<PAGE>
As filed with the Securities and Exchange Commission on April 5, 2000
Registration No. 333-32034
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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AMENDMENT No. 2
To
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERSHOP Communications Aktiengesellschaft
(Exact Name of Registrant as Specified in its Charter)
INTERSHOP Communications Stock Corporation
(Translation of Registration Name into English)
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<S> <C> <C>
Federal Republic of Germany 7373 Not Applicable
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
Amsinckstrabe 57
D-20097 Hamburg
Federal Republic of Germany
(011) 49-40-23708-2
(Address and telephone number of Registrant's principal executive offices)
---------------
CRAIG W. HARDING
INTERSHOP Communications AG
600 Townsend Street, Suite 500
San Francisco, CA 94103
(415) 229-0100
(Name, address and telephone number of agent for service)
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Copies to:
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<S> <C>
WILLIAM H. HINMAN, JR. MARK A. BERTELSEN
Shearman & Sterling Wilson Sonsini Goodrich & Rosati
555 California Street, Suite 2000 Professional Corporation
San Francisco, CA 94104 650 Page Mill Road
Palo Alto, CA 94304
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 5, 2000
435,000 Bearer Ordinary Shares
[INTERSHOP LOGO APPEARS HERE]
in the form of 4,350,000 American Depositary Shares
--------
We are offering 4,350,000 American Depositary Shares. Each ADS represents
1/10 of one bearer ordinary share and will be evidenced by an American
Depositary Receipt.
Prior to this offering, there has been no public market for our ADSs. Our
ordinary shares are listed on the Neuer Markt of the Frankfurt Stock Exchange
under the symbol ISH. On April 4, 2000, the last reported sale price was
(Euro)404.00 per ordinary share, which is equivalent to $38.68 per ADS. We have
applied to list our ADSs on The Nasdaq Stock Market's National Market under the
symbol "ISHP."
We have granted the underwriters an option to purchase a maximum of 650,000
additional ADSs to cover over-allotments of ADSs.
Investing in our ADSs involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions INTERSHOP
------------- ------------- -------------
<S> <C> <C> <C>
Per ADS.................................... $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the ADSs will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Chase H&Q
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 2000.
<PAGE>
Inside Front Cover:
The following captions accompany a graphical depiction of our products on the
insider front cover:
"Sell Anywhere with Intershop
"Sell direct to businesses and consumers over the Internet
"Sell indirect through affiliate sites, online marketplaces and distributors'
websites
"Enable merchants to sell their products on line
"Enable marketplaces: Bring multiple buyers and sellers together at your online
marketplace"
<PAGE>
------------
TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary....................................................... 3
Summary Consolidated Financial Data...................................... 5
Risk Factors............................................................. 6
Presentation of Financial Information.................................... 15
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Price Range of Ordinary Shares........................................... 17
Exchange Rate Information................................................ 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 23
Business................................................................. 31
Management............................................................... 45
</TABLE>
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Page
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Certain Relationships and Related Transactions............................. 50
Principal Shareholders..................................................... 53
Description of Capital Stock............................................... 54
Shares Eligible for Future Sale............................................ 62
Description of American Depositary Shares.................................. 64
The German Equity Market................................................... 72
German Taxation............................................................ 74
Taxation of U.S. Investors................................................. 78
Limitations Affecting Security Holders..................................... 84
Underwriting............................................................... 85
Notice to Canadian Residents............................................... 87
Legal Matters.............................................................. 88
Experts.................................................................... 88
Available Information...................................................... 88
Index to Consolidated Financial Statements................................. F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
You should read the entire prospectus carefully, including the financial data
and related notes, before making an investment decision.
INTERSHOP Communications
We are a global provider of electronic commerce software. Electronic commerce
software applications are software applications that help businesses market and
sell their products and services over the Internet. Our products are targeted
toward large businesses, both those that sell their own products and services
online and those that assist other businesses in selling their products and
services online. Our products can be used to address entry-level electronic
commerce storefronts, as well as more advanced electronic commerce business
models such as online marketplaces. We market our software applications and
professional services to large businesses that have the ability to manage their
own electronic commerce sites. We also market our products and services to
application service providers, or ASPs. ASPs are companies that, with the help
of our software applications, manage electronic commerce sites for the growing
number of small- and medium-sized businesses seeking to establish a business
presence on the Internet. Businesses also use our software applications to
enable sellers of products and services by providing a forum for bringing
buyers and sellers together online. By offering products that provide solutions
to a range of distinct business models, we can meet the needs of our customers
as they evolve from entry-level to more sophisticated electronic commerce
operations while remaining on our software platform.
The growth of the Internet has fueled the demand for electronic commerce
technologies. These technologies support a wide range of online business
functions, from enabling transactions to providing marketing data about
customers. According to International Data Corporation, or IDC, the market for
Internet commerce applications is expected to grow from $1.7 billion in 1999 to
$13.2 billion by 2003.
Many existing electronic commerce software packages provided by our
competitors successfully display products and process orders. However, few
software packages can combine these basic functions with the ability to
integrate with existing business systems, to be deployed rapidly and to provide
intelligent merchandising capabilities, such as customer profiling, shopping
lists and cross-selling that allow companies to provide their online customers
with an individualized shopping experience. We believe that a large market
opportunity exists for a solution such as ours that meets the extensive
requirements of businesses developing an online presence.
We intend to continue to strengthen our position as a leading provider of
electronic commerce software applications enabling businesses to sell products
and services over the Internet. Key elements of our strategy include:
. Extending our leadership in the electronic commerce software market;
. Expanding our leadership position in providing software to ASPs;
. Providing solutions for a wide range of electronic commerce business
models;
. Continuing to expand our presence in the enterprise market by increasing
our sales and marketing capabilities;
. Strengthening our network of sales and technology partners; and
. Leveraging our global presence to capitalize on the growth in the
electronic commerce market.
3
<PAGE>
We have operations in the United States and Europe and a worldwide network of
over 600 channel partners, including PricewaterhouseCoopers, Deutsche Telekom,
Unisys, Northern Telecom and MindSpring. Our global presence allows us to work
closely with large businesses and ASPs that operate internationally. In 1998,
customers using our products established over 5,500 new electronic commerce
sites. According to IDC, this placed us in the top three companies cited in the
survey in terms of the number of sites established. By December 31, 1999, over
10,000 electronic commerce sites had been licensed to be deployed on our
products worldwide by ASPs and enterprises such as Bosch, Canon, Hewlett
Packard, MindSpring, Northern Telecom and US West.
We began doing business in 1992 as NetConsult Computersysteme GmbH. In April
1998, we incorporated as a German stock corporation. We are a holding company
and own seven subsidiaries that conduct all of our worldwide operations. In
1999, we had net a loss of $18.4 million, and we had an accumulated net deficit
of $45.4 million as of December 31, 1999.
Our operational headquarters are located at 600 Townsend Street, Suite 500
West, San Francisco, CA 94103, and our telephone number at that address is
(415) 229-0100. Our principal executive offices are located at Amsinckstrabe
57, 20097 Hamburg, Germany. Our website is located at www.intershop.com. The
information on our website is not part of this prospectus.
"INTERSHOP" is a registered trademark of our company. This prospectus
contains product names and trademarks of our company and other organizations.
The Offering
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<S> <C>
ADSs offered........................................ 4,350,000 ADSs representing
435,000 ordinary shares
Ordinary shares that will be outstanding after this 17,313,104 ordinary shares, which is
offering........................................... equivalent to 173,131,040 ADSs
Use of proceeds..................................... For working capital and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.............. ISHP
</TABLE>
The number of shares of common stock outstanding after this offering is based
on shares outstanding as of December 31, 1999.
4
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following table summarizes the statement of operations and balance sheet
data for our business and our predecessor. The following data should be read in
conjunction with "Selected Consolidated Financial Data," "Management Discussion
and Analysis of Financial Conditions and Results of Operations" and other
financial statements within this prospectus. For convenience only certain euro
figures have been translated into U.S. dollars at the rate of (Euro)1.00 =
$1.00, the noon buying rate in New York City for cable transfers in foreign
currencies certified by the Federal Reserve Bank of New York for customs
purposes on December 31, 1999. All prior year balances have been restated from
Deutsche marks into euros using the exchange rate as of January 1, 1999. Prior
to 1997, there was no common stock outstanding as we were organized as
INTERSHOP Communications GmbH, which is a limited liability corporation.
Accordingly, no earnings per share have been presented for periods prior to
1997. Financial data as of and for the years ended December 31, 1995 and 1996
represent information for INTERSHOP Communications GmbH.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
1995 1996 1997 1998 1999 1999
------ ------ ------ ------- ------- -----------
(Euro) (Euro) (Euro) (Euro) (Euro) US$
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues.................. 885 471 5,035 17,872 46,266 46,266
Gross profit.............. 217 (97) 2,348 12,364 33,015 33,015
Operating expenses........ 234 2,157 9,165 31,331 53,092 53,092
Operating loss............ (17) (2,254) (6,817) (18,967) (20,077) (20,077)
Net loss.................. (3) (2,320) (7,015) (17,308) (18,389) (18,389)
Basic and diluted net loss
per AG share attributable
to common shareholders... (1.19) (1.44) (0.97) (0.97)
Basic and diluted net loss
per American Depositary
Share (ADS) attributable
to common shareholders... (0.12) (0.14) (0.10) (0.10)
Shares used in per AG
share calculations....... 6,034 12,145 18,948 18,948
Shares used in per ADS
calculations............. 60,340 121,450 189,480 189,480
</TABLE>
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<CAPTION>
As of December 31,
----------------------------------------------------------
1999
--------------------------
Adjusted
for the
1995 1996 1997 1998 Actual Actual offering
------ ------ ------ ------- ------- ------- --------
(Euro) (Euro) (Euro) (Euro) (Euro) US$ (Euro)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ 57 214 5,058 34,185 12,065 12,065 284,728
Working capital......... (56) 224 (82) 31,709 10,020 10,020 282,683
Total assets............ 283 1,586 10,731 47,221 53,789 53,789 326,452
Long-term liabilities... 3 1,713 6,945 1,978 240 240 240
Accumulated deficit..... (5) (2,324) (9,489) (27,017) (45,406) (45,406) (45,406)
Total shareholders'
equity................. 47 (2,313) (9,593) 34,225 22,864 22,864 295,527
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below as well as other
information included in this prospectus before buying ADSs in this offering.
Risks Related to Our Business
We have incurred net losses in the past and expect to incur them in the
foreseeable future. If we continue to incur net losses for a period longer than
anticipated, we may be unable to continue operations.
We have incurred net losses for the past three years and expect to continue
to operate at a loss for the foreseeable future. We had an accumulated deficit
of (Euro)45.4 million as of December 31, 1999. Factors that may negatively
impact our future profitability include our high levels of expenditures in
sales and marketing to support product launches, potential decreases in
revenues if these product launches are unsuccessful and our high ongoing levels
of research and development expenses. If we fail to become profitable or are
unable to sustain profitability, we may be unable to continue our operations.
The market for our products and services is rapidly changing. If our products
and services do not gain or retain acceptance in this market, we may not
generate sufficient revenues to sustain our business.
The market for products and services that enable businesses to sell over the
Internet is new and evolving. Therefore, demand for and acceptance of recently
introduced products and services like ours is uncertain. We are particularly
susceptible to this risk because our current growth strategy includes
increasing our focus on products designed to serve individual enterprises in
addition to ASPs. In particular, we recently introduced our enfinity product
which is targeted at large enterprises. If this product does not achieve market
acceptance, we may not be able to grow our business. In addition, the market
for our products and services may not develop sufficiently to meet our revenue
goals. Specifically, our products and services may not be perceived as superior
to other products and services, may not meet our customers' needs or may not
prompt recommendations to other potential customers.
Our quarterly financial results are subject to significant fluctuations which
could harm our business and cause the price of our ADSs to fall.
We expect to experience significant fluctuations in our future quarterly
operating results that may be caused by many factors. These factors include:
. the size and the timing of orders in one quarter or from quarter to
quarter and the fact that the majority of our sales in any given quarter
historically occur in the last few weeks of the quarter;
. our ability to implement our software solutions within a given quarter
and the timing of our customers' acceptance of our products;
. the potential for delay or deferral of customer implementations of our
software and changes in customer budgets;
. increases in our operating expenses as we continue to expand our product
line and fund greater levels of research and development;
. our pricing and mix of products and services sold;
. the relatively long sales cycles for some of our products;
. changes in our pricing policies or those of our competitors;
. introduction of new products or product enhancements by our competitors;
6
<PAGE>
. our historic tendency to have larger sales revenues in the fourth
calendar quarter; and
. our large percentage of European sales which are adversely affected in
the third calendar quarter of each year due to reduced business
activities in the summer months.
Our business and, therefore, the market price of our shares and ADSs could be
subject to significant fluctuations in response to quarter-to-quarter
variations in our operating results and other events or factors.
We face intense and increasing competition in the market for electronic
commerce software applications, and our failure to compete successfully could
decrease our revenues.
The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. Since there are relatively low
barriers to entry in the market for electronic commerce applications,
competition from other established and emerging companies may develop in the
future. We expect competition to intensify as current competitors expand their
product offerings and new competitors enter the market. Increased competition
is likely to result in price reductions, lower average sales prices, reduced
margins, longer sales cycles and loss of market share, any of which could harm
our business, operating results or financial condition.
Many of our competitors have, and new potential competitors may have, longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, more experience developing electronic commerce
software, larger technical staffs, larger customer bases, more established
distribution channels, and greater brand recognition than we do. In addition,
many of our competitors have well-established relationships with our current
and potential customers, especially in the United States, and have extensive
knowledge of our industry. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and other incentives
not matched by us. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. As a result,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. We also expect that competition
may increase as a result of industry consolidations.
We cannot assure you that we will be able to compete successfully against
current or future competitors, or that competitive pressures will not reduce
our future revenues.
If we fail to introduce new products and enhance existing ones, our competitive
position and future business prospects could be harmed.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our products and services. The
Internet and the market for electronic commerce software are characterized by
rapid technological change, changes in user requirements and preferences,
frequent introductions of new products and services embodying new technologies
and the emergence of new industry standards and practices that could render our
technology and products obsolete. Consequently, we cannot predict the life
cycles of our products. Further, we may be unsuccessful or experience delays in
developing, acquiring or marketing new or enhanced products or services. Our
success will depend, in part, on our ability to both internally develop and
license leading technologies to enhance our existing products and services and
develop new products and services. We must continue to address the increasingly
sophisticated and varied needs of our customers, and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. In addition, as we continue to increase our focus on providing
products and services directly to individual enterprises, as opposed to ASPs,
we will face additional concerns that could hinder our ability to respond in a
timely manner to changes in market demand. These concerns include trying to
accommodate the requirements of a larger pool of customers with more
specialized needs and responding to the dynamics of a different market with
different product cycles. The development of our proprietary technology
involves significant technical and business risks. We may fail to use new
technologies effectively or adapt our
7
<PAGE>
proprietary technology and systems to customer requirements or emerging
industry standards. If we are unable to adapt to changing market conditions,
client requirements or emerging industry standards, we may not be able to
increase our revenues and expand our business. Any delay or failure in
implementing or marketing new or enhanced products or services could harm our
competitive position and our future business prospects.
Lengthy sales and implementation cycles could cause delays in revenue growth.
The period between our initial contact with a potential customer and the
purchase of our products and services is often long and subject to delays
associated with the lengthy budgeting and approval process of our customers.
Therefore, the historic sales cycle associated with the license and
implementation of many of our products has been lengthy and beyond our control.
As we continue to launch new products and increase our focus on providing
products and services directly to individual enterprises, as opposed to ASPs,
the length of these sales cycles could be increased temporarily or permanently.
These delays may have a negative impact on the timing of our revenues and, if
they occur, may be expected to cause our operating results to vary
significantly from quarter to quarter.
Our future revenues depend on third parties who market, sell and deploy our
products.
We rely on third parties to market and deploy our products. We relied on
third parties to deploy 27% of our products deployed in 1998 and 32% in 1999.
In addition, our customers rely on professional services organizations, such as
consulting firms, systems integrators and design firms to assist with the
development, integration and implementation of our products. If we cannot
adequately train a sufficient number of these firms in the use of our products
or if for any reason a large number of them support or promote competing
products or technologies, our business might be seriously harmed. Many of these
relationships are not subject to formal agreements and none of these firms is
under any obligation to provide services to us or our customers. If we fail to
develop and maintain relationships with leading consulting firms, system
integrators, ASPs and design firms, our ability to successfully market, sell
and deploy our products could be reduced.
We have a limited operating history, and our success may be limited by factors
often encountered by companies with a limited operating history.
Our original predecessor company, NetConsult Computersysteme GmbH, was
founded in 1992, and we were incorporated in our current form under German law
on April 23, 1998. Accordingly, we have only a limited operating history.
Factors that may negatively impact our future profitability include our high
levels of expenditures in sales and marketing to support upcoming product
launches, potential decreases in revenues if these product launches are
unsuccessful and our high ongoing levels of research and development expenses.
Each or all of these factors could limit our success.
A breach of our electronic commerce security measures could reduce future
demand for our products and services.
A requirement of the continued growth of electronic commerce and
communications is the secure transmission of confidential information over
public networks. We rely on a combination of a secure socket layer, the most
common encryption standard used on the Internet, and digital encryption
standard, which is commonly used for the encryption of financial information,
to provide the security necessary for the secure transmission of our customers'
data. A third party who is able to circumvent our security measures could
misappropriate proprietary information or interrupt our operations. Any such
compromise or elimination of our security could reduce future demand for our
products and services. In addition, we may be required to expend significant
capital and other resources to protect against such security breaches or to
address problems they may cause. Finally, since our activities involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could damage our reputation and expose us to a risk
of loss or litigation and possible liability.
8
<PAGE>
Our distribution strategy depends, in part, on ASPs. If they are unable to sell
their services which are based on our products, demand for our products may
decrease.
Our distribution strategy relies primarily upon relationships with ASPs, such
as MindSpring, and value added resellers. ASPs maintain and manage Internet
servers on which they provide electronic commerce sites to merchants who wish
to sell their products or services over the Internet. Sales to ASPs represented
51% of our net revenues in 1998 and 36% in 1999. If the ASPs are unable to sell
services which are based on our products to their customers, the demand for our
products by the ASPs could decrease substantially and our licensing revenues
from ASPs could decrease proportionally.
We depend on third parties for licensed technology that we might not be able to
obtain from other sources.
We rely on certain technology that we license from third parties, including
database software from Sybase, Persistence Software and Sun Microsystems and
other software that is integrated with our software to perform key functions.
Our third-party technology licenses may not continue to be available to us on
commercially reasonable terms, or at all. The loss or inability to maintain any
of these technology licenses could prevent use of our products and services
until equivalent technology, if available, is identified, licensed and
integrated. Further, we cannot assure you that we will be able to acquire new
third party licenses that may be necessary for our business.
Losing some or all of our key personnel could harm our ability to manage our
business.
Our business depends substantially on the performance of our executive
officers and key employees, especially our chief executive officer, Mr. Stephan
Schambach. We are dependent upon our ability to retain and motivate high
quality personnel, especially for our management and development teams. Losing
the services of any of our executive officers or other key employees could
seriously harm our business, operating results and financial condition.
Our future success and ability to expand operations also depends upon our
ability to identify, hire, train and retain other highly qualified technical
and managerial personnel. Competition for top personnel is intense as these
personnel are in limited supply, and we might not be able to hire or retain
sufficient numbers of other highly qualified technical and managerial personnel
to support our business.
Currency fluctuations in the various markets in which we do business may
negatively affect our overall operating results, which are reported in euros.
We conduct many of our operations through subsidiaries in several countries,
primarily Germany, the United Kingdom, the United States, France and Sweden.
The operating and financial results of our subsidiaries are reported in the
relevant foreign currencies and then translated into euros at the applicable
foreign currency exchange rates for inclusion in our consolidated financial
statements. The exchange rates between these currencies and the euro may
fluctuate. We have not entered into any hedging or other arrangements for the
purpose of guarding against the risk of currency fluctuations. Therefore, the
translation effect of such fluctuations may have a harmful effect on our
results of operations and financial position as reported in euros. In general,
appreciation of the local currencies relative to another currency has an
adverse effect on revenues and operating income denominated in that currency,
while depreciation of the local currencies has a positive effect on revenues
and operating income denominated in the local currencies.
We have experienced significant growth of our business in recent periods and
failure to manage our continued growth could strain our management and other
resources.
Competing in the markets in which we participate requires effective planning
and management. Our rapid growth could place a significant strain on our
managerial, operational and financial resources. In particular, the rapid
increase in our number of employees, especially in the United States, could
cause our current facilities to
9
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become insufficient for our needs. To manage our growth, we must continue to
implement and improve our operational and financial systems and to expand,
train and manage our employee base. The cost of investment and the continuing
maintenance costs for these applications adds significantly to our general and
administrative expenses.
In addition, our systems, procedures and controls might not be adequate to
support our operations. In particular, our rapid growth in the United States
could tax the capabilities of our information systems and our ability to
continue to effectively integrate our worldwide operations. We may not succeed
in achieving the rapid execution necessary to exploit the market for our
products and services. Our future operating results will also depend on our
ability to expand our sales and marketing organizations, establish distribution
channels to penetrate different and broader markets, and expand our support
organization commensurate with the increasing base of our installed products.
If we are unable to manage our growth effectively or fail to acquire resources
or assistance necessary to manage or support our growth, our business might be
harmed.
If we fail to meet the challenges associated with operating internationally, we
may not be able to grow our business.
Our products are currently marketed in over 25 countries in Europe, North
America, South America, Africa and the Asia/Pacific regions. Our future revenue
growth depends upon the successful continued expansion of our sales, marketing,
support and service organizations, through direct or indirect channels, in the
countries in which potential customers are located. This expansion will require
that we establish new offices, hire new personnel and manage operations in
widely disparate geographies, economies, legal systems, languages and cultures.
In pursuing our international strategy, we face several additional risks. These
risks include:
. uncertainty of market acceptance in new regions due to language,
cultural or other factors;
. lower levels of Internet usage and electronic commerce usage in the
countries outside of the United States and Europe;
. unexpected changes and differences in regulatory requirements,
particularly as applied to electronic commerce;
. our inability to manage our international growth, which we began before
we were able to firmly establish our business model or infrastructure in
a single market or a small number of markets;
. difficulty in collecting accounts receivable in some jurisdictions;
. potentially adverse tax consequences; and
. our ability to find and develop relationships with international
companies.
If we are unable to manage the potential effects of any of these risks, we
may not be able to grow our business in the future.
Our customer base is concentrated and our success depends on our ability to
retain certain existing customers.
Deutsche Telekom accounted for approximately 23% of our net sales for the
year ended December 31, 1998, and 9% for the year ended December 31, 1999. Our
top ten customers accounted for approximately 41% of net sales for the year
ended December 31, 1998 and 31% of net sales for the year ended December 31,
1999. We expect to continue to derive a significant portion of our revenues
from sales to a limited number of customers. The loss or a substantial decrease
in the volume of orders from Deutsche Telekom or any of our other top customers
may harm our business.
We are subject to numerous taxing authorities which could make tax assessments
against us for prior years.
Since some of our subsidiaries operate outside of the United States, we are
subject to the jurisdiction of numerous foreign tax authorities. These tax
authorities monitor the income generated in their jurisdictions and
10
<PAGE>
regulate various corporate transactions, including intercompany transfers. We
cannot assure you that intercompany transfers and various corporate
transactions will not be challenged by foreign tax authorities or that such
challenges will not harm our business. Except with respect to INTERSHOP
Communications, Inc. and INTERSHOP Communications GmbH, no tax audits have yet
been performed on us or our subsidiaries. The tax audit did not cover our
existing corporate group structure. Accordingly, a subsequent tax assessment
may occur.
Taxes on transactions on the Internet being considered by the United States and
other jurisdictions could slow the growth of electronic commerce and,
therefore, harm our business.
Tax authorities on the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
commerce over the Internet. New United States state tax regulations may subject
us to additional state sales, income and other taxes. A recently passed United
States federal law places a temporary moratorium on certain types of taxation
on Internet companies. If sales, income or other types of taxes over the
Internet are imposed, those taxes would likely increase our cost of doing
business.
We may not be able to adequately protect our intellectual property rights.
Our success depends, in part, upon our proprietary technology and other
intellectual property rights. To date, we have relied primarily on a
combination of copyright, trade secret, and trademark laws, and nondisclosure
and other contractual restrictions on copying and distribution to protect our
proprietary technology. We cannot assure you that our means of protecting our
intellectual property rights in the United States or abroad will be adequate or
that others, including our competitors, will not use our proprietary technology
without our consent.
We may face intellectual property infringement claims that are costly to
resolve.
We cannot assure you that third parties will not claim that our current or
future products and services infringe upon their intellectual property rights.
For example, the United States Patent and Trademark Office has granted, and may
continue to grant, patents for inventions that represent traditional methods of
doing business, but adapted for use on the Internet. In November 1998 we were
approached by Open Market, Inc., which proposed to license to us several
patents held by Open Market. In September 1999, we responded to the Open Market
inquiry, informing Open Market that based on our review of the Open Market
patents, we believe that the technology used in our products is sufficiently
independent and does not infringe on the patents awarded to Open Market. We
have not received any further inquiries or correspondence from Open Market.
Although we do not believe that we are infringing its patent rights, Open
Market may claim that we are doing so. If a claim of patent infringement by
Open Market or any other companies were made against us, we would likely incur
significant expenses in defending against the claim, which could harm our
business. In addition, if a claim of infringement is made against us and we are
not successful in defending against the claim, we could be liable for
substantial damages. We may also be required to make royalty payments, which
could be substantial, to the holder of the patent rights. These events could
harm our business and limit our prospects for growth.
From time to time, other third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies
that are important to us. In addition, third parties may assert claims or
initiate litigation against us or our manufacturers, suppliers or customers
with respect to existing or future products, trademarks or other proprietary
rights.
We are obligated under certain agreements to indemnify other parties and our
customers as a result of claims that we infringe on the proprietary rights of
third parties. If we are required to indemnify parties under these agreements,
our operating results could be harmed.
We may not be able to secure necessary funding in the future or may only be
able to do so at terms disadvantageous to us or our current shareholders.
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. We
11
<PAGE>
expect to use the net proceeds of this offering primarily for working capital
and general corporate purposes, including to fund the growth of our business.
We believe that these proceeds, together with our existing capital resources,
will be sufficient to meet our capital requirements for the near term. However,
our capital requirements depend on several factors, including the rate of
market acceptance of our products and services, the ability to expand our
customer base, our ability to control costs and other factors. If capital
requirements vary materially from those currently planned, we may require
additional financing sooner than anticipated. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
shareholders will be reduced, shareholders may experience additional dilution
or such equity securities may have rights, preferences or privileges senior to
those of the holders of our ordinary shares and ADSs. Additional financing may
not be available when needed on terms favorable to us or at all. If adequate
funds are not available or are not available on acceptable terms, we may be
unable to develop new or enhance our products and services, take advantage of
future opportunities or respond to competitive pressures.
Concentration of ownership of our ordinary shares and ADSs may limit your
ability to influence corporate matters.
Mr. Stephan Schambach, our chief executive officer, is not a direct
shareholder of our company. However, both he and Mr. Burgess Jamieson hold
shares in our U.S. subsidiary which may be converted into the ordinary shares
of our company. In the event that all shares in our U.S. subsidiary were
converted into the ordinary shares of our company after the consummation of
this offering, Mr. Schambach would own approximately 12.6% of our capital stock
and Messrs. Schambach and Jamieson together would own approximately 13.7% of
our capital stock. In this event, Messrs. Schambach and Jamieson, along with
other members of our supervisory board, management board and executive
officers, would own approximately 27.7% of our capital stock. As a result, this
group of shareholders will be able to exercise significant influence over all
matters requiring shareholder approval. If some or all of this group of
shareholders choose to act or vote together, they will have the power to
control matters requiring shareholder approval, including supervisory board
elections, amendments to our articles of association and approval of
significant corporate transactions like mergers or sales of all of our assets.
This concentration of ownership may have the effect of discouraging third
parties from making a tender offer or bid to acquire our company at a price per
share that is above the then-current market price.
We could be subject to potential product liability claims and could be forced
to pay damages on those claims.
Software products as complex as ours may contain undetected errors or defects
when first introduced or when new versions are released. Customers or third
parties might detect other errors once they have started using our software.
They might also use our software for purposes for which it was not intended.
Our license agreements with customers and distribution partners often contain
provisions designed to limit our exposure to potential product liability
claims, such as disclaimers of warranties and limitations on liability for
special, consequential and incidental damages. In addition, our contracts often
limit the amounts recoverable by others for damages to the amounts paid to us
by the customer for the product or service which gives rise to the claim.
Although we have been subject to no such claims as of the date of this
prospectus, the continued sale and support of our products may result in our
being subject to those claims. However, customers who bring liability claims
may seek damages beyond the scope of these contracts and subject us to losses
which may not be covered by our product liability insurance. If we were
required to pay those damages, our operating margins would be reduced.
Certain antitakeover provisions under German law and in our articles of
association may discourage acquisitions of us that may be beneficial to you.
We are subject to the Takeover Code of the Exchange Expert Commission of the
German Federal Ministry of Finance. These provisions, along with the provisions
of our articles of association, may have the effect of deterring hostile
takeovers or delaying or preventing changes in our control or management. As a
result, transactions that would award you a premium for your ADSs over the
current market prices may not be
12
<PAGE>
completed. In addition, these provisions may limit your ability to approve
transactions that you believe to be in your best interest.
You may not be able to enforce United States legal judgments against us.
We are a stock corporation (Aktiengesellschaft) organized under the laws of
Germany. Some of the members of our supervisory board (Aufsichtsrat) and
management board (Vorstand) are non-residents of the United States. A
substantial portion of the assets of those persons and of our assets are
located outside of the United States. As a result, it may not be possible to
effect service of process within the United States upon those persons or upon
us or to enforce against them judgments obtained in United States courts based
on the civil liability provisions of the United States securities laws. In
addition, awards of punitive damages in actions brought in the United States or
elsewhere may not be enforceable in Germany.
Risks Related to the Offering
The price of your ADSs may fluctuate dramatically and your investment in our
ADSs could suffer a decline in value.
The worldwide equity markets in recent years, and in particular the market
for Internet stocks, have experienced extreme price and volume fluctuations.
This market volatility affects the market prices of the stock of many high
technology and Internet companies and is often unrelated or disproportionate to
the operating performance of these companies. In addition, negative changes in
financial estimates of our performance by securities analysts could cause
volatility in the price of our ADSs. These fluctuations, as well as general
economic and market conditions, may negatively affect the market price for our
ordinary shares and ADSs without regard to any changes in our results of
operations or financial condition.
You may not be able to resell your ADSs.
Prior to this offering, there has been no public market for the ADSs,
although our ordinary shares trade in Germany on the Neuer Markt of the
Frankfurt Stock Exchange. While we intend to apply to list our ADSs on The
Nasdaq Stock Market's National Market, we cannot assure you that an active
trading market for our ADSs will develop or be maintained after listing. If an
active trading market is not developed or maintained, the liquidity and trading
prices of our ADSs could be negatively affected.
We have broad discretion in spending the proceeds of this offering and may do
so in ways with which you disagree.
We intend to use the proceeds for working capital and general corporate
purposes. Since we have no specific allocations for the use of the net proceeds
of this offering, our management will have broad discretion over the ways in
which the proceeds will be used. Because of the number and variability of
factors that determine our use of the net proceeds of this offering, you may
not agree with the uses management chooses or that the proceeds will be
invested in a way that yields a favorable return to you.
Future sales of our shares may cause our ordinary share prices to decline.
If our shareholders sell substantial amounts of our ordinary shares,
including ordinary shares issued upon the exercise of outstanding options and
warrants, in the public market following this offering, the market price of our
ADSs could fall. In addition, these sales could create the perception to the
public of difficulties or problems with our products and services. As a result,
these sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate.
See "Shares Eligible for Future Sale" for additional details on the number of
shares which may be sold in the public market and the timing of sales of our
ordinary shares.
13
<PAGE>
You will face substantial and immediate dilution.
The present owners of our issued and outstanding ordinary shares have also
acquired a controlling interest in our company at a cost substantially less
than the price at which the investors in this offering will acquire their ADSs
or shares. In addition, purchasers of our ADSs will experience immediate and
substantial dilution of approximately $37.65 in net tangible book value per ADS
or approximately 97% of the assumed offering price of $38.68 per ADS, based on
an exchange rate of (Euro)1.00 = $0.96, on April 4, 2000, adjusting for the
ratio of 1/10 an ordinary share per ADS. Since voting power is shared among all
outstanding ordinary shares, the issuance of more ordinary shares reduces the
voting powers of each previously outstanding ordinary share.
14
<PAGE>
PRESENTATION OF FINANCIAL INFORMATION
We had previously prepared consolidated financial statements in Deutsche
Marks. We now prepare consolidated financial statements in the euro, and we
have restated all historical financial information from DM into the euro. Our
share price is quoted in the euro on the Neuer Markt of the Frankfurt Stock
Exchange. In this prospectus, references to "DM" are to Deutsche marks,
references to "(Euro)" are to the euro, and references to "$" and "U.S.
dollars" are to United States dollars. For convenience only and except where
noted otherwise, certain euro figures have been translated into U.S. dollars at
the rate of (Euro)1.00 = $1.00, the noon buying rate in New York City for cable
transfers in foreign currencies certified by the Federal Reserve Bank of New
York for customs purposes on December 31, 1999. You should not consider these
translations as representations that the euro amounts actually represent such
U.S. dollar amounts or could be converted into U.S. dollars at the rate
indicated. See "Exchange Rate Information" for information concerning the
Deutsche Mark to dollar exchange rate from January 1, 1994 through December 31,
1998 and the euro to dollar exchange rate from January 1, 1999 through December
31, 1999.
The euro to DM exchange rate is a fixed rate of DM 1.95583 = (Euro)1.00.
Our fiscal year ends on December 31, and references in this prospectus to any
specific fiscal year are to the twelve-month period ended December 31 of such
year.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such an "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify such
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding
the growth of electronic commerce and related service markets and spending. You
should not place undue reliance on these forward-looking statements, which
apply only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks we face that are described above under the caption
"Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
Our net proceeds from the sale of the shares and ADSs in this offering are
estimated to be $156.9 million, or (Euro)163.9 million, after deducting the
estimated underwriting discount and estimated offering expenses. This assumes
an assumed offering price of $38.68 per ADS.
We currently expect to use the net proceeds primarily for working capital and
general corporate purposes. For the fiscal year ending December 31, 2000, we
currently estimate that from the net proceeds product development expenses will
be between $10.0 million and $20.0 million and expenses relating to the
expansion of our sales and marketing organization will be between $30.0 million
and $40.0 million. These projected expenses are estimates and approximations
only and do not represent firm commitments by us. Our actual results have
deviated significantly from our forecasts in the past and are likely to do so
in the future. As a result, investors should not rely on these forecasts when
considering an investment in us. In addition, we may use a portion of the net
proceeds for further development of our product lines through acquisitions of
products, technologies and businesses, although we have no present commitments
or agreements to make any major acquisitions. The amount of cash that we will
actually expend for working capital purposes will vary significantly depending
on a number of factors, including future revenue growth, if any, and the amount
of cash we generate from operations. Thus, management will have significant
discretion in applying the net proceeds of this offering. Pending the uses
described above, we will invest the net proceeds in investment grade, interest-
bearing securities.
DIVIDEND POLICY
We have never declared or paid any dividends. We currently intend to retain
all available earnings generated by our operations for the development and
growth of our business and do not currently anticipate paying any cash
dividends on our ordinary shares or ADSs. If we were to pay any dividends, we
would pay them in Deutsche marks until the euro replaces the Deutsche mark as
legal tender in the Federal Republic of Germany, after June 30, 2002. After
that date, we would pay any dividends in euros.
16
<PAGE>
PRICE RANGE OF ORDINARY SHARES
Currently, the principal trading market for our ordinary shares is the Neuer
Markt of the Frankfurt Stock Exchange.
For December 31, 1999, approximately 50 U.S. holders held our ordinary
shares. These holders held approximately 1,500,000 ordinary shares,
representing less than 10% of our outstanding ordinary shares.
The following tables set forth, for the periods indicated, the reported high
and low quoted closing prices, together with the average daily trading volume,
on the Neuer Markt of the Frankfurt Stock Exchange. Our ordinary shares began
trading on the Neuer Markt of the Frankfurt Stock Exchange on July 16, 1998. On
April 4, 2000, the closing price of our ordinary shares on the Neuer Markt of
the Frankfurt Stock Exchange was (Euro)404.00 per ordinary share, which is
equivalent to $38.68 per ADS.
Frankfurt Stock Exchange
<TABLE>
<CAPTION>
Frankfurt Stock Exchange Average Daily
Price per Share Trading Volume
------------------------- --------------
High Low
------------ ------------ (in thousands)
<S> <C> <C> <C>
1998
Third quarter....................... (Euro) 41.24 (Euro) 31.10 36.32
Fourth quarter...................... 42.44 26.42 34.79
1999
First quarter....................... (Euro) 60.50 (Euro) 33.20 44.45
Second quarter...................... 82.67 58.67 72.42
Third quarter....................... 104.50 73.67 88.77
Fourth quarter...................... 308.00 100.40 89.25
2000
First quarter....................... (Euro)671.00 (Euro)241.00 82.67
Second quarter (through April 4,
2000).............................. 424.00 404.00 218.99
</TABLE>
17
<PAGE>
EXCHANGE RATE INFORMATION
For a discussion of the impact of exchange rate fluctuations on our business,
financial condition and results of operations, see "Risk Factors--Currency
Fluctuations May Negatively Affect Our Operating Results" and "Management
Discussion and Analysis of Financial Condition and Results of Operations."
The following table sets forth, for the periods and dates indicated, the
average, high, low and period-end noon buying rates for converting Deutsche
marks to U.S. dollars, expressed in Deutsche marks per U.S. dollar, and
converting euros to U.S. dollars, expressed in euros per U.S. dollar. Effective
January 1, 1999, the euro was introduced in the 11 member states of the
European Union currently participating in the European Monetary Union, known as
the EMU, as a common legal currency among those states for "paperless"
transactions, pending the substitution of euro bank notes and coins for the
national currencies of the participating member states between January 1, 2002
and July 1, 2002. Effective July 1, 2002, the euro will be the official legal
tender for the participating member states, and the national currencies of
those member states will be withdrawn from circulation. The fixed exchange rate
for the euros converted to the Deutsche mark is DM 1.95583 per (Euro)1.00. We
do not represent that the Deutsche mark or euro amounts shown below could be or
could have been converted into U.S. dollars at any particular rate or at all.
The period average is the average of the noon buying rates on the last business
day of each full calendar month during the relevant period.
<TABLE>
<CAPTION>
Period Period
As of December 31, High Low Average End
- ------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
1995............................................ DM 1.57 DM 1.34 DM 1.43 DM 1.43
1996............................................ 1.57 1.43 1.50 1.55
1997............................................ 1.87 1.54 1.73 1.79
1998............................................ 1.86 1.56 1.76 1.68
1999............................................ 1.96 1.64 1.84 1.95
2000 (through April 4, 2000).................... 2.06 1.88 1.98 2.04
</TABLE>
The table below sets forth, for the periods and dates indicated, information
concerning the noon buying rates for the euro quoted by the Federal Reserve
Bank of New York expressed in euro per $1.00. We do not represent that the euro
or U.S. dollar amounts shown below could be or could have been converted into
U.S. dollars at any particular rate or at all. The period average is the
average of the noon buying rates on the last business day of each full calendar
month during the relevant period.
<TABLE>
<CAPTION>
Period
High Low Average Period End
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of April 4, 2000................. (Euro)1.05 (Euro)0.96 (Euro)1.01 (Euro)1.04
</TABLE>
18
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. our actual capitalization as of December 31, 1999; and
. our capitalization as adjusted to give effect to our sale of 4,350,000
ADSs at an assumed public offering price of $38.68 per ADS and deduction
of the estimated underwriting discount and estimated offering expenses
payable by us.
Unless we specifically state otherwise, the information in this prospectus
does not take into account the issuance of up to 650,000 ADSs that the
underwriters have the option to purchase solely to cover over-allotments. If
the underwriters exercise their over-allotment option in full, 17,378,104
ordinary shares will be outstanding after this offering based on the shares
outstanding as of December 31, 1999. This table excludes:
. 1,633,000 ordinary shares reserved for issuance under our 1999 Stock
Option Plan as of December 31, 1999;
. 353,497 ordinary shares reserved for issuance under our 1997 Equity
Incentive Plan as of December 31, 1999; and
. 2,728,900 ordinary shares reserved for issuance to Messrs. Stephan
Schambach and Burgess Jamieson in the event of the conversion of their
shares in INTERSHOP Communications, Inc., our U.S. subsidiary as of
April 4, 2000.
For convenience only certain euro figures have been translated into U.S.
dollars at the rate of (Euro)1.00 = $1.00, the noon buying rate in New York
City for cable transfers in foreign currencies certified by the Federal Reserve
Bank of New York for customs purposes on December 31, 1999.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------
Actual As Adjusted
---------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
(Euro) $ (Euro) $
Total long-term borrowings................. 20 20 20 20
Bearer ordinary shares .................... 16,878 16,878 17,313 17,313
Paid-in capital............................ 48,169 48,169 211,629 211,629
Deferred compensation...................... (273) (273) (273) (273)
Notes receivable from shareholders......... (141) (141) (141) (141)
Accumulated deficit........................ (45,406) (45,406) (45,406) (45,406)
Accumulated other comprehensive income..... 3,637 3,637 3,637 3,637
------- ------- ------- -------
Total shareholders' equity............... 22,864 22,864 186,759 186,759
------- ------- ------- -------
Total capitalization..................... 22,884 22,884 186,779 186,779
======= ======= ======= =======
</TABLE>
19
<PAGE>
DILUTION
Our net tangible book value, as of December 31, 1999, was (Euro)22.0 million
($21.0 million), or approximately (Euro)1.30 per ordinary share ($0.12 per
ADS). Net tangible book value per ordinary share represents the amount of our
total tangible assets, minus the amount of our total liabilities, divided by
the number of shares outstanding. After giving effect to our issuance and sale
of 435,000 ordinary shares in this offering at the assumed offering price of
(Euro)404.00 per share ($38.68 per ADS) (after deducting estimated underwriting
discounts, commissions and estimated offering expenses which we will pay), our
pro forma net tangible book value, as of December 31, 1999, would have been
(Euro)163.9 million ($156.9 million) or (Euro)10.73 per ordinary share ($1.02
per ADS). This represents an immediate increase in pro forma net tangible book
value of (Euro)9.43 per share ($0.90 per ADS) to our existing shareholders and
an immediate dilution in net tangible book value of (Euro)393.27 per ordinary
share ($37.66 per ADS) to you for purchasing shares in this offering. Per ADS
U.S. dollar amounts are calculated at a rate of (Euro)1.00 = $0.96, on April 4,
2000, adjusting for the ratio of 1/10 of an ordinary share per ADS.
The following table shows this per share dilution:
<TABLE>
<CAPTION>
Per Share Per ADS
------------ -------
<S> <C> <C>
Assumed offering price................................... (Euro)404.00 $38.68
Net tangible book value at December 31, 1999 before
giving effect to this offering.......................... 1.30 0.12
Increase attributable to this offering................... 9.43 0.90
Pro forma net tangible book value at December 31, 1999
after giving effect to this offering.................... 10.73 1.02
------------ ------
Dilution to new investors................................ (Euro)393.27 $37.66
============ ======
</TABLE>
The following table sets forth, on a pro forma basis, as of December 31,
1999, the number of shares issued by us, the total consideration paid to us and
the average price paid per ordinary share by existing shareholders and by new
investors purchasing shares in this offering. Per ADS U.S. dollar amounts are
calculated at a rate of (Euro)1.00 = $0.96, on April 4, 2000, adjusting for the
ratio of 1/10 of an ordinary share per ADS.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
---------------- ----------------------- -------------------
Number % Amount % Per Share Per ADS
---------- ----- ----------------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders... 16,878,104 97.5 (Euro) 64,633,000 26.9 (Euro) 3.83 $ 0.37
New investors........... 435,000 2.5 175,740,000 73.1 404.00 38.68
---------- ----- ----------------- -----
Total................. 17,313,004 100.0 (Euro)240,373,000 100.0 (Euro)13.88 $ 1.33
========== ===== ================= =====
</TABLE>
This table excludes:
. 1,633,000 ordinary shares reserved for issuance under our 1999 Stock
Option Plan as of December 31, 1999;
. 353,497 ordinary shares reserved for issuance under our 1997 Equity
Incentive Plan as of December 31, 1999; and
. 2,728,900 ordinary shares reserved for issuance to Messrs. Stephen
Schambach and Burgess Jamieson in the event of the conversion of their
shares in INTERSHOP Communications, Inc., our U.S. subsidiary as of
April 4, 2000.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The consolidated statement of operations data for the years ended December
31, 1997, 1998 and 1999 and the consolidated balance sheet data at December 31,
1998 and 1999 are derived from our consolidated financial statements, which
have been audited by Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH, independent public accountants, and are
included elsewhere in this prospectus. The consolidated statement of operations
data for the years ended December 31, 1995 and 1996 and the consolidated
balance sheet data at December 31, 1995 and 1996 are derived from our
consolidated financial statements, audited by Arthur Andersen
Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH, not included
in this prospectus. All prior year balances have been restated from Deutsche
marks into euros using the exchange rate as of January 1, 1999. Prior to 1997,
there was no common stock outstanding as we were organized as INTERSHOP
Communications GmbH, which is a limited liability corporation. Accordingly, no
earnings per share have been presented for periods prior to 1997. Financial
data as of and for the years ended December 31, 1995 and 1996 represent
information for INTERSHOP Communications GmbH.
When you read this selected consolidated financial data, it is important that
you also read the historical consolidated financial statements and related
notes included in this prospectus, as well as the section in this prospectus
entitled "Management Discussion and Analysis of Financial Condition and Results
of Operations." For convenience only certain euro figures have been translated
into U.S. dollars at the rate of (Euro)1.00 = $1.00, the noon buying rate in
New York City for cable transfers in foreign currencies certified by the
Federal Reserve Bank of New York for customs purposes on December 31, 1999.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
1995 1996 1997 1998 1999 1999
------ ------ ------ ------- ------- -----------
(Euro) (Euro) (Euro) (Euro) (Euro) US$
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
Consolidated Statement of
Operations Data:
Revenues:
Licenses................ 43 25 2,947 11,295 29,534 29,534
Services, maintenance
and other revenues..... 842 446 2,088 6,577 16,732 16,732
--- ------ ------ ------- ------- -----------
Total revenues........ 885 471 5,035 17,872 46,266 46,266
--- ------ ------ ------- ------- -----------
Cost of revenues:
Licenses................ 120 85 442 1,742 4,786 4,786
Services, maintenance
and other revenues..... 548 483 2,245 3,766 8,465 8,465
--- ------ ------ ------- ------- -----------
Total cost of
revenues............. 668 568 2,687 5,508 13,251 13,251
--- ------ ------ ------- ------- -----------
Gross profit............. 217 (97) 2,348 12,364 33,015 33,015
Operating expenses:
Research and
development............ 30 298 1,006 4,368 7,115 7,115
Sales and marketing..... 78 1,069 4,705 18,368 34,771 34,771
General and
administrative......... 126 790 3,454 6,729 11,206 11,206
Legal settlement
costs.................. -- -- -- 1,866 -- --
--- ------ ------ ------- ------- -----------
Total operating
expenses............. 234 2,157 9,165 31,331 53,092 53,092
--- ------ ------ ------- ------- -----------
Operating loss........... (17) (2,254) (6,817) (18,967) (20,077) (20,077)
Other income, net........ 14 (66) (198) 1,659 1,688 1,688
--- ------ ------ ------- ------- -----------
Net loss................. (3) (2,320) (7,015) (17,308) (18,389) (18,389)
=== ====== ====== ======= ======= ===========
Accretion of redeemable
preferred stock......... (149) (220) -- --
------ ------- ------- -----------
Net loss attributable to
common shareholders..... (7,164) (17,528) (18,389) (18,389)
Basic and diluted net
loss per AG share
attributable to common
shareholders............ (1.19) (1.44) (0.97) (0.97)
Basic and diluted net
loss per American
Depositary Share
attributable to common
shareholders
(unaudited)............. (0.12) (0.14) (0.10) (0.10)
------ ------- ------- -----------
Shares used in per AG
share calculation....... 6,034 12,145 18,948 18,948
------ ------- ------- -----------
Shares used in per ADS
calculation............. 60,340 121,450 189,480 189,480
------ ------- ------- -----------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------
1995 1996 1997 1998 1999 1999
------ ------ ------ ------- ------- -----------
(Euro) (Euro) (Euro) (Euro) (Euro) US$
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ 57 214 5,058 34,185 12,065 12,065
Working capital......... (56) 224 (82) 31,709 10,020 10,020
Total assets............ 283 1,586 10,731 47,221 53,789 53,789
Long-term liabilities... 3 1,713 6,945 1,978 240 240
Accumulated deficit..... (5) (2,324) (9,489) (27,017) (45,406) (45,406)
Total shareholders'
equity................. 47 (2,314) (9,593) 34,225 22,864 22,864
</TABLE>
From inception to December 31, 1996 the Company reported its consolidated
financial statements in Deutsche marks (DM). In 1997, the Company reported in
U.S. dollars as INTERSHOP Communication, Inc., a U.S. entity, was the parent
company in that year. These financial statements were then restated and
presented in DM after the Company acquired the majority of the outstanding
shares of INTERSHOP Communications, Inc. during 1998. With the introduction of
the euro ((Euro)) on January 1, 1999, the Company has elected to present the
accompanying consolidated financial statements in euro. Accordingly, the
Deutsche mark consolidated financial statements for each period presented have
been restated into euro using the Deutsche mark/euro exchange rate as of
January 1, 1999 of (Euro)1 = DM 1.95583. The Company's restated financial
statements in euro depict the same trends as would have been presented if it
had continued to present its consolidated financial statements in Deutsche
marks. The consolidated financial statements will, however, not be comparable
to financial statements for periods prior to January 1, 1999 in euro of other
companies that previously reported their financial information in a currency
other than Deutsche marks. See disclosure of the above reporting currency
information in Note 1 of Notes to Consolidated Financial Statements.
22
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of the financial
condition and results of operations in conjunction with "Selected Consolidated
Financial Data" and the consolidated financial statements and related notes.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this prospectus.
Overview
We are a global provider of electronic commerce software applications that
enable businesses to sell their products and services over the Internet. Our
products can be integrated with existing business systems to allow our
customers to sell goods and services over the Internet without replacing their
existing business systems. The merchandising capabilities of our products, such
as customer profiling and cross-selling, help our customers to increase sales
revenues. We also provide professional services for our customers to assist in
the installation and ongoing maintenance of our software applications. We began
marketing electronic commerce software in 1992 in Jena, Germany and were a
development stage company until 1997. We introduced our current product line in
March 1998 and derive most of our revenue through licensing of our software
products.
We have previously prepared and reported our consolidated financial
statements in Deutsche marks. With the introduction of the euro on January 1,
1999, we elected to present the accompanying consolidated financial statements
in euro. Accordingly, the Deutsche mark consolidated financial statements for
each period presented have been restated into euro using the Deutsche mark/euro
exchange rate as of January 1, 1999 of (Euro)1 = DM 1.95583. Our restated euro
financial statements depict the same trends as would have been presented if we
had continued to present our consolidated financial statements in Deutsche
marks. The consolidated financial statements will, however, not be comparable
to the euro financial statements of other companies that previously reported
their financial information in currency other than Deutsche marks.
The financial information expressed in United States dollars is presented for
the convenience of the reader and is translated from euro at the noon buying
rate in New York City for cable transfers in euro as certified for custom
purposes by the Federal Reserve Bank of New York on December 31, 1999 which was
(Euro)1.00 to US$ 1.00. The translated amounts should not be construed as a
representation that the local currency has been, could have been, or could be
in the future, converted into U.S. dollars at this or any other rate of
exchange.
Source of Revenues and Revenue Recognition Policy
To date, we have generated revenues principally from the sale of licenses of
our software products and by providing related professional services including
consulting, implementation, technical support, maintenance and training. We
generally license our products to customers on a "right to use" basis pursuant
to a perpetual license. Our license agreements are generally in the same
standard form, although each license may be individually negotiated and may
contain variations. Our licenses are generally non-transferable or, if
transferable, any transfer is subject to our reasonable approval. The standard
end-user license agreement provides for an initial license fee based on the
number and types of electronic commerce sites or computers involved. Additional
license fees are charged when the number of electronic commerce sites or
servers exceeds the number covered by the initial license fee.
We recognize product license revenues when all of the following conditions
are met:
. we have a non-cancelable license agreement with the customer;
. we have delivered the software product to the customer;
. the amount of fees to be paid by the customer is fixed or determinable;
and
. the collection of these fees is probable.
23
<PAGE>
In instances where we provide services which significantly alter the features
and functionality of our software, we recognize the license and related service
revenues based on the percentage of completion as work progresses.
Our remaining revenues are primarily attributable to service revenues, which
include consulting, customer support and training revenue. Customers may
purchase implementation services from us, but we expect to rely increasingly on
third-party consulting organizations to deliver these services directly to our
customers.
We bill professional services either on a time and materials basis or on a
fixed-price basis. We recognize professional services fees billed on a time and
materials basis as the services are performed. We recognize professional
services fees on fixed-price arrangements as the work progresses, based on our
estimate of the work completed.
We also enter into support agreements with customers in which we agree to
provide technical support and software updates. We recognize revenues from
these agreements as service revenues over the term of the agreement, which is
typically one year.
The costs associated with our license revenues include royalty payments to
third parties for integrated technology, the cost of manuals and product
documentation, production media used to deliver our products and shipping
costs, including the costs associated with the electronic transmission of
software to new customers. Our cost of maintenance and service revenues
includes salaries and related expenses for our customer support, implementation
and training services organizations, costs of third parties contracted to
provide consulting services to customers and an allocation of our facilities,
communications and depreciation expenses.
Our operating expenses are classified according to the nature of the
expenditure. The three general categories are: research and development, sales
and marketing and general and administrative. Costs for overhead and facilities
are allocated to each category that use the overhead and facilities services
based on their headcount.
In connection with stock option grants to our employees, our balance of
deferred stock-based compensation totaled approximately (Euro)0.3 million as of
December 31, 1999. This amount represents the difference between the exercise
price and the deemed fair market value of our common stock for accounting
purposes on the date we granted these stock options. This amount is included as
a component of stockholders' equity and is being amortized on a straight-line
basis by charges to operations over the vesting period of the options. For
fiscal 1998 and 1999, we recorded approximately (Euro)0.2 million and
(Euro)0.3 million of stock-based compensation amortization expense,
respectively. The amortization of the remaining deferred stock-based
compensation will result in additional charges to operations through 2001.
Although revenues increased in each of the past three years, we incurred
significant costs to develop our technology and products and to recruit and
train personnel for our engineering, sales, marketing, professional services
and administrative departments. As a result, we incurred significant losses for
each of the past four years and as of December 31, 1999, had an accumulated
deficit of (Euro)45.4 million. We intend to continue to invest heavily in
sales, marketing and research and development. We therefore expect to continue
to incur operating losses for the foreseeable future.
Our limited operating history makes predicting future operating results very
difficult. We believe that period-to-period comparisons of operating results
should not be relied upon as predictive of future performance. Our prospects
must be considered in light of the risks, expenses and difficulties encountered
by companies at an early state of development, particularly companies in new
and rapidly evolving markets. We may not be successful in addressing these
risks and difficulties. Although we have experienced significant percentage
growth in revenues in recent periods, we do not believe that prior growth rates
are sustainable or indicative of future operating results.
24
<PAGE>
We had 544 full-time employees as of December 31, 1999 and intend to hire a
significant number of employees in the future. This expansion places
significant demands on our management and operational resources. To manage this
rapid growth and increased demand, we will need to invest in and implement
scalable operational systems, procedures and controls. We must also be able to
recruit qualified candidates to manage our expanding operations. We expect
future expansion to continue to challenge our ability to hire, train, manage
and retain our employees.
Years Ended December 31, 1997, 1998 and 1999
Revenues
Licenses. License revenues were (Euro)2.9 million for 1997, (Euro)11.3
million for 1998 and (Euro)29.5 million in 1999, representing increases of 290%
from 1997 to 1998 and 161% from 1998 to 1999. The increase in license revenues
from 1997 to 1998 is attributable to increased sales to new customers resulting
from increased headcount in our sales force. The increase in license revenues
from 1998 to 1999 is attributable to increased sales to new customers.
Approximately 50% of this increase is attributable to increased headcount in
our sales force, approximately 30% is attributable to the release of our ePages
and enfinity product lines and approximately 20% is attributable to our
geographic expansion to other European countries. Total headcount in our sales
department was 34 people at December 31, 1997, 72 at December 31, 1998 and 101
at December 31, 1999.
Service, maintenance and other revenues. Service, maintenance and other
revenues were (Euro)2.1 million for 1997, (Euro)6.6 million for 1998 and
(Euro)16.7 million for 1999, representing increases of 214% from 1997 to 1998
and 153% from 1998 to 1999. Service revenues from professional services
consulting fees were (Euro)1.2 million for 1997, (Euro)4.7 million for 1998 and
(Euro)11.3 million for 1999. Service revenues from software maintenance and
support agreements were (Euro)0.3 million for 1997, (Euro)1.6 million for 1998
and (Euro)4.0 million for 1999. Other revenues were (Euro)0.6 million for 1997,
(Euro)0.3 million for 1998 and (Euro)1.4 million for 1999. The increase in
service, maintenance and other revenues is primarily attributable to the
increased licensing activity described above, which has resulted in increased
revenues from customer implementations and maintenance contracts.
Cost of Revenues
Licenses. Cost of revenues includes product license costs which include
royalties to third party software vendors for software embedded in our product
suite, as well as documentation and other informational media associated with
our products. Cost of license revenues was (Euro)0.4 million for 1997,
(Euro)1.7 million for 1998 and (Euro)4.8 million for 1999. The increase is
attributable to the increase in royalties paid to third parties from the
increase in license revenues. Royalties paid to third parties were (Euro)0.3
million for 1997, (Euro)1.0 million for 1998 and (Euro)2.8 million for 1999.
Service, maintenance and other revenues. Cost of service, maintenance and
other revenues includes salary and other related costs for our professional
services and support staff, as well as third party contractor expenses. Cost of
service, maintenance and other revenues was (Euro)2.2 million for 1997,
(Euro)3.8 million for 1998 and (Euro)8.5 million for 1999. The increase is
attributable to the increase in the number of employees providing
implementation, training and technical support services. Total headcount in our
professional services, training and support departments was 63 people at
December 31, 1997, 104 at December 31, 1998 and 175 at December 31, 1999.
Gross Profit
Gross profit was (Euro)2.3 million for 1997, (Euro)12.4 million for 1998 and
(Euro)33.0 million for 1999. The increase is attributable to the growth in our
customer base as well as the increase in license sales as a percentage of total
sales. Our customer base was 130 at December 31, 1997, 600 at December 31, 1998
and 3,100 at December 31, 1999. Management believes that this trend will
continue in the foreseeable future. Gross margins on service, maintenance and
other revenues was negative, 43% and 50% in 1997, 1998 and 1999, respectively.
The
25
<PAGE>
negative margin in 1997 was primarily due to the start-up costs associated with
establishing a professional services division, in particular the costs
associated with hiring software developers and engineers. Gross margin
percentages are impacted by product mix and variable labor costs. Fixed costs
and variable material costs have a minimal impact on gross margin.
Operating Expenses
Research and Development. Research and development expenses were (Euro)1.0
million for 1997, (Euro)4.4 million for 1998 and (Euro)7.1 million for 1999.
The increase is attributable to increases in the number of research and
development personnel. Total headcount in our research and development
department was 32 people at December 31, 1997, 51 at December 31, 1998 and 112
at December 31, 1999. To date, all software development costs have been
expensed in the period incurred. We believe that continued investment in
research and development is critical to attaining our strategic objectives,
and, as a result, we expect research and development expenses to increase
significantly in future periods.
Sales and Marketing. Sales and marketing expenses were (Euro)4.7 million for
1997, (Euro)18.4 million for 1998 and (Euro)34.8 million for 1999. The increase
in the total amount of sales and marketing expenses is attributable to the
increased number of sales and marketing employees and the increase in marketing
program expenses. Total headcount in our marketing department was 27 people at
December 31, 1997, 44 at December 31, 1998 and 78 at December 31, 1999.
Marketing program expenses were (Euro)1.0 million for 1997, (Euro)3.8 million
for 1998 and (Euro)13.2 million for 1999. We believe that continued investment
in sales and marketing is critical to attaining our strategic objectives, and,
as a result, we expect sales and marketing expenses to increase in future
periods.
General and Administrative. General and administrative expenses were
(Euro)3.5 million for 1997, (Euro)6.7 million for 1998 and (Euro)11.2 million
for 1999. The increase is primarily attributable to the increase in the number
of administrative personnel. The number of administrative personnel was 24
people at December 31, 1997, 49 at December 31, 1998 and 78 at December 31,
1999. We believe that general and administrative costs will further increase as
we expect to continue adding personnel to support our expanding operations and
incurring additional costs related to the growth of our business.
Other Income, Net
Other income, net consists of interest income, interest expense and other
non-operating expenses. Other income, net was (Euro)(0.2) million for 1997,
(Euro)1.7 million for 1998 and (Euro)1.7 million for 1999. The increase from
1997 to 1998 is due to interest income generated from the remaining proceeds
from our initial public offering in Germany in July 1998. Included in other
income, net is employment-related government subsidies in Germany. We are under
no obligation to repay any amounts subsidized by the German government for
employment related expenses and we do not expect ever to repay such subsidies.
After receiving no subsidies in 1997, we received (Euro)1.3 million in 1998 and
(Euro)0.9 million in 1999.
26
<PAGE>
Quarterly Results of Operations
The following table sets forth consolidated statement of operations data for
each of the eight consecutive quarters ending December 1999, as well as the
percentage of our total revenues represented by each item. We believe that this
information has been prepared substantially on the same basis as the audited
consolidated financial statements appearing elsewhere in this prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the unaudited
quarterly results of operations. Amounts in U.S. dollars are unaudited and
translated at (Euro)1.00 to $1.00, the noon buying rate on December 31, 1999.
For recent exchange rates between the euro and the U.S. dollar, please see
"Exchange Rate Information." You should read this information in conjunction
with our annual audited consolidated financial statements and related notes
appearing elsewhere in this prospectus. The operating results for any quarter
are not indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) US$
(in thousands)
Revenues: (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Licenses................ 2,399 2,284 2,295 4,319 4,489 6,026 5,690 13,328 13,328
Services, maintenance
and other revenues..... 1,058 1,305 2,269 1,943 2,483 3,471 4,812 5,966 5,966
------ ------ ------ ------ ------ ------- ------ ------ ------
Total revenues.......... 3,457 3,589 4,564 6,262 6,972 9,497 10,502 19,294 19,294
------ ------ ------ ------ ------ ------- ------ ------ ------
Cost of revenues:
Licenses................ 462 384 399 815 561 785 1,015 2,072 2,072
Services, maintenance
and other revenues..... 632 653 1,101 1,061 1,564 1,742 1,940 3,572 3,572
------ ------ ------ ------ ------ ------- ------ ------ ------
Total cost of revenues.. 1,094 1,037 1,500 1,876 2,125 2,527 2,955 5,644 5,644
------ ------ ------ ------ ------ ------- ------ ------ ------
Gross profit............ 2,363 2,552 3,064 4,386 4,847 6,970 7,547 13,650 13,650
Operating expenses:
Research and
Development............ 882 765 1,347 1,374 1,461 1,518 2,149 1,987 1,987
Sales and marketing..... 4,594 3,782 4,279 5,713 5,244 7,203 6,321 16,004 16,004
General and
administrative......... 1,662 3,710 1,495 1,729 2,220 2,722 2,561 3,702 3,702
------ ------ ------ ------ ------ ------- ------ ------ ------
Total operating
expenses............... 7,138 8,257 7,121 8,816 8,925 11,443 11,031 21,693 21,693
------ ------ ------ ------ ------ ------- ------ ------ ------
Operating income
(loss)................. (4,775) (5,705) (4,057) (4,430) (4,078) (4,473) (3,484) (8,043) (8,043)
Other income, net....... 322 (150) 831 656 597 287 134 670 670
------ ------ ------ ------ ------ ------- ------ ------ ------
Net income (loss)....... (4,453) (5,855) (3,226) (3,774) (3,481) (4,186) (3,350) (7,373) (7,373)
====== ====== ====== ====== ====== ======= ====== ====== ======
<CAPTION>
As a Percentage of Total Revenues
-----------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) (Euro) US$
Revenues: (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Licenses................ 69.4 % 63.6 % 50.3 % 69.0 % 64.4 % 63.5 % 54.2 % 69.1 % 69.1 %
Services and
maintenance............ 30.6 % 36.4 % 49.7 % 31.0 % 35.6 % 36.5 % 45.8 % 30.9 % 30.9 %
------ ------ ------ ------ ------ ------- ------ ------ ------
Total revenues.......... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
------ ------ ------ ------ ------ ------- ------ ------ ------
Cost of revenues:
Licenses................ 13.4 % 10.7 % 8.7 % 13.1 % 8.1 % 8.3 % 9.6 % 10.7 % 10.7 %
Services, maintenance
and other revenues..... 18.2 % 18.2 % 24.2 % 16.9 % 22.4 % 18.3 % 18.5 % 18.5 % 18.5 %
------ ------ ------ ------ ------ ------- ------ ------ ------
Total cost of revenues.. 31.6 % 28.9 % 32.9 % 30.0 % 30.5 % 27.6 % 28.1 % 29.3 % 29.3 %
------ ------ ------ ------ ------ ------- ------ ------ ------
Gross profit............ 68.4 % 71.1 % 67.1 % 70.0 % 69.5 % 73.4 % 71.9 % 70.7 % 70.7 %
Operating expenses:
Research and
Development............ 25.5 % 21.3 % 29.4 % 21.9 % 21.0 % 16.0 % 20.4 % 10.3 % 10.3 %
Sales and marketing..... 132.9 % 105.4 % 93.8 % 91.3 % 75.2 % 75.8 % 60.2 % 82.9 % 82.9 %
General and
administrative......... 48.1 % 103.4 % 32.8 % 27.6 % 31.8 % 28.7 % 24.4 % 19.2 % 19.2 %
------ ------ ------ ------ ------ ------- ------ ------ ------
Total operating
expenses............... 206.5 % 230.1 % 156.0 % 140.8 % 128.0 % 120.5 % 105.0 % 112.4 % 112.4 %
------ ------ ------ ------ ------ ------- ------ ------ ------
Operating income
(loss)................. (138.1)% (159.0)% (88.9)% (70.8)% (58.5)% (47.1)% (33.1)% (41.7)% (41.7)%
Other income, net....... 9.3 % (4.2)% 18.2 % 10.5 % 8.6 % 3.0 % 1.3 % 3.5 % 3.5 %
------ ------ ------ ------ ------ ------- ------ ------ ------
Net income (loss)....... (128.8)% (163.2)% (70.7)% (60.3)% (49.9)% (44.1)% (31.8)% (38.2)% (38.2)%
====== ====== ====== ====== ====== ======= ====== ====== ======
</TABLE>
27
<PAGE>
Our quarterly revenue increased throughout 1998 and 1999 primarily as a
result of the introduction of our INTERSHOP 3, INTERSHOP 4 and our INTERSHOP
enfinity products and the substantial growth of our sales force. The 84%
increase in revenues from the quarter ended September 30, 1999 to the quarter
ended December 31, 1999 is primarily attributable to the release of our
enfinity product line as well as new customer purchases of INTERSHOP 4. Cost of
revenues has increased in each of the last three quarters as a result of the
hiring of employees. Total operating expenses increased in each of the last
four quarters primarily due to increased expenses associated with building a
sales and marketing infrastructure including the development of a direct sales
force, increased spending on research and development to support new product
introductions and an increase in general and administrative expenses to manage
our expanding operations.
License and service revenues as a percentage of total revenues have varied
from quarter to quarter due to the timing of the release of new products. The
relative amount of license revenues as compared to service revenues has varied
based on the volume of license fees for software solutions compared to the
volume of license fees for additional sites, which generally do not require
services. In addition, the amount of services we provide for a software
solution can depend in large part on the solution which has been licensed, the
complexity of the customers' information technology environment, the resources
directed by customers to their implementation projects, the number of users
licensed and the extent to which consulting organizations provide services
directly to customers.
Our operating expenses as a percentage of total revenue have generally
decreased from quarter to quarter due to our historical rapid revenue growth.
Our revenues and operating results can vary, sometimes substantially, from
quarter to quarter, causing significant variations in operating results during
certain quarters. Our revenues, particularly our license revenues, are
difficult for us to forecast for several reasons. These include:
. market acceptance of and demand for our current and new products and
enhancements;
. our ability to fulfill orders received within a given quarter and the
timing of our customers' acceptance of our products;
. the potential for delay or deferral of customer implementations of our
software and changes in customer budgets;
. increases in our sales and marketing expenses as we begin production of
upgrades to our product line and continue to fund greater levels of
research and development;
. our pricing and mix of products and services sold;
. the relatively long sales cycles for some of our products;
. the size and the timing of orders in one quarter or from quarter to
quarter and the fact that the majority of our sales in any given quarter
historically occur in the last few weeks of the quarter;
. changes in pricing policies and introduction of new products or product
enhancements by our competitors; and
. announcements of technological innovations or new products or services
by us or our competitors.
Included in these quarterly results is a contract with a third party under
which we are to be paid, in total, $11.4 million. We recognized income under
this contract ratably each quarter and will continue to do so until the
expiration of the contract in June 2000.
Historically, our business, as is common in the software industry, has
experienced its highest revenues in the fourth quarter of each year, due
primarily to year-end capital purchases by customers. Because our operating
expenses are based upon anticipated revenue levels and because a high
percentage of our expenses are relatively fixed in the near term, any shortfall
in anticipated revenue or delay in recognition of revenue could result in
significant variations in our operating results from quarter to quarter. In
addition, we may not be able to confirm any shortfalls until late in the
quarter or following the end of the quarter because license agreements are
often executed late in a quarter.
28
<PAGE>
Liquidity and Capital Resources
Since our inception, we have financed our operations through private
placements of preferred stock and bridge loans from investors as well as funds
raised from an initial public offering in Germany in July 1998. As of December
31, 1999, we had (Euro)12.1 million in cash, cash equivalents and short-term
investments, and (Euro)10.0 million in working capital.
Net cash provided by operating activities was (Euro)2.6 million in 1997. Net
cash used in operating activities was (Euro)21.0 million in 1998 and (Euro)24.4
million in 1999. Net cash provided in 1997 was primarily due to the receipt of
a significant prepayment for an extended contract from a major customer. Net
cash flows used in operating activities in 1998 and in 1999 reflect net losses
and, to a lesser extent, the increase in accounts receivable from increased
revenues.
Net cash used in investing activities was (Euro)2.0 million in 1997,
(Euro)3.8million in 1998 and (Euro)7.5 million in 1999. Cash used in investing
activities primarily reflects purchases of property and equipment in each
period.
Net cash from financing activities was (Euro)4.1 million in 1997, (Euro)52.7
million in 1998 and (Euro)9.8 million in 1999. These cash flows reflect
primarily proceeds from private sales of preferred stock of (Euro)5.2 million
between 1997 and April 1998 and the proceeds from the public sale of common
stock of (Euro)53.9 million in July 1998. In 1999, financing cash flows were
primarily proceeds from a loan from a shareholder for (Euro)7.0 million.
Capital expenditures, net of capital leases, were (Euro)1.9 million in 1997,
(Euro)3.3 million in 1998 and (Euro)3.6 million in 1999. Our capital
expenditures consisted of purchases of resources to manage our operations,
including computer hardware and software, office furniture and equipment and
leasehold improvements. We expect that our capital expenditures will continue
to increase in the future. Since our inception, we have generally funded
capital expenditures either through the use of working capital or with capital
leases.
During 1999, we experienced a significant growth in our operating expenses,
in particular an increase of (Euro)2.7 million from 1998 to 1999 in research
and development and an increase of (Euro)16.4 million from 1998 to 1999 in
sales and marketing expenses. As a result, we anticipate that operating
expenses, as well as planned capital expenditures, will constitute a material
use of our cash resources. In addition, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or
product lines. We believe that the net proceeds from this offering along with
our current resources will be sufficient to meet our near-term working capital
and operating resource expenditure requirements.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires companies to
record derivative financial instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statements No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for our balance sheets). This
statement will not have a material impact on the financial condition or results
of our operations.
In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15,
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<PAGE>
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. These statements will not
have a material impact on the financial condition or results of our operations.
Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the Risk Factors section.
Interest Rate Risk
As of December 31, 1999, we had cash and cash equivalents of approximately
(Euro)12.1 million which consist of cash and highly liquid short-term
investments with original maturities of three months or less at the date of
purchase. These investments may be subject to interest rate risk and will
decrease in value if market interest rates increase. A hypothetical increase or
decrease in market interest rates by 10% from the market interest rates at
December 31, 1999 would cause the fair value of these short-term investments to
change by an immaterial amount. Declines in interest rates over time will,
however, reduce our interest income.
Foreign Currency Exchange Rate Risk
A significant portion of our business is conducted in currencies other than
the euro. Our international sales are primarily made through our subsidiaries
in their respective regions and are generally denominated in the local
currency. Expenses incurred by their subsidiaries are also denominated in the
local currency. Accordingly, the functional currency of their subsidiaries is
the local currency. Of our consolidated revenues in 1997, 1998 and 1999,
approximately 23%, 43% and 63%, respectively, were attributable to non-German
operations and translated into euro. As a consequence, period-to-period changes
in the average exchange rate in a particular currency can significantly affect
revenues and operating income denominated in that currency. In general,
appreciation of the euro relative to another currency has an adverse effect on
revenues and operating income denominated in that currency, while depreciation
of the euro has a positive effect on revenues and operating income denominated
in the local currency. The principal non-euro currencies in which our
subsidiaries conduct business and are subject to the risks described above are
the U.S. dollar and the British pound sterling.
Equity Price Risk
We do not own any significant equity investments. Therefore, we are not
currently exposed to any direct equity price risk.
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<PAGE>
BUSINESS
We are a global provider of electronic commerce software applications that
enable businesses to sell their products and services over the Internet. Our
products are targeted toward large businesses, both those that sell their own
products and services online and those that assist other businesses in selling
their products and services online. We target our software applications and
professional services to large businesses that have the ability to manage their
own electronic commerce sites. We also target our products and services to ASPs
that use our software applications to manage electronic commerce sites for the
growing number of small- and medium-sized businesses seeking an Internet
presence and to online marketplaces who provide an online forum for sellers by
bringing buyers and sellers together online. Furthermore, our products can be
used to address simpler, entry-level electronic commerce business models, as
well as more advanced electronic commerce business models. By offering products
that provide solutions to a range of distinct business models, we can meet the
needs of our customers as they evolve from entry-level to more sophisticated
electronic commerce operations while remaining on our software platform.
We have operations in the United States and Europe and a worldwide network of
over 600 channel partners, including PricewaterhouseCoopers, Deutsche Telekom,
Unisys, Northern Telecom and MindSpring. Our global presence allows us work
closely with large businesses and ASPs that operate internationally. In 1998,
customers using our products established over 5,500 new electronic commerce
sites. According to IDC, this placed us in the top three companies cited in the
survey in terms of number of sites established. By December 31, 1999, over
100,000 electronic commerce sites had been licensed to be deployed on our
products worldwide.
Industry Background
The Growth and Evolution of the Internet and Electronic Commerce
The Internet is a rapidly growing and increasingly accepted medium for
commerce. IDC estimates that the Internet commerce market is expected to grow
from $111 billion in 1999 to $1.3 trillion by 2003. As the Internet and online
business has proliferated, there has been increasing demand for technologies
that allow companies to leverage the Internet. The foremost among these is
electronic commerce software. The electronic commerce software market consists
of technologies that support a wide range of critical online business
functions, from enabling transactions to providing marketing data about
customers. According to IDC, the market for Internet commerce applications is
expected to grow from $1.7 billion in 1999 to $13.2 billion by 2003.
The rapid growth and acceptance of the Internet as a medium for commerce is
compelling mainstream businesses to participate in electronic commerce and
creating demand for pre-packaged electronic commerce software applications. As
recently as a few years ago, electronic commerce was dominated by a small
number of companies that used the Internet as their primary sales channel. Many
of these electronic commerce pioneers established their presence on the Web
using internally developed solutions that took a long time to deploy, were
costly to install and maintain and did not integrate well with existing
financial and operational software systems. As electronic commerce activity
continues to expand rapidly, a growing number of businesses have been compelled
to adopt the Internet as a medium of commerce in order to remain competitive.
At the same time, businesses are finding that speed is a key factor in
successfully establishing an electronic commerce presence. As a result,
businesses are seeking pre-packaged software applications that support
sophisticated electronic commerce sites while reducing the lengthy development
and implementation times and costly maintenance requirements of custom-
developed solutions.
In conjunction with the growth and acceptance of the Internet as a compelling
medium for commerce for traditional businesses, there has been a proliferation
of ASPs that rely on pre-packaged software applications. ASPs make it easier
for traditional businesses--particularly small- to medium-sized businesses--to
sell products and services over the Internet by maintaining and managing
servers on which they provide outsourced hosting of electronic commerce sites.
ASPs demand electronic commerce solutions that deploy rapidly, require
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<PAGE>
little installation and maintenance, integrate well with existing billing and
customer care systems and allow the ASP to offer their customers varying levels
of functionality priced according to customer needs.
Recently, a large and growing number of online marketplaces has emerged.
These new online marketplaces include those that address business-to-consumer
needs and those focusing on vertical and horizontal business-to-business
electronic commerce in a wide variety of industries. Online marketplaces bring
buyers and sellers together in a single online environment, giving sellers an
additional channel through which to access customers online. This provides
online sellers an effective alternative to establishing their own destination
sites and taking on the expensive and difficult task of attracting customers to
come directly to their site.
Challenges for Electronic Commerce Solutions
While many existing electronic commerce software solutions successfully
process orders and perform other basic functions, few combine basic
functionality, intelligent merchandising capabilities, integration with
existing business systems and rapid deployment. Even fewer are built upon the
new and emerging standards that will support not only today's business models,
but also the new business models that will redefine how businesses exploit the
opportunities offered by electronic commerce. Businesses developing an online
presence are seeking a software solution that should:
. Provide intelligent merchandising capabilities. Intelligent
merchandising allows a business to capture information about its
customers and their purchasing behavior. By engaging in intelligent
merchandising a business can give its online shopper an improved
customer experience and better target offers to that customer's needs,
resulting in higher sales per customer visit and increased customer
loyalty.
. Integrate with existing business systems. As electronic commerce assumes
a more critical role in business strategy, it becomes imperative for
companies to integrate their electronic commerce sites directly into
existing business systems. Online storefronts should effectively be an
extension of these systems to improve operational flow, reduce costs and
increase customer satisfaction.
. Provide a packaged solution. Businesses that are entering the online
market often are initially unwilling or unable to make large
expenditures in the most advanced software and will eventually want to
upgrade to higher levels of functionality without incurring substantial
costs. A packaged solution reduces the time and expense of implementing
and deploying an electronic commerce solution.
. Serve as complete electronic commerce engines that enable a myriad of
transactions between suppliers, distributors and customers. New online
marketplaces and trading communities are emerging, allowing businesses
to trade more efficiently. These new business models require complete
electronic commerce engines that can serve as the foundation for a
variety of different business functions and enable a full range of
transactions between suppliers, distributors and customers.
. Support the new and emerging standards that will enable new and emerging
electronic commerce business models. In order to enable some of the
newer and more revolutionary emerging electronic commerce business
models a number of new standards and technologies are emerging, such as
XML and Enterprise Java Beans. We believe that only those businesses
whose electronic commerce applications are built on these new
technologies and standards will be able to effectively take advantage of
emerging business models in electronic commerce, such as selling through
online marketplaces.
The INTERSHOP Solution
We offer electronic commerce software applications that enable businesses to
sell goods and services over the Internet. We target both businesses who sell
their own products and services online and businesses, such as ASPs and online
marketplaces, who help companies sell their products and services online. Our
software provides both basic electronic commerce functionality and advanced
features, such as intelligent merchandising
32
<PAGE>
capabilities, and it also allows customers to customize and extend the
functionality of their electronic commerce sites through product enhancements
developed by our independent software vendor partners. Our products are
designed to support a wide range of business models, including basic business-
to-consumer and business-to-business functionality that many businesses need
today, as well as more advanced business models including enabling online
marketplaces, electronic commerce enabling the value chain and supporting
online electronic commerce communities, so that they serve not only our
customers' electronic commerce needs today, but will also provide a seamless
upgrade path to allow them to engage in emerging electronic commerce business
models tomorrow. In addition, our software works in conjunction with a
company's existing technology infrastructure, integrates with existing business
systems and supports an array of emerging online business models in enabling
transactions between suppliers, distributors and customers.
Our software applications offer our customers the following features and
benefits:
Core Electronic Commerce Engine
We offer electronic commerce software applications that serve as core
electronic commerce engines for businesses selling goods and services over the
Internet. Our software provides both basic electronic commerce functionality
and advanced features like intelligent merchandising capabilities and it also
allows customers to customize and extend the functionality of their electronic
commerce sites through product enhancements developed by our independent
software vendor partners. Our software works in conjunction with a company's
existing technology infrastructure, integrates with existing business systems
like enterprise resource planning and supply chain management software and
serves as the intermediary between a business and its trading partners by
integrating emerging online business systems like electronic commerce software.
Our applications provide the electronic commerce functionality that a
business requires to sell goods and services online. This functionality
includes:
. the ability to display goods and services online;
. search and catalog capabilities;
. electronic shopping carts;
. integration with existing business systems; and
. support for online transactions.
Intelligent Merchandising Capabilities
Our software applications contain built-in advanced intelligent merchandising
capabilities such as profiling, shopping lists, cross-selling, promotions and
advanced reporting. These capabilities allow our customers to deepen their
relationships with their customers, increase the average revenue per customer
visit, encourage an increased number of customer visits and increase word-of-
mouth referrals, letting them better market to their customers. In addition,
lessons learned from marketing to their customers online can be leveraged
throughout their brick-and-mortar business, allowing them to use their
electronic commerce site as a testing ground to improve the way they market
their products and services to their customers across all channels.
Faster Deployment than Existing Solutions
While supporting a complete range of electronic commerce functionality, our
products are packaged software applications which allow them to be easily and
quickly installed and provide a comprehensive maintenance and upgrade path.
Electronic commerce sites using our software applications are usually deployed
within 60 days on average. We believe this is more than 30 days faster than
most companies developing electronic commerce solutions. In addition, many of
our customers have deployed their electronic commerce sites in less than 30
days.
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<PAGE>
Integration with Existing Business Systems
Our products include software modules that support integration with existing
business systems, such as financial, customer relationship management and
enterprise resource planning software and other critical business systems. This
integration allows our enterprise customers to build electronic commerce sites
that leverage existing business systems to perform inventory control, accounts
receivable management and other basic functions. For ASPs, our products
similarly integrate with existing billing, customer care, registration and
authentication systems.
Our Platform Supports Major Emerging Online Business Models
Our software applications support more than basic business-to-consumer or
business-to-business electronic storefronts. Our products are powerful core
electronic commerce engines that connect trading partners and enable
transactions between suppliers, distributors and customers. Our software
permits our customers to engage in a variety of activities associated with
established electronic commerce business models focusing not only on the common
electronic commerce business models used today, but also those that will allow
a business to expand and enhance the ways it exploits electronic commerce in
the future. These business models can be grouped according to whether our
customer sells its own products and services online or whether it enables
others to sell online, as well as the level of sophistication of the business
model. As shown in the figure below, the four basic categorizations include
direct selling, indirect selling, enabling merchants and enabling marketplaces.
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<PAGE>
The business models included in each category and a brief description follow:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Category Business Model Description
- -------------------------------------------------------------------------------
<C> <C> <S>
Sell direct Sell direct to consumers Selling products and services
to consumers via online
storefront
Sell direct to businesses Selling products and services
to other businesses via online
electronic commerce site
- -------------------------------------------------------------------------------
Sell indirect Affiliate selling Supporting the ability to
seamlessly and automatically
sell via portals and affiliate
sites
Electronic commerce Sponsor an online community of
enabled channel electronic commerce sites for
brick-and-mortar distribution
channel partners, enabling them
to engage in electronic
commerce while reducing channel
conflict with existing channel
Selling on marketplaces Supporting the ability to
seamlessly and automatically
sell via online marketplaces
and business-to-business
portals
- -------------------------------------------------------------------------------
Enable merchants Store hosting Supporting the hosting of a
large number of electronic
commerce sites all at one
central location
Application hosting Supporting high-end electronic
commerce outsourcing
functionality, including
integration with sophisticated
business systems such as
electronic resource planning
and enterprise financials
- -------------------------------------------------------------------------------
Enable marketplaces Aggregation Supporting an online
marketplace by aggregating
products from a large number of
sellers onto a single online
site
Auction Supporting an online
marketplace with auction
pricing functionality
Procurement Supporting an online
marketplace with functionality
specific to procurement, such
as organizational approvals
Exchange Supporting an online
marketplace with bid/ask
pricing functionality
Commerce community Supporting the hosting of a
community of related electronic
commerce sites at one central
location with community
features such as shared
shopping baskets
</TABLE>
- --------------------------------------------------------------------------------
Strategy
Our objective is to become the leading provider of electronic commerce
software applications. Our strategy is to provide superior products and related
services to a wide range of electronic commerce businesses. The key elements to
our strategy are:
Extend leadership in electronic commerce software. We have been providing
electronic commerce software applications since 1994 and have developed
significant expertise in this developing field. We intend to maintain our
leadership in this area by continuing investments in research and development
to further refine our line of industry-leading products, by branding and
awareness advertising to further establish our brand recognition, by building
partnerships with best-in-class companies who supplement our electronic
commerce solution sale and by exerting our thought leadership through focus on
providing solutions for a complete set of new and emerging business models.
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<PAGE>
Expand our leadership position in providing software to ASPs. We license our
software to ASPs for companies that want a third party to host their electronic
commerce software solutions. We believe that the ASP option is particularly
attractive to small- and mid-size companies that typically have limited
internal information technology resources. To date, we have established
relationships with many of the leading ASPs, including Concentric, MindSpring,
Northern Telecom, PSINet and US West. In the future, we intend to leverage
these relationships to establish partnerships with additional ASPs.
Continue to expand our presence in the enterprise market by increasing our
sales and marketing capabilities. In the fourth quarter of 1999, we introduced
our enfinity product line which is targeted at servicing the complicated needs
of large businesses. We intend to increase enfinity's market presence through a
variety of sales and marketing programs designed to generate market awareness
and to help establish enfinity as the leading electronic commerce software
solution for large businesses. In addition, we plan to leverage our
relationships with ASPs and systems integrators to help promote and sell the
enfinity product.
Continue to provide solutions for a wide range of electronic commerce
business models. Our product line provides effective solutions for companies
looking not only to take advantage of today's electronic commerce business
models but also more sophisticated, emerging business models. We will continue
to pioneer products that address emerging business models through our focus on
leading electronic commerce-enabling technologies, such as XML, Enterprise Java
Beans, Java Server Pages, ICE and LDAP.
Strengthen our network of sales and technology partners. We have established
relationships with a number of systems integrators and other professional
services providers that market, sell and support our products. We intend to
strengthen our existing relationships and continue to develop top-tier partners
to facilitate the distribution of new products and entry into new markets. We
also plan to expand strategic alliances with leading hardware and software
vendors to ensure the interoperability of our products.
Leverage our global presence. We combine extensive operation in North and
South America, Europe and Asia with a worldwide network of partners to provide
dedicated service to businesses in over 25 countries. We have recently opened
an office in Hong Kong that will provide sales and customer service
capabilities. In addition, we intend to leverage this global presence to
capitalize on the rapid worldwide growth of the electronic commerce market. We
will also continue to build relationships with leading independent software
vendors in order to extend the functionality of our products.
Products and Services
We provide a comprehensive array of software products and related services
that allows businesses to engage in electronic commerce. Our products enable
businesses who sell their own products and services online to run their own
electronic commerce sites and to sell in new and innovative ways such as
through marketplaces and online portals. Further, our products also allow ASPs
and online marketplaces to facilitate online selling by hosting sites for other
businesses and by providing online marketplaces which bring buyers and sellers
together in a virtual environment. We supplement our products with professional
and customer services to provide our customers with implementation and ongoing
maintenance of our products.
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<PAGE>
Products
Our products are designed to work individually or in conjunction with one
another in order to mix and match to address the customer's particular need and
address the customer's particular business model. In December 1999, we launched
our INTERSHOP enfinity product which is targeted primarily at supporting our
customers in direct selling, is used in conjunction with other products to
support indirect selling and also supports online marketplaces. The remainder
of our product line--INTERSHOP ePages, INTERSHOP Hosting and INTERSHOP
Merchant--is targeted primarily toward ASPs and the enabling merchants business
model, as well as working in conjunction with enfinity to support indirect
selling. For additional detail on our products, see the table below:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Product Description Business models supported Target customer
- --------------------------------------------------------------------------------------
<C> <S> <C> <C>
enfinity Highly sophisticated . Sell direct Large enterprises,
sites for large . Sell indirect "dot.com" companies and
businesses that need . Enable marketplaces online marketplaces
high performance and
complete integration
- --------------------------------------------------------------------------------------
Merchant Sophisticated sites for . Enable merchants ASPs
small- to medium-sized . Sell indirect
businesses hosted on
their own individual
server
- --------------------------------------------------------------------------------------
Hosting Sophisticated sites for . Enable merchants ASPs
small- to medium-sized . Sell indirect
businesses that share a
single server
- --------------------------------------------------------------------------------------
ePages Entry-level storefronts . Enable merchants ASPs
for small businesses . Sell indirect
- --------------------------------------------------------------------------------------
</TABLE>
We include several different types of software from various software vendors
which are included in our products. These include database software,
application servers and search engines. In most cases, the software supplier
has the right to terminate its supplier agreement in the event we materially
breach the license agreement.
Services
We support our software products with a full set of services, including
professional services, customer support and training. We provide these services
through our in-house services organization and through our network of over 600
affiliated service providers and systems integrators. Our services include the
following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Service Principal Attributes
- -------------------------------------------------------------------------------
<C> <S>
Technical support Variety of technical support packages such as "per
packages incident" and annual support contracts which include
free upgrades and no limits on inquiries
- -------------------------------------------------------------------------------
Training and product Comprehensive series of classes to provide the knowledge
education and skills to successfully deploy, use and maintain our
products and solutions
- -------------------------------------------------------------------------------
Consulting services Assessment of electronic commerce business models,
marketing plans and technical needs
- -------------------------------------------------------------------------------
Software development Deployment of technology into customer systems and
integration into existing enterprise resource planning
and infrastructure systems
- -------------------------------------------------------------------------------
Outsourced project Evaluation, execution, testing and roll-out of projects
management
- -------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Customers
Our customers consist mainly of two types: ASPs and marketplace operators who
use our products to host Internet sites for on-line merchants and run online
marketplaces and enterprises who sell these products directly and indirectly
over the Internet. By December 31, 1999, over 100,000 electronic commerce sites
had been licensed on our software products worldwide. The following is a list
of customers from which we have received over $150,000 in revenues since the
beginning of 1998:
<TABLE>
<S> <C>
Businesses Who Sell Direct Businesses Who Enable Merchants
and Sell Indirect and Enable Marketplaces
. ATL . Adero
. Bosch . Bell Emergis (Bell Canada)
. Canon . Bell South
. Cicada Music . Cardinal Health
. Coram Healthcare . Cobalt
. Dresdner Bank . Concentric Network
. GE Capital . Deutsche Telekom
. Globana Online . eWeb Asia
. Gutenberg Communications . First World Communications
. Hewlett-Packard . France Telecom
. JBA Deutschland . Freecom
. Live Mind . Go2Net
. Modus Media . Ision Internet
. Silicon Graphics . MindSpring
. S.W.I.F.T. . National Association of Realtors
. Times Square 2000 . Nextron
. VRC NetShopping . None Networks
. Waterstone's Bookshops . Northern Telecom
. NTL
. Orbit
. PSINet
. Quoka Online
. Strato
. Telecom New Zealand
. Ticketmaster CitySearch
. Tradewind
. Unisys
. U S West
</TABLE>
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<PAGE>
Customer Case Studies
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Business model
Customer category Application
- -------------------------------------------------------------------------------
<C> <C> <S>
Compaq Sell indirect Compaq Germany has been working to make its
personal computer products available online
supporting, rather than competing with its
existing channel partners. We, along with
Deutsche Telecom, provided Compaq with a
solution allowing its current channel partners
to run and manage their own online stores,
pre-populated by Compaq with the newest
catalog data and leveraging the customer
traffic that comes to Compaq's main website.
Within three months of the scoping exercise,
the first sites were up and running,
generating increased demand and positive
feedback from the channel partners.
- -------------------------------------------------------------------------------
Cicada Music Sell direct Cicada Music is dedicated to delivering a
revolutionary experience in online music
shopping, providing a music service to the
customer with the goal of delivering music
wherever its customer is, whether that is on
their desktop, in their car, or even to a
customer's cell phone in real time. In order
to achieve this goal, PricewaterhouseCoopers
worked with us to build an electronic commerce
enabled portal for users to listen to live
streaming audio, create custom compact discs
and download MP3 music files. Using our
enfinity product, we were able to build a
fully funtional pilot website,
www.cicadamusic.com, in six weeks.
- -------------------------------------------------------------------------------
Cardinal Health Sell indirect Cardinal Health, one of the largest providers
of health care products with sales through six
of the top 10 pharmaceutical chains nationwide
and annual revenues of over $24 billion, asked
us to fortify its existing retail channel
against the increasing competition of virtual
pharmacies. Based on our Hosting and ePages
products, Cardinal sponsors multi-tiered
electronic commerce solutions for its channel
partners, allowing them to compete with online
pharmacies and improving channel efficiency.
- -------------------------------------------------------------------------------
MindSpring Enable MindSpring Enterprises, based in Atlanta, GA,
merchants serves over 1.3 million subscribers and over
60,000 web hosting accounts, or 2.9 million
subscribers and close to 100,000 hosting
accounts when combined with EarthLink, and has
chosen our products with which to offer
electronic commerce hosting to its customers.
With our help, MindSpring offers customers an
easy-to-use storefront offering customized to
MindSpring's look and feel. By offering a
variety of classes of service based on several
of our hosting products, ePages and Hosting,
MindSpring offers a seamless upgrade path from
simple template-driven storefronts with
limited functionality all the way up to
feature-rich storefronts that include an
unlimited number of products and multiple
payment systems, giving MindSpring's customers
a smooth upgrade path.
</TABLE>
- --------------------------------------------------------------------------------
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<PAGE>
Sales and Marketing
Sales
We sell our products through 20 worldwide sales and distribution network of
offices located in North America, Europe, Asia, South America and Australia. We
sell directly through a force of over 65 sales professionals. We also sell
indirectly through a network of over 600 channel partners worldwide. Our
partners participate in programs offering a mix of training, technical support,
marketing support, access to special information on our website and a
developer's license. The majority of our software license sales are indirect,
delivered by one of these channel partners. We intend to continue to increase
our direct and indirect sales channels.
Marketing
Our marketing efforts support our strategy to become the leading provider of
software applications used by businesses to build electronic commerce sites
that enable businesses to sell their products and services over the Internet.
We support this strategy in a variety of ways, including identification of the
most appropriate target customers for our products, building the right sales
and distribution channels to get our products to those customers, promoting and
advertising our products in order to create brand awareness among those
customers and pricing our products so that they are consistent with customer
expectations.
Target Customers. Within the enterprise market, we target the key business
decision makers, including the chief executive officer, vice-president of
marketing, chief information officer, chief financial officer and directors of
electronic commerce. Within the ASP market, we target product managers and
product line managers responsible for the electronic commerce line of business.
Promotion. We support an ongoing, multi-pronged approach to promoting our
services and generating awareness in our target customers. This includes a mix
of print advertising, trade shows, direct marketing and communications on our
web site. We design promotional activities to position ourselves as the leading
enterprise-class vendor in electronic commerce, to increase awareness for our
products with our target customers and to generate sales leads for the sales
channel. Trade shows and direct marketing are conducted on an ongoing, year-
round basis and are designed to increase awareness and create sales leads. We
conduct high-profile advertising campaigns several times per year to support
new product launches. In October of each year, we conduct a show called
INTERSHOP Open. It is targeted toward our customers, partners and developers
and provides an annual forum for the open exchange of information and provides
us with a platform to launch new products and make other major announcements.
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<PAGE>
Strategic Alliances
To ensure that we deliver a comprehensive solution to our customers, we have
established strategic relationships with system integrators, independent
software vendors and vendors of hardware and database platforms. The following
chart outlines the value of each category to our business and representative
companies in each category:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Category Value to Our Business Representative Companies
- -----------------------------------------------------------------------------------------
<C> <S> <C>
System integrators System integrators . Andersen Consulting
and Internet implement our products . Cambridge Technology Partners
professional and generate sales leads . Computer Sciences Corporation
service providers . debis (a division of Daimler-Chrysler)
. Grant Thornton LLP
. Intellia
. Keane
. KPMG
. PricewaterhouseCoopers
. Unisys
. Whittman-Hart
. Xuma
- -----------------------------------------------------------------------------------------
Hardware/database Our relationship with . Compaq
platforms vendors of hardware . Hewlett-Packard
platforms helps us . IBM
ensure the reliability, . Intel
scalability and . Oracle
performance of our . Silicon Graphics
software applications . Sun Microsystems
. Sybase
- -----------------------------------------------------------------------------------------
Independent Third parties provide . Allaire
software and solutions that allow our . Bright Info
service vendors customers to customize . Cognos
and extend the . CyberSource
functionality of our . CyberCash
software applications . CommerceOne
. FedEx
. Great Plains
. Interwoven
. NetPerceptions
. Persistence
. SAP
. Symantec
. Talisma
. UPS
- -----------------------------------------------------------------------------------------
</TABLE>
Competition
The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. Increased competition is likely to
result in price reductions, lower average sales prices, reduced margins, longer
sales cycles and loss of market share, any of which could harm our business,
operating results or financial condition. Our primary source of direct
competition comes from electronic commerce
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<PAGE>
software companies, platform vendors and online services. In addition, we may
encounter future competition from enterprise software companies and software
vendors in related technology.
Our current direct competitors break into the following categories:
. Other electronic commerce software companies: We compete with software
application vendors including Open Market, BroadVision, Interworld and
Art Technology Group.
. Large integrated software technology companies: We also compete against
companies such as Microsoft, IBM, Netscape (a subsidiary of America
Online) and Oracle which each offer electronic commerce software and may
try to increase their share of this market.
Our current indirect competitors include:
. Electronic commerce online services: This category is comprised of
Yahoo! Stores, iMall and others. These online services focus on hosting
small business sites and compete directly with our ASP customers in the
low-end merchant market.
Our potential future competitors could also include:
. Enterprise software companies: Large vendors of enterprise software,
such as Baan, SAP, i2 Technologies, JD Edwards and Siebel, may enter the
electronic commerce market.
. Other software vendors: This group includes electronic commerce vendors
such as Commerce One and Ariba plus Internet content management and
personalization firms such as Vignette and Net Perceptions.
We believe that the principal competitive factors for electronic commerce
software applications and solutions are breadth and scope of solution, depth of
supplier content, the ability to operate with existing information technology
systems, scalability, functionality, ease-of-use, ease-of-implementation, total
cost of ownership and installed base of referenceable customers. We believe we
currently compete favorably with our competitors in these areas.
Many of our competitors have, and new potential competitors may have, longer
operating histories, significantly greater financial, technical, marketing and
other resources than us, more experience developing electronic commerce
software, larger technical staffs, larger customer bases, more established
distribution channels, greater brand recognition and greater financial,
marketing and other resources than we do. In addition, many of our competitors
have well-established relationships with our current and potential customers,
especially in the United States and have extensive knowledge of our industry.
In the past, we have lost potential customers to competitors for various
reasons, including lower prices and other incentives not matched by us. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address customer needs. As a result, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. We also expect that competition may
increase as a result of industry consolidations.
Research and Development
Our research and development organization has eight teams that include our
existing products, advanced development, backbone technology, payment and other
types of cartridges, quality assurance, UNIX, versions and development of
localized versions. Each of the eight teams shares information in order to more
efficiently resolve a similar problem and provide comprehensive solutions. Our
product development activities are conducted in large part through our
operations in Jena, Germany, but are coordinated closely with our product
management resources located in San Francisco, California.
We believe our research and development team and core technologies represent
a significant competitive advantage. The software and Internet applications
development teams include a number of key employees who
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have developed Internet applications and services and have extensive experience
with Java programming. Our research and development team is working with the
leading technologies and standards, including XML, Enterprise Java Beans, Java
Server Pages and LDAP, to help ensure our software applications are compatible
with the newest electronic commerce technology. Furthermore, we believe that
having our research and development team based in Jena, Germany is a
competitive advantage because we have lower labor costs and higher retention
levels than comparable software companies with research and development teams
based in the United States.
In developing updates of its standard software that meet our customers'
needs, we take into account experience gathered in our support to our existing
customers. In addition, the research and development groups in Jena focus on
the continuous development of the existing products and the preparing the next
software generation by anticipating the upcoming demands for electronic
commerce software. In addition, enhancements to the existing products and the
next generation products are tested by a separate group of programmers with
expertise and experience in locating defects and "bugs."
We expect that most of our enhancements to existing and future products will
be developed internally. However, we currently license certain externally-
developed technologies and will continue to evaluate externally-developed
technologies to integrate with our solutions. These externally developed
technologies, if suffering from defects, quality issues or the lack of product
functionality required to make our solutions successful in the marketplace, may
seriously impact and harm our business.
Intellectual Property and Other Rights
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 contractual provisions, confidentiality procedures, trade
secrets and patent, copyright and trademark laws.
We license rather than sell our products and require our customers to enter
into license agreements, which impose restrictions on their ability to utilize
the software. In addition, we seek to avoid disclosure of our trade secrets
through a number of means, including but not limited to, requiring those
persons with access to our proprietary information to execute confidentiality
agreements with us and restricting access to our source code. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. We currently
have no U.S. or EEC patent applications pending.
"INTERSHOP" is a registered trademark of our company in the United States and
Germany. We also hold trademarks in several other jurisdictions. In addition,
"INTERSHOP" and the INTERSHOP logo are registered as trademarks in other
foreign countries. We also have filed applications to register these trademarks
in several countries. We have filed trademark applications in the United States
for "Creating the Digital Economy." The above mentioned trademark applications
are subject to review by the applicable governmental authority, may be opposed
by private parties and may not issue.
In 1998, we entered into a settlement agreement with the Swiss company
INTERSHOP Holding AG which limits our use of the name "INTERSHOP" as part of
our business name and of our various trademarks and product names. We do not
consider these restrictions to have a material adverse effect on our present
and future business activities. The restrictions are designed to avoid
confusion of the Swiss company with our company. In particular, we may not set
up operations or go public in Switzerland using "INTERSHOP" as a business name
or as part of a business name, nor use "INTERSHOP" as formal business name
without an addition such as "Communications."
Employees
As of December 31, 1999, we had a total of 544 employees, including 112 in
research and development, 179 in sales and marketing, 175 in customer support,
professional services and training and 78 in administration and finance. Of
these employees, 176 were located in the United States and 368 were located
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outside the United States. None of our employees is represented by a collective
bargaining agreement, nor have we experienced any work stoppages. We consider
our relations with our employees to be good.
Facilities
All of our facilities in the United States and Europe are leased from third
parties. Our principal U.S. sales, marketing, customer service and
administrative office occupies approximately 22,000 square feet in
San Francisco, California, under a sublease that expires on July 31, 2000. We
have arranged to move to a larger facility in San Francisco when or before our
lease expires. Our principal European sales, marketing and administrative
office occupies approximately 11,366 square feet in Hamburg, Germany and our
principal research, development and European customer support offices occupy
approximately 12,873 square feet in Jena, Germany. We also maintain
professional services operations which occupy approximately 3,400 square feet
in Stuttgart, Germany and 5,800 square feet on Long Island, New York.
In addition, we also lease sales and support offices in the metropolitan
areas of Atlanta, Boston, Charlotte, Chicago, Denver, Hong Kong, Los Angeles,
London, Melbourne, New York, Paris, Sao Paulo, Seattle, Stockholm, Sydney,
Toronto and Washington, D.C.
Legal Proceedings
We are not currently a party to any material legal proceedings.
Governmental Regulation
The laws governing Internet transactions remain largely unsettled. The
adoption or modification of laws or regulations relating to the Internet could
harm our business, operating results and financial condition by increasing our
costs and administrative burdens. It may take years to determine whether and
how existing laws such as those governing intellectual property, privacy,
libel, consumer protection and taxation apply to the Internet. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. We must comply with new regulations in both Europe
and the United States, as well as any regulations adopted by other countries
where we do business. The growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, as well as new laws governing the taxation of
electronic commerce.
Our software products are sold by our United States subsidiary and by its
subsidiaries. The software products currently sold and distributed by our
United States subsidiary do not contain any encryption technology which is
subject to United States, German or European Union export controls. However,
this may change in the future. Export controls, either in their current form or
as may be subsequently enacted, may delay the introduction of new products or
limit our ability to distribute products outside of the United States or
electronically. While we intend to take precautions against unlawful
exportation, the global nature of the Internet makes it difficult to
effectively control the distribution of our products. In addition, governmental
legislation or regulation may further limit levels of encryption or
authentication technology. Further, various countries regulate the import of
certain encryption technology and have adopted laws relating to personal
privacy issues which could limit our ability to distribute products in those
countries.
Structure of Our Company
We are a holding company that directly and indirectly owns seven subsidiaries
that conduct all of our business worldwide. We were incorporated in our current
form under German law on April 23, 1998. Our company was founded in 1992 as
NetConsult Computersysteme GmbH, which is now one of our subsidiaries.
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MANAGEMENT
Management Board
We established our management board in April 1998. Our management board is
responsible for the management of our company, the exercise of our business
activities and the supervision of our property. The following table lists the
current members of the management board:
<TABLE>
<CAPTION>
Member
Name Age since Position
---- --- ------ --------
<C> <C> <C> <S>
Stephan Schambach....... 29 1998 Chairman of the management board, Chief
Executive Officer (Vorstandsvorsitzender)
and Founder
Wilfried Beeck.......... 40 1998 Member of the management board, Chief
Financial Officer (Finanzvorstand) and
Founder
</TABLE>
Stephan Schambach. Mr. Schambach has served as the Chairman of the management
board since 1998. Stephan Schambach is the founder of our company and director
of the management board. In 1990, at the age of 19, he terminated his physics
studies at the University of Jena to implement his idea for the commercial use
of the Internet in his own firm. In 1992 he established NetConsult
Computersysteme GmbH to provide consulting services to German companies. In
1996, he established INTERSHOP Communications, Inc. and has since managed the
enterprise as both chairman of the board and chief executive officer and as a
member of the board of management for our company.
Wilfried Beeck. Mr. Beeck has served as a member of the management board
since 1998. He was appointed as chief financial officer of our company in June
1998. Wilfried Beeck is a co-founder of NetConsult Computersysteme GmbH 1992
and INTERSHOP Communications, Inc. He studied mathematics and computer science
at the University of Kiel before entering the computer industry in the early
1980s. Before co-founding INTERSHOP Communications, Inc. in 1996, he founded
Dart Software GmbH, a vendor of object-oriented software tools and business
applications.
Under our articles of association, our supervisory board may adjust the
number of members of the management board at any time. Currently, there are two
members serving on the management board. The members of the management board
are appointed by the supervisory board for a term of no more than five years.
The current management board was elected for a term of five years that expires
on June 22, 2003. A member of the management board can only be terminated for
significant cause based upon a decision by the supervisory board.
In addition to the management board, we employ the following executive
officers. Messrs. Costello, Demetros, Harding, Oreste and Callan are employed
on an at-will basis. None of the other executive officers listed below is party
to employment agreements with us.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Karsten Schneider....... 39 Senior Vice President of Business Development and
Founder
Frank Gessner........... 31 Vice President of Engineering
Bernhard Marbach........ 38 Vice President of Sales for Europe and Asia
Wolfgang Schober........ 37 Vice President of Professional Services
Dirk Reiche............. 35 Vice President of Finance for Europe and Asia
Dieter Neujahr.......... 40 Vice President of Operations for Europe
Keith C. Costello....... 33 President for the Americas
James Demetros.......... 37 Vice President of Sales for the Americas
Craig W. Harding........ 42 General Counsel and Secretary for the Americas
Philip L. Oreste........ 33 Vice President of Finance for the Americas
Edward J. Callan........ 34 Vice President of Marketing
</TABLE>
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Karsten Schneider, Senior Vice President of Business Development. Mr.
Schneider oversees strategic alliances, business and market development and the
independent software vendor partner program worldwide. He founded the company
in 1992. Prior to 1992, Mr. Schneider worked at Carl Zeiss, an optics
engineering company headquartered in Jena, Germany, where he was a development
engineer. He received a degree in Mechanical & Electrical engineering in Sofia,
Bulgaria with honors.
Frank Gessner, Vice President of Engineering. Mr. Gessner joined us in 1995.
As Vice President of Engineering, Mr. Gessner manages research and development
activities for us. Prior to that time, he studied computer science at the
Bolton University in England and at the University of Leipzig, where he
received a degree with honors.
Bernhard Marbach, Vice President of Sales for Europe and Asia. Mr. Marbach
directs sales in Europe and Asia for us. Prior to joining our company in 1997,
Mr. Marbach was at PINK software GmbH in Hamburg, where he was vice president
for worldwide sales. In addition, Mr. Marbach was Director of Sales for Central
Europe for NeXT Software. Mr. Marbach studied marketing and management and
computer science at the University of Hamburg.
Wolfgang Schober, Vice President of Professional Services. Mr. Schober is
responsible for worldwide professional and consulting services. Prior to
joining our company in February 1998, he worked for 13 years at Hewlett-Packard
in Germany, Colorado and California as a manager of international projects, a
manager of electronic commerce research and development manager. Mr. Schober
also studied mathematics at the University of Stuttgart and technical computer
science at the professional school in Ulm.
Dirk Reiche, Vice President of Finance for Europe and Asia. Mr. Reiche leads
the financial group within our European organization. He studied business
administration at the University of Hamburg. He began his career as a manager
in the Gruner & Jahre publishing house. Before he joined us in 1997, he worked
for a new media start-up company and a telecommunications provider in Berlin-
Brandenburg.
Dieter Neujahr, Vice President of Operations for Europe. Mr. Neujahr, who
joined us in 1999, is responsible for operations in Europe. Previously he
served as founder and managing director of the European headquarters of Intuit
in Munich and managed the first foreign language development and release of
programs such as Quicken and QuickBooks. Mr. Neujahr also worked at Intuit's
worldwide headquarters in Palo Alto, California, where he led the introduction
of various service marketing programs in the U.S. market. Mr. Neujahr studied
economic science and economical informatics at Nurnberg und Wurzberg.
Keith C. Costello, President for the Americas. Mr. Costello, who joined us in
January 2000, is primarily responsible for our business activities in the
Americas. Immediately prior to joining us, Mr. Costello was with Oracle
Corporation, where he was Vice President for Oracle Consulting. Prior to that,
Mr. Costello held management positions at Booz, Allen & Hamilton and Price
Waterhouse. He holds a Bachelor of Arts from the University of California,
Berkeley.
James Demetros, Vice President of Sales for the Americas. Mr. Demetros is
responsible for all markets in the sales for the United States, Canada and
Latin America. Prior to joining Intershop in 1999, Mr. Demetros was Director of
Apple's Enterprise Software Division (formerly NeXT Software). Prior to Apple's
acquisition of NeXT Software, Mr. Demetros held positions as Senior Director of
U.S. Sales Operations, Director of Eastern Regional Operations and Director,
Northeast Regional Operations. Mr. Demetros began his career in computer
technology at Wang Laboratories where he held a variety of sales and sales
management positions. He is a graduate of the University of Connecticut.
Craig W. Harding, General Counsel and Secretary for the Americas. Mr.
Harding, who joined us in 1997, is the senior legal officer for North America.
Previously, he was General Counsel and Secretary at Actra Business Systems,
LLC, which is a joint venture of Netscape Communication Corporation and GE
Information Services. Mr. Harding also served as General Counsel at Kaleida
Labs, a joint venture of IBM and Apple Computer, and as General Counsel at
Sierra On-Line. He holds degrees in mathematics from Duke University and law
from Vanderbilt University School of Law.
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<PAGE>
Philip L. Oreste, Vice President of Finance for the Americas. As Vice
President of Finance for the Americas, Mr. Oreste manages investor relations,
accounting and controlling. He was formerly Controller of Pacific Bell Internet
Services, the Internet service provider and subsidiary of Pacific Bell. He has
also held the position of Vice President of Finance for Shakey's. Mr. Oreste
earned a Bachelor of Science degree in Accounting from the University of San
Francisco and is a licensed Certified Public Accountant in the State of
California.
Edward J. Callan, Vice President, Marketing. Mr. Callan, who joined us in
1998, guides our worldwide marketing organization, including product
management, marketing communications, public relations, Web marketing, channel
marketing, technical training and documentation. He was formerly Vice President
of Consumer and Small Business Marketing for SBC Internet, where he managed
marketing strategy for both Pacific Bell Internet and Southwestern Bell
Internet brands. Prior to that, Mr. Callan spent three years with Dataquest as
a Senior Consultant and developed marketing strategies for clients in the
Internet, telecommunications and software industries. Mr. Callan has an MBA
from the Wharton School of the University of Pennsylvania, and a Bachelor's
degree in Electrical Engineering and Computer Science from the University of
California at Berkeley.
Supervisory Board
Our supervisory board oversees the leadership of the management board. The
following table lists the current members of the supervisory board:
<TABLE>
<CAPTION>
Member
Name Age since Principal Occupation
---- --- ------ --------------------
<C> <C> <C> <S>
Eckhard Pfeiffer, Chairman........ 58 1999 Former Chief Executive Officer
of Compaq Computer Corporation
Theodore J. Smith, Vice Chairman.. 70 1998 Chairman, FileNet Corporation
Joerg Menno Harms................. 60 1998 Managing Director, Hewlett-
Packard GmbH
Lorenzo Pelliciolo................ 48 1999 Chief Executive Officer of Seat
Regine Gialle
Knut Fockler, PhD................. 50 1999 Director of Multimedia, Deutsche
Telekom AG
Hartmut Esslinger, PhD............ 55 1999 Founder of frogdesign, an
integrated design company
</TABLE>
Under our articles of association, the supervisory board has six members. In
general, the members of the supervisory board are appointed for the year terms
ending on the adjournment of the general shareholders' meeting for the fourth
fiscal year after the beginning of their term of service, unless the general
shareholders' meeting determines a shorter period of service at the time of
their election. A supervisory board member's term will end on the appointment
of his successor unless he resigns or is dismissed earlier. In general, each
member of the supervisory board can be dismissed at any time by a three-fourths
majority of the general shareholders' meeting.
Compensation
Compensation of the Executive Officers and the Management Board. We paid
aggregate compensation of $861,120 to the executive officers and the members of
the management board in fiscal year 1999. Of such amount, none was paid in
respect of pension or other similar benefits. There are no pension reserves for
the executive officers and members of the management board.
Between 10% and 20% of the total remuneration paid to the executive officers
and the members of the management board depends on their achievement of
performance targets, which are defined by certain qualitative criteria, as well
as our sales and profit. These targets are set by the supervisory board, in
accordance with German law, on an annual basis. In addition, they are entitled
to participate in the 1999 Stock Option Plan (for a description of this plan,
please see "Management--Equity Incentive Plans").
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<PAGE>
Compensation of the Management Board. As of December 31, 1999, there were no
pension reserves for members of the management board. Members of the management
board are entitled to participate in the 1999 Stock Option Plan (for a
description of this plan, see "Management--Equity Incentive Plans"). As of
March 15, 2000, members of the management board collectively hold 3,900,000
shares, which includes 2,500,000 shares issuable to Mr. Stephan Schambach.
Compensation of the Supervisory Board. We reimburse members of the
supervisory board for their out-of-pocket expenses related to their service on
the supervisory board. However, we do not otherwise compensate members of the
supervisory board.
Equity Incentive Plans
Effective as of June 21, 1999, we adopted a unified stock option plan, which
we refer to as the 1999 Plan. The 1999 Plan provides for grants of options to
purchase shares of our company to board members, executive officers and
employees of our company and our affiliates. Options granted under the 1999
Plan are intended to attract, commit and motivate these individuals. We have
granted options under the 1999 Plan to nearly all new employees who have joined
us on or after June 21, 1999. These are usually granted as of the hiring date
of each employee.
We also maintain the INTERSHOP Communications, Inc. 1997 Equity Incentive
Plan, which we refer to as the 1997 Plan, pursuant to which selected employees,
officers, directors and consultants of our subsidiaries were granted stock
options. The details of the 1999 Plan and the 1997 Plan are as follows:
The 1999 Stock Option Plan. At the shareholders' meeting on June 21, 1999,
our shareholders adopted the 1999 Plan, which became effective on July 1, 1999,
and authorized the grant of stock options (Bezugsrechte), which we refer to as
AG Options, to employees, officers and directors of our company and our
affiliates, including members of the management board. There are two pools of
shares authorized under the 1999 Plan. There are 133,000 shares for grants of
stock options to members of the management board and general managers of our
subsidiaries and 1,500,000 shares for grants of stock options to all other
employees.
The management board is authorized to determine which eligible employees will
receive AG Options and to set the terms and conditions of the AG Options. In
the case of AG Options granted to members of the management board, the
supervisory board determines the terms of the awards. The supervisory board can
also determine additional performance targets that must be met prior to the
grant of an AG Option to any participant.
Each AG Option is exercisable for one share. The vesting schedules of the AG
Options will be four years from the date of the grant; however, pursuant to
German law, no AG Options will be exercisable, even though a portion is vested,
prior to the second anniversary of the date of grant. The exercise price of the
AG Options is equal to 120% of the fair market value of the AG Shares on the
date of grant, where the fair market value is determined to be the average
closing sales price as quoted on the Neuer Markt for the 10 trading days prior
to the date of the grant. The exercise price can be reduced by a shareholders'
resolution if, at any time, we issue shares or securities convertible into
shares at a price lower than the exercise price of an outstanding AG Option.
The AG Options granted under the 1999 Plan are not transferable except by
will or the laws of descent and distribution.
The 1997 Equity Incentive Plan. Prior to our shareholder's meeting on June
21, 1999, INTERSHOP Communications, Inc., our United States subsidiary,
maintained the 1997 Plan pursuant to which selected employees, officers,
directors and consultants of all of our subsidiaries who joined us prior to
June 21, 1999, were granted stock options, which we refer to as U.S. Options.
Effective as of June 21, 1999, we no longer grant options to new employees
under the 1997 Plan. The U.S. Options are exercisable for AG Shares at a ratio
of 5:3.
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<PAGE>
The U.S. Options granted under the 1997 Plan include both incentive stock
options within the meaning of Section 422 of the United States Internal Revenue
Code of 1986, as amended, and non-incentive stock options, which we refer to as
non-statutory stock options. Incentive stock options may only be granted to
employees and must have an exercise price equal to or greater than the fair
market value of the shares on the date of grant. The non-statutory stock
options may be granted to employees, consultants or directors and cannot have
an exercise price less than 85% of the fair market value of the shares on the
date of grant.
The 1997 Plan is administered by the management board, which has the full
authority to amend and interpret the plan and the options granted under the
1997 Plan. The vesting schedules of the options granted under the 1997 Plan
vary from grant to grant; however, a minimum of 20% of the total number of
shares subject to an option must vest each year. Generally, the U.S. Options
vest with respect to 17% of the shares on the six-month anniversary of the date
of grant and in 30 monthly installments with respect to the remaining 83% of
the shares. Vested options may be exercised at any time following their vesting
date and prior to the tenth anniversary of the date of grant; however, an
individual optionholder may not exercise stock options more than four times in
any calendar year.
Upon the termination of an optionholder's status as an employee, director, or
consultant for any reason other than death or disability, the unvested portion
of the option will be forfeited and the vested portion will remain exercisable
for a maximum of three months. The options granted under the 1997 Plan are not
transferable, except by will or by the laws of descent and distribution.
Outstanding Options
As of December 31, 1999, there were 473,000 outstanding options to purchase
ordinary shares (including 86,083 outstanding options held by our executive
officers). As of December 31, 1999, the weighted average exercise price of all
our outstanding options was (Euro)73.90 per share. The options outstanding as
of December 31, 1999 will expire at various times prior to June 2009. Of these
options, none are held by the members of the supervisory board and the
management board.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1997, INTERSHOP Communications, Inc. acquired 100% of the shares
of INTERSHOP Communications GmbH pursuant to a share exchange agreement,
entered into in December 1996, between INTERSHOP Communications, Inc. and the
shareholders of INTERSHOP Communications GmbH. The outstanding capital stock
and debt of INTERSHOP Communications GmbH were converted into common and
preferred stock, respectively, in INTERSHOP Communications, Inc. INTERSHOP
Communications, Inc. thus became the parent company of INTERSHOP Communications
GmbH and its subsidiaries.
As part of the restructuring activities that occurred in May and June 1998,
prior to our initial public offering in Germany, INTERSHOP Communications GmbH
acquired 100% of the shares of a dormant company, that was since renamed
"INTERSHOP Communications AG," from its founders Dr. Robert Rottger and Ms.
Jutta Niedrich for approximately (Euro)51,129. The purpose of this transaction
was to establish a German stock corporation as the parent company for the group
prior to our initial public offering in Germany. Since it often takes several
weeks to form a new Aktiengesellschaft, German companies that intend to
reorganize as a Aktiengesellschaft often acquire a dormant company in lieu of
forming a new one.
The then existing stockholders of INTERSHOP Communications, Inc. exchanged
their shares in INTERSHOP Communications, Inc. for shares of our company. The
holders of 79.3% of the shares of INTERSHOP Communications, Inc. received
12,354,810 shares of our company. As a result of this transaction, we became
the parent company of INTERSHOP Communications, Inc. and its subsidiaries. Due
to certain tax consequences, our founder Mr. Schambach, and a private investor,
Mr. Jamieson, did not contribute all of their shares of INTERSHOP
Communications, Inc. and currently still hold 16.0% and 1.5%, respectively, of
that company's capital stock. Other than us, Messrs. Schambach and Jamieson are
the only other current stockholders of INTERSHOP Communications, Inc., and each
is entitled to exchange his shares in that company for shares in our company at
a ratio of 5:3, using conditional capital specifically approved for this
purpose at our stockholders' meeting on June 23, 1998. As of December 31, 1999,
Messrs. Schambach and Jamieson may exchange their 4,260,000 and 381,500 shares,
respectively in INTERSHOP Communications, Inc., into 2,500,000 and 228,900
shares, respectively, of our company.
The post-formation and share contribution agreement (Nachgrundungs- und
Einbringungsvertrag) was executed on June 22, 1998 by our management board and
also by several holders of ordinary and preferred shares of INTERSHOP
Communications, Inc. These shareholders include Messrs. Stephan Schambach and
Wilfried Beeck, both of whom are members of our management board. The record of
the execution of the post-formation and share contribution agreement indicates
that Mr. Beeck acted both on our behalf and as a shareholder of INTERSHOP
Communications, Inc. Our shareholders approved the post-formation and share
contribution agreement at the shareholders' meeting held on June 23, 1998 in
accordance with Section 52 of the German Stock Corporation Act, or the AktG.
Section 112 of the AktG provides that, in connection with any transaction
between members of the management board and a corporation, the corporation must
be legally represented by its supervisory board. The agreement was approved by
our supervisory board on June 21, 1999. There is some question under German law
as to whether Section 112 applies to the execution of an agreement which is to
be approved by the shareholder's meeting in accordance with Section 52 and,
further, whether a supervisory board could retroactively approve an agreement
that was entered into in violation of Section 112, if applicable. We, however,
believe that Section 112 does not apply to the agreement and that the agreement
is valid. In a situation where an agreement needs to be approved by a
shareholder's meeting according to Section 52, which was the case here, Section
112 does not apply, and, consequently, no requirement for the supervisory board
to represent a company when entering into the agreement. After having reviewed
the legal background, although there are no precedent court decisions, we are
of the opinion that Section 112 does not apply to the agreement. If our
conclusion on the non-application of Section 112 were incorrect, we believe,
nevertheless, that the agreement would have been provisionally invalid when
executed, but could subsequently be ratified, and would have become valid
retroactively, by the approval of the supervisory board as of June 21, 1999.
Although two dated German regional court decisions held, that such an approval
would not be sufficient, our view that a violation of Section 112 would be
cured by a subsequent supervisory board's approval is
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supported by more recent decisions of the German Supreme Court. In the event
that the German Supreme Court held the agreement to be invalid, all or a
portion of the ordinary and preferred shares of INTERSHOP Communications, Inc.
would not have been transferred to us effectively. Consequently, share issued
by us in order to fulfill our obligations under the agreement would not carry
any voting rights. Furthermore, any alleged invalidity of the agreement could
possibly affect the validity of future resolutions passed at any of our
shareholders' meetings, provided that an action to set aside the resolutions
were brought forward within one month after adoption of the resolution. If the
German Supreme Court were to determine that we had violated Section 112, we
would take appropriate steps to re-execute the agreement and to re-consummate
the transaction with the approval of all parties to the agreement. We believe
the parties would be obliged to give approval under the German good-faith-
principle. There is a slim possibility that the re-execution may not be
possible by an attachment of the shares by creditors of the other parties to
the agreement or by the insolvency of these other parties.
In May 1998, we entered into a legal settlement that obligated us to pay
(Euro)1.9 million. Private Equity Bridge Invest Ltd., or PEBI, an affiliate of
one of the underwriters from our initial public offering in Germany, paid this
amount on our behalf in exchange for shares of preferred stock of INTERSHOP
Communications, Inc. No shares of preferred stock of INTERSHOP Communications,
Inc. were issued to PEBI. At various times between June and December 1998, PEBI
purchased a total of 120,090 shares of our company from us and purchased 60,000
shares of our company from INTERSHOP Communications GmbH for a total cash
consideration of (Euro)4.0 million, whereas the total market value was
(Euro)5.9 million.
Also at our stockholders' meeting on June 23, 1998, at which the sole
stockholder was INTERSHOP Communications GmbH, resolutions were passed that
increased our capital stock, or, in other words, authorized additional shares.
On June 23, 1998, the Vice Chairman of the Supervisory Board, Mr. Theodore J.
Smith, subscribed to 50,001 newly issued no-par value shares at an issue price
of (Euro)12.78 per share, resulting in an aggregate payment of (Euro)639,118.
This subscription agreement was entered into in connection with the
cancellation of a convertible promissory note that was entered into between Mr.
Smith and INTERSHOP Communications, Inc. in April 1998. The promissory note had
been in the amount of $500,000 and bore interest at the rate of 7% per annum.
The proceeds of the issuance of the promissory note were used for the Company's
general working capital needs during the period prior to its initial public
offering in Germany.
In January 1998, INTERSHOP Communications, Inc. granted Mr. Beeck a put
right to sell his interests in a limited liability company for $250,000. In
exchange, the company transferred to INTERSHOP Communications, Inc. management
and technical employees as well as limited intellectual property. The purpose
of this transaction was to transfer these assets from the limited liability
company to us in a cash-efficient manner. The limited liability company still
exists but has no ongoing business operations. Mr. Beeck has not exercised this
put right and we are not aware of any intentions on his part to do so.
Effective as of July 1997, Deutsche Telekom, one of our most significant
customers and also a strategic partner, acquired a license to use our software
for a period of three years. On December 31, 1997, Deutsche Telekom, through
its venture capital subsidiary T-Telematik Venture Holding GmbH, purchased
approximately 7.8% of the then outstanding capital stock of INTERSHOP
Communications, Inc. for $3,830,000 and then subsequently exchanged this
capital stock for shares of our company pursuant to an agreement dated June 23,
1998.
In 1999, two of our shareholders, Mr. Stephan Schambach and Mr. Wilfried
Beeck, both of whom are members of our management board, have agreed to loan to
us in the amount of (Euro)5,000,000, and (Euro)7,000,000, respectively, in the
form of an overdraft credits for our working capital credit
(Betriebsmitteldredit), each of which bears interest at the rate of 6% per
annum. The loans are callable with three months notice beginning December 31,
2000. There are prepayment penalties for each loan of twelve months interest if
the loans are paid down prior to December 31, 2000. As of December 31, 1999, we
had drawn down the full (Euro)7,000,000 of the loan from Mr. Beeck.
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During 1996, we entered into a series of unsecured loans with some of our
shareholders. Interest is payable quarterly at 10%. The loans may be repaid at
any time, but no later than February 2004. Cumulated interest of (Euro)50,618
was paid on December 31, 1998 and the remaining outstanding principal balance
at that same date was (Euro)20,000.
We believe that all the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of March 15, 2000 and as
adjusted to reflect the sale of the shares in this offering by:
. each person, or group of affiliated persons, who is known by us to own
beneficially more than 10% of our ordinary shares;
. each member of the management board;
. each member of the supervisory board; and
. members of the management board and the supervisory board as a group.
Except as otherwise noted, the persons or entities in this table have sole
voting and investment power with respect to all the ordinary shares owned by
them. The following tables assumes no exercise of the over-allotment by the
underwriters. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and generally includes voting power
or investment power with respect to securities. Ordinary shares subject to
options currently exercisable or exercisable within 60 days of the date of this
prospectus are deemed outstanding for the purpose of computing the percentage
beneficially owned by the person holding such options but are not deemed
outstanding for the purpose of computing the percentage beneficially owned by
any other person. Mr. Schambach holds 16.3% of the shares of our U.S.
subsidiary INTERSHOP Communications, Inc. which he may exchange at any time for
our ordinary shares at a ratio of 5:3. Percentage of beneficial ownership is
based upon 19,504,212 shares outstanding prior to this offering and 19,939,212
shares outstanding following this offering. This figure assumes that Mr.
Schambach has exchanged his shares of our U.S. subsidiary, INTERSHOP
Communications, Inc., for our shares, and the latter figure assumes no exercise
of the over-allotment option by the underwriters. We believe that the persons
named in this table, based on information provided by such persons, have sole
voting and investment power with respect to the ordinary shares indicated.
<TABLE>
<CAPTION>
Percentage Owned
-----------------
Ordinary Before After
Name of Beneficial Owner Shares Offering Offering
- ------------------------ --------- -------- --------
<S> <C> <C> <C>
Stephan Schambach................................. 2,500,000 12.8 12.5
Wilfried Beeck.................................... 1,400,000 7.2 7.0
Eckhard Pfeiffer.................................. 80,000 * *
Theodore J. Smith................................. 26,458 * *
Joerg Menno Harms................................. 300 * *
Lorenzo Pelliciolo................................ 0 * *
Knut Fockler...................................... 0 * *
Hartmut Esslinger................................. 0 * *
Members of the management board and the
supervisory board and executive officers as a
group............................................ 5,281,647 27.1 26.5
</TABLE>
- --------
* Represents less than 1% of our outstanding shares.
The total number of outstanding shares used to calculate the percentages in
the above table does not include the exercise of the over-allotment option. If
the over-allotment option is exercised, the underwriters will have an option to
purchase from us an additional 650,000 ADSs.
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DESCRIPTION OF CAPITAL STOCK
The following summary is based upon our articles of association (Satzung) and
the German Stock Corporation Act (Aktiengesetz, AktG), each as in effect on the
date of this prospectus. This summary is intended to contain all material
information in relation to our capital stock and the rights attaching to the
shares, but does not purport to be complete. It is qualified in its entirety by
reference to the articles of association and German law in effect on the date
of this prospectus.
Capital Increases and Decreases
Following this offering, our issued and outstanding capital stock
(Grundkapital) will be (Euro)17,439,212, divided into 17,439,212 bearer
ordinary shares of no par value (Stuckaktien). These shares have a calculated
value (rechnerischer Wert) of (Euro)1.00 each.
Under the German Stock Corporation Act, our capital may be increased by a
resolution passed by a majority of the shareholders of at least three-quarters
of our outstanding capital stock present at the shareholders' meeting.
Alternatively, the shareholders may, by a resolution approved by a majority
of the shareholders holding at least three-quarters of our outstanding capital
stock represented at the shareholders' meeting, empower the management board to
issue with the approval of the supervisory board, within a period not exceeding
five years, shares in a specified amount, thus creating authorized capital
(genehmigtes Kapital). Finally, the shareholders may create, by a resolution
requiring the same majority, conditional capital (bedingtes Kapital) for the
purposes of issuing shares to optionees or for the purpose of a contemplated
merger.
The nominal amount of each authorized capital and conditional capital may not
exceed 50% of our capital stock outstanding at the time the resolution to
create that capital is adopted, provided that in the case of conditional
capital created for the purpose of granting stock options to employees, this
limit is 10% of the capital stock outstanding at the time of the resolution.
Any decrease in our share capital requires the approval of a majority of the
shareholders holding at least three-quarters of our outstanding share capital
represented at the shareholders' meeting.
Bearer Ordinary Shares
We were incorporated in Germany on April 23, 1998 with a capital stock of
(Euro)51,129, divided into 60,000 bearer ordinary shares with a calculated
value of (Euro)0.85 each. We were registered with the commercial register of
Hamburg, Germany on May 20, 1998.
In accordance with the Law on Introduction of Shares with no par value
(Stuckaktiengesetz), enacted on April 1, 1998, the then existing shares were
converted into shares of no par value (Stuckaktien) at the general meeting of
May 26, 1998.
(Euro) In the context of a restructuring, our capital stock was increased from
(Euro)51,129 to (Euro)153,464 by means of a (Euro)102,335 cash contribution by
PEBI in exchange for the issuance of 120,090 new shares. Subsequently, our
capital stock was increased by way of contributions-in-kind of (Euro)10,528,190
from (Euro)153,464 to (Euro)10,681,654 through the issuance of 12,354,810 new
shares. The contribution-in-kind consisted of the contribution of 20,591,348
shares of INTERSHOP Communications, Inc. The shares of approximately 200
employees and advisors of INTERSHOP Communications, Inc. which were contributed
to us in the course of that contribution-in-kind, had been previously
transferred to a trustee.
In addition, at our special meeting on June 23, 1998, we resolved that our
capital be increased from (Euro)10,681,654 to (Euro)10,724,263 by means of a
(Euro)42,609 cash contribution in exchange for the issuance of 50,001 new
shares to Mr. Theodore J. Smith. Subsequently, INTERSHOP Communications GmbH,
our former sole shareholder, transferred its 60,000 shares to PEBI.
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After the foregoing transactions, 12,584,901 shares, with a calculated value
of (Euro)0.85 per share, were issued and outstanding. On July 9, 1998,
3,000,000 shares with a calculated value of (Euro)0.85 were issued in
connection with our initial public offering. Additionally, 627,162 shares and
147,867 shares were issued on January 15, 1999 and on April 23, 1999,
respectively, to Mr. Christof K. Leiste from conditional capital II, following
his exercise of exchange rights pursuant to the 1997 Plan. Similarly, 206,700
shares were issued to Mr. Burgess Jamieson from conditional capital III,
following the exercise of his exchange rights.
After these share issuances, our share capital amounted to (Euro)14,117,306
divided into 16,566,630 shares with a calculated value of (Euro)0.85 per share.
Our shareholders' meeting held on June 21, 1999 resolved the conversion of the
share capital from DM into euro. Following that conversion the share capital
amounted to (Euro)14,117,305.70. The shareholders' meeting resolved a capital
increase from (Euro)14,117,305.70 by (Euro)2,449,324.30 to (Euro)16,566,630 by
converting amounts available in a capital reserve (Kapitalrucklage). The
capital increase was carried out without issuing new shares. Furthermore, the
shareholders' meeting resolved a 3:1 stock split, and all share amounts and
calculated values have been restated in this prospectus to reflect this stock
split. All shares have full dividend rights for the fiscal year from January 1,
1999 to December 31, 1999.
After the June 21, 1999 meeting, we issued an additional 71,747 shares and
240,000 shares in 1999 out of conditional capital II and III, respectively. In
2000, as of March 15, 2000, we issued an additional 70,108 and 56,000 shares
out of conditional capital II and III, respectively.
Unless otherwise regulated by law, one share grants one vote in all matters
subject to a shareholders' vote, including the election of the members of the
supervisory board. Neither our certificate of incorporation nor our articles of
association provide for cumulative exercise of voting rights for the election
of board members. The holders of common shares are entitled to receive fixed
dividends, approved by the annual shareholders' meeting and funded by means
available for this purpose under the applicable rules and regulations. In case
of liquidation, any liquidation proceeds remaining after paying off all of our
liabilities would be distributed among shareholders in proportion to the total
number of the shares held by each shareholder. Common shareholders are not
subject to contribution and have no rights to conversion, reimbursement or
preferential rights for the purchase of additional shares, regardless of share
class. Shares outstanding have been paid in full and are not contributory.
Preferred Stock
At this time, we have not authorized any shares of preferred stock. Our
articles of association do not permit the issuance of such preferred stock
without the approval of the majority of the shareholders. If our shareholders
wish to enable us to issue preferred stock at a certain time in the future,
they would need to consent to the amendment of the articles of association,
which requires a majority of three-quarters of the capital stock present at a
shareholders' meeting.
Stock Option Plans
1999 Stock Option Plan. We currently maintain a stock option plan that became
effective on June 21, 1999. This plan provides for grants of options to
purchase AG Shares to board members, executive officers and employees of our
company and our affiliates. The options granted under this plan are intended to
attract, commit and motivate these key individuals. Each option granted under
the 1999 Plan is exercisable for one AG Share. As of December 31, 1999, 158,000
options had been granted under the 1999 Plan. For a more detailed description
of the 1999 Plan, see "Management--Equity Incentive Plans."
1997 Equity Incentive Plan. The INTERSHOP Communications, Inc. 1997 Equity
Incentive Plan provides options to certain employees, officers, directors and
consultants of our subsidiaries. Each option granted under the 1997 Plan is
exercisable for AG Shares at a ratio of 5:3. We no longer grant options under
this plan; however, there were 315,000 options outstanding under this plan as
of December 31, 1999. For a more detailed description of the 1997 Plan, see
"Management--Equity Incentive Plans."
Number of Shares Available for Allocation Under the Stock Option Plan
Our shareholders' meeting on June 23, 1998 resolved conditional capital
increases for the issuance of shares to employees holding options exercisable
for our shares. Some employees were granted options
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<PAGE>
exercisable for shares of INTERSHOP Communications, Inc. under the 1997 Plan.
Those employees have entered into agreements allowing them to exercise their
options of INTERSHOP Communications, Inc. for our shares. Our shareholders'
meeting on June 21, 1999 has amended the conditional capital increases. The
following conditional pools of shares are available for issuance to holders of
options or subscription rights (Bezugsrechte):
. Our share capital is conditionally increased by our first pool of
conditional capital to (Euro)1,633,000 for the issuance of 1,500,000
shares to our employees and their affiliates and 133,000 shares to
members of our management board and our affiliates. The conditional
capital increase is made to grant subscription rights (Bezugsrechte) to
the aforementioned persons. The subscription rights can be exercised
between two and five years of the date of grant.
. Our share capital is conditionally increased by our second pool of
conditional capital by (Euro)424,971 for the issuance of 424,971 shares.
The conditional capital increase is made to grant exchange rights to all
holders of options of INTERSHOP Communications, Inc. known to us for an
exchange ratio of five option rights to receive one INTERSHOP
Communications, Inc. share to three option rights to receive one share
of our company. After the issuance of 141,582 shares since the June 21,
1999 meeting, conditional capital II currently has 283,389 unissued
shares remaining.
The respective number of shares available for issuance can be adjusted at the
shareholders' meeting within the 50% limitation of (S) 192 para. 3, German
Stock Corporation Act (Aktiengesetz, AktG), or, if the conditional capital is
created in order to grant stock options to employees, within a limit of 10% of
the outstanding share capital at the time the resolution upon the additional
capital is adopted. As of December 31, 1999, 588,988 options exercisable for
shares of INTERSHOP Communications, Inc. were outstanding. Based on the
conversion of options to purchase INTERSHOP Communications, Inc. shares into
options to purchase our shares, 424,971 options have been granted. Additional
options were granted, in particular, to European employees prior to our initial
public offering in Germany in 1998.
Resolutions of the Meeting of Shareholders
At our shareholders' meeting held on June 21, 1999, the following
resolutions, in particular, were duly adopted:
Resolutions in connection with the conversion of the share capital from DM
into euro:
. Conversion of the share capital from DM 27,611,050 into
(Euro)14,117,305.70.
. Increase of the share capital from (Euro)14,117,305.70 to
(Euro)16,566,630 by (Euro)2,449,324.30 by converting amounts available
in a capital reserve (Kapitalrucklage). The capital increase was carried
out without issuing new shares.
. Stock split of 3:1, the 5,522,210 shares split into 16,566,630 shares.
. Conversion of the authorized capital I from DM 2,500,000 into
(Euro)1,278,229.70 and increase by (Euro)221,770.30 to (Euro)1,500,000.
. Conversion of the authorized capital II from DM 1,500,000 into
(Euro)766,937.82 and increase by (Euro)133,062.18 to (Euro)900,000.
. Conversion of the conditional capital I from DM 2,500,000 into
(Euro)1,278,229.70 and increase by (Euro)221,770.30 to (Euro)1,500,000.
. Conversion of the remaining conditional capital II from DM 708,285 into
(Euro)362,140.37 and increase by (Euro)62,830.63 to (Euro)424,971.
. Conversion of the remaining conditional capital III from DM 5,041,500
into (Euro)2,577,678.02 and increase by (Euro)447,221.98 to
(Euro)3,024,900.
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<PAGE>
Further resolutions:
. Conditional increase of the capital stock up to a maximum of
(Euro)1,633,000 through the issuance of up to 1,500,000 new bearer
ordinary shares to our employees and the employees of our affiliated
companies and up to 133,000 new bearer ordinary shares to the members of
our management board and of our affiliated companies, which represented
the creation of a new conditional capital I for the issuance of options
to employees and members of the management board.
. Authorization for the management board (Vorstand) to increase the share
capital within a period of five years after registration of this
resolution into the commercial register by up to (Euro)5,883,000 through
the issuance of up to 5,883,000 new bearer ordinary shares against
contribution in cash or in kind, which represented the creation of a new
authorized capital III.
. Authorization until December 20, 2000 to purchase and sell our shares
for a price not to be higher or lower than 10% of the average exchange
quotation on the Neuer Markt of the Frankfurt Stock Exchange of the
preceding 10 exchange days.
Under Section 193(2) of the German Stock Corporation Act, or the AktG, a
shareholders' resolution effecting a conditional capital increase needs to set
forth, among other things, the issue price for the new shares, or,
alternatively, the basis on which the issue price is to be determined. We
believe that the resolution on our conditional capital II, as resolved at our
shareholders' meeting held on June 23, 1998, complies with the requirements of
Section 193(2) and, therefore, was validly adopted. Due to the somewhat unclear
wording of the actual resolution, a third party could assert that the
resolution did not comply with the requirement that the issue price or the
basis on which the issue price is to be determined must be set forth in the
resolution. Non-compliance with this requirement, other than a complete
omission of both the issue price and the basis on which it is to be determined,
would not render the resolution void but would merely give rise to an action to
set aside the resolution under Section 246. To be actionable, such an action
would need to be initiated within one month after the adoption of the
resolution. Since this time period has lapsed, the resolution could not be set
aside in this manner. Although we are of the opinion that it would be highly
unlikely, we cannot completely dismiss the possibility that the German Supreme
Court could render a final nullity judgment if a third party were instead to
bring an action for declaration of nullity of the resolution regarding
conditional capital II. To our knowledge, there is no binding legal authority
supporting such a declaration. However, German stock corporation law has also
been interpreted to the effect that, in the case of a nullity judgment, the
shares issued out of our conditional capital II would be deemed invalid.
Consequently, the holders of those shares would not be entitled to vote at our
shareholders' meetings. If the holders of invalid shares attended a
shareholders' meeting in the future, any resolutions passed at that meeting
could potentially be set aside if, excluding the invalid votes, the resolution
would not have been passed by the requisite vote. In addition, any receipt of
any distributions or dividends by the holders of invalid shares would be deemed
unjust, and this could give rise to claims against us in the amount of any
unjust distribution or dividends. We consider the likelihood any such claims
being raised to be low.
If both valid and invalid shares were traded, all of our shares would
eventually become indistinguishably commingled so that it would become
impossible to distinguish if and to what extent a particular shareholder holds
valid or invalid shares. As a consequence, after some time, all or
substantially all of our shareholders would hold both valid and invalid shares.
Although we cannot deny the possibility that certain shareholders could assert
damage claims against us, we do not believe that this would cause damage to any
of our shareholders because the proportionate stake of each shareholder would
not be affected. Regardless of this, we are of the opinion that, even if the
underlying resolution regarding conditional capital II were declared void by
the German Supreme Court, the shares issued out of that capital would,
regardless of the invalidity of the underlying resolution, have to be treated
as validly issued in accordance with the German legal principles of de facto
companies (faktische Gesellschaft). In addition, we intend to take all
appropriate steps to cure the potential invalidity. These steps could include
making an offer to all holders of invalid shares to exchange their invalid
shares for valid ones issued out of a properly authorized capital. In any
event, an action for declaration of nullity of the resolution regarding our
conditional capital II would be time barred if brought after the lapse
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of the relevant statute of limitations, which statute will lapse within less
than 18 months. Less than 5.4% of our current outstanding shares have been
issued out of our conditional capital II.
Shares
All shares issued by us have been issued in, or transformed into, bearer
ordinary shares. The shares are freely transferable. Ownership of the shares
will pass at the earliest upon delivery or, if such shares are deposited with a
clearing system, in accordance with the rules of the relevant clearing system.
The shares may be deposited with, and held through, Deutsche Borse Clearing AG,
or DBC, the German clearing system based in Frankfurt am Main, Germany.
Notification Requirements
Under the German Stock Corporation Act, any enterprise owning shares in a
German stock corporation must promptly notify that corporation in writing if
the aggregate number of shares held by it exceeds, or declines to, a threshold
of 25 or 50 percent of the corporation's capital. For the purpose of this
notice requirement, shares owned by an enterprise include shares owned by an
enterprise it controls, directly or indirectly, as well as shares held by a
person on behalf of any of such entities. If a shareholder fails to give this
notice, and if such failure continues, that shareholder may not exercise any
rights as a shareholder and is not entitled to receive dividends on such
shares.
Shareholders' Meetings
At our annual general shareholders' meeting, our shareholders resolve the
allocation and distribution of profit, approve or disapprove the actions of the
members of the management board and the supervisory board and appoint our
auditors. The meeting takes place within the first eight months of our fiscal
year, which runs from January 1 to December 31, and is called by the management
board. Our shareholders also periodically elect the members of the supervisory
board. Shareholder approval is required for important corporate measures, which
include:
. capital increases and decreases;
. approval of stock options;
. issuance of bonds convertible into shares;
. bonds with warrants to purchase shares;
. profit participating bonds and profit participating rights;
. amendments to the articles of association; and
. mergers and similar transactions and the dissolution of our company.
Special meetings may be called by the management board or the supervisory
board or upon request of shareholders holding, individually or collectively, at
least 5 percent of the nominal value of our capital stock. Shareholders holding
in total at least 5 percent of our capital stock or shares in total nominal
amount of at least DM 1,000,000 or (Euro)500,000 may require that modified or
additional resolutions be proposed at the shareholders' meeting and that those
resolutions be published prior to the meeting. Notices of shareholders'
meetings are announced in the German Federal Gazette (Bundesanzeiger) one month
prior to the meeting. The notice consists of the publication of the time and
place of the meeting, the agenda and the conditions for participation of
shareholders.
The right to attend and vote at a shareholders' meeting is only accorded to
those shareholders who deposit their shares or certificates of deposit of a
bank serving as a depositary for such securities at least four working days,
excluding Saturdays, with us, a German notary, a bank serving as a depositary
for such securities (Wertpapiersammelbank) or at any other place of deposit
specified in the notice of the meeting. Shares are also
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deemed to have been deposited if, with the consent of one of the depositees
listed above, they are held for such depositee in a bank account and are
blocked until the end of the shareholders' meeting. In order to exercise the
right to attend and vote at the meeting, shareholders must provide us with
appropriate documentation which evidences the deposit of their shares as
described above at the meeting. Following a deposit of shares or the blocking
of the account in which they are held, a holder of shares may still sell or
otherwise dispose of his shares. In that event, any voting instructions a
shareholder may have given with respect to such shares will be ignored.
Shareholders may appoint proxies to represent them at shareholders' meetings.
For information on the voting rights of holders of ADRs, please see
"Description of American Depositary Shares."
Voting Rights
Each share entitles its holder to one vote. Generally, shareholders are
entitled to vote at shareholders' meetings in proportion to the number of
shares held, and a simple majority of votes cast is sufficient to approve a
measure unless a higher majority is required by German law or by the articles
of association. The German Stock Corporation Act requires that certain
significant resolutions be passed by a majority of at least three-quarters of
the capital stock present or represented at the meeting at which the vote is
taken. According to our articles of association, a simple majority of votes
cast at the shareholders' meeting is sufficient to pass a shareholder
resolution unless mandatory provisions of the German Stock Corporation Act
provide otherwise. The mandatory provisions, according to which a resolution
can only be passed by a majority of at least three quarters of the capital
stock present or represented, are the following:
. share capital increases that exclude shareholders' preemptive rights;
. the creation of authorized or conditional capital;
. changes to the articles of association modifying corporate purpose;
. any decrease of capital;
. mergers and similar transactions;
. dissolution; and
. company agreements (Unternehmensvertrage) like denomination or profit
transfer agreements.
The articles of association do not require higher majorities for any
additional resolutions.
Dividends
We have not declared or paid any cash dividends on our capital stock and do
not intend to pay any cash dividends in the foreseeable future but plan to
retain all earnings to finance our operations and expansion of our business.
Future dividends may be proposed by the supervisory board and the management
board in the general meeting of stockholders. Resolutions on the use of
earnings are considered at the annual general meeting of stockholders taking
place in the following fiscal year.
For information concerning the receipt of dividends by holders of ADSs,
please see "Description of American Depositary Shares."
Preemptive Rights
Under the German Stock Corporation Act, a shareholder in a stock corporation
has a preferential or preemptive right to subscribe for shares, debt
instruments convertible into shares, or involving a profit participation, and
to participation rights issued by the corporation in proportion to the shares
held by that shareholder. Under the German Stock Corporation Act, this
preferential right can be denied or limited only through a shareholders'
resolution approved by a majority of three-quarters of the capital stock
represented at a shareholders' meeting in person or by proxy. The resolution
must specifically approve both the capital stock
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increase and the denial or limitation of the shareholders' preemption rights.
Even with a three-quarters majority, the denial or limitation of preemptive
rights is permissible only under limited circumstances, including when:
. the capital increase involves a contribution in cash
(Barkapitalerhohung);
. the capital increase does not exceed 10% of the corporation's capital
(Grundkapital); and
. the issue price does not fall significantly below the price of the
corporation's shares on a stock exchange on which its shares are listed.
Preemptive rights may be transferred by agreement and delivery of the coupon
evidencing these rights. If the shares to which the preemptive rights relate
are held in a clearing system, the rights may be transferred in accordance with
the rules of such clearing system. Exercisable preemptive rights attaching to
the shares would generally be traded on the Neuer Markt of the Frankfurt Stock
Exchange for a limited number of days.
Due to the restrictions on the offer and sale of securities in the United
States under U.S. securities laws and regulations, we cannot assure you that
any offer of new shares to existing shareholders on the basis of their
preemptive rights will be made to U.S. holders of ADSs or shares. See
"Description of American Depositary Shares."
No Stockholder Action by Written Consent and Special Meetings
Any action requiring the approval of our shareholders may only be taken at a
duly called ordinary or special meeting, and may not be effected by a written
consent in lieu of such a meeting. This provision may have the effect of
delaying votes on a shareholder proposal until the next general meeting, unless
a special meeting is called by shareholders holding at least 5% of the nominal
value of our capital stock.
Liquidation
Apart from liquidation as a result of bankruptcy proceedings, our company may
be liquidated only with a majority of four-fifths of the votes cast and three-
quarters of the capital stock present or represented at a shareholders' meeting
at which the vote is taken. In accordance with the German Stock Corporation
Act, upon our liquidation, any liquidation proceeds remaining after paying off
all of our liabilities would be distributed among shareholders in proportion to
the total number of the shares held by each shareholder.
Purchase by Our Company of Our Own Shares
Under the German Stock Corporation Act, a corporation may not purchase its
own shares, subject to certain limited exceptions. The aggregate number of such
shares repurchased by a German corporation may not in general exceed ten
percent of its capital stock. At the shareholders' meeting held on June 21,
1999, we were authorized, until December 20, 2000, to purchase our own shares
up to a maximum of 10% of our capital stock. We will publish details of
relevant dealings in our own equity securities each year in our annual report.
Antitakeover Provisions
To comply with the admission regulations of the Neuer Markt of the Frankfurt
Stock Exchange, we have adopted the Takeover Code recommended by the Stock
Exchange Expert Commission (Borsensachverstandigenkommission) at the German
Federal Ministry of Finance. This Takeover Code, while not having the force of
law, is nevertheless in practice complied with by all relevant market
participants. These provisions, and the provisions of our articles of
association, may have the effect of deterring hostile takeovers or delaying or
preventing changes in our control or management, including transactions in
which shareholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
shareholders to approve transactions that they may deem to be in their best
interests. See "Risk Factors--Certain antitakeover provisions under German law
and in our articles of association may discourage takeover attempts."
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Amendment of Articles of Association
Resolutions seeking to amend the articles of association may be proposed
either jointly by the supervisory board and the management board or by
shareholders holding a total of at least 5% of our capital stock or shares in
total nominal amount of at least DM 1 million or (Euro)500,000. Any such
resolution must be passed by a majority of at least three-quarters of the
nominal capital stock present or represented at the meeting at which the vote
is taken.
Deliverability and Clearing
The shares and ADSs being offered hereunder will initially be represented by
one or more global share certificates deposited with Clearstream Banking AG.
Several shares may be represented by one certificate. The form and content of
the share certificates, the dividend coupons and the renewal coupons will be
determined by the management board with the consent of the supervisory board.
On , 2000, the global share certificates representing the shares
were deposited with Clearstream Banking AG, as share depositary. The shares are
expected to be accepted for clearance through Clearstream Banking AG, the
Euroclear System and Clearstream Banking, societe anonyme. The shares may be
credited at the option of investors either to a German bank's Clearstream
Banking AG account or to the accounts of participants with Euroclear or
Clearstream Banking, societe anonyme. Our ADSs will be eligible for clearance
through the facilities of The Depository Trust Company.
The German securities identification number (WKN) of the shares is 622 700.
The international securities identification number (ISIN) of the shares is DE
000 622 7002 and the ISIN of our ADSs is US 46069W 10 09. The common code of
the shares is 008885109. The CUSIP number of our ADSs is 46069W 10 0.
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SHARES ELIGIBLE FOR FUTURE SALE
Following this offering, we will have 17,313,104 ordinary shares outstanding,
assuming no exercise of the over-allotment option and no exercise of
outstanding options to purchase shares based on the shares outstanding as of
December 31, 1999. The 4,350,000 ADSs sold in this offering, representing
435,000 shares, are freely tradable without restriction or further registration
under the Securities Act of 1933, except that any shares held by our
"affiliates", as that term is defined in Rule 144 under the Securities Act, may
generally only be sold in compliance with the limitations of Rule 144 described
below.
The remaining 16,878,104 ordinary shares are deemed "restricted securities"
as defined under Rule 144. Restricted securities may be sold in the public
market in the United States only if they become registered or if they qualify
for an exemption from registration under Rule 144, Rule 701 or Rule 904 under
the Securities Act, which are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 701 and
16,878,104 shares will be eligible for sale from time to time after the date of
this prospectus.
Prior to this offering, including our executive officers and members of our
supervisory board and management board, holders of a total of approximately
5,281,647 shares have entered into lock-up agreements generally providing that
they will not, subject to limited exceptions, offer, sell, contract to sell or
otherwise dispose of, or enter into any transaction, including any derivative
transaction, having an economic effect similar to that of a sale of, any of our
shares or any other of our securities which are substantially similar to our
shares or which are convertible into or exchangeable for, or represent the
right to receive, our shares or securities which are substantially similar to
our shares for a period of 90 days after the date of this prospectus without
the prior written consent of Credit Suisse First Boston Corporation. As a
result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under the provision of Rules 144, 144(k), 701 and 904,
shares subject to lock-up agreements will not be eligible for sale until these
lock-up agreements expire or are waived by Credit Suisse First Boston
Corporation. See "Underwriting."
In general, under Rule 144, a person, or persons whose shares are aggregated,
including an affiliate, who has beneficially owned shares for at least one year
is entitled to sell, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
. one percent of the then outstanding shares (approximately 173,131 shares
immediately after this offering); or
. the average weekly trading volume in the shares during the four calendar
weeks preceding the date on which notice of such sale is filed, subject
to certain restrictions.
In addition, a person who is not deemed to have been an affiliate of ours 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, would be entitled to
sell such shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of ours, an
acquiror's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
Rule 701 under the Securities Act provides that shares acquired pursuant to
written plans, such as our equity incentive plans, may be resold by persons
other than affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period.
Rule 904 of Regulation S under the Securities Act provides that shares owned
by any person, other than persons deemed to be affiliates by virtue of their
significant shareholdings in our company may be sold without registration
outside the United States, provided the sale is accomplished in an offshore
transaction, as that term is defined in Regulation S, and no directed selling
efforts, as that term is defined in Regulation S, are made, subject to certain
other conditions. In general, this means that the shares, including
"restricted" shares and
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shares held by our directors and officers who do not own a significant
percentage of the shares, may be sold without registration on the Neuer Markt
of the Frankfurt Stock Exchange or otherwise outside the United States.
Prior to this offering, our shares have been listed on the Neuer Markt of the
Frankfurt Stock Exchange. No prediction can be made as to the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of shares in the public market, especially by affiliates,
could adversely affect the market price of our shares and ADSs and could impair
our future ability to raise capital through the sale of our equity securities.
We have agreed, to the extent permitted by law, not to issue, sell or
otherwise dispose of any shares during the 90-day period following the date of
this prospectus and have agreed to neither announce nor effect any increase in
capital during such period without the prior written consent of the global
coordinator of this offering, except that we may issue shares and grant options
under our equity incentive plans. See "Risk Factors--Future sale of shares of
our shares may cause our share prices to decline."
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
Citibank, N.A. will act as the depositary bank for our ADSs. Citibank's
depositary offices are located at 111 Wall Street, New York, New York 10005.
ADSs represent ownership interests in securities that are on deposit with the
depositary bank. ADSs are normally represented by certificates that are
commonly known as American Depositary Receipts or ADRs. The depositary bank
typically appoints a custodian to safekeep the securities on deposit. In this
case, the custodian is Citibank AG, located at Neue Mainzer Strabe 75,
60311 Frankfurt am Main, Germany 4189211.
We have appointed Citibank as depositary bank pursuant to a deposit
agreement. A copy of the deposit agreement is on file with the Securities and
Exchange Commission under cover of a registration statement on Form F-6. You
may obtain a copy of the deposit agreement from the Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please refer to registration number 333-11642 when retrieving your copy.
We are providing you with a summary description of our ADSs and your rights
as an owner of ADSs. Please remember that summaries by their nature lack the
precision of the information summarized and that a holder's rights and
obligations as an owner of ADSs will be determined by the deposit agreement and
not by this summary. We urge you to review the deposit agreement in its
entirety as well as the form of ADR attached to the deposit agreement.
Each ADS represents 1/10 of a share of INTERSHOP Communications AG on deposit
with the custodian bank. An ADS will also represent any other property received
by the depositary bank or the custodian on behalf of the owner of the ADS but
that has not been distributed to the owners of ADSs because of legal
restrictions or practical considerations.
If you become an owner of ADSs, you will become a party to the deposit
agreement and therefore will be bound to its terms and to the terms of the ADR
that represents your ADSs. The deposit agreement and the ADR specify our rights
and obligations as well as your rights and obligations as an owner of ADSs and
those rights and obligations of the depositary bank. As an ADS holder, you
appoint the depositary bank to act on your behalf in certain circumstances. The
deposit agreement is governed by New York law. However, our obligations to the
holders of ordinary shares will continue to be governed by the laws of Germany,
which may be different from the laws in the United States.
As an owner of ADSs, you may hold your ADSs either by means of an ADR
registered in your name or through a brokerage or safekeeping account. If you
decide to hold your ADSs through your brokerage or safekeeping account, you
must rely on the procedures of your broker or bank to assert your rights as an
ADS owner. Please consult with your broker or bank to determine what those
procedures are. This summary description assumes you have opted to own ADSs
directly by means of an ADR registered in your name and, as such, we will refer
to you as the "holder."
Dividends and Distributions
As a holder, you generally have the right to receive the distributions we
make on the securities deposited with the custodian bank. Your receipt of these
distributions may be limited, however, by practical considerations and legal
limitations. Holders will receive distributions under the terms of the deposit
agreement in proportion to the number of ADSs held as of a specified record
date.
Distributions of Cash
Whenever we make a cash distribution for the securities on deposit with the
custodian, we will notify the depositary bank. Upon receipt of our notice, the
depositary bank will arrange for the funds to be converted into U.S. dollars
and for the distribution of the U.S. dollars to the holders.
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The conversion into U.S. dollars will take place only if practicable. The
amounts distributed to holders will be net of the fees, expenses, taxes and
governmental charges payable by holders under the terms of the deposit
agreement. The depositary will apply the same method for distributing the
proceeds of the sale of any property, such as undistributed rights, held by the
custodian in respect to securities on deposit.
Distributions of Ordinary Shares
Whenever we make a distribution of ordinary shares for the securities on
deposit with the custodian, we will notify the depositary bank. Upon receipt of
such notice, the depositary bank will either distribute to holders new ADSs
representing the ordinary shares deposited or modify the ADS-to-share ratio, in
which case each ADS you hold will represent rights and interests in the
additional ordinary shares so deposited. Only whole new ADSs will be
distributed. Fractional entitlements will be sold and the proceeds of such sale
will be distributed as in the case of a cash distribution.
The distribution of new ADSs or the modification of the ADS-to-share ratio
upon a distribution of ordinary shares will be made net of the fees, expenses,
taxes and governmental charges payable by holders under the terms of the
deposit agreement. In order to pay such taxes or governmental charges, the
depositary bank may sell all or a portion of the new ordinary shares so
distributed.
No distribution of new ADSs will be made if it would violate a law, such as
the U.S. securities laws, or if it is not reasonably practicable. If the
depositary bank does not distribute new ADSs as described above, it will use
its best efforts to sell the ordinary shares received and will distribute the
proceeds of the sale as in the case of a distribution of cash.
Distributions of Rights
Whenever we intend to distribute rights to purchase additional ordinary
shares, we will give prior notice to the depositary bank and we will assist the
depositary bank in determining whether it is lawful and reasonably practicable
to distribute rights to purchase additional ADSs to holders.
The depositary bank will establish procedures to distribute rights to
purchase additional ADSs to holders and to enable holders to exercise those
rights if it is lawful and reasonably practicable to make the rights available
to holders of ADSs, and if we provide all of the documentation contemplated in
the deposit agreement, such as opinions to address the lawfulness of the
transaction. You may have to pay fees, expenses, taxes and other governmental
charges to subscribe for the new ADSs upon the exercise of your rights. The
depositary bank is not obligated to establish procedures to facilitate the
distribution and exercise by holders of rights to purchase new ordinary shares
directly rather than new ADSs.
The depositary bank will not distribute the rights to you if:
. we do not request that the rights be distributed to you or we ask that
the rights not be distributed to you;
. we fail to deliver satisfactory documents to the depositary bank; or
. it is not reasonably practicable to distribute the rights.
The depositary bank will sell the rights that are not exercised or not
distributed if such sale is lawful and reasonably practicable. The proceeds of
that sale will be distributed to holders as in the case of a cash distribution.
If the depositary bank is unable to sell the rights, it will allow the rights
to lapse, and you will realize no benefit from them.
Elective Distributions
Whenever we intend to distribute a dividend payable at the election of
shareholders either in cash or in additional ordinary shares, we will give
prior notice to the depositary bank and will indicate whether we wish
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the elective distribution to be made available to you. In such case, we will
assist the depositary bank in determining whether such distribution is lawful
and reasonably practical.
The depositary bank will make the election available to you only if it is
reasonably practical and if we have provided the documentation contemplated in
the deposit agreement. In such case, the depositary bank will establish
procedures to enable you to elect to receive either cash or additional ADSs, in
each case as described in the deposit agreement.
If the election is not made available to you, you will receive either cash or
additional ADSs, depending on what a shareholder in Germany would receive for
failing to make an election, as is more fully described in the deposit
agreement.
Other Distributions
Whenever we intend to distribute property other than cash, ordinary shares or
rights to purchase additional ordinary shares, we will notify the depositary
bank in advance and will indicate whether we wish that distribution to be made
to you. If so, we will assist the depositary bank in determining whether a
distribution to holders is lawful and reasonably practicable.
If it is reasonably practicable to distribute that property to you and if we
provide the documentation contemplated in the deposit agreement, the depositary
bank will distribute the property to the holders in a manner the bank
reasonably deems practicable.
The distribution will be made net of fees, expenses, taxes and governmental
charges payable by holders under the terms of the deposit agreement. In order
to pay any taxes and governmental charges, the depositary bank may sell all or
a portion of the property received.
The depositary bank will not distribute the property to you and will sell the
property if:
. we do not request that the property be distributed to you or if we ask
that the property not be distributed to you;
. we do not deliver satisfactory documents to the depositary bank; or
. the depositary bank determines that all or a portion of the distribution
to you is not reasonably practicable.
The proceeds of this type of sale will be distributed to holders as in the
case of a cash distribution.
Redemption
Whenever we decide to redeem any of the securities on deposit with the
custodian, we will notify the depositary bank. If it is reasonably practicable
and if we provide the documentation contemplated in the deposit agreement, the
depositary bank will mail notice of the redemption to the holders.
The custodian will be instructed to surrender the ordinary shares being
redeemed against payment of the applicable redemption price. The depositary
bank will convert the redemption funds received into U.S. dollars upon the
terms of the deposit agreement and will establish procedures to enable holders
to receive the net proceeds from the redemption upon surrender of their ADRs to
the depositary bank. You may have to pay fees, expenses, taxes and other
governmental charges upon the redemption of your ADSs. If less than all ADSs
are being redeemed, the ADSs to be retired will be selected by lot or on a pro
rata basis, as we and the depositary bank may determine.
Changes Affecting Ordinary Shares
The ordinary shares held on deposit for your ADSs may change from time to
time. For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or classification of the ordinary shares or a
recapitalization, reorganization, merger, consolidation or sale of assets.
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If any such change were to occur, your ADSs would, to the extent permitted by
law, represent the right to receive the property received or exchanged in
respect of the ordinary shares held on deposit. The depositary bank may in
those circumstances deliver new ADSs to you or call for the exchange of your
existing ADSs for new ADSs. If the depositary bank may not lawfully distribute
that property to you, the depositary bank may sell that property and distribute
the net proceeds to you as in the case of a cash distribution.
Issuance of ADSs upon Deposit of Ordinary Shares
The depositary bank may create ADSs on your behalf if you or your broker
deposit ordinary shares with the custodian. The depositary bank will deliver
these ADSs to the person you indicate only after you pay any applicable
issuance fees and any charges and taxes payable for the transfer of the
ordinary shares to the custodian.
The issuance of ADSs may be delayed until the depositary bank or the
custodian receives confirmation that all required approvals have been given and
that the ordinary shares have been duly transferred to the custodian. The
depositary bank will only issue ADSs in whole numbers.
When you make a deposit of ordinary shares, you will be responsible for
transferring good and valid title to the depositary bank. As such, you will be
deemed to represent and warrant that:
. the ordinary shares are duly authorized, validly issued, fully paid,
nonassessable and legally obtained;
. all preemptive and similar rights, if any, with respect to such shares
have been validly waived or exercised;
. you are duly authorized to deposit the ordinary shares;
. the ordinary shares presented for deposit are free and clear of any
lien, encumbrance, security interest, charge, mortgage or adverse claim,
and are not, and the ADSs issuable upon such deposit will not be
"restricted securities," as defined in the deposit agreement; and
. the ordinary shares presented for deposit have not been stripped of any
rights or entitlements.
If any of the representations or warranties are incorrect in any way, we and
the depositary bank may, at your cost and expense, take any and all actions
necessary to correct the consequences of the misrepresentations.
Withdrawal of Ordinary Shares upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the depositary bank
for cancellation and then receive the underlying ordinary shares at the
custodian's offices. In order to withdraw the ordinary shares represented by
your ADSs, you will be required to pay to the depositary the fees for
cancellation of ADSs and any charges and taxes payable upon the transfer of the
ordinary shares being withdrawn. You assume the risk for delivery of all funds
and securities upon withdrawal. Once canceled, ADSs will not have any rights
under the deposit agreement.
If you hold an ADR registered in your name, the depositary bank may ask you
to provide proof of identity and genuineness of any signature and certain other
documents as the depositary bank may deem appropriate before it will cancel
your ADSs. The withdrawal of the ordinary shares represented by your ADSs may
be delayed until the depositary bank receives satisfactory evidence of
compliance with all applicable laws and regulations. Please keep in mind that
the depositary bank will only accept ADSs for cancellation that represent a
whole number of securities on deposit.
You will have the right to withdraw the securities represented by your ADSs
at any time except for:
. temporary delays that may arise because the transfer books for the
ordinary shares or ADSs are closed or ordinary shares are immobilized on
account of a shareholders' meeting or a payment of dividends;
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. obligations to pay fees, taxes and similar charges; or
. restrictions imposed because of laws or regulations applicable to ADSs
or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to withdraw
the securities represented by your ADSs except to comply with mandatory
provisions of law.
Voting Rights
As a holder, you generally have the right under the deposit agreement to
instruct the depositary bank to exercise the voting rights for the ordinary
shares represented by your ADSs. The voting rights of holders of ordinary
shares are described in "Description of Capital Stock--Voting Rights."
At our request, the depositary bank will mail to you any notice of
shareholders' meeting received from us together with information explaining how
to instruct the depositary bank to exercise the voting rights of the securities
represented by ADSs.
If the depositary bank timely receives voting instructions from a holder of
ADSs, it will endeavor to vote the securities represented by the holder's ADSs
in accordance with such voting instructions.
Please note that the ability of the depositary bank to carry out voting
instructions may be limited by practical and legal limitations and the terms of
the securities on deposit. We cannot assure you that you will receive voting
materials in time to enable you to return voting instructions to the depositary
bank in a timely manner. Securities for which no voting instructions have been
received will not be voted.
Fees and Charges
As an ADS holder, you will be required to pay the following service fees to
the depositary bank:
<TABLE>
<CAPTION>
Service Fees
------- ----
<S> <C>
Issuance of ADSs.................................................. Up to 5c per ADS issued
Cancellation of ADSs.............................................. Up to 5c per ADS issued
Exercise of rights to purchase additional ADSs.................... Up to 5c per ADS canceled
Distribution of cash dividend or ADSs pursuant to stock
dividends (or other fee distribution of stock)................... Up to 2c per ADS held
Distribution of cash upon sale of rights and other entitlements... Up to 2c per ADS held
</TABLE>
As an ADS holder you will also be responsible to pay certain fees and
expenses incurred by the depositary bank and certain taxes and governmental
charges such as:
. fees for the transfer and registration of ordinary shares, such as upon
deposit and withdrawal of ordinary shares;
. expenses incurred for converting foreign currency into U.S. dollars;
. expenses for cable, telex and fax transmissions and for delivery of
securities; and
. taxes and duties upon the transfer of securities, such as when shares
are deposited or withdrawn from deposit.
We have agreed to pay certain other charges and expenses of the depositary
bank. Note that the fees and charges you may be required to pay may vary over
time and may be changed by us and by the depositary bank. You will receive
prior notice of those changes.
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Amendments and Termination
We may agree with the depositary bank to modify the deposit agreement at any
time without your consent. We undertake to give holders 30 days prior notice of
any modifications that would prejudice any of their substantial rights under
the deposit agreement, except in very limited circumstances enumerated in the
deposit agreement.
You will be bound by the modifications to the deposit agreement if you
continue to hold your ADSs after the modifications to the deposit agreement
become effective. The deposit agreement cannot be amended to prevent you from
withdrawing the ordinary shares represented by your ADSs, except as permitted
by law.
We have the right to direct the depositary bank to terminate the deposit
agreement. Similarly, the depositary bank may in certain circumstances on its
own initiative terminate the deposit agreement. In either case, the depositary
bank must give notice to holders at least 30 days before termination.
Upon termination, the following will occur under the deposit agreement:
. For a period of six months after termination, you will be able to
request the cancellation of your ADSs and the withdrawal of the ordinary
shares represented by your ADSs and the delivery of all other property
held by the depositary bank in respect of those ordinary shares on the
same terms as prior to the termination. During this six months period
the depositary bank will continue to collect all distributions or
dividends received on the ordinary shares on deposit but will not
distribute any property to you until you request the cancellation of
your ADSs.
. After the expiration of such six months period, the depositary bank may
sell the securities held on deposit. The depositary bank will hold the
proceeds from that sale and any other funds then held for holders of
ADSs in a non-interest bearing account. At that point, the depositary
bank will have no further obligations to holders other than to account
for the funds then held for holders of ADSs still outstanding.
Books of Depositary
The depositary bank will maintain ADS holder records at its depositary
office. You may inspect those records at its office during regular business
hours but solely for the purpose of communicating with other holders in the
interest of business matters relating to ADSs and the deposit agreement.
The depositary bank will maintain records in New York facilities to record
and process the issuance, cancellation, combination, split-up and transfer of
ADRs. These facilities may be closed from time to time, to the extent not
prohibited by law.
Limitations on Obligations and Liabilities
The deposit agreement limits our obligations and the depositary bank's
obligations to you. Please note the following:
. We and the depositary bank are obligated only to take the actions
specifically stated in the depositary agreement without negligence or
bad faith.
. The depositary bank disclaims any liability for any failure to carry out
voting instructions, for any manner in which a vote is cast or for the
effect of any vote, provided it acts in good faith and in accordance
with the terms of the deposit agreement.
. The depositary bank disclaims any liability for any failure to determine
the lawfulness or practicality of any action, for the content of any
document forwarded to you on our behalf or for the accuracy of any
translation of such a document, for the investment risks associated with
investing in ordinary shares, for the validity or value of the ordinary
shares, for any tax consequences that result from the
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ownership of ADSs, for the credit worthiness of any third party, for
allowing any rights to lapse under the terms of the deposit agreement,
for the timeliness of any of our notices or for our failure to give
notice, provided we act without negligence or bad faith.
. We and the depositary bank will not be obligated to perform any act that
is inconsistent with the terms of the deposit agreement.
. We and the depositary bank disclaim any liability if we are prevented or
forbidden from acting on account of any law or regulation, any provision
of our articles of association, any provision of any securities on
deposit or by reason of any act of God or war or other circumstances
beyond our control.
. We and the depositary bank disclaim any liability by reason of any
exercise of, or failure to exercise, any discretion provided for the
deposit agreement or in our articles of association or in any provisions
of securities on deposit.
. We and the depositary bank further disclaim any liability for any action
or inaction in reliance on the advice or information received from legal
counsel, accountants, any person presenting ordinary shares for deposit,
any holder of ADSs or authorized representative thereof, or any other
person believed by either of us in good faith to be competent to give
such advice or information.
. We and the depositary bank also disclaim liability for the inability by
a holder to benefit from any distribution, offering, right or other
benefit which is made available to holders of ordinary shares but is
not, under the terms of the deposit agreement, made available to you.
. We and the depositary bank may rely without any liability upon any
written notice, request or other document believed to be genuine and to
have been signed or presented by the proper parties.
Pre-Release Transactions
The depositary bank may, in certain circumstances, issue ADSs before
receiving a deposit of ordinary shares or release ordinary shares before
receiving ADSs. These transactions are commonly referred to as "pre-release
transactions." The deposit agreement limits the total size of pre-release
transactions and imposes a number of conditions on such transactions, such as
the need to receive collateral, the type of collateral required and the
representations required from brokers. The depositary bank may retain any
compensation earned as a result of engaging in the pre-release transactions.
Taxes
You will be responsible for the taxes and other governmental charges payable
on ADSs and the securities represented by ADSs. We, the depositary bank and the
custodian may deduct from any distribution the taxes and governmental charges
payable by holders and may sell any and all property on deposit to pay the
taxes and governmental charges payable by holders. You will be liable for any
deficiency if the sale proceeds do not cover the taxes that are due.
The depositary bank may refuse to issue ADSs, to deliver, transfer, split and
combine ADRs or to release securities on deposit until all taxes and charges
are paid by the applicable holder. The depositary bank and the custodian may
take reasonable administrative actions to obtain tax refunds and reduced tax
withholding for any distributions on your behalf. However, you may be required
to provide to the depositary bank and to the custodian proof of taxpayer status
and residence and such other information as the depositary bank and the
custodian may require to fulfill legal obligations. You are required to
indemnify us, the depositary bank and the custodian for any claims with respect
to taxes based on any tax benefit obtained for you.
Also see "German Taxation" and "Taxation of U.S. Investors."
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Foreign Currency Conversion
The depositary bank will arrange for the conversion of all foreign currency
received into U.S. dollars if such conversion is practical, and it will
distribute the U.S. dollars in accordance with the terms of the deposit
agreement. You may have to pay fees and expenses incurred in converting foreign
currency, such as fees and expenses incurred in complying with currency
exchange controls and other governmental requirements.
If the conversion of foreign currency is not practical or lawful, or if any
required approvals are denied or not obtainable at a reasonable cost or within
a reasonable period, the depositary bank may take the following actions in its
discretion:
. convert the foreign currency to the extent practical and lawful and
distribute the U.S. dollars to the holders for whom the conversion and
distribution is lawful and practical;
. distribute the foreign currency to holders for whom the distribution is
lawful and practical; and
. hold the foreign currency, without liability for interest, for the
applicable holders.
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THE GERMAN EQUITY MARKET
The Frankfurt Stock Exchange and the Neuer Markt
The Frankfurt Stock Exchange is the most significant of the eight German
stock exchanges, handling 17,022 securities in 1998. In Germany, total turnover
in equities grew by more than 40% in 1997, to DM 1.4 trillion, of which DM 1.2
trillion were attributed to the Frankfurt Stock Exchange. The Frankfurt Stock
Exchange has become the second largest stock exchange in Europe and the fourth
largest stock exchange in the world in terms of turnover, ranked after the New
York Stock Exchange, The Nasdaq Stock Market's National Market and the London
Stock Exchange.
The Neuer Markt of the Frankfurt Stock Exchange is a trading segment that was
launched in March 1997. It is designed for innovative, small to mid-size
companies in high growth industries or in traditional industries that have an
international orientation and that are willing to provide active investor
relations. In 1998, the index of the Neuer Markt growth segment closed at
2,744.55 points, up 174% from 1997. Issuers are requested to provide investors
on an ongoing basis with information such as annual and quarterly reports,
including cash flow statements, and a corporate action timetable. This
information is required to be submitted in English and German as well as in
electronic form, thus enabling the stock exchange to disseminate corporate
information via the Internet.
Trading on the Neuer Markt
Trading of ordinary shares listed on the Neuer Markt takes place on the floor
of the stock exchange, but is computer-aided. Markets in listed securities are
generally of the auction type, but listed securities also change hands in
inter-bank dealer markets off of the Frankfurt Stock Exchange. Price formation
is determined by open bid by state-appointed specialists (Aamtliche Makler) who
are themselves exchange members, but who do not, as a rule, deal with the
public. Prices of currently traded securities are displayed continuously during
trading hours. At the half-way point of each trading day, a single standard
quotation is determined for all ordinary shares.
The members' association of the Frankfurt Stock Exchange publishes a daily
list of prices which contains the standard prices of all traded securities, as
well as their highest and lowest quotations during the past year.
Ordinary shares traded on the Neuer Markt can also be accepted for trading on
a computer-aided system called Xetra. Trading on Xetra takes place on every
business day between 8:30 a.m. and 5:00 p.m., Frankfurt time. Trading within
the Xetra system is done by banks and securities dealers who have been admitted
to trading on at least one of Germany's stock exchanges. Xetra is integrated
into the Frankfurt Stock Exchange and is subject to its rules and regulations.
Transactions on the Frankfurt Stock Exchange, including transactions within
the Xetra system, are settled on the second business day following trading.
Transactions for large volumes or involving foreign parties off of the
Frankfurt Stock Exchange are generally also settled on the second business day
following trading, unless the parties have agreed upon a different date.
Following a recent amendment to the rules governing securities trading by
German banks (Sonderbedingungen fur Wertpapiergeschafte), customer orders to
buy or sell listed securities must be executed on a stock exchange, unless the
customer instructs otherwise. Trading can be suspended by the Frankfurt Stock
Exchange if orderly stock exchange trading is temporarily endangered or if a
suspension is in the public interest.
A specific feature of the Neuer Markt of the Frankfurt Stock Exchange is the
introduction of the obligatory "Betreuer," or market-maker, an entity admitted
for trading at the Frankfurt Stock Exchange which provides additional liquidity
by quoting prices for the buying and selling of ordinary shares on request.
Each issuer on the Neuer Markt of the Frankfurt Stock Exchange has to nominate
at least two Betreuer which will not only ensure that there is sufficient
liquidity for its ordinary shares, but also serve as consultants on all stock
market related matters for the issuer. Neuer Markt equity listings are admitted
to electronic trading through Xetra.
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Trading on German stock exchanges is regulated by, among others, the Federal
Supervisory Office for Securities Trading (Bundesaufsichtsamt fur den
Wertpapierhandel).
We will apply to list our ADSs on The Nasdaq Stock Market's National Market
under the symbol "ISHP" and the ordinary shares are listed on the Neuer Markt
of the Frankfurt Stock Exchange. Ordinary shares trade on the Neuer Markt under
the symbol "ISH." The Neuer Markt is still a relatively new market.
Accordingly, we cannot assure you that an active trading market for the
ordinary shares will be maintained on the Neuer Markt or that the Neuer Markt
will not experience problems in settlement or clearance as trading develops.
Any such delays or problems could adversely affect the market price of the
ordinary shares and in turn our ADSs. Persons proposing to trade the ordinary
shares on the Neuer Markt should inform themselves about the potential costs of
such trading.
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GERMAN TAXATION
The following is a summary discussion of certain tax matters arising under
German tax law. Our discussion does not purport to be a comprehensive, but we
have provided a materially complete description of all of the tax
considerations which may be relevant to a decision to purchase ADSs in this
offering. The discussion is based on the tax laws of the Federal Republic of
Germany as in effect on the date of this prospectus, which are subject to
change, possibly with retroactive effect. With the exception of certain
illustrative data, the discussion is limited to the taxation of dividends,
capital gains, income, gifts and inheritance under German law, and does not
address all aspects of such German taxation. The discussion does not consider
any specific facts or circumstances that may apply to a particular purchaser.
In particular, this discussion does not comprehensively treat the tax
considerations that will be relevant to prospective investors who reside
outside Germany. For a discussion of certain tax considerations relevant to
U.S. investors see "Taxation of U.S. Investors." Any person who is in doubt as
to his tax position is urged to consult a tax advisor before purchasing shares.
A brief discussion of German corporate taxation precedes the discussion of
taxes applicable to shareholders.
Taxation of Our Company
In general, German corporations are subject to corporate income tax at a rate
of 40% on nondistributed profits and of 30% on distributed profits. Since
January 1, 1998, a surtax (Solidaritatszuschlag) has been charged at a rate of
5.5% on corporate income tax liability. For distributed profits generated since
1999, the effective overall tax burden from corporate income tax and surtax
amounts to 31.94%. The effective overall tax burden is higher than the
combination of the nominal rates of 31.65% (30% plus 5.5% thereof), because the
method of calculating corporate income tax liability does not apply to the
surtax.
In addition, German corporations are subject to a trade tax which, depending
upon the municipal district in which their facilities are located, can amount
to between 15% and 21% of net income. The trade tax is, however, deductible
from net income for the purpose of calculating a German corporation's regular
corporate tax. As a result, the effective burden of the trade tax generally
lies between 13% and 18% of net income.
The combination of the corporate income tax and the trade tax, together with
the surtax, lead to an average tax burden for German corporations amounting to
approximately 43% for distributed profits and approximately 52% for
undistributed profits.
Taxation of Dividends
Taxpayers resident in Germany are generally entitled to a tax credit in the
amount of three-sevenths of the gross amount, before dividend withholding tax,
of profits received in distribution. This credit reduces their personal or
corporate income tax liability. The credit also reduces the basis for the 5.5%
surtax on a German taxpayer's personal or corporate income tax liability.
Shareholders not tax resident in Germany are not entitled to this tax credit.
Even shareholders tax resident in Germany are not entitled to this tax credit
under certain circumstances, for example when they receive dividends in
distributions of profits that were tax free owing to an applicable income tax
treaty.
In addition to corporate income tax, dividends paid by a German resident
stock corporation (Aktiengesellschaft) are subject to withholding tax equal to
25% of the amount of the gross dividend distributed plus a 5.5% surtax
(Solidaritatszuschlag) on that amount, corresponding to a tax of 1.375% of the
cash dividend. The withholding tax and surtax retained by the corporation will
be credited against the personal or corporate income tax and surtax liability
of German tax resident shareholders or will be refunded to them. Thus, German
shareholders are effectively taxed in advance, in the amount of the tax credit,
the withholding tax and the surtax thereon.
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For shareholders who are tax resident in Germany, the German corporate tax
imputation system effectively leads to a neutralization of the corporate income
tax, i.e., the income underlying the dividend is taxed at the individual income
or corporate income tax rate of the shareholder. To achieve this, the income of
the shareholder is taxed on a grossed-up basis, i.e., the German tax resident
shareholder receives for taxation purposes 51.54% of the taxable dividend in
cash, 17.5% as a tax credit resulting from withholding tax, plus 0.96% tax
credit for the surtax, and 30% as a tax credit for the underlying corporate
income tax. If a shareholder's assessable personal or corporate income tax plus
surtax thereon is less than the tax credit of 48.46%, the excess tax credit
will be refunded; if the personal or corporate income tax is higher, additional
personal or corporate income tax plus surtax becomes payable.
German tax resident individual shareholders, finance companies and corporate
shareholders whose shares are part of a business property are subject to trade
tax on gross dividends received, unless the shareholder owns 10% or more of the
nominal capital stock of the company at the beginning of the calendar year. The
applicable trade tax burden generally amounts to between 15% and 21%, depending
upon the trade tax rate fixed by the municipality in which the business
facilities of the shareholder are located. Trade tax is a deductible expense
for income or corporate income tax purposes of the shareholder.
Under the provisions of any applicable income tax treaty, the level of the
German withholding tax on a dividend paid by a company tax resident in Germany
to a shareholder not tax resident in Germany may be reduced. The shareholder
entitled to the reduced rate of withholding tax under the applicable income tax
treaty is, however, generally required to file a claim with the German tax
authorities for repayment of the amount by which the actual amount of
withholding tax, including surtax, exceeds the maximum amount of withholding
tax permitted to be collected by the applicable income tax treaty.
The withholding tax on dividends may, in certain circumstances, be reduced to
zero. Essentially, this applies only in situations where the shareholder is a
qualifying corporation not tax resident in Germany but tax resident in one of
the other member states of the European Union and further requirements are met.
Where the shares are part of the business property of a permanent
establishment or a fixed place of business of the non-resident shareholder
maintained in Germany, the shareholder will be taxed on the same basis of
taxation as a shareholder tax resident in Germany who holds the shares as
business property. The shareholder can then utilize tax credits as a German tax
resident shareholder. Trade tax will be payable under the same circumstances
and at the same rate as in the case of a German tax resident shareholder. If
the shareholder is a natural person, income derived in such person's permanent
establishment or fixed place of business in Germany is subject to income tax at
such person's personal income tax rate.
The corporate income tax rate for a shareholder not tax resident in Germany
holding the shares as part of the business property of a permanent
establishment which the shareholder maintains in Germany is 40%. If the
permanent establishment earned no other income and had no expenses, such as
interest on loans to finance the shareholding or trade tax, the shareholder
would be entitled to a refund of tax amounting to 7.91%. There is no
withholding tax payable on transferring the dividend from a permanent
establishment or fixed base in Germany to a head office abroad.
Taxation of Capital Gains
A shareholder tax resident in Germany who realizes any capital gains upon the
disposal of shares is subject to taxes in Germany if the disposal is made no
later than one year after the acquisition. Most income tax treaties with
Germany provide that shareholders not resident in Germany who do not maintain a
permanent establishment or fixed base in Germany are not subject to German
income or trade tax on capital gains.
Under German tax law, a capital gain resulting from the disposal of shares is
also subject to taxation in Germany, regardless of how long the shares have
been held, if at any time during the five year period preceding
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the disposal of the shares the shareholder or, in the case of a gratuitous
acquisition of the shares, his predecessor held at least 10% of the share
capital.
Regardless of the term of the possession, any capital gains resulting from
the disposal of shares are subject to taxation in Germany if the shares were
held as part of the business property of a permanent establishment in Germany.
Gift and Inheritance Tax
Under German law, the transfer of shares will be subject to German
inheritance and gift tax on a transfer by reason of death or a gift, if:
. the shares were held by the donor or transferor as part of the business
property of a permanent establishment or a fixed base maintained in
Germany;
. the donor or transferor or the heir, donee or other beneficiary is
resident in Germany or, with respect to German citizens who are not
resident in Germany, if such donor, transferor or beneficiary has not
been continuously residing outside of Germany for a period of more than
five years; or
. the shareholder holds, alone or together with related persons, directly
or indirectly, ten percent or more of the corporation's nominal capital
stock.
The few German estate tax treaties currently in force, such as the treaty
with the United States, usually provide that German gift or inheritance tax may
only be imposed in the first two instances above.
Other German Taxes
There are no German transfer, stamp or other similar taxes which would apply
on the sale or transfer of the shares. Wealth tax is no longer levied in
respect of any taxation period which has started on January 1, 1997 or later.
For collection periods from 1998 on, the trade capital tax has been abrogated.
Planned Reform of Corporate Taxation in Germany
In December 1999, the Government of the Federal Rupublic of Germany released
a draft bill for the reform of corporate tax and the reduction of tax rates.
According to the present stage of the legislative procedure, the planned
amendments are expected to be effective January 1, 2001 at the earliest. Other
than possible significant changes within the course of the legislative
procedure, the following amendments, among others, are planned:
. The imputation system, or corporation tax credit system, shall be
abolished within a transitional period. At the shareholder's level, a
credit of the corporation tax paid by the corporation would no longer
take place.
. Retained and distributed profits of a corporation would be taxed at a
standard corporation tax rate of 25%.
. The top rate of the income tax would be cut to 48.5% by 2001. Further
decreases to 45% are planned in the following years.
. The tax rates of the withholding tax on income from capital investment
would be reduced by 5%.
. With regard to shareholders subject to unlimited income tax liability,
only half of the dividends would be subject to income tax, the so-called
sytem of taxing half of the distributed profits. If the shareholder is
subject to unlimited corporation income tax liabilty, the received
dividends would not be taxed at all.
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. Capital gains of corporations upon sale of shares would not be subject
to corporation taxation. This rule is expected to become applicable for
the first time between January 1, 2001 and January 1, 2002, depending on
the fiscal year of the corporation the shares are to be sold.
. Even after the expiration of the one-year holding period, profit from
sales of shares held by a private investor would be subject to income
tax by half, if he, or in the event of a gratuitous acquistion, one of
his predcesors, had a share in the nominal capital of the corporation of
at least 1% at some time within the last five years. This amendment
would be applicable to resident and non-resident taxpayers unless an
applicable tax treaty provides otherwise.
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TAXATION OF U.S. INVESTORS
General
The following is a summary of material United States and German tax
considerations relating to the ownership and disposition of ordinary shares or
ADSs by U.S. Holders, which we define below. As discussed below, our discussion
does not purport to be comprehensive, but we have provided a materially
complete description of the tax considerations which may be relevant to the
ownership and disposition of ordinary shares or ADSs by U.S. Holders. The
discussion is based on tax laws of the United States and Germany as in effect
on the date hereof, including the Convention Between the United States of
America and The Federal Republic of Germany for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income
and Capital and to Certain other Taxes, which we refer to as the Income Tax
Treaty, and the Convention Between the United States of America and the Federal
Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes
on Estates, Inheritances, and Gifts, which we refer to as the Estate Tax
Treaty. These laws are subject to change, possibly with retroactive effect.
In general, a "U.S. Holder" is any beneficial owner of shares or ADSs:
. who is a resident of the United States for the purposes of the Income
Tax Treaty;
. who is not also a resident of the Federal Republic of Germany for the
purposes of the Income Tax Treaty;
. who owns the shares or ADSs as capital assets;
. who owns, directly or indirectly, less than 10% of the voting stock;
. who does not hold shares as part of the business property of a permanent
establishment located in Germany or as part of a fixed base of an
individual located in Germany and used for the performance of
independent personal services; and
. who is entitled to benefits under the Income Tax Treaty with respect to
income and gain derived in connection with the shares or ADSs.
The discussion does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to the ownership and disposition of
shares or ADSs, and, in particular, it does not address United States federal
taxes other than income tax and German taxes other than income tax, gift and
inheritance taxes and capital tax. Moreover, the discussion does not consider
any specific facts or circumstances that may apply to a particular U.S. Holder.
Some U.S. Holders including tax-exempt entities, certain insurance companies,
traders in securities that elect to mark to market, investors that actually or
constructively own ten percent or more of the voting shares, holders subject to
the alternative minimum tax, securities broker-dealers and certain other
financial institutions, holders who hold the shares or ADSs in a hedging
transaction or as part of a straddle or conversion transaction or holders whose
functional currency is not the U.S. dollar, may be subject to special rules.
Prospective investors are urged to consult their tax advisors regarding the
United States federal, state, local, German and other tax consequences of
owning and disposing of shares or ADSs. In particular, prospective investors
are urged to consult their tax advisers to confirm their status as U.S. Holders
and the consequences to them if they do not so qualify.
In general, for United States federal income tax purposes, holders of ADRs
evidencing ADSs will be treated as the owners of the shares represented by such
ADSs. Unless the context otherwise requires, all references in this section to
"shares" are deemed to refer likewise to ADSs representing an ownership
interest in shares.
Taxation of Dividends
For United States federal income tax purposes, U.S. Holders must include in
income, as foreign source ordinary income, the gross amount of any dividend by
us, as determined before reduction for German
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withholding taxes to the extent paid or deemed paid out of our current or
accumulated earnings and profits as determined for United States federal income
tax purposes. As discussed in more detail below, the amount of the dividend
shall include, where applicable, the German tax credit-related refund, under
the Income Tax Treaty, equal to 5% of the gross amount of the dividend which is
treated for United States federal income tax purposes as a distribution equal
to 5.88% of the gross amount of the dividend actually paid.
Dividends paid in Deutsche marks to a U.S. Holder of shares will be included
in income in a U.S. dollar amount calculated by reference to the exchange rate
in effect on the date the dividends, including the deemed refund of German
corporate tax, are received by the U.S. Holder or, in the case of ADSs, by the
depositary bank. If dividends paid in Deutsche marks are converted into U.S.
dollars on the date received, U.S. Holders generally should not be required to
recognize foreign currency gain or loss in respect of the dividend income.
Generally, any gain or loss resulting from currency exchange fluctuations,
during the period from the date the dividend payment is includible in income to
the date that payment is converted into U.S. dollars, will be treated as
ordinary income or loss. Such gain or loss will generally be considered income
from sources within the United States for foreign tax credit limitation
purposes.
U.S. Holders may be eligible for a United States foreign tax credit for
certain German income taxes paid on these dividends. U.S. Holders should be
aware that under no circumstances will a United States foreign tax credit be
available in respect of any portion of a foreign tax which the U.S. Holder is
entitled to have refunded, whether pursuant to the terms of a tax treaty or
foreign law. For foreign tax credit limitation purposes, dividends paid by us
will be considered income from sources outside the United States, but generally
will be treated separately, together with other items of "passive income," or
in the case of certain holders "financial services income." Dividends paid by
us will not be eligible for the dividends-received deduction generally allowed
to United States corporations in respect of dividends received from United
States corporations.
Under German law, German corporations (as described in "German Taxation--
Taxation of Dividends") generally are required to withhold tax on dividends in
a total amount equal to 26.375% of the gross amount paid to resident and
nonresident shareholders, consisting of a 25% withholding tax plus a 1.375%
surtax. A partial refund of this withholding tax can be obtained by U.S.
Holders under the Income Tax Treaty.
In the case of a U.S. Holder, the German withholding tax is partially
refunded under the Income Tax Treaty to reduce the withholding tax to 15% of
the gross amount of the dividend. In addition, so long as the German imputation
system provides German resident individual shareholders with a tax credit for
corporate taxes on dividends paid by German corporations, the Income Tax Treaty
provides that U.S. Holders are entitled to a further refund equal to 5% of the
gross amount of the dividend. For United States federal income tax purposes,
the benefit resulting from this refund is treated as a dividend received by the
U.S. Holder with respect to German corporate taxes equal to 5.88% of the gross
amount of the dividend actually paid, subject to a 15% German withholding tax
equal to 0.88% of the dividend actually paid, that is, 15% of 5.88%.
Thus, for each $100 of gross dividend paid by us to a U.S. Holder, such
holder will initially receive $73.625, that is, $100 less 26.375% withholding
tax. The dividend after partial refund of the withholding tax under the Income
Tax Treaty will be subject to a German withholding tax of $15. If the U.S.
Holder also applies for the additional 5% refund, German withholding tax is
effectively reduced to $10. The cash received per $100 of gross dividend
therefore is $90. For United States federal income tax purposes, the U.S.
Holder will be treated as having received a total dividend of $105.88, to the
extent such amount is paid out of our current and accumulated earnings and
profits as determined for United States federal income tax purposes, consisting
of the $100 gross dividend and the deemed refund of German corporate tax of
$5.88. The notional $105.88 dividend is deemed to have been subject to German
withholding tax of $15.88. Thus, for each $100 of gross dividend, the U.S.
Holder will include $105.88 in gross income and will be entitled to a foreign
tax credit of $15.88, subject to the general limitations of United States
federal income tax law.
Effective January 1, 1998, a 5.5% surtax on the German withholding tax is
levied on dividend distributions paid by a German resident company. The surtax
amounts to 1.375%, that is, 5.5% x 25% of the
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gross dividend amount. Since the Income Tax Treaty limits the maximum amount
the German withholding tax, U.S. Holders are entitled to a full refund of this
surtax.
German Refund Procedures
In the case of U.S. Holders of ADSs, Citibank, which is the depositary bank,
and we will perform, on behalf of such U.S. Holders, certain administrative
functions necessary to obtain the 5% refund, the refund of the German
withholding tax in excess of 15%, and the refund of the 5.5% German surtax when
applicable. The following procedure is currently permitted by the German tax
authorities but that permission may be revoked, or the procedure may be
amended, at any time in the future.
In order to utilize this procedure, the U.S. Holder will be required to
submit the following items to Citibank, the depositary bank:
. a certification of their last filed U.S. federal income tax return from
the Internal Revenue Service on IRS Form 6166; and
. a complete and signed form, which will be provided to the U.S. Holder by
the depositary bank, stating basic information required for us to file
the German claim for refund form on behalf of the U.S. Holder
authorizing us to perform these procedures and agreeing that the German
tax authorities may inform the Internal Revenue Service of any refunds
of German taxes.
The depositary bank will provide the U.S. Holder with an unsigned request for
an IRS Form 6166 which the U.S. Holder will be required to file with the
Internal Revenue Service at the address specified below to obtain the Form
6166. The issued Form 6166 will be valid for a period of three years from the
date of the last filed return to which it relates.
The depositary bank will act on the signed authorization and receipt of IRS
Form 6166 prepare and file, on behalf of U.S. Holders, the German claim for
refund tax with the German tax authorities. The German tax authorities will
issue the refunds which will be denominated in Deutsche marks in the name of
the depositary bank which will convert the refunds into U.S. dollars and issue
corresponding checks to the U.S. Holders.
The claim for refunds must be submitted within four years of the end of the
calendar year in which the dividend is received. The depositary bank and we
anticipate filing the claims for refunds within a reasonable time after receipt
of the necessary documentation. U.S. Holders are urged to return the necessary
documentation to the depositary bank in a timely fashion.
U.S. Holders holding ADRs registered with brokers participating in the
Depositary Trust Company will not be able to utilize this procedure because
brokers use the Quick Conditional Refund process.
In order to obtain the five percent tax credit-related refund, the refund of
the German withholding tax in excess of 15%, and the refund of the 5.5% German
surtax, U.S. Holders of shares must submit the following items directly to the
German tax authorities:
. a claim for refund;
. the original bank voucher, or certified copy, issued by the paying
entity documenting the tax withheld; and
. an IRS Form 6166.
Refund claims will be made by Citibank on a special refund claim form, which
must be filed with the German tax authorities at the following address:
Bundesamt fur Finanzen, FriedhofstraBe 1, D-53225 Bonn, Germany. The refund
claim forms may be obtained from the German tax authorities at the same address
where the applications are filed, or from the Embassy of the Federal Republic
of Germany, 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998.
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U.S. Holders may obtain a Form 6166, which is a certification of the U.S.
Holder's last filed United States federal income tax return, by filing a
request with the office of the Director of the Internal Revenue Service Center
at the following address: Internal Revenue Service Center, Philadelphia,
Pennsylvania, Foreign Certificate Request, P.O. Box 16347, Philadelphia, PA
19114-0447. Requests for certification are to be made in writing and must
include the U.S. Holder's name, social security number or employer
identification number, tax return form number, and tax period for which such
certification is requested. The Internal Revenue Service will send IRS Form
6166 directly to the U.S. Holder.
Refunds under the Income Tax Treaty are not available for shares held by a
U.S. Holder in connection with a permanent establishment or fixed base in
Germany.
Taxation of Capital Gains
German Taxation. Under the Income Tax Treaty, a U.S. Holder will not be
liable for German tax on capital gains realized or accrued on the sale or other
disposition of shares, unless the shares are held in connection with a
permanent establishment or fixed base in Germany.
United States Federal Income Taxation. Upon a sale or other disposition of
shares, a U.S. Holder will recognize gain or loss for United States federal
income tax purposes in an amount equal to the difference between the U.S.
dollar value of the amount realized and the U.S. Holder's tax basis, determined
in U.S. dollars, in the shares. Such gain or loss will generally be capital
gain or loss. In the case of certain non-corporate U.S. Holders, including
individuals, any capital gain will generally be subject to U.S. federal income
tax at preferential rates if specified minimum holding periods are met. In
addition, any gain or loss realized by a U.S. Holder on the sale or other
disposition of shares will generally be treated as U.S. source gain.
Passive Foreign Investment Company Status
We believe that we are not a passive foreign investment company, which we
refer to as a PFIC, for U.S. federal income tax purposes and do not expect to
become a PFIC in the year that includes this offering or in future years.
However, because this conclusion is a factual determination made annually and
because there are uncertainties in the application of the relevant rules, we
cannot assure you that we will not be considered to be a PFIC for any fiscal
year. In general, a non-U.S. corporation will be classified as a PFIC if either
(i) at least 75% of its gross income for a taxable year is passive income or
(ii) if the average quarterly value of assets held by it during a taxable year
which produce or are held for the production of passive income represents at
least 50% of the value of all of its assets. For this purpose, the corporation
must take into account a proportionate share of the income and assets of each
corporation in which it owns, directly or indirectly, at least a 25% interest.
If we were a PFIC, a U.S. Holder would generally be subject to special rules
with respect to (a) any gain realized on the sale or other disposition of the
shares and (b) any "excess distribution" by us to the U.S. Holder. An excess
distribution generally consists of distributions to the U.S. Holder on the
shares during a single taxable year that are greater than 125% of the average
annual distributions received by the U.S. Holder in the three preceding taxable
years or during the U.S. Holder's holding period for the shares, if shorter.
Under these rules:
. the gain or excess distribution would be allocated ratably over the U.S.
Holder's holding period for the shares;
. the amount allocated to the taxable year in which the gain or excess
distribution was realized would be taxable as ordinary income;
. the amount allocated to each prior year, with certain exceptions, would
be subject to tax at the highest tax rate in effect for that year; and
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. the interest charge generally applicable to underpayments of tax would
be imposed in respect of the tax attributable to each such year. Special
rules apply with respect to the calculation of the amount of the foreign
tax credit with respect to excess distributions by a PFIC.
In certain circumstances, a U.S. Holder, in lieu of being subject to the
passive foreign investment company rules discussed above, may make an election
to include gain on the stock of a passive foreign investment company as
ordinary income under a mark-to-market method provided that such stock is
regularly traded on a qualified exchange. Under current law, the mark-to-market
election may be available to a U.S. Holder since the ADSs will be listed on the
Nasdaq National Market, which constitutes a qualified exchange as designated in
the Code. There can be no assurances, however, that the ADSs will be "regularly
traded" on such exchange. It is intended that only the ADSs will be listed on
the Nasdaq National Market. The ordinary shares are listed on the Neuer Markt
of the Frankfurt Stock Exchange, which must meet certain trading, listing,
financial disclosure and other requirements to be treated as a qualified
exchange under applicable Treasury regulations for purposes of the mark-to-
market election, and no assurance can be given that the shares will be
"regularly traded" for purposes of the mark-to-market election.
If a U.S. Holder makes an effective mark-to-market election, the U.S. Holder
will recognize as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of
the passive foreign investment company shares or ADSs and the U.S. Holder's
adjusted tax basis in such shares or ADSs. Losses would be allowed only to the
extent of net mark-to-market gain previously included by the U.S. Holder under
the election for prior taxable years. A U.S. Holder's adjusted tax basis in
passive foreign investment company shares or ADSs will be increased by the
amount of any income inclusion and decreased by the amount of any deductions
under the mark-to-market rules.
If a U.S. Holder makes a mark-to-market election, it will be effective for
the taxable year for which the election is made and all subsequent taxable
years unless the shares or ADSs are no longer regularly traded on a national
securities exchange or the Internal Revenue Service consents to the revocation
of the election. A mark-to-market election is subject to complex and specific
rules and requirements, and U.S. Holders are urged to consult their tax
advisors about the availability of the mark-to-market election and whether
making the election would be advisable in their particular circumstances.
If we were a PFIC, a U.S. Holder would be required to make an annual return
on IRS Form 8621 regarding distributions received with respect to shares and
any gain realized on the disposition of shares.
Gift, Estate and Inheritance Taxes
The Estate Tax Treaty provides that an individual whose domicile is
determined to be in the United States for purposes of the treaty will not be
subject to German inheritance and gift tax, or the equivalent of the United
States federal estate and gift tax, on the individual's death or making of a
gift unless the shares are part of the business property of a permanent
establishment located in Germany or are part of the assets of a fixed base of
an individual located in Germany and used for the performance of independent
personal services. An individual's domicile in the United States, however, does
not prevent imposition of German inheritance and gift tax with respect to an
heir, donee, or other beneficiary who is domiciled in Germany at the time the
individual died or the gift was made.
The Estate Tax Treaty also provides a credit against United States federal
estate and gift tax liability for the amount of inheritance and gift tax paid
to Germany, subject to certain limitations, in a case where the shares are
subject to both German inheritance or gift tax and United States federal estate
or gift tax.
Other German Taxes
There are no German transfer, stamp or other similar taxes that would apply
to U.S. Holders who purchase or sell shares.
82
<PAGE>
U.S. Information Reporting and Backup Withholding
Dividend payments on the shares and proceeds from the sale, exchange or
redemption of shares may be subject to information reporting to the IRS and
possible U.S. backup withholding at a 31% rate. Backup withholding will not
apply, however, to a holder who furnishes a correct taxpayer identification
number or certificate of foreign status and makes any other required
certification or who is otherwise exempt from backup withholding. Persons
required to establish their exempt status generally must provide such
certification on IRS Form W-9, entitled Request for Taxpayer Identification
Number and Certification, in the case of U.S. persons and on IRS Form W-8 BEN,
entitled Certificate of Foreign Status, in the case of non-U.S. persons.
Finalized U.S. Department of Treasury regulations, which are applicable to
payments made after December 31, 2000, have generally expanded the
circumstances under which information reporting and backup withholding may
apply unless the holder provides the information described above.
Amounts withheld as backup withholding may be credited against a holder's
U.S. federal income tax liability, and a holder may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS and furnishing any required
information. U.S. Holders of shares should consult their tax advisors regarding
the application of the information reporting and backup withholding rules.
83
<PAGE>
LIMITATIONS AFFECTING SECURITY HOLDERS
At the current time, Germany does not restrict the export or import of
capital, except for investments in Iraq and Libya in accordance with applicable
resolutions adopted by the United Nations and the European Union. However, for
statistical purposes only, every individual or corporation residing in Germany
must report to the German Central Bank (Bundesbank), subject only to certain
immaterial exceptions, any payment received from or made to an individual or a
corporation resident outside Germany if such payment exceeds DM 5,000 (or the
equivalent in a foreign currency). In addition, German residents must report
any claims against or any liabilities payable to nonresidents if such claims or
liabilities, in the aggregate, exceed DM 3 million (or the equivalent in a
foreign currency) during any one month. German residents must also report any
direct investment outside Germany if such investment exceeds DM 100,000.
There are no limitations on the right of non-resident or foreign owners to
hold or vote our shares or ADSs imposed by German law or the articles of
association.
84
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc.
and U.S. Bancorp Piper Jaffray Inc. are acting as representatives, the
following respective number of ADSs:
<TABLE>
<CAPTION>
Underwriter Number of ADSs
- ----------- --------------
<S> <C>
Credit Suisse First Boston Corporation...........................
Chase Securities Inc.............................................
U.S. Bancorp Piper Jaffray Inc...................................
---------
Total.......................................................... 4,350,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the ADSs in the offering if any are purchased, other than those
ADSs 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
ADSs may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata
basis up to 650,000 additional ADSs from us at the public offering price less
the underwriting discounts and commissions. This option may be exercised only
to cover any over-allotments of ADSs.
The underwriters propose to offer the ADSs initially at the public offering
price on the cover page of this prospectus and to selling group members at that
price less a concession of $ per ADS. The underwriters and selling group
members may allow a discount of $ per ADS on sales to other broker/dealers.
After the 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>
Total
-----------------------------
Percentage Without With
Per ADS per ADS Over-allotment Over-allotment
------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us...... $ $ $
Expenses payable by us....... $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any of our ordinary shares or securities convertible into or
exchangeable or exercisable for any of our ordinary shares, 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 90 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.
Members of our supervisory board and management board, our executive officers
and a security holder have agreed that they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any of our
ordinary shares or securities convertible into or exchangeable or exercisable
for any of our ordinary
85
<PAGE>
shares, 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 ordinary shares, whether
any such aforementioned transaction is to be settled by delivery of our
ordinary shares 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 90 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering price
up to 250,000 ADSs for employees, directors and other persons associated with
us who have expressed an interest in purchasing securities in the offering. The
number of ADSs available for sale to the general public in the offering will be
reduced to the extent such persons purchase such reserved ADSs. Any reserved
ADSs not so purchased will be offered by the underwriters to the general public
on the same terms as the other ADSs.
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.
Our ordinary bearer shares are listed on the Neuer Markt of the Frankfurt
Stock Exchange under the symbol ISH. We have applied to list the ADSs on The
Nasdaq Stock Market's National Market under the symbol "ISHP".
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 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, the Neuer Markt of the Frankfurt Stock
Exchange or otherwise and, if commenced, may be discontinued at any time.
86
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the ADSs 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 ADSs are effected. Accordingly, any resale of the ADSs 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 ADSs.
Representations of Purchasers
Each purchaser of ADSs in Canada who receives a purchase confirmation will be
deemed to represent to us and the dealer from whom the purchase confirmation is
received that (i) the purchaser is entitled under applicable provincial
securities laws to purchase the ADSs without the benefit of a prospectus
qualified under the securities laws, (ii) where required by law, that the
purchaser is purchasing as principal and not as agent, and (iii) the purchaser
has reviewed the text above under "Resale Restrictions."
Rights of Action for 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 recession 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 these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these 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 the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any ADSs
acquired by the purchaser in 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 report must be filed in respect
of ADSs acquired on the same date and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of ADSs should consult their own legal and tax advisors
with respect to the tax consequences of an investment in the ADSs in their
particular circumstances and with respect to the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
87
<PAGE>
LEGAL MATTERS
The validity of our shares and ADSs will be passed upon for us by Shearman &
Sterling, San Francisco, California, our United States counsel, and Haarmann,
Hemmelrath & Partner, our German counsel. The underwriters have been
represented by Wilson Sonsini Goodrich & Rosati, Palo Alto, California, United
States counsel, and Oppenhof Raedler, German counsel.
EXPERTS
The audited financial statements included in this prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen
Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of that firm as experts in
giving said reports.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form F-1 under
the Securities Act with respect to the securities offered in this offering.
This prospectus, which forms a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
registration statement. Statements contained in this prospectus concerning the
contents of any contract or other document filed as an exhibit to the
registration statement are materially complete but, in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the registration statement, and each such statement is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions.
Prior to this offering, we were not subject to the periodic reporting
requirements of the Securities Exchange Act. As a result of this offering, we
will become subject to those requirements and in accordance therewith will be
required to file reports and other information with the Commission. Reports and
other information filed with the Commission, including copies of the
registration statement, may be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of Commission located at Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661-2551 and Room 1300, 7 World Trade
Center, New York, New York 10048. Copies of these materials at prescribed rates
will also be available by mail from the public reference branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.
As a foreign private issuer, we are exempt under the Securities Exchange Act
from, among other things, the rules governing the furnishing and content of
proxy statements adopted under Section 14 of the Securities Exchange Act and
the short-swing profit recovery provisions set forth in Section 16 of the
Securities Exchange Act.
We will furnish Citibank, the depositary for our ADSs, with annual reports in
English, which will include a review of operations and annual audited
consolidated financial statements prepared in conformity with U.S. GAAP. We
will also furnish to Citibank in English all notices of shareholders' meetings
and other reports and communications that are made generally available to our
shareholders. Citibank will make those notices, reports and communications
available to holders of ADSs in the manner we request and will mail to all
record holders of ADSs a notice containing a summary of the information
contained in any notice of a shareholders' meeting received by Citibank.
See "Description of American Depositary Shares."
88
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Convertible Redeemable Preferred Stock and
Shareholders' Equity.................................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To INTERSHOP Communications Aktiengesellschaft:
We have audited the accompanying balance sheets of INTERSHOP Communications
Aktiengesellschaft (a German corporation) and subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of operations,
shareholders' stock equity and cash flows for each of the three years in the
period ended December 31, 1999. 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 financial statements referred to above present fairly, in
all material respects, the financial position of INTERSHOP Communications
Aktiengesellschaft and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Nendza Bolash
Wirtschaftsprufer Certified Public
Accountant
Hamburg, February 24, 2000
F-2
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1998 1999 1999
------- ------- ----------
(Euro) (Euro) US$
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................ 34,185 12,065 12,065
Restricted cash.................................. 114 1,437 1,437
Trade receivables, net of allowances for doubtful
accounts of (Euro)443, (Euro)1,614 and US$1,614,
respectively.................................... 5,886 23,333 23,333
Prepaid expenses and other current assets........ 2,542 3,870 3,870
------- ------- -------
Total current assets........................... 42,727 40,705 40,705
PROPERTY AND EQUIPMENT, net...................... 3,667 5,610 5,610
INVESTMENTS...................................... 512 6,222 6,222
OTHER ASSETS..................................... 315 1,252 1,252
------- ------- -------
Total assets................................... 47,221 53,789 53,789
======= ======= =======
CURRENT LIABILITIES
Current portion of capital lease obligation...... 25 33 33
Notes payable to shareholder..................... -- 7,000 7,000
Accounts payable................................. 2,710 5,149 5,149
Accrued liabilities.............................. 3,224 9,960 9,960
Deferred revenue................................. 5,059 8,543 8,543
------- ------- -------
Total current liabilities...................... 11,018 30,685 30,685
NOTES PAYABLE TO SHAREHOLDERS AND CAPITAL LEASE
OBLIGATIONS..................................... 230 20 20
DEFERRED REVENUE................................. 1,748 220 220
------- ------- -------
Total liabilities.............................. 12,996 30,925 30,925
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY
Common stock, stated value (Euro)1--authorized:
29,932,501 shares; outstanding: 15,584,901
shares in 1998 and 16,878,104 shares in 1999.... 13,281 16,878 16,878
Paid-in capital.................................. 50,225 48,169 48,169
Notes receivable from shareholders............... (1,428) (141) (141)
Deferred compensation............................ (799) (273) (273)
Accumulated deficit.............................. (27,017) (45,406) (45,406)
Accumulated other comprehensive income (loss).... (37) 3,637 3,637
------- ------- -------
Total shareholders' equity .................... 34,225 22,864 22,864
------- ------- -------
Total liabilities and shareholders' equity..... 47,221 53,789 53,789
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from Deutsche marks into
euros using the exchange rate as of January 1, 1999.
F-3
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------
1997 1998 1999 1999
------ ------- ------- -----------
(Euro) (Euro) (Euro) US$
(unaudited)
<S> <C> <C> <C> <C>
Revenues:
Licenses.............................. 2,947 11,295 29,534 29,534
Services, maintenance and other
revenues............................. 2,088 6,577 16,732 16,732
------ ------- ------- -------
Total revenues...................... 5,035 17,872 46,266 46,266
------ ------- ------- -------
Cost of revenues:
Licenses.............................. 442 1,742 4,786 4,786
Services, maintenance and other
revenues............................. 2,245 3,766 8,465 8,465
------ ------- ------- -------
Total cost of revenues.............. 2,687 5,508 13,251 13,251
------ ------- ------- -------
Gross profit............................ 2,348 12,364 33,015 33,015
Operating expenses:
Research and development.............. 1,006 4,368 7,115 7,115
Sales and marketing................... 4,705 18,368 34,771 34,771
General and administrative............ 3,454 6,729 11,206 11,206
Legal settlement costs................ -- 1,866 -- --
------ ------- ------- -------
Total operating expenses............ 9,165 31,331 53,092 53,092
------ ------- ------- -------
Operating loss.......................... (6,817) (18,967) (20,077) (20,077)
Other income (expense):
Interest income....................... 122 968 515 515
Interest expense...................... (292) (797) (42) (42)
Other income (expense)................ (28) 1,488 1,215 1,215
------ ------- ------- -------
Total other income (expense), net... (198) 1,659 1,688 1,688
------ ------- ------- -------
Net loss................................ (7,015) (17,308) (18,389) (18,389)
Accretion of redeemable preferred
stock.................................. (149) (220) -- --
------ ------- ------- -------
Net loss attributable to common
shareholders........................... (7,164) (17,528) (18,389) (18,389)
====== ======= ======= =======
Basic and diluted net loss per AG share
....................................... (1.19) (1.44) (0.97) (0.97)
====== ======= ======= =======
Basic and diluted net loss per ADS
share.................................. (0.12) (0.14) (0.10) (0.10)
====== ======= ======= =======
Shares used in per AG share calculations
....................................... 6,034 12,145 18,948 18,948
====== ======= ======= =======
Shares used in per ADS share
calculations........................... 60,340 121,450 189,480 189,480
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from Deutsche marks into
euros using the exchange rate as of January 1, 1999.
F-4
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Statements Of Convertible Redeemable Preferred Stock And
Shareholders' Equity
(in thousand euro, except share data)
<TABLE>
<CAPTION>
Convertible
Redeemable
Preferred Stock
------------------
Shares Amount
---------- ------
<S> <C> <C>
Balance, December
31, 1996......... 6,720,000 1,355
Net loss........ -- --
Foreign currency
translation
adjustments..... -- --
Issuance of
common stock.... -- --
Exercise of
stock options... -- --
Issuance of
Series C
preferred
stock........... 1,200,000 3,482
Accretion of
preferred
stock........... -- 149
---------- ------
Balance, December
31, 1997......... 7,920,000 4,986
========== ======
Net loss........ -- --
Foreign currency
translation
adjustments..... -- --
Issuance of
common stock of
Inc............. -- --
Issuance of
Series D
preferred
stock........... 233,910 1,873
Issuance of
common stock for
cash to member
of supervisory
board...........
Issuance of
common stock for
cash and
forgiveness of
legal settlement
obligation...... -- --
Accretion of
preferred
stock........... -- 220
Conversion of
preferred stock
of subsidiary to
common stock of
parent, net of
share amounts
not converted... (7,568,310) (7,079)
Shares not
converted....... (585,600) --
Reclassification
for formation of
AG.............. -- --
Issuance of
common stock in
initial public
offering, net... -- --
Exercise of
stock options... -- --
Deferred
compensation.... -- --
Amortization of
deferred
compensation.... -- --
---------- ------
Balance, December
31, 1998......... -- --
========== ======
Net loss........ -- --
Foreign currency
translation
adjustments..... -- --
Unrealized gain
on marketable
securities...... -- --
Conversion of
common stock of
subsidiary to
common stock of
parent.......... -- --
Exercise of
stock options... -- --
Change in stated
value of common
stock........... -- --
Collections on
notes receivable
from
shareholders.... -- --
Amortization of
deferred
compensation.... -- --
---------- ------
Balance, December
31, 1999......... -- --
========== ======
<CAPTION>
Shareholders' Equity
----------------------------------------------------------------------------------------------------------
Common Stock Notes Accumulated
-------------------------- Receivable Other Total
Stated From Deferred Accumulated Comprehensive Shareholders' Comprehensive
Shares Value APIC Shareholders Compensation Deficit Income (Loss) Equity Loss
----------- ------ ------- ------------ ------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1996......... 6,000,000 -- 51 -- -- (2,325) (40) (2,314) --
Net loss........ -- -- -- -- -- (7,015) -- (7,015) (7,015)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- (132) (132) (132)
Issuance of
common stock.... 22,500 -- 17 -- -- -- -- 17 --
Exercise of
stock options... 605,310 -- 400 (400) -- -- -- -- --
Issuance of
Series C
preferred
stock........... -- -- -- -- -- -- -- -- --
Accretion of
preferred
stock........... -- -- -- -- -- (149) -- (149) --
----------- ------ ------- ------------ ------------ ----------- ------------- ------------- -------------
Balance, December
31, 1997......... 6,627,810 -- 468 (400) -- (9,489) (172) (9,593) (7,147)
=========== ====== ======= ============ ============ =========== ============= ============= =============
Net loss........ -- -- -- -- -- (17,308) -- (17,308) (17,308)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- 135 135 135
Issuance of
common stock of
Inc............. 60,000 -- 186 -- -- -- -- 186 --
Issuance of
Series D
preferred
stock........... -- -- -- -- -- -- -- -- --
Issuance of
common stock for
cash to member
of supervisory
board........... 50,001 43 596 -- -- -- -- 639 --
Issuance of
common stock for
cash and
forgiveness of
legal settlement
obligation...... 180,090 153 5,661 -- -- -- -- 5,814 --
Accretion of
preferred
stock........... -- -- -- -- -- (220) -- (220) --
Conversion of
preferred stock
of subsidiary to
common stock of
parent, net of
share amounts
not converted... 7,568,310 -- 7,079 -- -- -- -- 7,079 --
Shares not
converted....... (2,646,000) -- -- -- -- -- -- -- --
Reclassification
for formation of
AG.............. -- 9,894 (9,894) -- -- -- -- -- --
Issuance of
common stock in
initial public
offering, net... 3,000,000 2,557 44,774 -- -- -- -- 47,331 --
Exercise of
stock options... 744,690 634 394 (1,028) -- -- -- -- --
Deferred
compensation.... -- -- 961 -- (961) -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- 162 -- -- 162 --
----------- ------ ------- ------------ ------------ ----------- ------------- ------------- -------------
Balance, December
31, 1998......... 15,584,901 13,281 50,225 (1,428) (799) (27,017) (37) 34,225 (17,173)
=========== ====== ======= ============ ============ =========== ============= ============= =============
Net loss........ -- -- -- -- -- (18,389) -- (18,389) (18,389)
Foreign currency
translation
adjustments..... -- -- -- -- -- -- 652 652 652
Unrealized gain
on marketable
securities...... -- -- -- -- -- -- 3,022 3,022 3,022
Conversion of
common stock of
subsidiary to
common stock of
parent.......... 446,700 416 (416) -- -- -- -- -- --
Exercise of
stock options... 846,503 732 1,027 -- -- -- -- 1,759 --
Change in stated
value of common
stock........... -- 2,449 (2,449) -- -- -- -- -- --
Collections on
notes receivable
from
shareholders.... -- -- -- 1,287 -- -- -- 1,287 --
Amortization of
deferred
compensation.... -- -- (218) -- 526 -- -- 308 --
----------- ------ ------- ------------ ------------ ----------- ------------- ------------- -------------
Balance, December
31, 1999......... 16,878,104 16,878 48,169 (141) (273) (45,406) 3,637 22,864 (14,715)
=========== ====== ======= ============ ============ =========== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from Deutsche marks into
euros using the exchange rate as of January 1, 1999.
F-5
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1997 1998 1999 1999
------ ------- ------- ----------
(Euro) (Euro) (Euro) US$
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ (7,015) (17,308) (18,389) (18,389)
Adjustments to reconcile net loss to
cash provided by (used in) operating
activities:
Depreciation.......................... 510 1,657 2,076 2,076
Provision for doubtful accounts....... 67 269 2,037 2,037
Amortization of deferred
compensation......................... -- 162 308 308
Legal settlement costs................ -- 1,866 -- --
Change in:
Accounts receivable................... (2,244) (4,080) (18,220) (18,220)
Prepaid expenses and other current
assets............................... (822) (1,695) (1,474) (1,474)
Other assets.......................... (38) (58) (830) (830)
Accounts payable...................... 1,880 436 2,228 2,228
Deferred revenue...................... 9,819 (3,245) 1,542 1,542
Accrued expenses and other
liabilities.......................... 451 1,013 6,298 6,298
------ ------- ------- -------
Net cash provided by (used in) operating
activities............................. 2,608 (20,983) (24,424) (24,424)
------ ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unaffiliated company...... -- (512) (1,199) (1,199)
Purchases of equipment, net of capital
leases................................. (1,902) (3,302) (3,625) (3,625)
Restricted cash......................... (117) -- (1,227) (1,227)
Purchase of marketable securities....... -- -- (1,490) (1,490)
------ ------- ------- -------
Net cash used in investing activities... (2,019) (3,814) (7,541) (7,541)
------ ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock... 3,377 1,873 -- --
Proceeds from sale of common stock...... -- 52,104 1,759 1,759
Proceeds from debt issuance............. 1,765 1,975 7,937 7,937
Collections on notes receivable from
shareholders........................... -- -- 1,287 1,287
Repayments of indebtedness.............. (1,027) (3,233) (1,144) (1,144)
------ ------- ------- -------
Net cash provided by financing
activities............................. 4,115 52,719 9,839 9,839
------ ------- ------- -------
Effect of change in exchange rates on
cash................................... 140 1,205 6 6
------ ------- ------- -------
Net change in cash and cash
equivalents............................ 4,844 29,127 (22,120) (22,120)
Cash and cash equivalents, beginning of
year................................... 214 5,058 34,185 34,185
------ ------- ------- -------
Cash and cash equivalents, end of year.. 5,058 34,185 12,065 12,065
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements. All
balances for years prior to 1999 have been restated from Deutsche marks into
euros using the exchange rate as of January 1, 1999.
F-6
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
INTERSHOP Communications AG, a German stock corporation (the "Company"), is
the successor to INTERSHOP Communications, Inc. and INTERSHOP Communications
GmbH. INTERSHOP Communications GmbH was originally founded in 1992 as
NetConsult Communications GmbH in Germany as a limited liability company.
NetConsult Communications GmbH established a wholly owned subsidiary,
NetConsult Communications, Inc., a Delaware corporation, in March 1996. These
companies were subsequently renamed INTERSHOP Communications GmbH and INTERSHOP
Communications, Inc. (the predecessor company), respectively.
In December 1996, INTERSHOP Communications, Inc. (U.S. Inc.) entered into a
share exchange agreement with INTERSHOP Communications GmbH (GmbH) to acquire
100% of GmbH's outstanding shares. The shareholders of GmbH's common shares
received common shares in U.S. Inc. Holders of existing debt (approximately
(Euro)1.14 million) and capital (approximately (Euro)211,000) in GmbH, totaling
approximately (Euro)1.4 million, received 6,720,000 shares of preferred stock
in U.S. Inc. The fair value of the preferred stock issued was equal to the
carrying value of the debt and capital for which it was exchanged. The share
exchange did not alter the relative ownership interest of the parent company.
Upon completion of the transaction, U.S. Inc. became the parent company of GmbH
and its subsidiaries.
On June 23, 1998, the holders of 79.26% of the shares of U.S. Inc. exchanged
their shares of preferred and common stock of U.S. Inc., totaling 20,591,348,
into 12,345,810 shares of the Company. As a result of this transaction, U.S.
Inc. became a majority-owned subsidiary of the Company. Two stockholders,
including Stephan Schambach, our founder and Chief Executive Officer, did not
contribute all of their shares of U.S. Inc. due to certain tax consequences,
and, as of December 31, 1999, still hold 16.4% and 1.5%, respectively, of U.S.
Inc.'s common stock. These two stockholders are entitled to exchange their
shares in U.S. Inc. for shares in the Company at a ratio of 5:3, using
conditional capital specifically approved for this purpose. The instruments
held by these individuals are considered to be part of the majority interest in
AG given the related party nature of the holdings, their conversion rights and
their probable conversion, given the fact that they are subject to repurchase
at US $0.01 per share if not converted by 2004. Accordingly, the cost basis of
such shares is included in additional paid in capital in the accompanying
consolidated financial statements. Conversions of U.S. Inc. shares to AG shares
subsequent to the initial conversion in June 1998 are treated as an increase to
the stated value of the common stock and a corresponding decrease to additional
paid in capital. During 1999, these stockholders converted 744,500 common
shares of U.S. Inc. for 446,700 shares of the Company. As of December 31, 1999,
these stockholders held 4,641,500 shares in U.S. Inc., and these shares are
convertible into 2,784,900 shares of the Company at any time. If these two
shareholders were to have converted their shares as of December 31, 1999, they
would own approximately 14% of the Company.
The accompanying consolidated financial statements reflect the consolidated
results of the Company and its wholly and majority owned subsidiaries, which
have been prepared according to United States generally accepted accounting
principles ("U.S. GAAP"). All significant intercompany transactions and
balances between the companies have been eliminated.
The Company has previously prepared and reported its consolidated financial
statements as of and for the year ended December 31, 1997 in U.S. Dollars, as
the parent company at that time was Intershop Communications, Inc. These
financial statements were restated and presented in Deutsche marks ("DM") after
the Company acquired the majority of the outstanding shares of INTERSHOP
Communications, Inc. in 1998. With the introduction of the euro ((Euro)) on
January 1, 1999, the Company has elected to present the accompanying
consolidated financial statements in euro. Accordingly, the Deutsche mark
consolidated financial statements for each period presented have been restated
into euro using the Deutsche mark/euro exchange rate as of January 1, 1999 of
(Euro)1 = DM 1.95583. The Company's restated financial statements in euro
depict the
F-7
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
same trends as would have been presented if it had continued to present its
consolidated financial statements in Deutsche marks. The consolidated financial
statements will, however, not be comparable to financial statements for periods
prior to January 1, 1999 in euro of other companies that previously reported
their financial information in a currency other than Deutsche marks.
The financial information expressed in US Dollars is presented for the
convenience of the reader and is translated from euro at the Noon buying rate
in New York City for cable transfers in euro as certified for custom purposes
by the Federal Reserve Bank of New York on December 31, 1999 which was
(Euro)1.00 to US$1.00. The translated amounts should not be construed as a
representation that the euro has been, could have been, or could be in the
future, converted into US Dollars at this or any other rate of exchange.
Unless otherwise noted, all references to the "Company" refer to INTERSHOP
Communications AG and its subsidiaries, as well as its predecessors. The
Supervisory Board has authorized the filing of a registration statement with
the U.S. Securities and Exchange Commission to register shares of its common
stock in the form of American Depositary Shares ("ADSs"). Each ADS will
represent 1/10 of one AG share.
The Company is a global provider of electronic commerce software applications
that enable businesses to sell their products and services over the Internet.
The Company's products can be integrated with existing business systems to
allow its customers to sell goods and services over the Internet without
replacing their existing business systems. The merchandising capabilities of
the Company's products, such as customer profiling and cross-selling, help
allow its customers to maximize sales revenues. The Company also provides
professional services for its customers to assist in the installation and
ongoing maintenance of our software applications.
During 1997, the Company commenced commercial shipment of its products and
emerged from the development stage. Although no longer in the development
stage, the Company continues to be subject to the risks and challenges similar
to other companies in a comparable stage of development. These risks include,
but are not limited to, operating in a new and rapidly evolving market,
competition from larger companies, dependence on new products, dependence on
key personnel, uncertain profitability, and a limited operating history.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company's operations outside of Germany is the
local country's currency. Consequently, assets and liabilities of operations
outside Germany are translated into euros using exchange rates at the end of
each reporting period. Revenues and expenses are translated at the average
exchange rates prevailing during the period. Cumulative translation gains and
losses are reported as a separate component of shareholders' equity.
F-8
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Statement of Cash Flows
The Company paid (Euro)229,000, (Euro)540,000 and (Euro)37,000 in cash for
interest in 1997, 1998 and 1999, respectively. The Company paid (Euro)9,000,
(Euro)13,000 and (Euro)61,000 in cash for taxes in 1997, 1998 and 1999,
respectively. The Company sold equipment and leased it back in 1997 in a non-
cash transaction. The Company recognized no gain or loss on the transactions
and the value of the leased equipment is (Euro)119,000.
The Company considers all investments with original maturities of 90 days or
less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of accounts receivable. The Company performs
ongoing credit evaluations of its customer's financial condition and the risk
with respect to trade receivables is further mitigated by the fact that the
Company's customer base is diversified.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and long-term debt
approximate their fair values.
Marketable securities designated as available for sale are recorded at market
with any unrealized gain or loss being recorded in the shareholders' equity
section of the Balance Sheet.
Property and Equipment
Property and equipment are stated at cost. Capital leases are recorded at the
present value of the future minimum lease payments at the date of acquisition.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years. Capital leases and leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease terms or their estimated useful life.
Software Development Costs
The Company accounts for internally generated software development costs in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility of the product, which the Company
defines as the development of a working model and further defines as the
development of a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
gross product revenue, estimated economic life and changes in technology. Such
costs are reported at the lower of unamortized cost or net realizable value. To
date, internal software development costs that were eligible for capitalization
have not been significant and the Company has charged all software development
costs to research and development expense as incurred.
The Company expenses all research and development costs as incurred.
F-9
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses of (Euro)0.9
million, (Euro)1.5 million and (Euro)4.2 million were included with sales and
marketing expenses for 1997, 1998 and 1999, respectively.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October 1995. This accounting standard permits
the use of either a fair value based method of accounting or the method defined
in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for stock-based compensation arrangements.
Companies that elect to employ the method proscribed by APB 25 are required to
disclose the pro forma net income (loss) that would have resulted from the use
of the fair value based method. The Company has elected to continue to account
for its stock-based compensation arrangements under the provisions of APB 25,
and, accordingly, it has included in Note 8 the pro forma disclosures required
under SFAS No. 123.
Revenue Recognition
The Company generates the following types of revenue:
Licenses. License fees are earned under software license agreements primarily
to end-users, and to a lesser extent resellers and distributors. Revenues from
licenses to end-users are recognized upon shipment of the software if
persuasive evidence of an arrangement exists, collection of the resulting
receivable is probable and the fee is fixed and determinable. If an acceptance
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. As of January 1, 1998,
the Company adopted the provisions of the American Institute of Certified
Public Accountants ("AICPA") Statement Of Position ("SOP") 97-2, "Software
Revenue Recognition" ("SOP 97-2").
Service and maintenance. Services consist of support arrangements and
consulting and education services. Support agreements generally call for the
Company to provide technical support and provide certain rights to unspecified
software updates to customers. Revenue on technical support and software update
rights is recognized ratably over the term of the support agreement. The
Company provides consulting and education services to its customers; revenue
from such services is generally recognized as the services are performed.
For arrangements that include multiple elements, the fee is allocated to the
various elements based on vendor-specific objective evidence of fair market
value established by independent sale of the elements when sold separately.
In June 1997, the Company entered into a software license agreement with a
shareholder for total license fees of (Euro)10.1 million, which was received in
cash in 1997. The Company is recognizing the revenue associated with this
agreement over the three-year term of the agreement. In 1997, the Company
recognized (Euro)1.7 million of revenue associated with this agreement,
representing 33% of consolidated revenue in 1997. In 1998, the Company
recognized (Euro)3.4 million of revenue associated with this agreement, and
(Euro)0.8 million related to other agreements with this customer, which
combined represented 23% of consolidated revenue in 1998. In 1999, the Company
recognized (Euro)4.2 million of revenue associated with this agreement
representing 9% of consolidated revenue in 1999. In 1999, an executive from
this customer became a member of our Supervisory Board. Another member of our
Supervisory Board is also an executive with another one of our customers. Sales
to this customer represented 13%, 6% and 2% of consolidated revenue in 1997,
1998 and 1999, respectively. Besides these two customers, no other customer
accounted for 10% or more of consolidated revenues for any year presented.
F-10
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which the Company adopted beginning on
January 1, 1998. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The objective of SFAS No. 130 is to report a measure of
all changes in equity of an enterprise that results from transactions and other
economic events of the period other than transactions with shareholders
("comprehensive income"). Comprehensive income is the total of net income
(loss) and all other non-owner changes in shareholders' equity.
Accumulated other comprehensive income (loss) consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1998 1999
--------- -----------
<S> <C> <C>
Foreign currency translation adjustment.............. (Euro)(37) (Euro) 615
Unrealized gain on available-for-sale securities..... -- 3,022
--------- -----------
(Euro)(37) (Euro)3,637
========= ===========
</TABLE>
In the years ended December 31, 1997 and 1998, the only component of other
comprehensive income is the net foreign currency translation, which was
(Euro)132,000 and (Euro)135,000, respectively. A summary of the components of
other comprehensive income for the year ended December 31, 1999 is as follows
(in thousands):
<TABLE>
<CAPTION>
Before Tax Income After Tax
Amount Tax Amount
----------- ------ -----------
<S> <C> <C> <C>
Unrealized gain on available-for-sale
securities................................ (Euro)3,022 -- (Euro)3,022
Foreign currency translation adjustment.... 652 -- 652
----------- ---- -----------
(Euro)3,674 -- (Euro)3,674
=========== ==== ===========
</TABLE>
Earnings Per Share
Basic net loss per common share is presented in conformity with SFAS No. 128
"Earnings Per Share" for all periods presented. Basic net loss per share is
computed using the weighted-average number of vested outstanding shares of
common stock. Diluted net loss per share is computed using the weighted-average
number of vested shares of common stock outstanding and, when dilutive,
unvested common stock outstanding, potential common shares from options and
warrants to purchase common stock using the treasury stock method and from
convertible securities using the as-if-converted basis. The options exercised
that result in shares subject to repurchase have been excluded in computing the
number of weighted average shares outstanding for earnings per share purposes.
Weighted average shares subject to repurchase were 233,000, 525,000 and 550,000
for 1997, 1998 and 1999, respectively. All potential common shares have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect would be antidilutive. Pursuant to the Securities
and Exchange Commission (SEC) Staff Accounting Bulletin No. 98, common stock
and convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of the offering, are included in the calculation of
basic and diluted net loss per share as if they were outstanding for all
periods presented. To date, the Company has not had any issuances or grants for
nominal consideration.
Earnings per share data has been presented on both a per weighted AG share
and per weighted ADS share basis. The ADS weighted share amounts were computed
by dividing all AG weighted share amounts by ten to reflect the conversion
ratio between AG shares and ADS shares. The total number of shares excluded
from the
F-11
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
calculations of diluted net loss per AG share were approximately 1,299,000,
1,125,000 and 473,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. Shares excluded in the per ADS loss per share calculation were
approximately 12,990,000, 11,250,000 and 4,730,000, respectively. See Note 8
for further information on these securities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
companies to record derivative financial instruments on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statements No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 (or January 1, 2001
for INTERSHOP). The Company has no derivative financial and commodity
instruments, forward contracts or hedging arrangements in cash and cash
equivalents. This statement should not have a material impact on the financial
condition or results of INTERSHOP's operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. These statements will not have a material impact on the financial
condition or results of INTERSHOP's operations.
Reclassifications
Certain 1997 and 1998 balances have been reclassified to conform to the
presentation used in 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Computer equipment................................. (Euro)4,834 (Euro)7,724
Furniture and fixtures............................. 1,138 2,552
Leasehold improvements............................. 36 332
----------- -----------
6,008 10,608
Accumulated depreciation and amortization.......... (2,341) (4,998)
----------- -----------
Property and equipment, net........................ (Euro)3,667 (Euro)5,610
=========== ===========
</TABLE>
Equipment under capital leases included in property and equipment as of
December 31, 1998 and 1999 was (Euro)114,000. Accumulated amortization of
leased equipment was (Euro)26,000 and (Euro)81,000 as of December 31, 1998 and
1999, respectively.
F-12
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
As of December 31, 1999, future minimum lease payments under capital leases
together with their present value were (in thousands):
<TABLE>
<S> <C>
Total minimum lease payments...................................... (Euro) 39
Amounts representing interest..................................... (6)
---------
Present value of minimum lease payments........................... 33
Less current portion.............................................. (33)
---------
(Euro)--
=========
</TABLE>
4. INVESTMENTS
During 1998 and 1999, the Company made investments in a non-public company in
Israel totaling (Euro)0.5 million and (Euro)1.2 million, respectively. The
total investment of (Euro)1.7 million in this entity represents an ownership
interest of approximately 12% as of December 31, 1999. The investments are
carried at their original cost basis.
In 1999, the Company acquired approximately (Euro)1.5 million of common stock
in a public company in the United Kingdom. These equity securities are
classified as available for sale securities. The Company recorded an unrealized
gain of (Euro)3.0 million during 1999 based on the market value at December 31,
1999 of the securities of (Euro)4.5 million. The unrealized gain was included
as a component of comprehensive income in the statement of shareholders' equity
for 1999.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
VAT payable.......................................... (Euro) -- (Euro)2,476
Accrued commissions.................................. 170 1,817
Employee compensation................................ 947 2,068
Other................................................ 2,107 3,599
----------- -----------
(Euro)3,224 (Euro)9,960
=========== ===========
</TABLE>
6. NOTES PAYABLE TO SHAREHOLDERS
During 1999, the Company entered into a secured loan agreement for (Euro)7.0
million with an officer of the Company who is also a shareholder and a member
of the management board. Interest on the note is payable quarterly at 6%. The
loan is callable with three months notice beginning December 31, 2000. There is
a prepayment penalty of three months interest if the loan is paid down prior to
December 31, 2000.
During 1996, the Company entered into a series of unsecured loans with
certain shareholders. Interest is payable quarterly at 10%. The outstanding
principal on the notes are classified as long-term and were (Euro)179,000 and
(Euro)20,000 at December 31, 1998 and 1999, respectively. The loans may be
repaid at any time, at the discretion of the Company, but no later than
February 2004.
F-13
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
Facilities and certain furniture and equipment are leased under operating
leases. As of December 31, 1999, future minimum annual lease payments
(excluding the lease payments relating to capitalized facilities discussed in
Note 3) are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
2000.......................................................... (Euro) 5,035
2001.......................................................... 4,122
2002.......................................................... 4,237
2003.......................................................... 4,311
2004.......................................................... 4,244
Subsequent years.............................................. 8,151
------------
Total....................................................... (Euro)30,100
============
</TABLE>
Rent expense was (Euro)492,000, (Euro)1,277,000 and (Euro)2,022,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
Legal Matters
The Company is a defendant in various legal matters arising in the normal
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate resolution of these matters is not expected to have a
material effect on these consolidated financial statements.
8. SHAREHOLDERS' EQUITY
Stock Splits and Change in Stated Value
In conjunction with the share exchange discussed in Note 1 between the
shareholders of INTERSHOP Communications, Inc. and the Company in June 1998,
the shares of INTERSHOP Communications, Inc. were exchanged for shares of the
Company on a 1-for-5 basis. In June 1999, the Company changed the stated value
of its common stock from DM 5 per share to (Euro)1 per share and effected a 3-
for-1 stock split. Unless otherwise noted, all share and per share amounts
presented have been restated to retroactively reflect this conversion ratio and
stock split for all periods presented.
The adjustment to the stated value of the Company's common stock is reflected
in the Consolidated Statements of Convertible Redeemable Preferred Stock and
Shareholders' Equity as an increase to the stated value of the common stock for
(Euro)2.4 million and a corresponding decrease to additional paid in capital as
of June 1999.
Convertible Redeemable Preferred Stock
During 1997, the Company issued 1,200,000 shares of preferred stock at
approximately (Euro)3 per share resulting in aggregate proceeds of (Euro)3.5
million. In March 1998, the Company sold 233,910 shares of preferred stock in
INTERSHOP Communications, Inc. at approximately (Euro)8 per share resulting in
aggregate proceeds of (Euro)1.9 million.
Significant rights, restrictions, and preferences of preferred stock included
cash dividends at a rate of 8% per annum, as defined, liquidation preferences,
voting rights, and conversion and redemption features.
F-14
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Prior to the share exchange between the shareholders of INTERSHOP
Communications, Inc. and the Company in June 1998, all outstanding shares of
preferred stock converted to the same number of shares of common stock of
INTERSHOP Communications, Inc. After considering the conversion ratio and stock
split discussed above, shares of INTERSHOP Communications, Inc. common stock
were converted to shares of the Company on a 5-for-3 basis.
Convertible Promissory Note
In April 1998, U.S. Inc. entered into a convertible promissory note, which
bears interest at 7%, with a member of the Company's Supervisory Board for
US$500,000. The principal and accrued interest were convertible at the option
of the holder, in whole or in part, into shares of U.S. Inc.'s next series of
preferred stock issued in connection with a third party financing at the
purchase price per share paid by the third party investors. The principal and
interest would automatically convert into common stock in the event that U.S.
Inc. completed an underwritten public offering, as defined, at the initial
public offering price less a 25% discount. In the event that a new series of
preferred stock were not issued, or a public offering did not occur, then the
outstanding principal and accrued interest were convertible at the option of
the holder, in whole or in part, into common stock of U.S. Inc. at (Euro)8.01
per share. All principal and unpaid interest was due and payable, to the extent
not converted, on October 28, 1998.
In conjunction with the legal entity reorganization that occurred in June
1998, the U.S. Inc. repaid the note to the board member, and the board member
purchased 50,001 shares of the Company's common stock for (Euro)12.78 per
share, resulting in aggregate proceeds of (Euro)639,118.
Legal settlement obligation
In May 1998, we entered into a legal settlement related to a trademark
dispute that obligated us to pay (Euro)1.9 million. An investor paid this
amount on behalf of the Company. In exchange, this investor purchased 180,090
shares from the Company on June 23, 1998. The final purchase price for these
shares was determined based on the average trading price for one month
following the Company's initial public offering in Germany. Based on this
average trading price, the investor paid an additional (Euro)4.0 million in
cash for these shares. The Company has recorded the legal settlement cost of
(Euro)1.9 million and the additional cash received of (Euro)4.0 million as an
increase in equity in exchange for the 180,090 shares issued.
Deferred Compensation
In connection with the grant of certain stock options to employees prior to
the initial public offering in July 1998, the Company recorded deferred
compensation of approximately (Euro)1.0 million representing the intrinsic
value of the options, i.e., the difference between the deemed value of the
common stock for accounting purposes and the option exercise price of such
options at the date of grant. This amount is presented as a reduction of
shareholders' equity and amortized ratably over the vesting period of the
applicable options. Approximately (Euro)162,000 and (Euro)308,000 was expensed
during the years ended December 31, 1998 and 1999, respectively, and the
balance will be expensed ratably over the remaining vesting periods.
Compensation expense is decreased in the period of forfeiture for any accrued
but unvested compensation arising from the early termination of an option
holder's services. No compensation expense related to any other periods
presented has been recorded.
F-15
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
1997 Equity Incentive Plan
The Company had originally reserved 2,000,000 shares of common stock for
issuance to employees, directors and consultants under its 1997 Equity
Incentive Plan (the 1997 Plan). The Board of Directors may grant incentive or
non-statutory stock options at prices not less than 100% or 85%, respectively,
of fair market value as determined by the Board of Directors, at the date of
grant. Options vest ratably over periods determined by the Board, generally
three years. The Board also has the authority to set exercise dates (no longer
than ten years from the date of grant), payment terms, and other provisions for
each grant. The Company generally had the right of first refusal for all common
stock issued under the 1997 Plan should the holder desire to sell or otherwise
transfer any of the shares. The Company's right of first refusal terminated
upon the effective date July 16, 1998, of the Company's initial public
offering.
1999 Equity Incentive Plan
Effective as of June 21, 1999, the Company adopted a new stock option plan
(the 1999 Plan) covering board members, executive officers and certain
employees. The options under the 1999 Plan vest ratably over a four year period
beginning six months from the date of grant; however, pursuant to the German
Stock Corporation Act, no options will be exercisable, even though a portion is
vested, prior to the second anniversary of the date of grant. The exercise
price of the options is equal to 120% of the market price of the shares on the
date of grant, where the market price is determined to be the average closing
price as quoted on the Neuer Markt for the 10 trading days prior to the date of
grant.
There are two pools of shares authorized under the 1999 Plan. There are
133,000 shares for grants of stock options to members of the management board
and general managers of subsidiaries and 1,500,000 shares for grants of stock
options to all other employees. During the year ended December 31, 1999, the
Company granted 158,000 options with a weighted average exercise price of
(Euro)128.41 per share. No shares under the 1999 Plan were exercised, expired
or cancelled in 1999.
Stock-Based Compensation
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. If compensation cost for the Plan had been determined
based on the minimum value at the grant dates for the awards calculated in
accordance with the method prescribed by SFAS No. 123, the impact on the
Company's net loss and net loss per share would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Net loss attributable to
common shareholders
As reported................. (Euro)(7,164) (Euro)(17,528) (Euro)(18,389)
Pro forma................... (7,337) (17,563) (21,204)
Basic and diluted earnings per
AG share
As reported................. (Euro) (1.19) (Euro) (1.44) (Euro) (0.97)
Pro forma................... (1.22) (1.45) (1.12)
Basic and diluted earnings per
ADS
As reported................. (Euro) (0.12) (Euro) (0.14) (Euro) (0.10)
Pro forma................... (0.13) (0.15) (0.11)
</TABLE>
F-16
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Option activity under the plans was as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Shares Exercise Shares Exercise
Outstanding Price Outstanding Price Outstanding Price
----------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- -- 1,299 (Euro)0.57 1,125 (Euro) 2.93
Granted................. 2,106 (Euro)0.65 792 4.21 447 78.30
Exercised............... (606) 0.65 (744) 1.15 (847) 2.15
Canceled................ (201) 1.12 (222) 1.01 (252) 5.54
----- ---------- ----- ---------- ----- -----------
Outstanding at end of
year................... 1,299 (Euro)0.57 1,125 (Euro)2.93 473 (Euro)73.90
===== ========== ===== ========== ===== ===========
</TABLE>
The following table summarizes information with respect to the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Number of Contractual Average Number Average
Range of Options Life Exercise Exercisable Exercise
Exercise Prices Outstanding (Years) Price at 12/31/99 Price
--------------- ----------- ----------- -------- ----------- --------
(000s) (Euro) (000s) (Euro)
<S> <C> <C> <C> <C> <C>
0.08 - 0.16 21 7.6 0.14 6 0.09
0.79 - 1.57 13 8.0 1.49 3 1.51
3.14 66 8.2 3.14 9 3.14
6.29 26 8.6 6.29 2 6.29
23.02 - 34.60 26 8.9 27.28 19 27.49
36.12 - 54.20 77 9.2 45.95 34 46.00
56.48 - 76.45 86 9.4 64.16 19 64.01
92.20 - 134.72 135 4.7 113.99 -- --
149.66 - 223.30 16 4.9 181.64 -- --
232.86 - 319.98 7 5.0 257.68 -- --
--- ---
473 7.5 73.90 92 36.53
=== ===
</TABLE>
The 1997 Plan allows for the issuance of options that are immediately
exercisable through execution of a restricted stock purchase agreement. Shares
purchased subject to a restricted stock purchase agreement generally vest over
three years. In the event of termination of employment, the Company may
repurchase unvested shares at a price equal to the original issuance price. As
of December 31, 1999, 357,802 shares of common stock issued and outstanding
were unvested and subject to repurchase by the Company at (Euro).08 to
(Euro)6.29 per share. All shares that were exercised early are held by a
trustee on behalf of the employee. In the event that an employee leaves the
Company with unvested shares, the unvested shares are sold in the open market,
and the proceeds of the sale are contributed to the Company.
The fair value of each option grant is estimated on the date of grant
utilizing risk-free interest rates on the date of grant (5.8%-6.5% in 1997,
4.2%-5.6% in 1998 and 4.6%-6.2% in 1999) with maturities equal to the expected
option term of 4.5 years. The dividend assumed is estimated at 0% in 1997, 1998
and 1999 and the volatility is assumed to be 0% through the date of the
Company's initial public offering in 1998 and 69% for all periods subsequent to
that date.
F-17
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Shares Reserved for Future Issuance
As of December 31, 1999, the Company had conditional capital of 4,771,397
shares. Conditional capital is equivalent to shares reserved for future
issuance, as follows:
<TABLE>
<S> <C>
Conversion of remaining INTERSHOP Communications Inc. shares... 2,784,900
Stock options.................................................. 1,986,497
---------
4,771,397
=========
</TABLE>
9. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which taxes become payable.
The income tax benefit differs from the amounts which would result by
applying the applicable German statutory rates to the loss before taxes, as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Provision (benefit) at German
statutory rate................ (Euro)(2,919) (Euro)(10,079) (Euro)(9,783)
Foreign losses benefited at a
lower tax rate................ 13 3,480 2,998
Change in valuation allowance.. 3,186 8,749 9,854
Tax credits.................... (4) (17) --
Nondeductible expense.......... 9 40 214
Deductible IPO costs........... -- (2,173) (79)
Change in statutory tax rate... -- -- (2,490)
Other.......................... (285) -- (714)
------------ ------------- ------------
Provision (benefit) for income
taxes......................... (Euro) -- (Euro) -- (Euro) --
============ ============= ============
</TABLE>
The components of the deferred tax asset were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards.................. (Euro)9,797 (Euro)18,973
Tax credit carryforwards.......................... 42 82
Accruals not currently deductible................. 506 1,287
Capitalized start-up costs........................ 17 16
Other............................................. 43 (99)
----------- ------------
10,405 20,259
Valuation allowance............................... (10,405) (20,259)
----------- ------------
Net deferred tax asset............................ (Euro) -- (Euro) --
=========== ============
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset as
a result of uncertainties regarding the realization of the asset including the
limited operating history of the Company and the lack of profitability to date.
F-18
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
For the year ended December 31, 1999, the Company had net operating loss
carryforwards for tax reporting purposes in various tax jurisdictions as
follows (in thousands):
<TABLE>
<S> <C>
U.S. Federal.................................................. (Euro)37,275
U.S. state.................................................... 19,938
German........................................................ 6,597
Other......................................................... 4,236
------------
Total....................................................... (Euro)68,046
============
</TABLE>
In addition, as of December 31, 1999, the Company had U.S. Federal and U.S.
state income tax credit carryforwards of approximately (Euro)70,000 and
(Euro)48,000, respectively. U.S. Federal and state net operating losses
carryforwards expire in various periods through 2019. The German net operating
loss carry forwards for tax purposes relate to corporate income tax and
municipal trade tax and carry forward indefinitely. The Tax Reform Act of 1986
and German tax law contains provisions which may limit the net operating loss
and tax credit carryforwards to be used in any given year upon the occurrence
of certain events, including a significant change in ownership interest.
10. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
and Enterprise and Related Information."
The Company is organized based upon the nature of the products and services
it offers. Under this organizational structure, the Company operates in two
fundamental business segments: product and service. The product segment
includes the development and sale of the Company's software products. The
service segment provides service and support for the Company's products. The
Company's products are primarily developed at its facilities in Jena, Germany,
and are sold through a direct sales force and independent distributors in
Europe, North America, South America, Australia and Asia.
The information in the following tables is derived directly from the
Company's internal financial reporting used by the Company's chief decision
makers for corporate management purposes. The Company evaluates its segments'
performance based on several factors, of which the primary financial measure is
gross margin. Unallocated costs include corporate and other costs not allocated
to business segments for management reporting purposes. The accounting policies
followed by the Company's business segments are the same as those described in
Note 2 to the consolidated financial statements. The Company does not allocate
assets by segment for management reporting purposes.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998 1999
----------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Revenues from unaffiliated
customers:
Product.......................... (Euro)2,947 (Euro)11,295 (Euro)29,534
Services......................... 2,088 6,577 16,732
----------- ------------ ------------
Total revenue.................. (Euro)5,035 (Euro)17,872 (Euro)46,266
=========== ============ ============
Gross margin:
Product.......................... (Euro)2,505 (Euro) 9,553 (Euro)24,748
Services......................... (157) 2,811 8,267
----------- ------------ ------------
Total gross margin............. (Euro)2,348 (Euro)12,364 (Euro)33,015
=========== ============ ============
</TABLE>
F-19
<PAGE>
INTERSHOP COMMUNICATIONS AG AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Revenues by geographic location are attributed to the country from which the
sale is made and are presented below (in thousands):
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------
1997 1998 1999
------ ------ ------
(Euro) (Euro) (Euro)
<S> <C> <C> <C>
Germany................................................. 3,895 10,232 17,190
United States........................................... 961 5,940 18,366
United Kingdom.......................................... -- 797 7,000
Other*.................................................. 179 903 3,710
----- ------ ------
Total................................................. 5,035 17,872 46,266
===== ====== ======
</TABLE>
- --------
* Revenues for other geographic locations are substantially derived from France
in 1997 and 1998 and France and Sweden in 1999.
Long-lived assets located by geographic location are as follows (in
thousands):
<TABLE>
<CAPTION>
As of December 31,
--------------------
1997 1998 1999
------ ------ ------
(Euro) (Euro) (Euro)
<S> <C> <C> <C>
Germany................................................. 1,256 1,404 1,644
United States........................................... 802 2,074 2,671
United Kingdom.......................................... -- 48 716
Other................................................... 33 141 579
----- ----- -----
Total................................................. 2,091 3,667 5,610
===== ===== =====
</TABLE>
F-20
<PAGE>
[INTERSHOP LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities being registered which are to be
paid by INTERSHOP, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 93,207
The Nasdaq Stock Market's National Market listing fee............ 5,000
National Association of Securities Dealers, Inc. filing fee...... 30,500
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 625,000
Accounting fees and expenses..................................... 350,000
Miscellaneous.................................................... 43,293
----------
Total........................................................ $1,300,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
The laws of Germany make no provisions for indemnification of officers and
directors. Our articles of association or by-laws do not provide for the
indemnification of any controlling person, director or officer. We carry an
insurance policy with AIG Europe for DM 5 million of coverage which covers
officers and directors. Other than the insurance policy with AIG, there are no
indemnification agreements with our officers and directors.
Item 15. Recent Sales of Unregistered Securities
All of INTERSHOP's securities that were sold by INTERSHOP within the past
three years which were not registered under the Securities Act are described
below:
On July 15, 1998 we commenced an initial public offering on the Neuer Markt
of the Frankfurt Stock Exchange and placed a total of 2,339,100 of our common
shares at a price of DM 100 per share. All shares sold in the United States
were private placements and therefore did not require registration under the
Securities Act pursuant to the exemption provided for in Section 4(2) of the
Securities Act. The underwriters were Bank J. Vontobel & Co AG, Commerzbank
Aktiengesellschaft, Hambrecht & Quist Euromarkets S.A. and Sal. Oppenheim jr. &
Cie. Kommanditgesellschaft auf Aktien.
Item 16. Exhibits and Financial Statement Schedules
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Summary Translation of Articles of Association (Satzung)
4.1** Form of Share Certificate for Ordinary Shares
4.2** Form of Deposit Agreement including Form of ADR Certificate
(incorporated by reference from the Registrant's Registration
Statement on Form F-6 (Registration No. 333-11642))
5.1** Opinion of Haarmann, Hemmelrath & Partner
8.1** Opinion of Shearman & Sterling relating to tax matters
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.1** 1997 Equity Incentive Plan
10.2** 1999 Stock Option Plan
10.3** Summary Translation of Intershop Communications Reorganization
Agreement (Post-Formation Acquisition and Capital Contribution
Agreement)
10.4** Intershop Communications Reorganization Agreement
10.5** Summary Translation of Trademark Agreement between Intershop Holding
AG, Intershop Communications, Inc. and Intershop Communications GmbH
10.6** Summary Translation of Loan Agreement between Wilfried Beeck and
Intershop Communications AG
10.7** Summary Translation of Loan Agreement between Stephan Schambach and
Intershop Communications AG
10.8* Software License, Services and Support Agreement between Persistence
Software and Intershop Communications AG(1)
10.9* Asset Purchase Agreement from Fountainhead Management, Aaron Kaufman
and Intershop Communications AG(1)
10.10* Cooperation Agreement with Deutsche Telekom AG and Intershop
Communications AG(1)
10.11* Summary Translation of Reseller Agreement with Sybase GmbH and
Intershop Communications AG(1)
10.12* Summary Translation of Reseller Agreement with Oracle Deutschland GmbH
and Intershop Communications AG(1)
10.13* Technology License and Distribution Agreement with Sun Microsystems
and Intershop Communications AG(1)
21.1** List of Subsidiaries
23.1* Consent of Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
23.2** Consent of Haarmann, Hemmelrath & Partner (included in exhibit 5.1)
23.3** Consent of Shearman & Sterling (included in exhibit 8.1)
23.4** Consent of International Data Corporation
</TABLE>
- --------
* Filed herewith
** Previously filed
(1) The Registrant has applied for confidential treatment for portions of this
agreement. Accordingly, portions thereof have been omitted and filed
separately.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to INTERSHOP's directors, officers and controlling persons
pursuant to the provisions described under "Item 14, Indemnification of
Directors and Officers" above, or otherwise, INTERSHOP has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by a
II-2
<PAGE>
director, officer or controlling person in connection with the securities being
registered, INTERSHOP will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
INTERSHOP hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by INTERSHOP pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has caused this Registration Statement
on Form F-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in San Francisco, California, on April 5, 2000.
INTERSHOP COMMUNICATIONS AKTIENGESELLSCHAFT
By: /s/ Stephan Schambach
_____________________________________________
Stephan Schambach
Chief Executive Officer
(Vorstandsvorsitzender)
By: /s/ Wilfried Beeck
_____________________________________________
Wilfried Beeck
Chief Financial Officer (Finanzvorstand)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Stephan Schambach and Wilfried Beeck, and each of them
severally, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, including any subsequent registration
statement filed pursuant to Rule 462(b), granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agents of either of them, or their or his substitues, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Stephan Schambach Chairman of the Management Board, April 5, 2000
----------------------------------- Chief Executive Officer and
Stephan Schambach Vorstandsversitzender (Principal
executive officer)
/s/ Wilfried Beeck Member of the Management Board April 5, 2000
----------------------------------- and Finanzvorstand (Principal
Wilfried Beeck financial officer and principal
accounting officer)
</TABLE>
II-4
<PAGE>
SIGNATURE AUTHORIZED REPRESENTATIVE OF THE REGISTRANT
Pursuant to the requirements of the Securities Act of 1933, the undersigned,
the duly authorized representative in the United States of the registrant, has
signed this Registration Statement on Form F-1, or amendment thereto, in his
capacity as an authorized officer of INTERSHOP Communications, Inc., in San
Francisco, California, on April 5, 2000.
INTERSHOP COMMUNICATIONS, INC
By: /s/ Keith C. Costello
_____________________________________________
Keith C. Costello
President
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Summary Translation of Articles of Association (Satzung)
4.1** Form of Share Certificate for Ordinary Shares
4.2** Form of Deposit Agreement including Form of ADR Certificate
(incorporated by reference from the Registrant's Registration
Statement on Form F-6 (Registration No. 333-11642))
5.1** Opinion of Haarmann, Hemmelrath & Partner
8.1** Opinion of Shearman & Sterling relating to tax matters
10.1** 1997 Equity Incentive Plan
10.2** 1999 Stock Option Plan
10.3** Summary Translation of Intershop Communications Reorganization
Agreement (Post-Formation Acquisition and Capital Contribution
Agreement)
10.4** Intershop Communications Reorganization Agreement
10.5** Summary Translation of Trademark Agreement between Intershop Holding
AG, Intershop Communications, Inc. and Intershop Communications GmbH
10.6** Summary Translation of Summary of Loan Agreement between Wilfried
Beeck and Intershop Communications AG
10.7** Summary Translation of Loan Agreement between Stephan Schambach and
Intershop Communications AG
10.8* Software License, Services and Support Agreement between Persistence
Software and Intershop Communications AG(1)
10.9* Asset Purchase Agreement from Fountainhead Management, Aaron Kaufman
and Intershop Communications AG(1)
10.10* Cooperation Agreement with Deutsche Telekom AG and Intershop
Communications AG(1)
10.11* Summary Translation of Reseller Agreement with Sybase GmbH and
Intershop Communications AG(1)
10.12* Summary Translation of Reseller Agreement with Oracle Deutschland GmbH
and Intershop Communications AG(1)
10.13* Technology License and Distribution Agreement with Sun Microsystems
and Intershop Communications AG(1)
21.1** List of Subsidiaries
23.1* Consent of Arthur Andersen Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
23.2** Consent of Haarmann, Hemmelrath & Partner (Included in exhibit 5.1)
23.3** Consent of Shearman & Sterling (included in exhibit 8.1)
23.4** Consent of International Data Corporation
</TABLE>
- --------
* Filed herewith
** Previously filed
(1) The Registrant has applied for confidential treatment for portions of this
agreement. Accordingly, portions thereof have been omitted and filed
separately.
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
Exhibit 10.8
[LOGO]
Persistence Software License, Services, and Support Agreement
This Customer Agreement and Attached License Addendum (the "Agreement") is
entered into by and between the parties set forth immediately below as of
December 31, 1998 (the "Effective Date") and shall remain in effect until
terminated as set forth in this Agreement:
Persistence Software, Inc., Intershop Communications GmbH
1720 South Amphlett Boulevard, Third Floor and its Affiliates
San Mateo, CA 94402 Leutragraben 2-4
("PSI") 07743 Jena Germany
("Intershop")
"Intershop" as defined in this agreement is a(n): VAR [X] End-User __
Application developed with Software: "Intershop 4" or "Intershop 2000" (code-
---------------------------------------
named "Beehive"/1)/
-------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Item Description Unit Price Net Price
---- ----------- ---------- ---------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. 12 x PowerTier Builder for EJB License $**** $****
(to be invoiced immediately)
2. 12 x PowerTier Link for Rational Rose License $**** $****
(to be invoiced immediately)
3. 2 x PowerTier Server Development Runtime License $**** $****
(to be invoiced immediately)
4. 12 months Maintenance Services on Items 1-3 @ ****% $****
****% of license fee (to be invoiced immediately)
5. Pre-payment for additional PowerTier Licenses, $****
Maintenance Services and/or Royalties (as defined
below) (to be invoiced immediately)
6. 33 days of professional services (see Note 1 on this $**** $****
Cover Sheet for further details)
(to be invoiced immediately)
7. Pre-payment for additional PowerTier Licenses, $****
Maintenance Services and/or Royalties
(to be invoiced upon completion of certain tasks as
specified in Note 2 on this Cover Sheet).
8. Royalties (as defined in Note 3 of this Cover Sheet) ****% ****%
(to be invoiced monthly)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________________
/1/ Beehive is a new architecture meets the needs of the both the marketplace
(i.e. the new digital intermediary), and future models of electronic commerce by
providing an object-oriented, extensible framework on which this application and
future applications can be built and deployed. Not only does the Beehive
architecture support new and evolving models of eCommerce, but it also supports
existing models such as the Mall and Single Supplier/Store. A standardized
framework provides consistent practices regarding customization, which enable
quicker implementation and customization for Intershop's customers and
Intershop's professional services group. Beehive and products that run on the
Beehive platform and applications that incorporate the PowerTier runtime are
expected to be Intershop's a primary revenue stream in 1999 and Intershop's
principle revenue stream in 2000
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
<TABLE>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9. Maintenance Services for Software sold subject to ****% ****%
Royalty payments
(to be invoiced at the same time as Royalties)
10. Option to reduce royalties by ****% $****
(see Note 4 of this Cover Sheet)
11. Charge for each copy of "PowerTier Developer Pack" $****
(defined as 1 x PowerTier Object Builder + 1 x
PowerTier Link for Rose) that is sold as part of an
Intershop product.
(see Note 5 of this Cover Sheet)
12. Use of GUT (see Note 6 of this Cover Sheet) ****
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The parties acknowledge that license, service, and, support, are subject to the
terms of the Agreement attached hereto and agree to the terms contained therein.
NOTE 1: Each visit to Intershop's offices in Jena will involve maximum 1 day
travelling time which shall be charged at the daily rate. All actual, pre-
approved and reasonable expenses incurred in carrying out any professional
services for Intershop will be re-charged to Intershop at cost. This will
include, but is not limited to, all travel costs, hotel costs, car hire, and $60
per day for incidental expenses such as meals, telephone etc.
NOTE 2: Attached to this Agreement as Exhibit C is a document describing the
enhancements to PowerTier that Persistence will develop and deliver either
before or as part of the release of PowerTier/EJB currently known as "Stingray".
Once these enhancements have been delivered, Intershop will be invoiced for Item
7 above.
NOTE 3: Royalties at the rate specified in Item 8 above shall be charged on all
Intershop net revenues (net of any sales tax) generated by products containing
the PowerTier Server Production Runtime, including net revenues received by
Intershop resulting products developed and distributed by third parties and
which contain the PowerTier Server Production Runtime. Royalties at the rate
specified in Item 8 above shall also be charged on all Intershop revenues (net
of any sales tax) generated by products containing the PowerTier Object Builder
subject to the limitations defined in Note 5 of this Cover Sheet. For purposes
of this Note 3, "net revenue" means gross revenues, less any applicable sales,
use, or withholding taxes, or any applicable ad valorem taxes.
NOTE 4: This option specified as Item 10 on the Cover Page of this Agreement can
be exercised by Intershop at any time. The ****% reduction will come into effect
3 months after Intershop pays to Persistence the sum specified in item 8
above $**** of this payment will be counted as a prepayment against future
PowerTier Licenses, Maintenance Services and/or Royalties.
NOTE 5: Intershop is entitled to resell only 2 copies of the PowerTier Developer
Pack to each End User subject to the Royalty amount specified in Item 8 above.
Any additional sales of PowerTier Developer Pack shall be subject to the charge
specified in Item 11 above. In any event, all PowerTier Developer Packs resold
to End Users shall require Intershop to contractually limit use of the PowerTier
Developer Pack to work related to the End-User's use of Beehive.
NOTE 6: Intershop agrees that any use of GUT will be entirely at their own risk
and will be unsupported. Intershop will be responsible for the maintenance of
any code generated by GUT, and support for any PowerTier generated code that
contains GUT-generated code will only be provided if the problem can be
reproduced with the GUT-generated code removed. Intershop also agrees that GUT
and any documentation relating to GUT is entirely confidential and therefore
specifically and especially covered by clauses 2.1.3, 3 and 10. Under no
circumstances may GUT be used by anyone other than Intershop employees, and
under no circumstances may GUT be used other than at Intershop premises. PSI
will give good faith consideration to allowing Intershop to sublicense GUT to
Intershop's customers.
<PAGE>
AGREED AND ACCEPTED:
Persistence Software, Inc. Intershop Communications Gmbh
By: /s/ Martin McCure By: /s/ Stephan Schambach
----------------------- ---------------------------
Name: Martin McCure Name: STEPHAN SCHAMBACH
--------------------- ------------------------
Title: CONTROLLER Title: ________________________
---------------------
Date: 12/31/98 Date: 12/31/98
--------------------- -----------------------
3
<PAGE>
Persistence Software License, Services, and Support Agreement
- --------------------------------------------------------------------------------
Persistence Software
License, Services, and Support Agreement
1. Definitions.
1.1. "Application" means any software application developed by Intershop
using the Software or including any Objects. Intershop represents and warrants
that the description of the Application set forth on the Cover Sheet is true and
correct.
1.2. "Cover Sheet" means the cover page to this Agreement.
1.3. "End User(s)" means (a) if Intershop is a VAR, end user customers of
VAR which acquire the Application for their business purposes and not for resale
or for any other purpose, or (b) Intershop itself, if Intershop is licensing the
Software for its own use as set forth on the Cover Sheet.
1.4. "Maintenance Services" means the provision of releases under Section
8, if purchased as set forth on the Cover Sheet.
1.5. "Objects" means objects generated by Intershop's use of the Software
in accordance with its documentation, however Objects shall not be deemed to
include any example or demonstration objects included with the Software.
1.6. "Object Code" means the machine executable version of a software
program.
1.7. "PowerTier" means PSI's proprietary Object Server middleware
application server which manages an object cache containing data from a database
and all documentation thereto, as delivered to Intershop hereunder.
1.8. "Professional Services" means consulting services provided on a per-
day basis as set forth on the Cover Sheet.
1.9. "Releases" means all revisions, updates, modifications or
enhancements PSI may make to the Software under the Agreement.
1.10. "Services" means the Professional Services, the Support Services,
and the Maintenance Services.
1.11. "Software" means the PSI software programs listed on the Cover
Sheet.
1.12. "Support Services" means the Support Services as set forth in
Section 8, if purchased as set forth on the Cover Sheet.
1.13. "VAR" means value-added applications integrators licensed under this
Agreement to develop and license end-user applications integrating the Objects.
1.14. "Work Product" means any application developed in a Rapid
Applications Development Lab and/or any code written by PSI personnel.
1
<PAGE>
1.15. "Affiliates" means any corporation, partnership, joint venture or
other entity or person controlled by Intershop Communications AG. For purposes
of this definition, the term "control" shall mean the direct or indirect
beneficial ownership of 50% or more of the voting interests (representing the
right to vote for the election of directors or other managing authority) in an
entity.
2. License.
2.1. VAR License. If Intershop is a VAR, the terms of this Section 2.1
shall apply.
2.1.1. Development and Deployment License. Subject to the terms and
conditions of this Agreement, PSI hereby grants VAR a worldwide non-exclusive,
nontransferable, limited, fee-bearing license to use the Software internally,
only in Object Code and only in the environment(s) set forth on the Cover Sheet,
solely for purposes of: (i) developing the Application(s) and creating Objects,
(ii) demonstrating the Application(s) to potential customers, (iii) providing
training in the use of the Application(s) to VAR's employees and End Users, and
(iv) providing support for the Application(s) and Objects to End Users.
2.1.2. Limited Distribution License. Subject to the terms and
conditions of this Agreement, and limited to the number of Licenses purchased as
detailed on the Cover Page of this Agreement, PSI grants VAR a non-exclusive,
royalty-bearing, non-transferable license to reproduce, translate into spoken
languages, distribute (by any means known or hereafter developed, including
electronic distribution), sublicense, market, promote and grant third parties
such rights regarding the PowerTier Software, but solely (i) in Object Code,
(ii) only when embedded in an Application or sold as part of or in connection
with VAR's standard products. Intershop will distribute the Applications and
documentation under terms not materially less protective of the rights of PSI
than those Intershop uses for its other products or in accordance with a license
agreement substantially similar to the end user license agreement terms attached
hereto as Exhibit A (which may be amended from time to time in PSI's sole
---------
discretion). In addition, PSI grants VAR a non-exclusive, non-royalty-bearing,
non-transferable license to prepare, use, reproduce, translate, sublicense,
market, promote and distribute derivative works (such derivative works will be
subject to PSI's prior approval) of the associated documentation to incorporate
in Intershop's documentation for the Applications. Intershop may grant to its
distribution channels (including original equipment manufacturers) the rights
set forth above., give them approval rights of any derivative works
2.1.3. Limited Right to Reproduce. Subject to the terms and
conditions of this Agreement, PSI hereby grants VAR a non-exclusive, non-
transferable, limited license to make up to five (5) copies of the Software, in
Object Code only, and only for archival or backup purposes. VAR shall not
modify, translate or create derivative works of all or any part of the Software.
VAR may not distribute such archived or backup copies and such must be kept on
VAR's premises.
2.1.4. Trademark License. Intershop and its channels of distribution
may but are not required to use PSI trademarks and logos set forth in Exhibit B
applicable to the Software in connection with the activities contemplated under
this
2
<PAGE>
Agreement. On PSI's request, Intershop will furnish PSI with a sample of such
trademark usage. Subject to the terms and conditions of this Agreement, PSI
hereby grants VAR a non-exclusive, non-transferable license to use the PSI
trademarks, trade names and logos set forth in Exhibit B (as amended from time
----------
to time by PSI in its sole discretion) (the "Marks"), solely in connection with
the marketing of copies of the Application(s). Except for the right to use Marks
as set forth in this Section, nothing contained in this Agreement shall be
construed to grant VAR any right, title or interest in or to any trademarks,
trade names or logos of PSI or any third party supplier to PSI. VAR shall not
challenge PSI's ownership of the Marks. VAR will maintain a high quality
standard in producing and marketing the Application(s).
2.1.5. Proprietary Rights Notice. VAR agrees to reproduce and include
any copyright or other proprietary rights notices of PSI in all copies, in whole
or in part, of the Software. VAR need not include a copyright notice on any
Application(s), except on the inside front cover of any associated
documentation. VAR will not in any case remove or alter any proprietary notices
on or in the Software; however in no event will VAR be requited to include, or
reproduce a copyright or other proprietary notice on the Application.
2.2. End User License. If Intershop is an End User, subject to the terms
and conditions of this agreement, PSI grants Intershop a personal, non-
exclusive, nontransferable, restricted right to use one or more copies of the
Software, as set forth on the Cover Sheet or the applicable license certificates
in the country in which Intershop acquired the software for Intershop's own
internal business purposes. Such use shall consist of loading the software into
the temporary memory (i.e., RAM) or installing the software on the permanent
memory (e.g., hard disk, CD-ROM, or other storage device) of the number of
computers set forth on the Cover Sheet. Intershop may not permit multiple users
to use the software over a network or by other means unless so specified on the
applicable license certificate. Intershop may either (i) make one (1) copy of
the software solely for purposes of having a backup copy, provided that
Intershop reproduce on that copy all copyright notices and any other
confidentiality or proprietary legends that are on the original copy of the
software, or (ii) transfer the software to a single hard disk provided Intershop
keep the original solely as a backup copy. Intershop may transfer its permitted
copies of the software to different computers only if Intershop removes the copy
in its entirety from the prior computer and does not exceed the total allowable
number of copies. Intershop understands that PSI may update the Software at any
time and, except as set forth herein, in doing so incurs no obligation to
furnish such updates to Intershop pursuant to this Agreement unless Intershop
pays PSI separately for such updates and Intershop agrees that such updates, if
any, shall be subject to this Agreement. All Software and any Releases will be
delivered hereunder F.O.B. PSI facilities and will be deemed accepted upon
delivery.
2.3. Reservation of Rights. PSI reserves all rights in the Software and in
any intellectual property rights PSI may create or acquire by performing
Services which are not expressly granted to Intershop in this Agreement.
3. No Reverse Engineering. Except as expressly permitted by applicable law,
Intershop shall not decompile, reverse engineer or otherwise attempt to derive,
obtain or modify the source code of the Software, or assist or encourage any
third party to do so. If Intershop is a VAR Intershop further agrees that End
Users shall not be provided with access
3
<PAGE>
to any source code for the Software, and shall not be permitted to modify the
functionality of the any Application in any way.
4. Ownership.
PSI retains title to the Software. PSI Shall have no ownership interest in
Intershop's products (including the Applications), other than the rights in the
Software described in the preceding sentence. Customer acknowledges that the
licenses granted pursuant to this Agreement do not provide Customer with any
right, title or ownership of the Software or any PSI intellectual property right
except the license rights expressly granted herein or as otherwise identified
below.
5. Fees and Payment.
5.1. Software Use License Payment. Intershop shall pay PSI the fee set
forth on the Cover Sheet in U.S. Dollars. Intershop agrees to pay the fee within
thirty (30) days of the Effective Date of this Agreement.
5.2. PowerTier and Object Deployment Fees and Payment. Intershop shall pay
PSI in full for all items specified on the Cover Sheet in U.S. Dollars within
thirty (30) days of any invoice being raised (for royalty payments, such
invoices will be raised quarterly) by PSI for said items. For each End User to
which an Application has been delivered the Intershop shall maintain (but need
only deliver to PSI only information reasonably needed by PSI to verify the
calculation of quarterly royalties payable) the following detailed information:
company name and location, technical support contact, phone/fax numbers,
hardware and database platforms used, number of copies of the Application(s)
licensed, and sales value of the Application(s) delivered to the end-user.
Payment by Intershop shall include support for each End User as set forth
herein.
5.3. Services Payments.
5.3.1. PSI will invoice Intershop upon the Effective Date for the
initial year of this Agreement and thereafter within ninety (90) days prior to
the end of each subsequent year of this Agreement for the applicable annual
Support Services fees and Maintenance Services fees for the subsequent year. All
payments shall be made by Intershop to PSI in U.S. Dollars within thirty (30)
days of issuance of invoice. If Intershop does not pay PSI such amounts prior to
the beginning of the next year of this Agreement, then PSI may elect to withhold
from Intershop such Support Services. The withholding of Support Services by PSI
does not release Intershop from any obligations arising from this Agreement nor
does it release Intershop from the obligation to pay for Support Services
contracted for in this Agreement nor does it constitute a breach of this
Agreement.
5.3.2. PSI shall invoice Intershop monthly for any Professional
Services All payments shall be made by Intershop to PSI in U.S. Dollars within
thirty (30) days of issuance of invoice for Professional Services.
5.4. Incidental Expenses. Intershop shall reimburse PSI for all pre-
approved and reasonable travel and living expenses incurred by PSI in
conjunction with performing the
4
<PAGE>
Professional Services if performance of such services include any visits to
Intershop's facilities. All payments shall be made by Intershop to PSI in U.S.
Dollars within thirty (30) days of issuance of invoice for Incidental Expenses.
5.5. Taxes and Interest. The fees set forth herein exclude all applicable
sales, use and other taxes, and Intershop will be responsible for payment of all
such taxes (except those based on PSI's income), fees, duties and charges, and
any related penalties and interest arising from the payment of the fees. Any
portion of the fees set forth above that is not paid when due will accrue
interest at a rate of one and one half percent (1.5%) per month or the maximum
rate permitted by applicable law, whichever is less, from the due date until
paid.
5.6. Records and Audit. Intershop shall maintain complete, clear, accurate
records of the number of units of Applications distributed, sold or otherwise
transferred or deployed, returns and credits therefor, and payments received.
Upon 10 days' prior notice, PSI shall have the right to have an inspection and
audit of all the relevant accounting and sales books and records of Intershop
conducted by an auditor reasonably acceptable to both parties. Any such audit
shall be upon reasonable written notice and shall be conducted during normal
business hours no more than twice per year. If any such audit should disclose
any underreporting or underpayment of amounts due, Intershop shall promptly pay
PSI such amounts, including applicable interest. If the underreporting exceeds
five percent (5%) of the total amounts due, Intershop shall bear the cost of
such audit.
6. Delivery. PSI shall deliver a License Certificate corresponding to the
number of concurrent users and type of Software specified on the Cover Sheet to
Intershop within fifteen (15) business days after execution of this Agreement.
The Software shall be deemed accepted by Intershop upon delivery to Intershop.
7. ESCROW
Concurrently with the execution of this Agreement, Intershop, PSI and an
escrow agent mutually acceptable to the parties shall enter into a software
escrow agreement upon terms and conditions mutually agreeable to the parties
which shall provide for the release of the source code of the Software to
Intershop for the purposes and upon the occurrence of the release conditions
described in Exhibit D hereto.
8. Maintenance Services.
8.1 Support of Intershop. PSI agrees to provide Intershop with the
technical support, error corrections, bug fixes, enhancements, ports to
additional platforms, upgrades and updates with respect to the Software and
Documentation as further described in Exhibit C.
8.2 End User Support. PSI shall provide back-end support to Intershop, as
further described in Exhibit C, but shall not be required to provide front-line
support to end users of the Applications ("End Users"). Intershop may, in its
sole discretion, determine the terms and conditions of such support and charge
End Users a fee in connection therewith.
8.3 Training of Intershop. PSI shall provide training to Intershop
5
<PAGE>
employees, independent contractors and consultants in accordance with the
provisions set forth in Exhibit C.
9. Professional Services. PSI will provide Professional Services to Intershop
as defined in Section 1.8.
9.1 Fees. Professional Services are provided on a daily fee basis as
detailed on the Cover Sheet of this agreement. Professional Services are
additive to, and not included in, fees paid for Support and Maintenance
Services. Payment for Professional Services by Intershop to PSI shall be made in
U.S. Dollars within thirty (30) days of issuance of invoice for Professional
Services.
9.2 Method of Performing Services. PSI will determine the method, details,
and means of performing the work to be carried out for Intershop. Intershop
shall have no right to and shall not, control the manner or determine the method
of accomplishing such work. Intershop may, however, require PSI's personnel to
observe at all times the security and safety policies of Intershop. In addition,
Intershop shall be entitled to exercise a broad general power of supervision and
control of the results of work performed by PSI personnel to ensure satisfactory
performance including the right to inspect, stop work, make suggestions or
recommendations as to the detail of the work.
9.3 Scheduling. PSI will attempt to accommodate work schedule requests of
the Intershop to the extent possible. Should any personnel of PSI be unable to
perform scheduled services because of illness, resignation, or other causes
beyond PSI's reasonable control, PSI will attempt to replace such personnel
immediately, but PSI shall not be liable for failure if it is unable to do so,
giving due regard to its other commitments and priorities.
9.4 Reporting. Intershop will advise PSI of the individuals to whom PSI's
personnel will report progress on day-to-day work. Intershop and PSI shall
develop appropriate administrative procedures for the performance of work at
Intershop's site. Intershop shall, at the Intershop's option, periodically
prepare an evaluation of the work performed by PSI personnel for submission to
PSI.
9.5 Expenses. Intershop shall be responsible for all travel and living
expenses incident to the performance of the services for the Intershop. These
expenses will be collected as incurred and invoiced to Intershop monthly.
9.6 Ownership. All copyrights, patents, trade secrets, or other
intellectual property rights associated with any ideas, concepts, techniques,
inventions, processes or works of authorship developed or created by PSI or its
personnel prior to commencement of work hereunder or during the course of
performing Customer's work and all Work Product shall belong exclusively to PSI.
PSI hereby grants to Customer an unrestricted, irrevocable, non-exclusive,
perpetual, worldwide license to use for its internal business purposes the Work
Product within the scope of the services provided hereunder. Intershop will own
all extensions, modifications, and derivative works to the Software (subject to
PSI's underlying Software) developed by Intershop. PSI will not license ideas,
concepts, techniques, inventions, processes or works of authorship developed or
created by PSI or its personnel primarily for or on behalf Intershop to
competitors of Intershop without Intershop's prior
6
<PAGE>
written consent.
10. Confidentiality.
10.1 Confidentiality. Each party shall maintain in confidence all
Confidential Information (as defined below) disclosed by the other party hereto.
The receiving party (the "Recipient") agrees that it shall not use, disclose or
grant use of such Confidential Information except as expressly authorized by the
disclosing party hereunder. Recipient hereby agrees to use at least the same
standard of care as it uses to protect its own confidential information of a
similar nature, but not less than a reasonable degree of care, to ensure that
its employees, agents or consultants do not disclose or make any unauthorized
use of such Confidential Information. Recipient shall promptly notify the
disclosing party (the "Discloser") upon discovery of any unauthorized use or
disclosure of Discloser's Confidential Information. "Confidential Information"
means any confidential or proprietary information, source code, plans or any
other information relating to any research project, work in process, future
development, scientific, engineering, manufacturing, marketing or business plan
or financial or personnel matter relating to Discloser, its present or future
products, sales, suppliers, customers, employees, investors or business,
identified by Discloser as Confidential Information, whether in oral, written,
graphic or electronic form. If disclosed in written, graphic or electronic form,
the information must be marked as confidential. If disclosed in oral form, such
Confidential Information must be reduced to writing and marked as Confidential
Information within thirty (30) days following disclosure. The parties agree that
the material financial terms of the Agreement will also be considered
Confidential Information of both parties.
10.2 Exceptions. The obligations of confidentiality contained in Section
10.1 will not apply to Object Code if Intershop is a VAR, nor will the
obligations apply the extent that it can be established by Recipient by
competent, documented proof that such Confidential Information' (a) was already
known to Recipient, other than under an obligation of confidentiality, at the
time of disclosure by the Discloser; (b) was generally available to the public
or otherwise part of the public domain at the time of its disclosure to
Recipient; (c) became generally available to the public or otherwise part of the
public domain after its disclosure and other than through any act or omission of
Recipient in breach of this Agreement; (d) was disclosed to Recipient, other
than under an obligation of confidentiality, by a third party who had no
obligation not to disclose such information to others; or (c) was developed
independently by Recipient without reference to or use of the Confidential
Information of Discloser.
10.3 Return of Confidential Information. Each party shall promptly return
all Confidential Information it receives to the other party (i) after any
termination or expiration of this Agreement, or (ii) upon written notice from
the Discloser requesting return of such Confidential Information.
11. Limited Warranties.
11.1 Title. PSI warrants that it has the right to grant the licenses as
set forth in this Agreement, and that such licenses to the best of PSI's
knowledge do not infringe on any third parties' proprietary or personal rights.
PSI further warrants at the time of execution of this Agreement, PSI is unaware
of any pending or
7
<PAGE>
threatened lawsuits concerning any aspect of the Software. If PSI becomes aware
of any pending or threatened lawsuit concerning any aspect of the Software, PSI
shall notify Intershop and provide Intershop with all information reasonably
related thereto.
11.2 Year 2000. PSI represents and warrants that the Software as delivered
is Year 2000 Compliant. PSI agrees to provide Intershop with a copy of the
compliance testing results promptly upon request by Intershop. For purposes of
this section, "Year 2000 Compliant" means that the Software is designed to be
used prior to, during, and after calendar year 1999 and 2000 and that it will
operate during each such time period without error relating to date data, and
specifically including any errors relating to, or the product of, date data
which represents or references different centuries or more than one century.
11.3 Services Warranty. PSI warrants that the Services, if any, will be
performed in a workmanlike and professional manner.
11.4 Non-Infringement. Without limiting Intershop's rights under Section
12, should the Software become, or in PSI's opinion be likely to become, the
subject of any infringement claim or suit, PSI shall, at its option:
A. procure for Intershop the right to continue distributing the
Software, as well as the right for Intershop and its customers to
continue use of the Software, while maintaining its functionality;
or,
B. modify the Software such that it no longer infringes the
proprietary rights of any third party, while maintaining the
functionality, look and feel of the Applications.
If none of the foregoing is commercially reasonable and the use of the
Software is enjoined, PSI may terminate the license and refund monies paid and
Customer shall return the Software.
11.5 Performance. PSI warrants that (a) the media on which the Software is
delivered will be free of defects in material and workmanship; (b) the Software
will function in accordance with the specifications for the Software in
applicable documentation; and (c) the Documentation shall be accurate in all
material respects. In the case of a breach of the warranties in this Section
11.5 (and in addition to any rights Intershop may have), PSI shall repair or
replace nonconforming, unsuitable or inaccurate Software or Documentation within
a reasonable period of time (not to exceed ten (10) days) of notice of such
condition.
11.6 DISCLAIMER. THE WARRANTIES PROVIDED BY PSI HEREIN ARE THE ONLY
WARRANTIES PROVIDED BY PSI WITH RESPECT TO THE TECHNOLOGY AND DOCUMENTATION.
SUCH WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES BY PSI, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, WITH RESPECT TO THE TECHNOLOGY.
8
<PAGE>
12. INDEMNITY.
12.1 Obligations of Each Party. Each party (the "Indemnifying Party")
will indemnify, defend and hold harmless the other party (the "Indemnified
Party") from all costs, damages, legal fees and settlement fees incurred by the
Indemnified Party arising from third party claims arising from the manufacture,
use, reproduction or distribution, as permitted under this Agreement, of any
content, technology or other information provided by Indemnifying Party to
Indemnified Party, including without limitation claims arising out of any
alleged infringement or misappropriation of any copyright, trademark, trade
secret, patent or other intellectual property right, or violation of any right
of privacy or publicity. For the indemnification obligations above to be
applicable, the Indemnified Party must (a) promptly notify the Indemnifying
Party in writing of any such claim and grant the Indemnifying Party sole control
of the defense and all related settlement negotiations, and (b) cooperate with
the Indemnifying Party, at the Indemnifying Party's expense, in defending or
settling such claim.
12.2 Exclusions from Indemnification. Notwithstanding the foregoing, PSI
shall have no indemnity obligation under this Section 12 for any Claim relating
to: (i) modifications of the Software made by any entity other than PSI, if such
Claim would not have arisen or such infringement or misappropriation would not
have occurred but for such modifications, (ii) combination or use of the
Software with other products (including without limitation an Application) if
such Claim would not have arisen or such infringement or misappropriation would
not have occurred but for such combination or use, (iii) use of an outdated
version of the Software after PSI has made available an updated version which
does not infringe, or (vi) any functionality of the Software made at Intershop's
request, if such Claim would not have arisen or such infringement or
misappropriation would not have occurred but for such functionality.
12.3 Entire Liability. The foregoing states PSI's entire liability, and
Intershop's sole and exclusive remedy with respect to any infringement or
misappropriation of any patent, copyrights, trademarks, trade secrets or other
intellectual property rights of any third party.
13. LIMITATION OF LIABILITY. EXCEPT FOR BREACHES OF SECTIONS 2, 3 AND 10, EACH
PARTY AGREES THAT THE OTHER PARTY WILL NOT BE LIABLE FOR ANY LOSS OF USE,
INTERRUPTION OF BUSINESS, LOST PROFITS OR ANY INDIRECT, SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES OF ANY KIND REGARDLESS OF THE FORM OF ACTION WHETHER IN
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT PRODUCT LIABILITY, OR OTHERWISE,
EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. IN
NO EVENT SHALL. EITHER PARTY'S LIABILITY TO THE OTHER PARTY EXCEED THE PAYMENTS
RECEIVED BY PSI FROM CUSTOMER WITHIN THE PRECEDING 12 MONTHS. THE PARTIES
ACKNOWLEDGE AND AGREE THAT THIS SECTION 13 IS AN ESSENTIAL ELEMENT OF THE
AGREEMENT AND THAT IN ITS ABSENCE, THE ECONOMIC TERMS OF THIS AGREEMENT WOULD BE
SUBSTANTIALLY DIFFERENT. THE LIMITATIONS IN THIS SECTION 13 SHALL NOT REDUCE THE
LIABILITY OF EITHER PARTY UNDER SECTION 12.
9
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14. Term and Termination.
14.1 Term. This Agreement shall be effective as of the Effective Date and
shall continue in effect for until the Termination Date, unless terminated
earlier in accordance with this Section 14.
14.2 Termination for Cause. Either party may terminate this Agreement if
the other party breaches a material term or condition of this Agreement and
fails to cure such breach following sixty (60) days written notice.
14.3 Survival of Certain Terms. Sections 1 "Definitions", 3 "No Reverse
Engineering", 4 "Ownership", 5.2 "PowerTier and Object Deployment Fees and
Payments", 5.6 "Records and Audit", 10 "Confidentiality", 11.5 "No Other
Warranties", 13 "Limitation of Liability", 14.3 "Survival of Certain Terms" and
16 "General" shall survive any termination of this Agreement. Within thirty (30)
days after termination of this Agreement, Intershop shall make no further use of
and shall return to PSI, at Intershop's expense, any property, materials or
other items (including without limitation all PSI Confidential Information) of
PSI. If Intershop is a VAR, Each sublicense of PowerTier permitted hereunder
which is in effect as of the termination or expiration of this Agreement may
remain in effect under the same terms or others approved by PSI thereafter;
provided, that the relevant End User (i) is not in breach of the terms of such
sublicense, and (ii) shall thereafter owe all obligations pertaining to its
licensee of PowerTier directly to PSI.
14.4 Other Remedies. Nothing contained herein shall limit any other
remedies that PSI may have for the default of Intershop under this Agreement nor
relieve Intershop of any of its obligations incurred prior to termination of
this Agreement.
15. Marketing. PSI and Intershop agree that PSI may issue a press release at a
time selected by Intershop but in no event later than the date of first customer
shipment of the Application. Intershop shall have prior approval of press
release, but agrees not to unreasonably withhold that approval. PSI and
Intershop agree that they will hold discussions regarding the possibility of
engaging in mutually beneficial marketing activities which may include customer
success story, joint participation in media events from time to time, promotion
of PowerTier as a core technology embedded in Intershop and various co-branding
and co-marketing activities..
16. General.
16.1 Independent Contractors. The relationship of PSI and Intershop
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct and control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint venturers, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow either party to
create or assume any obligation on behalf of the other party for any purpose
whatsoever.
16.2 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed exclusively under the laws of the State of California as between
California residents and without reference to conflict of laws principles. The
United Nations Convention on the International Sale of Goods shall not apply to
this Agreement or the subject matter hereof. Both parties agree to submit to the
exclusive jurisdiction and venue of and agree that
10
<PAGE>
any cause of action arising under this Agreement shall be brought in a court in
San Mateo County, California.
16.3 Notices. Any notice required or permitted to be given under this
Agreement shall be delivered (i) by hand, (ii) by registered or certified mail,
postage prepaid, return receipt requested, to the address of the other party set
forth on the cover page hereto, or to such other address as a party may
designate by written notice in accordance with this Section 16.3, (iii) by
overnight courier, or (iv) by fax with confirming letter mailed under the
conditions described in (ii). Notice so given shall be deemed effective when
received, or if not received by reason of fault of the addressee, when
delivered.
16.4 Nonassignability and Binding Effect. Intershop agrees that its rights
and obligations under this Agreement may not be transferred or assigned directly
or indirectly without the prior written consent of PSI. PSI may assign this
Agreement upon written notice to Intershop. Subject to the foregoing sentence,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns. Any assignments in violation of this
Section shall be null and void.
16.5 Export Control. Since this Software is subject to the export control
laws of the United States, Intershop may not export or re-export the Software
without the appropriate United States and foreign government licenses. Intershop
shall otherwise comply with all applicable export control laws and shall defend,
indemnify and hold PSI and all PSI suppliers harmless from any claims arising
out of Intershop's violation of such export control laws. Intershop further
agrees to comply with the United States Foreign Corrupt Practices Act, as
amended.
16.6 Restricted Rights Notices. The Software is a "commercial item," as
such term is defined at 48 C.F.R. (S) 2.101 (OCT 1995), consisting of
"commercial software" and, along with the documentation thereto, "commercial
computer software documentation" as such terms are used in 48 C.F.R. (S) 12.212
(SEPT 1995). Consistent with 48 C.F.R. (S) 12.212 and 48 C.F.R. (S)(S) 227.7202-
1 through 227.7202-4 (JUNE 1995), Intershop will provide PowerTier to U.S.
Government End Users (i) only as a commercial item and (ii) with only those
rights as are granted to all other End Users pursuant to the terms and
conditions herein. In the event that Intershop receives a request from any
agency of the U.S. Government to provide the Software and documentation thereto
with rights beyond those set forth above, Intershop will notify PSI of the scope
of rights requested and the agency making such request, and PSI may, in its sole
discretion, accept or reject such request.
16.7 Severability. If any provision of this Agreement is found to be
invalid, unlawful or unenforceable by a court of competent jurisdiction, such
invalid term shall be severed from the remaining portion of this Agreement which
will continue to be valid and enforceable to the fullest extent permitted by
law.
16.8 Force Majeure. Except for payment obligations, nonperformance of
either party shall be excused to the extent that performance is rendered
impossible by strike, fire, flood, governmental acts or orders or restrictions,
failure of suppliers, or any other reason where failure to perform is beyond the
reasonable control of the non-performing party.
16.9 Entire Agreement. This Agreement including the Exhibits attached, the
Cover Page and, if applicable, the Addenda set forth the entire agreement and
understanding
11
<PAGE>
of the parties relating to the subject matter of this Agreement and merge all
prior discussions between them. No modification of or amendment to this
Agreement, nor any waiver of any rights under this Agreement, shall be effective
unless in writing signed by the party to be charged. Additional or inconsistent
terms of any purchase order are expressly excluded and are hereby rejected.
12
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Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
EXHIBIT A
END USER MINIMUM TERMS AND CONDITIONS
END USER LICENSE AGREEMENT
This End User License Agreement ("Agreement") is made as of the date the sealed
media package containing this Agreement is opened (the "Effective Date") by and
between Persistence Software, Inc., with principal offices at 1720 S. Amphlett
Blvd., Suite 300, San Mateo, California, 94402 ("PSI") and the corporation or
individual opening the sealed media package ("Licensee"). BY OPENING THE SEALED
MEDIA PACKAGE, LICENSEE IS AGREEING TO BE BOUND BY THE TERMS OF THIS AGREEMENT
OR OTHER AGREEMENT SPECIFICALLY SIGNED BY LICENSEE AND AGREED TO IN WRITING BY
PSI. IF LICENSEE DOES NOT AGREE TO THE TERMS OF THIS AGREEMENT, LICENSEE SHOULD
RETURN THE UNOPENED MEDIA PACKAGE AND THE ACCOMPANYING ITEMS FOR A FULL REFUND.
1. Grant of License.
- -------------------
The Persistence PowerTier software contained in the sealed media package
comprises the PowerTier Developer Toolkit (incorporating the PowerTier Builder,
DOCK and Link products), PowerTier server and ProActive Agents (collectively the
"Software"). The PowerTier Developer Toolkit is licensed for the number Of
developers specified on the invoice and/or license certificate issued by PSI.
Any individual who interfaces with the PowerTier Development Server, who uses
the PowerTier Builder, DOCK or Link products, who generates, modifies the files,
or debugs the objects generated by the PowerTier Builder is considered a
developer for licensing purposes. The PowerTier Server and ProActive Agent
software contained in the sealed media package is licensed for the development
and production application server(s) specified on the invoice and/or license
certificate issued by PSI. Each application server connected to the PowerTier
Server is considered a PowerTier Server for licensing purposes. For applications
which access multiple application servers, licenses must be purchased for all
such servers. Each concurrent user of an application deployed using the
PowerTier server(s) also needs a PowerTier user license. The total number of
concurrent users licensed to use the PowerTier server(s) is specified on the
invoice and/or license certificate issued by PSI. Licensee may make one (1)
object code copy of the Software solely for back-up purposes. Licensee may not
modify or translate the Software, merge any portion of the Software with any
other program, transfer, lease, sublicense, rent or resell the Software, or
remove any proprietary notices from the Software. Licensee shall not export or
re-export, directly or indirectly, the Software and Documentation, or any part
thereof, in a manner prohibited by the U.S. Export Administration Act or the
regulations thereunder.
2. Limited Warranty and Disclaimer.
- ----------------------------------
PSI warrants that, for a period of thirty (30) days from the date of delivery,
the Software will substantially achieve the functionality described in the
associated documentation provided by PSI (the "Documentation"). PSI also
warrants that the media on which the Software is furnished will be free from
defects in materials and workmanship for a period of thirty (30) days from the
date of delivery to Licensee. PSI's entire liability and Licensee's exclusive
remedy under this warranty will be - at PSI's option - to replace the media, to
correct the Software, or to refund the purchase price and terminate this
Agreement. PSI does not warrant that the Software will meet Licensee's
requirements or that the operation of the Software will be uninterrupted or
error free. EXCEPT FOR THE LIMITED WARRANTIES EXPRESSLY SET FORTH IN THIS
SECTION 2, PSI MAKES AND LICENSEE RECEIVES NO WARRANTIES OR CONDITIONS, EXPRESS
OR IMPLIED. PSI SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, NONINFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE.
1
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EXHIBIT A
END USER MINIMUM TERMS AND CONDITIONS
Page 2
3. Limitation of Liability.
- --------------------------
IN NO EVENT WILL PSI BE HELD LIABLE FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL
DAMAGES, INCLUDING DAMAGES FOR LOSS OF DATA, LOST OPPORTUNITY OR LOST PROFITS.
THIS LIMITATION WILL APPLY EVEN IF PSI HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGE. LICENSEE ACKNOWLEDGES THAT THE LICENSE FEE REFLECTS THIS ALLOCATION
OF RISK.
4. Ownership and Rights.
- -----------------------
This license is not a sale. Title and copyrights to the Software and
Documentation remain with PSI, and PSI reserves all rights not expressly granted
to Licensee herein. This license may not be assigned or transferred without the
prior written consent of PSI. Licensee acknowledges that the Software source
code remains a confidential trade secret of PSI and therefore agrees not to
attempt to decipher, reverse engineer or decompile the Software, or otherwise
attempt to gain access to the source code for the Software. Licensee also agrees
not to develop passwords or codes to enable use by unauthorized users.
5. Term and Termination.
- -----------------------
This Agreement will begin on the Effective Date and will remain in effect until
terminated as set forth in this Section 5. This Agreement will automatically
terminate in the event that Licensee breaches any of its terms. In particular,
unauthorized copying, or use by more than the authorized number of users of the
Software, will result in automatic termination of this Agreement. Licensee may
also terminate the license at any time by providing written notice and
certification that all copies of the Software and Documentation have been
destroyed. On any termination, all use of the Software and Documentation must
stop.
6. U.S. Government Restricted Rights.
- ------------------------------------
The Software and Documentation are considered to be "commercial computer
software" and "commercial computer software documentation", respectively,
pursuant to DFAR Section 227.7202 and FAR Section 12.212, as applicable. Use,
duplication or disclosure of the Software and/or Documentation by the U.S.
Government is subject to the restrictions set forth in DFAR Section 227.7202 for
military agencies, and FAR Section 12.212 for civilian agencies. PSI reserves
all rights not expressly granted herein. The contractor/manufacturer is
Persistence Software, Inc., 1720 S. Amphlett Blvd., Suite 300, San Mateo,
California 94402.
7. Governing Law.
- ----------------
This agreement will be governed by the laws of the State of California, without
reference to conflict of laws principles.
8. General.
- -----------
This Agreement constitutes the entire agreement between Licensee and PSI and
supersedes any prior agreement concerning the Software and Documentation. PSI is
not bound by any provision of any purchase order, receipt, acceptance,
confirmation, correspondence, or otherwise, unless PSI specifically agrees to
the provision in writing.
2
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EXHIBIT B
PSI TRADEMARKS, TRADE NAMES AND LOGOS
Persistence Software, Inc.
U.S. Federal Taxpayer I.D. 94-3138935
Incorporated in California May 31, 1991 as Fulcrum Innovations
Name change to Persistence Software, Inc. 1992
Tradenames:
-----------
Persistence Software, Inc.
Persistence Software, Ltd.
Registered Trademarks, Service Marks, & Copyrights:
---------------------------------------------------
Persistence
Persistence Software, Inc.
Trans App
Live Object Cache
Persistence Object Builder
Persistence Object Server
Pro Active Agents
PowerTier
Power Tier
Powertier Server
Acceleratier
Appcelerator
Logos
-----
A) "Power Your Performance"
B) "Powered b[LOGO]werTier"
As above, but with [LOGO]rsistence Powertier" wording
rather [LOGO]ur Performance"
C) "Persistence"
[LOGO]
REQUIRED USAGE: Further to clause 2.1.4 of the Agreement, VAR is required to
display the "Powered by Persistence PowerTier" Logo on all packaging for the
Application(s) and as part of the start-up routine when the Application(s) are
executed, such logo to be no less than 3cm diameter wherever used.
3
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EXHIBIT C
Maintenance and Technical Support
1. SUPPORT
1.1 PSI Back-End Support. During the term of this Agreement, and for a
period of one (1) year thereafter PSI shall provide to Intershop back-end
support services, consistent with the support obligations described on Exhibit
C-1 hereto (which Exhibit may be supplemented or replaced, from time to time, by
mutual agreement), with respect to the Applications including, without
limitation, identification of defective Software source and object code and
providing corrections, workarounds and/or patches to correct defects or errors
in such source or object code.
2.2 Technical Support of Intershop. During the term of this Agreement, and
for a period of one (1) year thereafter, in addition to the back-end support
services described above, PSI shall provide to Intershop the following technical
support services:
A. PSI shall appoint a technical contact to whom Intershop may address
all technical questions relating to PSI technologies. Upon execution of this
Agreement, the parties shall determine a mutually agreeable procedure by which
Intershop shall direct its technical questions to the appropriate PSI technical
contact.
B. PSI shall promptly answer all technical questions asked by
Intershop relative to the Software.
2.3 Training of Intershop. [To be determined.]
2.4 Upgrades, Updates, Ports, Error Corrections and Enhancements. PSI will
include Intershop in its alpha and beta programs for any upgrades, updates or
ports to additional platforms to the Software released during the term of this
Agreement, and will provide Intershop with the production version of such
upgrades, updates or ports simultaneously with its earliest release of such
upgrades, updates or ports to other customers. PSI shall also provide Intershop
during the term hereof with any error corrections, bug fixes and enhancements to
the Software simultaneously with its earliest release of such error corrections,
bug fixes or enhancements to other customers. Intershop may, but is not required
to, incorporate any such upgrade, update, port, error correction, bug fix or
enhancement in a Application or Applications.
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Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
Exhibit C - Continued [LOGO]
PowerTier/EJB Product Commitments for Intershop
- -----------------------------------------------
Persistence undertakes to enhance its PowerTier/EJB product for Intershop as
detailed below.
Where it is stated that an enhancement will be "in the Orca release" this means
that the enhancement will be delivered as part of the PowerTier/EJB version
which is code-named "Orca", and which is scheduled to be available as a beta
version on December 4/th /1998.
Where it is stated that an enhancement will be "in the Stingray release" this
means that the enhancement will be delivered as part of the PowerTier/EJB
version which is code-named "Stingray", and which is scheduled to be available
as a beta version at the end of January 1999, with additional beta releases at
the end of February and the end of March 1999.
The enhancements are classified under 2 headings:-
. Acceptance Criteria": these are the features that must be in the Stingray
release in order for PowerTier/EJB to be accepted by Intershop, which in turn
will enable Persistence to invoice Intershop for the second agreed pre-
payment.
. "Required"' these are enhancements that Persistence must provide to
Intershop, although it is acceptable for them to be made available after the
Stingray release.
ACCEPTANCE CRITERIA
1. Unicode Support
A mechanism will be put into PowerTier/EJB that automatically translates
Unicode in the Java application layer into UTF8-encoded data for storing in
the database. This mechanism will be completely transparent to the
developer.
When: by end of February 1999.
2. Cache Clearing
The problem whereby EJB Beans are not cleared from the PowerTier/EJB Server
will be fixed by the end Of February 1999.
When: by end of February 1999.
3. Optimistic Failure Handling
A mechanism will be provided whereby PowerTier/EJB can enable an
application to automatically recover optimistic lock failures so that the
object(s),that caused an optimistic lock failure can be automatically
refreshed from the database.
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Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
When: By the end of February 1999.
4. Solving Java Server Toolkit Integration Problem
This has already been achieved.
When: closed.
5. Controlling the Visibility of Beans over the Network
Currently all EJB Beans register with RMI, which means they are all
'visible' to any user on the network. This is an unacceptable security
exposure. Persistence will enhance PowerTier/EJB to: a) replace RMI
registration with JNDI registration; and b) allow you to specify in the EJB
Deployment Descriptor whether or not an EJB Bean is to register with JNI.
Consequently, you will be able to completely control which beans are
'visible' over the network and which are 'hidden'.
When: In the Stingray release.
6. Reflection-Based Generation for Session Beans
Reflection-based-generation will enable Java Classes that you have already
written to be automatically transformed into EJB Session Beans.
When: In the Orca release.
7. Reflection-Based Generation for Entity Beans
Reflection-based-generation will enable custom methods that you have
written to be automatically incorporated into EJB Entity Beans along with
the methods generated by the PowerTier/EJB toolset.
When: In the Orca release.
8. EJB Lifecycle Hook Methods
These will be provided in the Orca release.
When: In the Orca release.
9. Support for Java Packages
Packages will be supported in the PowerTier Server as part of the Orca
release.
When: In the Orca release
13
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Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
10. "Lazy-Fetch"
PowerTier/EJB will be enhanced to provide a "Lazy Fetch" mechanism, which
provides is a cursor-like access for the results of find XXX()-methods.
When: In the Stingray release
11. Additional 'Find' Mechanism
A "multi-class fetch" mechanism will be provided that enables queries to
include 'joins'.
When: In the 'Stingray' release.
12. Oracle 8 Client Library Support
This will be provided in the Orca release.
When: In the Orca release.
REQUIRED
13. Cache Synchronisation
PowerTier will be enhanced to provide a mechanism that, in conjunction
with a communications protocol, enables the same EJB Entity Beans
contained in separate PowerTier Servers to be kept synchronised.
When: In the Stingray release.
14. 2-phase commit across multiple databases from a single application server
PowerTier/EJB will be enhanced to enable the co-ordination of 2-phase
commits across multiple database from a single PowerTier/EJB application
server.
When: In the Stingray release.
15. Native Unicode Support
In PowerTier native Unicode will be included as UCS2 in the
Java/application Layer. This is a long term requirement.
When: In a later release after Stingray.
14
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Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
EXHIBIT C-1
Support Obligations
Persistence Technical Support Policies
(Europe)
Overview
Persistence Technical Support enables you to make the most out of your software
investment by providing timely, courteous and knowledgeable support. We have
designed a Technical Support Centre to co-ordinate much of your day-to-day
interaction with Persistence Software.
These policies and procedures are the basis of our customer support commitment.
They describe in detail our support services and the procedures for you to
follow when using Technical Support. By defining clear guidelines, we aim to
simplify communications, with the goal of resolving your product questions and
problems as quickly as possible. This document also describes our policies for
the duration of support for old releases and for building patches to supported
releases.
Persistence Technical Support Centre
European customer technical support calls are handled by a local support centre
based in London. This support centre liases directly with European customers and
the Central Customer Support Centre based at our headquarters in North America.
Contacting Technical Support
You must have a valid maintenance contract in effect to use the Technical
Support Centre. Please include your maintenance contract number when you contact
the Technical Support Centre and indicate that you are based in Europe. You may
contact our Technical Support Centre by phone, email or completing the form in
the Tech Support area of the web site, using the following contact information:
Telephone: +44 171 588 4344
Email: [email protected]
------------------------
Web Site: www.persistence.com
-------------------
Tracking System
All Cases and errors are tracked through an automated problem resolution system.
This is the central repository for all information about your technical contacts
with us.
Our on-line system allows us to:
[_] Track all of our interactions with you
[_] Track all of our efforts on your behalf as we resolve your issues
[_] Keep detailed information on the problems you report and the questions you
ask
[_] Search for problem resolutions that have been documented in our Frequently
Asked Questions (FAQ) database.
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Persistence Software License, Services, and Support Agreement Confidential
- --------------------------------------------------------------------------------
[_] Maintain a customer profile on your primary and alternate technical
contacts
[_] Communicate case status and escalate the most important cases to senior
Persistence engineers.
Other Sources of Information
The Technical Support Centre is also a valuable source of information. The
Support Centre will provide information on Persistence products including:
[_] Frequently asked questions
[_] Knowledge Base
[_] Online User/Reference Manual
[_] Known bugs
[_] Release notes
Support Centre Procedures
Persistence Technical Support handles your requests using a prioritisation
process for resolving the most critical problems quickly. A Technical Support
Engineer opens your case, verifies your support contract, and records the
preliminary information. The Engineer will then give you a Case ID that you can
use for your future reference. All information related to the case is tracked
using this Case ID. Through experience or reference material the Engineer may
resolve your case during the initial contact. If this is not possible, the
Engineer may ask you to send further information, and may involve other
engineers to consult on the case.
3.1 Customer Contacts
To maintain consistent communications with you, we allow one primary and two
alternate technical contacts per development project. You assign these
individuals and are the only ones authorised to contact the Persistence Support
Centre. To change your contacts, please ask technical support for Contact Change
Request Form (CCRF). If an individual who is not on the contact list calls, we
will ask that they first call one of the assigned contacts, who will in turn
contact us.
In the case of an evaluation, we allow one client contact per evaluation. This
is the person named in the Evaluation Request Form (ERF).
3.2 Required Information
To speed handling of technical support issues, it is more efficient if you
prepare some information beforehand. The checklist below presents information
that is required before any problem resolution can begin.
[_] Company name and contact information
[_] Persistence Product
[_] Persistence Product version number
[_] Hardware platform and operating system
[_] Database vendor and version number
[_] Compiler vendor and version number
[_] ORB vendor and version number (if appropriate)
[_] Statement of the problem or question. This may also include code-fragments
6
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Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
3.3 Opening a Call
All customer queries are initially recorded in our tracking system as a Call. A
Call does not have a priority associated with it. Technical Support Centre's
objective is to close all open calls as soon as possible. A call will be closed
after answering the customer's questions/queries or by escalating Calls to
Problems or Enhancement requests (see section 3.4 Opening a Problem).
3.4 Opening a Problem
A Call will be escalated to Problem status after the Technical Support Centre
has verified the problem with a supported Persistence product. The Technical
Support Centre must have your minimal test case (see section 3.5 Minimal Test
Case Information) to do this. Once a Problem is opened, the Technical Support
Centre will assign a priority based on the prioritisation criteria documented in
section 3.6 Case Priority Levels.
3.5 Minimal Test Case Information
In order for work to begin on your problem, Persistence must be able to
reproduce the condition in our own environment. In some situations, it may be
possible to reproduce your problem based on your description alone. In other
cases, we will require a minimal test case from you before we can begin work.
The minimal test case represents the minimum application required to reproduce
the problem:
- ---------------
Object Model Your persist file with a maximum of 5 classes
- ---------------
- ---------------
Test case code main.cpp program with no more than 50 lines which reproduces
- --------------- your problem
- ---------------
Makefile A simple Makefile to build your test case
- ---------------
- ---------------
Modified If your problem involves methods added to Persistence
Generated Code generated code, include the relevant modified generated files
- ---------------
- ---------------
Client If your problem involves a three-tier architecture, be sure
- --------------- to include simplified client files
Figure 1 - Minimal test case
Until we receive the necessary information to duplicate the reported problem in
our Technical Support Centre, work cannot begin on problem resolution. In
addition, cases which contain more than five classes or which involve
significant amounts of code not related to the problem may be placed at a lower
priority for resolution.
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Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
Once a minimal test case has been received by the Technical Support Centre and
reproduced by the Technical Support Engineer, the Case ID will be assigned a
priority (i.e. P1, P2, P3, and P4), which will determine when resources are
assigned to fix the problem.
3.6 Case Priority Levels
Persistence prioritises your case based on its severity. Cases with severity
levels of P1, P2, or P3 are automatically escalated to more senior engineering
resources if they are not resolved within the specified time period (See Table 1
- - Problem resolution goals). In order for cases to be prioritised, they must be
submitted along with a minimal test case.
The following diagram illustrates the decision tree for determining case
priorities:
--Yes-- P1 Priority
Stop Work
--No-- on production --Yes-- P2 Priority
system?
- -----------------
Customer Stops work
problem with -- Work-around --No-- on development
minimal test case available? system?
- -----------------
--Yes-- P4 Priority --No-- P3 Priority
Figure 2 - Priority levels
3.6.1 Case Priority P1
- ----- ----------------
When you have an emergency in a production system that stops work, the Technical
Support Centre prioritises your case as P1. 'Stops work' means that production
work has halted and cannot continue. This priority allows us to immediately
direct your case to the Engineer with the correct expertise. When the
appropriate Engineer is not immediately available, our goal is to have contacted
you to begin problem resolution within one hour after we have received a minimal
test case.
P1 cases without resolution or work-around within one day of receiving a test
case are immediately escalated to a Senior Engineer and management.
3.6.2 Case Priority P2
- ----- ----------------
When you have a condition in a development system that stops work, the Technical
Support Centre prioritises your case as P2. 'Stops work' means that further
development work has halted and cannot continue. This priority allows us to
immediately direct your case to the Engineer with the correct expertise. When
the appropriate Engineer is not immediately available, our goal is to have
contacted you to begin problem resolution within two hours after we have
received a minimal test case.
8
<PAGE>
Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
P2 cases without resolution or work-around within two days of receiving a test
case are escalated to a Senior Engineer and management.
Note: During P1 and P2 problem resolution there will be ongoing communication
providing status and information exchange to facilitate resolution of the
problem.
3.6.3 Case Priority P3
- ----------------------
When you have a condition in a development or production system that does not
prohibit progress, for which there is no work-around, the Technical Support
Centre, prioritises your case as P3. A 'work-around' is a known solution to
resolve the condition. This priority--allows us to devote resources to
identifying a work-around. Our goal is to have contacted you to begin problem
resolution within four hours after we have received a minimal test case.
P3 cases without resolution or work-around within 1 week of receiving a test
case are escalated to a Senior Engineer and management.
3.6.4 Case Priority P4
- ----------------------
When you encounter a known condition in a development or production system for
which there is a robust work-around, the Technical Support Centre prioritises
your case as P4. Our goal is to have contacted you regarding this issue within
one day. This condition will be addressed in a scheduled release of Persistence.
The following table summarises the response goals of the Technical Support
Centre. Note that in all cases, a minimal test case is required.
- -------------------------------------------------------------------------------
Case priority Initial Respond with Work-around or
contact within commitment within
- -------------------------------------------------------------------------------
P1 - stops production 1 hour 2 working days
P2 - stops development 2 hours 3 working days
P3 - no work-around 4 hours 1 week
P4 - work-around exists 1 day N/A
Table 1 - Problem resolution goals
3.7 Patches to Resolve Problems
Once the Technical Support Centre has verified a problem your Case ID will be
given a priority. When requested, Persistence will endeavour to provide patches
to P1, P2, and P3 priority problems on supported versions of Persistence
products (see section 0, 'Duration of Support for Releases'). In some cases,
patches may not be possible and you will be required to upgrade to a more recent
version of the product.
For P1 and P2 problems Persistence will create, build, and test a patch as
quickly as possible, usually within 3 days of problem verification. P3 problems
will be resolved in a subsequent product release. P4 problems may be resolved in
conjunction with other product enhancements.
The table below summarises the goals for the delivering patches. The time
periods begin when the Technical Support Centre has verified the problem:
- --------------------------------------------------------------------
Case priority Goal for delivering patch
- --------------------------------------------------------------------
9
<PAGE>
Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
P1 - stops production within 3 working days
P2 - stops development within 4 working days
P3 - no work-around in subsequent release
P4 - work-around exists as part of other enhancement
Table 2 - Patch delivery goals
3.8 Escalation to a Manager
Whenever the Persistence Technical Support Centre is not meeting your needs or
expectations, you may escalate the case or any other issue to the Technical
Support Centre Manager. You may also contact the Technical Support Centre
Manager if the case becomes too complex or you become concerned that our
Engineers are not able to resolve the case in a suitable manner.
3.9 Requesting an Enhancement
Each enhancement request will be assigned a Case ID. This will allow us to track
your request and to inform you when the enhancement is available.
Duration of Support for Releases
The Persistence Technical Support Centre will provide responses (as described
above) for supported releases. The duration of support will vary depending on
the type of release. Persistence defines three types of releases:
General Availability (GA)
A GA release will be sent to all customers who have current support contracts.
A GA release will be supported for the longer of:
[_] 18 months
[_] One year after the next GA release.
Beta
Beta releases will be sent to customers who have been selected to participate in
the beta program.
Beta releases will not be supported beyond the shipment of the next GA, or Beta
release. Therefore, Persistence recommends that Beta releases be not used for
shipment of production systems.
Alpha
Alpha releases are sent in rare situations to satisfy urgent customer needs.
Alpha releases will not be supported beyond the shipment of the next GA, Beta,
or Alpha release. Therefore, Persistence recommends that Alpha releases be not
used for shipment of production systems.
Support for New Versions of Operating Systems, Databases, Compilers, ORBs, and
Class Libraries
Persistence intends to provide one or two GA releases per year. Persistence
attempts to support any configuration that is commercially available (i.e. not
in Beta) 60 days prior to the scheduled GA
10
<PAGE>
Persistence Software License, Services, and Support Agreement CONFIDENTIAL
- --------------------------------------------------------------------------------
release of Persistence Products. Persistence will support the important new
features of the new operating system, database, compiler, ORB, and/or class
library as they may apply to various Persistence products.
Support for Old Versions of Operating Systems, Databases, Compilers, ORBs, and
Class Libraries
Persistence products interact with and depend on operating systems, databases,
compilers, ORBs, and/or class libraries. As new versions of the products are
available, Persistence will discontinue support for old version of these
products. This section describes the policy for terminating our support of a
particular release of an operating system, database, compiler, ORB and/or class
library.
Operating Systems
New releases of Persistence products will continue to support an old version of
an operating system for one year after a GA release of Persistence product is
available that supports the new version of the operating system.
Databases
New releases of Persistence products will continue to support an old version of
a database for one year after a GA release of Persistence product is available
that supports the new version of the database.
Compilers
New releases of Persistence products will continue to support an old version of
a compiler for six months after a GA release of Persistence product is available
that supports the new version of the compiler.
ORBs
New releases of Persistence products will continue to support an old version of
a ORB for six months after a GA release of Persistence product is available that
supports the new version of the ORB.
Class Libraries
New releases of Persistence products will continue to support an old version of
a class library for six months after a GA release of Persistence product is
available that supports the new version of the class library.
14
<PAGE>
Persistence Software License, Services, and Support Agreement Confidential
- --------------------------------------------------------------------------------
Exhibit D
Terms to be agreed upon subsequent to signing of
Agreement
15
<PAGE>
EXHIBIT 10.9
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
ASSET PURCHASE AGREEMENT
dated as of February 26, 1999
by and among
INTERSHOP COMMUNICATIONS, INC.,
A Delaware corporation
FOUNTAINHEAD MANAGEMENT, INC.,
A New York corporation
and
AARON KAUFMAN,
an individual
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. Purchase And Sale Of Assets................................... 1
1.1 Sale of Assets................................................ 1
1.2 Excluded Assets; No Assumption of Liabilities................. 1
1.3 Initial Purchase Price and Payment............................ 1
1.4 Earn-Out Payment.............................................. 2
1.5 Time and Place of Closing..................................... 3
1.6 Transfer of the Assets........................................ 3
1.7 Assignment of the Leases...................................... 3
1.8 Possession; Delivery of Records............................... 3
1.9 Further Assurances............................................ 3
SECTION 2. Representations And Warranties Of Fountainhead And The
Selling Stockholder 3
2.1 Organization and Qualification............................... 4
2.2 Authority.................................................... 4
2.3 Subsidiaries................................................. 4
2.4 Financial Statements......................................... 4
2.5 Title to Properties; Liens; Condition of Properties.......... 5
2.6 Taxes........................................................ 5
2.7 Absence of Undisclosed Liabilities........................... 5
2.8 Absence of Certain Changes................................... 5
2.9 Patents, Trade Names and Trademarks.......................... 6
2.10 Contracts.................................................... 6
2.11 Litigation................................................... 7
2.12 Compliance with Laws......................................... 7
2.13 Warranty or Other Claims..................................... 7
2.14 Disclosure of Material Information........................... 7
2.15 Labor Relations; Employees................................... 7
2.16 Creditors.................................................... 8
SECTION 3. Representations And Warranties Of Intershop.................. 8
3.1 Organization and Qualification............................... 8
3.2 Authority.................................................... 8
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 4. Covenants.................................................... 9
4.1 Covenants of Fountainhead and the Selling Stockholder........ 9
4.2 Selling Stockholder's Covenant Not to Compete................ 9
4.3 Affirmative Covenants of INTERSHOP........................... 9
4.4 Mutual Covenant.............................................. 10
SECTION 5. Conditions................................................... 10
5.1 Conditions to the Obligations of INTERSHOP................... 10
5.2 Conditions to Obligations of Fountainhead.................... 11
SECTION 6. Rights And Obligations Subsequent To Closing................. 11
6.1 Survival of Warranties....................................... 11
6.2 Sales Taxes.................................................. 11
SECTION 7. Indemnification.............................................. 11
7.1 Indemnification by Fountainhead and the Selling Stockholder.. 11
7.2 Indemnification by INTERSHOP................................. 12
7.3 Notice; Defense of Claims.................................... 13
SECTION 8. Confidentiality.............................................. 13
SECTION 9. Miscellaneous................................................ 13
9.1 Fees and Expenses............................................ 13
9.2 Notices...................................................... 13
9.3 Entire Agreement............................................. 14
9.4 Governing Law; Venue......................................... 14
9.5 Broker's Fees................................................ 15
9.6 Assignability................................................ 15
9.7 Publicity and Disclosures.................................... 15
9.8 Waivers; Severability........................................ 15
9.9 Headings..................................................... 15
9.10 Counterparts................................................. 15
</TABLE>
ii
<PAGE>
SCHEDULES AND EXHIBITS
Schedule I: Acquired Assets
Schedule II: Excluded Assets
Exhibit A: Leases
Exhibit B: Disclosure Schedule
Exhibit C: Landlord's Estoppel Certificate
Exhibit D: Assignment of Leases
Exhibit E: Employment Offer Letter: Aaron Kaufman
iii
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made effective as of
February 26, 1999, by and among INTERSHOP Communications, Inc., a Delaware
corporation ("INTERSHOP"), Fountainhead Management, Inc., a New York corporation
("Fountainhead"), and Aaron Kaufman, the sole stockholder of Fountainhead (the
"Selling Stockholder").
Whereas, INTERSHOP desires to purchase and Fountainhead desires to sell to
INTERSHOP certain properties and assets of Fountainhead for the consideration
specified herein without the assumption by INTERSHOP of any liabilities or
obligations of Fountainhead other than as specifically set forth below, all on
the terms and subject to the conditions hereof.
Now, Therefore, in consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
SECTION 1. Purchase and Sale of Assets.
1.1 Sale of Assets. Subject to the provisions of this Agreement,
Fountainhead hereby agrees to sell and INTERSHOP hereby agrees to purchase all
of the properties, assets, rights and business of Fountainhead (other than cash)
including, without limitation, Fountainhead's accounts receivable, notes
receivable, inventories, real estate, properties, plants, equipment, leases,
proprietary rights on intellectual property rights, patents, trademarks, trade
names, trade secrets, service marks, routes, customer lists, covenants not to
compete with Fountainhead and all computer hardware and software associated with
Fountainhead (the "Assets"). Certain of the Assets are listed on Schedule I
attached hereto. INTERSHOP also agrees to assume the lease of real property
between Fountainhead and BDG 115 Broadhollow, L.P. for the offices located at
115 Broadhollow Road, Melville, New York (the "Office"), a copy of which is
attached hereto as Exhibit A, and two equipment leases between Fountainhead and
Norwest Financial Leasing, Inc. and Eastern Funding LLC (the "Leases").
Fountainhead and the Selling Stockholder hereby covenant and agree to use their
best reasonable efforts obtain the consent of the landlord and/or any other
required party to enable Fountainhead to assign or transfer the Leases to
INTERSHOP.
1.2 Excluded Assets; No Assumption of Liabilities. INTERSHOP shall not
purchase the excluded asset set forth on Schedule II attached hereto. INTERSHOP
shall not assume any liabilities of Fountainhead, including without limitation
the principal and interest owed by Fountainhead to the Werner and Linda Schmitt
Trust Account, Werner Schmitt and Dru Doshi under three (3) separately executed
promissory notes (the "Notes"), whether accrued or contingent, except for (i)
obligations arising under the Leases, and (ii) any amounts remaining unpaid on
general business accounts payable and obligations included in deferred revenue.
Fountainhead acknowledges that it and Robert Kaufman remain solely liable for
the principal and interest owed under the Notes.
1.3 Initial Purchase Price and Payment. In consideration of the sale by
Fountainhead to INTERSHOP of the Assets, at the Closing, INTERSHOP shall pay to
Fountainhead the aggregate amount of **** to be paid in ****
1.
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
installments as follows (the payments after April 1, 1999 to be reflected in the
promissory note attached hereto as Exhibit F):
(i) ****,
(ii) ****,
(iii) ****,
(iv) ****.
1.4 Earn-Out Payment.
(a) During ****, up to an additional **** will be payable by
INTERSHOP to the Selling Stockholder (the "Earn-Out Payment"), contingent upon
the Gross Revenues and Net Income/Loss of the Intershop Professional Services
U.S. (East) (that professional services entity located in Melville, New York)
recognized in fiscal year 1999 and calculated in accordance with the following
procedures:
(i) The Earn-Out Payment will be calculated by multiplying
****% by the 1999 Gross Revenues of the Intershop Professional Services U.S.
(East), provided however, that (a) such Earn-Out Payment be no more than ****
and (ii) the Earn-Out Payment will be Zero Dollars ($0) if the Intershop
Professional Services U.S. (East) runs a Net Loss for fiscal year 1999;
(ii) Not later than March 1, 2000, INTERSHOP shall prepare
and deliver to the Selling Stockholder a statement certified by the Chief
Financial Officer of INTERSHOP, setting forth the amount of Gross Revenues and
the Net Income/Loss of the Intershop Professional Services U.S. (East) for the
fiscal year ending December 31, 1999, the Earn-Out Payment amount, if any, and a
reasonably detailed description of the relevant calculations (the "Earn-Out
Statement). "Gross Revenue" and "Net Income/Loss" calculations will be for
recognized revenue for services (excluding software license, maintenance, and
technical support fees) and performed in accordance with generally accepted
accounting principles; and
(iii) If the Selling Stockholder has any objections to the
Earn-Out Statement, he shall deliver a reasonably detailed statement describing
his objections to INTERSHOP within thirty (30) days after receiving the Earn-Out
Statement. The Selling Stockholder and INTERSHOP shall use reasonable efforts to
resolve any objections to the calculations of Gross Revenues and Net
Income/Loss. If the parties do not obtain a final resolution within thirty (30)
days after INTERSHOP's receipt of a statement of objections, the Selling
Stockholder and INTERSHOP shall, within five (5) business days, select an
accounting firm mutually acceptable to them to resolve any remaining objections.
If the Selling Stockholder and INTERSHOP are unable to agree on a choice of an
accounting firm, such accounting firm will be selected by lot from a list of the
New York offices of the nationally recognized
2.
<PAGE>
accounting firms (at the time) after excluding the regular outside accounting
firm of INTERSHOP. Such accounting firm shall render its determination within
thirty (30) days of being engaged. The determination of any accounting firm so
selected will be set forth in writing and will be conclusive and binding upon
the parties. If such accounting firm determines that the Selling Stockholder is
entitled to an additional portion of the Earn-Out Payment from INTERSHOP,
INTERSHOP shall, within ten (10) days, pay such amount with interest from March
31, 2000 to the date such amount is actually paid at the simple rate of ten
percent (10%) per annum. If such accounting firm determines that INTERSHOP
overpaid the Selling Stockholder, the Selling Stockholder shall, within ten (10)
days, remit such overpayment to INTERSHOP, with interest thereon at the simple
rate of ten percent (10%) per annum, from the date previously paid by INTERSHOP,
to the date the overpayment is actually repaid. The fees and expenses of the
accounting firm shall be borne by the Selling Stockholder if there is no change
in the calculation or the Selling Stockholder has been overpaid and by INTERSHOP
if the Selling Stockholder has been underpaid.
(b) For purposes of Section 1.4(a), the Intershop Professional
Services U.S. (East) is defined as the existing market and industry segments to
which Fountainhead provides professional services, as of the Closing Date.
1.5 Time and Place of Closing. The closing of the purchase and sale
provided for in this Agreement (the "Closing") shall be held at the offices of
Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California, at 10:00 a.m. on February 26, 1999 immediately following the
execution of this Agreement (the "Closing Date").
1.6 Transfer of the Assets. At the Closing, Fountainhead shall deliver to
INTERSHOP good and sufficient instruments of transfer transferring to INTERSHOP
all right, title and interest in and to all of the Assets. Such instruments of
transfer (i) shall be in the form and shall contain the warranties, covenants
and other provisions (not inconsistent with the provisions hereof) that are
usual and customary for transferring the type of property involved under the
laws of the jurisdictions applicable to such transfers, (ii) shall be in form
and substance satisfactory to counsel for INTERSHOP, and (iii) shall effectively
vest in INTERSHOP, good title to the Assets free and clear of all liens,
restrictions and encumbrances.
1.7 Assignment of the Leases. At the Closing, Fountainhead shall use its
best efforts to deliver or cause to be delivered to INTERSHOP an effective
assignment of the Leases, with such assignment thereof and consents to
assignments as are necessary to assure INTERSHOP of the full benefit of the
same. To the extent that the assignment of the Leases shall require the consent
of any other parties thereto, this Agreement shall not constitute an assignment
thereof; provided however, that before the Closing, Fountainhead shall have
obtained any necessary consents or waivers to assure INTERSHOP of the benefits
of the Leases.
1.8 Possession; Delivery of Records. At the Closing, Fountainhead shall
take all reasonable steps to put INTERSHOP in actual possession and operating
control of the Assets and the Office, and Fountainhead shall have vacated the
Office. After the Closing, Fountainhead shall afford to INTERSHOP and its
accountants and attorneys reasonable access to the books and records of
Fountainhead and shall permit INTERSHOP to make extracts and copies therefrom
3.
<PAGE>
for the purpose of preparing such tax returns of INTERSHOP as may be required
after the Closing and for other proper purposes reasonably requested by
INTERSHOP.
1.9 Further Assurances. After the Closing, Fountainhead shall from time to
time upon the request of INTERSHOP, execute and deliver further instruments of
transfer and assignment (in addition to those delivered under this Section 1)
and take such other actions as INTERSHOP may reasonably require to transfer,
assign to and/or vest in INTERSHOP any of the Assets and the Leases. Nothing
herein shall be deemed a waiver by INTERSHOP of its right to receive at the
Closing an effective transfer of the Assets and assignment of the Leases.
SECTION 2. Representations and Warranties of Fountainhead and the Selling
Stockholder
Except as set forth on the Disclosure Schedule attached hereto as Exhibit
B, Fountainhead and the Selling Stockholder jointly and severally represent and
warrant to INTERSHOP as follows:
2.1 Organization and Qualification. Fountainhead is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has full corporate power and authority to own or lease its
properties as such properties are owned or leased and to conduct its business as
such business is currently being conducted. Fountainhead is qualified to do
business as a foreign corporation in each jurisdiction in which the ownership of
its property or the conduct of its business makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
on the business or the financial condition of Fountainhead.
2.2 Authority. Each of Fountainhead and the Selling Stockholder has the
full power and authority to enter into this Agreement and the other documents
and agreements contemplated hereby and to carry out the transactions
contemplated hereby and thereby. The execution, delivery and performance by
Fountainhead and the Selling Stockholder of this Agreement and the other
documents and agreements contemplated hereby have been duly and validly
authorized and approved by all necessary action on the part of Fountainhead, and
each of this Agreement and the other documents and agreements contemplated
hereby is a legal, valid and binding obligation of Fountainhead and the Selling
Stockholder, enforceable against Fountainhead and the Selling Stockholder in
accordance with its terms, subject to laws of general application from time to
time in effect affecting creditors' rights and to the exercise of judicial
discretion in accordance with general equitable principles. There are no
requirements applicable to Fountainhead to make any filing with, or give any
notice to, or to obtain any permit, authorization, consent or approval of, any
governmental or regulatory authority or any other person as a material condition
to the lawful consummation by Fountainhead of the transactions contemplated by
this Agreement, except as set forth on the Disclosure Schedule. Neither the
execution and delivery of this Agreement by Fountainhead nor the consummation by
Fountainhead of the transactions contemplated by this Agreement shall (a)
conflict with or result in any material breach of any provision of the
Certificate of Incorporation or Bylaws of Fountainhead, (b) result in a default
(or give rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license agreement, lease or any contract, instrument or obligation to
which
4.
<PAGE>
Fountainhead is a party or by which Fountainhead, or any of the Assets or the
Leases may be bound, (c) violate in any material respects any statute, rule,
regulation, order, writ, injunction or decree applicable to Fountainhead, any of
the Assets or the Leases, or (d) result in the creation of any (individually or
in the aggregate) liens, charges or encumbrances on any of the Assets or the
Leases.
2.3 Subsidiaries. Fountainhead does not own, directly or indirectly, any
securities issued by any business organization or governmental authority.
2.4 Financial Statements. Fountainhead has delivered to INTERSHOP
unaudited balance sheets and statements of operations of Fountainhead as of and
for the year ended December 31, 1998 and for the two months ended February 28,
1999. Fountainhead's balance sheet as of February 28, 1999 is hereinafter
referred to as the "Base Balance Sheet." All of the aforementioned financial
statements have been prepared in accordance with generally accepted accounting
principles established by the American Institute of Certified Public Accountants
applied consistently during the periods covered thereby and to the best of
Fountainhead's and the Selling Stockholder's knowledge, present fairly the
financial condition of Fountainhead at the dates of such statements and the
results of its operations for the periods covered thereby.
2.5 Title to Properties; Liens; Condition of Properties.
(a) Fountainhead owns no real property and leases no real property
other than the Office as of the date hereof, and Fountainhead is not a party to
any leases for personal property [other than the Leases]. Fountainhead has good
and marketable title to the Assets, and the Leases are valid and subsisting. No
default by Fountainhead exists under the Leases, and none of the Assets or the
Leases are subject to any mortgage, pledge, lien, conditional sale agreement,
security interest, encumbrance or other charge, or license, except as reflected
in the Base Balance Sheet, and except for statutory liens for real property
taxes not yet delinquent or payable.
(b) All of the Assets are in good working order and all the Assets
that are machinery or equipment have been properly maintained and conform with
all applicable ordinances, regulations and zoning or other laws.
2.6 Taxes. Fountainhead has filed all federal, state and local income,
excise, franchise, real estate and sales and use tax returns required to be
filed by it and has paid all taxes owing by it except taxes, which have not yet
accrued or otherwise become due, for which adequate provision has been made in
the pertinent financial statements referred to in Section 2.4 above. The
provisions for taxes reflected in the Base Balance Sheet are adequate to cover
any and all tax liabilities of Fountainhead in respect of its business,
properties and operations during the periods covered by such financial
statements. No extensions of time for the assessment of deficiencies for any
year are in effect. Neither the Internal Revenue Service nor any other taxing
authority is now asserting or threatening to assert against Fountainhead any
deficiency or claim for additional taxes, interest thereon or penalties in
connection therewith.
2.7 Absence of Undisclosed Liabilities. As of the date of the Base Balance
Sheet, Fountainhead had no liabilities of any nature, whether accrued, absolute,
contingent or otherwise
5.
<PAGE>
(including, without limitation, liabilities as guarantor or otherwise with
respect to obligations of others, or liabilities for taxes due or then accrued
or to become due), except for the Leases and those certain liabilities reflected
in the Base Balance Sheet. As of the date hereof, Fountainhead has no
liabilities of any nature, whether accrued, contingent or otherwise (including,
without limitation, liabilities as guarantor or otherwise with respect to
obligations of others), except for the Leases and those certain liabilities
reflected on the Base Balance Sheet.
2.8 Absence of Certain Changes. Except as disclosed on the Disclosure
Schedule and as otherwise provided in this Agreement, from the date of the Base
Balance Sheet to the date hereof, there has not been:
(a) any change in the financial condition, properties, Assets, Leases,
liabilities, or business operations of Fountainhead, which change, by itself or
in conjunction with all other such changes, whether or not arising in the
ordinary course of business, has been or is likely to be materially adverse with
respect to the Assets, the Office or the Leases;
(b) any contingent liabilities incurred by Fountainhead (as guarantor
or otherwise) with respect to the obligations of others that could have a
material adverse effect on the Assets, the Office or the Leases;
(c) any mortgage, encumbrance or lien placed on any of the Assets or
the Leases which remains in existence on the date hereof;
(d) any obligation or liability incurred by Fountainhead (not included
in the Base Balance Sheet) in excess of $1,000 individually provided that the
aggregate of such undisclosed individual items does not exceed $15,000;
(e) any purchase, sale or other disposition, or any agreement (other
than this Agreement) or other arrangement for the purchase, sale or other
disposition, of any part of the Assets, the Office or the Leases in excess of
$1,000 individually provided that the aggregate of such undisclosed individual
items does not exceed $15,000;
(f) any other transaction entered into by Fountainhead that could have
a material adverse effect on the Assets, the Office or the Leases;
(g) any contracts entered into by Fountainhead;
(h) any payments to, or contracts entered into with, any director,
officer, member or affiliate of Fountainhead or any loans or advances;
(i) any write-down or write-up of the value of any of the Assets;
and/or
(j) any agreement or understanding, whether in writing or otherwise,
for Fountainhead or the Selling Stockholder to take any of the actions specified
in paragraphs (a) through (i) above.
2.9 Patents, Trade Names and Trademarks. All patents, patent applications,
registered copyrights, trade names, registered trademarks and trademark
applications that are
6.
<PAGE>
owned by or licensed to Fountainhead are listed on the Disclosure Schedule
hereto, which Schedule indicates with respect to each, the nature of
Fountainhead's interest therein and the expiration date thereof or the date on
which Fountainhead's interest therein terminates. To the best of its knowledge,
Fountainhead is not in any way making an unlawful or wrongful use of any
confidential information, know-how or trade secrets of any third party,
including, without limitation, any former employer of any present or past
employee of Fountainhead.
2.10 Contracts. Except as set forth on the Disclosure Schedule,
Fountainhead is not a party to or subject to:
(a) any employment contract or contract for services not terminable
within 30 days by and without penalty or further liability to Fountainhead;
(b) any contract or agreement for the sale of any commodity, material,
equipment or service material to the Assets, the Office or the Leases;
(c) any contract or agreement material to the Assets, the Office or
the Leases; other than contracts for the purchase or sale of commodities,
material, equipment or services utilized in the ordinary course of business,
entered into after the date of the Base Balance Sheet;
(d) any contract or agreement with any present or former officer,
director or member of Fountainhead or with any persons or organizations
controlled by or affiliated with any of them; or
(e) other than the Leases, any lease or other agreement under which
Fountainhead is lessee of or holds or operates any items of tangible personal
property owned by any third party.
Any copy of such contract, commitment, plan, agreement or license that has
been provided by Fountainhead to INTERSHOP or its counsel prior to the execution
of this Agreement is tree, correct and complete, has been subject to no
amendment, extension or other modification as of the date hereof and is
described on the Disclosure Schedule. Fountainhead is not in default under any
such contract, commitment, plan, agreement or license described on the
Disclosure Schedule (a "default" being defined for purposes hereof as an actual
default or any set of facts which would, upon receipt of notice or passage of
time, or both, constitute a default under any such instrument).
2.11 Litigation. There is no litigation pending or threatened against
Fountainhead or the Selling Stockholder. Fountainhead is not engaged as a
plaintiff to any litigation.
2.12 Compliance with Laws. To the best of Fountainhead's knowledge,
Fountainhead is not in violation of any laws or regulations, the violation of
which would have a material adverse effect upon the Assets, the Office or the
Leases, including, without limitation, laws and regulations relating to
employment, occupational safety and environmental matters. Fountainhead has not
received notice of, and, to the best of Fountainhead's knowledge, there has
never been any citation, fine or penalty imposed upon or asserted against
Fountainhead under any federal, state or local law or regulation relating to
employment, occupational safety, zoning or environmental matters.
7.
<PAGE>
2.13 Warranty or Other Claims. There are no material existing or threatened
claims against Fountainhead and no claims asserted against Fountainhead for
renegotiation or price redetermination of any business transaction, and there
are no facts upon which any such claim could be based.
2.14 Disclosure of Material Information. Neither this Agreement nor the
Disclosure Schedule set forth any untrue statement of a material fact relating
to Fountainhead or the Selling Stockholder, or omit to state a material fact
necessary to make the statements herein or therein relating to Fountainhead not
misleading.
2.15 Labor Relations; Employees. Upon consummation of the transactions
contemplated by this Agreement, INTERSHOP shall not by reason of anything done
prior to the Closing be liable to any Fountainhead employee for so-called
"severance pay" or any other payments arising from or in connection with the
employment of such employees by Fountainhead or the termination thereof.
Fountainhead is in compliance with all applicable laws arid regulations
respecting labor, employment and employment practices, terms and conditions of
employment and wages and hours. None of Fountainhead's employees belongs to any
labor union.
2.16 Creditors. Each of Fountainhead's creditors (collectively, the
"Creditors") are listed in the Disclosure Schedule, and the amount owed each
such Creditor by Fountainhead as of the date hereof is set forth opposite such
Creditor's name.
SECTION 3. Representations and Warranties of Intershop.
INTERSHOP represents and warrants as follows:
3.1 Organization and Qualification. INTERSHOP is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has full corporate power and authority to own or lease its
properties as such properties are owned or leased and to conduct its business as
such business is conducted. INTERSHOP is qualified to do business as a foreign
corporation in each jurisdiction in which the ownership of its property or the
conduct of its business makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect on the business
or the financial condition of INTERSHOP.
3.2 Authority. INTERSHOP has full power and authority to enter into this
Agreement and the other documents and agreements contemplated hereby and to
carry out the transactions contemplated hereby and thereby. Subject to approval
by the Intershop Communications AG Vorstand of the 1998 Intershop Communications
AG Stock Option Plan, the execution, delivery and performance by INTERSHOP of
this Agreement and the other documents and agreements contemplated hereby have
been duly and validly authorized and approved by all necessary action on the
part of INTERSHOP, and each of this Agreement and the other documents and
agreements contemplated hereby executed by INTERSHOP is a legal, valid and
binding obligation of INTERSHOP enforceable against INTERSHOP in accordance with
its terms, subject to laws of general application from time to time in effect
affecting creditors' rights and to the exercise of judicial discretion in
accordance with general equitable
8.
<PAGE>
principles. Neither the execution and delivery of this Agreement by INTERSHOP
nor the consummation by INTERSHOP of the transactions contemplated by this
Agreement shall (a) conflict with or result in any breach of any material
provisions of the Certificate of Incorporation or Bylaws of INTERSHOP, (b)result
in a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any material
note, bond, mortgage, indenture, license agreement, lease or other material
contract, instrument or obligation to which INTERSHOP is a party or by which
INTERSHOP or any of its assets may be bound, (c) violate in any material
respects any statute, role, regulation, order, writ, injunction or decree
applicable to INTERSHOP or any of its assets where the consequences of any such
violations would, in the aggregate, have a material and adverse effect on
INTERSHOP, or (d)result in the creation of any material (individually or in the
aggregate) liens, charges or encumbrances on any of the assets of INTERSHOP.
SECTION 4. Covenants.
4.1 Covenants of Fountainhead and the Selling Stockholder. Each of
Fountainhead and the Selling Stockholder hereby covenants and agrees to do each
of the following:
(a) Perform and fulfill all conditions and obligations on their part
to be performed and fulfilled under this Agreement, to the end that the
transactions contemplated by this Agreement shall be fully carried out;
(b) Use its best reasonable efforts to obtain all authorizations,
consents and permits of others required to permit the consummation of the
transactions contemplated by this Agreement;
(c) File with any governmental agencies or departments or give persons
all notices, reports and other documents required by law with respect to this
Agreement and promptly submit any additional information or documentary material
properly requested by any such governmental agency or department; and
(d) Deliver to INTERSHOP and cause their counsel to deliver to
INTERSHOP, the closing documents referenced in this Agreement.
4.2 Selling Stockholder's Covenant Not to Compete. The Selling Stockholder
hereby covenants and agrees that he will not, without INTERSHOP's express
written consent:
(a) For three (3) years following the Closing Date, engage in any
employment or business activity which is competitive with INTERSHOP in the
United States in electronic commerce consulting or management; and
(b) For two (2) years after the date of termination of his employment
with INTERSHOP, directly or through others, either for himself or any other
person: (i) induce or attempt to induce any employee, independent contractor or
consultant of INTERSHOP to leave the employ of INTERSHOP; or (ii) induce or
attempt to induce any customer, supplier, licensee, or business relation of
INTERSHOP to cease doing business with INTERSHOP.
9.
<PAGE>
If any provision of Section 4.2 shall be held by a court of competent
jurisdiction to be excessively broad as to duration, activity or subject, it
shall be deemed to extend only over the maximum duration, activity or subject as
to which such provision shall be valid and enforceable under applicable law.
4.3 Affirmative Covenants of INTERSHOP. INTERSHOP hereby covenants and
agrees that it shall do each of the following:
(a) Assist Fountainhead in its efforts to obtain all authorizations,
consents and permits required to permit the consummation of the transactions
contemplated by this Agreement and the continuation of Fountainhead's business
after consummation of this transaction, including the moving of Fountainhead's
assets that are not being acquired by INTERSHOP; and
(b) Deliver to Fountainhead and cause its counsel to deliver to
Fountainhead, the closing documents referred to in this Agreement.
4.4 Mutual Covenant. Fountainhead, the Selling Stockholder and INTERSHOP
each agree that, for tax and other purposes, the fair market value of the Assets
and the Leases shall be as set forth in the Disclosure Schedule.
SECTION 5. Conditions.
5.1 Conditions to the Obligations of INTERSHOP. The obligations of
INTERSHOP to consummate this Agreement and the transactions contemplated hereby
are subject to the fulfillment by Fountainhead and the Selling Stockholder,
prior to or at the Closing, of the following conditions precedent:
(a) Representations; Warranties; Covenants.
(i) Each of the representations and warranties of
Fountainhead and the Selling Stockholder set forth in Section 2 shall be true
and correct in all material respects on and as of the Closing Date.
(ii) Fountainhead and the Selling Stockholder shall have
performed, on or before the Closing Date, all of their obligations hereunder
which by the terms hereof are to be performed on or before the Closing Date.
(iii) All action necessary to authorize the execution,
delivery and performance of this Agreement by Fountainhead and the Selling
Stockholder and the consummation of the transactions contemplated herein shall
have been duly and validly taken by Fountainhead and the Selling Stockholder.
(iv) Fountainhead and the Selling Stockholder shall have
obtained all authorizations, consents and permits of others required to permit
the consummation of the transactions contemplated herein.
10.
<PAGE>
(v) Fountainhead shall have delivered to INTERSHOP a certificate
of Fountainhead's President, dated as of the Closing Date, attesting to the
effectiveness and validity of Section 5.1(a)(i) through (iv) hereof.
(b) Delivery of Certain Documents. Fountainhead and the Selling
Stockholder shall have delivered to INTERSHOP copies of all contracts,
commitments, leases and other documents required to be delivered as set forth
herein.
(c) Landlord's Estoppel Certificate. Fountainhead shall have delivered
to INTERSHOP an executed Landlord's Estoppel Certificate in the form attached
hereto as Exhibit C.
(d) Assignment of Leases. Fountainhead shall have delivered to
INTERSHOP an executed Assignment of Lease and Assumption of Lease Obligations in
the form attached hereto as Exhibit D for each of the Leases.
(e) Employment Offer Letter. The Selling Stockholder shall have
executed the Employment Offer Letter in the form attached hereto as Exhibit E.
5.2 Conditions to Obligations of Fountainhead. Fountainhead's obligations
to consummate this Agreement and the transactions contemplated hereby are
subject to the fulfillment by INTERSHOP, or the written waiver by Fountainhead,
prior to or at the Closing Date of the following conditions precedent:
(a) Representations; Warranties; Covenants.
(i) Each of the representations and warranties of INTERSHOP
contained in Section 3 shall be true and correct in all material respects on and
as of the Closing Date.
(ii) INTERSHOP shall, on or before the Closing Date, have
performed all of its obligations hereunder which by the terms hereof are to be
performed on or before the Closing Date.
(iii) All action necessary to authorize the execution,
delivery and performance of this Agreement and the Employment Letter by
INTERSHOP and the consummation of the transactions contemplated herein shall
have been duly and validly taken.
(iv) INTERSHOP shall have delivered to Fountainhead a
certificate of INTERSHOP's President, dated as of the Closing Date, attesting to
the effectiveness and validity of this Section 5.2(a)(i) through (iii) hereof.
(b) Employment Offer Letter. INTERSHOP shall have executed the
Employment Offer Letter in the form attached hereto as Exhibit E. Pursuant to
such Employment Offer Letter, INTERSHOP has agreed to issue to the Selling
Stockholder two Incentive Stock Options to purchase up to an aggregate 16,500
shares of INTERSHOP Communications AG common stock, subject to the vesting terms
as stated therein.
11.
<PAGE>
SECTION 6. Rights and Obligations Subsequent to Closing.
6.1 Survival of Warranties. All representations, warranties, agreements,
covenants and obligations herein or in any scheduled certificate or financial
statement delivered by any party to another party incident to the transactions
contemplated hereby are material, shall be deemed to have been relied upon by
the other party and shall survive until the second anniversary of the Closing
regardless of any investigation and shall not merge into the performance of any
obligation by any party hereto.
6.2 Sales Taxes. Fountainhead shall pay all taxes due with respect to the
sale of the Assets and the assignment to INTERSHOP of the Leases.
SECTION 7. Indemnification.
7.1 Indemnification by Fountainhead and the Selling Stockholder. Each of
Fountainhead and the Selling Stockholder agrees to defend, indemnify and hold
INTERSHOP and its officers, directors, employees and agents harmless from and
against any damages, liabilities, losses and expenses (including, without
limitation, reasonable counsel fees and disbursements and expenses) of any kind
or nature whatsoever which may be sustained or suffered by INTERSHOP based upon
(a) a breach of any representation, warranty or covenant made by Fountainhead in
this Agreement, or in any Schedule or Exhibit hereto or any certificate or
financial statement delivered hereunder; (b) by reason of any claim, action or
proceeding asserted or instituted arising out of any matter or thing covered by
such representations, warranties or covenants, including, without limitation,
any tax liabilities of Fountainhead for periods prior to or ending on the
Closing Date, any liabilities of Fountainhead not disclosed to INTERSHOP in the
Disclosure Schedule or any liabilities arising from any breach of such
representations, warranties or covenants; (c) any claims, action or proceeding
arising or asserted on or before the Closing Date; (d) any claim, action or
proceeding (for severance pay or otherwise) arising in connection with the
termination of any employee of Fountainhead, whether or not such termination
occurs in connection with the transactions contemplated hereby; or (e) any
claims of creditors with respect to the Assets or the Leases ("INTERSHOP
Indemnifiable Claims"). INTERSHOP may proceed against Fountainhead or the
Selling Stockholder at any time or times for recovery of INTERSHOP Indemnifiable
Claims. Notwithstanding any contrary provision of this Section 7.1, Fountainhead
and the Selling Stockholder shall have no liability pursuant to this Section 7.1
for INTERSHOP Indemnifiable Claims arising after the date two (2) years from the
date of the Closing, other than those arising from or in connection with (i)
state, local and federal income and other taxes and penalties and interest
thereon or (ii) claims, actions or proceedings (whether arising or asserted
before or after the date hereof) asserted or instituted by persons or entities
not parties to this Agreement. Neither Fountainhead nor the Selling Stockholder
shall be required to make any indemnification payment pursuant to this Section
7.1 until such time as the total amount of all damages that have been directly
or indirectly suffered or incurred by INTERSHOP exceeds $10,000 in the
aggregate. At such times as the total amount of such damages exceeds $10,000 in
the aggregate, INTERSHOP shall be entitled to be indemnified only against the
portion of such damages exceeding $10,000.
7.2 Indemnification by INTERSHOP. INTERSHOP agrees to defend, indemnify
and hold Fountainhead and the Selling Stockholder harmless from and against any
damages,
12.
<PAGE>
liabilities, losses and expenses (including, without limitation, reasonable
counsel fees and disbursements and expenses) of any kind or nature whatsoever
that may be sustained or suffered by Fountainhead or the Selling Stockholder
based upon (a) a breach of any representation, warranty or covenant made by
INTERSHOP in this Agreement or in any Schedule or Exhibit hereto or any
certificate or financial statement delivered hereunder or (b) by reason of any
claim, action or proceeding asserted or instituted arising out of any matter or
thing covered by such representations, warranties or covenants ("Fountainhead
Indemnifiable Claims"). Notwithstanding any contrary provision of this Section
7.2, INTERSHOP shall have no liability pursuant to this Section 7.2 for
Fountainhead Indemnifiable Claims arising after the date two (2) years from the
date of the Closing. INTERSHOP shall not be required to make any indemnification
payment pursuant to this Section 7.2 until such time as the total amount of all
damages that have been directly or indirectly suffered or incurred by
Fountainhead and the Selling Stockholder exceeds $10,000 in the aggregate. At
such times as the total amount of such damages exceeds $10,000 in the aggregate,
Fountainhead and the Selling Stockholder shall be entitled to be indemnified
only against the portion of such damages exceeding $10,000.
7.3 Notice; Defense of Claims.
(a) A party claiming indemnification under Section 7 or Section 8
hereunder (the "Indemnified Party") shall give prompt written notice to the
party obligated to indemnify of each claim for indemnification hereunder (the
"Indemnifying Party"), specifying the amount and nature of the claims and of any
matter which in the opinion of the Indemnified Party is likely to give rise to
an indemnification claim. Failure to give notice of a matter which may give rise
to an indemnified claim shall not affect the rights of the Indemnified Party to
collect such claim from the Indemnifying Party or any transferee in liquidation,
except to the extent the Indemnifying Party is prejudiced thereby.
(b) The Indemnifying Party shall have the right to control the defense
of any third-party claim, action or proceeding giving rise to a claim for
indemnification at its own expense in the defense of any such matter or its
settlement. The Indemnified Party and the Indemnifying Party agree to render to
each other assistance as they may reasonably require of each other in order to
ensure the proper and adequate defense of any such claims, action or proceeding.
In connection with any such claims, action or proceeding, no Indemnifying Party
shall consent to entry of any judgment or enter into any settlement without the
prior written consent of the Indemnified Party.
SECTION 8. Confidentiality.
Except for the use of such information and documents in connection with the
transactions contemplated by this Agreement or as otherwise required by and law
or regulation (including the rules of the United States Securities and Exchange
Commission, Deutsche Borse and Germany), each of Fountainhead and the Selling
Stockholder agree to keep in strict confidence any non-public information
obtained by them from INTERSHOP in connection with their investigations or
otherwise in connection with the transactions.
13.
<PAGE>
SECTION 9. Miscellaneous.
9.1 Fees and Expenses. Each of the parties shall bear such party's own
expenses in connection with the negotiation and the consummation of the
transactions contemplated by this Agreement, and no expenses of Fountainhead or
the Selling Stockholder relating in any way to the purchase and sale of the
Assets and assumption of the Leases hereunder shall be charged to or paid by
INTERSHOP.
9.2 Notices. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if delivered or mailed by
registered mail:
To: INTERSHOP Communications, Inc.
600 Townsend St., Top Floor West
San Francisco, CA 94103
Attention: Craig W. Harding, Esq.
With a copy to: Thomas Grohnert
INTERSHOP Communications AG
Amsinckstr. 57
D-20097 Hamburg Germany
To: Fountainhead Management, Inc.
115 Broadhollow Road, Suite 275
Melville, NY 11747
Attention: President
To: Aaron Kaufman
21 Branwood Road
Dix Hills, NY 11747
With a copy to: Mathew O'Connell, Esq.
Crest Media Com Capital
320 Park Ave., /17th/ Floor
New York, NY 10022
or to such other address of which either party may by registered mail notify the
other party.
9.3 Entire Agreement. This Agreement, including the Schedules and Exhibits
referred to herein, is complete; and all communications, promises,
representations, understandings, warranties and agreements with reference to the
subject matter hereof, and all inducements to the making to this Agreement
relied upon by any party hereto, have been expressed herein or in such Schedules
or Exhibits.
9.4 Governing Law. This Agreement, and the rights of the parties hereto,
shall be governed by and construed in accordance with the laws of the State of
California as such laws apply to agreements among California residents made and
to be performed entirely within the laws of the State of California.
14.
<PAGE>
9.5 Broker's Fees. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 6.14 being untrue.
9.6 Assignability. This Agreement shall be assignable by INTERSHOP to an
affiliate of INTERSHOP or otherwise upon written notice to Fountainhead and the
Selling Stockholder, although no such assignment shall relieve INTERSHOP of any
liabilities or obligations under this Agreement. This Agreement may not be
assigned by Fountainhead or the Selling Stockholder without the prior written
consent of INTERSHOP. This Agreement shall be enforceable by, and shall inure to
the benefit of, the parties hereto and their permitted successors and assigns,
and no others.
9.7 Publicity and Disclosures. No press releases or general public
announcements, either written or oral, of the transactions contemplated by this
Agreement, shall be made without the prior knowledge and written consent of the
parties.
9.8 Waivers; Severability. The failure of any of the parties to this
Agreement to require the performance of a term or obligation under this
Agreement or the waiver by any of the parties to this Agreement of any breach
hereunder shall not prevent subsequent enforcement of such term or obligation or
be deemed a waiver of any subsequent breach hereunder. In case any one or more
of the provisions of this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement but this Agreement shall be construed as if such invalid or
illegal or unenforceable provision or part of a provision had never been
contained herein.
9.9 Headings. The headings of the Sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
9.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement.
15.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this ASSET PURCHASE
AGREEMENT to be executed as of the date set forth above by their duly authorized
representatives.
INTERSHOP Communications, Inc.
By: /s/ Stephan Schambach
-------------------------------------
Stephan Schambach
President and CEO
Fountainhead Management, Inc.
By: /s/ Aaron Kaufman
-------------------------------------
Aaron Kaufman
President and CEO
Selling Stockholder
By: /s/ Aaron Kaufman
-------------------------------------
Aaron Kaufman
16.
<PAGE>
SCHEDULE I
Acquired Assets
1) RECEIVABLES, NET $558,986
2) SECURITY DEPOSITS 71,772
3) FIXED ASSETS, NET 119,727
17.
<PAGE>
SCHEDULE II
Excluded Assets
1. Cash in Fountainhead's bank account at Citibank as of the effective date of
the Agreement.
<PAGE>
EXHIBIT A
Leases
<PAGE>
EXHIBIT B
DISCLOSURE SCHEDULE
This Disclosure Schedule sets forth all the disclosures comprising exceptions to
the representations and warranties of Fountainhead Management, Inc. in
connection with that certain Asset Purchase Agreement, dated as of February 26,
1999:
Section 2.2: None
Section 2.8a: None
Section 2.8b: None
Section 2.8c: None
Section 2.8d: None
Section 2.8e: None
Section 2.8f: None
Section 2.8g: Sub Contractor Agreement with SysGen
Section 2.8h: None, other than normal recurring payroll.
Section 2.8i: None
Section 2.8j: None
Section 2.9: None
Section 2.10: None
Section 2.14: None
Section 2.16: None, except as for the holders of the Notes described on the
attached.
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
NON-BANK FINANCING
------------------
3/4/99
1. Promissory Note (Unsecured)
Parties: Fountainhead Management, Inc. and Werner Schmitt
Date: 9/28/97
Term: 9/28/98 (no notice of default or claim by lendor)
Amount: $****
Interest: 15%
2. Promissory Note (Unsecured)
Parties: Fountainhead Management, Inc. and Werner Schmitt
Date: 5/6/98
Term: 12 months (?)
Amount: $****
Interest: 15%
3. Promissory Note (Unsecured)
Parties: Fountainhead Management, Inc. and Dru Doshi
Date: 8/5/97
Term: 7/15/98 (no notice of default or claim by lendor)
Amount: $****
Interest: 15%
<PAGE>
EXHIBIT C
Landlord's Estoppel Certificate
<PAGE>
EXHIBIT D
Assignment of Leases
<PAGE>
EXHIBIT E
EMPLOYMENT OFFER LETTER: AARON KAUFMAN
February 26, 1999
Aaron Kaufman
21 Branwood Road
Dix Hills, NY 11747
RE: Employment Terms
Dear Aaron:
Intershop Communications, Inc. is pleased to offer you the position of
Director of Professional Services - East Coast on the following terms:
1. You initially will report to the Senior Vice President of Sales
and Marketing. You will work out of our office in Melville, New York. Intershop
may change your position, duties, and work location from time to time due to
business necessity provided that any material diminution of your position or
duties or a change in your work location which requires you to relocate your
home will be considered a termination without cause.
2. Commencing on March 26, 1999, your compensation will be $3,541.67
per semi-monthly pay period (annualized at $85,000), less payroll deductions and
all required withholdings.
3. You will be eligible for the standard Company benefits on the
first of the month following the your first 60 days of employment at Intershop.
Details about these benefits are provided in the Summary Plan Description
available for your review.
4. You will receive incentive stock options (the "Initial Options")
to purchase up to 16,000 shares of the Intershop Communications AG common stock
at the average closing price for Intershop Communications AG common stock for
the 10 business days prior to your date of hire (132.27 euros). The Initial
Options will be subject to the terms and conditions of the Intershop
Communications AG 1998 Stock Option Plan, except with regard to vesting,
pursuant to a stock option agreement in a form acceptable to both you and
Intershop Communications AG. The vesting will commence on March 26, 1999. If
your employment is terminated (a) by your death or (b) by Intershop without
"cause" then 100% of the shares subject to purchase under the Initial Options
will vest upon the date of termination. However, if (a) you voluntarily
terminate your employment with Intershop or (b) Intershop terminates your
employment with "cause" then the Initial Options shall vest pursuant to the
terms and conditions of the Intershop Communications AG 1998 Stock Option Plan.
<PAGE>
For purposes of this Section 4, unless otherwise agreed to by the
parties "cause" will be determined by an independent panel of arbitrators (one
selected by each party, and a third appointed by the two selected arbitrators)
in accordance with the Commercial Rules of the American Arbitration Association
(the "Rules"); provided, however, that in the event of conflict between the
Rules and the terms of this Agreement, the terms of this Agreement shall govern.
The place of arbitration shall be San Francisco, California, and the law
applicable to the arbitration procedure shall be California Labor Code,
applicable California judicial decisions, and the Federal Arbitration Act (9 USC
(S) 2). To commence arbitration of any such dispute, the party desiring
arbitration shall notify the other party in writing in accordance with the
Rules.
On the thirtieth business day following the appointment of the
arbitrator, each party shall submit to the arbitrator a form of final decision
specifying the relief to which such party in good faith believes it is entitled.
Such form of final decision shall not be subject to further modification by the
party making such submission after it is received by the arbitrator. Within
thirty (30) days after the submission of such proposed forms of decision, or as
soon thereafter as may be reasonably possible, the arbitrator shall adopt as its
decision one of the two alternative submissions made by the respective parties.
The alternative chosen by the arbitrator shall be chosen in its entirety and
shall not be subject to modification by the arbitrator. The arbitrator shall
choose the form of final decision that, in its judgment, is most consistent with
the terms of this Agreement and the intent of the parties, as supported by
evidence presented by the parties in the arbitration proceedings or, if the
subject matter of the dispute is not clearly addressed in or determinable under
this Agreement, that, in its opinion, is legally correct under the
circumstances. The arbitrator shall not be required to provide the reasons for
its decision. The parties agree that the award of the arbitrator shall (1) be
the sole and exclusive remedy between them regarding any claims, counterclaims,
or issues presented to the arbitrator; and (2) be final and subject to no
judicial review. The parties hereto agree that judgment on the arbitration award
may be entered and enforced in any court having jurisdiction over the parties or
their assets. Each party shall, except as otherwise provided herein, be
responsible for its own expenses, including legal fees, incurred in the course
of any arbitration proceedings. The fees of the arbitrator shall be divided
evenly between the parties.
5. You will also receive incentive stock options to purchase up to 500 shares
of the Intershop Communications AG common stock on March 26, 1999 at the average
closing price for the ten (10) business days prior to the date of grant. The
options shall vest pursuant to and be subject to the Intershop Communications AG
1998 Stock Option Plan.
6. As an Intershop employee, you will be expected to sign and comply with a
Proprietary Information and Inventions Agreement which prohibits unauthorized
use or disclosure of Intershop proprietary information.
7. Your employment relationship with Intershop is at-will. You may terminate
your employment with Intershop at any time and for any reason whatsoever simply
by notifying Intershop. Likewise, Intershop may terminate your employment at any
time and for any reason whatsoever, with or without cause or advance notice.
This at-will employment relationship cannot be changed except in writing signed
by a Company officer.
<PAGE>
8. The employment terms in this letter supersede any other agreements or
promises made to you by anyone, whether oral or written. As required by law,
this offer is subject to satisfactory proof of your right to work in the United
States.
9. Your employment will start as of February 26, 1999. For the period through
March 26, 1999, you will be entitled to "wind down" the Fountainhead business.
We look forward to your favorable reply and to a productive and enjoyable
work relationship.
Sincerely yours,
/s/ Stephan Schambach
INTERSHOP COMMUNICATIONS, INC.
Stephan Schambach
President and CEO
Accepted:
/s/ Aaron Kaufman
- -----------------------------------
Aaron Kaufman
2/26/99
- -----------------------------------
Date
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
EXHIBIT F
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned hereby jointly and severally promise to
pay to the order of Fountainhead Management Inc., the sum of ****, together with
interest thereon at the rate of 8 1/4% per annum on the unpaid balance, as
follows:
(i) ****,
(ii) ****,
(iii) ****,
(iv) ****.
All payments shall be first applied to interest and the balance to
principal. This Note may be prepaid, at any time, in whole or in part, without
penalty.
This Note shall at the option of the holder hereof be immediately due and
payable upon failure to make any payment due hereunder or for breach of any
condition of any security interest, mortgage, pledge agreement or guaranty
granted as collateral security for this Note or breach of any condition of any
security agreement or mortgage, if any, having a priority over any security
agreement or mortgage on collateral granted, in whole or in part, as collateral
security for this Note or upon the filing by any of the undersigned of an
assignment for the benefit of creditors, bankruptcy, or for relief under any
provisions of the Bankruptcy Code; or by suffering an involuntary petition in
bankruptcy or receivership not vacated within thirty days.
In the event this Note shall be in default, and placed with an attorney for
collection, then the undersigned agree to pay all reasonable attorney fees and
costs of collection. Jurisdiction and venue for any such collection proceedings
will be the State of New York. Payments not made within 10 business days of
written notice by the holder (which notice can be provided at any time following
due date). All payments hereunder shall be made to such address as may from time
to time be designated by any holder hereof. The undersigned and all other
parties to this Note, whether as endorsers, guarantors or sureties waive demand,
presentment and protest and all notices thereto and further agree to remain
bound, notwithstanding any extension, modification, waiver, or other indulgence
by any holder or upon the discharge or release of any obligor hereunder or to
this Note, or upon the exchange, substitution, or release of any collateral
granted as security for this Note.
Signed and sealed under pains and penalties of perjury this 26 day of
--
February, 1999.
/s/ Philip Oreste
Philip Oreste
Vice President, Finance
INTERSHOP Communications, Inc.
<PAGE>
EXHIBIT 10.10
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
Cooperation Agreement
between
Intershop Communications GmbH
Leutagraben 2-4
07743 Jena
and
Deutsche Telekom AG
- Zentrale [Central Office] -
Friedrich Ebert Allee 140
53133 Bonn
Preamble
Intershop Communications GmbH (referred to herein as IS) and Deutsche Telekom AG
(referred to hereinafter as DT) intend to enter into a partnership in the area
of electronic commerce (Internet) as described below.
This cooperation should make it possible for DT to develop new fields of
business and new sales markets with the utilization of IS technology. IS will
support DT in utilizing the best technology currently available. DT will use its
own resources and distribution channels to implement and market IS technology.
Both parties will work closely to develop new markets throughout the world and
to implement business models. IS will actively support DT in construction of the
DT Technology Center in Palo Alto, USA.
This contract shall not establish grounds for exclusivity for either party.
Section 1: Object of the agreement
IS shall supply DT with the current version of INTERSHOP Mall software for UNIX
and Windows NT. The scope of the delivery shall include a version which is
currently in the planning stage and will support Oracle and Informix, the source
text, technical documentation, all handbooks in printed and digital form and
training sessions to be conducted.
INTERSHOP Mall software and end user documentation shall be supplied in German,
English and French. DT shall also be supplied with translations planned for the
future. Translations into more complicated languages (such Chinese and Arabic)
shall be delivered to DT against a
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION.
corresponding cost contribution. The scope of the service rendered shall also
include the Japanese translation of the software and documentation planned for
the third quarter of 1998.
The scope of the services rendered shall also include the cost of the Sybase
licenses needed for the operation of INTERSHOP Mall. Licenses for Oracle or
Informix databases shall not be covered by this agreement.
DT shall provide suitable protection for the source text to prevent access by
any unauthorized third parties (e.g., by depositing it with a notary or an
attorney).
Section 2: Scope of the license
IS shall grant DT a license to INTERSHOP Mall software without quantity
restrictions for a period of **** years after the signing of this agreement. The
License shall be granted only for DT's own use. DT's own use shall also include
use by 100% subsidiaries of DT and subsidiaries whose majority interest and
whose operative control lie with DT upon signing of this agreement and shall
continue to lie with DT in the future. Should DT decide in the future to
disincorporate and legally divest itself of the TMS department, then the TMS
department shall also be entitled to DT's own use. In case of doubt, the parties
shall reach an agreement by mutual consent.
In the event DT wants to sell sublicenses to third parties, a separate
distribution agreement shall be concluded. The list prices in effect shall be
appended to this agreement as Addendum 1.
The authorization to prepare copies of the master version or to circulate
previously prepared copies without the consent of IS shall expire on expiration
of the license. However, DT shall have the right to supply copies and to
complete all business relationships planned and/or in the bidding phase during
the term of the agreement with a binding bid time of half a year.
DT shall have the option of claiming maintenance service after expiration of the
term of the agreement. The cost of such maintenance service shall amount to US
$**** p.a. Of this amount,. US $**** shall be due at the start of the accessory
maintenance service agreement, and US $**** shall be due **** after the
accessory agreement goes into effect. The maintenance service shall be optional
and must be requested at least six months before expiration of this cooperation
agreement. It shall run for **** with the option of a final extension of one
additional year.
The maintenance service agreement shall include the following services:
- - supplying technical papers, documentation, marketing materials in an
electronic file format,
- - **** max days of engineering support for each year of the extension,
- - elimination of any software mistakes and delivery of minor updates
(patches) within a suitable period of time.
<PAGE>
During the term of the maintenance service agreement, IS shall grant DT the same
conditions for claiming additional services as described in the cooperation
agreement (in particular (S) 5, (S) 6).
Delivery of new software releases shall be excluded from this agreement.
Section 3: Remuneration
DT shall pay IS the amount of US $11.4 million (eleven million four hundred
thousand dollars) plus the statutory value-added tax.
Payment of the agreed remuneration shall be made within thirty (30) days after
signing of the cooperation agreement.
All prices shall be considered as price plus statutory value-added tax.
Section 4: Update package
The scope of the agreement shall include the update package described below.
This shall grant DT and its subsidiaries and affiliates described in (S) 2
worldwide use of INTERSHOP Mall software with the following services:
During the term of the cooperation agreement, IS shall
- - deliver the latest software version (planned updates at least once a
year),
- - supply technical documents, documentation and marketing materials in an
electronic file format (for reproduction),
- - conduct an initial training session for each software release for a study
group to be appointed by DT (maximum 20 people),
- - provide 50 days of engineering support in the first year of the
agreement
40 days of engineering support in the second year of the
agreement and
40 days of engineering support in the third year of the
agreement for a study group within DT to be appointed on a permanent
basis (no end user support!),
- - eliminate any software errors and provide minor updates (patches) within
a suitable period of time,
- - provide DT with the improved plug-ins (modules) that are also to be made
available to other customers at no cost; more far-reaching developments
and those containing third party technologies shall be supplied against
appropriate remuneration and shall not be included in the update package.
IS shall to the best of their ability take into account suggestions by DT for
special features in all new software versions.
DT shall pay the following additional remuneration for the update package:
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
Start of agreement - December 31, 1997 US $****
January 1, 1998 - December 31, 1998 US $****
January 1, 1999 - December 31, 1999 US $****
January 1, 2000 - end of agreement US $****
The additional remuneration shall be payable in quarterly portions in advance.
The support and training bids included in this service shall not be applicable
in this form for the subsidiaries and affiliated companies of DT as described in
(S) 2 or for departments outside the specified study group or for customer of
DT. Agreements for service, maintenance, programming and support can be
concluded by all other departments and subsidiaries of DT at the respective
prevailing hourly and daily rates.
Section 5: Professional services
Subsequent to the initial support services to be rendered by IS to DT and
contained in the update package, the following terms shall be in effect with
regard to professional services:
IS shall provide DT with resources from their Professional Service Team for
planning services and reference installations (e.g., in planning and
construction of a data center). IS shall offer DT reduced daily rates for this
purpose for services as listed below:
Project management **** DM per man day
Engineering **** DM per man day
Prototyping **** DM per man day
Web design **** DM per man day
Quality assurance **** DM per man day
Support **** DM per man day
On request, IS shall assist DT in establishing its own end user hotline. In view
of the personnel resources and accommodations available at DT, an additional
source of revenue shall be created for DT in this regard. For support in
establishing its own DT hotline department (merchant and distribution partners'
hotline and training sessions) the parties shall count on a time expenditure of
six weeks ****. The goal shall be to establish a scalable hotline and training
concept with which the size of the hotline and training department can be
individualized to conform to the given customer requirements.
IS shall make available to DT at no cost the internal database as cased-based
[sic; case-based?] reasoning or similar technologies as part of the support
provided in establishing the end user hotline.
Section 6: Technical support
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED
The following terms shall apply to technical support services that are not
covered by the remuneration for the update package:
IS shall offer technical support to DT at a reduced hourly rate. The technical
support shall include all technical services not covered by the remuneration for
the update package. Regular support shall be offered at the rate of DM ****
weekdays from 9 a.m. to 5 p.m. as well as 24-hour support including weekends at
the rate of ****.
Section 7: Contract hierarchy
For the contract services regulated in the preceding (S) 1 through (S) 6, the
following shall be in effect in the order listed:
a. this agreement:
The specific terms of this agreement for the transfer of data processing
programs (BVB transfer); the contractual terms of Deutsche Telekom AG for
consulting and support services in the data processing field (on a
contractual basis) (Addendum 2) and the contractual terms for consulting
and support services of Deutsche Telekom AG in the data processing field
(based on a shop agreement) (Addendum 3);
b. the General Terms of Business for Acquisitions by Deutsche Telekom AG
(AGBE) (Addendum 4).
Section 8: Obligations of IS
In view of the proposed activities, IS shall render the following services that
shall be paid for by the remuneration for the update package specified in
Section 4:
<PAGE>
1. Technical obligations:
- -- ---------------------
a. Providing, on demand, the specific OEM adaptation of the user interfaces
for DT with respect to the DT corporate identity;
b. Supplying project directors and developers at the reduced daily rates given
in the addendum to implement DT projects,
c. Providing the engineering support days listed in (S) 4;
d. Informing DT regularly regarding the release status and planned new version
features as well as the general stares of projects related to DT,
e. Preparing special documentation as part of DT projects;
f. Supplying Intershop Mall software updates as part of the service described
above;
g. Supplying alpha and beta versions of Intershop Mall software to DT;
h. Supplying all current Intershop products to DT for internal evaluation;
i. Provide initial training for DT developer teams with each software release.
The parties shall reach a separate agreement regarding remuneration for other
technical obligations.
2. Marketing activities:
- -- --------------------
The following marketing activities represent a mutual declaration of intent:
a. The presentation of DT as a partner of IS on its web site with a link to
the DT web site;
b. Inclusion of DT in all IS marketing and sales materials;
c. Participation in joint marketing, distribution, press and PR activities;
d. Inclusion of DT in IS training programs.
3. PR obligations:
- -- ---------------
a. Use of worldwide IS PR activities for disclosure of the partnership with
DT;
b. Preparation of press reports for important joint projects;
c. Participation in the press conference organized by DT for presentation of
the partnership with IS;
<PAGE>
d. Participation in press conferences and conventions;
e. Joint appearances at fairs and exhibitions.
Section 9: Obligations of DT
In view of the proposed activities, DT shall render the following services:
1. Technical obligations:
- -- ----------------------
a. Supplying a special project manager and a suitable developer team;
b. Participation of DT in training sessions organized by IS;
c. Holding training sessions by DT for DT's own customers.
2. Marketing activities:
- -- ---------------------
The following marketing activities represent a mutual declaration of intent:
a. Presenting IS as the partner of DT at its TMS web site with a link to the
IS web site;
b. Inclusion of IS in all electronic commerce, marketing and sales
materials;
c. Participation in joint marketing, distribution, press and PR activities;
d. Inclusion of IS in the DT training program;
e. Transfer of text and graphic elements to IS for use in IS branding.
3. PR obligations:
- -- ---------------
a. Use of worldwide DT PR activities for disclosure of the partnership with
IS;
b. Preparation of press releases for important joint projects;
c. Participation in press conferences and conventions;
d. Joint appearances at fairs and exhibitions;
e. DT and IS shall disclose their partnership at a joint press conference
immediately after the signing of the agreement.
The main thematic point shall be the influence of the two partners on the
economic future of
<PAGE>
worldwide electronic commerce.
Section 10: Mutual declaration of consent further regarding areas of cooperation
IS and DT intend to collaborate in the following fields and enter into
negotiations regarding corresponding agreements:
a. Development of a worldwide marketing and sales plan to identify and
safeguard joint distribution potentials;
b. Joint preparation of marketing materials and brochures; for joint
marketing activities, a median value shall be determined to permit
establishment of mutual compensation services and advertising cost
allowances;
c. Developing a joint worldwide PR strategy;
d. Joint participation in fairs, exhibitions, road shows and seminars;
e. Joint development and promotion of reference installations;
f. Establishing contact with the respective technology partners;
g. Corporate participation of DT in Intershop Communications Inc. in the
amount of 7.84% of the joint capital by stipulation of a corresponding
option for DT which shall be limited to a term of March 31, 1998.
Section 11: Antitrust clause
The parties are aware of the fact that the cooperation agreements based on the
declarations of intent as per (S) 8 through (S) 10 of this agreement, in
particular the option agreement intended as per (S) 10 g of this agreement
regarding the acquisition of shares in Intershop Communications Inc. by DT,
shall be reviewed from the standpoint of antitrust laws before the signing of
this agreement and may possibly require legalization by antitrust authorities.
<PAGE>
Section 12: Confidentiality
The parties agree to the strictest mutual confidentiality regarding all business
and industrial secrets of which the other party becomes aware as part of this
cooperation. This confidentiality requirement shall remain in effect even after
the duration of this agreement. The parties are aware of the fact that violation
of this confidentiality obligation would incur liability for damages. Each party
shall admonish his own employees to take the greatest possible care in handling
the other party's confidential information.
Section 13: Guarantee
IS shall provide a guarantee within the framework of statutory provisions.
Liability for indirect losses or consequential damages for deficiencies shall be
precluded in any case. The guarantee shall expire as soon as there is any
interference by DT or any other third party in the products transferred by IS.
In the event that IS is obligated to correct errors, eliminate shortcomings and
provide support and fails to comply with this obligation, DT shall grant IS a
suitable grace period to comply with said obligation. If IS again fails to
comply with such a demand, DT shall grant IS a final grace period and then shall
be entitled to eliminate said shortcomings itself at the expense of IS or to
commission a third party to eliminate said shortcomings or to perform file
required service.
<PAGE>
EXHIBIT 10.11
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
Sybase / Intershop Reseller Agreement
Summary of Principle Terms
Parties: Sybase GmbH
Intershop Communications GmbH
Date: March 1996
Purpose: Allows Intershop to develop e-commerce solutions that utilize
embedded runtime versions of Sybase database technology, and to
sublicense derivatives of the Sybase product through its
distributors.
Upgrades: Sybase agrees to pay Intershop commissions under certain
circumstances if a user upgrades to a full Sybase database
license.
Support: Intershop to receive front line support from Sybase.
Payment: Intershop agrees to pay Sybase the fees for runtime versions,
runtime support and transaction fees 30 days after the end of the
month during which Intershop has sent out the copy of the Sybase
derivative. Following July 1, 1996, Intershop paid Sybase nine
installments for the bulk purchase of runtime licenses, a total of
****
Audit: Sybase can audit Intershop only once a year to determine the
correct usage and the number of sublicensed copies of Sybase
programs.
Term: The original contract was scheduled to expire on March 28 1998,
but was extended and amended on March 20 1998. The extension
acknowledged the relocation of Intershop's headquarters to San
Francisco and extended the account status to global. License fees
for the entire year of 1998 were increased to *** payable in four
installments.
Disclosure: If Sybase desires, the parties will determine the wording of the
announcement of their cooperation. Both parties have permission
that Intershop participates in the Sybase VAR program and that
Intershop develops and offers solutions that include Sybase
programs.
Warranty: The Sybase warranty is good for one year starting with the date of
delivery to Intershop and assures that the program was developed
according to the current state of technology, thoroughly tested
and is in compliance to the functionality described in the
documentation. The warranty includes only Sybase product. Sybase
does not warrant the product developed and distributed by
Intershop.
Pricing: In this contract extension, Sybase offered Intershop the annual
option to purchase licenses at the same pricing for the following
three years.
<PAGE>
EXHIBIT 10.12
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
Oracle / Intershop Reseller Agreement
Summary of Principal Terms
Parties: Oracle Deutschland GmbH
Intershop Communications GmbH
Date: October 15, 1998; extended through ****
Type of Agreement Alliance Member (Reseller)
Products: Oracle run time products sold as application specific
full use licenses. An application-specific full use
license is a restricted type of license sold by a
Solution Provider in conjunction with its Application
Package. Application Specific Full Use licenses may
only be used by the end-user to execute the Alliance
Member's application program.
Intershop Applications: Intershop Merchant and Hosting Editions and their
upgrades.
Royalty payable Intershop or its Distributor will pay ****% of the list
price (without a discount) to Oracle. Intershop will
give 90 days' notice to Oracle of any change in the
Intershop price list.
Quarterly Reports Intershop will provide quarterly sales and royalty
reports to Oracle.
Limitations The use of the Oracle product is currently restricted
to 2 CPUs (but can be any machine, not just
workgroup servers)
Modifications The Oracle programs may be used in conjunction with an
Intershop application that has been modified or
customized provided the customizations and
modifications remain within the scope of the Intershop
application. For example, if the Alliance Member's
application is defined as a financial application,
which manages accounts payable, accounts receivable,
and generates invoices, the application could not be
modified to include a customized order entry module, or
a shipping and receiving module.
<PAGE>
EXHIBIT 10.13
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
TECHNOLOGY LICENSE
AND
DISTRIBUTION AGREEMENT
This Technology License and Distribution Agreement (the "Agreement") is
entered into this 2nd day of December 1998 (the "Effective Date") between Sun
--- --------
Microsystems, Inc. ("Sun"), with a place of business at 901 San Antonio Road,
Palo Alto, California 94303 and Intershop Communications GmbH and its
Affiliates, a German corporation with a place of business at 600 Townsend
Street, San Francisco, CA 94103 ("Licensee").
RECITALS
WHEREAS Sun wishes to license its Java/TM /technology, while maintaining
compatibility among Java language based products; and
WHEREAS Sun wishes to protect and promote certain trademarks used in connection
with Java technology; and
WHEREAS Licensee wishes to develop and distribute products based upon Sun's Java
technology;
NOW THEREFORE, Sun and Licensee enter into this Agreement on the following
terms.
1.0 DEFINITIONS
1.1 "Application Programming Interfaces" or "APIs" means the names of
class library calls and the number and types of arguments they take in invoking
the functionality of such class libraries.
1.2 "Applet" means a Java application which (i) runs on the Java
Environments and (ii) consists of Java byte codes executable by the Java Runtime
Interpreter (but does not include or incorporate the Java Runtime Interpreter or
the Java class libraries).
1.3 "Bug Fixes" means correction of errors in either the Shared Part or
Platform Dependent Part of the Technology.
1.4 "Documentation" means the materials which Sun provides for use with
the Technology, as more particularly identified in Exhibit C, as may be revised
by Sun during the Term.
1.5 "Derivative Work(s)" means any work which is based upon the
Technology, such as a revision, modification, translation, abridgement,
condensation, expansion, collection, compilation or any other form in which the
Technology may be recast, transformed or adapted, any new material, information
or data relating to and derived from the Technology, the preparation, use and/or
distribution of which, in the absence of this Agreement or other authorization
from the owner, would constitute infringement under applicable law.
1.6 "Distributors" means distribution channels designated by Licensee for
distribution of Products, including OEMs, distributors, resellers, dealers and
sales representatives.
1.7 "Exhibit C" means collectively Exhibits C-1 through C-n which
incorporate into the Agreement the specific terms and conditions for each
Technology licensed hereunder.
1.8 "FCS" means first commercial shipment of a production version of a
software or hardware product or technology.
1.9 "Field of Use" means the relevant market segments and/or product areas
for each Technology specified in Exhibit C.
1.10 Java Classes" means the specific class libraries associated with each
Technology defined in Exhibit C, as may be revised by Sun during the Term.
1.11 "Java Environment(s)" means each or all the Java Application
Environment ("JAE"), Personal Java Environment ("pJava"), Embedded Java
Environment ("eJava"), JavaCard Application
1
<PAGE>
Environment ("JCAE"), and future Java Environments, described in specifications
from Sun, as may be introduced or revised by Sun during the Term.
1.12 "Java Runtime Interpreter" means the program(s) which implement the
Java virtual machine for a particular Java Environment as specified in the Java
Virtual Machine Specification from Sun, as may be revised by Sun during the
Term.
1.13 "Java Test Suites" means the applicable test suites associated with
each Technology, as may be revised by Sun during the Term.
1.14 "Licensee Open Class(es)" means an additional Java class and
associated API(s) developed by or for Licensee which: (i) extends the
functionality of a Java Environment; and (ii) is exposed to third party Software
developers for the purpose of developing additional software which invokes such
additional Java class.
1.15 "OEM" means an original equipment manufacturer of hardware and/or
software, who integrates Products into its own valued added products or
technologies which represent a significant functional and value enhancement to
the Products, and which are distributed through its established distribution
channels.
1.16 "Platform Dependent Part" means those Source Code files (and
corresponding binary code) of the Technology which are not in a "share"
directory or subdirectory thereof.
1.17 "Product(s)" means a Licensee Product into which the Technology is
implemented or integrated. A Product must: (i) have a principal purpose which is
substantially different from that of the stand-alone Technology; (ii) represent
a significant functional and value enhancement to the Technology; (iii) operate
in conjunction with the Technology; and (iv) not be marketed as a technology
which replaces or substitutes for the Technology. A list of Products current as
of the Effective Date is included in Exhibit C for each Technology. Licensee may
add Products within the designated Field of Use for such Products by written
notification to Sun.
1.18 "Shared Pan" means those Source Code files (and corresponding binary
code) of the Technology which are identified as "shared" (or words of similar
meaning) or which are in any "share" directory or subdirectory thereof.
1.19 "Source Code" means the human readable version, in whole or in part,
of the Technology supplied to Licensee and any corresponding comments and
annotations.
1.20 "Standard Extensions" means the additional classes and associated APIs
specified in Exhibit C.
1.21 "Technology" means each specific Java technology (excluding Tools)
licensed by Sun hereunder as more fully described in Exhibit C, as may be
revised by Sun during the Term, and Upgrades thereto to the extent Licensee is
authorized to receive them.
1.22 "Term" means the term of the Agreement as specified in Section 9.1.
1.23 "Tools" means any Java Test Suites, and other development tools, in
source or binary code form specified in Exhibit C, as may be revised by Sun
during the Term.
1.24 "Upgrades" means bug fixes, modifications, variations, and
enhancements, to the extent included in a patch or release of the Technology
unless otherwise specified in Exhibit C, which Sun generally licenses as part of
the Technology.
1.25 "Affiliate" means the parent corporation (Intershop Communications AG)
of Intershop Communications GmbH, as well as any corporation or other legal
entity in which Intershop Communications AG directly or indirectly owns or
controls, and continues to own or control, fifty percent (50%) or more of the
voting interests (representing the right to vote for the election of directors
or other managing authority) in an entity.
2.0 LICENSE GRANTS
2.1 Source Code Product Development License.
----------------------------------------
a. Product Development. Subject to the terms and conditions contained in
-------------------
this Agreement, Sun hereby grants to Licensee, solely for the Field(s) of
Use, a worldwide, non-
2
<PAGE>
exclusive, non-transferable license to use and modify the Source Code to
create Derivative Works including:
(i) porting of the Platform Dependent Part to platforms other than
those offered by Sun and specified in Exhibit C;
(ii) development of Bug Fixes;
(iii) integration of the Source Code, Bug fixes and Derivative Works
with other source code of Licensee; and
(iv) compiling all of the foregoing to create Products.
b. Product Development Restrictions. In the exercise of the rights
--------------------------------
granted in Section 2.1a. above, Licensee:
(i) must include the Shared Part, complete and unmodified in the
Product;
(ii) may not modify the functional behavior of the Java Runtime
Interpreter or the Java Classes;
(iii) may not modify or subset the interfaces of the Java Runtime
Interpreter or the Java Classes;
(iv) may not subset the Java Classes;
(v) may not modify or extend the public class or interface
declarations whose names begin with "java", "sun.hotjava", "COM.sun" or
their equivalents in any subsequent naming convention; and
(vi) may not sublicense or distribute the Source Code or Derivative
Works thereof, to third parties, except as provided in Section 2.4.
c. Bug Fixes. Licensee will inform Sun promptly, and no later than it
---------
informs any third party, of any bugs identified in the Technology, and to
the extent that Licensee elects to correct such bugs, Licensee will make
such Bug Fixes promptly available to Sun free of all restrictions as they
are implemented.
d. Proprietary Rights Notices. Licensee shall not remove any copyright
--------------------------
notices, trademark notices or other proprietary legends of Sun or its
suppliers contained on or in the Technology or Documentation, and shall
incorporate such notices in all Products and related documentation as
applicable;. Licensee shall comply with all reasonable requests by Sun to
include additional copyright or other proprietary rights notices of Sun
or third parties from time to time; provided, however, that in no event
will Intershop be required to add a "based on Java" mark or associated
logo to product packaging or to the splash screen for the Product.
e. Applet Tags. Any Product that reads or writes hypertext markup
-----------
language (HTML) or standard generalized markup language (SGML) shall use
the Document Type Definition ("DTD") as specified in Exhibit A when
referencing the Applet tag, unless another DTD is defined for the Applet
tag by an industry standard.
2.2. Source Code Research License.
----------------------------
a. Subject to the terms and conditions contained in this Agreement, Sun
hereby grants to Licensee, without the right to sublicense, a worldwide,
non-exclusive, non-transferable license to use and modify the Source Code
for internal research and development, to facilitate the development of
Products. This research license is not subject to the restrictions set
forth in Section 2.1b above, provided that Licensee may not incorporate
any of the Source Code or Derivative Works created pursuant to this
research license into Products or any other products.
3
<PAGE>
b. If Licensee identifies any changes which are necessary to the Shared
Part to enable porting to other platforms, Sun will make reasonable
efforts to evaluate the feasibility of implementing such changes or
reclassifying the necessary code as Platform Dependent.
2.3. Documentation License. Subject to the terms and conditions contained
---------------------
in this Agreement, Sun hereby grants to Licensee, solely for the Field(s) of
Use, a worldwide, non-exclusive, non-transferable license to use, modify,
translate and subset the Documentation to create technically accurate Licensee
documentation associated with the Products.
2.4 Sublicensing of Source Code. Licensee may deliver and sublicense the
---------------------------
Source Code to third parties (excluding customers of Licensee) located in the
United States, the European Union (as constituted as of the Effective Date),
Canada and Japan for the sole purpose of furnishing services to Licensee in
connection with the rights granted in Section 2.1 above; provided that all such
third parties shall execute appropriate documents acknowledging their work-made-
for-hire status and/or effecting assignments of all intellectual property rights
with respect to such work to Licensee or Sun, as appropriate, and undertaking
obligations of confidentiality and non-use with respect to such work. Sun may,
upon its request, review and approve or reject any documents proposed for use by
Licensee prior to any use of such contractors.
2.5 Licensee Open Classes. Subject to the terms and conditions contained
---------------------
in this Agreement, Sun hereby grants to Licensee, solely for use with
Products, a worldwide, non-exclusive, non-transferable license to use
information gained from access to the Technology to develop Licensee Open
Classes, provided that:
a. Licensee may not include any of the Technology in such Licensee Open
Class;
b. Licensee uses only names for Licensee Open Classes that begin with
"COM.Licensee" or such other convention as Sun may reasonably require,
and shall make commercially reasonable efforts to ensure that other
software which Licensee develops relating to the Technology conforms to
this convention;
c. Licensee publishes to the industry, on a non-confidential basis and
free of all restrictions, the specification for any Licensee Open Class
as early as is reasonably possible but in no event later than the date
on which it first provides such specification or an implementation
thereof to any third party. Included with such specification shall be
an appropriate test suite sufficiently detailed to allow any third
party reasonably skilled in the technology to produce implementations
compatible with the specification. Licensee shall use its reasonable
commercial efforts to clarify and correct the specification or the test
suite upon written request by Sun;
d. Licensee agrees to refrain from enforcing any copyrights or patent
rights that it might have relating to compatibility or interface, which
would be infringed by Sun or any third party implementing the
specifications for a Licensee Open Class;
e. Licensee hereby grants to Sun a non-exclusive, worldwide, fully-paid-
up license to use an unlimited number of copies of the Licensee Open
Class, in binary form, for Sun's internal use for evaluation and
demonstration; and
f. Licensee agrees to negotiate in good faith with Sun the terms of a
commercial license for the source code of the Licensee Open Class.
2.6 Tools License Grant. Subject to the terms and conditions contained in
-------------------
this Agreement, Sun hereby grants to Licensee, a worldwide, non-exclusive, non-
transferable license to use the Tools solely for the purpose of developing and
testing Products. Licensee may not sublicense the Tools unless specifically
provided in Exhibit C.
4
<PAGE>
2.7 Binary Code Distribution License. Subject to the terms and conditions
--------------------------------
contained in this Agreement, Sun hereby grants to Licensee, solely for the
Field(s) of Use, a non-exclusive, worldwide, right and license to distribute the
Product(s) in binary form only, both directly and through Distributors, subject
to the following:
a. Distributors shall not be authorized to modify any portion of the
Technology or Derivative Works thereof created by Licensee, and shall
be obligated to abide by the relevant terms in this Agreement governing
use, distribution, compatibility, and confidentiality.
b. Licensee or its Distributors shall require an end user license
agreement for all Product(s) distributed, which includes the minimum
terms specified in Exhibit C for each Technology, unless it is not
customary in the industry to include an end user license with such
Products;
c. No compatibility logo or other trademark is licensed hereunder for
use with the Technology licensed hereunder and described in Exhibit C-
12. However, should Sun subsequently introduce such a mark to signifiy
that a Product based upon the Technology licensed hereunder satisfies
the compatibility requirements set forth in Section 2.8 and Exhibit C-
12, then, if requested by Sun, Licensee shall enter into a trademark
license agreement with Sun for such mark in accordance with Sun's then
standard terms and conditions for such a license. Sun's rights under
the foregoing sentence shall not apply to the most current version of
Licensee's "Beehive" product, and "maintenance" or "dot" releases
thereto, as of the date on which Sun notifies Licensee that Sun intends
to introduce a compatibility logo or other trademark for use with
Products based on the Technology described in Exhibit C-12. For
example, if Licensee has released a FCS version 5.1 of Beehive as of
the date on which Licensee receives the notification from Sun, then any
Beehive v. 5.x release would not be subject to the trademark license.
d. Licensee may release Product(s) based on pre-FCS versions of the
Technology, if clearly labeled as a pre-release version and only for
beta testing purposes.
2.8 Compatibility Requirements.
--------------------------
a. Unless otherwise specified in Exhibit C, from time to time during
the term of the Agreement, Sun may make available to Licensee at no
cost, Java Test Suites for validating that the portion of Licensee's
Product which interprets Java bytecodes is compatible with the then-
current version of the applicable Technology and Standard Extensions.
b. Each release of a Product by Licensee must pass the most current
applicable Java Test Suite that was available from Sun one hundred
twenty (120) days before FCS of such version of the Product. In the
event that Licensee elects to use a version of the Technology and/or
Standard Extension(s) that is newer than that which is required under
this Section 2.8, then Licensee agrees to pass the Java Test Suite that
corresponds to such newer version.
c. If Licensee provides Sun with written notice of the existence of a
bug in a current Java Test Suite, then Licensee shall be released from
compatibility with the minimum portion of such Java Test Suite
necessary to avoid the impact of such bug, until such time as Sun
provides to Licensee a corrected or new Java Test Suite.
d. Upon request by Sun, Licensee shall promptly make any modifications
to any Product necessary for it to meet the compatibility requirements
set out in this Section 2.8.
5
<PAGE>
2.9 Ownership
---------
a. Ownership by Sun. Sun retains all right, title and interest in the
----------------
Technology, Documentation, Tools, Bug Fixes, and modifications to the
Shared Part. Licensee agrees to execute (in recordable form where
appropriate) any instruments and/or documents as Sun may reasonably
request to verify and maintain Sun's ownership rights in the foregoing,
or to transfer any part of the same which may vest in Licensee for any
reason.
b. Ownership by Licensee. Licensee retains all right, title and
---------------------
interest in the Products, any License Open Classes, and any Derivative
Works (excluding Bug Fixes and modifications to the Shared Part),
created by or for Licensee as authorized under the terms of this
Agreement, subject to Sun's underlying ownership rights Identified in
Section 2.9.a.
2.10 No Other Grant. Each party agrees that this Agreement does not grant
--------------
any right or license, under any intellectual property rights of the other party,
or otherwise, except as expressly provided in this Agreement, and no other right
or license is to be implied by or inferred from any provision of this Agreement
or by the conduct of the parties.
3.0 SUPPORT AND UPGRADES
3.1 Licensee Support and Upgrades. Sun shall provide support and Upgrades
-----------------------------
to Licensee under the terms and conditions specified in Exhibit C, and payment
terms specified in Section 4.1. The frequency of Upgrades shall be at Sun's sole
discretion provided that any Upgrades will be made available to Licensee at the
same time as Sun makes such Upgrades generally available to commercial licensees
of the applicable Technology.
3.2 End User Support. Licensee is not authorized to make any representation
----------------
or warranty on behalf of Sun to Licensee's end users or third parties. Licensee
shall provide technical and maintenance support service for its Distributors and
end user customers in accordance with Licensee's standard support practices. Sun
shall not be responsible for providing any support to Licensee's Distributors or
customers for the Technology or the Product(s).
4.0 PAYMENT
4.1 License and Support Fees. Licensee shall pay to Sun the fees set forth
------------------------
in Exhibit C within thirty (30) days from the Effective Date of this Agreement.
Thereafter, and for the term of the Agreement, Licensee shall pay the annual
support and Upgrade Fees on or before the anniversary of the Effective Date.
4.2 Royalty Payments. Payment of royalties shall be made quarterly, shall
----------------
be due thirty (30) days following the end of the calendar quarter to which they
relate and shall be submitted with a written statement documenting the basis for
the royalty calculation.
4.3 Taxes. All payments required by this Agreement shall be made in United
-----
States dollars, are exclusive of taxes, and Licensee agrees to bear and be
responsible for the payment of all such taxes, including, but not limited to,
all sales, use, rental receipt, personal property or other taxes and their
equivalents which may be levied or assessed in connection with this Agreement
(excluding only taxes based on Sun's net income). To the extent Licensee is
required to withhold taxes based upon Sun's income in any country, Licensee
shall provide Sun with written evidence of such withholding, suitable for Sun to
obtain a tax credit in the United States.
4.4 Records. Licensee shall maintain account books and records consistent
-------
with Generally Accepted Accounting Principles appropriate to Licensee's
domicile, as may be in effect from time to time, sufficient to allow the
correctness of the royalties required to be paid pursuant to this Agreement to
be determined.
4.5 Audit Rights. Sun shall have the right to audit such accounts upon
------------
reasonable prior notice using an independent auditor of Sun's .choice (the
"Auditor"). The Auditor shall be bound to keep confidential the details of the
business affairs of Licensee and to limit disclosure of the results of any audit
to the sufficiency of the accounts and the amount, if any, of a payment
adjustment that should be made. Such audits shall not occur more than once each
year (unless discrepancies are discovered in excess of the five percent (5%)
threshold set forth in Section 4.6, in which case two consecutive quarters per
year may be audited). Except as set forth in Section 4.6 below, Sun shall bear
all costs and expenses associated with the exercise of its rights to audit.
4.6 Payment Errors. In the event that any errors in payments shall be
--------------
determined, such errors shall be corrected by appropriate adjustment in payment
for the quarterly period during which the error is discovered. In the event of
an underpayment of more than five percent (5%) of the proper amount owed, upon
such underpayment being properly determined by the Auditor, Licensee shall
6
<PAGE>
reimburse Sun the amount of said underpayment and all reasonable costs and
expenses associated with the exercise of its rights to audit, and interest on
the overdue amount at the maximum allowable interest rate from the date of
accrual of such obligation.
7
<PAGE>
5.0 ADDITIONAL AGREEMENT OF PARTIES
5.1 Notice of Breach or Infringement. Each party shall notify the other
--------------------------------
immediately in writing when it becomes aware of any breach or violation of the
terms of this Agreement, or when Licensee becomes aware of any potential or
actual infringement by a third party of the Technology or Sun's intellectual
property rights therein.
6.0 LIMITED WARRANTY AND DISCLAIMER
6.1 Limited Warranty. Sun represents and warrants that the media, if any,
----------------
on which the Technology is recorded will be free from defects in materials and
workmanship for a period of ninety (90) days after delivery. Sun's sole
liability with respect to breach of this warranty is to replace the defective
media. Except as expressly provided in this Section 6.1, Sun licenses the
Technology Documentation and Tools to Licensee on an "AS IS" basis.
6.2 General Disclaimer. EXCEPT AS SPECIFIED IN THIS AGREEMENT, ALL OTHER
------------------
REPRESENTATIONS AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THE
TECHNOLOGY, TOOLS, AND DOCUMENTATION ARE HEREBY DISCLAIMED.
6.3 Limitation. The limited warranty set forth in this Section 6.0 are
----------
expressly subject to Section 9.0 (Limitation of Liability).
7.0 CONFIDENTIAL INFORMATION
7.1 Confidential Information. For the purposes of this Agreement,
------------------------
"Confidential Information" means the Technology, Tools, Documentation and that
information which relates to (i) either party's hardware or software, (ii) the
customer lists, business plans and related information of either party, and
(iii) any other technical or business information of the parties, including the
terms and conditions of this Agreement and the Trademark License. In all cases,
information which a party wishes to be treated as "Confidential Information"
shall be marked as "confidential" or "proprietary" (or with words of similar
import) in writing by the disclosing party on any tangible manifestation of the
information transmitted in connection with the disclosure, or, if disclosed
orally, designated as "confidential" or "proprietary" (or with words of similar
import) at the time of disclosure. Sun has no obligation of confidentiality to
Licensee with respect to Bug Fixes, modifications to the Shared part, or the
specifications for any Licensee Open Class.
7.2 Preservation of Confidentiality. The parties agree that all disclosures
-------------------------------
of Confidential Information (as defined under Section 7.1 above) shall be
governed by and treated in accordance with the terms of the Confidential
Disclosure Agreement (the "CDA") attached hereto as Exhibit B and incorporated
herein by reference, modified as follows:
(a) the definition of "Confidential Information" shall be as set forth in
Section 7.1 above notwithstanding any definition provided in the CDA;
(b) the use of Confidential Information shall be limited to the scope of
this Agreement;
(c) the obligations of confidentiality expressed in the CDA shall extend
three (3) years from the date of disclosure, except with respect to
Sun Source Code which shall be held confidential in perpetuity; and
(d) the CDA shall remain in effect for the term of this Agreement.
8
<PAGE>
8.0 LIMITED INDEMNITY
8.1 The parties acknowledge that the Technology may be in pre-release form
and that Sun shall not be liable for any defects or deficiencies in the
Technology, Documentation, Tools or in any Product, process or design created
by, with or in connection with the Technology whether or not such defects and/or
deficiencies are caused, in whole or in part, by defects or deficiencies in the
design or implementation of the Technology or Documentation. Upon FCS of the
Technology by Sun, Sun will provide to Licensee a limited indemnity as described
In Sections 8.2-8.3 below.
8.2 Sun will defend, at its expense, any legal proceeding brought against
Licensee, to the extent it is based on a claim that use of the FCS or subsequent
production version(s) of the Technology, Documentation or Tools is an
infringement of a third party trade secret or a copyright in a country that is a
signatory to the Berne Convention, and will pay all damages awarded by a court
of competent jurisdiction, or such settlement amount negotiated by Sun,
attributable to such claim, provided that Licensee: (i) provides notice of the
claim promptly to Sun; (ii) gives Sun sole control of the defense and settlement
of the claim; (iii) provides to Sun, at Sun's expense, all available
information, assistance and authority to defend; and (iv) has not compromised or
settled such proceeding without Sun's prior written consent.
8.3 Should any FCS Technology Documentation or Tools or any portion thereof
become, or in Sun's opinion be likely to become, the subject of a claim of
infringement for which indemnity is provided under Section 8.2, Sun shall, in
addition to the obligations specified in Section 8.2, as Licensee's sole and
exclusive remedy, elect to: (i) obtain for Licensee the right to use such FCS
Technology-, (ii) replace or modify the FCS Technology, Documentation or Tools
so that it becomes non-infringing-, or if alternatives (i) or (ii) are not
commercially practicable; (iii) accept the return of the Technology,
Documentation or Tools and grant Licensee a refund of the License Fee, as
depreciated on a five year straight-line basis.
8.4 THIS SECTION 8 STATES THE ENTIRE LIABILITY OF SUN WITH RESPECT TO
INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS BY THE TECHNOLOGY AND TOOLS.
SUN SHALL HAVE NO OTHER LIABILITY WITH, RESPECT TO INFRINGEMENT OF INTELLECTUAL
PROPERTY RIGHTS OF ANY THIRD PARTY AS A RESULT OF USE, LICENSE, OR SALE OF
TECHNOLOGY OR TOOLS.
8.5 Indemnity by Licensee. Except for claims for which Sun is obligated
---------------------
to indemnify Licensee under Section 8.2 or elects to indemnify under the
Trademark License, Licensee shall defend, at Licensee's expense, any and all
claims brought against Sun by third parties, and shall pay all damages awarded
by a court of competent jurisdiction, or such settlement amount negotiated by
Licensee, arising out of or in connection with Licensee's use, reproduction or
distribution of the Technology, Documentation, Product(s), or Licensee Open
Classes. Licensee's obligation to provide indemnification under this Section 8.5
shall arise provided that Sun: (i) provides notice of the claim promptly to
Licensee; (ii) gives Licensee sole control of the defense and settlement of the
claim-, (iii) provides to Licensee, at Licensee's expense, all available
information, assistance and authority to defend; and (iv) has not compromised or
settled such proceeding without Licensee's prior written consent.
9.0 LIMITATION OF LIABILITY
9.1 Limitation of Liability. Except for express undertakings to indemnify
-----------------------
under this Agreement and/or breach of Sections 2.1b, 2.4, 2.8, 7.0 or 9.2:
a. Each party's liability to the other for claims relating to this
Agreement, whether for breach or in tort, shall be limited to the license
fees paid by Licensee for the Technology related to the claims.
b. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL,
SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH OR ARISING
OUT OF THIS AGREEMENT (INCLUDING LOSS OF PROFITS, USE, DATA, OR OTHER
ECONOMIC ADVANTAGE), NO MATTER WHAT THEORY OF LIABILITY, EVEN IF EITHER
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OR PROBABILITY OF SUCH DAMAGES.
FURTHER, LIABILITY FOR SUCH DAMAGE SHALL BE EXCLUDED, EVEN IF THE
EXCLUSIVE REMEDIES PROVIDED FOR IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL
PURPOSE. The provisions of this Section 9.0 allocate the risks under this
Agreement between Sun and Licensee and the parties have relied upon the
limitations set forth herein in determining whether to enter into this
Agreement.
9.2 High Risk Activities. The Technology is not designed or intended for
--------------------
use in on-line control of aircraft, air traffic, aircraft navigation or aircraft
communications; or in the design, construction, operation or maintenance of any
nuclear facility. Sun disclaims any express or implied warranty of fitness for
such uses. Licensee agrees that it will not use or license the Technology for
such purposes, and that it will ensure that its licensees and end users of the
Technology are provided a copy of the foregoing notice.
<PAGE>
10.0 TERM AND TERMINATION
10.1 Term. The Term of this Agreement shall begin on the Effective Date and
----
shall continue for a period of five (5) years, or until terminated as provided
below. Each year for five (5) consecutive years following expiration of the
initial five (5) year term, at Licensee's sole option, Licensee may extend the
Term of this Agreement for one (1) additional year. Licensee shall indicate its
intent to extend the Agreement by written notice to Sun at least thirty (30)
days prior to the expiration of the preceding Term. Termination is permitted
either for breach of this Agreement, upon thirty (30) days written notice to the
other party and an opportunity to cure within such thirty (30) day period, or
upon any action by Licensee alleging that use or distribution of the Technology
by Sun or any of Sun's licensees of the Technology, infringes a patent of
Licensee.
10.2 Effect of Expiration. Upon expiration of this Agreement, Sun shall
--------------------
retain use, under the terms of this Agreement, of the rights received hereunder,
and Licensee shall be authorized to: (i) distribute Product(s) containing the
version of the Technology incorporated therein at the time of expiration,
subject to Licensee's continued compliance with this Agreement including the
Java Test Suites current at the time of expiration, and payment of royalties,
and (ii) retain one (1) copy of the Source Code to support customers having
copies of Product(s) distributed by Licensee prior to the expiration hereof. All
other rights of Licensee shall terminate upon such expiration.
10.3 Effect of Termination. In the event of termination of this Agreement by
---------------------
Sun in accordance with Section 10.1 above, Licensee shall promptly: (i) return
to Sun all copies of the Technology, Documentation, and other Confidential
Information of Sun (collectively "Sun Property") in Licensee's possession or
control; or (ii) permanently destroy or disable all copies of the Sun Property
in Licensee's possession or control, except as specifically permitted in writing
by Sun; and (iii) provide Sun with a written statement certifying that Licensee
has complied with the foregoing obligations. All rights and licenses granted to
Licensee shall terminate upon such termination.
10.4 No Liability for Expiration or Lawful Termination. Neither party shall
-------------------------------------------------
have the right to recover damages or to indemnification of any nature, whether
by way of lost profits, expenditures for promotion, payment for goodwill or
otherwise made in connection with the business contemplated by this Agreement,
due to the expiration or permitted or lawful termination of this Agreement. EACH
PARTY WAIVES AND RELEASES THE OTHER FROM ANY CLAIM TO COMPENSATION OR INDEMNITY
FOR TERMINATION OF THE BUSINESS RELATIONSHIP UNLESS TERMINATION IS IN MATERIAL
BREACH OF THIS AGREEMENT.
10.5 No Waiver. The failure of either party to enforce any provision of this
---------
Agreement shall not be deemed a waiver of that provision. The rights of Sun
under this Section 10.0 are in addition to any other rights and remedies
permitted by law or under this Agreement.
10.6 Survival. The parties' rights and obligations under Sections 2.0, 4.0,
--------
5.2, 7.0, 8.0, 9.0, 10.0, and 11.0 shall survive expiration or termination of
this Agreement, except in the event of termination by Sun under Section 10.1, in
which case Licensee's rights under Section 2.0 shall not survive.
10.7 Irreparable Harm. The parties acknowledge that breach of Sections 2.0,
----------------
5.2, 7.0, 9.2, 11.4 and 11.7 would cause irreparable harm, the extent of which
would be difficult to ascertain. Accordingly, they agree that, in addition to
any other legal remedies to which a non-breaching party might be entitled, such
party shall be entitled to obtain immediate injunctive relief in the event of a
breach of the provisions of such Sections.
11.0 MISCELLANEOUS
11.1 Notices. All written notices required by this Agreement must be
-------
delivered in person or by means evidenced by a delivery receipt and will be
effective upon receipt by the persons at the addresses specified below.
10
<PAGE>
Sun Licensee
Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, California 94303
Attn.: Java Software Division Vice President, Sales
cc: Java Software Division Legal Department
11.2 Marketing and Press Announcements. Licensee's initial press
---------------------------------
announcement concerning execution of this Agreement must be reviewed by Sun
prior to its release. Following release by Licensee of the initial press
release, Licensee hereby authorizes Sun to include Licensee in a published list
of licensees of the Technology. Similarly, following release by Licensee of the
initial press release Sun shall also be authorized to use Licensee's name in
advertising, marketing collateral, and customer success stories prepared by or
on behalf of Sun for the Technology, subject to prior approval by Licensee, such
approval not to be unreasonably withheld or delayed.
11.3 Partial Invalidity. If any of the above provisions are held to be in
------------------
violation of applicable law, void, or unenforceable in any jurisdiction, then
such provisions are herewith waived or amended to the extent necessary for the
License to be otherwise enforceable in such jurisdiction. However, if in Sun's
opinion deletion or amendment of any provisions of the License by operation of
this paragraph unreasonably compromises the rights or increase the liabilities
of Sun or its licensors, Sun reserves the right to terminate the License.
11.4 U.S. Government Restricted Rights. If Licensee is licensing Product or
---------------------------------
accompanying documentation to or on behalf of the U.S. Government, it shall be
made subject to "Restricted Rights", as that term is defined in the Federal
Acquisition Regulations ("FARs") in paragraph 52.227-19(c)(2), or its equivalent
paragraph in the DOD Supplement to the FARs. Contractor/Manufacturer is: Sun
Microsystems Inc., 901 San Antonio Road, Palo Alto, California 94303.
11.5 Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions of this
Agreement in any other language shall be for accommodation only and shall not be
binding on the parties to this Agreement. All communications and notices made or
given pursuant to this Agreement, and all documentation and support to be
provided, unless otherwise noted, shall be in the English language.
11.6 Governing Law. This Agreement is made under and shall be governed by
-------------
and construed under the laws of the State of California, regardless of its
choice of laws provisions.
11.7 Compliance with Laws. The Technology and Documentation, including
--------------------
technical data, is subject to U.S. export control laws, including the U.S.
Export Administration Act and its associated regulations, and may be subject to
export or import regulations in other countries. Licensee agrees to comply
strictly with all such regulations and acknowledges that it has the
responsibility to obtain such licenses to export, re-export or import the
Technology, Documentation or Product(s) as may be required after delivery to
Licensee.
Licensee shall make reasonable efforts to notify and inform its employees
having access to the Technology of Licensee's obligation to comply with the
requirements stated in this Section.
11.8 Disclaimer of Agency. The relationship created hereby is that of
--------------------
licensor and licensee and the parties hereby acknowledge and agree that nothing
herein shall be deemed to constitute Licensee as a franchisee of Sun. Licensee
hereby waives the benefit of any state or federal statutes dealing with the
establishment and regulation of franchises.
11.9 Delivery. As soon as practicable after the Effective Date, Sun shall
--------
deliver to Licensee one (1) copy of each of the deliverables set forth in
Exhibit C. Licensee acknowledges that certain of the deliverables are in various
stages of completion and agrees to accept the deliverables as and to the extent
completed as of the date of delivery and "AS IS." In the event any deliverable
is already in the possession or custody of Licensee, such item(s) shall, to the
extent used in connection with
11
<PAGE>
the rights granted in Section 2.0 above, be subject to the terms of this
Agreement, notwithstanding any pre-existing agreement or understanding between
Licensee and Sun with respect to such items.
11.10 Assignment and Change in Control. This Agreement may not be assigned or
--------------------------------
transferred by either party without the prior written consent of the other
party, which consent shall not be unreasonably withheld or delayed, except that
Sun may assign or transfer this Agreement to a majority-owned subsidiary.
11.11 Construction. This Agreement has been negotiated by Sun and Licensee
------------
and by their respective counsel. This Agreement will be fairly interpreted in
accordance with its terms and without any strict construction in favor of or
against either party.
11.12 Force Majeure. Except for the obligation to pay money, neither party
-------------
shall be liable to the other party for non-performance of this Agreement, if the
non-performance is caused by events or conditions beyond that party's control
and the party gives prompt notice under Section 11.1 and makes all reasonable
efforts to perform.
11.3 Exhibits.
--------
The following are included herein by reference as integral parts of this
Agreement:
. Exhibit A - Document Type Definition
. Exhibit B - Confidential Disclosure Agreement
. Exhibit C - Technology Specific Terms and Conditions
. Exhibit D - Trademark License
To the extent the terms and conditions of Exhibit C are contrary to the terms
and conditions of this Agreement, the terms and conditions of the Exhibit C
shall govern.
11.14 Section References. Any reference contained herein to a section of this
------------------
Agreement shall be meant to refer to all subsections of the section.
11.15 No Competitive Restrictions. The parties agree that nothing in this
---------------------------
Agreement is intended to prohibit Licensee from independently developing or
acquiring technology that is the same as or similar to the Technology, provided
that Licensee does not do so in breach of Exhibit B to this Agreement.
11.16 Complete Understanding. This Agreement and the Exhibits hereto
----------------------
constitute and express the final, complete and exclusive agreement and
understanding between the parties with respect to its subject matter and
supersede all previous communications, representations or agreements, whether
written or oral, with respect to the subject matter hereof. No terms of any
purchase order or similar document issued by Licensee shall be deemed to add to,
delete or modify the terms and conditions of this Agreement. This Agreement may
not be modified, amended, rescinded, canceled or waived, in whole or part,
except by a written instrument signed by the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
Sun: Licensee:
By: /s/ Alan Baratz By: /s/ Stephan Schambach
-------------------------------- -------------------------
Name: Alan Baratz Name: STEPHAN SCHAMBACH
------------------------------ -----------------------
(Print or Type) (Print or Type)
Title: President, Java Software Title: GESCH A FTSFUHRER
----------------------------- ----------------------
Date: 12/11/98 Date: December 2 1998
------------------------------ -----------------------
12
<PAGE>
EXHIBIT A
DOCUMENT TYPE DEFINITION
In order to ensure interoperability between all Java compliant browsers, Sun
needs to define the exact notation of applets in HTML documents. The format of
the APPLET tag shall be implementation language independent and SGML compliant.
SGML compliance is important if the APPLET tag is to be accepted as part of the
HTML standard in the future.
Example:
[applet codebase="http://java.sun.com/people/avh/classes"
code="Bounceltem.java" width=400 height=300] [/applet]
The applet tag has the following attributes:
CODEBASE The base url of the applet. The applet's code is located relative to
this URL. If this attribute is not specified, it defaults to the document's URL.
CODE The file in which the applet is located. This file is relative to
base url of the applet, It cannot be absolute.
ALT Alternate text which can be displayed by text only browsers.
NAME The symbolic name of the applet. This name can be used by applets in
the same page to locate each other.
WIDTH Required attribute which specifies the initial width of the applet in
pixels.
HEIGHT Required attribute which specifies the initial height of the applet
in pixels.
ALIGN The alignment of the applet, similar to the img tag.
VSPACE The vertical space around the applet, similar to the img tag.
HSPACE The horizontal space around the applet, similar to the img tag.
Note that the position of the applet in the page is determined by the width,
height, align, vspace and hspace attributes just like the img tag.
Applets can access the above attributes using the getParameter() method call
defined in the Applet class. All attribute/parameter names are automatically
folded to lower case. Applets that require parameters in addition to the
predefined ones need to use the param tag. It is unfortunately not legal in SGML
for a tag to have an arbitrary list of attributes. That is why additional applet
parameters explicitly using the PARAM tag have to be named. For example:
[applet code="DateItem.class" alt="The Date" width=200 height=40]
[param name="speaker" value="avh"]
[param name="translator" value="DutchTime"]
[/applet]
In addition to the ALT tag, Licensee can include additional text and markup
before the applet end tag. Java compliant browsers will ignore this text, but
browsers that do not understand the applet tag will display it instead of the
applet. For example:
[applet codebase-classes code=lmageLoop.class width=100 height=100]
[param name=imgs value="images/duke"]
13
<PAGE>
If Licensee were using a Java enabled browser, Licensee would see an animation
instead of this static image. [p]
[img src=images/duke/T1.gif"]
[/applet]
Below is the formal SGML DTD for the APPLET and PARAM tags.
[!ELEMENT APPLET - - (PARAM*, (%text;)*)]
[!ATTLIST APPLET
CODEBASE CDATA #IMPLIED-- code base --
CODE CDATA #REQUIRED-- code file --
ALT CDATA #IMPLIED-- alternative string --
NAME CDATA #IMPLIED-- the applet name --
HEIGHT NUMBER #REQUIRED
ALIGN (leftlrightltopltexttoplmiddlel
absmiddlelbaselinelbottomlabsbottom) baseline VSPACE NUMBER #IMPLIED
HSPACE NUMBER #IMPLIED
]
[!ELEMENT PARAM - O EMPTY]
[!ATTLIST PARAM
NAME NAME #REQUIRED-- The name of the parameter--
VALUE CDATA #IMPLIED-- The value of the parameter--
]
14
<PAGE>
EXHIBIT B
CONFIDENTIAL DISCLOSURE AGREEMENT
(to be attached)
15
<PAGE>
EXHIBIT C
TECHNOLOGY SPECIFIC TERMS AND CONDITIONS
The technologies licensed hereunder are those initialled by both parties
below:
<TABLE>
<CAPTION>
Exhibit Technology Licensee Sun
<S> <C> <C> <C>
C-1: Java Application Environment
-------- ----
C-2: Personal Java Environment
-------- ----
C-3: Embedded Java Environment
-------- ----
C-4: Java Card Application Environment
-------- ----
C-5: HotJava Browser
-------- ----
C-6: HotJava Views
-------- ----
C-7: JavaServer Toolkit
-------- ----
C-8: Java Development Tools
-------- ----
C-9: HotJava HTML Component
-------- ----
C-10: Personal Web Access
-------- ----
C-11: Hot Spot Premium Components
-------- ----
C-12: Java Web Server CWH A.B.
-------- ----
C-13: Java Media Framework
-------- ----
C-14: Java Shared Data Toolkit
-------- ----
</TABLE>
16
<PAGE>
****CONFIDENTIAL TREATMENT REQUESTED:
OMITTED PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE COMMISSION
EXHIBIT C-12
I. Description of Technology and Documentation
****
II. Field(s) of Use:
electronic commerce and associated activities (e.g., messaging,
communities)
III. Product List-
lntershop 4.0 (code-named Beehive) and related add-on cartridges for use
with Beehive;
IV. Schedule of Fees and Royalties:
A. Upfront Source License Fee: ****
--------------------------
B. Annual Support and Update, Fees: ****
-------------------------------
C. Binary Distribution Royalties per unit ****
--------------------------------------
* Licensee agrees to make a non-refundable prepayment of royalties in the amount
of **** which shall be offset against the first 400 units licensed by
Licensee, provided, however, that no royalty shall be due for: (i) units
distributed by Licensee at no charge that are for educational, demonstration or
evaluation purposes; or (ii) the first 250 units distributed by Licensee each
month at no charge or at a nominal charge (i.e. cost recovery only) for staging
servers which are for development purposes only.
V. Compatibility Requirements
Products must fully comply with the Documentation specified in Section
l.b above, and pass the Java Test Suites for the Java Web Server and any
included Standard Extensions, pursuant to the requirements of Section 2.8 of the
Agreement. Licensee may self-certify such compatibility unless Sun policy
requires verification of compatibility by an independent test facility
designated by Sun, at Licensee's expense. Licensee may not incorporate or
otherwise distribute a Licensee Open Class which implements functionality
substantially similar to any Java Classes required in another Java Environment.
VI. Compatibility Logo
N/A
VII. Description of Support and Upgrades
a. Updates and Bug Tracking. Subject to payment of the fees specified in
------------------------
this Exhibit C, Licensee shall have access to the Technology, Updates and the
JavaSoft bug tracking database via Sun's commercial licensee web site, and shall
be included on Sun's commercial licensee general support alias. Licensee shall
have access to the JavaSoft commercial licensee FTP site for the purpose of down
loading FCS releases of Updates, as well as early access versions of the
Technology as Sun makes such versions available.
VIII. Supplemental Terms.
These terms and conditions for Java Web Server supplement the terms and
conditions of the Agreement. Capitalized terms not defined herein shall have the
meaning specified in the Agreement. These terms and conditions shall supersede
any inconsistent or conflicting terms and conditions in the Agreement.
a. Microline Key Classes.
---------------------
1. Licensee may use the Key Class solely for the purpose of utilizing the
Microline Component Toolkit class libraries in authorized extensions of the Java
Web Server Administration Tool, and distribute the Key Class embedded/contained
in such extensions. To this end, Licensee may:
a) use one copy of the Key Class on a single computer;
b) use the Key Class yourself to enable the additional functionality of
the Microline Component Toolkit in applets and applications you create;
c) distribute the Microline Component Toolkit and Key Class bundled with
your implementation of the Java Web Server, and authorize your Java Web
Server licensees to use the Key Class solely for the purpose of utilizing
the Microline Component Toolkit class libraries in authorized extensions
of the Java Web Server Administration Tool, and distribute the Key Class
embedded/contained in such extensions;
d) develop Java applets or applications containing the Key Class and
distribute the Key Class embedded/contained in your applet or
applications;
e) make one copy of the Key Class for archival purposes, or copy the Key
Class onto the hard disk of your computer and retain the original for
archival purposes.
2. Licensee may not, except as provided in Section 1.c) above:
a) cause or permit unauthorized copying, reproduction or disclosure of
any portion of the Key Class, or any instructions, manuals, or other
documentation which accompanies the software;
b) distribute the Key Class as part of a toolkit which would allow other
developers to enable the restricted functionality in the Microline
Component Toolkit;
c) distribute the Key Class without containing/embedding it in an applet
or application;
d) sublicense, rent or lease any portion of the Key Class;
e) reverse engineer, decompile, disassemble, modify, translate, make any
attempt to discover the source code of the Key Class, or create
derivative works from the Key Class.
b. Export Restrictions.
-------------------
The Java Web Server contains encryption technology which is subject to
U.S. Export Administration Regulations. Diversion of such Software contrary to
U.S. law is prohibited. Licensee agrees that neither the Software nor any direct
product therefrom is being or will be acquired for, shipped, transferred, or
reexported, directly or indirectly, to proscribed or embargoed countries or
their nationals, nor be used for nuclear activities, chemical biological
weapons, or missile projects unless authorized by the U.S. government.
Proscribed countries are set forth in the U.S. Export Administration
Regulations. Countries subject to U.S. embargo are: Cuba, Iran, Iraq, Libya,
North Korea, Syria, and the Sudan. This list is subject to change without
further notice from Sun and Licensee must comply with the list as it exists in
fact. Licensee certifies that it is not on the U.S. Department of Commerce's
Denied Persons List and affiliated lists nor on the U.S. Department of
Treasury's Specially Designated Nationals List. Licensee agrees to comply
strictly with all U.S. export laws and assumes sole responsibility to obtain
licenses to export or reexport as may be required.
a. With respect to the "weak" or "for export" (i.e. SSL component with 40
bit encryption or less) version of the Software, Licensee may export this
version of the Software subject to import regulations in certain
countries (for example, France).
b. With respect to the "strong" or "not for export" (i.e.SSL component
with greater than 40 bit encryption) version of the Software, Licensee
may not use or export such version anywhere other than the United States
or Canada.
c. Licensee is responsible for complying with any applicable local laws,
including but not limited to the export and import regulations of other
countries.
d. These obligations survive expiration or termination of this Agreement.
c. License to Distribute JRE.
-------------------------
Licensee is granted a royalty-free right to reproduce and distribute the
JRE binary code licensed hereunder, provided that Licensee distributes the JRE
software complete and unmodified only as part of, and for the sole purpose of
running, Licensee's Product into which the JRE software is incorporated and does
not distribute additional software intended to replace any component(s) of the
JRE software.
IX. End User License Terms
Licensee shall include the following terms and conditions, provided that
Licensee shall substitute Licensee's name in place of Sun as appropriate.
1. Restrictions. Software is confidential copyrighted information of Sun
and title to all copies is retained by Sun and/or its licensors. Customer shall
not modify, decomplie, disassemble, decrypt, extract, or otherwise reverse
engineer Software. Software may not be leased, assigned, or sublicensed, in
whole or in part. Software is not designed or intended for use in on-line
control of aircraft, air traffic, aircraft navigation or aircraft
communications; or in the design, construction, operation or maintenance of any
nuclear facility.
2. Export Regulations. Software, including technical data, is subject to
U.S. export control laws, including the U.S. Export Administration Act and its
associated regulations, and may be subject to export or import regulations in
other countries. Customer agrees to comply strictly with all such regulations
and acknowledges that it has the responsibility to obtain licenses to export,
re-export, or import Software. Software may not be downloaded or otherwise
exported or re-exported (i) into, or to a national or resident of, Cuba, Iraq,
Iran, North Korea, Libya, Sudan, Syria or any country to which the U.S. has
embargoed goods; or (ii) to anyone on the U.S. Treasury Department's list of
Specialty Designated Nations or the U.S. Commerce Departments Table of Denial
Orders.
3. Restricted Rights. Use, duplication or disclosure by the United
States government is subject to the restrictions as set forth in the Rights in
Technical Data and Computer Software Clauses in DFARS 252.227-7013(c)(1)(ii) and
FAR 52.227-19(c)(2) as applicable.
4. Microline Key Classes. Include the Microline Key Classes provisions
specified in Section VIII. above.
17
<PAGE>
18
<PAGE>
19
<PAGE>
IX. End User License Terms
Licensee shall include the following terms and conditions, provided that
Licensee shall substitute Licensee's name in place of Sun as appropriate.
1. Restrictions. Software is confidential copyrighted information of Sun and
title to all copies is retained by Sun and/or its licensors. Customer shall not
modify, decompile, disassemble, decrypt, extract, or otherwise reverse engineer
Software. Software may not be leased, assigned, or sublicensed, in whole or in
part. Software is not designed or intended for use in on-line control of
aircraft, air traffic, aircraft navigation or aircraft communications; or in the
design, construction, operation or maintenance of any nuclear facility.
2. Export Regulations. Software, including technical data, is subject to U.S.
export control laws, including the U.S. Export Administration Act and its
associated regulations, and may be subject to export or import regulations in
other countries. Customer agrees to comply strictly with all such regulations
and acknowledges that it has the responsibility to obtain licenses to export,
re-export, or import Software. Software may not be downloaded, or otherwise
exported or re-exported (i) into, or to a national or resident of, Cuba, Iraq,
Irwin, North Korea, Libya, Sudan, Syria or any country to which the U.S. has
embargoed goods; or (ii) to anyone on the US. Treasury Department's list of
Specially Designated Nations or the U.S. Commerce Department's Table of Denial
Orders.
3. Restricted Rights. Use, duplication or disclosure by the United States
government is subject to the restrictions as set forth in the Rights in
Technical Data and Computer Software Clauses in DFARS 252.227-7013(c) (1) (ii)
and FAR 52.227-19(c) (2) as applicable.
4. Microline Key Classes. Include the Microline Key Classes provisions
specified in Section Viii. above.
20
<PAGE>
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement (333-32034).
ARTHUR ANDERSEN
Wirtshaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
Nendza Bolash
Wirtshaftsprufer Certified Public Accountant
Hamburg, Germany
April 4, 2000
