number at this location is
212-509-4000.
LISTING
Our common stock has been approved for listing on the Nasdaq National
Market under the trading name "VRGE."
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<PAGE> 80
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, only a limited number of 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 19,332,524
shares of common stock, assuming the conversion of all outstanding preferred
stock and based on common stock outstanding as of March 31, 2000, assuming the
cash exercise or conversion of warrants to purchase 181,818 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
March 31, 2000, there were options to purchase 3,653,514 shares of common stock,
and warrants to purchase 126,476 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 15,650,707 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 84,000 --
181 days after the date 13,326,610 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 2,349,357 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.
December 17, 2000 684,343 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
December 17, 2000.
June 28, 2001 1,636,361 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
June 28, 2001.
</TABLE>
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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 193,325 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> 82
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 11,952,560 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 8,849,017 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> 83
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated June 28, 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc. and Wit SoundView Corporation 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...................... 1,594,000
FleetBoston Robertson Stephens Inc.......................... 956,400
Wit SoundView Corporation................................... 637,600
Donaldson, Lufkin & Jenrette Securities Corporation......... 52,000
E*OFFERING Corp............................................. 52,000
Friedman, Billings, Ramsey & Co., Inc....................... 52,000
Invemed Associates LLC...................................... 52,000
C.E. Unterberg, Towbin...................................... 52,000
Wedbush Morgan Securities, Inc.............................. 52,000
---------
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 $0.462 per share. The
underwriters and the selling group members may allow a discount of $0.10 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... $0.77 $0.77 $2,695,000 $3,099,250
Expenses payable by us..... $0.57 $0.50 $2,000,000 $2,000,000
</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
83
<PAGE> 84
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 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, and who reconfirm their intent to purchase within
one week prior to the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "VRGE."
In September 1999 and December 1999, we sold shares of our series E
preferred stock in a private placement at a purchase price of $6.56 per share.
In this private placement, FleetBoston Robertson Stephens Inc. and some of its
employees and affiliated entities purchased 73,123 shares. FleetBoston Robertson
Stephens Inc. purchased these shares of series E preferred stock on the same
terms as the other investors in the private placement.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price was determined by negotiation between
us and the representatives. The principal factors 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;
84
<PAGE> 85
- 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.
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.
85
<PAGE> 86
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
- such purchaser is entitled under applicable provincial securities laws to
purchase such common stock without the benefit of a prospectus qualified
under such securities laws,
- where required by law, that such purchaser is purchasing as principal and
not as agent, and
- such purchaser has reviewed the text above under "Release Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions of
the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgement against the issuer or such person in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act British Columbia,
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such
86
<PAGE> 87
purchaser pursuant to this offering. Such report must be in the form attached to
British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which
may be obtained from us. Only one such report must be filed in respect of common
stock acquired on the same date and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. As of March 31,
2000, an investment partnership and individual attorneys at Gray Cary owned an
aggregate of 15,243 shares of Virage preferred stock. The underwriters have been
represented by Wilson Sonsini Goodrich & Rosati, Palo Alto, California. As of
March 31, 2000, an investment partnership and individual attorneys at Wilson
Sonsini owned an aggregate of 15,243 shares of Virage preferred stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at March 31, 1999 and 2000, and for each of
the three years in the period ended March 31, 2000, as set forth in their
report. We have 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.
87
<PAGE> 88
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of our common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about us and our capital
stock. The rules and regulations of the SEC allow us to omit various information
included in the registration statement from this document.
In addition, upon completion of this offering, we will become subject to
the reporting and information requirements of the Exchange Act and, as a result,
will file periodic reports, proxy statements and other information with the SEC.
You may read and copy this information at the following public reference rooms
of the SEC:
<TABLE>
<S> <C> <C>
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison
Room 1024 Suite 1300 Street
Washington, DC 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the public
reference section of the SEC, 450 Fifth Street, N.W. Room 1024, Washington, DC
20549, at prescribed rates. You may obtain information on the operation of the
public reference rooms by calling the SEC at 1-(800) SEC-0330.
The SEC also maintains an Internet website that contains reports, proxy
statements and other information about issuers, like Virage, who file
electronically with the SEC. The address of that website is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements, and make available to our stockholders quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
88
<PAGE> 89
VIRAGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 90
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Virage, Inc.
We have audited the accompanying consolidated balance sheets of Virage,
Inc. as of March 31, 1999 and 2000, and the related consolidated 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, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Virage, Inc. at March 31, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
April 17, 2000,
except for Note 12, as to
which the date is June 8, 2000
F-2
<PAGE> 91
VIRAGE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY
--------------------------- MARCH 31,
1999 2000 2000
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,356,541 $ 10,107,405
Accounts receivable, net of allowance for doubtful
accounts of $133,756 and $590,743 at March 31, 1999 and
2000, respectively...................................... 959,594 1,791,539
Prepaid expenses and other current assets................. 316,921 631,302
Deferred advertising costs................................ -- 585,376
------------ ------------
Total current assets.................................. 5,633,056 13,115,622
Property and equipment:
Computer equipment and software........................... 1,182,863 2,694,213
Furniture................................................. 229,101 596,927
Leasehold improvements.................................... 187,439 329,582
------------ ------------
1,599,403 3,620,722
Less: accumulated depreciation............................ 856,143 1,299,905
------------ ------------
743,260 2,320,817
Restricted investments...................................... 78,805 2,083,063
Other assets................................................ 149,619 1,352,902
------------ ------------
Total assets.......................................... $ 6,604,740 $ 18,872,404
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 183,834 $ 773,202
Accrued payroll and related expenses...................... 636,230 658,677
Accrued expenses.......................................... 214,240 1,768,800
Deferred revenue.......................................... 438,800 1,656,535
Current portion of borrowings under bank equipment term
loans................................................... 238,654 157,766
Current portion of capital lease obligations.............. 42,629 --
------------ ------------
Total current liabilities............................. 1,754,387 5,014,980
Long-term portion of borrowings under bank equipment term
loans..................................................... 240,705 83,333
Commitments and contingencies
Redeemable convertible preferred stock, $0.001 par value:
Authorized shares -- 11,046,201
Issued and outstanding shares -- 7,282,499 at March 31,
1999, and 10,316,199 at March 31, 2000, and none pro
forma (liquidation preference of $37,962,270)........... 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 -- 20,000,000 actual; 100,000,000 pro
forma
Issued and outstanding shares -- 2,323,383 at March 31,
1999, and 3,698,146 at March 31, 2000, and 14,014,345
pro forma............................................. 2,323 3,698 14,014
Additional paid-in capital................................ 951,542 23,671,084 60,655,767
Deferred compensation..................................... (398,675) (14,595,325) (14,595,325)
Accumulated deficit....................................... (13,881,455) (32,300,365) (32,300,365)
------------ ------------ ------------
Total stockholders' equity (net capital deficiency)... (13,326,265) (23,220,908) $ 13,774,091
------------ ------------ ============
Total liabilities and stockholders' equity............ $ 6,604,740 $ 18,872,404
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 92
VIRAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
License revenues................................. $ 1,437,635 $ 1,955,509 $ 4,187,497
Service revenues................................. 130,446 253,497 1,102,062
Other revenues................................... 1,133,629 1,141,203 271,404
----------- ----------- ------------
Total revenues................................ 2,701,710 3,350,209 5,560,963
Cost of revenues:
License revenues................................. 454,117 396,932 869,648
Service revenues(1).............................. 61,928 426,258 2,399,548
Other revenues................................... 809,060 859,156 259,816
----------- ----------- ------------
Total cost of revenues........................ 1,325,105 1,682,346 3,529,012
----------- ----------- ------------
Gross profit....................................... 1,376,605 1,667,863 2,031,951
Operating expenses:
Research and development(2)...................... 1,751,533 2,325,194 4,182,377
Sales and marketing(3)........................... 2,809,815 4,361,536 8,349,435
General and administrative(4).................... 935,019 1,272,635 2,652,593
Stock-based compensation......................... -- -- 1,070,182
----------- ----------- ------------
Total operating expenses...................... 5,496,367 7,959,365 16,254,587
----------- ----------- ------------
Loss from operations............................... (4,119,762) (6,291,502) (14,222,636)
Interest and other income.......................... 61,954 134,524 421,449
Interest expense................................... (42,115) (12,555) (37,687)
----------- ----------- ------------
Loss before income taxes........................... (4,099,923) (6,169,533) (13,838,874)
Provision for income taxes......................... -- -- (36,000)
----------- ----------- ------------
Net loss........................................... (4,099,923) (6,169,533) (13,874,874)
Series E convertible preferred stock dividend...... -- -- (4,544,036)
----------- ----------- ------------
Net loss applicable to common stockholders......... $(4,099,923) $(6,169,533) $(18,418,910)
=========== =========== ============
Basic and diluted net loss per share applicable to
common stockholders.............................. $ (2.84) $ (3.67) $ (8.06)
=========== =========== ============
Shares used in computation of basic and diluted net
loss per share applicable to common
stockholders..................................... 1,443,161 1,679,402 2,285,759
=========== =========== ============
Pro forma basic and diluted net loss per share
applicable to common stockholders................ $ (1.67)
============
Shares used to compute pro forma basic and diluted
net loss per share applicable to common
stockholders..................................... 11,005,896
============
</TABLE>
-------------------------
(1) Excluding $98,079 in amortization of deferred stock-based compensation for
the year ended March 31, 2000.
(2) Excluding $198,669 in amortization of deferred stock-based compensation for
the year ended March 31, 2000.
(3) Excluding $393,885 in amortization of deferred stock-based compensation for
the year ended March 31, 2000.
(4) Excluding $379,549 in amortization of deferred stock-based compensation for
the year ended March 31, 2000.
See accompanying notes.
F-4
<PAGE> 93
VIRAGE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
-----------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------ PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- ----------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997.... 3,143,590 $ 5,822,623 1,506,172 $1,506 $ 386,517 $ --
Issuance of shares of
Series B preferred stock,
net of issuance costs.... 446,615 1,150,606 -- -- -- --
Issuance of shares of
Series C preferred stock,
net of issuance costs.... 2,055,601 5,499,125 -- -- -- --
Issuance of common stock... -- -- 3,850 4 997 --
Exercise of stock options
by employees............. -- -- 313,429 313 64,857 --
Exercise of stock options
by consultants........... -- -- 1,000 1 319 --
Net loss and comprehensive
net loss................. -- -- -- -- -- --
---------- ----------- --------- ------ ----------- ------------
Balance at March 31, 1998.... 5,645,806 12,472,354 1,824,451 1,824 452,690 --
Issuance of shares of
Series C preferred stock,
net of issuance costs.... 183,205 478,806 -- -- -- --
Issuance of shares of
Series D preferred stock,
net of issuance costs.... 1,453,488 4,984,753 -- -- -- --
Issuance of common stock... -- -- 17,135 17 10,273 --
Exercise of stock options
by employees............. -- -- 481,797 482 89,904 --
Deferred compensation
related to grant of stock
options.................. -- -- -- -- 398,675 (398,675)
Net loss and comprehensive
net loss................. -- -- -- -- -- --
---------- ----------- --------- ------ ----------- ------------
Balance at March 31, 1999.... 7,282,499 17,935,913 2,323,383 2,323 951,542 (398,675)
Issuance of Series E
preferred stock, net of
issuance costs........... 3,033,700 19,059,086 -- -- -- --
Deemed dividend on Series E
preferred stock.......... -- -- -- -- 4,544,036 --
Issuance of common stock... -- -- 44,583 45 184,956 --
Exercise of stock options
by employees............. -- -- 1,315,264 1,315 1,061,984 --
Exercise of stock options
by consultants........... -- -- 15,166 15 76,526 --
Repurchase of common
stock.................... -- -- (250) -- (38) --
Deferred compensation
related to grant of stock
options.................. -- -- -- -- 15,886,360 (15,886,360)
Amortization of deferred
compensation............. -- -- -- -- -- 1,689,710
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................. -- -- -- -- -- --
---------- ----------- --------- ------ ----------- ------------
Balance at March 31, 2000.... 10,316,199 $36,994,999 3,698,146 $3,698 $23,671,084 $(14,595,325)
========== =========== ========= ====== =========== ============
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
----------------------------
TOTAL
STOCKHOLDERS'
EQUITY (NET
ACCUMULATED CAPITAL
DEFICIT DEFICIENCY)
------------ -------------
<S> <C> <C>
Balance at March 31, 1997.... $ (3,611,999) $ (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 and comprehensive
net loss................. (4,099,923) (4,099,923)
------------ ------------
Balance at March 31, 1998.... (7,711,922) (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 and comprehensive
net loss................. (6,169,533) (6,169,533)
------------ ------------
Balance at March 31, 1999.... (13,881,455) (13,326,265)
Issuance of Series E
preferred stock, net of
issuance costs........... -- --
Deemed dividend on Series E
preferred stock.......... (4,544,036) --
Issuance of common stock... -- 185,001
Exercise of stock options
by employees............. -- 1,063,299
Exercise of stock options
by consultants........... -- 76,541
Repurchase of common
stock.................... -- (38)
Deferred compensation
related to grant of stock
options.................. -- --
Amortization of deferred
compensation............. -- 1,689,710
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................. (13,874,874) (13,874,874)
------------ ------------
Balance at March 31, 2000.... $(32,300,365) $(23,220,908)
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 94
VIRAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(4,099,923) $(6,169,533) $(13,874,874)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock issued to consultants for services........... -- 10,290 --
Depreciation and amortization............................. 267,984 404,094 443,762
Amortization of deferred compensation related to employee
stock options........................................... -- -- 1,070,182
Amortization of deferred compensation related to
consultants' stock options.............................. -- -- 619,528
Amortization of deferred advertising costs and technology
right................................................... -- -- 210,060
Write-off of investment in Scimagix....................... -- -- 78,680
Changes in operating assets and liabilities:
Accounts receivable..................................... (87,270) (343,342) (831,945)
Prepaid expenses and other current assets............... (76,121) (227,588) (314,381)
Other assets............................................ (23,080) (19,543) (1,111,681)
Accounts payable........................................ 83,607 51,003 589,368
Accrued payroll and related expenses.................... 192,303 232,026 22,447
Accrued expenses........................................ 320,743 (227,500) 1,554,560
Deferred revenue........................................ 11,596 291,033 1,217,735
----------- ----------- ------------
Net cash used in operating activities....................... (3,410,161) (5,999,060) (10,326,559)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (545,425) (474,833) (2,021,319)
Investment in Scimagix...................................... -- (78,680) --
Increase in restricted investments.......................... (13,805) -- (2,004,258)
----------- ----------- ------------
Net cash used in investing activities....................... (559,230) (553,513) (4,025,577)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan financing................................ 750,000 250,000 --
Principal payments on loans................................. -- (520,641) (238,260)
Principal payments on capital leases........................ (103,602) (154,510) (42,629)
Proceeds from issuance of common stock, net of
repurchases............................................... 66,491 90,386 1,324,803
Proceeds from issuance of preferred stock................... 6,649,731 5,463,559 19,059,086
----------- ----------- ------------
Net cash provided by financing activities................... 7,362,620 5,128,794 20,103,000
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents........ 3,393,229 (1,423,779) 5,750,864
Cash and cash equivalents at beginning of period............ 2,387,091 5,780,320 4,356,541
----------- ----------- ------------
Cash and cash equivalents at end of period.................. $ 5,780,320 $ 4,356,541 $ 10,107,405
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 42,115 $ 12,554 $ 37,687
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Series E convertible preferred stock dividend............... $ -- $ -- $ 4,544,036
Deferred advertising costs.................................. $ -- $ -- $ 780,501
Deferred technology right................................... $ -- $ -- $ 185,217
</TABLE>
See accompanying notes.
F-6
<PAGE> 95
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Virage, Inc. ("Virage" or "the Company") is a provider of software products
and application services that enable owners of video content to catalog, manage
and distribute their video assets over the Internet and corporate intranets.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Virage and
its wholly owned subsidiary, Virage Europe, Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation.
As of March 31, 2000, the Company had cash and cash equivalents of
$10,107,405 and working capital, computed as current assets less current
liabilities, of $8,100,642. For the year ended March 31, 2000, the Company used
cash of $10,326,559 in its operating activities. Management believes that, to
the extent existing resources and anticipated total revenues are insufficient to
fund the Company's planned activities, additional debt or equity financing will
be available from existing investors and other parties.
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, 1999 and 2000.
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 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 March 31, 1999 and 2000, the Company has $78,805 and $2,083,063,
respectively, in certificates of deposit that are held as collateral for certain
letters of credit that are required pursuant to agreements in which the Company
has entered, including the Company's operating lease agreements (see Note 4).
The carrying values of these certificates of deposit approximate their fair
values as of March 31, 1999 and 2000.
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;
F-7
<PAGE> 96
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and also 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 the American
Institute of Certified Public Accountants' ("AICPA") Statement of Position No.
97-2 ("SOP 97-2"), "Software Revenue Recognition", as amended by Statement of
Position No. 98-4, "Deferral 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 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. For those contracts
that consist solely of license and maintenance, the Company recognizes license
revenues 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 a per copy basis for licensed software when each copy of the
license requested by the customer is delivered. Revenue is recognized on
licensed software on a per user or per server basis for a fixed fee when the
product master is delivered to the customer. There is no right of return or
price protection for sales to domestic and international distributors, system
integrators, or value added resellers (collectively, "resellers"). In situations
where the reseller has a purchase order from the end user that is immediately
deliverable, the Company recognizes revenue on shipment to the reseller, if
other criteria in SOP 97-2 are met, since the Company has no risk of
concessions. The Company defers revenue on shipments to resellers if the
reseller does not have a purchase order from an end user that is immediately
deliverable or other criteria in SOP 97-2 are not met. The Company recognizes
royalty revenues upon receipt of the quarterly reports from the vendors.
Virage Interactive services. Virage Interactive services revenues consist
of set-up fees, video processing fees and transaction fees. Set-up fees are
recognized ratably over the initial contract term, which is generally six to 18
months. The Company generates video processing fees for each hour of video that
a customer deploys. Processing fees are recognized as encoding, indexing and
editorial services are performed and are based upon hourly rates per hour of
video content processed. 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
F-8
<PAGE> 97
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the Company has 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 Financial Accounting Standards Board'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
The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses, and such losses have been within
management's expectations. The Company generally requires no collateral from its
customers.
Major customers (non-federal government agencies). For the year ended March
31, 1998, two customers each accounted for 11% of the Company's total revenues.
For the year ended March 31, 1999, one customer accounted for 13% of the
Company's total revenues. For the year ended March 31, 2000, two customers each
accounted for 13% and 10% of the Company's total revenues.
As of March 31, 2000, European customers accounted for approximately 18% of
the balance of accounts receivable (European customers were less than 10% as of
March 31, 1999). One European customer comprised 13% of the balance of accounts
receivable at March 31, 2000. If this customer failed to meet its obligation,
the Company would incur a loss of approximately $239,000.
Federal Government Agencies. For the years ended March 31, 1998, 1999, and
2000 direct and indirect revenues from federal government agencies accounted for
12%, 40%, and 12%, respectively, of total revenues. For the year ended March 31,
1999, two federal government agencies accounted for 17% and 14% of total
revenues (no single federal government agency accounted for more than 10% of
total revenues for the year ended March 31, 1998 or March 31, 2000).
ADVERTISING COSTS
Advertising costs are expensed as incurred. Deferred advertising costs,
which relate to the issuance of a warrant to purchase 75,435 shares of the
Company's Series E preferred stock to an Internet portal company, are being
amortized on a straight-line basis over the contract period (see Note 6).
Advertising expense, including the amortization of the
F-9
<PAGE> 98
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
aforementioned warrant's fair value, totaled $255,601 for the year ended March
31, 2000 and was insignificant for each of the two years in the period ended
March 31, 1999.
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, the Company 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 the FASB's 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 the Company'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 March 31, 2000.
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 below and in the consolidated statements of
operations, has been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the assumed conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
F-10
<PAGE> 99
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
YEARS ENDED MARCH 31,
------------------------------------------
1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
Net loss applicable to common
stockholders................ $(4,099,923) $(6,169,533) $(18,418,910)
=========== =========== ============
Weighted-average shares of
common stock outstanding.... 1,600,272 2,023,358 2,710,182
Less weighted-average shares
of common stock subject to
repurchase.................. (157,111) (343,956) (424,423)
----------- ----------- ------------
Weighted-average shares used
in computation of basic and
diluted net loss per share
applicable to common
stockholders................ 1,443,161 1,679,402 2,285,759
=========== =========== ============
Basic and diluted net loss per
share applicable to common
stockholders................ $ (2.84) $ (3.67) $ (8.06)
=========== =========== ============
Shares used in computation of
basic and diluted net loss
per share applicable to
common stockholders......... 2,285,759
Pro forma adjustment to
reflect weighted-average
effect of the assumed
conversion of convertible
preferred stock............. 8,720,137
------------
Shares used in computing pro
forma basic and diluted net
loss per share applicable to
common stockholders......... 11,005,896
============
Pro forma basic and diluted
net loss per share
applicable to common
stockholders................ $ (1.67)
============
</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
1,607,175 and 2,013,690 shares of common stock and common stock equivalents were
outstanding at March 31, 1998 and 1999, respectively. At March 31, 2000, the
Company had 3,779,990 antidilutive securities outstanding and also had
outstanding agreements to issue up to approximately $20,000,000 of additional
shares of common stock at a to be determined price (see Note 6). Such
securities, had they been
F-11
<PAGE> 100
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999, or at the date of original issuance, if later.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial instruments
at March 31, 2000. The amounts reported for cash and cash equivalents, accounts
receivable, restricted investments, accounts payable, bank equipment term loans
and capital lease obligations approximate their carrying values due to
short-term maturities of these instruments.
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 (see Notes 6 and 12). Unaudited pro forma
stockholders' equity at March 31, 2000, as adjusted for the assumed conversion
of convertible preferred stock based on the shares of convertible preferred
stock outstanding at March 31, 2000, is disclosed on the Company's consolidated
balance sheet.
LONG-LIVED ASSETS
The Company has 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.
F-12
<PAGE> 101
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 ended 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. The Company 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.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
2. CASH EQUIVALENTS
Cash equivalents as of March 31, 1999 and 2000 consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1999 2000
---------- ----------
<S> <C> <C>
Money market fund..................... $3,427,511 $8,491,166
Bankers acceptance.................... 669,755 --
---------- ----------
Total................................. $4,097,266 $8,491,166
========== ==========
</TABLE>
F-13
<PAGE> 102
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 2000
-------- ----------
<S> <C> <C>
Technology right, net of amortization of
$14,935............................... $ -- $ 170,282
Offering costs.......................... -- 811,777
Deposits................................ 59,501 360,629
Investment in Scimagix.................. 78,680 --
Other................................... 11,438 10,214
-------- ----------
$149,619 $1,352,902
======== ==========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LINE OF CREDIT AND EQUIPMENT TERM LOANS
In December 1999, the Company renewed existing credit facilities with a
bank, under which it may borrow up to a maximum of $1,500,000 under a line of
credit, based on 80% of eligible accounts receivable. The line of credit
provides for interest at a rate of prime less 0.25% per annum (8.75% at March
31, 2000) and matures on November 1, 2000. At March 31, 2000, there were no
outstanding borrowings under the line of credit and approximately $1,298,000 was
available. In addition, the Company has two separate equipment term loans under
credit facilities with the same bank. At March 31, 2000, the Company had $32,766
of debt outstanding under the first equipment term loan and $208,333 of debt
outstanding under the second term loan. Both equipment term loans provide for
interest at prime plus 0.5% per annum (9.5% at March 31, 2000). Under the
provisions of the credit facilities, the Company is required to maintain certain
financial and nonfinancial covenants. The Company 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 fiscal years ended March 31:
<TABLE>
<S> <C>
2000......................................... $157,766
2001......................................... 83,333
--------
$241,099
========
</TABLE>
LEASES
In February 2000, the Company entered into a six-year operating lease
agreement on a new building for its California corporate offices. Rental
payments begin in August 2000 and the Company is required to maintain a
$2,000,000 letter of credit pursuant to the agreement. In conjunction with the
lease agreement, the Company will also issue a warrant to the landlord to
purchase $2,000,000 of the Company's common stock (see Note 6). In addition, the
Company is also required to hold other letters of credit as collateral for
F-14
<PAGE> 103
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
certain of its other operating lease agreements. Rental expense was $229,933,
$354,530, and $717,486 for the years ended March 31, 1998, 1999, and 2000,
respectively.
Future minimum lease payments under noncancelable operating leases at March
31, 2000 are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDED MARCH 31, LEASES
-------------------- -----------
<S> <C>
2001................................. $ 2,259,960
2002................................. 3,566,414
2003................................. 2,886,556
2004................................. 2,853,984
2005................................. 2,952,384
Thereafter........................... 4,262,400
-----------
Total minimum payments.................... $18,781,698
===========
</TABLE>
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.
SIGNIFICANT AGREEMENTS AND RELATED COMMITMENTS
In March 2000, the Company entered into a one-year services agreement with
Akamai Technologies, Inc. ("Akamai"). The agreement stipulates that Akamai and
the Company will resell each other's products and services and that the Company
guarantees to purchase or resell a minimum of $250,000 of Akamai products and
services during the first year of the services agreement. To the extent that the
Company is unable to meet its minimum sales requirement of Akamai products and
services to third parties, the Company is required to pay Akamai the difference
between the amount sold and the $250,000 minimum commitment. The Company will
offset any revenues received from Akamai by any guaranteed amounts paid to
Akamai. In addition, the Company entered into a stock purchase agreement with
Akamai whereby Akamai has agreed to purchase a certain amount of the Company's
common stock at the IPO price in a private placement concurrent with, and
contingent upon, the closing of the Company's IPO (see Note 6).
In March 2000, the Company entered into a one-year services agreement with
RealNetworks, Inc. ("RealNetworks"). The agreement provides for RealNetworks to
license and use certain Company technology within RealNetworks' websites and
video player for which the Company is to receive certain fees, subject to
certain minimums, as defined within the agreement. The agreement also stipulates
that the Company is to provide $240,000 of credit to customers of RealNetworks
that can be applied toward Virage Interactive services set-up fees and indexing
and encoding services (based upon Virage standard pricing). In addition, at the
Company's option, the Company will provide an additional $300,000 of set-up fees
and indexing and encoding services (based upon Virage cost incurred) to
RealNetworks' customers during the term of the agreement or, to the extent not
provided, purchase the difference in the form of RealNetworks' advertising
services over the subsequent twelve month period. The Company will reduce its
revenues received from RealNetworks to the extent that the Company provides the
aforementioned
F-15
<PAGE> 104
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
service credits to RealNetworks customers or purchases RealNetworks'
advertisements. Finally, the Company entered into a stock purchase agreement
with RealNetworks whereby RealNetworks has agreed to purchase a certain amount
of the Company's common stock at the IPO price in a private placement concurrent
with, and contingent upon, the closing of the Company's IPO (see Note 6).
LITIGATION
The Company is subject to various claims that 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 the Company.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock at March 31, 1999 and 2000 is as
follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND
SHARES OUTSTANDING
DESIGNATED -----------------------
AT MARCH 31,
MARCH 31, -----------------------
2000 1999 2000
---------- --------- ----------
<S> <C> <C> <C>
Series A.......................... 2,066,667 2,066,667 2,066,667
Series B.......................... 1,532,192 1,523,538 1,523,538
Series C.......................... 2,238,806 2,238,806 2,238,806
Series D.......................... 1,500,000 1,453,488 1,453,488
Series E.......................... 3,708,536 -- 3,033,700
---------- --------- ----------
Total redeemable convertible
preferred stock.............. 11,046,201 7,282,499 10,316,199
========== ========= ==========
</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 $11.152 or (ii) the election of holders of at least 83% of the
outstanding preferred stock (see Note 12).
Proportional adjustments of the Series A, B, C, D, and E preferred stock
conversion rates will be made for splits, combinations, stock dividends,
recapitalizations, and the like. The conversion rate for a particular series of
the preferred stock will be subject to adjustment in the event that the Company
issues additional equity securities at less than the conversion price for that
series of preferred stock (other than shares of common stock issued or issuable
to employees, consultants, and directors under plans and agreements approved by
the Company's Board of Directors as well as the other exceptions currently set
forth in the Company's Certificate of Incorporation); provided, however, that if
any holder of preferred stock does not purchase its pro rata amount, such holder
will have those shares as to which his pro rata rights were not exercised
converted into a new series of preferred stock that has no antidilution
protection, except that the Series E preferred
F-16
<PAGE> 105
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $0.12, $0.208, $0.2144, $0.2752 and $0.5248 per
share of Series A, B, C, D, and E preferred stock, respectively. As of March 31,
2000, 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 $1.50, $2.60, $2.68, $3.44
and $6.56 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 $1.50 per
share of Series A preferred stock, $2.60 per share of Series B preferred stock,
$2.68 per share of Series C preferred stock, $3.44 per share of Series D
preferred stock, and $6.56 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 $11.152 per share.
On September 21, 1999, the Company issued 2,349,357 shares of Series E
redeemable convertible preferred stock at a price of $6.56 per share for a total
purchase price of $15,411,781, before issuance costs. The issuance price of
$6.56 was considered to be equal to the fair value at the time of issuance.
On December 17, 1999, the Company issued 684,343 additional shares of
Series E redeemable convertible preferred stock at a price of $6.56 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 approximately $13.20 per share. The
difference between the fair value of $13.20 per share and the issue price of
$6.56 per share has been accounted for as a deemed dividend totaling $4,544,036.
F-17
<PAGE> 106
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In January 2000, the Company's board of directors approved the filing of a
Registration Statement with the Securities and Exchange Commission permitting
Virage to sell common stock to the public. Upon completion of the initial public
offering ("IPO"), Virage's Certificate of Incorporation will be amended to
reduce the number of authorized preferred stock from 11,046,201 shares to
2,000,000 shares and increase authorized common stock to 100,000,000 shares. The
Board of Directors will have the authority, without action by the stockholders,
to designate and issue the 2,000,000 shares of 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.
COMMON STOCK PURCHASE AGREEMENT
On March 24, 2000, the Company entered into a common stock purchase
agreement with Akamai, CNET, Inc. ("CNET"), RealNetworks, and Thomson Consumer
Electronics, Inc. (collectively, "the purchasers") whereby the Company agreed to
sell the Company's common stock to the purchasers at the IPO price in a private
placement concurrent with, and contingent upon, the closing of the Company's
IPO. The common stock purchase agreement with the purchasers originally was to
expire on May 24, 2000, but was amended to extend the expiration date (see Note
12).
WARRANTS
In September 1995, in connection with a capital lease agreement, the
Company issued warrants to purchase 16,666 shares of common stock at an exercise
price of $0.75 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 $0.75, 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, the Company
issued warrants to purchase 6,666 shares of common stock at an exercise price of
$0.75 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 $0.75, 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 8,654 shares of Series B preferred stock at an exercise
price of $2.60 per share. The warrants expire in May 2002. Interest expense
related to the fair value of the warrants
F-18
<PAGE> 107
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $2.60, 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 19,055 shares of Series E preferred stock at an exercise
price of $6.56 per share, subject to certain adjustments. The warrant expires 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 $11.152 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 $13.20, a risk-free interest rate of
5.9%, a volatility factor of 90%, and a life of 3 years. The fair value of the
warrants has been recorded as a technology right and will be amortized to cost
of goods sold over the life of the agreement, which expires on December 31,
2004. Amortization expense of $14,935 was recorded through March 31, 2000.
On December 28, 1999, the Company issued a warrant to purchase 75,435
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 $6.56 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 $11.152 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 $13.20, 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, which commenced in
the month-ended January 31, 2000, and which corresponds with the beginning of
the advertising program. Amortization expense of $195,125 was recorded through
March 31, 2000.
In February 2000, the Company entered into a six-year operating lease
agreement on a new building. As part of the operating lease agreement, the
Company will issue a warrant to the landlord to purchase $2,000,000 of the
Company's common stock. The warrant will be issued concurrent with the pricing
of the Company's IPO and will have an exercise price equal to the offering price
to the public as set forth in the Company's final prospectus and will be
non-forfeitable and immediately exercisable for a number of shares of the
Company's common stock determined as the quotient of $2,000,000 divided by the
F-19
<PAGE> 108
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's IPO price. If not exercised, the warrant will expire at the end of the
first day that the Company's stock begins trading on NASDAQ. Preliminarily, the
Company has estimated that the value of the warrant at the time of issue will be
approximately $72,000 using a Black-Scholes model with the following
assumptions: assumed IPO price of $11.00 as the deemed fair value, a risk-free
interest rate of 6.1%, a volatility factor of 90%, and an expected life of one
day (based upon the foregoing explanation of the warrant's short contractual
life). The value of the warrant will be amortized as rent expense over the term
of the six-year lease agreement.
EMPLOYEE STOCK PLANS
In December 1997, the Company's stockholders agreed to terminate the
Virage, Inc. 1995 Stock Option Plan (the 1995 Plan) and to introduce the Virage,
Inc. 1997 Stock Option Plan (the 1997 Plan). All options issued under the 1995
Plan remained outstanding under that plan and did not become outstanding under
the 1997 Plan. The 1997 Plan provides for the granting of incentive stock
options and nonqualified stock options to employees, directors, and consultants.
Under the 1997 Plan, the Board of Directors determines the term of each award
and the award price. In the case of incentive stock options, the exercise price
may be established at an amount not less than the fair market value at the date
of grant, while nonstatutory options may have exercise prices not less than 85%
of the fair market value as of the date of grant. Options granted to any person
owning stock possessing more than 10% of the total combined voting power must
have exercise prices of at least 110% of the fair market value at the date of
grant. Options generally vest ratably over a four-year period commencing with
the grant date and expire no later than ten years from the date of grant.
Options granted under the 1995 Plan are not exercisable until they are
fully vested. Options granted under the 1997 Plan are immediately exercisable,
but shares so purchased that are not yet vested may be repurchased by Virage
upon termination of employment at the exercise price.
All shares subject to options outstanding under the 1995 Plan that expired
or were terminated, canceled, or repurchased were added to the number of shares
authorized and reserved for issuance under the 1997 Plan.
Virage has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under the
FASB's Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), requires use of option valuation models
that were not developed for use in valuing employee stock options.
F-20
<PAGE> 109
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity and related information 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, 1997............... 213,332 1,343,722 $0.15
Options authorized.................... 2,577,520 -- --
Options granted....................... (597,662) 597,662 $0.27
Options exercised..................... -- (314,429) $0.21
Options canceled...................... 35,366 (51,766) $0.19
---------- ----------
Balance at March 31, 1998............... 2,228,556 1,575,189 $0.19
Options granted....................... (1,246,937) 1,246,937 $0.45
Options exercised..................... -- (481,797) $0.19
Options canceled...................... 220,355 (358,625) $0.24
---------- ----------
Balance at March 31, 1999............... 1,201,974 1,981,704 $0.35
Options authorized.................... 5,000,000 -- --
Options granted....................... (3,121,423) 3,121,423 $7.26
Options exercised..................... -- (1,330,430) $0.86
Options canceled...................... 119,183 (119,183) $0.74
---------- ----------
Balance at March 31, 2000............... 3,199,734 3,653,514 $6.00
========== ==========
</TABLE>
As of March 31, 2000, there were 513,314 shares of common stock exercised
pursuant to stock options that were not fully vested. These shares are subject
to repurchase solely at the option of Virage at the original grant price upon an
employee's termination.
Options canceled during the years ended March 31, 1998 and 1999 of 51,766
and 358,625, respectively, included options issued under both the 1995 and 1997
Plans. Options canceled that were issued under the 1995 Plan of 16,400 and
138,270 during the years ended March 31, 1998 and 1999, 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 16,400 and 138,270,
respectively, for the years ended March 31, 1998 and 1999.
The following table summarizes information about stock options outstanding
and exercisable at March 31, 2000:
<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>
$0.15 - $ 0.40 626,906 7.26 $0.26 498,426 $0.28
$1.00 - $ 2.50 343,355 9.01 $1.70 343,355 $1.70
$3.00 - $ 6.00 1,213,811 9.61 $5.41 1,213,811 $5.41
$8.00 - $12.00 1,469,442 9.86 $9.89 1,469,442 $9.89
--------- ---------
$0.15 - $12.00 3,653,514 9.25 $6.00 3,525,034 $6.20
========= ==== ===== ========= =====
</TABLE>
F-21
<PAGE> 110
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 2000, the Company's board of directors approved the Virage, Inc.
2000 Employee Stock Purchase Plan (the "ESPP") which is designed to allow
eligible employees of the Company to purchase shares of the Company's common
stock at semiannual intervals through periodic payroll deductions. An aggregate
of 1,100,000 shares of common stock has been reserved for the ESPP, and no
shares have been issued through March 31, 2000. The ESPP is implemented in a
series of successive offering periods, each with a maximum duration of 24
months. Eligible employees can have up to 10% of their base salary deducted that
is to be used to purchase shares of the common stock on specific dates
determined by the board of directors (up to a maximum of $25,000 per year based
upon the fair market value of the shares). The price of common stock purchased
under the ESPP will be equal to 85% of the lower of the fair market value of the
common stock on the commencement date of each offering period or the specified
purchase date.
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company had accounted for
its employee stock options 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 1998, 1999, and 2000:
risk-free interest rates of 5.9%, 5.7% and 5.8%, respectively, no dividend
yield, and an expected life of the options of four 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 the Company'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 the
Company'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, 1998,
1999 and 2000 was $0.032, $0.064, and $4.28, respectively.
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 $4,109,923,
$6,215,533 and $19,765,024 or $(2.85), $(3.70) and $(8.65) per share for the
years ended March 31, 1998, 1999 and 2000, respectively.
DEFERRED COMPENSATION
During the years ended March 31, 1999 and 2000, the Company recorded
aggregate deferred compensation of $398,675 and $15,886,360, respectively,
representing the difference between the exercise price of stock options granted
and the then deemed fair value of the Company'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
years ended March 31, 2000, Virage amortized $1,689,710 of deferred compensation
of which $1,070,182 related to stock options issued to employees (presented
separately in the Company's statement of operations) and $619,528 related to
stock options issued to consultants.
F-22
<PAGE> 111
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTIONS ISSUED TO CONSULTANTS
As of March 31, 2000, the Company had granted options to purchase 295,523
shares of common stock to consultants at exercise prices ranging from $1.00 to
$12.00 per share. The options were granted in exchange for consulting services
to be rendered and vest over periods ranging from immediately to four years. The
Company valued these options at $2,846,377, being their fair value estimated
using a Black-Scholes valuation model assuming fair values of common stock
ranging from $2.03 to $14.67 per share, risk-free interest rates ranging from
4.75% to 6.13%, volatility factor of 90% and a life of four years. The Company
recorded a charge to operations of $619,528 for the year ended March 31, 2000
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 March 31, 2000, common stock reserved for future issuance was as
follows:
<TABLE>
<S> <C>
Conversion of Series A preferred stock..................... 2,066,667
Conversion of Series B preferred stock..................... 1,523,538
Conversion of Series C preferred stock..................... 2,238,806
Conversion of Series D preferred stock..................... 1,453,488
Conversion of Series E preferred stock..................... 3,033,700
Series E preferred stock warrants.......................... 94,490
Series B preferred stock warrants.......................... 8,654
Common stock warrants...................................... 23,332
Employee stock purchase plan............................... 1,100,000
Stock option plan.......................................... 6,853,248
----------
18,395,923
==========
</TABLE>
In addition, the Company has available an adequate number of shares of
common stock to provide for the common stock purchase agreement with Akamai,
CNET, RealNetworks, and Thomson Consumer Electronics, Inc. (see Note 6) and the
warrant to be issued to the Company's landlord (see Note 6) upon the
consummation of the Company's IPO.
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 March 31, 2000.
F-23
<PAGE> 112
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The Company accounts for income taxes pursuant to the FASB's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). The provision for income taxes of approximately $36,000 for the year
ended March 31, 2000 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 for or benefit from income
taxes for each of the two years in the period ended March 31, 1999.
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
MARCH 31,
------------------------------------
1998 1999 2000
------- -------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax benefit at Federal statutory rate
(33%)..................................... $(1,394) $(2,047) $(4,705)
Loss for which no tax benefit is currently
recognizable.............................. 1,394 2,047 4,705
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,
-------------------
1999 2000
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 4,608 $ 7,900
Tax credit carryforwards........................ 372 700
Capitalized R&D................................. 337 467
Accruals and reserves not currently
deductible................................... 274 1,459
------- --------
Total deferred tax assets.................... 5,591 10,526
Valuation allowance............................... (5,591) (10,526)
------- --------
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 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 $4,935,000
during the years ended March 31, 1998, 1999 and 2000, respectively.
F-24
<PAGE> 113
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000, the Company had federal and state net operating loss
carryforwards of approximately $22,000,000 and $7,000,000, respectively. As of
March 31, 2000, the Company also had federal and state research and development
tax credit carryforwards of approximately $483,000 and $330,000, 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 year ended March 31, 2000 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 years ended March 31, 1999 and 2000, Virage recognized $125,000 and
$127,500 of such fees as license revenue based on cash receipts.
11. SEGMENT AND GEOGRAPHIC INFORMATION
Through March 31, 1999, the Company operated within one business
segment -- the sale of software and related software support services. For the
year ended March 31, 2000, the Company had two reportable segments: the sale of
software and related software support services including revenues from U.S.
government agencies ("software") and the sale of its Virage Interactive services
which includes set-up fees, video processing fees, and transaction fees ("VI").
The Company's Chief Operating Decision Maker ("CODM") is the Company's Chief
Executive Officer who evaluates performance and allocates resources based upon
total revenues and gross margin (loss). Discreet financial information for each
segment's profit and loss and each segment's total assets is not provided to the
Company's CODM, nor is it tracked by the Company. The accounting policies for
the reportable segments are consistent with those described in the summary of
significant accounting policies. Total revenues for the Company's software
segment were $5,123,125 and total revenues for the Company's VI segment were
$437,838 for the year ended March 31, 2000. Total cost of revenues for the
Company's software segment were $1,599,874 and total cost of revenues for the
Company's VI segment were $1,929,138 for the year ended March 31, 2000. Gross
profit for the Company's software segment was $3,523,251 and gross loss for the
Company's VI segment was $1,491,300 for the year ended March 31, 2000.
Total revenues to customers located outside of the United States were
approximately $358,000 and $1,241,000 for the year ended March 31, 1999 and
2000, respectively (insignificant for the year ended March 31, 1998). The
Company's European subsidiary, Virage Europe, Ltd., which was established in
November 1998, accounted for approximately $140,000 and $1,137,000 of the
Company's total revenues for the years ended March 31, 1999 and 2000,
respectively.
F-25
<PAGE> 114
VIRAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
REVERSE STOCK SPLIT AND AMENDED PREFERRED STOCK AGREEMENT
In June 2000, the Company's stockholders approved a 1-for-2 reverse stock
split of the Company's preferred and common stock. The reverse stock split will
take place and become effective just prior to the consummation of the Company's
IPO. All share data information has been restated to reflect the reverse stock
split.
In addition, the Company amended the conversion terms of its redeemable
convertible preferred stock by reducing the automatic conversion price per share
to $8.00 per share from $11.152 per share.
OPTIONS GRANTED SUBSEQUENT TO MARCH 31, 2000
In May 2000, the Company granted a total of 515,250 common stock options at
a price of $12.00 per share. The Company believes that the price of the stock
options granted is equivalent to the stock options' deemed fair value on the
date of grant.
COMMON STOCK PURCHASE AGREEMENT AMENDMENT
In May 2000, the Company amended its common stock purchase agreement (see
Note 6) with Akamai, CNet, RealNetworks and Thomson Consumer Electronics, Inc.
to sell the aforementioned parties approximately $18,000,000 of the Company's
common stock and to extend the expiration date of the common stock purchase
agreement until July 2000.
PROCEEDS FROM SENIOR LINE OF CREDIT FACILITY
In May 2000, the Company received $806,000 pursuant to its senior line of
credit facility.
F-26
<PAGE> 115
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> 116
[VIRAGE LOGO]
