-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PmX2mwJCb0ZdRbY6vWcIqRcOE+T7A/S3lKrY4aPC/POZtkamf6VOGuu07mfZqTay obh8+0vcFTHIXxYrmpRt2Q== 0001021408-00-001798.txt : 20000525 0001021408-00-001798.hdr.sgml : 20000525 ACCESSION NUMBER: 0001021408-00-001798 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREND MICRO INC CENTRAL INDEX KEY: 0001089463 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: SEC FILE NUMBER: 333-10568 FILM NUMBER: 642443 BUSINESS ADDRESS: STREET 1: ODAKYU SOUTHERN TOWER 10F 2-1 YOYOGI 2 STREET 2: CHOME SHIBUYA-KU CITY: TOKYO 151-8583 JAPAN STATE: M0 ZIP: 00000 MAIL ADDRESS: STREET 1: ODAKYU SOUTHERN TOWER 10F 2-1 YOYOGI 2 STREET 2: CHOME SHIBUYA-KU CITY: TOKYO 151-8583 JAPAN STATE: CA ZIP: 95014 POS AM 1 POS AM NO. 2 TO FORM F-1 As filed with the Securities and Exchange Commission on May 24, 2000 Registration No. 333-10568 ================================================================================ ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ POST-EFFECTIVE AMENDMENT NO. 2 TO FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _________________________ Trend Micro Kabushiki Kaisha (Exact Name of Registrant as Specified in its Charter) _________________________ Trend Micro Incorporated (Translation of Registrant's Name into English) _________________________ Japan 7372 Not Applicable (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
Odakyu Southern Tower, 10F 2-1, Yoyogi 2-chome Shibuya-ku, Tokyo 151-8583, Japan 81-3-5334-3600 (Address and telephone number of registrant's principal executive offices) _________________________ Andrew Kwok-To Lai Chief Operating Officer c/o Trend Micro, Inc. 10101 N. DeAnza Blvd., Suite 400 Cupertino, California 95014 (408) 257-1000 (Name, address and telephone number of agent for service) _________________________ Copies to : Jonathan Lemberg, Esq. Stan Yukevich, Esq. Morrison & Foerster LLP AIG Building, 11th Floor 1-3, Marunouchi 1-chome Chiyoda-ku, Tokyo 100-0005, Japan Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] _______________________________ 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. ________________________________________________________________________________ ================================================================================ PROSPECTUS - ---------- Trend Micro Incorporated 810,000 Shares of Common Stock This prospectus relates to the offering in the United States of up to 810,000 shares of our common stock under the terms of the U.S. program of our 1999 incentive plan. The selling shareholder currently owns 810,000 of our outstanding shares and is selling all of the shares offered under the U.S. program of the 1999 incentive plan. We will not receive any of the proceeds from this offering. The ADSs to be issued upon exchange of the shares at the option of the holder of such shares are traded on The Nasdaq National Market under the symbol "TMIC." The offering price of the shares was set at the market price of our shares in Japan on July 12, 1999. Our shares are traded on the over-the-counter market in Japan. On July 12, 1999, the last reported sale price of the shares on the over-the-counter market in Japan was (Yen)6,133, equivalent to $50.19 per share. Investing in the shares and ADSs involves risks. See "Risk Factors" beginning on page 10. Per Share Total --------- ----- Initial offering price...................... $50.19 $40,653,900 Proceeds to the selling shareholder......... $50.19 $40,653,900 The figures in the per share and "Total" columns reflect conversion of the per share price in Yen to U.S. Dollars at a rate of (Yen)122.19 per U.S. Dollar, the U.S. Federal Reserve Board noon buying rate on July 12, 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. May 24, 2000
Table of Contents Page ---- Presentation of Financial and Other Information..................................................................... 2 Cautionary Statement Regarding Forward-Looking Statements........................................................... 3 Prospectus Summary.................................................................................................. 4 Risk Factors........................................................................................................ 10 Use of Proceeds..................................................................................................... 20 Dividend Policy..................................................................................................... 20 Capitalization...................................................................................................... 20 Exchange Rates...................................................................................................... 21 Market Price Information............................................................................................ 21 Selected Consolidated Financial Information......................................................................... 23 Management's Discussion and Analysis Of Financial Condition and Results of Operations............................... 26 Business............................................................................................................ 39 Management.......................................................................................................... 57 Principal Shareholders and Selling Shareholder...................................................................... 62 Certain Relationships and Related Party Transactions................................................................ 63 Shares Eligible for Future Sale..................................................................................... 64 Description of Capital Stock........................................................................................ 66 Description of American Depositary Receipts......................................................................... 70 Tax Considerations.................................................................................................. 75 Enforceability of Civil Liabilities................................................................................. 83 Japanese Foreign Exchange and Other Regulations..................................................................... 84 Plan of Distribution................................................................................................ 86 Legal Matters....................................................................................................... 89 Experts............................................................................................................. 90 Where You Can Find More Information................................................................................. 90 Summary of Significant Differences between Generally Accepted Accounting Principles in Japan and the United States.. 91
PRESENTATION OF FINANCIAL AND OTHER INFORMATION We publish our consolidated financial statements in Japanese yen. References in this prospectus to "$" or "dollars" are to U.S. dollars, references to "(Yen)" are to Japanese yen and references to "NT$" are to New Taiwan dollars. For your convenience, this prospectus contains translations of some Japanese yen amounts into U.S. dollars. Unless otherwise noted in this prospectus, for Japanese yen amounts as of December 31, 1998, we have translated these amounts into U.S. dollars at the rate of $1.00:(Yen)113.08, which was the noon buying rate in New York City for cable transfers in Japanese yen as certified by the Federal Reserve Bank of New York on December 31, 1998 and for Japanese yen amounts as of December 31, 1999, we have translated these amounts into U.S. dollars at the rate of $1.00: (Yen)102.16, which was the noon buying rate in New York City for cable transfers in Japanese yen as certified by the Federal Reserve Bank of New York on December 31, 1999. You should not treat these translations as representations that the Japanese yen amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the exchange rate indicated. Unless otherwise indicated, references to Trend Micro, we, our or us include Trend Micro Incorporated and its wholly-owned subsidiaries. All trademarks appearing in this prospectus are the property of their respective owners. 2 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The discussion in this prospectus contains forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, levels of activity, performance, or achievements to differ materially from those implied by the forward-looking statements. The forward-looking statements in this prospectus can be identified, in some instances, by the use of words such as "expects," "anticipates," "intends," "believes," and similar language. We cannot guarantee future results, levels of activity, performance or achievements. Potential risks and uncertainties which may cause our actual results to differ materially from those implied by the forward-looking statements include, but are not limited to: . difficulties in addressing new virus and other computer security problems; . timing of new product introductions and lack of market acceptance for our new products; . the level of continuing demand for, and timing of sales of, our existing products; . rapid technological change within the anti-virus software industry; . changes in customer needs for anti-virus software; . existing products and new product introductions by our competitors and the pricing of those products; . declining prices for our products and services; . difficulties in adapting our products and services to the internet; . the effect of future acquisitions on our financial condition and results of operations; . the effect of adverse economic trends on our principal markets; . the effect of foreign exchange fluctuations on our results of operations; . the potential lack of attractive investment targets; . difficulties in successfully executing our investment strategy; and . other risks discussed under "Risk Factors" and elsewhere in this prospectus. 3 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information appearing elsewhere in this prospectus regarding Trend Micro, the shares being sold in the offering and the ADRs that such shares are exchangeable for, and our financial statements and notes to those statements. appearing elsewhere in this prospectus. Our Business Trend Micro develops, markets and supports anti-virus software and management solutions for corporate computer systems and personal computers. Our products deliver virus protection at each access point within the corporate network where data files are exchanged. We completed our initial public offering on the over-the-counter market in Japan in August 1998. We market and license our anti-virus software products worldwide but primarily in Japan, the United States and Taiwan. Japan accounted for approximately 49% and 43% of our net sales in 1998 and 1999, respectively. The United States accounted for approximately 19% and 28% of our net sales in 1998 and 1999, respectively. Taiwan accounted for approximately 19% and 11% of our net sales in 1998 and 1999, respectively. Market Opportunity The anti-virus software market has grown rapidly in recent years. We believe that the key drivers of growth in the anti-virus software market currently are: . the proliferation of servers and desktop computers due to use of the internet for communication and commerce; . increasing use of e-mail, which is susceptible to computer virus infection; and . the increasing number and variety of new computer viruses in circulation. Our Strategy Our goal is to develop and deliver the most effective anti-virus and security software in the market. We seek to achieve this goal through the following key strategies: . Use the internet to update, monitor and manage our products. . Expand our market presence in the U.S. and Europe through cooperative marketing activities with major hardware manufacturers, software developers and internet service companies, and other marketing initiatives. . Develop software to meet security threats more quickly and effectively than our competitors. . Maintain our leading market position in Japan. 4 Challenges We Face Challenges we face in implementing our strategy include: . Larger software companies may offer anti-virus and other security software as a standard feature of other software products. . To counter slowing sales growth in Japan and elsewhere in Asia due in part to continuing weakness in the Japanese economy and Asian economies generally, we must significantly increase our market share in the U.S. and Europe. . Our main competitors have greater financial resources and a larger share of the U.S. and European anti-virus software markets than we do. . We must keep up with rapid change in the computer software and internet service industries. * * * Our principal executive offices are at Odakyu Southern Tower, 10th Floor, 2-1 Yoyogi 2-chome, Shibuya-ku, Tokyo 151-8583, Japan, and our telephone number is 81-3-5334-3600. You can visit our website at www.antivirus.com. Information contained on our website does not constitute part of this prospectus. 5 The Offering Our common stock to be outstanding after the offering as shown below is based on shares outstanding as of April 30, 2000. This share amount excludes 2,293,725 shares issuable upon the exercise of warrants granted under our 1997, 1998 and 1999 incentive plans, of which 1,513,375 shares were issuable upon the exercise of vested warrants as of April 30, 2000. Offering...................................... Up to 810,000 shares. Selling shareholder........................... STG Incentive Company L.L.C. is selling all of the shares offered in the offering. Initial offering price........................ $50.19 per share. Common stock to be outstanding after the offering..................................... 65,096,142 shares Listings...................................... The shares are listed on the Japanese over-the-counter market. ADSs (at a ratio of 10 ADSs to 1 share) are traded on The Nasdaq National Market under the symbol "TMIC." Use of proceeds............................... We will not receive any of the proceeds from the offering. You may purchase the shares offered hereby by exercising options granted to you under the U.S. program of our 1999 incentive plan. The options were issued by STG Incentive Company L.L.C., a Delaware limited liability company organized by Trueway Company Limited, Gainway Enterprises Limited and Steve Ming-Jang Chang for purposes of the U.S. program. For more information on the terms of the 1999 incentive plan and STG Incentive Company L.L.C., see "Plan of Distribution" on page 86. 6 Summary Consolidated Financial Information The following table summarizes certain financial information for our business. The consolidated income statement information for the fiscal years ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet information as of December 31, 1998 and 1999 that are identified as being in accordance with U.S. GAAP, are derived from and should be read together with our consolidated financial statements prepared in accordance with U.S. GAAP, which have been audited by PricewaterhouseCoopers, independent accountants, and are included elsewhere in this prospectus. The consolidated balance sheet statement information as of December 31, 1997 that is identified as being in accordance with U.S. GAAP is derived from our consolidated balance sheet prepared in accordance with U.S. GAAP, which has been audited by PricewaterhouseCoopers, independent accountants, and is not included in this prospectus. The consolidated income statement information for the fiscal years ended December 31, 1995 and 1996, and the consolidated balance sheet information as of December 31, 1995 and 1996, are derived from our unaudited consolidated financial statements prepared in accordance with Japanese GAAP and are not included in this prospectus. The consolidated income statement information for the years ended December 31, 1997, 1998 and 1999, and the consolidated balance sheet information as of December 31, 1997, 1998 and 1999, that are identified as being in accordance with Japanese GAAP are derived from our consolidated financial statements prepared in accordance with Japanese GAAP, which have been audited by PricewaterhouseCoopers, independent accountants, and are not included in this prospectus. You should read the following information together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes beginning on page F-1 of this prospectus. Some of the information below and in "Selected Consolidated Financial Information" is presented in accordance with Japanese GAAP, which differs in important ways from U.S. GAAP. We describe significant differences between Japanese GAAP and U.S. GAAP under "Management's Discussion and Analysis of Financial Condition and Results of Operations.Accounting Differences between Japanese GAAP and U.S. GAAP" and "Summary of Significant Differences between Generally Accepted Accounting Principles in Japan and the United States." Prior to August 1996, Trend Micro was a Taiwanese company. In August 1996, Trend Micro was reorganized in a series of transactions by which Trend Micro became the parent corporation of Trend Micro Incorporated (Taiwan) and each of the international subsidiaries then owned by Trend Taiwan. 7
Year Ended December 31, ------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999 -------------------------------------------------------------------------------------- (in millions of yen and thousands of dollars, except per share data) Consolidated Income Statement Information: In accordance with Japanese GAAP Net sales (Yen)1,781 (Yen)4,318 (Yen)7,943 (Yen)10,217 (Yen)13,741 $134,505 ------------ ------------ ------------ ------------ ----------- -------- Operating income 553 927 2,349 2,427 4,254 41,641 ------------ ------------ ------------ ------------ ----------- -------- Income before income tax 530 974 2,432 2,379 4,464 43,696 Income taxes (116) (346) (1,118) (1,325) (1,997) (19,548) ------------ ------------ ------------ ------------ ----------- -------- Net income 414 628 1,314 1,054 2,467 24,148 ------------ ------------ ------------ ------------ ----------- -------- Net income per share (basic) (Yen)41.41 (Yen)11.63 (1) (Yen)24.33 (2) (Yen)18.50 (3) (Yen)38.82 $ 0.38 ============ ============ ============ ============ =========== ======== Net income per share (diluted) ---- ---- ---- (Yen)18.10 (Yen)37.73 $ 0.37 ============ ============ ============ ============ =========== ======== Cash dividends (Yen)5.92 (4) ---- ---- ---- (Yen)3.33 (5) $ 0.03 ============ ============ ============ ============ ============ ========
Year Ended December 31, -------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999 -------------------------------------------------------------------------------- (in millions of yen and thousands of dollars, except per share data) In accordance with U.S. GAAP Net sales........................ (Yen)7,398 (Yen)9,746 (Yen)13,633 $133,449 Cost of sales.................... 734 560 481 4,714 ---------- ---------- ----------- -------- Gross profit................... 6,664 9,186 13,152 128,735 ---------- ---------- ----------- -------- Operating expenses: Selling......................... 1,316 1,618 2,240 21,922 Research and development........ 557 960 994 9,733 General and administrative...... 2,755 4,995 5,986 58,592 ---------- ---------- ----------- -------- Total operating expenses...... 4,628 7,573 9,220 90,247 ---------- ---------- ----------- -------- Operating income................. 2,036 1,613 3,932 38,488 ---------- ---------- ----------- -------- Other income, net..................... 82 85 67 658 ---------- ---------- ----------- -------- Income before income taxes........ 2,118 1,698 3,999 39,146 ---------- ---------- ----------- -------- Income taxes......................... 1,267 1,295 1,849 18,103 ---------- ---------- ----------- -------- Income before equity in losses of affiliated companies............. 2,150 21,043 ----------- -------- Equity in losses of affiliated companies........................ 3 23 ----------- -------- Net income..................... (Yen)851 (Yen)403 (Yen)2,147 $ 21,020 ========== ========== ----------- ======== Net income per share (basic)... (Yen)15.77(6) (Yen)7.08(6) (Yen)33.79 $ 0.33 ========== ========== =========== ======== Net income per share (diluted)..... -- (Yen)6.92(6) (Yen)32.85 $ 0.32 ========== ========== =========== ======== Weighted average common shares outstanding (basic).............. 54,000,000 56,973,091 63,550,164 Weighted average common shares outstanding (diluted)............ -- 58,241,860 65,376,326
8
Consolidated Balance Sheet Information: In accordance with Japanese GAAP Cash and cash equivalents (6)........ (Yen) -- (Yen) -- (Yen)1,144 (Yen)9,396 (Yen)15,649 $153,180 Total assets......................... 1,907 3,262 5,544 17,456 28,857 282,469 Total liabilities.................... 963 1,689 2,657 3,215 10,381 101,615 Stockholders' equity................. (Yen)944 (Yen)1,573 (Yen)2,887 (Yen)14,241 (Yen)18,476 $180,854 In accordance with U.S. GAAP Cash and cash equivalents........... (Yen)1,144 (Yen)9,396 (Yen)15,649 $153,180 Total assets........................ 5,435 17,716 28,781 281,729 Total liabilities................... 3,190 4,143 11,471 112,289 Shareholders' equity................ (Yen)2,245 (Yen)13,573 (Yen)17,310 $169,440
_______________________________ (1) As adjusted to reflect 54,000,000 shares outstanding as of December 31, 1996 as permitted under U.S. GAAP. As a result of the reorganization, shares outstanding decreased from 10,000,000 shares at December 31, 1995 to 6,000 shares at December 31, 1996. Net income per share based upon 6,000 shares outstanding at December 31, 1996 was (Yen)104,664. (2) As adjusted to reflect 54,000,000 shares outstanding as of December 31, 1997 as permitted under U.S. GAAP. Shares outstanding increased from 6,000 shares on December 31, 1996 to 18,000 shares in a one-into-three stock split effected on September 1, 1997. Net income per share based on 18,000 shares outstanding at December 31, 1997 was (Yen)72,979. (3) Shares outstanding increased from 18,000 shares on December 31, 1997 to 62,506,800 shares on December 31, 1998 due to the following events: . an increase to 1,800,000 shares on January 1, 1998 in connection with a lowering of the par value of our shares; . a one-into-ten stock split effected on May 7, 1998; . issuance of 2,500,000 shares on August 18, 1998 in connection with our initial public offering in Japan; . issuance of 335,600 shares upon exercise of warrants issued under the 1997 and 1998 incentive plans; and . a one-into-three stock split effected on September 30, 1999. (4) Dividend amounts in New Taiwan dollars have been translated into Japanese yen at the Bank of Tokyo-Mitsubishi TTM rate on September 11, 1995 of NT$1.00 : (Yen)3.6127. (5) Reflects an extraordinary dividend of (Yen)208.3 million paid in March 1999 to commemorate the listing of our shares on the Japanese over-the-counter market. (6) As adjusted to reflect the changes in outstanding shares described in note 3 as permitted under U.S. GAAP. (7) Consolidated data under Japanese GAAP for cash and cash equivalents for the years 1995-1996 is not available. 9 RISK FACTORS You should consider carefully the risks described below and the other information in this prospectus before investing in the shares or the ADSs. The occurrence of any of the following risks could hurt our business, financial condition or results of operations. In such case, the trading price of our shares and the ADSs could decline and you could lose all or part of your investment. Major software and hardware vendors may incorporate anti-virus protection in their product offerings, which could render our products obsolete or unmarketable Major vendors of operating system software, other software such as firewall or e-mail software or computer hardware may decide to enhance or bundle their products with other products to include anti-virus functions. These companies may offer anti-virus protection as a standard feature in their products, at minimal or no additional cost to customers. This could render our products obsolete or unmarketable, particularly if anti-virus products offered by these vendors were comparable to our products. In addition, even if these vendors' anti-virus products offered fewer functions than our products, or were less effective in detecting and cleaning virus-infected files, customers could still choose them over our products due to lower cost. Because we generate substantially all of our revenue from a single product line, we are vulnerable to decreased demand for such products Unlike software companies with diversified product lines, substantially all of our net sales come from licensing and selling anti-virus software products. Although we have begun to offer more comprehensive network and internet security and management software and services, we expect anti-virus products to continue to account for the largest portion of our net sales for the foreseeable future. If the demand for, or the prices of, this software drop as a result of competition, technological change or other factors such as lower growth or a contraction in the worldwide anti-virus software market, our business, financial conditions and results of operations could materially suffer. Deterioration in our relationship with SOFTBANK could result in a decrease in sales of our products We depend on our relationship with SOFTBANK, which is our largest customer and has played an instrumental role in the development of our business in Japan. An adverse change in our relationship with SOFTBANK would result in decreased sales to SOFTBANK and could disrupt our relationships with distributors of our products. This could make it difficult for us to market our products in Japan. Sales to SOFTBANK totaled approximately (Yen)1.4 billion or 19% of our net sales in 1997, approximately (Yen)2.4 billion or 24% of our net sales in 1998 and (Yen)2.5 billion ($24.0 million) or 18% of our net sales in 1999. In addition, SOFTBANK has close relationships with many systems integrators through which we sell our anti-virus software to corporate end users in Japan. At the time of our initial public offering in Japan in August 1998, SOFTBANK was our largest shareholder. Since that time, SOFTBANK has reduced its holding of our shares. This process culminated in March 2000, when SOFTBANK sold all of its remaining shares of our common stock and thus ceased to be a Trend Micro shareholder. We do not believe that our business relationship with SOFTBANK will suffer as a result of SOFTBANK's sale of its Trend Micro shares, but we cannot be sure that it will not. 10 Because of our dependence on SOFTBANK, the price of our shares and ADSs could fall as a result of adverse events affecting SOFTBANK, even if the events do not relate directly to us Because of our dependence on SOFTBANK, the price of our shares and ADSs could fall as a result of adverse events affecting SOFTBANK that do not affect us directly, such as a deterioration in SOFTBANK's business. Also, public market analysts and investors might view SOFTBANK's sale of all of its Trend Micro shares in March 2000 as a withdrawal of SOFTBANK's support for us. As a result, the price of our shares and the ADSs could also fall. Our net sales in Japan could decline as a result of our revised corporate licensing policy in Japan Starting in April 1999, we revised our corporate licensing policy in Japan. Under our revised policy, SOFTBANK may have less incentive to sell our products because discounts on sales to SOFTBANK have been reduced. To date, the new licensing policy has not hurt our business relationship with SOFTBANK or with other distributors, or resulted in a decrease in net sales. However, we cannot be sure that our revised corporate licensing policy will not hurt our business in the future. If SOFTBANK's or other distributors' purchases of our products were to decrease significantly because of the revised policy, our net sales would likely decline. Because rapid technological change regularly occurs in the anti-virus software market, our products may become obsolete The anti-virus software market is characterized by: . rapid technological change; . the proliferation of new and changing computer viruses; . frequent product introductions and updates; and . changing customer needs. These characteristics of our market create significant risks and uncertainties for our business success. For example, our competitors might introduce anti-virus products that are technologically superior to our products. Additionally, new software operating system, network system or anti-virus software industry standards could emerge. Emerging trends in these systems and standards currently include applications distributed over the internet and the use of a web browser to access client-server systems. Our existing products might be incompatible with some or all of such standards. Our business, financial condition and results of operations could materially suffer unless we are able to respond quickly and effectively to these developments. Because our competitors are more established than we are in the U.S. and European markets, we may not be able to increase our market share in such markets We believe that our share of the anti-virus software market in the U.S. and Europe is small relative to the market shares of our principal competitors, despite the growth of our sales in these markets in 1999. Because our competitors are already well-established in these key markets and have greater financial and other resources and market recognition, we may not be able to compete effectively for market share. If this happens, we may not be able to increase sales or our market share in these markets, which could materially hurt the prospects for growth in our business. 11 Some of our major competitors have the following important advantages over us in the U.S. and European markets: . greater name recognition; . more diversified product lines; . larger customer bases; and . significantly greater financial, technical, marketing and other resources. As a result, as compared to us, our competitors may be able to: . better withstand downturns in the anti-virus software market and in the computer . software market in general; . adapt more quickly to new or emerging technologies or changes in customer requirements; and . more effectively and profitably market, sell and support their products. We may suffer a loss of sales and market share in our core Japanese market if our competitors achieve success in Japan Two of our major competitors, Network Associates and Symantec Corporation, have entered the Japanese anti-virus software market and are allocating significant resources to achieving success in this Japanese anti-virus software market. Although these competitors currently have smaller shares of the Japanese market than Trend Micro, Network Associates and Symantec each has significantly greater financial, marketing and other resources as a whole than we do. Additionally, competition in our core Japanese market and in other Asian markets could intensify in the future if other competitors emerge. As a result of our competitors' efforts, we may not be able to maintain our current leading market position in Japan in the future. Also, in order to respond effectively to increased competition, we may be required to devote more of our product development, marketing and other resources to the Japanese market, which could limit our ability to grow in other markets. A material loss of sales and market share in Japan as a result of our competitors' success could materially harm our business, financial condition and results of operations. Our growth may suffer if we are not successful in establishing a new internet service business One of our key strategies for long-term growth is to establish a line of business focused on delivering network management and security services over the internet for a fee. If we do not successfully establish and expand this business, we may lose sales to our competitors who are able to effectively establish an internet-based service business model. We do not have significant experience in this business area, and we have generated only limited revenues from this business to date. Because we may acquire companies to grow our business, future acquisitions may reduce our earnings and result in increased costs in our business operations In a rapidly changing industry, we occasionally review acquisition opportunities. Accordingly, we may seek to expand our business through acquisitions, including our internet service business. Unlike some of our major competitors, we have limited experience in acquiring existing businesses. Future acquisitions could result in numerous risks and uncertainties, including: 12 . Our inability to retain customers, suppliers and other important business relationships of an acquired business; . Difficulties in integrating an acquired company into Trend Micro, including the acquired company's operations, personnel, products and information systems; . Diversion of our management's attention from other business concerns; and . Adverse effects on our results of operations from acquisition-related charges and amortization of goodwill and purchased technology. If we make such an acquisition using stock, our current shareholders' ownership interests will be diluted. Any of these factors could materially hurt our business, financial condition and results of operations. We must adapt to the rapidly changing business environment brought on by the widespread use of the internet We have been seeking to use the internet in many parts of our business, including in the sale, distribution and support of our products. There are still many uncertainties regarding many facets of the internet, including reliability, security, access, tax, government regulation and cost. We also run the risk of not adapting to the latest changes in the internet, which could harm our business operations. If growth of the internet does not develop at the rapid pace we expect, our business, financial condition and operating results could be adversely affected. If hackers gain unauthorized access to our systems, we could suffer disruptions in our business and long-term damage to our reputation As an anti-virus company that delivers virus protection products over the internet, we may be more susceptible to problems caused by hackers than other software companies. For example, if hackers were able to cause us to transmit computer viruses or interrupt the delivery of our anti-virus software monitoring and security services over the internet, we could suffer substantial disruptions in our business and material damage to our reputation. This could result in a significant loss of our customers and other important business relationships. We could also incur costs for public relations efforts following attacks by hackers. Hacker activities could also force us to incur substantial costs to fix technical problems or result in hackers gaining access to our proprietary information. We must effectively manage our growth Our business has grown rapidly. This growth has placed, and any future growth would continue to place, a significant strain on our limited personnel, management and other resources. Our ability to manage any future growth in our business will require us to: . attract, train, retain, motivate and manage new employees successfully; . effectively integrate new employees into our operations; and . continue to improve our operational, financial, management and information systems and controls. If we continue to grow, our management systems currently in place may be inadequate or we may not be able to effectively manage our growth. In particular, we may be unable to: . provide effective customer service; . develop and deliver products in a timely manner; 13 . implement effective financial reporting and control systems; . implement a new internet-based service business model; or . exploit new market opportunities and effectively respond to competitive pressures. We sell our products through intermediaries who may not vigorously market our products, have rights of return or may have difficulty in timely paying for purchased products We market substantially all of our products to end users through intermediaries, including distributors, resellers and value-added resellers. Our distributors sell other products that are complementary to, or compete with, our products. While we encourage our distributors to focus on our products through market and support programs, these distributors may give greater priority to products of other suppliers, including competitors. We rely heavily on our management and technical personnel, who may not remain with us in the future We rely, and will continue to rely, on a number of key technical and management employees, including our CEO, Steve Ming-Jang Chang. While we require our employees to sign employment agreements, our employees are generally not otherwise subject to noncompetition covenants. If any of our key employees leave, our business, results of operations and financial condition could suffer. Fluctuations in our interim financial results could cause the market price for the shares and the ADSs to fall We believe that our interim financial results may fluctuate in ways that do not reflect the long-term trend of our future financial performance. It is likely that in some future semi-annual or other interim periods, our operating results may be below the expectations of public market analysts and investors. In this event, the price of our shares and the ADSs could fall. Factors which could cause our interim financial results to fluctuate include: . Timing of sales of our products and services due to customers' budgetary constraints, seasonal buying patterns and our promotional activities; . New product introductions by our competitors; . Significant marketing campaigns, research and development efforts, employee hirings, and other current expenditures by Trend Micro to drive the growth of our business; . Changes in customer needs for anti-virus software; and . Changes in economic conditions in our major markets. Because of the influence of our principal shareholders, our other shareholders may be unable to influence our business Our principal shareholders, including our executive officers and directors, beneficially owned approximately 45.9% of our outstanding shares as of March 31, 2000. These shareholders, if they act together, would be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. Our principal shareholders may have strategic or other interests that conflict with the interests of our other shareholders. As a result, the concentration in our 14 shareholdings may have the effect of delaying or preventing a change in control of Trend Micro, which could result in the loss of a significant financial gain to our shareholders. Under the terms of SOFTBANK's prior investment in Trend Micro, in the past we have held management meetings with SOFTBANK. A SOFTBANK executive is also currently a member of our board of directors. As a result, although SOFTBANK no longer owns Trend Micro shares after its sale of our stock in March 2000, SOFTBANK remains able to influence our management and affairs. Because Japan is our largest market, weakness in the Japanese economy may hurt our business performance While our sales in the U.S. have increased in recent years, we remain significantly dependent on the Japanese market. Net sales of our anti-virus software products in Japan accounted for approximately 50% of our net sales in 1997, approximately 49% in 1998 and approximately 43% in 1999. During 1998 and 1999, the Japanese economy contracted due to a number of factors, including weak consumer spending and lower capital investment by Japanese companies. We believe the sluggish Japanese economy has hindered growth in our net sales during the last three years. We currently anticipate that the rate of growth in our net sales in Japan will continue to decline, partly due to continued weakness in the Japanese economy. Because we make a significant percentage of our net sales in Asia, we are more vulnerable than our competitors to weaknesses in the economies of Asian countries Since the late summer of 1997, a number of Asian countries have experienced economic, banking and currency difficulties that have led to economic downturns in those countries. Among other things, the decline in value of Asian currencies, together with difficulties in obtaining credit, has significantly limited the purchasing power of our Asian customers. This has resulted in lower net sales of our products in 1999 and 1998 than in 1997 in Taiwan, Hong Kong, Korea, Malaysia and other Asian countries. Net sales of our products in these countries was approximately (Yen)2.0 billion or approximately 28% of our net sales in 1997, approximately (Yen)1.9 billion ($17.2 million) or approximately 20% of our net sales in 1998 and approximately (Yen)1.8 billion or approximately 13% of our net sales in 1999. When compared with our main competitors, we believe we make a greater portion of our total sales in these countries. We expect that continued economic weakness in Asia will continue to hinder our growth. Because we earn revenues denominated in a number of different currencies, foreign exchange fluctuations could lower our results of operations Our reporting currency is the Japanese yen and the functional currency of each of our subsidiaries is the currency of the country in which the subsidiary is domiciled. However, a significant portion of our revenues and operating expenses is denominated in currencies other than the Japanese yen, primarily the U.S. dollar and the New Taiwan Dollar. As a result, appreciation or depreciation in the value of other currencies as compared to the Japanese yen could result in material transaction or translation gains or losses which could reduce our operating results. These negative effects on Trend Micro from currency fluctuations could become more significant if we are successful in increasing our sales in markets outside of Japan. We do not currently engage in currency hedging activities. 15 Because our business depends significantly on intellectual property, infringement of our intellectual property could hurt our business Our success depends upon the development of proprietary software technology. We rely on a combination of contractual rights and patent, copyright, trademark and trade secret laws to establish and protect proprietary rights in our software. If we are unable to establish and protect these rights, our competitors may be able to use our intellectual property to compete against us. This could limit our growth and hurt our business. At present, our U.S. subsidiary holds three issued U.S. patents and our Taiwan subsidiary holds four issued U.S. patents. It is possible that no additional patents will be issued to us or any of our subsidiaries. In addition, our issued patents may not prevent other companies from competing with us. We also enter into confidentiality agreements with our employees and license agreements with our customers, and limit access to our proprietary information and its distribution. However, we cannot guarantee that any of these measures will discourage others from misappropriating our technology or independently developing similar technology. Our business could suffer if we do not prevail in our lawsuits with Network Associates Our U.S. subsidiary, Trend Micro, Inc., is currently involved in two lawsuits with Network Associates. In May 1997, Trend U.S. sued Network Associates in the U.S. Federal District Court for the Northern District of California, alleging that some of Network Associates' products infringe Trend U.S.'s patent relating to the technology used in our InterScan VirusWall product, and seeking injunctive relief and unspecified money damages. Network Associates has asserted counterclaims against us in this litigation. In April 2000, Network Associates filed suit against Trend U.S. in the U.S. Federal District Court for the Northern District of Texas, alleging that Trend U.S.'s anti-virus software packages, including the Trend Virus Control System, infringes a Network Associates patent. Network Associates' complaint seeks injunctive relief and unspecified money damages. A ruling that is adverse to Trend U.S. in either of these lawsuits could hurt our business, including by hindering our efforts to further develop the U.S. market. Also, any ruling that requires Trend U.S. to pay damages or refrain from taking specified actions, or finds that any of our patents are invalid, could reduce our operating results or limit our ability to compete. We are currently in negotiations with Network Associates to settle all outstanding litigation between the parties. Although we expect to reach agreement with Network Associates on terms that are acceptable to us, we cannot assure you that we will be able to do so. We may also become involved in other litigation in the future. If this happens, we might have to incur significant costs. This could hurt our business and operating results, and cause the market price of the shares and ADSs to fall. Product liability claims asserted against us in the future could hurt our business Our products are designed to protect customers' network systems and personal computers from damage caused by computer viruses. As a result, if a customer suffers damage from viruses, the customer could sue us on product liability or related grounds, claim damages for data loss or make other claims. Our license agreements typically contain provisions, such as disclaimers of warranty and limitations of liability, which seek to limit our exposure to these types of claims. However, in some jurisdictions these provisions may not be enforceable or statutory, public policy or other grounds. We currently do not carry product liability insurance covering claims arising in the U.S. While we have not been sued on product liability grounds to date, a successful product liability or related claim brought against us could harm our business. 16 Our stock price is volatile, and investors buying the shares or ADSs may not be able to resell them at or above their purchase price Our common shares are traded on the Japanese over-the-counter market, which is the principal market for the shares. The Japanese over-the-counter market is not as large or as active as the Tokyo Stock Exchange or The Nasdaq National Market and therefore may be less liquid and more volatile. Recently, the U.S. and Japanese securities markets have experienced significant price and volume fluctuations. The market prices of securities of high-tech companies, and internet companies in particular, have been especially volatile. Since trading in our shares commenced on the Japanese over-the-counter market on August 17, 1998, our stock price has fluctuated between a low of (Yen)1,393 and a high of (Yen)32,800. Since trading in our ADSs commenced on the Nasdaq National Market on July 8, 1999, the price of our ADSs has fluctuated between a low of $4.667 and a high of $31.875. The closing price on the Japanese over-the-counter market for our stock on May 18, 2000 was (Yen)12,800, and the closing price on The Nasdaq National Market for our ADSs on May 17, 2000 was $13.125 per ADS. The market price of our shares and ADSs is likely to fluctuate in the future. We do not expect to pay cash dividends We intend to retain any future earnings to finance our business and operations and any future growth. Therefore, we do not anticipate paying any cash dividends in the foreseeable future. Yen-dollar fluctuations could cause the market price of the ADSs to decline, reduce dividend amounts payable to ADS holders, if declared, and affect other items as expressed in U.S. dollars Fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect the U.S. dollar equivalent of the Japanese yen price of the shares on the Japanese over-the-counter market and, as a result, are likely to affect the market price of the ADSs. These fluctuations will also affect our earnings, the book value of our assets and our shareholders' equity as expressed in U.S. dollars. If in the future we decide to pay dividends on the shares, we will declare any cash dividends in Japanese yen. Exchange rate fluctuations will also affect the dividend amounts payable to ADS holders following conversion into U.S. dollars of dividends paid in Japanese yen on the shares represented by the ADSs. Sales of additional shares to the public may cause the price of the shares and ADSs to fall The sale of a substantial amount of shares in our global offering of shares in the form of shares and American Depositary Shares in July 1999 increased significantly the number of shares held by the public. This may cause the price of the shares and the ADSs to fluctuate more than the price of the shares has in the past, and may also cause the price of the shares and ADSs to decline. In addition, if our shareholders sell substantial amounts of shares or ADSs in the public market, the market price of the shares and the ADSs could fall. Such 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. At April 30, 2000, we had 65,096,142 shares issued and outstanding, assuming no exercise of outstanding warrants. All of these shares are freely tradable in our primary trading market, the Japanese over-the-counter market. Certain of our shares are also traded in the United States in the form of ADSs in compliance with the holding period, volume, and manner of sale restrictions under Rule 144 under the Securities Act of 1933. It is also possible that we may issue additional shares in connection with our financing activities, acquisition activities or otherwise. Any shares that we issue will also be freely tradable in the Japanese over-the-counter market, and, 17 depending on the circumstances of their issuance, may also be freely tradable in the U.S. public market. The rights of small shareholders are limited under the Japanese unit share system Our articles of incorporation provide that 500 shares constitute one "unit." The Japanese Commercial Code restricts the rights of shares that do not constitute whole units. Holders of shares constituting less than one unit do not have the right to vote, to institute derivative actions or to examine our books and records. Each ADS offered in the offering represents the right to receive one-tenth of one share. A holder who owns less than 5,000 ADSs will indirectly own less than a whole unit. Under the deposit agreement governing the rights of ADS holders, in order to withdraw any shares, an ADS holder must surrender ADRs evidencing 5,000 ADSs or a multiple of 5,000 ADSs. Each ADR will bear a legend to that effect. Under the unit share system, holders of less than a unit have the right to require us to purchase their shares. Holders of ADSs that represent other than multiples of whole units cannot withdraw the underlying shares representing less than one unit. They will therefore be unable, as a practical matter, to . exercise the right to require us to purchase the underlying shares, or . receive cash settlement in lieu of withdrawal. As result, as a holder of ADSs, you will not be able to access the Japanese markets through the withdrawal mechanism to sell shares in lots of less than one unit. The unit share system does not affect the transferability of ADSs, which may be transferred in any lot size. As a holder of ADSs, you will have fewer rights than a shareholder has and you will have to act through the depositary to exercise those rights The rights of shareholders under Japanese law to take actions including voting their shares, receiving dividends and distributions, bringing derivative actions, examining the company's accounting books and records and exercising appraisal rights are available only to holders of record. Because the depositary, through its custodian agents, is the record holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying your ADSs as instructed by you and will pay to you the dividends and distributions collected from us. However, in your capacity as an ADS holder, you will not be able to bring a derivative action, examine the accounting books and records of the company or exercise appraisal rights through the depositary. Rights of shareholders under Japanese law may be more limited than under the law of other jurisdictions Our articles of incorporation, our board of directors' regulations and the Japanese Commercial Code govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors' and officers' fiduciary duties and shareholders' rights may be different from those that would apply if we were a non-Japanese company. For example, under the Commercial Code, only holders of 3% or more of the issued and outstanding shares are entitled to examine our accounting books and records. Shareholders' rights under Japanese law may not be as extensive as shareholders' rights under the law of other countries. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in another jurisdiction. In addition, Japanese courts may not be willing to 18 enforce liabilities against us in actions brought in Japan which are based upon the securities laws of the United States or any U.S. state. 19 USE OF PROCEEDS We will not receive any proceeds from this offering. DIVIDEND POLICY We currently intend to retain any earnings for reinvestment to develop our business. In September 1995, we paid a cash dividend of (Yen)36.1 million, or (Yen)5.92 per share, based on 10,000,000 shares of Trend Micro Incorporated (Taiwan) outstanding on December 31, 1995. In March 1999, to commemorate the listing of our shares on the Japanese over-the-counter market, we declared and paid to our shareholders of record as of December 31, 1998 an extraordinary dividend of (Yen)208.3 million, or (Yen)3.33 per share. CAPITALIZATION The following table shows the capitalization of Trend Micro in accordance with U.S. GAAP at December 31, 1999. You should read this table together with the consolidated financial statements and notes beginning on page F-1 and "Selected Consolidated Financial Information" on page 23. "Common stock issued and outstanding" below does not include 2,293,725 shares issuable upon the exercise of outstanding warrants granted under our 1997, 1998 and 1999 incentive plans, of which 1,513,375 shares were issuable upon the exercise of warrants vested as of April 30, 2000. We increased the number of our authorized shares from 72,000,000 to 83,000,000 in March 1999 and from 83,000,000 to 250,000,000 in March 2000.
December 31, 1999 ----------------- (in millions of yen and thousands of dollars) ---------------------------------- Long-term liabilities (Yen) 6,352 $ 62,173 ----------- --------- Shareholders' equity: Common stock ((Yen)50 par value); 83,000,000 shares authorized, 64,842,900 shares issued and outstanding 5,415 53,002 Additional paid-in capital 9,199 90,042 Legal reserve 150 1,468 Deferred compensation (102) (994) Retained earnings 3,082 30,171 Net unrealized gain on debt and equity securities 216 2,114 Cumulative translation adjustments (633) (6,196) Treasury stock, at cost (1999, 875 shares) (17) (168) ------------ --------- Total shareholders' equity 17,310 169,439 ------------ --------- Total capitalization (Yen) 23,662 $ 231,612 ============ =========
20 EXCHANGE RATES The Japanese yen is convertible into U.S. dollars at freely floating rates, and there are currently no restrictions on the transfer of Japanese yen between Japan and the United States. On May 17, 2000, the noon buying rate in New York City for cable transfers in Japanese yen as certified by the Federal Reserve Bank of New York was US$1.00 = (Yen)109.53. The following table shows, for the last five fiscal years, the average of the month-end noon buying rates for US$1.00. For 2000, information shown below is through May 17, 2000.
Japanese Yen per U.S. Dollar Year Ended December 31, ---------------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 ---------------------------------------------------------------------------------------------- Average................. (Yen) 94.07 (Yen)109.31 (Yen)121.85 (Yen)130.88 (Yen)112.79 (Yen)107.49 High.................... 104.20 115.88 131.08 147.14 124.45 111.11 Low..................... 81.12 103.92 111.42 113.08 101.53 101.70 Period-end.............. 103.28 115.77 130.45 113.08 102.16 109.53
MARKET PRICE INFORMATION Japanese Over-The-Counter Market Our shares have been traded since August 18, 1998 on the Japanese over-the- counter market, which is the principal trading market for the shares. Prior to August 18, 1998, there was no public market for the shares. The following table shows, for the periods indicated, the high and low closing per-share sale prices of the shares as reported by the Japan Securities Dealers Association, taking into account the one-into-three stock split effected on September 30, 1999.
Yen Price Per Share ------------------------------- High Low ----------- ----------- 1998 Third quarter (August 18 to September 30, 1998).......... (Yen) 2,833 (Yen) 1,867 Fourth quarter........................................... 2,583 1,393 1999 First quarter............................................ 5,100 2,367 Second quarter........................................... 7,333 3,800 Third quarter............................................ 10,833 3,177 Fourth quarter........................................... 25,800 14,000 2000 First quarter............................................ 32,800 16,900 Second quarter (through May 18, 2000).................... 19,100 9,500
On May 18, 2000, the closing sale price of the shares on the Japanese over- the-counter market was (Yen)12,800 per share. 21 U.S. Market Certain of our shares have been traded on The Nasdaq National Market since July 8, 1999 in the form of American Depositary Shares under the symbol "TMIC." The following table shows, for the periods indicated, the high and low closing per-ADS sale price of the ADSs and the average daily trading volume of the ADSs, taking into account the one-into-three stock split effected on September 30, 1999.
Dollar Price Per ADS --------------------------- High Low ----------- ----------- 1999 Third quarter (from July 8, 1999)........................... $13.125 $ 4.667 Fourth quarter.............................................. 24.500 13.500 2000 First quarter............................................... 31.875 16.500 Second quarter (through May 17, 2000)....................... 17.188 10.375
On May 17, 2000, the closing sale price of the ADSs on The Nasdaq National Market was $13.125 per ADS. Overview of the Japanese Over-The-Counter Market On the Japanese over-the-counter market, member securities firms trade registered stocks primarily through JASDAQ Market Services, Inc., which acts as a matching and settlement agent for the Japan Securities Dealers Association. Member securities firms receive bid and offer quotations, trading volumes, selling prices and other trading information through a computerized system. As of March 31, 2000, the stock of 872 companies was registered on the Japanese over-the-counter market. As of March 31, 2000, the Japanese over-the-counter market had an aggregate market capitalization of approximately (Yen)30.7 trillion. 22 SELECTED CONSOLIDATED FINANCIAL INFORMATION You should read the following selected consolidated financial information together with the financial statements and notes to the statements beginning on page F-1 of this prospectus, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Summary of Significant Differences Between Generally Accepted Accounting Principles in Japan and the United States" included elsewhere in this prospectus. The consolidated income statement information for the fiscal years ended December 31, 1997, 1998 and 1999, and the consolidated balance sheet information as of December 31, 1998 and 1999, that are identified as being in accordance with U.S. GAAP are derived from and should be read together with our consolidated financial statements prepared in accordance with U.S. GAAP, which have been audited by PricewaterhouseCoopers, independent accountants, and are included elsewhere in this prospectus. The consolidated balance sheet statement information as of December 31, 1997 that is identified as being in accordance with U.S. GAAP is derived from our consolidated balance sheet prepared in accordance with U.S. GAAP, which has been audited by PricewaterhouseCoopers, independent accountants, and is not included in this prospectus. The consolidated income statement information for the fiscal years ended December 31, 1995 and 1996, and the consolidated balance sheet information as of December 31, 1995 and 1996, are derived from our unaudited consolidated financial statements prepared in accordance with Japanese GAAP and not included in this prospectus. The consolidated income statement information for the years ended December 31, 1997, 1998 and 1999, and the consolidated balance sheet information as of December 31, 1997, 1998 and 1999, that are identified as being in accordance with Japanese GAAP are derived from our consolidated financial statements prepared in accordance with Japanese GAAP, which have been audited by PricewaterhouseCoopers, independent accountants, and are not included in this prospectus. Some of the information below is presented in accordance with Japanese GAAP, which differs in important ways from U.S. GAAP. For a summary of significant differences between Japanese GAAP and U.S. GAAP, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Accounting Differences between Japanese GAAP and U.S. GAAP" and "Summary of Significant Differences between Generally Accepted Accounting Principles in Japan and the United States." Historical results are not necessarily indicative of future results of operations. Prior to August 1996, Trend Micro was a Taiwanese company. In August 1996, Trend Micro was reorganized in a series of transactions by which Trend Micro became the parent corporation of Trend Taiwan and each of the international subsidiaries then owned by Trend Taiwan. 23
Year Ended December 31, -------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999 -------------------------------------------------------------------------------------- (in millions of yen and thousands of dollars, except per share data) Consolidated Income Statement Information: In accordance with Japanese GAAP Net sales........................ (Yen)1,781 (Yen)4,318 (Yen)7,943 (Yen)10,217 (Yen)13,741 $134,505 ---------- ---------- ---------- ----------- ----------- -------- Operating income................. 553 927 2,349 2,427 4,254 41,641 ---------- ---------- ---------- ----------- ----------- -------- Income before income tax......... 530 974 2,432 2,379 4,464 43,696 Income taxes..................... (116) (346) (1,118) (1,325) (1,997) (19,548) ---------- ---------- ---------- ----------- ----------- -------- Net income....................... 414 628 1,314 1,054 2,467 24,148 ---------- ---------- ---------- ----------- ----------- -------- Net income per share (basic)..... (Yen)41.41 (Yen)11.63 (1) (Yen)24.33 (2) (Yen)18.50(3) (Yen) 38.82 $ 0.38 ========== ========== ========== =========== =========== ======== Net income per share (diluted)... ---- ---- ---- (Yen)18.10 (Yen) 37.73 $ 0.37 ========== ========== ========== =========== =========== ======== Cash dividends................... (Yen)5.92 (4) ---- ---- (Yen) 3.33 (5) 0.03 ========== ========== ========== =========== =========== ========
Year Ended December 31, --------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999 --------------------------------------------------------------------------------------- (in millions of yen and thousands of dollars, except per share data) In accordance with U.S. GAAP Net sales.......................... (Yen)7,398 (Yen)9,746 (Yen)13,633 $ 133,449 Cost of sales...................... 734 560 481 4,714 ---------- ---------- ----------- --------- Gross profit................... 6,664 9,186 13,152 128,735 ---------- ---------- ----------- --------- Operating expenses:................ Selling........................ 1,316 1,618 2,240 21,922 Research and development....... 557 960 994 9,733 General and administrative..... 2,755 4,995 5,986 58,592 ---------- ---------- ----------- --------- Total operating expenses.... 4,628 7,573 9,220 90,247 ---------- ---------- ----------- --------- Operating income................... 2,036 1,613 3,932 38,488 ---------- ---------- ----------- --------- Other income, net.................. 82 85 67 658 ---------- ---------- ----------- --------- Income before income taxes......... 2,118 1,698 3,999 39,146 ---------- ---------- ----------- --------- Income taxes....................... 1,267 1,295 1,849 18,103 ---------- ---------- ----------- --------- Income before equity in losses of affiliate companies..... 403 2,150 21,043 ========== =========== ========= Equity in losses of affiliated companies.............. - 3 23 ========== =========== ========= Net income......................... (Yen) 851 (Yen) 403 (Yen) 2,147 $ 21,020 ========== ========== =========== ========= Net income per share (basic)....... (Yen)15.77 (6) (Yen) 7.08 (6) (Yen) 33.79 $ 0.33 ========== ========== =========== ========= Net income per share (diluted)..... -- (Yen) 6.92 (Yen) 32.85 $ 0.32 ========== ========== =========== ========= Weighted average common shares outstanding (basic)............... 54,000,000 56,973,091 63,550,164 Weighted average common shares outstanding (diluted)............. -- 58,241,860 65,376,326
24
December 31, --------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 1999 --------------------------------------------------------------------------------- (in millions of yen and thousands of dollars, except per share data) Consolidated Balance Sheet Information: In accordance with Japanese GAAP Cash and cash equivalents (6)........... (Yen) -- (Yen) -- (Yen) 1,444 (Yen) 9,396 (Yen)15,649 $153,180 Total assets............................ 1,907 3,262 5,544 17,456 28,857 282,469 Total liabilities....................... 963 1,689 2,657 3,215 10,381 101,615 Stockholders' equity.................... (Yen) 944 (Yen) 1,573 (Yen) 2,887 (Yen)14,241 (Yen)18,476 $180,854 In accordance with U.S. GAAP Cash and cash equivalents............... (Yen) 1,144 (Yen) 9,396 (Yen)15,649 $153,180 Total assets............................ 5,435 17,716 28,781 281,729 Total liabilities....................... 3,190 4,143 11,471 112,289 Shareholders' equity.................... (Yen) 2,245 (Yen)13,573 (Yen)17,310 $169,440
_______________________________ (1) As adjusted to reflect 54,000,000 shares outstanding as of December 31, 1996 as permitted under U.S. GAAP. As a result of the reorganization, shares outstanding decreased from 10,000,000 shares at December 31, 1995 to 6,000 shares at December 31, 1996. Net income per share based upon 6,000 shares outstanding at December 31, 1996 was (Yen)104,664. (2) As adjusted to reflect 54,000,000 shares outstanding as of December 31, 1997 as permitted under U.S. GAAP. Shares outstanding increased from 6,000 shares on December 31, 1996 to 18,000 shares in a one-into-three stock split effected on September 1, 1997. Net income per share based on 18,000 shares outstanding at December 31, 1997 was (Yen)72,979. (3) Shares outstanding increased from 18,000 shares on December 31, 1997 to 62,506,800 shares on December 31, 1998 due to the following events: . an increase to 1,800,000 shares on January 1, 1998 in connection with a lowering of the par value of our shares, . a one-into-ten stock split effected on May 7, 1998, . issuance of 2,500,000 shares on August 18, 1998 in connection with our initial public offering in Japan, . issuance of 335,600 shares upon exercise of warrants issued under the 1997 and 1998 incentive plans, and (4) Dividend amounts in New Taiwan dollars have been translated into Japanese yen at the Bank of Tokyo-Mitsubishi TTM rate on September 11, 1995 of NT$1.00 : (Yen)3.6127. (5) Reflects an extraordinary dividend of (Yen)208.3 million paid in March 1999 to commemorate the listing of our shares on the Japanese over-the-counter market. (6) As adjusted to reflect the changes in outstanding shares described in note 3, as permitted under U.S. GAAP. (7) Consolidated data under Japanese GAAP for cash and cash equivalents for the years 1995-1996 is not available. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion together with the financial statements and notes beginning on page F-1 of this prospectus. Additionally, the following discussion includes forward-looking statements about our business and future performance. You should read these forward-looking statements together with the description of the uncertainties and risks associated with these statements contained under the heading "Cautionary Statement Regarding Forward- Looking Statements" in this prospectus. Overview Trend Micro develops, markets and supports anti-virus software and management solutions for corporate computer systems and desktop personal computers. Our net sales consist primarily of license and license renewal fees, as well as limited sales of our products to other companies for inclusion in their products. Site license fees for corporate end users consist of a fee for the license itself and fees for maintenance and support delivered over the initial license term. Maintenance and support generally includes virus pattern updates, product version updates, telephone and online technical support and free use of our 24-hour service centers. Upon expiration of the initial term, corporate end users can renew the license annually by paying a fee generally equal to one-half of the initial license fee in Japan and 20%-50% of the initial license fee in the U.S. and elsewhere, depending on the country. For retail purchasers of PC-cillin/Virus Buster, the license fee includes maintenance and support for the initial one-year term only. In order to receive maintenance and support services after the initial term, these retail purchasers must pay a percentage, generally less than one-half, of the original license fee. We generally recognize revenues from product licenses when: . the product has been shipped or electronically delivered; . no significant vendor obligations remain; and . collection of the resulting account receivable is probable. In general, we record sales revenues attributable to maintenance and support as deferred revenue and recognize such revenues ratably over the license term. The percentage of the license fee which is deferred varies depending on the location of the Trend Micro entity making the sale, as well as the product sold. The weighted average percentage of license fees which were deferred was approximately 25% in both 1998 and 1999. In 1999, we began to receive support fees from systems integrators who subscribe to our eDoctor services. See note 1 to the financial statements. Our net sales grew 40% from approximately (Yen)9.7 billion in 1998 to approximately (Yen)13.6 billion ($133.4 million) in 1999. Our net sales consist primarily of sales by our operating entities in Japan, the U.S., Taiwan and Europe. Japan, the U.S., Taiwan and Europe accounted for approximately 43%, 28%, 12% and 13%, respectively, of our net sales in 1999, and approximately 49%, 19%, 18% and 8%, respectively, in 1998. Net sales in Japan totaled approximately (Yen)4.8 billion and (Yen)5.8 billion ($57.2 million) in 1998 and 1999, respectively, representing approximately 49% and 43% of our total net sales in these periods. The decrease in the percentage of our total net sales represented by our net sales in Japan was primarily the result of increased U.S. net sales in 1999. In absolute terms, net sales in 26 Japan grew approximately 22% from 1998 to 1999, primarily due to increased sales of our internet-based products to corporate users. Net sales in Japan grew approximately 30% from 1997 to 1998. Our rate of sales growth in Japan in 1998 and 1999 was significantly lower than in 1997, when our net sales in Japan grew approximately 84% over 1996. Our lower sales growth in Japan in 1998 and 1999 resulted primarily from the fact that by the end of 1997 we had already established a large base of corporate end users due to rapid growth in 1997, and consequently added new corporate customers at a slower rate in 1998 and 1999. More generally, Japanese corporations' demand for anti-virus solutions has lagged demand elsewhere, particularly in the U.S. Our U.S. net sales grew from approximately (Yen)1.9 billion in 1998 to approximately (Yen)3.8 billion ($37.5 million) in 1999, an increase of approximately 105%. Net sales in the U.S. grew approximately 76% from approximately (Yen)1.1 billion in 1997 to approximately (Yen)1.9 billion in 1998. These annual increases in our U.S. net sales resulted largely from higher sales of internet-based products as well as our server-based products such as ServerProtect, primarily as a result of increased internet and server use by new corporate end users. The continuing recession in Asia adversely affected our net sales in Japan and other parts of Asia during 1998 and 1999. This was especially true in Taiwan, where net sales decreased from approximately (Yen)1.8 billion in each of 1997 and 1998, to approximately (Yen)1.6 billion ($16.1 million) in 1999. Net sales in Europe grew approximately 124% from approximately (Yen)813 million in 1998 to (Yen)1.8 billion ($17.9 million) in 1999. Net sales in Europe grew approximately 90% from approximately (Yen)428 million in 1997 to (Yen)813 million in 1998. The growth in net sales from 1997 to 1998 resulted largely from increased sales following the establishment of our European subsidiaries during 1997. We achieved an increased rate of growth in sales from 1998 to 1999 as we gained greater name recognition in the European market and as a result of heightened use of anti-virus products by European corporate customers. Net sales outside of Japan, the U.S., Taiwan and Europe increased approximately 17% from approximately (Yen)379 million in 1997 to approximately (Yen)445 million in 1998, and from 1998 to 1999 increased approximately 9% from approximately (Yen)445 million to approximately (Yen)483 million ($4.7 million). These increases were primarily due to higher corporate sales in Europe. Until April 1999, we offered three types of licenses to Japanese corporate customers: . a two-year "executive license" for corporate customers who purchased our products through Vaccine Bank, a cooperative marketing program which we established with SOFTBANK in 1997; . a one-year site license for Virus Buster; and . a one-year site license for our server package for corporate customers who purchased our products through systems integrators. Holders of executive licenses have been eligible for license fee discounts through SOFTBANK. Effective as of April 1, 1999, we adopted a uniform one-year site license policy for all new Japanese corporate end users, effectively combining the three licenses described above. We adopted this license policy to realize a more stable revenue stream based entirely on annual license fees, rather than a combination of bi-annual and annual license fees. In addition, we increasingly work directly with systems integrators to provide support and service to corporate end 27 users. As a result, we are placing less emphasis on other distribution channels in Japan. Under our new licensing policy, volume discounts are available for corporate end users with a large number of personal computers. Discounts on sales to SOFTBANK have been reduced. As in the past, end users may license our products directly from us or through SOFTBANK, or other distributors or systems integrators. Existing executive licenses will remain in effect through their initial term and are renewable for a two-year renewal term at discounted rates stated in the original license. After the first renewal, our standard renewal terms described above will apply. In markets other than Japan and Taiwan, we generally offer one-year corporate site licenses, with volume discounts for large corporate customers. We made rebate payments to SOFTBANK of approximately (Yen)5.4 million in 1997, approximately (Yen)22.6 million in 1998 and approximately (Yen)97.8 million ($1.0 million) in 1999. The rebate amounts were based on SOFTBANK's achievement of sales targets agreed upon between SOFTBANK and us. We record rebate payments as deductions of sales revenue on an accrual basis. Our consolidated financial statements are denominated in Japanese yen. All asset and liability accounts of our foreign subsidiaries are translated into Japanese yen at the year-end rates of exchange. We translate all income and expense accounts at rates of exchange that approximate those prevailing at the time of the transactions and accumulate the resulting adjustments as a separate component of shareholders' equity. We translate foreign currency-denominated receivables and payables into Japanese yen at year-end rates of exchange and recognize or expense the resulting translation gains or losses on a current basis. Fluctuations in the exchange rate between the Japanese yen and other currencies, principally the U.S. dollar and the New Taiwan Dollar, will affect the translation of the financial results of our foreign subsidiaries into Japanese yen for purposes of our consolidated financial results, and will also affect the Japanese yen value of any amounts we receive from our subsidiaries. In the past we have recorded a majority of our expenses, and recognized a substantial majority of our net sales, in Japanese yen. In October 1997, April and June 1998 and July 1999, we granted warrants to attract and retain key employees. Also, in July 1999, options were granted under the U.S. program of our 1999 incentive plan. The warrants granted in 1997 generally commenced vesting 30 days after our initial public offering, which we completed in August 1998. The warrants granted in 1998 generally commenced vesting on the first anniversary of the grantee's employment. The warrants granted in 1999 generally commenced vesting six months after the grant date, and the stock options granted in 1999 will generally commence vesting one year after the grant date. Using methodology under Accounting Principles Board Opinion No. 25, we have recorded a non-cash compensation expense of approximately (Yen)397.5 million for the year ended December 31, 1998 and approximately (Yen)379.8 million ($3.7 million) for the year ended December 31, 1999 with respect to the 1998 warrants. This expense accounts for the difference between the exercise prices of the 1998 warrants and the deemed fair market value as of the warrants' grant date of the shares issuable upon exercise of the warrants. The 1998 warrants are expected to continue to vest through December 31, 2000. Consequently, we expect to record additional non-cash compensation expense of approximately (Yen)101.5 million in 2000. Had such non-cash compensation expense for our 1998 warrants in 1998 and 1999 been determined based on the fair value of such warrants at the grant dates, as prescribed by Statement of Financial Accounting Standards No. 123, our pro forma net income would have been approximately (Yen)147.6 million in 1998 and approximately (Yen)1.7 billion in 1999, and net income per share would have been (Yen)2.59, or (Yen)2.53 on a fully diluted basis, in 1998 and (Yen)26.73, or (Yen)25.98 on a fully diluted basis, in 1999. Those figures are significantly different than those determined under Accounting Principles Board Opinion No. 25. Those differences result mainly from the current price of the shares and their expected volatility. The impact of the 28 pro forma value of the warrants computed under Statement of Financial Accounting Standards No. 123 has not affected our reported earnings or cash flows. The impact has been measured for disclosure purposes only and is entirely non-cash in nature. See note 14 to the financial statements. We issued (Yen)6 billion worth of unsecured bonds due July 2002 with detachable warrants in connection with our 1999 incentive plan in July 1999. The bonds bear interest at the annual rate of 2.5%. We have invested the proceeds of the bonds in cash and other short-term investments. Since these investments are likely to yield less interest income than the interest expense on the bonds, we will incur a net interest expense with respect to the bonds. Results of Operations The following table sets forth the results of operations for Trend Micro in absolute terms and as a percentage of net sales. Our historical operating results are not necessarily indicative of the results for any future period.
For the Year Ended December 31 ------------------------------------------------------------------- 1998 1998 1999 1999 1999 ------------------------------------------------------------------- (in thousands, except percentages) Net sales............................................. (Yen)9,745,664 100.0% (Yen)13,633,170 100.0% $133,449 Cost of sales......................................... 559,530 5.7 481,574 3.5 4,714 -------------- ----- --------------- ----- -------- Gross profit..................................... 9,186,134 94.3 13,151,596 96.5 128,735 -------------- ----- --------------- ----- -------- Operating expenses: Selling.......................................... 1,617,759 16.6 2,239,594 16.4 21,922 Research and development......................... 960,156 9.9 994,340 7.3 9,733 General and administrative....................... 4,994,937 51.2 5,985,740 43.9 58,592 -------------- ----- --------------- ----- -------- Total operating expenses................... 7,572,852 77.7 9,219,674 67.6 90,247 -------------- ----- --------------- ----- -------- Operating income...................................... 1,613,282 16.6 3,931,922 28.9 38,488 Other income (expense): Interest income.................................. 44,620 0.4 148,487 1.1 1,453 Interest expense................................. (29,279) (0.3) (66,526) (0.5) (651) Gain on sales of marketable securities........... 146,310 1.5 280,532 2.1 2,746 Foreign exchange gain (loss), net................ (70,934) (0.7) (174,921) (1.3) (1,712) Other income (expense), net...................... (6,133) (0.1) (120,298) (1.0) (1,178) -------------- ----- --------------- ----- -------- Total other income........................ 84,584 0.8 67,274 0.4 658 -------------- ----- --------------- ----- -------- Income before income taxes............................ 1,697,866 17.4 3,999,196 29.3 39,146 -------------- ----- --------------- ----- -------- Income taxes: Current.......................................... 1,641,902 16.8 2,538,455 18.6 24,848 Deferred......................................... (347,151) (3.5) (688,988) (5.1) (6,745) -------------- ----- --------------- ----- -------- 1,294,751 13.3 1,849,467 13.5 18,103 -------------- ----- --------------- ----- -------- Income before equity in losses of affiliated companies............................................ 2,149,729 15.8 21,043 ============== ===== =============== ===== ======== Equity in losses of affiliated companies.............. 2,356 - 23 ============== ===== =============== ===== ======== Net income............................................ (Yen)403,115 4.1% (Yen)2,147,373 15.8% $ 21,020 ============== ===== =============== ===== ========
29 Comparison of the Years Ended December 31, 1998 and 1999 Net Sales Net sales increased 40% from (Yen)9.7 billion in 1998 to (Yen)13.6 billion ($133.4 million) in 1999. The increase was primarily due to increased sales of internet-based products such as InterScan VirusWall and ScanMail, which grew from approximately (Yen)2.8 billion or 29% of our net sales in 1998 to approximately (Yen)6.3 billion ($61.8 million) or 46% of our net sales in 1999. Net sales of server-based products, primarily ServerProtect, increased from approximately (Yen)1.0 billion or 10% of our net sales in 1998 to approximately (Yen)1.5 billion ($14.7 million) or 11% of our net sales in 1999, reflecting higher corporate demand for internet-based products. Net sales of anti-virus software for personal computers, including retail package sales of PC-cillin/Virus Buster, declined from approximately (Yen)3.7 billion or 38% of net sales in 1998 to approximately (Yen)3.5 billion ($34.3 million) or 26% of net sales in 1999, and no longer represent the largest portion of our net sales. Within the personal computer product category, retail package sales of personal computer software decreased from approximately (Yen)1.6 billion in 1998 to approximately (Yen)0.7 billion ($7.2 million) in 1999, due primarily to decreased sales of our products in our Asian markets. We released Virus Buster 2000 in September 1999. Site license sales of personal computer software to corporate end users increased from approximately (Yen)2.1 billion in 1998 to approximately (Yen)2.8 billion ($27.1 million) in 1999. Our net sales include a limited amount of sales of our products to other companies for inclusion in their products. Sales of these products decreased slightly from approximately (Yen)1.0 billion in 1998 to approximately (Yen)0.7 billion ($6.9 million) in 1999, and as a percentage of net sales decreased from 10% in 1998 to 5% in 1999. The decrease was due primarily to lower sales of our Trend Chip-Away Virus product. Our net sales also include revenues from product upgrade fees, maintenance fees, royalties and service sales. Sales in these areas increased from approximately (Yen)0.6 billion in 1998 to approximately (Yen)1.5 billion ($14.7 million) in 1999. The increase was due primarily to increased license renewals by corporate customers and Virus Buster updates in September 1999. As a percentage of net sales, sales in these areas increased from approximately 6% in 1998 to approximately 10% in 1999. Royalties totaled approximately (Yen)0.5 billion or 5% of net sales in 1998. No royalties were paid in 1999. The decrease was due to termination in 1998 of license agreements for a third party to sell PC-cillin under that party's brand name and for another third party to license scan engine technology. The remainder of our net sales consists of sales of other products, which totaled approximately (Yen)0.2 billion ($2.0 million) or 2% of net sales in each of 1998 and 1999. Cost of Sales Cost of sales consists primarily of outbound shipping and handling costs, costs of manuals and packaging, and amortization of software development costs. Cost of sales decreased 14% from approximately (Yen)559.5 million in 1998 to approximately (Yen)481.6 million ($4.7 million) in 1999. The decrease was primarily due to the decrease in retail package sales for personal computer software, which has lowered costs by reducing the amount of packaging required for our net sales. 30 Operating Expenses Operating expenses increased 22% from approximately (Yen)7.6 billion in 1998 to approximately (Yen)9.2 billion ($90.2 million) in 1999. Selling Selling expenses consist primarily of advertising and selling commissions. Selling expenses were approximately (Yen)1.6 billion in 1998 and approximately (Yen)2.2 billion ($21.9 million) in 1999, an increase of 38%. The increase was primarily a result of increased advertising expenditures in Japan and the U.S. Research and development Research and development expenses consist primarily of payroll and related expenses for software engineers who develop and update our anti-virus software products. Research and development expenses increased 4% from approximately (Yen)960.2 million in 1998 to approximately (Yen)994.3 million ($9.7 million) in 1999. Research and development personnel increased from 152 at December 31, 1998 to 204 at December 31, 1999. Our research and development expenses in 1999 grew at a slower rate than our 1999 net sales largely due to our substantially increased research and development spending in 1998, the benefits of which carried over into 1999. All costs relating to research and development to establish the technological feasibility of our software products are expensed as incurred. In our software development process, technological feasibility is established upon completion of all significant testing for the original English language version of the product. We produce local language versions of our anti- virus software, such as Japanese and Chinese, from the English language version by adding local language functions. Localization costs, which include direct labor and overhead costs, are capitalized and amortized over the estimated life of the product in accordance with Statement of Financial Accounting Standards No. 86. We believe that we will need to continue to incur costs to update current products and develop new products to remain competitive. Accordingly, we expect our research and development expenses to increase moderately in absolute terms in future periods. General and administrative General and administrative expenses consist primarily of payroll and related expenses, customer service, accounting and administration and other general corporate expenses. General and administrative expenses increased 20% from approximately (Yen)5.0 billion in 1998 to approximately (Yen)6.0 billion ($58.6 million) in 1999, representing approximately 51% and 44% of net sales for these years. The increase in general and administrative expenses was primarily due to higher payroll costs due to new hires and existing employees. Employees engaged in activities other than research and development increased from 382 at December 31, 1998 to 494 at December 31, 1999. We expect general and administrative costs to increase in absolute terms in future periods as we expand our operations. Other income (expense) We earned interest income of approximately (Yen)44.6 million during 1998 and approximately (Yen)148.5 million ($1.4 million) during 1999. Interest income in 1999 was primarily earned from the investment of approximately (Yen)10.2 billion ($89.8 million) in net proceeds from our August 1998 Japanese initial public offering in Japanese money market funds and other cash equivalents, and from interest received from our investment in bonds issued by SOFTBANK. 31 In 1999 we recognized a gain on sales of marketable securities of approximately (Yen)280.5 million ($2.7 million). The gain primarily resulted from our sale in shares of common stock of USWeb/CKS, a Nasdaq-listed U.S. technology company. At December 31, 1999, we held common stock of USWeb/CKS with an unrealized gain of approximately (Yen)412.4 million ($4.0 million). In March 2000, pursuant to Whittman-Hart's acquisition of USWeb/CKS in a stock-for-stock merger transaction, we received common shares of MarchFirst, the renamed Whittman-Hart parent entity following the merger, in exchange for our remaining holdings of USWeb/CKS common stock. Income Taxes Our statutory tax rate was 51.4% in 1998 and 47.7% in 1999. A change in Japanese income tax regulations reduced our statutory rate to approximately 42.1% beginning on January 1, 2000. Our effective tax rate was 76.3% in 1998 and 46.2% in 1999. The difference between our statutory and effective tax rates in 1998 and 1999 resulted largely from changes in the valuation allowances relating to tax-deferred assets held by our U.S. subsidiary, and non-tax deductible expenses in the form of non-cash warrant compensation expense of approximately (Yen)397.5 million in 1998 and approximately (Yen)379.8 million ($3.7 million) in 1999. Comparison of the Years Ended December 31, 1997 and 1998 The following table sets forth the results of operations for Trend Micro in absolute terms and as a percentage of net sales. Our historical operating results are not necessarily indicative of the results for any future period.
-------------------------------------------------------------------------- 1997 1997 1998 1998 1998 -------------------------------------------------------------------------- (in thousands, except percentages) Net sales...................................... (Yen)7,397,979 100.0% (Yen)9,745,664 100.0% $86,184 Cost of sales.................................. 733,789 9.9 559,530 5.7 4,948 ------------- ----- ------------ ----- ------- Gross profit.............................. 6,664,190 90.1 9,186,134 94.3 81,236 ------------- ----- ------------ ----- ------- Operating expenses: Selling................................... 1,315,492 17.8 1,617,759 16.6 14,306 Research and development.................. 557,001 7.5 960,156 9.9 8,491 General and administrative................ 2,755,435 37.3 4,994,937 51.2 44,172 ------------- ----- ------------ ----- ------- Total operating expenses.............. 4,627,928 62.6 7,572,852 77.7 66,969 ------------- ----- ------------ ----- ------- Operating income 2,036,262 27.5 1,613,282 16.6 14,267 Other income (expense): Interest income........................... 46,203 0.6 44,620 0.4 394 Interest expense.......................... (34,984) (0.5) (29,279) (0.3) (259) Gain on sales of marketable securities.... - - 146,310 1.5 1,294 Foreign exchange gain (loss), net......... 66,907 0.9 (70,934) (0.7) (627) Other income (expense), net............... 3,508 0.1 (6,133) (0.1) (54) ------------- ----- ------------ ----- ------- Total other income.................... 81,634 1.1 84,584 0.8 748 ------------- ----- ------------ ----- ------- Income before income taxes..................... 2,117,896 28.6 1,697,866 17.4 15,015 ------------- ----- ------------ ----- ------- Income taxes: Current................................... 1,337,364 18.1 1,641,902 16.8 14,520 Deferred.................................. (70,919) (1.0) (347,151) (3.5) (3,070) ------------- ----- ------------ ----- ------- 1,266,445 17.1 1,294,751 13.3 11,450 ------------- ----- ------------ ----- ------- Net income..................................... (Yen)851,451 11.5% (Yen)403,115 4.1% $ 3,565 ============= ===== ============ ===== =======
32 Net Sales Net sales increased 32% from approximately (Yen)7.4 billion for the year ended December 31, 1997 to approximately (Yen)9.7 billion ($86.2 million) for the year ended December 31, 1998. The increase was primarily due to increased sales of internet-based products such as InterScan VirusWall and ScanMail, which grew from approximately (Yen)1.5 billion or 20% of our net sales in 1997 to approximately (Yen)2.8 billion ($24.8 million) or 29% in 1998. Net sales of server-based products, primarily ServerProtect, increased in absolute terms from approximately (Yen)0.8 billion in 1997 to approximately (Yen)1.0 billion ($8.7 million) in 1998 and decreased slightly as a percentage of net sales from 11% in 1997 to 10% in 1998, reflecting higher corporate demand for internet-based products. Net sales of anti-virus software for personal computers, including retail package sales of PC-cillin/Virus Buster, declined as a percentage of net sales, but still represented the largest portion of our net sales in 1998, totaling approximately (Yen)3.7 billion ($32.6 million), or 38% of net sales. Sales of these products totaled approximately (Yen)3.2 billion or 43% of net sales in 1997. Within the personal computer product category, retail package sales of personal computer software decreased slightly from approximately (Yen)1.8 billion in 1997 to approximately (Yen)1.6 billion ($13.9 million) in 1998, while site license sales of personal computer software to corporate end users increased significantly from approximately (Yen)1.4 billion in 1997 to approximately (Yen)2.1 billion ($18.7 million) in 1998. The increase was due primarily to higher demand by corporate end users for our product suites which typically include our personal computer software products. Net sales of our products to other companies for inclusion in their products increased in absolute terms from approximately (Yen)0.5 billion in 1997 to approximately (Yen)1.0 billion ($8.6 million) in 1998, and as a percentage of net sales from 7% in 1997 to 10% in 1998. This increase was primarily due to significant growth in net sales of our Trend ChipAway Virus product, which increased from approximately (Yen)31.1 million in 1997 to approximately (Yen)479.9 million ($4.2 million) in 1998. Service sales increased in absolute terms from approximately (Yen)0.5 billion in 1997 to approximately (Yen)0.6 billion ($5.2 million) in 1998, but decreased slightly in percentage terms from 7% of net sales in 1997 to 6% in 1998. Royalties totaled approximately (Yen)0.5 billion or 7% of net sales in 1997, and approximately (Yen)0.5 billion ($4.1 million) or 5% in 1998. The decrease in percentage terms was due to termination in 1998 of license agreements for a third party to sell PC-cillin under that party's brand name and for a third party to license scan engine technology. Net sales of other products decreased from approximately (Yen)0.4 billion or 5% of net sales in 1997 to approximately (Yen)0.2 billion ($1.8 million) or 2% in 1998. The decrease was primarily due to a suspension of sales of some products on a customized combined basis. Cost of Sales Cost of sales decreased 24% from approximately (Yen)733.8 million for the year ended December 31, 1997 to approximately (Yen)559.5 million ($4.9 million) for the year ended December 31, 1998. The decrease was primarily attributable to cost savings from . our decision in 1998 to distribute our products only on CD-ROMs, and . our delivery of computer virus signature updates via the internet. 33 Operating Expenses Operating expenses increased 64% from approximately (Yen)4.6 billion for the year ended December 31, 1997 to approximately (Yen)7.6 billion ($67.0 million) for the year ended December 31, 1998. Selling Selling expenses were approximately (Yen)1.3 billion for the year ended December 31, 1997 and approximately (Yen)1.6 billion ($14.3 million) for the year ended December 31, 1998, an increase of 23%. The increase was primarily a result of increased advertising expenditures in Japan and the U.S. Research and development Research and development expenses increased 72% from approximately (Yen)557.0 million for the year ended December 31, 1997 to approximately (Yen)960.2 million ($8.5 million) for the year ended December 31, 1998. The increase was primarily attributable to hiring of additional software engineers to support product development and quality assurance. Research and development personnel increased from 116 at December 31, 1997 to 152 at December 31, 1998. General and administrative General and administrative expenses increased 81% from approximately (Yen)2.8 billion for the year ended December 31, 1997 to approximately (Yen)5.0 billion ($44.2 million) for the year ended December 31, 1998, representing approximately 37% and 51% of net sales for these years. The increase was primarily due to higher payroll costs due to new hires and bonuses to existing employees, as well as non-cash compensation expense of approximately (Yen)397.5 million ($3.5 million) relating to our employee stock incentive programs and increased lease expenses. Employees engaged in activities other than research and development increased from 239 at December 31, 1997 to 382 at December 31, 1998. Other income (expense) We earned interest income of approximately (Yen)46.2 million during 1997 and approximately (Yen)44.6 million ($0.4 million) during 1998. Interest income in 1997 was primarily earned from investments in time deposits in Taiwan. Interest income in 1998 was primarily earned from the investment of approximately (Yen)10.2 billion ($89.8 million) in net proceeds from our August 1998 Japanese initial public offering in Japanese money market funds and other cash equivalents. Interest income decreased slightly in 1998, despite an increase in cash and cash equivalents, due to a change from time deposits in Taiwan, which generally earn a higher rate of interest, to Japanese money market funds and other cash equivalents. For the year ended December 31, 1998, we recognized a gain on sales of marketable securities of approximately (Yen)146.3 million ($1.3 million), primarily in connection with our sale of common stock of USWeb/CKS. As of December 31, 1999, we continued to hold USWeb/CKS common stock with an unrealized gain of approximately (Yen)412.4 million ($4.0 million). Income Taxes Our statutory tax rate for each of the years ended December 31, 1997 and 1998 was 51.4%. A change in Japanese income tax regulations reduced this rate to approximately 47.7% beginning 34 on January 1, 1999. Our effective tax rate was 59.8% for 1997 and 76.3% for 1998. The increase in the effective rate for 1998 was primarily due to increased taxes as a result of an increase in non-tax deductible expenses in the form of non-cash warrant compensation expense of approximately (Yen)397.5 million ($3.5 million). The increase was also attributable to an approximately (Yen)174.3 million ($1.5 million) net increase in the valuation allowance for tax-deferred assets held by our U.S. subsidiary. Accounting Differences between Japanese GAAP and U.S. GAAP We prepare financial statements in accordance with both Japanese GAAP and U.S. GAAP. In this prospectus we include five years of selected financial information in accordance with Japanese GAAP, and two years of consolidated financial statements, prepared in accordance with U.S. GAAP. The principal differences between Japanese GAAP and U.S. GAAP which affect our net sales and net income are: . Revenue Recognition: A portion of our net sales from product licenses is attributable to post-contract support, such as product updates, virus pattern updates and customer support. Under Japanese GAAP, the portion of net sales attributable to these services is recognized as income at the beginning of the license term. Under U.S. GAAP, these service revenues are deferred and recognized ratably over the license term. . Warrant Compensation Expense: Under Japanese GAAP, the carrying value of the 1998 warrants is recognized as compensation expense when the warrants are distributed to employees. This carrying value is equal to (Yen)2.85 per warrant, which was the amount we paid to repurchase the warrants from SOFTBANK. Under U.S. GAAP, the non-cash compensation charge associated with the 1998 warrants which we have recorded in the amount of (Yen)397.5 million in 1998 and (Yen)379.8 million ($3.7 million) in 1999, and will record in the amount of (Yen)101.5 million in 2000, is accrued as an expense. This expense accounts for the difference between the exercise price and the deemed fair market value of the shares underlying the 1998 warrants as of the grant date of the warrants. . Bonuses to Directors and Employees of Certain Non-U.S. Subsidiaries: We accrued (Yen)191 million ($1.7 million) in bonuses to directors and employees of some of our non-U.S. subsidiaries in 1998. Under Japanese GAAP, these bonuses are accounted for as an appropriation of retained earnings when approved by our stockholders. Under U.S. GAAP, these bonuses are generally accrued as expense. Liquidity and Capital Resources Prior to our initial public offering, we financed our operations primarily through the private placement of common stock, bank lines of credit and funds generated from operations. In August 1998, we completed our initial public offering in Japan, in which we issued 2.5 million shares at a price of (Yen)1,433 per share. Proceeds from the initial public offering were approximately (Yen)10.2 billion ($89.8 million), net of offering costs. At December 31, 1999, we had cash and cash equivalents and marketable securities of approximately (Yen)16.2 billion ($159.3 million), up from approximately (Yen)11.1 billion at December 31, 1998. The increase was primarily due to operating activities and proceeds from our issuance of bonds. 35 Net cash used in operating activities was approximately (Yen)610.5 million in 1998 compared to net cash provided by operating activities of approximately (Yen)1.5 billion ($14.5 million) in 1999. Cash used in operating activities in 1998 was primarily the result of lower net income, an increase in accounts receivable relating to net sales in the fourth quarter of 1998 and a decrease in accrued income and other taxes related to payment of estimated Japanese corporate income tax. This decrease was partially offset by amortization of deferred compensation expense relating to the warrants issued in 1997 and 1998 and deferred revenue associated with increased net sales. The decrease was also offset by an increase in other current liabilities related to withholding taxes imposed upon dividends paid by our Taiwan subsidiary and upon inter-company payments in connection with relocation of our corporate headquarters to Japan. Cash provided by operating activities in 1999 was primarily the result of higher net income, an increase in deferred revenue associated with increased net sales and amortization of deferred compensation expense relating to the warrants issued in 1997 and 1998. These increase were primarily offset by an increase of accounts receivable relating to increased net sales. Net cash used in investing activities was approximately (Yen)1.5 billion in 1998 and approximately (Yen)2.7 billion ($26.0 million) in 1999. The increase from 1998 to 1999 was primarily due to a (Yen)4.0 billion ($39.8 million) increase in payments for purchases of marketable securities and a (Yen)1.0 billion ($9.4 million) increase in payments for other investments. This increase was partially offset by proceeds from sales of marketable securities of (Yen)2.4 billion ($23.4 million) and proceeds from maturates of marketable securities for (Yen)1.1 billion ($10.8 million). Net cash provided by financing activities was approximately (Yen)10.4 billion in 1998 and approximately (Yen)7.6 million ($74.2 million) in 1999. Net cash provided by financing activities in 1998 consisted primarily of cash received from the issuance of shares in our initial public offering. Net cash provided by financing activities in 1999 consisted primarily of proceeds from our issuance of bonds in connection with our 1999 warrants. In 1998, we entered into three overdraft agreements with Japanese commercial banks, under which we are able to obtain short-term financing at prevailing interest rates for periods not in excess of one year. The aggregate amount available under these overdraft agreements is (Yen)800 million ($7.8 million). Each of the overdraft agreements has an initial one-year term and is automatically renewed for additional one-year terms unless otherwise notified by either party. At December 31, 1999, no amounts were outstanding under these overdraft agreements. During the year ended December 31, 1998, our Taiwan subsidiary entered into three lines of credit. Under these lines of credit, an aggregate of (Yen)1.3 billion ($11.1 million) was available. We cancelled these lines of credit during 1999, and no amounts were outstanding on December 31, 1999. In July 1999, we issued (Yen)6 billion worth of unsecured bonds in connection with our 1999 incentive plan. We used the proceeds of the bond issuance for working capital and general corporate purposes. Our capital requirements depend on numerous factors, including . market acceptance of our products, . the resources we devote to developing, marketing, selling and supporting our products, and 36 . the extent to which we are able to establish relationships with strategic partners in the U.S., Europe and elsewhere. We plan to devote additional capital resources to hire additional engineers and other employees and expand our product development, support, and sales and marketing organizations, to expand marketing programs, establish additional facilities worldwide and for other general corporate activities. Additionally, in the future we may make acquisitions and strategic investments in order to grow our business. We believe that our current cash balance, cash flow from operations and existing credit facilities will satisfy our working capital and capital expenditure requirements for the next 12 months. However, we cannot be sure that we will not require additional funding during the next twelve months or in the future. If we do need additional funding during the next 12 months or in the future, such funding may not be available on commercially reasonable terms, if at all. Even if no such additional funds are required, we may seek additional equity or debt financing. Market Risk Disclosure As discussed in Note 18 to the consolidated financial statements, we have a policy not to utilize any derivative financial instruments with off-balance sheet risk. The financial instruments other than derivatives as of December 31, 1999 were cash and cash equivalents including money market funds, marketable debt and equity securities, accounts receivable and payable and short-term borrowings. Among these financial instruments, we do not have significant market sensitive instruments with significant exposure to market risk, except for the following: . An investment in USWeb/CKS, which was formerly listed on The Nasdaq National Market. This investment had a fair market value of $4.6 million as at December 31, 1999. During the course of the year ended December 31, 1999, the high, low and month-end average trading prices for the investment were $51.69, $17.63 and $31.23. The potential change in the fair market value of the investment, assuming a 10% change in prices, would be a gain or loss of approximately $460,000. USWeb/CKS has merged with Whittman-Hart in March 2000. The shares of marchFIRST, the renamed Whittman-Hart parent entity following the merger, now trade on The Nasdaq National Market under the symbol MRCH. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As a result, the Year 2000 problem is that software that records only the last two digits of the calendar year may not be able to distinguish whether "00" means 1900 or 2000. This software will need to be upgraded to accept four digit entries to distinguish between 21st century and 20th century dates and avoid software failures or erroneous data results. We have evaluated all of the internally-developed and third-party software and hardware technology which we use for Year 2000 compliance. We use multiple software systems in our operations. These systems include several financial, sales and customer support software programs which have been developed by other companies and which are material to our business. Based on our evaluation, we believe that these programs are Year 2000 compliant, and, as of April 30, 2000, we have not experienced any material Year 2000-related problems. The costs which we have incurred in the course of our Year 2000 evaluation process have not been material. 37 Although we have not experienced any material Year 2000 problems as of April 30, 2000, there can be no assurance that such problems will not occur in the future. 38 BUSINESS We develop, market and support anti-virus software and management solutions for corporate computing systems and personal computers. Our products deliver virus protection at each access point within the corporate network where data files are exchanged. Our products have recently won the following awards: Publication Award PC Professionnell In February 2000, German magazine PC Professionnell awarded the Editor's Choice distinction to ServerProtect, OfficeScan Corporate Edition and Trend Virus Control System. Windows NT ServerProtect won Windows NT Magazine's Editor's Choice Magazine Award in its December 1999 issue. InfoWorld October 1998 "Test Center Hot Pick" award for Trend Virus Control System, ServerProtect and OfficeScan Corporate Edition package. For products or solutions deemed to offer stand-out technology, among other criteria. InfoWorld In February 1999 InfoWorld picked the same software package as the anti-virus "Solution of the Year" for 1998. PC Magazine In April 1999 a package of Trend Virus Control System, ServerProtect, ScanMail and OfficeScan Corporate Edition earned a "NeaTSuite/Editor's Choice" award based upon performance tests comparing anti-virus solutions. PC Magazine is published by Ziff-Davis Inc., a subsidiary of SOFTBANK. Network Magazine In April 1999 Network Magazine picked Trend Virus Control System as the anti-virus "Product of the Year" for 1999. Our products operate across a range of computer operating system platforms, including Windows NT, Windows 2000, Windows 98, NetWare, Sun Solaris and several versions of UNIX. Corporate and government end users of our anti-virus software and management tools include Boeing, Bank of America, Hewlett-Packard, Chase Manhattan Bank, Lucent Technologies, GTE, Coca-Cola, MCI WorldCom, ConAgra, Microsoft, Siemens, Bayer, Deutsche Bank, Nestle, Nissan, the European Parliament and the European Commission. Trend Micro began commercial operations in May 1989, shortly after computer viruses were first detected, and we completed our initial public offering on the Japanese over-the-counter market in August 1998. We listed American Depositary Shares on The Nasdaq National Market in July 1999 in connection with a global offering of 12,750,000 shares in the form of shares and ADRs. 39 Industry Background The Computer Virus Problem Computer viruses are software programs which infect computer systems by secretly attaching themselves to other software, self-replicating and spreading as data from diskettes is downloaded into a personal computer's memory. They also spread as e-mail and application software files are transmitted among multiple users within a computer network or through the internet. Viruses cause varying degrees of damage, including displaying disruptive messages on a user's screen, altering or destroying system files, and reformatting a computer's hard drive. In corporate networks, viruses can cause network servers and client computers to stop working. This can result in significant productivity losses, damage to data files and system reconfiguration costs. The Evolution of Computer Viruses Computer viruses were first identified in 1986. Until 1995, the most prevalent type of viruses were "boot sector" viruses, which infect the portion of a floppy disk that was used to start a personal computer and load the operating system. These viruses spread to a user's hard disk when the computer accesses the disk to load system files into memory. "Polymorphic" viruses, which use complex encryption and change characteristics each time they copy themselves into a new host program, also developed during this period. By the mid-1990s, computer networks had become a critical tool for information sharing within companies. Viruses followed this new communication channel, and the primary infection target shifted from the personal computer to the network server. With enhanced productivity from computer use came the risk of more widespread damage: in a networked environment, a virus in a single desktop computer can easily be transmitted through the server to other clients, and infect the entire network. A second-generation class of viruses called "macro viruses" followed the development of the enterprise network. Like other viruses, macro viruses can replicate only by attaching to other software programs. Macro viruses differ from other viruses, however, in that they attach to macro-enabled data files such as Word and Excel. Macro viruses are relatively easy to create because they can be written in Basic or other relatively simple programming languages and, as a result, comprise most of the growth in new viruses. The International Computer Security Association published a virus prevalence survey in 1999 which stated that macro viruses accounted for approximately two-thirds of all virus infections among 300 North American companies surveyed. Like many of our competitors, we are a member of the Association and in the past have been a corporate sponsor of the Association's annual survey. We also participate in anti-virus industry consortia organized by the Association. The Association has provided certification testing of OfficeScan, ServerProtect, InterScan and other of our products for us in 1999 for a fee of $22,000. Most recently, the advent of the internet as a medium for communication and commerce has increased the likelihood of infection by a third generation of viruses carried by applets. Applets are small programs written in ActiveX and Java. Programmers use ActiveX and Java applets in web pages to enable animation and interactivity. Accessing a web page containing ActiveX or Java applets automatically triggers the download and execution of these programs by the desktop computer. Neither ActiveX nor Java requires a separate program to access other computers on the internet because they can use the internet as a host. As a result, malicious code in 40 these languages can easily replicate and infect computer systems and files. We believe that most companies do not yet have security systems to detect and eliminate ActiveX and Java viruses. Virus Detection Techniques The traditional method of virus detection has been pattern-matching scanning, which involves gathering suspicious code samples, conducting code analysis, creating new virus signature files and distributing such files to customers as updates to existing anti-virus software. This process can be time- consuming and is generally recognized as ineffective against macro viruses which can replicate and spread quickly through e-mail and the internet. To block macro viruses more effectively, anti-virus software developers have created rule-based scanning, which runs suspect code in an emulated computing environment to confirm whether it is a virus. Development of the Anti-Virus Software Market The anti-virus software market has grown significantly in the past few years and is expected to continue to grow in the future. According to Dataquest, an independent research organization, worldwide anti-virus revenues have grown from approximately $375 million in 1996 to approximately $771 million in 1998, and are expected to grow to approximately $1.16 billion in 2002. International Data Corporation, another independent research organization, estimates that worldwide anti-virus revenues have grown from approximately $686 million in 1997 to approximately $1.1 billion in 1998, and are expected to grow to approximately $2.9 billion in 2002. Until recently, sales of anti-virus software products consisted primarily of sales of desktop programs. As viruses followed the shift by companies from stand-alone desktop personal computers to client-server networks, anti-virus software developers introduced new products to operate at the network server level. Screening data at the server has the benefit of preventing viruses from spreading to multiple personal computers through the exchange of files and e- mail messages. In addition, the growth of the internet has resulted in increased risk of virus infection for networks. In response, anti-virus software companies have begun to develop solutions to protect against viruses entering the corporate network from the internet. While many businesses, particularly in the United States and Europe, have responded to the computer virus threat by adopting network security policies and adding anti-virus software to their networks, viruses continue to infect enterprise networks worldwide. According to data compiled by the Information- Technology Promotion Agency, a quasi-governmental organization affiliated with the Japanese Ministry of International Trade and Industry, incidents of virus infections in Japan have increased significantly, from 755 in 1996 to 3,645 in 1999. We cooperate with the Information-Technology Promotion Agency by providing information regarding new types of viruses, product demonstrations and virus protection seminars. In 1998, the Information-Technology Promotion Agency paid us approximately (Yen)9.0 million ($75,000) for virus analysis services. We believe that, for publicity and other reasons, companies in Japan tend not to report virus infections as readily as companies elsewhere and that the actual number of incidents is even higher. The International Computer Security Association's 1999 survey indicates that the 300 surveyed North American companies experienced about 13 virus encounters per 1,000 machines per month during the period from January 1996 to February 1999. Our products have evolved with the development of the anti-virus software market as a whole. Until recently, sales of anti-virus software products consisted primarily of sales of our desktop programs, such as PC-cillin/Virus Buster, which we introduced in Japan in 1991. To meet 41 increased demand for network-based products as companies shifted from stand- alone desktop personal computers to client-server enterprise networks in the early 1990s, we introduced LANprotect, our first server application, in 1993. To address the increased risk of virus infection for enterprise networks resulting from widespread use of the internet, we introduced InterScan VirusWall in 1997 to provide real-time scanning at the internet gateway. The internet gateway is the network server where data enters the network from the internet. In 1998 we introduced Trend Virus Control System to enable network-wide anti-virus software monitoring, updating and management from a central management console. Challenges to Providing Comprehensive Anti-virus Protection The evolution of computer viruses with the shift from stand-alone personal computers to client-server enterprise networks and, most recently, the emergence of the internet has created a number of challenges to businesses seeking protection against viruses: . Keeping Pace with the Rapid Evolution and Proliferation of New Viruses. As computer technology has grown more sophisticated, the number of viruses, as well as the type or "species" of viruses, have grown rapidly. We estimate that the number of known viruses has increased from approximately 100 in 1990 to more than 25,000 in 1999. We believe that new viruses are appearing at the rate of 14 or 15 per day. Moreover, there are now at least five "species" of viruses, each exploiting a different aspect of computer technology: boot sector viruses, file viruses, macro viruses, script viruses and malicious ActiveX and Java programs. Our virus prevalence estimates are based on our experience in developing and maintaining our products. We keep a record of each virus which our software has detected and removed, and maintain computer files of virus samples. The above estimates are based on the number and types of viruses that we have detected and removed on an annual basis from 1990 to 1999. . Protecting Against Infections at Multiple Levels. New technologies have not only spurred growth in the number and types of viruses, they have also created multiple entry points for viruses. Transmission of viruses is no longer confined to downloading a file off a floppy disk onto a desktop personal computer. Viruses can now be transmitted at the server level, through files transmitted from a local area network server to client, and the internet gateway level, through e-mail or Java applets embedded in web pages. Traditional approaches which focus on protecting only at the desktop level have become inadequate in today's networked environment. . Difficulty in Providing Enterprise-Wide Protection Against Rapidly Evolving Virus Technology. The pervasiveness of computing technology in today's business enterprises creates enormous challenges for deploying and updating comprehensive anti-virus protection. No matter how advanced the basic underlying anti-virus program, protection for a computer system consisting of multiple servers and hundreds or even thousands of client computers is inadequate unless there is an efficient means to administer it. Traditional approaches which rely on monitoring by information technology staff are costly and inefficient. Strategy We seek to develop and deliver the most effective anti-virus and security software in the market. Our strategy to attain this goal includes: 42 Implement Internet Service Business Model. We believe the internet presents an important opportunity to address customers' network security needs by offering products and services delivered through the internet. Our Trend Virus Control System software and eDoctor service already use the internet to update, monitor and manage anti-virus software throughout the enterprise network. We plan to offer services for a fee over the internet indirectly through systems integrators and internet and telecom service providers. We are also expanding our business model to include additional security-oriented solutions such as our InterScan eManager e-mail management product and our InterScan WebManager internet access management product. We will seek to offer additional internet- related applications which can manage network capacity, control access to designated websites and provide security for electronic commerce transactions. We may also in the future seek to expand our business by acquiring companies which offer competitive services delivered over the internet. Expand International Market Presence through Strategic Partnerships. We are focusing on increasing our share of the international anti-virus and network security market, particularly in the U.S. and Europe. One of our strategies in this area is to form alliances with major computer hardware manufacturers, software developers and telecom providers. We believe these partnerships create new sales channels for our products and strengthen the Trend Micro brand name in key markets. To this end, we have entered into agreements with Check Point, Compaq, Hewlett-Packard, IBM/Lotus, Lucent Technologies, Microsoft, Oracle and other companies. These agreements provide for cooperative marketing activities such as the vendors' referral of customers to our products and reference to our products in their product literature and websites. Our agreements with these vendors also typically provide for co-development and licensing arrangements so that our products and the vendors' products operate smoothly when used together. We plan to seek relationships with other providers of complementary products such as server vendors and network management software developers. Enhance Trend Micro's Technology. Our multinational team of 251 research and development anti-virus engineers has enabled us to focus on providing innovative anti-virus products and services to customers. We intend to continue to improve our existing products and to develop new products and services, such as our InterScan AppletTrap software for detecting unknown ActiveX and Java malicious code. Consolidate Leading Market Position in Japan. We believe we are the leading supplier of anti-virus software products to corporate users in Japan. Sales of anti-virus software to Japanese corporate end users typically occur through distributors and systems integrators. To consolidate our market position in Japan, we are seeking additional distributors, and to expand distribution through our existing distributor and systems integrator partners. We plan to continue our focus on the Japanese corporate market, where we believe that some companies do not yet use anti-virus software to protect their networks. Maintain Strong Customer Support Network. To support our international customer base and to provide real-time service response, we have established a network of virus analysis centers staffed with our multinational team of 132 computer virus engineers, which includes employees in the United States, Taiwan, Japan and the Philippines. Our service centers allow customers to send virus infected files via e-mail for detection and cleaning. We intend to further foster customer allegiance by working together with our systems integrators, value-added resellers and strategic partners to provide high levels of service and support. 43 The Trend Micro Enterprise Solution Trend Micro offers a suite of integrated anti-virus software and anti-virus management solutions designed to provide comprehensive, cost-effective protection at each level of the enterprise network -- from the internet gateway to the desktop personal computer. Our anti-virus solutions provide the following benefits: . Advanced Protection Against New Viruses. The core of our anti-virus solutions is our proprietary pattern matching, rules-based and emulation detection technologies which can identify and remove most known viruses, including boot sector, polymorphic, macro and applet based viruses. Our Cheetah scanning engine, which incorporates our MacroTrap virus detection technology, rapidly detects known and some unknown macro viruses. In addition, we continuously collect data on new viruses and offer solutions which allow: . important virus events to be recorded in a comprehensive system log; . weekly anti-virus software updates to help protect against emerging viruses; and . monthly anti-virus "health check" status reports. . Multi-level Anti-virus Protection. Our products operate at multiple levels in the enterprise network: . first, at the gateway level, before data enters the network server; . second, at the network server, where infected files can be detected before being transmitted to client computers; and . finally, at the client computer itself. We believe that protection at the gateway level is of particular importance due to the increasingly widespread use of the internet. Our InterScan product, with its real-time scanning technology, provides virus protection at the network server where data enters the network from the internet. . Web-based, Enterprise-Wide Anti-virus Updating, Monitoring and Management. Our Trend Virus Control System technology allows anti- virus deployment, updating and monitoring to be performed via the internet and across the enterprise network. We offer products, described more fully below, in the following categories: . enterprise-wide management; . internet gateway virus protection; . server level virus protection; . desktop level virus protection; 44 . internet-based service solutions; and . integrated small business solutions. Enterprise-Wide Management Trend Virus Control System is a management tool that allows the network administrator to monitor, update and manage anti-virus programs on the network from a single point, regardless of the programs' physical location or platform. Once installed on a Windows NT server, the Trend Virus Control System registers every anti-virus product detected on the network and delivers network-wide virus reports and alerts to the central management console. Using technology that can automatically update and reconfigure software from a remote location, the Trend Virus Control System installs, configures and automatically delivers virus pattern updates to our InterScan VirusWall, ScanMail, ServerProtect and OfficeScan Corporate Edition anti-virus products. When used in conjunction with our eDoctor software, the Trend Virus Control System enables network-wide updating and management of anti-virus software by a service partner, such as a systems integrator, through the internet. The Trend Virus Control System and eDoctor give our product suite an important competitive advantage in Japan, where enterprises tend to rely on remotely based systems integrators to provide continuing anti-virus support. The Trend Virus Control System supports both Microsoft Internet Explorer and Netscape/AOL Navigator browsers. Internet Gateway Virus Protection InterScan VirusWall provides real-time scanning at the network server where data enters the network from the internet. InterScan VirusWall blocks viruses hidden in simple mail transfer protocol, file transfer protocol and hypertext transfer protocol internet traffic. Network administrators can set InterScan VirusWall to respond to virus infection incidents in any or all of the following ways: . alerting the system administrator; . isolating the infected file for later cleaning or later action; . deleting the infected file; or . permitting the user to download the file under controlled conditions. Check Point Software Technologies Ltd. in August 1998 certified that the Sun Microsystems Solaris version of InterScan VirusWall can operate compatibly on Check Point's FireWall-1 internet gateway server. InterScan VirusWall was named as Network Computing magazine's "Editor's Choice" for anti-virus solutions in April 1999 and received a similar award from the British magazine Network Week in April 1999. In 1999, we offered free downloading and 30-day use of InterScan VirusWall to prevent the Melissa virus, which struck networks worldwide in late March 1999, from infecting or damaging users' networks. InterScan eManager enables customers to block unsolicited bulk e-mail and other unwanted e-mail and to control distribution of sensitive e-mail content. InterScan eManager does this by combining checking of unsolicited bulk e-mail and the content of other incoming data from the internet into the same scanning step with InterScan's virus monitoring. InterScan eManager 45 also allows the system manager to optimize the use of the network's capacity to carry information by setting priorities for the delivery of large e-mail messages. In addition to its capability to scan incoming data from the internet, InterScan eManager offers profile-based filtering based on customized word lists to prevent confidential or inappropriate e-mail from being transmitted. InterScan eManager was introduced in the U.S. and Europe in December 1998 and was released in Japan in May 1999. InterScan WebProtect provides anti-virus protection for Microsoft proxy servers, a vulnerable point because internet traffic passes directly from the proxy server to the desktop. InterScan WebProtect scans on a real-time basis, automatically cleans infected files transferred through the internet, and blocks unsigned and suspect code written in Authenticode, Microsoft's digital identification software. InterScan WebProtect also blocks known malicious Java applets and ActiveX objects. Its "intelligent virus scanning" component automatically activates whenever internet access takes place, but can be configured to ignore types of multimedia files that cannot contain viruses, minimizing the program's effect on performance. InterScan WebProtect sends customizable warning messages to senders, recipients and the network administrator when it detects an internet mail infection and automatically tracks all infections in a detailed activity log. InterScan WebProtect was released in the U.S. and Europe in November 1996. InterScan AppletTrap is the newest addition to the InterScan product suite. It was introduced in the U.S. and Europe in March 1999. It detects and blocks both known and unknown malicious Java and ActiveX applets with minimal impact on internet traffic performance. InterScan AppletTrap first scans at the proxy server to detect and block applets containing known malicious code. It then uses patent-pending technology to instruct the destination client personal computer regarding acceptable behavior and shuts down applets exhibiting malicious behavior, such as trying to access unauthorized directories, without affecting network or client personal computer performance. Finally, unknown applets which have exhibited malicious behavior on a client personal computer are placed on a list to be automatically excluded at the server where data enters the network from the internet if such applets attempt to re-enter the network in the future. InterScan AppletTrap can be used in conjunction with either Netscape/AOL Navigator or Microsoft Internet Explorer. ScanMail acts at the e-mail and groupware server level to combat computer viruses where they currently most often appear: in document files shared via e- mail and groupware, which is software that facilitates work among personal computers users at different remote locations. When it detects a virus, ScanMail sends a customizable alert message to the administrator, sender and recipient without delaying the original message. Infected files are cleaned automatically and sent on to the intended recipients. Using ScanMail's ActiveX program controls, the network administrator can send files containing unknown viruses to Trend eDoctor Lab for analysis and disinfection. ScanMail products are available for Lotus Notes, Microsoft Exchange, Lotus cc:Mail, Microsoft Mail and OpenMail. ScanMail for Lotus Notes received the Gold Editors' Choice Security Award, recognizing innovative Lotus-based products, from Lotus Notes and Domino Adviser Magazine in May 1998. ScanMail for Microsoft Exchange was named as the "best buy" e-mail anti-virus solution in the January 2000 issue of SC Magazine. Server Level Virus Protection ServerProtect offers anti-virus protection at the file and application server level for organizations using Windows NT or Novell NetWare to manage their local area networks. ServerProtect scans and disinfects remote servers, sends infection notices, installs anti-virus programs on client personal computers and automatically generates a virus report log. 46 ServerProtect allows administrators of local area networks to securely install and manage virus protection on multiple servers and domains from a single console, which can be remotely located. Desktop Level Virus Protection OfficeScan Corporate Edition is the desktop-based anti-virus component of our corporate solution. While active at the desktop level, Office Scan Corporate Edition is centrally controlled and can be installed, managed and upgraded using the Trend Virus Control System, or deployed through an intranet web page, Windows NT remote server, Microsoft System Management Server or login script. Centralized administration ensures that all users have the most up-to-date software and virus descriptions, limits client modifications to the software, and ensures that reports of virus activity reach the system administrator. PC-cillin, which is marketed in Japan as Virus Buster, is our anti-virus product for the home personal computer and workstation. PC-cillin removes viruses without interrupting programs then running on the user's personal computer or workstation, when infections occur. PC-cillin includes an easy-to- use graphic user interface, and is available in Windows NT Workstation, Windows 98, Windows 95 and Windows 2000 Professional versions. Virus Buster was the only product among six personal computer anti-virus products surveyed to receive a "four-star" rating from the Japanese magazine PC Computing in September 1998. PC Computing is published by SOFTBANK. The latest version of PC-cillin enables users to prevent access to designated web page addresses. The latest version of Virus Buster released in Japan also includes a one-year warranty providing for a refund of the product's purchase price if, under conditions set forth in the product package, new viruses infect and cause damage to a user's files or programs. Trend Micro is insured against liabilities, subject to certain limitations and exclusions, arising from this warranty service. Trend ChipAway Virus provides hardware-level protection to stop boot-sector viruses from infecting the computer during the period before the operating system and traditional anti-virus software load. This product works by encoding virus protection in the basic input/output system, read-only memory chips used to start the computer before its operating system software loads. Internet-Based Support Services eDoctor is an anti-virus service to which purchasers of the Trend Virus Control System can subscribe for a monthly per-user fee. Qualified providers of first-line support, typically systems integrators and internet service providers, acting as "Premium Security Partners," use the management capabilities of Trend Virus Control System to install virus protection software on the customer's network, to resolve virus incidents and to continually diagnose and maintain virus protection systems remotely over the internet. eDoctor includes around-the-clock access to Trend Micro engineers who work with the Premium Security Partner and the customer in real-time to resolve virus incidents as they occur. Premium Security Partners will receive a significant portion of the monthly fee and are expected to play a key role in marketing the service. The role of the Premium Security Partner is particularly important in Japan, where enterprise users typically look to systems integrators to manage their networks and to provide virus solutions. eDoctor was introduced in Japan, the U.S. and Taiwan in December 1998. In September 1999, we also announced the establishment of the eDoctor Global Network, a worldwide internet anti-virus service initiative which builds malicious code protection directly into the internet infrastructure. The eDoctor Global Network enables customers to obtain virus protection as a value-added service from telecom companies, internet service providers and other managed service providers. Service providers who are part of the eDoctor Global Network include SECOM, JoS, UniSVR, Otsuka 47 Shokai, PSINet, Internet Security Systems, U S West, MCI's UUNet division, Sprint and Compaq Services. Trend eDoctor Lab is a web-based virus analysis service available generally to corporate end users to send virus-infected files via e-mail to one of Trend Micro's internationally located virus analysis centers for detection and cleaning. Files containing unusual or unknown viruses are automatically routed to the Trend Micro virus expert on duty. HouseCall is online scanning software which allows personal computer users to have virus infections detected and removed over the web. Upon detecting a virus, HouseCall lists its name and the infected file. If the virus cannot be removed, HouseCall gives the user the opportunity to delete the file. The service is accessible to all internet users from our website. HouseCall demonstrates Trend Micro's anti-virus expertise and serves as a useful tool to introduce potential customers to Trend Micro's family of products. Integrated Small Business Solution OfficeScan SBS is designed for the Microsoft Small Business Server. OfficeScan SBS combines file server protection, e-mail and groupware server protection for Microsoft Exchange, and desktop-based protection in a single package. It provides centralized installation, administration and reporting for networks of up to 25 workstations. OfficeScan SBS was recommended as an "excellent choice" by Computer Reseller News, a newsletter published for computer resellers, in May 1998. Technology We believe that our innovative anti-virus technologies are an important competitive advantage. Key technologies used in Trend Micro products include the following: Cheetah is the core of our anti-virus technology and our newest scanning engine. Cheetah, which is incorporated in all of Trend Micro's anti-virus products, detects most known viruses, including boot-sector, polymorphic, macro and applet-based viruses as well as some unknown viruses. When a virus is detected, Cheetah alerts system users based upon instructions selected by a network administrator and either blocks the virus-infected file from being forwarded or cleans and quarantines it, with notice to the user, mail recipient and/or network administrator. Cheetah also incorporates the following scanning technologies and features: . Trend Micro's proprietary SoftMice simulator, which traces, decrypts and extracts polymorphic viruses; . Trend Micro's DeepScan technology, which tracks a program's execution through multiple-layered files and locates viruses buried in the file body; . Wildcard virus scanning capability to detect variant viruses; . Scanning capability for 19 types of compressed files and decoding capability for MIME, BinHex, Base64 and UUEncoded files; and . A specific scanning module for detecting known malicious Java code. MacroTrap is an advanced virus detection technology incorporated into the Cheetah scanning engine. Unlike simple pattern matching detection technologies which identify viruses by 48 their unique software codes, MacroTrap uses rule-based scanning to detect known macro viruses and mutated versions of macro viruses by executing the code in a virtual environment that emulates the actual system environment in which the code will be run. Executed code that does not match the software code of any known virus but nonetheless violates predetermined rules of "good behavior" is then identified as suspect and "trapped." This method is particularly well suited for macro viruses because such viruses are very easily created and therefore more varied. Because it uses the same technology upon which Word and Excel files are based, MacroTrap extracts only the affected portion of each word processing or spreadsheet file it scans. This minimizes scanning time and the processing burden on the central processing unit. AppletTrap, our newest technology, detects known and unknown malicious ActiveX controls and Java applets with minimal impact on internet traffic performance. AppletTrap uses pattern-matching to block known malicious ActiveX controls and Java applets before they enter the network. AppletTrap's patent- pending technology also enables client personal computers to terminate unknown ActiveX controls or Java applets that are behaving in an abnormal manner before they can damage the computers' hard drive or spread elsewhere in the network. InterScan: Server Pipeline is our patented technology which enables scanning of data which has been transmitted through the internet, and also the review of the content of e-mail files. The scanning and detection functions are performed at the server level, enabling viruses to be detected and eliminated before they spread to client personal computers via e-mail or file exchange. The InterScan technology forms the basis of Trend Micro's product suites for the enterprise, including the InterScan VirusWall, ServerProtect, Scan Mail and eManager products. Cascade Update is a management program which centrally deploys anti-virus software from intranet servers to client personal computers. Upon installation, an IntraScan agent program remains on the client personal computer, configured to respond to messages from the server that indicate when new virus pattern updates or program upgrades or configuration changes are available. The agent program automatically downloads all new anti-virus program components from our website to the client personal computer. OfficeScan for Microsoft Small Business Server is Trend Micro's first implementation of the Cascade Update technology. Research and Product Development Trend Micro's research and product development activities focus on the development of new anti-virus and security software, enhancements to existing products and integration of products to enable monitoring, updating and management via the internet. We conduct research and development at our Tokyo headquarters and our U.S. and Taiwan subsidiaries and have a research staff of 147 engineers. Complementing our internal development efforts, we are members of industry-level initiatives such as the Association of Anti-virus Asia Researchers group launched in Hong Kong in September 1998. Our engineers' participation in this group gives us additional access to information regarding newly discovered viruses. Research and development expenditures, consisting primarily of software development costs and research and development staff salaries and benefits, increased from (Yen)557.0 million in 1997 to (Yen)960.2 million ($8.5 million) in 1998 and (Yen)994.3 million ($9.7 million) in 1999. Sales and Marketing We sell our products primarily to corporate end users on a site license basis through systems integrators, distributors and value-added resellers, with the remaining portion consisting 49 largely of retail package software sales through distributors. As a result, we are substantially dependent on these third parties. Our agreements with distributors are generally nonexclusive, do not have minimum purchase requirements and may be terminated by either party without cause. Our current marketing efforts are targeted primarily at large to mid-size corporations, and to a lesser extent, small businesses and individual end users. We work with systems integrators and value-added resellers, through which most of our sales are made, to increase the brand recognition and visibility of our products in the network security market. We also promote sales of our products as a suite so that corporate end users can benefit from comprehensive anti-virus protection throughout their enterprise networks. As part of these efforts, we also disseminate product and industry information through our website. In addition, we advertise in trade publications and exhibit our products at trade shows worldwide, including World PC Expo, Windows World Expo Japan, Comdex Japan in Japan, Comdex, InfoSec, NetWorld and Interop, Internet World, ISPCON, and the RSA Conference in the United States, CeBit in Germany and the Network and Windows NT shows in Britain. Japan We sell our products in Japan to both corporate and individual end users primarily through systems integrators and distributors, and conduct a limited amount of direct sales to end users, including online sales through a reseller's website. Historically, most of our revenues have been derived from sales in Japan. We expect that sales in Japan will continue to represent a significant percentage of our revenues in the future. Distribution Through Systems Integrators and Distributors. Virtually all of our sales to Japanese corporate end users are made through systems integrators, with remaining sales coming mostly from direct sales to major corporate customers. In Japan, systems integrators play a much larger role in delivering management information services than in the United States, providing primary computer support services such as installation, systems integration, upgrades and maintenance. Historically, a significant percentage of our net sales have been sales to SOFTBANK. For example, sales to SOFTBANK totaled approximately (Yen)2.4 billion ($21.1 million) or 24% of net sales in 1998 and (Yen)2.5 billion ($24.0 million) or 18% of net sales in 1999. The majority of these sales in 1998 took place through Vaccine Bank, a cooperative marketing program which we maintained with SOFTBANK from 1997 to early 1999. The majority of sales to SOFTBANK in 1999 consisted of SOFTBANK's sales of our products to systems integrators. Relationship with SOFTBANK. In December 1996, Trend Micro and SOFTBANK entered into two agreements for an investment by SOFTBANK in Trend Micro and the distribution by SOFTBANK of our products in Japan. The distribution agreement was an oral agreement granting SOFTBANK the non-exclusive right to distribute all of our anti-virus software products in Japan. Individual sales under this agreement were effected on a purchase-order basis. In June 1998, we and SOFTBANK entered into a written distribution agreement giving SOFTBANK a non-exclusive right to distribute our InterScan product suite in Japan at volume-based discount rates. Under a December 1998 memorandum to the 1996 oral agreement, SOFTBANK included Trend Virus Control System and ServerProtect for Windows NT in a number of computing products distributed by SOFTBANK. On January 1, 1999, we entered into a written agreement with SOFTBANK superseding the 1996 agreement and granting SOFTBANK the non-exclusive right to distribute in Japan all of our products other than the InterScan products, which continue to be covered by the 1998 written agreement. Individual sales under the January 1999 master distribution agreement were effected on a purchase-order basis. The January 1999 master 50 distribution agreement provided for percentage rebate payments to SOFTBANK based on the volume of sales of covered products. Currently, all distribution by SOFTBANK of our products in Japan is covered by an October 1999 distribution agreement with SOFTBANK COMMERCE, an indirect wholly-owned subsidiary of SOFTBANK. This distribution agreement gives SOFTBANK COMMERCE the non-exclusive right in Japan to distribute all of our products. It is automatically renewable for successive one-year terms, unless either party exercises its right of non-renewal by giving prior written notice. The October 1999 distribution agreement supersedes all prior agreements between SOFTBANK and Trend Micro relating to distribution of Trend Micro's products. We make rebate payments to SOFTBANK based on SOFTBANK's achievement of sales targets agreed upon between SOFTBANK and us. Service Provider and Other Relationships. In December 1998, we entered into an alliance with SECOM, a home security service provider. We certify SECOM to provide eDoctor and other anti-virus software to update, monitor and maintain SECOM customers' computer networks. We plan to certify additional service providers to offer 24-hour service and support to customers. We have developed with Hitachi Corporation a solution that allows users of Hitachi's JP1 network management software to click on a command icon in Hitachi's JP1 product to access our Trend Virus Control System product. We have developed a similar solution in cooperation with Fujitsu that allows users of SystemWalker, Fujitsu's network of operating and management software, to use Trend Virus Control System. In September 1999, we agreed to license InterScan VirusWall technology to PSINet K.K., a Japan internet service provider, enabling PSINet to provide virus scanning services to its corporate customers as part of its comprehensive security services. In March 2000, Otsuka Shokai began offering to its "a-mail" hosting service customers a virus detection and removal service developed jointly with Trend Micro. We also plan to pursue alliances with other internet service providers, which we believe are becoming increasingly important in the Japanese market. Recent Developments. In October 1999, we agreed with NTT Data, Hitachi, Cisco Systems Japan and S&T Consulting to form NTT Data Security Corporation, a joint venture which is designed to provide comprehensive network security services. Each of the five partners has expertise in a different area of network security, and we are contributing our antivirus and internet security expertise to the venture. The joint venture began its commercial operations in January 2000. In February 2000, we acquired a majority ownership interest in Nihon Unisoft Corporation, a Japanese Unix software solution provider in the networking communications and internet domain. We made this acquisition through ipTrend Incorporated, a wholly-owned subsidiary that we established in January 2000. As a result of the acquisition, ipTrend and Nihon Unisoft intend to jointly promote development of their internet-focused technology. The parties began offering Linux components and communication protocols to major internet service providers, information-technology vendors and communication companies in April 2000. United States Our U.S. sales strategy has evolved with the development of the anti-virus software market as a whole, moving from a focus on packaged software sales for the personal computer to our current focus on corporate protection. Initially, we distributed and sold mainly packaged anti-virus software for the personal computer in the U.S. through a republisher. As a market has developed for selling products to corporate customers with multiple users, we have shifted our strategy to 51 building relationships with value-added resellers and distributors who sell to corporate customers, and to cooperating with major hardware and software manufacturers. Our current focus in the U.S. is developing these strategic partnerships in the server, security, groupware and router areas to take advantage of our product strengths and partners' marketing channels and, in the process, to increase brand awareness of our products. As of March 2000, we had 30 employees dedicated to strategic partner and distributor relationships and 5 employees focusing on direct sales efforts in the U.S. Our direct sales efforts in the U.S. focus on sales to Fortune 1000 companies and government accounts. Strategic Partnerships. We have entered into agreements with Check Point, Compaq, Hewlett-Packard, IBM/Lotus, Lucent Technologies, Microsoft, Oracle, Sprint, UUNET Technologies and US West which include cooperative marketing activities such as these vendors' referral of customers to our products and reference to our products in their product literature and websites. Our agreements with these vendors also typically provide for co-development and licensing arrangements so that our and the vendors' products operate smoothly when used together. Under one relationship with Microsoft, InterScan WebProtect is available to users of Microsoft Proxy through a web link. We have also licensed Microsoft to include ScanMail in Microsoft's Resource Kits and have developed a compatible version of OfficeScan for the Microsoft Small Business Server. Check Point has certified InterScan VirusWall for Solaris and Window NT to be compatible with Check Point's Firewall-1 enterprise security solution. Under one agreement with Compaq, our anti-virus products are described as a compatible enterprise anti-virus solution in Compaq Active Answers, an online information service for marketing and buying enterprise computing solutions. We have licensed Compaq to provide technology found in ScanMail for Microsoft Exchange to Compaq customers who outsource this e-mail anti-virus protection function to Compaq. Under an agreement with Hewlett-Packard, we provide virus protection products to Hewlett-Packard's global CoVision internet solutions program. Hewlett-Packard has also certified Trend Virus Control System for use in conjunction with Hewlett-Packard's OpenView Node Manager, and has agreed to resell our products and services through Hewlett-Packard's North American Local Products Organization. This arrangement gives us access to leading resellers of Hewlett-Packard products and allows our products and services to be included as part of an integrated Hewlett-Packard solution. Trend Micro is also a "Lotus Premium Business Partner" which allows us to integrate our anti-virus solutions more closely with Lotus Notes/Domino and cc:Mail. In December 1998, we released ScanMail for Lotus Domino for the IBM AS/400 platform. Under our April 1999 agreement with Lucent Technologies, Lucent will promote InterScan VirusWall as a compatible anti-virus solution for use in conjunction with Lucent's VPN Gateway and Managed Firewall network access control system, and will facilitate marketing of our products. We have also licensed Sprint to provide its customers with InterScan VirusWall scanning capability at the internet gateway. A similar arrangement with US West allows US West to use InterScan VirusWall to automatically scan its customers' incoming and outgoing internet e-mail attachments for viruses. We have also licensed UUNET Technologies, the internet services division of MCI WorldCom, to provide virus scanning services using ScanMail technology to UUNET's Lotus Notes hosted customers. Distributors and Value-Added Resellers. Our principal distributors and value-added resellers in the U.S. are Software House International, Softmart, Vanstar, Interwork Technology, Ingram Micro, Midwest Systems, ASAP Software Express and Tech Data. Value-added resellers typically purchase products for resale to corporate customers, and provide limited update services and technical support. Distributors do not provide such additional services and support. To develop these relationships, in October 1997 we established the Trend Enterprise Security 52 Solutions reseller channel program which provides qualified resellers with training, marketing materials and sales referrals. Our website matches customers with certified distributors based on customers' geographical location. Approximately 50 resellers currently participate in our reseller channel program, including Secure IT, Netrex, Osage Systems and ASAP Software Express. We also provide such services and support to targeted corporate customers directly. Other Distribution Channels. We are also pursuing sales growth through other distribution channels including alliances with internet service providers and other providers of internet-related services. Under an agreement with Infonet Services Corporation, a global internet service provider, we receive a percentage royalty based on sales of our e-mail and internet traffic virus protection scanning services to Infonet customers. In addition, InterScan VirusWall has been added to the virus scanning services offered by Pilot Network Services, a provider of secure internet services to corporations. We also distribute our Virus Buster product under the name "PC-cillin" directly to end users who download it from our website. Other Parts of the World Outside of Japan and the United States, we sell our products mostly to corporate end users through distributors, resellers and value-added resellers, with some direct sales to corporate end users and retail customers. A majority of these sales in Asia were to corporate end users through systems integrators and distributors. We have formed alliances with internet service providers in Australia, Hong Kong and Taiwan to provide internet-based services such as e- mail security. Trend Micro currently plans to explore additional partnerships with internet service providers worldwide. The majority of our European revenues are from sales of site licenses to corporate users. Our principal systems integrators and distributors in Europe are C2000, MME and Peapod Distribution. As of April 2000, we had 13 employees dedicated to our "brand-name" partnership, reseller, value-added reseller and distributor relationships in Europe and 9 employees focusing on direct sales efforts. Potential customers accessing our website who wish to purchase products are referred to a list of resellers, based on the country where the customer is located. We are continuing to recruit other network security-oriented systems integrators and value-added resellers in Europe and Asia to target a broader range of prospective corporate customers. Our partnerships with global major hardware and software vendors also enhance our marketing efforts in Europe and Asia as well as in the U.S. Operations In Japan, we outsource assembly, packaging and shipping of all of our anti- virus software products to value-added resellers. Our Taiwanese subsidiary and, in some cases, third party service providers assemble, package and ship products to be sold in the United States, Europe and Asia other than Japan. Products are generally shipped within seven days of receipt of an order and, accordingly, there is minimum order backlog at any time. 53 Competition The markets for our products are highly competitive and changing rapidly, and we expect competition to increase in the near term. We believe that the principal competitive factors affecting the anti-virus software market are: . performance, including the number and type of viruses which can be detected and effectiveness in detecting and cleaning virus-infected files; . product features; . ease of use; . brand recognition; . customer service and technical support; . company reputation; and . price. Our primary competitors in the anti-virus software market are Network Associates, vendor of the McAfee VirusScan and Dr. Solomon's Toolkit product lines, and Symantec Corporation, vendor of Norton brand anti-virus products. Other competitors include Computer Associates International, Inc., Data Fellows Ltd., which distributes anti-virus software in Japan through Yamada Corporation, Sophos Plc, Finjan Software Ltd. and Security-7 Ltd. While we believe that our commitment to technological innovation and integrated product suites represents a competitive advantage over Network Associates and Symantec, these companies have generally greater name recognition, broader product lines, access to larger customer bases and greater financial, distribution and other resources. Network Associates and Symantec have been allocating significant resources to the Japanese anti-virus software market in recent years. In 1997, Symantec released a Windows 95 compatible Japanese version of its virus protection software in Japan, and Network Associates acquired a Japanese virus protection software maker, Jade K.K. In the U.S., we believe that Network Associates and Symantec have allocated greater resources than we have to the development of their anti-virus businesses and have significantly larger customer bases. With the introduction of InterScan eManager in October 1998, we entered the market for non-virus security products. Our primary competitors in this market are Integralis Technology Ltd. and Worldtalk Communications Corp. We expect to encounter competition from larger, more established companies as we begin to offer other non-virus security products. Intellectual Property Our ability to compete successfully depends in part on our ability to protect the proprietary technology contained in our software products. We rely upon a combination of patent, trademark, copyright and trade secret laws and contractual provisions to establish and protect proprietary rights in our software. 54 Our U.S. and Taiwanese subsidiaries hold the following principal patents relating to core technologies:
Name Status Registration Registration Applicant/Patentee ---- ------ Date Number ------------------ ------------ ------------ MacroAgent pre-boot Patented 8/22/1995 5,444,850 Trend Micro Incorporated authentication (USA) Network and Workstation Patented 10/21/1997 5,680,547 Trend Micro Incorporated Access pre-boot (Taiwan) Apparatus and method for Patented 3/30/1999 5,889,943 Trend Micro Incorporated e-mail virus detection (Taiwan) and elimination InterScan: Server pipeline Patented 4/22/1999 5,623,600 Trend Micro Incorporated (USA) System apparatus and Patented 9/14/1999 5,951,698 Trend Micro Incorporated method for macro virus (Taiwan) detection and removal Event-triggered iterative Patented 9/28/1999 5,960,170 Trend Micro Incorporated virus detection (Taiwan) Computer network Patented 11/9/1999 5,983,348 Trend Micro Incorporated malicious code scanner (USA)
The duration of these patents is 17 years from the date of registration. We plan to transfer the ownership of these patents to Trend Micro. We do not typically enter into signed license agreements with our corporate, government and institutional customers who license products directly from us. We include an electronic version of a "shrinkwrap" license in all of our electronically distributed software and a printed license in the box for our packaged products in order to protect our copyrights in those products. The enforceability of these licenses generally is uncertain in the United States as well as in foreign jurisdictions. In addition, the laws of some foreign countries either do not protect proprietary rights or offer only limited protection for those rights. In addition, as is common in the software industry, third parties may sue us for alleged infringement of their intellectual property rights. We may also have to take legal action to defend our intellectual property from infringement. We also generally enter into confidentiality agreements with our employees, and limit access to and distribution of proprietary information. Legal Proceedings In May 1997, Trend Micro Incorporated, our U.S. subsidiary, sued Network Associates, formerly McAfee Associates, Inc., and Symantec in the U.S. Federal District Court for the Northern District of California alleging that some of their products infringe a U.S. registered patent held by Trend U.S. relating to a system and method for detecting computer viruses in a network 55 environment and seeking injunctive relief and unspecified money damages. The products which incorporate the patented technology are InterScan VirusWall, InterScan eManager, InterScan WebProtect, InterScan AppletTrap, ScanMail and other of our products which we sell for inclusion in our customers' products. Trend U.S. settled its claims against Symantec in April 1998 by entering into a patent cross-license arrangement which included an agreement to exchange samples of viruses. In June 1997, Network Associates denied infringement, alleging that Trend U.S.'s patent is invalid, and filed counterclaims against Trend U.S. alleging unfair competition, false advertising, trade libel and interference with prospective economic advantage. These counterclaims are based primarily on Network Associates' allegations that Trend Micro made false claims about Network Associates products in its advertising and on its website. In April 2000, Network Associates filed suit against Trend U.S. in the U.S. Federal District Court for the Northern District of Texas, alleging that Trend U.S.'s anti-virus software packages, including the Trend Virus Control System, infringes a Network Associates patent which was issued on February 22, 2000. Trend Micro believes that the final disposition of these matters will not have a material adverse effect on Trend Micro's business or results of operations. We are currently in negotiations with Network Associates to settle all outstanding litigation between the parties. Although we expect to reach agreement with Network Associates on terms that are acceptable to us, we cannot assure you that we will be able to do so. Employees As of March 2000, we had 851 employees, of whom 593 are located in Asia, 146 are located in the United States, 75 are located in Europe and 37 are located in other regions. None of our employees is represented by a labor union and we have not experienced a work stoppage. We believe that our employee relations are good. Facilities Our headquarters are located in Tokyo, Japan, where we lease 1,537 square meters of office space under a lease which expires in March 2002. We also lease an aggregate of approximately 210 square meters of office space in Osaka and Fukuoka. We lease approximately 20,000 square feet of office space in Cupertino, California under a lease which expires in July 2002. We lease office space for our regional sales, research and development and sales office in Taiwan and for our customer service center in the Philippines. We also lease small sales offices in Korea, China, Hong Kong, Malaysia, Australia, Germany, Italy, France, the United Kingdom, Mexico, Brazil and Argentina. 56 MANAGEMENT The following table shows information regarding Trend Micro's directors and executive officers as of April 30, 2000. Our directors serve on the board for two year terms and statutory auditors serve for three year terms. Our executive officers serve at the discretion of the board. The terms of Messrs. Chang, Lai and Kitao and Ms. Chiang expire upon the completion of our ordinary shareholders' meeting in 2001. The terms of Messrs. Nakanishi and Watanabe expire upon the completion of our ordinary shareholders' meeting in 2002. The terms of Messrs. Sano, Kajikawa and Kawashima expire upon completion of our ordinary shareholders' meeting in 2002. The term of Mr. Hasegawa expires upon completion of our ordinary shareholders' meeting in 2003.
Name Age Position(s) - ---- --- ----------- Steve Ming-Jang Chang 45 Representative Director; President, Chief Executive Officer and Chairman of the Board Andrew Kwok-To Lai 43 Director; Chief Operating Officer and Executive Vice President Eva Yi-Fen Chiang 41 Director; Chief Technology Officer and Executive Vice President Hiroyuki Nakanishi 42 Director; Chief Financial Officer Toshihiro Watanabe 38 Director Yoshitaka Kitao 49 Director Fumio Hasegawa 60 Statutory Auditor Mitsuo Sano 43 Statutory Auditor Akira Kajikawa 41 Statutory Auditor Katsuya Kawashima 37 Statutory Auditor
Steve Ming-Jang Chang is the founder, Representative Director, Chairman of the Board, President and Chief Executive Officer of Trend Micro. Mr. Chang established Trend Micro's predecessor company in 1988, where he was President and Chief Executive Officer. He has served as Chairman of the Board, President and Representative Director of Trend Micro since March 1997. Under the Japanese Commercial Code, the representative director of a Japanese corporation has authority to enter into agreements on behalf of the company without authorization from the company's board of directors. Prior to founding Trend Micro, Mr. Chang was a sales engineer at Hewlett Packard Taiwan, from January 1977 to December 1978. He then worked as general manager of Ton Sin Information Inc. in Taiwan from January 1979 to December 1981. Mr. Chang founded AsiaTek Inc. in January 1982 and was its president until November 1988. Mr. Chang holds a B.S. in Applied Mathematics from Fujen University and an M.S. in Computer Science from Lehigh University. Andrew Kwok-To Lai has served as Chief Operating Officer of Trend Micro and an Executive Vice President of Trend U.S. since 1996. He was appointed as a Director of Trend Micro in March 1996. He served as an advisor to Trend Taiwan from September 1995 to February 1996. Mr. Lai began his career as a hardware engineer in 1981, when he joined Wycatt. Mr. Lai's software industry experience includes positions as Sales Account Manager, NetWare Center Manager and ten years as Asia Pacific Regional Director with Novell. Mr. Lai holds an A.S. from Ricks College and attended the Electrical Engineering Program at Brigham Young University. Eva Yi-Fen Chiang has served as Chief Technology Officer of Trend Micro since 1996 and as a Director of Trend Micro since August 1997. Ms. Chiang has also served as the Executive Vice President of Trend U.S. since May 1988. Ms. Chiang holds a B.A. in philosophy from Cheng Chi University in Taiwan and M.B.A. and M.I.S. degrees from the University of Texas at Dallas. Ms. Chiang is Steve Chang's sister-in-law. 57 Hiroyuki Nakanishi has been a Director of Trend Micro since March 2000 and is currently its Chief Financial Officer. Mr. Nakanishi has also served as a Director of ipTrend Incorporated since January 2000. Mr. Nakanishi is currently a director of SOFTBANK INVESTMENT CORP. and Softbank Ventures, Inc. Mr. Nakanishi began his career with Nomura Securities Co., Ltd., in 1982 and was Executive Manager of the Finance Department of SOFTBANK Corp. from 1995 to 1998. Mr. Nakanishi attended Hitotsubashi University where he received a B.A. in Law. Toshihiro Watanabe was appointed as a Director of Trend Micro in March 2000 and has been Head Manager of Sales and Marketing at Trend Micro since February 2000. Other positions Mr. Watanabe has held with Trend Micro include Department Manager of Sales & General Affairs and Human Resources from October 1997 to April 1998 and Director of Sales from May 1998 to January 2000. Prior to joining Trend Micro, Mr. Watanabe was a management and insurance business consultant from 1993 to 1997. Mr. Watanabe holds a B.A. in Economics from Hiroshima Shudo University. Yoshitaka Kitao has been a Director of Trend Micro since March 1997. Mr. Kitao is currently Executive Vice President and Chief Financial Officer of SOFTBANK, President and Representative Director of each of SOFTBANK FINANCE CORPORATION and CyberCash K.K., Chairman and Representative Director of SOFTBANK ACCOUNTING CORPORATION and a director of SOFTBANK America and SOFTBANK RIGHTS AGENCY CORPORATION. He also serves as the President and Representative Director of each of the following SOFTBANK affiliates: Morningstar Japan K.K., E*TRADE JAPAN K.K., FOREXBANK Co., Ltd., INSWEB Japan K.K., E*Advisor Co., Ltd., SOFT TREND CAPITAL Corp., E-Loan Japan K.K. and SOFTBANK INVESTMENT CORPORATION. In addition, Mr. Kitao serves as a director of Softbank Ventures, Inc. and SOFTBANK CONTENTS PARTNERS CORPORATION. Prior to joining SOFTBANK in June 1995, Mr. Kitao was Director of Nomura Wasserstein Perella Co., Ltd. from 1992 to 1993, Managing Director of Wasserstein Perella & Co., Inc. from 1989 to 1992 and was the General Manager for the Nomura Securities Co., Ltd.'s Corporate Finance and Services Dept. 3 from 1992 to 1995. Mr. Kitao holds a B.A. in Economics from Keio University. Fumio Hasegawa has been a Statutory Auditor of Trend Micro since March 2000. Previously, Mr. Hasegawa was Manager of the Managerial Accounting Section and Sub-manager of the Accounting Department of SHOWA SHELL SEKIYU K.K. from 1994 to 1996 and was a Director of Tokyo Shell Pack K.K. from 1996 to 2000. Mr. Hasegawa holds a B.C. in Accounting from Chuo University. Mitsuo Sano has been a Statutory Auditor of Trend Micro since March 1997. He is also currently a Statutory Auditor of Yahoo! Japan Corporation, and other SOFTBANK affiliates including Morningstar Japan K.K., SOFTBANK ACCOUNTING CORPORATION, Softbank Ventures, Inc., SOFTBANK RIGHTS AGENCY CORPORATION and CyberCash K.K. He is also a director of E*TRADE Securities Co., LTD. Previously, Mr. Sano served as General Manager of SOFTBANK's Accounting and Finance Department from December 1995 to May 1998 and as a manager in the Tokyo office of Price Waterhouse from October 1982 to September 1990. Mr. Sano holds a B.A. in Business Administration from the Yokohama National University and is qualified as a certified public accountant in Japan. Akira Kajikawa has been a Statutory Auditor of Trend Micro since March 1997. He is currently also a member of the Board of Directors of Yahoo! Japan Corporation, SOFTBANK RIGHTS AGENCY CORPORATION, and SOFTBANK INVESTMENT CORPORATION. Previously, Mr. Kajikawa was a General Manager in the Finance Department of SOFTBANK from 58 November 1996 to May 1997. Mr. Kajikawa started his investment banking career at Nomura Securities Co., Ltd., which he joined in April 1983. At Nomura Securities, he held various positions, including those in its foreign subsidiaries in the United Kingdom, Australia and Singapore. Mr. Kajikawa holds a B.A. in Commerce from Hitotsubashi University and an M.B.A. from the London Business School. Katsuya Kawashima has been a Statutory Auditor of Trend Micro since March 1999. Mr. Kawashima is also a director of SOFTBANK FINANCE CORPORATION, E*TRADE JAPAN K.K., E*Advisor Co., Ltd. and E*TRADE Securities Co., LTD., a statutory auditor of INSWEB Japan K.K., Director of SOFTBANK INVESTMENT CORPORATION and Director and Chief Operating Officer of Morningstar Japan K.K. From April 1985 to July 1995, he worked at Nomura Securities Co. Ltd. where his final position was deputy section manager. Mr. Kawashima holds a B.A. in Economics from Yamaguchi University. Compensation For the fiscal year ended December 31, 1999, the aggregate compensation of all directors and executive officers paid or accrued by Trend Micro was (Yen)72.9 million ($713,270). Under the Japanese Commercial Code and local practice, we may make severance payments to a retired director or statutory auditor with shareholder approval, if our management proposes such payments based on a resolution of our board of directors. However, we do not intend to make such a proposal for directors. We have an internal formula to determine the amounts of severance payments to directors and statutory auditors if we were to make such a proposal for statutory auditors. We have not recorded any liabilities relating to severance payments to directors and statutory auditors as of December 31, 1997, 1998 and 1999 because we have no liabilities to directors, and related liabilities to statutory auditors were insignificant. Incentive Plans 1997 Incentive Plan and 1998 Incentive Plans Our 1997 incentive plan and 1998 incentive plans provide for the grant of warrants to purchase shares to employees and directors. All directors and employees of Trend Micro and its subsidiaries, other than directors or employees residing in California and holding more than 10% of the outstanding shares, were eligible to participate in the incentive plans. All of the warrants authorized under the incentive plans, representing an aggregate of 5,326,800 shares, have been issued. As of April 30, 2000, warrants to purchase a total of 3,549,300 shares have been exercised, warrants to purchase a total of 374,400 shares have been retired, and warrants to purchase a total of 1,403,100 shares remain issued and outstanding. All warrants issued to date under the incentive plans were issued with an exercise price of (Yen)285 per share. Under the incentive plans, any warrants that have been retired, expired, become unexercisable or forfeited for any reason are not available for any future issuances. If required by applicable regulations, the exercise price of a warrant will be not less than 85% of the fair market value of the shares issuable upon exercise of the warrant on the date of grant. The warrants are exercisable at a rate determined by the board of directors in its sole discretion. However, the incentive plans provide that in no event will any warrant become exercisable at a rate less than 20% per year for each of the first five years from its issue date, and no warrant is exercisable after 10 years from its issue date. 59 The board of directors may amend the incentive plans and warrants and may assume, repurchase or resell outstanding warrants at any time in compliance with applicable laws, but any amendment or modification which materially alters or impairs a warrant holder's rights requires the warrant holder's prior written consent. The incentive plans permit the board of directors to impose transfer restrictions on the shares issuable upon exercise of the warrants, including a right of first refusal to purchase the shares. Each of the incentive plans terminates ten years after its respective date of adoption. Due to restrictions under the Japanese Commercial Code, the warrants were not issued directly to eligible employees but were initially issued as unsecured bonds with detachable warrants with a face value equal to the exercise price of the warrants. The bonds were issued and sold to SOFTBANK, upon which we fully redeemed the bonds and repurchased the warrants. Following these transactions, we transferred some of the warrants to our Japanese employees and sold the remaining warrants to our subsidiaries for transfer to employees at our subsidiaries. 1999 Incentive Plan We have adopted the Trend Micro Incorporated 1999 incentive plan. The 1999 incentive plan has two components: . we have issued warrants to acquire up to 937,500 newly-issued shares to employees in Japan and employees of our non-U.S. subsidiaries; and . under the U.S. program of the plan, STG Incentive Company L.L.C., a Delaware limited liability company organized by Gainway Enterprises Limited, Trueway Company Limited and Steve Ming-Jang Chang, has issued options directly to employees and directors of Trend U.S. to acquire up to 810,000 shares from STG Incentive Company L.L.C. The exercise price per share for the warrants and the options issued under the 1999 incentive plan is the fair market value of the shares on the date on which the exercise price was determined. We have issued the warrants in the form of unsecured bonds with detachable warrants. Immediately following issuance of the bonds, we repurchased the warrants and issued some of the warrants to our Japanese employees and sold the remaining warrants to our subsidiaries for issuance to employees outside of Japan and the United States. The terms of the warrants issued under our 1999 incentive plan are substantially identical to those of the warrants issued under the 1997 and 1998 incentive plans. Trend U.S. determines the allocation of and vesting for options. Options are granted by STG Incentive Company L.L.C. at the direction of Trend U.S. Each option gives the option holder the right to purchase one unit of 500 shares during the four-year period from the date of grant. The options will not be transferable other than by inheritance or under a domestic relations order by a court. Upon exercise of an option, you will deposit the underlying shares into the ADS facility and receive ADSs. The custodian will return shares underlying options which have not been exercised as of the end of the option term to STG Incentive Company L.L.C. for distribution to Trueway, Gainway and Mr. Chang. For additional information about the U.S. program, see "Plan of Distribution" beginning on page 86. 60 Warrant and Option Grants to Directors and Executive Officers The following table shows information about the warrants and options granted to the directors and executive officers of Trend Micro which are outstanding as of April 30, 2000.
Expiration Total Number of Shares ---------- ---------------------- Name Date Underlying Aggregate Exercise Price (1) - ---- ---- ---------- ------------------------ Warrants/Options ---------------- Andrew Kwok-To Lai 7/12/2003 51,000 $2,559,690 Eva Yi-Fen Chiang 7/12/2003 51,000 $2,559,690 Yoshitaka Kitao 7/22/2002 53,125 (Yen) 340,000,000 Hiroyuki Nakanishi 7/22/2002 53,125 (Yen) 340,000,000 Toshihiro Watanabe 7/22/2002 8,593 (Yen) 54,995,200 Directors and 7/22/2002 - Executive Officers as a 7/12/2003 216,843 $5,119,380 (Yen) 734,995,200 group (10 persons)
/(1)/ Yen figures represent aggregate yen-denominated exercise prices for warrants, and dollar figures represent aggregate dollar-denominated exercise prices for options. 61 PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER The following table shows information known to us regarding the beneficial ownership of our common stock as of March 31, 2000, by (1) each person known by us to own more than 10% of the outstanding shares, (2) STG Incentive Company L.L.C. and (3) all directors and executive officers as a group. As of March 31, 2000, there were 65,068,900 shares outstanding. To our knowledge, except as otherwise stated, each entity named in the table below has sole voting and investment power over the shares shown opposite the entity's name.
Shares of common stock beneficially Number of shares Shares of common stock owned prior to offered beneficially owned after offering in this offering offering ----------------------------- -------------------- ------------------------------ Name Number Percentage Number Number Percentage - -------- -------------- ------------- -------------------- ------------- --------------- Trueway Company Limited (1)................ 12,759,000 19.6 -- 12,759,000 19.6 P.O. Box 3151, Roadtown, Tortola, British Virgin Islands MLPFS Custody Account No. 2 (2)............ 6,776,000 10.4 6,776,000 10.4 South Tower, World Financial Center New York, NY 10080-0801 U.S.A. Gainway Enterprises Limited (3)............ 6,597,000 10.1 -- 6,597,000 10.1 P.O. Box 3151, Roadtown, Tortola, British Virgin Islands STG Incentive Company L.L.C................ 810,000 (4) 1.2 810,000 -- 1.2 c/o The Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 U.S.A. All directors and executive officers as a group (10 persons)..................... 4,266,000 (5) 6.6 -- 4,266,000 6.6
_____________________ (1) All of the shares of Trueway are beneficially owned by Yeh Min Yuen. None of Trend Micro's directors or executive officers have voting or investment power over the shares beneficially owned by Mr. Yeh. Trueway's share total reflects 157,000 shares transferred by Trueway to STG Incentive Company L.L.C. in July 1999 in connection with the U.S. program of the 1999 incentive plan. (2) The shares held by the MLPFS Custody Account No. 2 include 1,353,000 shares beneficially owned by Eva Chiang. The shares held by the MLPFS Custody Account No. 2 also include shares beneficially owned by family members of Eva Chiang and her husband. Steve Chang and Eva Chiang disclaim beneficial ownership of the shares beneficially owned by these family members. (3) All of the shares of Gainway are beneficially owned by Liao Hsueh-Hsuan. None of Trend Micro's directors or executive officers have voting or investment power over the shares beneficially owned by Mr. Liao. Gainway's share total reflects 243,000 shares transferred by Gainway to STG Incentive Company L.L.C. in July 1999 in connection with the U.S. program. (4) STG Incentive Company L.L.C.'s pre-offering share total reflects 810,000 shares transferred to STG Incentive Company L.L.C. by Trueway, Gainway and Mr. Chang in July 1999 in connection with the U.S. program of our 1999 incentive plan. (5) The share total includes 1,353,000 shares held by the MLPFS Custody Account No. 2 that are beneficially owned by Eva Chiang. The share total excludes 96,000 shares transferred by Steve Jang-Ming Chang to STG Incentive Company L.L.C. in July 1999 in connection with the U.S. program. For additional information regarding ownership of warrants, see "Management--Incentive Plans." 62 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Transactions with SOFTBANK In December 1996, we concluded a series of agreements with SOFTBANK involving an investment by SOFTBANK in Trend Micro and the distribution by SOFTBANK of our products in Japan. Stock Purchase. In December 1996, SOFTBANK purchased 18,900,000 shares from Steve Chang, Eva Chiang and several of their family members for approximately (Yen)555 per share, or an aggregate of (Yen)3.5 billion. At the time of the investment, the purchased shares represented 35% of our outstanding shares. In accordance with a price adjustment provision in the purchase agreement, SOFTBANK paid an additional (Yen)5 billion ($44.2 million) upon our Japanese initial public offering in August 1998. SOFTBANK sold 3,000,000 shares to an unaffiliated third party in September 1998, 12,750,000 shares in a global offering of our shares in July 1999, and the remaining 3,150,000 shares in March 2000. Until the purchase agreement was amended in June 1998 to delete a provision providing for such meetings, senior representatives from the two companies occasionally held management meetings to discuss operational and management issues relating to our business. The purchase agreement is no longer in effect. In addition, Mr. Yoshitaka Kitao and Mr. Hiroyuki Nakanishi, who are members of our board of directors, are a SOFTBANK executive and a former SOFTBANK employee, respectively. Also, three of our statutory auditors, Mr. Akira Kajikawa, Mr. Katsuya Kawashima and Mr. Mitsuo Sano, are current or former employees of SOFTBANK. Distribution. We have an important distribution agreement with SOFTBANK, our largest distributor in Japan as discussed under "Business--Sales and Marketing--Japan." Acquisition of SOFTBANK bonds. Between October 1998 and December 1998, Trend Micro purchased in the public market an aggregate of 12,000,000 units of bonds issued by SOFTBANK, for a total purchase price of (Yen)1,200,826,000. Of these bonds, 11,000,000 units had a maturity date of October 18, 1999 and a 2.3% annual interest rate. Semi-annual interest payments under these bonds were made on April 18 and October 18 of each year. The remaining 1,000,000 units have a maturity date of October 18, 2000, and bear interest at the rate of 2.65% per annum. Semi-annual interest payments under these bonds are also made on April 18 and October 18 of each year. We also currently own 17,000,000 units of SOFTBANK bonds which we purchased for (Yen)1.7 billion in March 1999. These bonds are due March 24, 2003 and bear 3% interest. Semi-annual interest payments under these bonds are due March 24 and September 24 of each year. In each instance, we purchased the SOFTBANK bonds at the then current fair market value of these bonds and in brokered transactions. Issuance of Bonds to SOFTBANK in Connection with Incentive Plans. In connection with the 1997 and 1998 incentive plans, we issued unsecured bonds with detachable warrants to SOFTBANK in the following amounts: on October 17, 1997, (Yen)908.5 million; on April 15, 1998, (Yen)412.9 million; and on June 15, 1998, (Yen)196.6 million. We immediately fully redeemed the bonds on their dates of issuance at their face value. We also repurchased all of the detachable warrants upon issuance of each bond and immediately distributed such warrants, at the fair market price on the date of issuance, to our and our subsidiaries' participating employees. We issued approximately (Yen)6 billion worth of unsecured bonds with detachable warrants to SOFTBANK, which may include affiliated companies, in connection with the 1999 incentive plan. These bonds remain outstanding. We have also repurchased the detachable warrants and distributed them, with an exercise price equal to the fair market value of the underlying shares on the date of issuance, to our and our non-U.S. subsidiaries' employees. The bonds will bear interest at the annual rate of 2.5%. 63 Investment in SoftTrend Capital. In December 1999, Trend Micro invested (Yen)12.5 million (approximately $122,000) in SoftTrend Capital Corporation. As of April 30, 2000, Trend Micro is a 20% shareholder of SoftTrend Capital. SoftTrend Capital is indirectly owned by SOFTBANK, and acts as manager for the SOFTBANK Internet Fund. Yoshitaka Kitao, who serves on the board of directors of both Trend Micro and SOFTBANK, is president and chief executive officer of SoftTrend Capital. Steve Ming-Jang Chang, Trend Micro's president and chief executive officer, also became a board member of SoftTrend Capital upon Trend Micro's investment in SoftTrend Capital. The SOFTBANK Internet Fund is a venture capital fund established in July 1999 for the purpose of making investments in internet-related companies. In December 1999, Trend Micro also made an investment of (Yen)960 million (approximately $9.4 million) in the SOFTBANK Internet Fund. Acquisition of Shares of USWeb. In May 1997, Trend Micro purchased common stock, and warrants to purchase common stock, of USWeb/CKS in a private placement for a total purchase price of $1.3 million. We sold 60,000 of these shares in September 1999 and 25,000 shares in December 1999. Aggregate proceeds from the sales of these shares were approximately $3.2 million. USWeb/CKS has subsequently merged with Whittman-Hart. In March 2000 we received shares of the merged entity, renamed marchFIRST, in exchange for the 104,170 shares of USWeb/CKS common stock that we then owned. SOFTVEN No. 2 Investment Enterprise Partnership, a venture capital fund which is managed by a wholly-owned subsidiary of SOFTBANK, is a former shareholder of USWeb/CKS. Corporate Reorganization Trend Micro's current operations are a result of a series of transactions in 1996 by which Trend Micro, which was initially a wholly-owned subsidiary of Trend Taiwan, became the parent corporation of Trend Taiwan and each of the international subsidiaries then owned by Trend Taiwan. In August 1996, Steve Chang, Eva Chiang, several of their family members, Trueway and Gainway purchased all of Trend Micro's then outstanding shares from Trend Taiwan for (Yen)130,000,000, and Trend Micro purchased all of the then outstanding shares of Trend U.S. and Trend Korea Inc. from Trend Taiwan for $640,000 and $70,000, respectively. As a result of these transactions, these shareholders wholly owned Trend Micro and Trend Taiwan. In October 1996, Trend Micro purchased all of the then outstanding shares of Trend Taiwan from these shareholders for NT$323,999,773, as a result of which Trend Taiwan became a majority-owned subsidiary of Trend Micro. In preparation for its initial public offering in the Japanese over-the- counter market in August 1998, Trend Micro effected a one-into-three stock split in September 1997 and a one-into-ten stock split in May 1998. In July 1999, Trend Micro effected a global offering of 12,750,000 shares including a concurrent listing of 3,300,000 shares in the form of ADSs on The Nasdaq National Market. SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares into the public market following the offering, whether on the Japanese over-the-counter market or into the U.S. market by conversion of outstanding shares into ADSs, could cause the market price of the shares and ADSs to fall. As of April 30, 2000, we have 65,096,142 shares issued and outstanding, assuming exercise of all options and outstanding warrants. If warrants outstanding at April 30, 2000 are exercised, we will have approximately 67,389,867 shares issued and outstanding. All of these shares are freely tradable in the Japanese over-the-counter market. Of 65,096,142 shares issued and outstanding, 64 . 3,300,000 shares in the form of ADSs sold in the U.S. and Canada in our global offering of shares and ADSs in July 1999 are freely tradable in the U.S. and are eligible for sale on The Nasdaq National Market, except for any American Depositary Shares acquired by an "affiliate" of Trend Micro, as defined in Rule 144 under the Securities Act; . 9,450,000 shares sold outside the U.S. and Canada in the Japanese and international portions of our global offering are freely tradable in the U.S. and, upon deposit with the depositary in exchange for ADSs, are eligible for sale on The Nasdaq National Market, except for any shares acquired by an "affiliate" of Trend Micro, as defined in Rule 144; . approximately 47,986,842 shares, including shares sold to the public in our initial public offering in Japan, will be eligible for sale in the U.S. in the form of ADSs immediately following the offering, and, in the case of shares held by "affiliates" of Trend Micro, as described in Rule 144, in compliance with the volume and manner of sale restrictions under Rule 144, or under another exemption from the registration requirements of the Securities Act; . approximately 3,549,300 shares have been issued upon exercise of warrants granted under our 1997 and 1998 incentive plans. Of these shares, under Rule 701 of the Securities Act, approximately 1,068,600 shares issued to U.S. employees will be tradable in the U.S. in compliance with the manner of sale restrictions under Rule 144 beginning 90 days after the date of this prospectus, approximately 1,963,800 shares issued to non-U.S. employees will be freely tradable in the U.S. and approximately 516,900 shares held by affiliates may be resold in compliance with the holding period, volume and manner of sale restrictions under Rule 144; and . the 810,000 shares covered by this prospectus will be eligible for sale immediately upon exercise of the options being granted under the U.S. program of the 1999 incentive plan. Approximately 1,284,000 shares are issuable upon exercise of warrants granted under our 1997 and 1998 incentive plans. Assuming exercise of the warrants, of these shares, under Rule 701 of the Securities Act, . approximately 651,412 shares issued to U.S. employees will be tradable in the U.S. in compliance with the manner of sale restrictions under Rule 144 beginning 90 days after the date of this prospectus, and . approximately 632,588 shares issuable to non-U.S. employees will be freely tradable in the U.S. Approximately 890,625 shares are issuable upon exercise of warrants granted under our 1999 incentive plan. Assuming exercise of these warrants, the shares issued will be eligible for sale in the U.S. in the form of ADSs upon such issuance, and, in the case of shares held by "affiliates" of Trend Micro, as described in Rule 144, in compliance with the holding period, volume and manner of sale restrictions under Rule 144. In general, under Rule 144 as currently in effect, a person, or persons whose shares are aggregated, including an affiliate, who has beneficially owned restricted shares for at least one year is entitled to sell, within any three- month period commencing 90 days after the effective date of this offering, a number of shares that does not exceed the greater of: (1) 1% of the then outstanding shares, which is equal to approximately 650,961 shares based on the shares outstanding as of April 30, 2000; or 65 (2) the average weekly trading volume in our shares during the four calendar weeks preceding such sale. Sales under Rule 144 must also comply with restrictions regarding the manner of sale, notice requirements and availability of current public information about Trend Micro, and the seller must file a Form 144 regarding these sales. A person who is not deemed to have been an affiliate of Trend Micro 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. In addition, any employee, officer or director of or consultant to Trend Micro who purchases his or her shares upon exercise of warrants or options issued to them under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701 under the Securities Act. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that persons other than affiliates may sell such shares in reliance on Rule 144 without having to comply with the public information, volume limitation or notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is required to wait until 90 days after the date of this prospectus before selling such shares. DESCRIPTION OF CAPITAL STOCK The following is a summary of material information concerning the shares, including summaries of material provisions of our articles of incorporation and share handling regulations, and of the Japanese Commercial Code and related legislation. These summaries should be read together with the articles and the share handling regulations which have been filed as exhibits to the registration statement of which this prospectus is a part. General Our authorized share capital as of April 30, 2000 is 250,000,000 shares, of which 65,096,142 shares with par value of (Yen)50 per share were issued and outstanding. Under the Commercial Code, shares must be registered and are transferable by delivery of share certificates. In order to assert shareholders' rights against us, a shareholder must have its name and address registered on our register of shareholders, in accordance with our share handling regulations. The registered beneficial holder of deposited shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able to assert shareholders' rights. A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with Japan Securities Depository Center. If a holder is not a participating institution in the Securities Center, it must participate through a participating institution, such as a securities company or bank having a clearing account with the Securities Center. All shares deposited with the center will be registered in the name of the center on our register of shareholders. Each participating shareholder will in turn be registered on our register of beneficial shareholders and be treated in the same way as shareholders registered on our register of shareholders. For the purpose of transferring deposited shares, delivery of share certificates is not required. Entry of the share transfer in the books maintained by the Securities Center for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The Securities Center system is intended to reduce paperwork required in connection with transfers of shares. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates. 66 Dividends Under our articles, our financial accounts will be closed on December 31 of each year and dividends, if any, will be paid to shareholders of record at December 31. In addition to year-end dividends, the board of directors may by resolution declare an interim cash dividend to shareholders of record as of June 30 of each year. Under the Commercial Code, however, we cannot declare or pay dividends unless specified financial criteria are met based on the amount of our stated capital and legal reserves. For information as to Japanese taxes on dividends, see "Tax Considerations--Japanese Taxation." Japanese Unit Share System In accordance with the requirements of the Commercial Code, our articles of incorporation provide that 500 shares constitute one "unit." Transferability of Shares Representing Less Than One Unit. Under the Commercial Code and the Deposit Agreement, holders of ADSs will be able to surrender ADSs and withdraw the underlying shares from deposit only in whole unit lots of one unit or larger. A holder who owns ADRs evidencing less than 5,000 ADSs will indirectly own less than a whole unit. Such a holder will not be able to dispose of its shares in lots of less than one unit and will not have access to the Japanese market through surrender of their ADSs and withdrawal and sale in Japan of the underlying shares. The Japanese unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size. Right of a Holder of Shares Representing Less Than One Unit to Require Trend Micro to Purchase Such Shares. A holder of shares representing less than one unit may at any time require Trend Micro to purchase such shares. Such shares will be purchased at their last reported sale price on the Japanese over- the-counter market on the day a request pertaining to such purchase is delivered to our transfer agent or, if no sales take place on that day, the price at which the next sale of shares is effected in the Japanese over-the-counter market, less applicable brokerage commissions. However, because holders of ADSs representing less than one unit are not able to withdraw the underlying shares from deposit, such holders will not be able to exercise this right as a practical matter. Other Rights of a Holder of Shares Representing Less Than One Unit. A holder of shares representing less than one unit has the following rights: . to receive dividends (including interim dividends); . to receive shares and/or cash by way of a stock split, upon consolidation or subdivision of shares or upon a capital decrease or merger; . to be allotted rights to subscribe for new shares and other securities when such rights are granted to shareholders; . to participate in any distribution of surplus assets upon the liquidation of Trend Micro; and . to require us to issue replacement certificates for lost, stolen or destroyed share certificates. A shareholder who owns shares representing less than one unit will not be able to exercise any other rights, including voting rights, the right to institute derivative actions and the right to examine our accounting books and records. 67 Voting Rights of a Holder of Shares Representing Less Than One Unit. A holder of shares representing less than one unit cannot exercise any voting rights pertaining to such shares. In calculating the quorum for various voting purposes, the aggregate number of shares representing less than one unit will be excluded from the number of outstanding shares. A holder of shares representing one or more whole units will have one vote for each share held, except as stated in "--Voting Rights" below. Consolidation by Operation of Law of Shares Constituting One Unit into One Share. The Japanese unit share system was intended to be an interim measure to encourage companies to issue shares denominated in larger amounts. The Commercial Code provides that, on a date to be specified by separate legislation, shares comprising one unit will be consolidated into one share. We do not currently know when a bill specifying such date will be submitted to the Japanese Diet. The Japanese Diet is the highest legislative body within the Japanese governmental system and performs a function analogous to that of the U.S. Congress. When this consolidation happens, a holder of a fractional share, equal to one-hundredth of one share or any integral multiple of one-hundredth which results from the consolidation, will be registered as the holder of the fraction in our register of fractional shares. A holder of any fraction representing less than one-hundredth of one share will be entitled to only limited rights, such as the right to receive a cash payment or a distribution of shares by way of a stock split. The registered holders of fractional shares may request that we issue share certificates, but such fractional shares will not have voting rights. In addition, unless the Articles are amended to provide otherwise, the rights of the fractional shareholders will be limited and will not include, for example, the right to receive dividends. Ordinary General Meeting of Shareholders We normally hold our ordinary general meeting of shareholders in March of each year in Tokyo, Japan. In addition, we may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks' advance notice. Under the Commercial Code, notice of any shareholders' meeting must be given to each shareholder having voting rights or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan in accordance with our share handling regulations, at least two weeks prior to the date of the meeting. Any shareholder or group of shareholders holding at least 300 units of shares, or 1% of the total outstanding shares, for a continuous period of six months or longer may propose a matter for consideration at a shareholders meeting by submitting a written request to the board of directors at least six weeks before such meeting. Voting Rights A shareholder is generally entitled to one vote per share except in those instances described in this paragraph and under "--Japanese Unit Share System" above. In general, under the Commercial Code, a resolution can be adopted at an ordinary meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Commercial Code and our articles of incorporation require a quorum for the election of directors and statutory auditors of not less than one-third of the total number of outstanding shares having voting rights. Our shareholders are not entitled to cumulative voting in the election of directors. A corporate shareholder whose outstanding shares are in turn more than one-quarter directly or indirectly owned by Trend Micro does not have voting rights. Shareholders may exercise their voting rights through proxies, provided that such proxies are also shareholders who have voting rights. The Commercial Code provides that a quorum of the majority of outstanding shares with voting rights must be present at a shareholders' meeting to approve any material corporate actions such as: 68 . amendment of the articles of incorporation; . the removal of a director or statutory auditor; . a dissolution, merger or consolidation; and . the transfer of the whole or an important part of our business. At least two-thirds of the shares having voting rights represented at the meeting must approve such actions. The voting rights of holders of ADSs are exercised by the depositary based on instructions from such holders. An agent of the depositary is the record holder of the underlying shares. Subscription Rights Holders of shares have no preemptive rights under our articles of incorporation. Under the Commercial Code, the board of directors may, however, determine that shareholders be given subscription rights in connection with a particular issue of new shares. In this case, such rights must be given on uniform terms to all shareholders as of a specified record date by at least two weeks' prior public notice to shareholders of the record date. Public or individual notice must be given to each of these shareholders at least two weeks prior to the date of expiration of the subscription rights. Rights to subscribe for new shares may be transferable or nontransferable as determined by the board of directors. If subscription rights are not transferable, a purported transfer by a shareholder who is not resident in Japan will be enforceable against Trend Micro and third parties only with our prior written consent. Liquidation Rights Upon a liquidation of Trend Micro, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the number of shares they own. Liability to Further Calls or Assessments All of our currently outstanding shares, including shares represented by the ADSs, are fully paid and nonassessable. Transfer Agent The Toyo Trust and Banking Company, Limited is the transfer agent for the Common Stock. Toyo Trust's office is located at 4-3, Marunouchi 1-chome, Chiyoda-ku, Tokyo, 100-0005 Japan. Toyo Trust maintains our register of shareholders and records transfers of record ownership upon presentation of share certificates. Repurchase by Trend Micro of Shares In addition to repurchases of shares constituting less than one unit, our articles of incorporation permit us to repurchase up to 4.8 million of our shares. 69 DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS The following is a summary of the material provisions of the deposit agreement between Trend Micro, The Bank of New York as depositary, registered holders of outstanding ADSs and the owners of a beneficial interest in ADSs evidenced by ADRs. You should read this summary together with the Deposit Agreement and the ADR. You can inspect a copy of the Deposit Agreement at the Corporate Trust Office of the depositary, currently located at 101 Barclay Street, New York, New York 10286, and at the principal offices of the custodian, which will act as agent of the depositary, currently the Kabutocho Branch of The Fuji Bank, Limited, at 6-7, Nihonbashi-Kabutocho, Chuo-ku, Tokyo 103-0026, Japan. American Depositary Receipts The Bank of New York issues the ADRs. The ownership interest in each share is represented by ten ADRs. The shares, or the right to receive shares, will be deposited by us with the custodian. Each ADR will also represent securities, cash or other property deposited with The Bank of New York but not distributed to ADR holders. You may hold ADRs either directly or indirectly through your broker or other financial institution. If you hold ADRs directly, you are an ADR holder. This description assumes you hold your ADRs directly. If you hold the ADRs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADR holders described in this section. You should consult with your broker or financial institution to find out what those procedures are. Because The Bank of New York will actually be the legal owner of the shares, you must rely on it to exercise the rights of a shareholder. The obligations of The Bank of New York are set out in a deposit agreement among us, The Bank of New York and you, as an ADR holder. The deposit agreement and the ADRs are generally governed by New York law. Share Dividends And Other Distributions The Bank of New York has agreed to pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of shares your ADRs represent. Cash. The Bank of New York will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any approval from the Japanese government is needed and cannot be obtained, the deposit agreement allows The Bank of New York to distribute the yen only to those ADR holders to whom it is possible to do so. It will hold the yen it cannot convert for the account of the ADR holders who have not been paid. It will not invest the yen and it will not be liable for interest. Before making a distribution, any withholding taxes that must be paid under Japanese law will be deducted. See "Tax Considerations--United States Federal Income Taxation--Taxation of Dividends Distributed on the Shares or ADSs." The Bank of New York will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when The Bank of New York cannot convert the Japanese currency, you may lose some or all of the value of the distribution. Shares. The Bank of New York may distribute new ADRs representing any shares we may distribute as a dividend or free distribution, if Trend Micro furnishes it promptly with satisfactory 70 evidence that it is legal to do so. The Bank of New York will only distribute whole ADRs. It will sell shares which would require it to issue a fractional ADR and distribute the net proceeds in the same way as it does with cash. If The Bank of New York does not distribute additional ADRs, each ADR will also represent the new shares. Rights to receive additional shares. If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, The Bank of New York may make these rights available to you. We must first instruct The Bank of New York to do so and furnish it with satisfactory evidence that it is legal to do so. If we do not furnish this evidence and/or give these instructions, and The Bank of New York decides it is practical to sell the rights, The Bank of New York will sell the rights and distribute the proceeds, in the same way as it does with cash. The Bank of New York may allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. If The Bank of New York makes rights available to you, it will exercise the rights and purchase the shares on your behalf. The Bank of New York will then deposit the shares and issue ADRs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay. U.S. securities laws may restrict the sale, deposit, cancellation and transfer of the ADRs issued after exercise of rights. For example, you may not be able to trade the ADRs freely in the United States. In this case, The Bank of New York may issue the ADRs under a separate restricted deposit agreement which will contain the same provisions as the deposit agreement, except for the changes needed to put the restrictions in place. Other Distributions. The Bank of New York will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, The Bank of New York has a choice. It may decide to sell what we distributed and distribute the net proceeds in the same way as it does with cash or it may decide to hold what we distributed, in which case the ADRs will also represent the newly distributed property. The Bank of New York is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders. We have no obligation to register ADRs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADRs, shares, rights or anything else to ADR holders. This means that you may not receive the distribution we make on our shares or any value for them if it is illegal or impractical for us to make them available to you. Deposit, Withdrawal and Cancellation The Bank of New York will issue ADRs if you or your broker deposit shares or evidence of rights to receive shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, The Bank of New York will register the appropriate number of ADRs in the names you request and will deliver the ADRs at its office to the persons you request. You may turn in your ADRs at The Bank of New York's office. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, The Bank of New York will deliver (1) the deliverable portion of the underlying shares to an account designated by you and (2) the deliverable portion of any other deposited securities underlying the ADR at the office of the custodian. Or, at your request, risk and expense, The Bank of New York will deliver the deliverable portion of the deposited securities at its office. The "deliverable portion" of the ADSs will be the maximum number of whole units of shares represented by the ADSs being 71 turned in by you at one time. If you turn in ADSs that do not constitute an integral multiple of 5,000 ADSs, The Bank of New York will deliver to you the deliverable portion of the ADSs and an ADR representing the remaining amount. Voting Rights You may instruct The Bank of New York to vote the shares underlying your ADRs but only if we ask The Bank of New York to ask for your instructions. Otherwise, you won't be able to exercise your right to vote unless you withdraw the shares. However, you may not know about the meeting enough in advance to withdraw the shares. If we ask for your instructions, The Bank of New York will notify you of the upcoming vote and arrange to deliver Trend Micro's voting materials to you. The materials will (1) describe the matters to be voted on and (2) explain how you, on a specified date, may instruct The Bank of New York to vote the shares or other deposited securities underlying your ADRs as you direct. For instructions to be valid, The Bank of New York must receive them on or before the date specified. The Bank of New York will try, as far as practical, in compliance with Japanese law and the provisions of our articles of incorporation, to vote or to have its agents vote the shares or other deposited securities as you instruct. The Bank of New York will only vote or attempt to vote as you instruct. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct The Bank of New York to vote your shares. In addition, The Bank of New York and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if your shares are not voted as you requested. Fees and Expenses
- ----------------------------------------------------------------------------------------------------------------------- ADR holders must pay: For: - ----------------------------------------------------------------------------------------------------------------------- $5.00 (or less) per 100 ADRs Each issuance of an ADR, including as a result of a distribution of shares or rights or other property Each cancellation of an ADR, including if the agreement terminates - ----------------------------------------------------------------------------------------------------------------------- $.02 (or less) per ADR Any cash payment - ----------------------------------------------------------------------------------------------------------------------- Registration or Transfer Fees Transfer and registration of shares on the share register of the Foreign Registrar from your name to the name of The Bank of New York or its agent when you deposit or withdraw shares - ----------------------------------------------------------------------------------------------------------------------- Expenses of The Bank of New York Conversion of Japanese yen to U.S. dollars Cable, telex and facsimile transmission expenses - ----------------------------------------------------------------------------------------------------------------------- Taxes and other governmental charges As necessary The Bank of New York or the Custodian have to pay on any ADR or share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes - -----------------------------------------------------------------------------------------------------------------------
72 Payment of Taxes You will be responsible for any taxes or other governmental charges payable on your ADRs or on the deposited securities underlying your ADRs. The Bank of New York may refuse to transfer your ADRs or allow you to withdraw the deposited securities underlying your ADRs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities underlying your ADRs to pay any taxes owed and you will remain liable for any deficiency. If it sells deposited securities, it will, if appropriate, reduce the number of ADRs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes. Reclassifications, Recapitalizations and Mergers
- -------------------------------------------------------------------------------------------------------------------------- If we: Then: - -------------------------------------------------------------------------------------------------------------------------- . Change the nominal or par value of our shares The cash, shares or other securities received by The Bank of New York will become deposited securities. . Reclassify, split up or consolidate any of the Each ADR will automatically represent its equal share of deposited securities the new deposited securities. The Bank of New York may, and will if we ask it to, . Distribute securities on the shares that are distribute some or all of the cash, shares or other not distributed to you securities it received. It may also issue new ADRs or ask you to surrender your outstanding ADRs in exchange . Recapitalize, reorganize, merge, for new ADRs, identifying the new deposited securities. liquidate, sell all or substantially all of our assets, or take any similar action - --------------------------------------------------------------------------------------------------------------------------
Amendment and Termination We may agree with The Bank of New York to amend the deposit agreement and the ADRs without your consent for any reason. If the amendment will cause any of the following results, the amendment will become effective 30 days after The Bank of New York notifies you of the amendment: . adds or increases fees or charges, except for . taxes and other government charges; . registration fees; . cable, telex or facsimile transmission costs; or . delivery costs or other such expenses; or . prejudices an important right of ADR holders. At the time an amendment becomes effective, you are considered, by continuing to hold your ADR, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended. The Bank of New York will terminate the deposit agreement if we ask it to do so. The Bank of New York may also terminate the deposit agreement if The Bank of New York has told us that it would like to resign and we have not appointed a new depositary bank within 90 days. In both cases, The Bank of New York must notify you at least 30 days before termination. After termination, The Bank of New York and its agents will be required to do only the following under the deposit agreement: . advise you that the deposit agreement is terminated, and 73 . collect distributions on the deposited securities and deliver the deliverable portion of shares and other deposited securities upon cancellation of ADRs. Six months after termination, The Bank of New York will, if practical, sell any remaining deposited securities by public or private sale. After that, The Bank of New York will hold the proceeds of the sale, as well as any other cash it is holding under the deposit agreement for the pro rata benefit of the ADR holders that have not surrendered their ADRs or are unable to surrender their ADRs because they represent less than a unit of shares. It will not invest the money and will have no liability for interest. The Bank of New York's only obligations will be to account for the proceeds of the sale and other cash. After termination our only obligations will be an indemnification obligation and our obligation to pay specified amounts to The Bank of New York. Limitations on Obligations and Liability to ADR Holders The deposit agreement expressly limits our obligations and the obligations of The Bank of New York, and it limits our liability and the liability of The Bank of New York. We and The Bank of New York: . are only obligated to take the actions specifically provided for in the deposit agreement without negligence or bad faith; . are not liable if either is prevented or delayed by law or circumstances beyond their control from performing their obligations under the deposit agreement; . are not liable if either exercises discretion permitted under the deposit agreement; . have no obligation to become involved in a lawsuit or other proceeding related to the ADRs or the deposit agreement on your behalf or on behalf of any other party; and . may rely upon any documents they believe in good faith to be genuine and to have been signed or presented by the proper party. In the deposit agreement, we and The Bank of New York agree to indemnify each other under designated circumstances. Requirements for Depositary Actions Before The Bank of New York will issue or register transfer of an ADR, make a distribution on an ADR, or process a withdrawal of shares, The Bank of New York may require: . payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any shares or other deposited securities; . production of satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and . compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer documents. The Bank of New York may refuse to deliver, transfer, or register transfers of ADRs generally when our books or the books of The Bank of New York are closed, or at any time if The Bank of New York or we think it advisable to do so. 74 You have the right to cancel your ADRs and withdraw the underlying shares at any time except: . when temporary delays arise because: (1) The Bank of New York or we have closed its or our transfer books; (2) the transfer of shares is blocked to permit voting at a shareholders' meeting; or (3) we are paying a dividend on the shares; . when you or other ADR holders seeking to withdraw shares owe money to pay fees, taxes and similar charges; or . when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADRs or to the withdrawal of shares or other deposited securities. This includes compliance with the unit sales rules under the Japanese Commercial Code. This right of withdrawal may not be limited by any other provision of the deposit agreement. Pre-Release of ADRs In compliance with the provisions of the deposit agreement, The Bank of New York may issue ADRs before deposit of the underlying shares. This is called a pre-release of the ADR. The Bank of New York may also deliver shares upon cancellation of pre-released ADRs, even if the ADRs are cancelled before the pre-release transaction has been closed out. A pre-release is closed out as soon as the underlying shares are delivered to The Bank of New York. The Bank of New York may receive ADRs instead of shares to close out a pre-release. The Bank of New York may pre-release ADRs only under the following conditions: . before or at the time of the pre-release, the person to whom the pre- release is being made must represent to The Bank of New York in writing that it or its customer owns the shares or ADRs to be deposited; . the pre-release must be fully collateralized with cash or other collateral that The Bank of New York considers appropriate; and . The Bank of New York must be able to close out the pre-release on not more than five business days' notice. In addition, The Bank of New York will limit the number of ADRs that may be outstanding at any time as a result of pre-release to 30% of the total shares deposited, although The Bank of New York may disregard the limit from time to time, if it thinks it is appropriate to do so. TAX CONSIDERATIONS The following is a general discussion of material Japanese and United States federal income tax consequences of the ownership of shares or ADSs by U.S. holders, as defined below. The summary is not a complete analysis or description of all potential tax consequences to U.S. holders. It does not address all tax considerations that may be relevant to all categories of potential purchasers, such as . U.S. holders who are broker-dealers or who own, directly or indirectly, 10% or more of the outstanding shares; 75 . U.S. holders holding the shares or ADSs as a hedge or as part of a hedging, straddle or conversion transaction; and . Some U.S. holders including: . insurance companies; . tax-exempt organizations; . financial institutions; . persons paying alternative minimum tax; and . persons having a functional currency other than the U.S. dollar. These persons may need to comply with special rules not discussed below. The summary deals only with holders who hold the shares or ADSs as capital assets. In addition, this summary is based on the representations of the depositary and the assumption that each obligation in the deposit agreement referred to in "Description of American Depositary Receipts," and any related agreement, will be performed in accordance with its terms. The summary of material U.S. federal income tax consequences, to the extent that it constitutes matters of U.S. law, summaries of U.S. legal matters or U.S. legal conclusions, is the opinion of Morrison & Foerster LLP, United States counsel for Trend Micro. The summary of material Japanese tax consequences, to the extent that it constitutes matters of Japanese law, summaries of Japanese legal matters or Japanese legal conclusions, is the opinion of Mitsui, Yasuda, Wani & Maeda, Japanese counsel for Trend Micro. Morrison & Foerster LLP has not opined as to whether Trend Micro is or will become either a "foreign personal holding company" or a "passive foreign investment company" for U.S. tax purposes because such determinations are inherently factual in nature. The following summary is based on: . the Japan - U.S. tax treaty; . current Japanese tax law; . the current United States Internal Revenue Code; and . current interpretations of these laws by Japanese and United States taxation authorities and courts. The treaty, the laws, or administrative or judicial interpretation of the treaty or the laws may change, and the changes may have retroactive effect. This discussion does not consider the effect of any state, local or national tax laws other than U.S. federal income tax or Japanese tax laws that may be applicable to a purchaser of shares or ADSs. We urge you to consult your tax advisors regarding the United States federal, state and local and the Japanese and other tax consequences of owning and disposing of shares and ADSs. 76 As used in this section of the prospectus, the term "U.S. holder" means a beneficial owner of shares or ADSs that is: . a citizen or resident of the United States for U.S. federal income tax purposes; . a corporation or other entity created or organized under the laws of the United States or any political subdivision of the United States; . an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of its source; . a trust, if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more U.S. persons has the authority to control all substantial decisions of the trust; or . a trust that has a valid election in effect under U.S. treasury regulations to be treated as a United States person. In general, and taking into account the earlier assumptions, for United States federal income and Japanese tax purposes, owners of ADRs evidencing ADSs will be treated as the owners of the shares represented by such ADSs, and no United States federal income tax or Japanese tax will be payable on exchanges of shares for ADSs, and ADSs for shares. Japanese Taxation The following summary describes the principal Japanese tax consequences relating to an investment in Trend Micro shares or ADSs. This summary applies only to persons or entities which are non-residents of Japan and to non-Japanese corporations without a permanent establishment in Japan to which the relevant income is attributable. Generally, Japanese withholding tax will apply to dividends paid by Trend Micro to a non-resident of Japan or a non-Japanese corporation. In general, no Japanese tax is payable on stock splits. However, if Trend Micro transfers a part of its retained earnings or legal reserve to stated capital, whether in connection with stock splits or otherwise, the transfer will be treated as a dividend payment for Japanese tax purposes, even though no payment is distributed to shareholders. In such case, Japanese income tax will be payable. Under the Japan-U.S. tax treaty, as currently in force, the maximum rate of Japanese withholding tax which may be imposed on dividends paid to a United States resident or corporation not having a "permanent establishment," which is generally a fixed place of business for industrial or commercial activity, in Japan is limited to: (1) 15% of the gross amount actually distributed; or (2) if the recipient is a corporation, 10% of the gross amount actually distributed, if (a) during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year if any, at least 10% of the voting shares of the paying corporation were owned by the recipient corporation, and 77 (b) not more than 25% of the gross income of the paying corporation for such prior taxable year, if any, consists of interest or dividends as defined in the treaty. For purposes of the Japan-U.S. tax treaty and Japanese tax law, U.S. holders of ADRs will be treated as the owners of the shares underlying the ADSs evidenced by the ADRs. In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident or non-Japanese corporation is 20%. Japan has entered into income tax treaties, conventions or agreements, whereby the 20% withholding tax rate is reduced generally to 15% for portfolio investors. In addition to the United States, countries with which Japan has concluded such treaties, conventions or agreements include Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom. You must file an application for reduced withholding with the Japanese tax authorities to claim the benefits of the reduced withholding rate on dividends under the Japan - U.S. tax treaty. The application must be filed on or before the day before the dividend is paid. If you hold ADSs, two application forms must be filed through the depositary, one form before the dividend payment and the other within eight months after Trend Micro's fiscal year in which the dividend is paid. To claim the reduced rate, you will need to file proof of: . taxpayer status; . residence; and . beneficial ownership. The depositary may also require you to provide other information. If you do not submit an application for reduced withholding before a dividend is paid, you may file a claim for refund of the excess tax with the Japanese tax authorities. You will not have to pay any Japanese tax on a sale of Trend Micro shares or ADSs. If you make a gift of Trend Micro shares or die holding Trend Micro shares, a person who receives the shares as a gift or inherits the shares may have to pay Japanese gift or inheritance tax. United States Federal Income Taxation U.S. Federal Tax Consequences of Options The following summarizes only the U.S. federal income tax consequences of the options granted under the U.S. program of the 1999 incentive plan. State and local tax consequences may differ. The grant of a nonqualified stock option under the U.S. program of the 1999 incentive plan will not result in any federal income tax consequences to the optionee, to Trend Micro or to Trend U.S. Upon exercise of a nonqualified stock option, the optionee is subject to income taxes at the rate applicable to ordinary compensation income on the difference between the option price and the fair market value of the shares on the date of exercise. This income is subject to withholding for federal and state income and employment tax purposes, and Trend U.S. may withhold such amounts from other compensation of the optionee, or may require the optionee to pay to Trend U.S. an amount 78 sufficient to satisfy the withholding obligation. Trend U.S. is entitled to an income tax deduction in the amount of the income recognized by the optionee. Any gain or loss on the optionee's subsequent disposition of the shares will be taxable as short-term or long-term capital gain or loss, depending on whether the shares are held for more than one year following exercise. The maximum marginal rate at which long-term capital gains are taxed is 20%. Trend U.S. does not receive an income tax deduction for any such gain recognized by the shareholder. Taxation of Dividends Distributed on the Shares or ADSs Distributions on Trend Micro shares or ADSs, including the amount of any Japanese tax withheld from the distribution, will be taxable at ordinary income rates as a dividend to a U.S. holder if paid out of Trend Micro's current or accumulated earnings and profits as determined under U.S. tax principles. Dividends will be foreign source income for U.S. tax purposes, and will not be eligible for the dividends-received deduction. Dividends paid on shares will be taxable when received by the U.S. holder. Dividends paid on ADSs will be taxable when received by the depositary. The amount of any distribution of property other than cash will be the fair market value of the property on the distribution date. The amount of any cash distribution paid in Japanese yen will equal the U.S. dollar value of the Japanese yen at the spot yen/dollar rate on the date of receipt by the U.S. holder, in the case of shares, or the depositary, in the case of the ADSs. This is the case regardless of whether a U.S. holder converts the payments into U.S. dollars. If the Japanese yen received as a dividend is not converted into U.S. dollars on the date of receipt, a U.S. holder will have a basis in the Japanese yen equal to its U.S. dollar value on the date of receipt. Gain or loss, if any, recognized by a U.S. holder on the sale or other disposition of Japanese yen will be U.S. source ordinary income or loss. Distributions in excess of Trend Micro's current or accumulated earnings and profits will be treated first as a non-taxable return of capital which will reduce the U.S. holder's tax basis in the shares or ADSs. As a result of the reduction in tax basis, the U.S. holder will realize an increased gain or reduced loss for tax purposes on a subsequent disposition of the shares or ADSs. Any distribution in excess of the U.S. holder's tax basis will be taxable as capital gain. Since the capital gain realized will not be foreign source income for U.S. tax purposes, a U.S. holder would not be able to use any Japanese withholding tax on the distribution as a credit against the U.S. tax on the capital gain. The Japanese withholding tax may be used as a credit against U.S. tax due on other foreign source income in the appropriate category for foreign tax credit purposes, or may be allowable as a deduction, as described in the next paragraph. A U.S. holder may elect to claim the Japanese tax withheld or paid on dividends on the shares or ADSs either as a deduction or as a foreign tax credit against the U.S. holder's U.S. federal income tax liability. In general, a U.S. holder can use foreign tax credits only up to the amount of the U.S. holder's foreign source income. Distributions on shares or ADSs that are taxable as dividends will generally constitute foreign source ordinary income for purposes of the U.S. foreign tax credit limitations. The overall limitation on foreign taxes eligible for credit is calculated separately on specific classes of income. For this purpose, dividends distributed by Trend Micro on the shares or ADSs will generally constitute "passive income" or, in the case of certain U.S. holders, "financial services income." Special rules apply to some individuals whose foreign source income during the taxable year consists entirely of "qualified passive income" and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 or $600 in the case of a joint return. A U.S. 79 holder may not be allowed a foreign tax credit for foreign taxes withheld on dividends paid on shares or ADSs if: . the U.S. holder has held the shares or ADSs for less than a specified minimum period during which the U.S. holder is not protected from risk of loss; . the U.S. holder is obligated to make payments related to the dividends; or . the U.S. holder holds the shares in arrangements in which the U.S. holder's economic profit, after U.S. taxes, is insubstantial. The rules governing the foreign tax credit are complex. You should consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances. Japanese income tax will be imposed on a transfer by Trend Micro of retained earnings or legal reserve to stated capital. Since such a transfer generally is not a taxable event for U.S. tax purposes, the Japanese income tax may be treated as imposed on "general limitation" income for U.S. foreign tax credit purposes. This could affect a U.S. holder's ability to utilize the credit. Such a transfer is not generally a taxable event for U.S. federal income tax purposes. Consequently, under the applicable Treasury regulations, any Japanese income taxes imposed in such case may be treated as imposed on "general limitation" income, which may affect your ability to utilize the associated credit. Taxation of Disposition of Shares or ADSs Upon a sale, exchange or other disposition of a share or an ADS, a U.S. holder will recognize gain or loss for U.S. federal income tax purposes equal to the difference between . the U.S. dollar amount realized on the sale, exchange or other disposition, or if the amount realized is denominated in yen, the U.S. dollar equivalent determined by reference to the yen/dollar spot exchange rate on the date of disposition; and . the adjusted basis of the share or ADS. Any such gain or loss will constitute capital gain or loss, and will constitute long-term capital gain or loss if the holding period for the share or ADS exceeds one year at the time of disposition. Individuals may be entitled to reduced tax rates on long-term capital gains. The ability to deduct capital losses may be limited. Any gain or loss recognized by a U.S. holder will generally be treated as United States source gain or loss. Foreign Personal Holding Company Status A foreign corporation will be classified as a foreign personal holding company if both of the following tests are satisfied: . at any time during the taxable year, five or fewer individuals who are United States citizens or residents own, or are deemed to own under attribution rules, more than 50% of its stock, measured by voting power or value; and . at least 60% of its gross income, regardless of source, as specifically adjusted, comes from certain passive sources. 80 After a corporation becomes a foreign personal holding company, the income test percentage for each subsequent taxable year is reduced to 50%. Trend Micro believes that it has not met the shareholder test at any time during its current taxable year and that it will not meet the shareholder test immediately after the offering. In addition, Trend Micro believes that it will not meet the income test. Therefore, Trend Micro believes that it is currently not a foreign personal holding company for U.S. federal income tax purposes. If Trend Micro were to be classified as a foreign personal holding company, U.S. holders, including some indirect holders, would be required to include in income, as a dividend, their pro rata share of Trend Micro's undistributed foreign personal holding company income if they were holders: . on the last day of Trend Micro's taxable year, or . if earlier, the last day of Trend Micro's taxable year in which Trend Micro satisfied the share ownership test. The pro rata share would increase a U.S. holder's basis in the shares by a corresponding amount. In addition, if Trend Micro became a foreign personal holding company, U.S. holders who acquire shares or ADSs from decedents would be denied the step-up of the income tax basis for such shares or ADSs to fair market value at the date of death which would otherwise have been available. Instead, the U.S. holders would have a tax basis equal to the lower of fair market value or the decedent's basis. Trend Micro will notify U.S. holders if it becomes aware that it is classified as a foreign personal holding company in any taxable year. Passive Foreign Investment Company Status A foreign corporation will be a passive foreign investment company if, after applying certain "look-through" rules, either: . 75% or more of its gross income is "passive income," defined to include dividends, interest and certain rents not derived in the active conduct of a trade or business, among other items, or . 50%, on average and generally by value, of its assets produce, or are held for the production of, passive income. The look-through rules provide in part that a foreign corporation that owns at least 25% by value of another corporation will be treated as if it owned a proportionate share of the other corporation's assets and earned a proportionate share of its income. Trend Micro believes that it currently is not a passive foreign investment company for U.S. federal income tax purposes and does not anticipate that it will become a passive foreign investment company in the future. This determination is based on our current and anticipated sources of income and on the current value of our tangible and intangible assets, including goodwill. We have determined our goodwill, in part, on the value of our stock, and a change in the value of our stock would affect this calculation. Trend Micro will notify holders if it becomes a passive foreign investment company in any taxable year. If Trend Micro were a passive foreign investment company for any taxable year, the rules described above under "Taxation of Dividends Distributed on the Shares or ADSs" and "Taxation of Disposition of Shares or ADSs" generally would not apply. Instead, a U.S. holder of shares or ADSs would have to comply with special tax rules on "excess distribution" in a taxable year with respect to 81 the shares or ADSs. For purposes of the passive foreign investment company rules, an excess distribution includes: . any gain realized on a disposition of the shares or ADSs; and . any distribution which is greater than 125% of the average of the distributions received by the U.S. holder in the three preceding taxable years or, if shorter, the period the U.S. holder has held the shares or ADSs. Under these rules: . the excess distribution or gain would be allocated ratably over the U.S. holder's holding period for the shares or ADSs; . the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we are a passive foreign investment company, would be taxed as ordinary income; . the amount allocated to each of the other taxable years would be taxed at the highest marginal rate in effect for the applicable class of taxpayer for that year; and . an interest charge for the deemed deferral benefit would be imposed on the resulting tax attributable to each such other taxable year. Any tax liability for amounts allocated to years prior to the year of the excess distribution may not be offset by any net operating loss of the U.S. holder. Any gains, but not losses, realized on the disposition of shares or ADSs of a passive foreign investment company will be taxed as ordinary income, even if the shares or ADSs are held as capital assets. A U.S. holder of shares or ADSs in a passive foreign investment company may avoid taxation under the rules for excess distributions described above by making a "qualified electing fund" election to include in income the holder's share of the company's income for a year, whether or not distributed. However, a U.S. holder may make a qualified electing fund election only if the company agrees to furnish the U.S. holder annually with certain tax information, and Trend Micro does not presently intend to prepare or provide such information. A U.S. holder of shares or ADSs in a passive foreign investment company may limit application of the rules for excess distributions described above by making a "deemed sale" election once a company ceases to be a passive foreign investment company. If the U.S. holder makes the election, the U.S. holder will be taxed under the excess distribution rules as if the holder had disposed of the shares at the time of the election. A subsequent disposition of the shares or ADSs and any distributions on the shares or ADSs after the deemed sale election will not be subject to the excess distribution rules. Alternatively, a U.S. holder of "marketable stock" in a passive foreign investment company may make a mark-to-market election as an alternative to taxation under the excess distribution rules. Under such election, the shareholder will include in income each year an amount equal to the excess, if any, of the fair market value of the passive foreign investment company stock as of the close of the taxable year over the shareholder's adjusted basis in such stock. The shareholder is allowed as an ordinary loss a deduction for the excess, if any, of the adjusted basis of the passive foreign investment company stock over its fair market value as of the close of the taxable year. However, deductions are limited to net mark-to-market gains on the stock which the shareholders included in income for prior taxable years. Amounts included in income pursuant to a mark-to-market election, 82 as well as gain on the actual sale or other disposition of the passive foreign investment company stock, are treated as ordinary income. Any loss realized on the sale or disposition of passive foreign investment company stock which does not exceed net mark-to-market gains previously included in income will be an ordinary loss. The tax rules applicable to distributions by corporations which are not passive foreign investment companies would apply to distributions by the passive foreign investment company. The mark-to-market election is available for stock or ADSs which are regularly traded on The Nasdaq National Market. The ADSs are traded on The Nasdaq National Market and, consequently, the mark-to-market election is available to U.S. holders of ADSs if Trend Micro were to be or become a passive foreign investment company. A U.S. holder who beneficially owns shares in a passive foreign investment company must file an annual return with the U.S. Internal Revenue Service on IRS Form 8621 that describes any distributions received on such shares and any gain realized on the disposition of such shares. Inheritance and Gift Tax As discussed in "Tax Considerations--Japanese Taxation" Japanese gift and inheritance taxes may be imposed on persons who receive Trend Micro stock as a gift from a U.S. holder or on the death of a U.S. holder. You should consult your own tax advisors regarding the effect of such taxes and the potential application of the Estate and Gift Tax Treaty between the United States and Japan. Information Reporting and Backup Withholding Information reporting to the Internal Revenue Service and backup withholding at a rate of 31% may apply to distributions on shares or ADSs and to proceeds from sales of shares or ADSs. Backup withholding will not apply to: . a U.S. corporation or organization which is exempt from backup withholding and, when required, provides evidence of its status; and . a U.S. holder who: . provides a correct taxpayer identification number; . certifies as to no loss of exemption from backup withholding; and . otherwise complies with the backup withholding rules. Amounts withheld under the backup withholding rules may be credited against a U.S. holder's 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 Internal Revenue Service. ENFORCEABILITY OF CIVIL LIABILITIES We are a Japanese stock company. Most of our directors and executive officers and some of the experts named in this prospectus are residents of Japan or countries other than the United States. All or a substantial portion of our assets and the assets of our directors and officers are located outside the United States. As a result, ADS holders may not be able to make service of process within the United States upon these persons or us, or to enforce in U.S. courts, or outside the United States, judgments obtained against such persons in U.S. courts. Holders may also not be able to 83 enforce in U.S. courts judgments obtained against such persons in non-U.S. courts. In particular, it may be difficult for holders to enforce, in lawsuits brought originally in U.S. or non-U.S. courts, liabilities predicated upon the U.S. securities laws. We have been advised by our Japanese legal counsel, Mitsui, Yasuda, Wani & Maeda, that there is doubt as to whether civil liabilities based solely upon U.S. laws, including the U.S. federal securities laws, are enforceable against such persons in Japan, whether in original actions or in actions for the enforcement of judgments of U.S. courts. JAPANESE FOREIGN EXCHANGE AND OTHER REGULATIONS Japanese Foreign Exchange Regulations The Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders and ministerial ordinances issued under the law govern the acquisition and holding of shares of equity securities of Japanese corporations, including Trend Micro, by exchange non-residents and by foreign investors. Exchange non-residents are individuals who are not resident in Japan and corporations whose principal offices are located outside Japan. Generally, branches and other offices of non-resident corporations located within Japan are regarded as exchange residents of Japan and branches and other offices of Japanese corporations located outside Japan are regarded as exchange non- residents of Japan. Foreign investors are defined to be: . individuals not resident in Japan; . corporations which are organized under the laws of foreign countries or whose principal offices are located outside Japan; . corporations not less than 50% of the shares of which are held by individuals or corporations described above; and . a corporation in which a majority of the directors or similar persons having the power of representation are non-resident individuals of Japan. On May 23, 1997 the Foreign Exchange and Foreign Trade Law was amended with effect from April 1, 1998. In accordance with this amendment, with minor exceptions, all aspects of the foreign exchange and foreign trade transactions which under the previous law required licensing or other approval or prior notification to the Minister of Finance of Japan now only require reporting of such transactions after they occur. However, the Minister of Finance of Japan retains the power to impose a licensing requirement for some transactions in limited circumstances. Offering of the Shares A selling shareholder is required to file a report concerning the transfer of securities with the Minister of Finance of Japan within 20 days of the date of transfer. Acquisition of Shares Except as described below, there are no limits under Japanese law on the right of foreign investors to hold or vote our securities. Exchange non- residents who acquire from an exchange 84 resident of Japan shares of a company, listed on any Japanese stock exchange or whose shares are traded on the Japanese over-the-counter market, are not required to file any notice prior to the acquisition. Under the Foreign Exchange and Foreign Trade Law the Minister of Finance may in some exceptional circumstances require prior approval for any such acquisition. An exchange resident who transfers shares of a listed company to an exchange non-resident for value exceeding (Yen)100 million must file a report concerning the transfer of securities with the Minister of Finance within 20 days of the date of such transfer. If a foreign investor acquires shares of a company listed on any Japanese stock exchange or whose shares are traded on the Japanese over-the-counter market and as a result of the acquisition, such foreign investor and designated related parties hold 10% or more of the issued shares, the foreign investor must file a report of the acquisition with the Minister of Finance and other Ministers having jurisdiction over the business of the issuer within 15 days from and including the date of the acquisition. In limited circumstances, including the case of an acquisition of the shares of Trend Micro that causes a foreign investor's ownership to reach such percentage, however, a prior notification of the acquisition must be filed with the Minister of Finance and other Ministers having jurisdiction over the business of the issuer. These Ministers may modify or prohibit the proposed acquisition. Dividends and Proceeds of Sales Under the Foreign Exchange and Foreign Trade Law, dividends paid on, and the proceeds of sales in Japan of, shares held by exchange non-residents may, in general, be converted into any foreign currency and repatriated abroad. The requirements described in "--Acquisition of Shares" above do not apply to the acquisition of shares by non-residents by way of stock splits. American Depositary Shares The formalities or restrictions referred to under "--Acquisition of Shares" above do not apply to the deposit of shares by a non-resident of Japan, the issuance of ADRs evidencing the ADSs created by such deposit in exchange therefor and the withdrawal of whole units of underlying shares upon surrender of ADRs. Reporting of Substantial Shareholdings The Securities and Exchange Law of Japan requires any person who has become a beneficial owner of more than 5% of the total issued shares of a company listed on any Japanese stock exchange or whose shares are traded on the Japanese over-the-counter market to file with the Minister of Finance within five business days a report concerning such shareholdings. A similar report must also be made in respect of any subsequent change of 1% or more in any such holding. For this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants are taken into account in determining both the number of shares held by the holder and the issuer's total issued share capital. Copies of each such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed or, in the case of shares traded in the Japanese over-the-counter market, the Japan Securities Dealers Association. 85 PLAN OF DISTRIBUTION Description of the U.S. Program of the 1999 Incentive Plan General Our board of directors and Trend U.S.'s board of directors adopted the U.S. program of the 1999 incentive plan in June and July 1999, respectively. Gainway Enterprises Limited, Trueway Company Limited and Steve Jang-Ming Chang, our President, formed STG Incentive Company L.L.C., a Delaware limited liability company, in July 1999 to issue options under the U.S. program to acquire up to 810,000 of our outstanding shares. Gainway Enterprises Limited has contributed 243,000 shares, Trueway Company Limited has contributed 471,000 shares, and Steve Chang has contributed 96,000 shares to STG Incentive Company L.L.C. for sale upon the exercise of options granted by STG Incentive Company L.L.C. under the U.S. program. A total of 810,000 shares have been deposited with Toyo Trust by STG Incentive Company L.L.C. for sale under the U.S. program. Options granted under the U.S. program will be non-qualified stock options which do not qualify as "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended. Please refer to "Tax Considerations--U.S. Federal Income Taxation--U.S. Federal Tax Consequences of Options" on page __ above for information concerning the tax treatment of non- qualified stock options. The U.S. program is not a qualified deferred compensation plan under Section 401(a) of the Internal Revenue Code and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. Purposes The purposes of the U.S. program are to attract and retain the best available personnel for, to provide additional incentives to the employees and directors of, Trend U.S. and to promote the success of Trend U.S.'s business. Administration of the U.S. program The U.S. program may be administered by Trend U.S.'s board of directors or by a committee or an officer of Trend Micro or Trend U.S. designated by the board, and is currently being administered by Andrew Lai. Mr. Lai is Chief Operating Officer, Executive Vice President and a director of Trend Micro. Mr. Lai receives no compensation for his services in administering the U.S. program. The administrator of the U.S. program has sole discretion to interpret any provision of the U.S. program, and to determine the terms of options granted under the U.S. program, including: . the exercise price of options granted, . the number of shares which you can purchase upon exercise of your option, . employees and non-employee directors who will receive options, . the vesting schedule for your options, and . any amendments to any option granted. 86 Eligibility Stock options may be granted under the U.S. program to employees or non- employee directors of Trend U.S. Terms of Options Granted Under the U.S. Program Each option is evidenced by a written stock option agreement between STG Incentive Company L.L.C. and the optionee. The option agreement includes the following terms and conditions: Exercise of the Option. No option may be exercised for less than 500 shares. At the time you desire to exercise your options, you will forward a notice of exercise along with the exercise price to the option agent in the United States, The Bank of New York. The option agent will forward the exercise price directly to STG Incentive Company L.L.C. and the notice of exercise to the transfer agent in Japan, Toyo Trust. The transfer agent will send the shares to a custodian in Japan, The Fuji Bank, Limited, which will deposit the shares in our ADR program in the United States and will issue instructions for the ADR depositary bank, The Bank of New York, to issue ADRs to you. Exercise Price. The per share exercise price of options granted under the U.S. program will be the fair market value of the shares on the date of grant. The U.S. program defines fair market value as the closing sales price as quoted on the stock exchange determined by the administrator of the U.S. program to be the primary market for the common stock, or The Nasdaq National Market, whichever is applicable. Exercise and Means of Payment. You may exercise your option by delivery of the notice of exercise and the exercise price to the option agent, The Bank of New York. The Bank of New York will pay the exercise price to STG Incentive Company L.L.C. and will notify the transfer agent, Toyo Trust, to issue a share certificate in your name evidencing the number of shares you have acquired from STG Incentive Company L.L.C. The shares will be then handled as described above under "Exercise of the Option." Dividend and Voting Rights. Even if you have exercised an option, you won't have voting, dividend or other rights as a shareholder in connection with the shares you acquire until Toyo Trust registers you as the holder of the shares on the stock register of the Company. Termination of Employment. If your service with Trend U.S. is terminated for any reason other than cause, death or disability, the option may be exercised within one month after termination if the option was vested and exercisable at the time of termination. To the extent the option has not vested as of the termination date, or if you do not exercise such option within the time period specified above, the option will terminate. If your service terminates for cause, the option will terminate immediately. Death. If you die while serving as an employee or director of Trend U.S., the option may be exercised at any time within six months after death, but only to the extent you were entitled to exercise the option at the time of death. If you die (1) within one month after termination, other than for cause, of your service with Trend U.S., or (2) during the six- month period following termination of your service as a result of disability, the option may be exercised within six months after your death to the extent the option was vested on the date of death. 87 Disability. If you become permanently disabled, and your service terminates as a result of the disability, you may exercise your option within six months from the date of termination, to the extent that the option was vested at the termination date. Termination of Options. Options granted under the U.S. program expire four years from the date of grant, unless your option agreement provides for a shorter term. Transferability of Options. Options may be transferred only by will, by the laws of descent and distribution, and if authorized by the administrator of the U.S. program, to members of your immediate family or pursuant to a domestic relations order. Other Provisions. If your option expires without being exercised, the underlying shares will be available for sale upon the exercise of additional options if Trend U.S.'s board or its committee decides to grant them later. Any shares which have not been purchased as of the date the U.S. program terminates will be retained by STG Incentive Company L.L.C., which may distribute those shares to its members, Trueway Company Limited, Gainway Enterprises Limited and Steve Chang. Capital Changes If any change, such as a stock split, stock dividend, combination or reclassification, is made which results in any increase or decrease in the number of issued shares without our receipt of consideration, Trend U.S.'s board or its committee will determine whether to adjust (1) the exercise price and the number of shares subject to outstanding options under the U.S. program, and (2) the number of shares reserved for sale under the U.S. program, if any, which are not then subject to outstanding options. If there is a sale of our assets, or a merger of Trend Micro or Trend U.S. with or into another corporation where Trend Micro or Trend U.S. is not the surviving entity or which results in shareholders who were not shareholders before such merger owning 50% of Trend Micro's or Trend U.S.'s voting shares, the successor corporation will assume each option under the U.S. program, or substitute an equivalent option. However, if the administrator of the U.S. program decides that you will have the right to exercise the option immediately and purchase all of the underlying shares, the administrator will notify you that the option is exercisable for a period of thirty days from the date of such notice. After this period, the option will terminate. If Trend Micro, Trend U.S. or a subsidiary of Trend U.S. sells its interests in an entity in which it holds a substantial ownership interest, as part of a sale, merger or consolidation of that entity and you are providing service primarily to that entity at the time, your options will vest, will be released from any restrictions on transfer and will become exercisable in accordance with the terms of your award agreement, unless your options are assumed by the successor entity or Trend Micro. Amendment and Termination The U.S. program shall continue for four (4) years unless sooner terminated by the administrator. The administrator may amend the U.S. program at any time or may terminate it without approval of the shareholders, unless shareholder approval is required under applicable law. No amendment of the U.S. program or termination of the U.S. program prior to its expiration can affect options which have already been granted. Any outstanding options under the U.S. program which have not been exercised at the expiration of the U.S. program's term will terminate. 88 Affiliates of Trend Micro Our officers and directors may be deemed to be "affiliates" of Trend Micro as that term is defined under Rule 144 of the Securities Act of 1933. Shares purchased under the U.S. Program by affiliates are subject to special restrictions on resale imposed by Rule 144 under the Securities Act. Among other requirements, Rule 144 imposes volume limitations on resales by affiliates. For these reasons, officers and directors who acquire shares under the U.S. program should consult legal counsel before exercising an option or selling the underlying shares. Terms of the Master Agreement between Trend U.S., STG Incentive Company L.L.C. and Toyo Trust Under the terms of the Master Agreement among The Bank of New York, Trend U.S., STG Incentive Company L.L.C., and Toyo Trust, STG Incentive Company L.L.C. has deposited with Toyo Trust the shares which you will acquire upon exercise of your options granted under the U.S. program. Toyo Trust will hold the shares deposited by STG Incentive Company L.L.C. pending exercise of options under the U.S. program. When you exercise your option, you will send a notice of exercise and the exercise price to The Bank of New York. The Bank of New York will pay the exercise price to STG Incentive Company L.L.C. The Bank of New York will also notify Toyo Trust to register on our share register in your name the number of shares you have acquired from STG Incentive Company L.L.C. The shares will be then handled as described above under ".Terms of Options Granted Under the U.S. Program.Exercise of the Option." Upon termination of the U.S. program and options issued under the U.S. program, Toyo Trust will return all shares of Trend Micro common stock it still holds to STG Incentive Company L.L.C. STG Incentive Company L.L.C. Trueway Company Limited, Gainway Enterprises Limited and Steve Jang-Ming Chang have contributed to STG Incentive Company L.L.C. an aggregate of 810,000 shares which may be sold upon exercise of options granted under the U.S. Program. STG Incentive Company L.L.C. will deposit the shares with Toyo Trust. Trueway Company Limited, Gainway Enterprises Limited and Steve Jang-Ming Chang each owns an ownership interest in STG Incentive Company L.L.C. based upon the number of shares which each has contributed to STG Incentive Company L.L.C. STG Incentive Company L.L.C. is the record holder of the shares with all of the rights of a shareholder. Until you exercise your options and you are registered as a shareholder on the share register of the Company, you will not have any rights of a shareholder of Trend Micro with respect to those shares. If STG Incentive Company L.L.C. receives a distribution of shares or other securities on the shares which it has deposited with Toyo Trust for sale under the U.S. program, STG Incentive Company L.L.C. will forward those securities to Toyo Trust so that when you exercise your option, you will receive both the shares covered by your option and any securities distributed on those shares. STG Incentive Company L.L.C. will retain any distribution of cash or other assets on the shares which it has deposited with Toyo Trust for sale under the U.S. program. STG Incentive Company L.L.C. will retain any shares not sold by the time the term of the U.S. program expires. If the U.S. program administrator terminates the U.S. program before its term expires, your options will not be affected. The options will lapse, however, if you have not exercised them by the end of the term of the options. LEGAL MATTERS The validity of the shares offered in this offering will be passed upon for Trend Micro by Mitsui, Yasuda, Wani & Maeda, Tokyo, Japan. Certain legal matters will be passed upon for Trend Micro and the selling shareholder by Morrison & Foerster LLP, Tokyo, Japan. 89 EXPERTS The consolidated financial statements of Trend Micro, as of December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999 that are included in this prospectus have been included in reliance on the report of PricewaterhouseCoopers, independent accountants, given on the authority of the said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form F-1 with the Securities and Exchange Commission covering the shares offered by this prospectus. This prospectus, which forms a part of that registration statement, does not contain all of the information contained in the registration statement. Please refer to the registration statement and its exhibits for further information on Trend Micro, the American Depositary Shares and the shares. Information regarding the contents of contracts or other documents described in this prospectus is not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contracts or documents. We file periodic reports and other information with the Commission. You may read and copy any reports, statements or other information on file at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain copies of this material from the Public Reference Section of the Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The ADSs are traded on The Nasdaq National Market under the symbol "TMIC." As a foreign private issuer, we are exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy statements to shareholders. In addition to the information described above, we furnish annual and interim reports, in Japanese, to registered shareholders, including the depositary or its nominee. The annual reports contain a description of our operations and are accompanied by audited annual financial statements, in Japanese, prepared in conformity with Japanese GAAP. Semi-annual interim reports include unaudited interim financial information prepared in accordance with Japanese GAAP. Trend Micro will furnish to the depositary translations of these semi-annual reports. Trend Micro will furnish to the depositary annual reports in English, including annual financial statements prepared in accordance with U.S. GAAP. We will also translate into English, if not already in English, or summarize notices of meetings of shareholders and other communications which are made generally available to our shareholders in Japan and of material importance to shareholders, and promptly furnish such English versions to the depositary. The depositary has agreed that it will promptly mail such reports to all record holders of ADRs evidencing ADSs. 90 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN JAPAN AND THE UNITED STATES We have prepared our consolidated financial statements in conformity with U.S. GAAP. However, other financial information in this prospectus has been prepared in conformity with Japanese GAAP, which differs from U.S. GAAP in material respects. This summary highlights some significant differences between Japanese GAAP and U.S. GAAP applicable to Trend Micro and our consolidated subsidiaries. However, this summary is not exhaustive. In addition, regulatory bodies that promulgate Japanese GAAP and U.S. GAAP have significant projects ongoing that could affect companies such as Trend Micro in the future. We have not attempted to identify below future differences between Japanese GAAP and U.S. GAAP as the result of prescribed changes in accounting standards. 1. Statement of cash flows Under Japanese GAAP, a consolidated statement of cash flows was not required as part of Trend Micro's basic financial statements for the 1998 fiscal year. Such statement was required as part of Trend Micro's basic financial statements for the 1999 fiscal year. Under U.S. GAAP, a statement of cash flows is required as part of the basic financial statements, and cash and cash equivalents include highly liquid investments that generally have original maturities at the time of purchase of three months or less. 2. Post-contract support revenues Under Japanese GAAP, we recognize revenues related to post-contract support agreements upon the commencement of the agreement. Trend Micro's renewed software license agreements are considered post-contract support agreements. Under U.S. GAAP, post-contract support revenues are deferred and recognized over the period of the agreements. 3. Valuation of inventories Under Japanese GAAP, inventories can be stated at the lower of cost or market. U.S. GAAP requires all inventories to be valued at the lower of cost or market. 4. Valuation of securities Under Japanese GAAP, investments in marketable securities are stated at the lower of cost or market, and non-marketable securities can be stated at cost. However, when significant impairment of value has been deemed permanent, cost is appropriately reduced. Under U.S. GAAP, investments in debt securities and equity securities that have readily determinable fair values, except for investments accounted for using the equity method, are to be classified in three categories and accounted for as follows: (a) Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Unrealized holdings gains and losses are not reported in the financial statements until realized or until a decline in fair value below cost is deemed to be other than temporary. 91 (b) Debt and marketable equity securities that are acquired and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. (c) Debt and equity securities not classified as either held-to- maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. 5. Accounting for income taxes Under Japanese GAAP, income taxes are principally provided for based on taxable income for the period, determined in accordance with applicable tax laws. For fiscal years beginning on or after April 1, 1999, deferred tax accounting must be applied in consolidated financial statements. Trend Micro has applied deferred tax accounting in its consolidated financial statements since the 1996 fiscal year. U.S. GAAP requires that deferred income taxes be recognized for temporary differences between the tax basis of the assets or liabilities and the reported amount in the financial statements and for tax loss carry-forwards which are permitted to be carried forward to offset taxable income over the next five years under the Japanese Income Tax Law. A valuation allowance is provided for the deferred tax assets if it is more likely than not that these assets will not be realized. 6. Translation of Foreign Currency Financial Statements Under Japanese GAAP, financial statements of overseas subsidiaries, affiliated companies and branches are translated into Japanese yen at the exchange rates prevailing at the end of the fiscal year of each entity, except for the shareholders' equity accounts, which are translated at historical rates. Income and expenses are translated at average rates of exchange prevailing during the year. Resulting gains and losses are deferred and presented as an asset or liability on the balance sheet. Under U.S. GAAP, assets and liabilities of overseas entities are translated into Japanese yen at the respective fiscal year-end exchange rates. Income and expenses are translated at average rates of exchange prevailing during the year. Resulting gains and losses are excluded from income and included in a separate component of shareholders' equity. 7. Accrued compensated absences Under Japanese GAAP, accrued compensated absences are normally not recognized for future absences due to the fact that such accruals do not meet the conditions for tax deductible provisions. The Company does not recognize such accrued compensated absences. U.S. GAAP requires that accrued compensated absences be recognized as earned by employees. 8. Accounting for Employee Retirement and Severance Benefits Under Japanese GAAP, an accrual is established for unfunded retirement allowances in the amount payable if all employees voluntarily terminated their employment at the balance sheet 92 date. For pension plans, pension expense is generally provided based on actuarial determinations and is charged to income when paid. U.S. GAAP requires pension costs to be actuarially computed and charged to expense as stipulated by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." 9. Bonuses to Directors and Statutory Auditors Under Japanese GAAP, bonuses to directors and statutory auditors are accounted for as an appropriation of retained earnings when approved by the stockholders. Under U.S. GAAP, such bonuses are generally accrued as an expense. 10. Warrant Compensation Expense Under Japanese GAAP, the carrying value of the warrants is recognized as compensation expense when the warrants are subsequently distributed to employees. The carrying value is equal to the purchase price paid by the company to repurchase the warrants following issuance of bonds with detachable warrants as required by Japanese law. No compensation expense is recognized based on the difference between the warrant exercise price and the fair value of the company's stock on the date of grant. Under U.S. GAAP, the difference between the fair value of the underlying stock as of the "measurement date," which, in general, is either the grant date or the date on which both the number of shares to which the employee is entitled and the exercise price are known, and the warrant exercise price is recognized as compensation expense and charged against income over the warrant vesting period. 93 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of independent accountants............................................................................... F-2 Consolidated balance sheets at December 31, 1998 and 1999....................................................... F-3 Consolidated statements of income for the years ended December 31, 1997, 1998 and 1999.......................... F-5 Consolidated statements of comprehensive income for the years ended December 31, 1997, 1998 and 1999............ F-6 Consolidated statements of shareholders' equity for the years ended December 31, 1997, 1998 and 1999............ F-7 Consolidated statements of cash flows for the years ended December 31, 1997, 1998 and 1999...................... F-9 Notes to consolidated financial statements...................................................................... F-11 Financial statement schedule for the years ended December 31, 1997, 1998 and 1999: Schedule II - Valuation and qualifying accounts................................................................. F-36
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. Financial statements of majority - owned subsidiaries of the registrant not consolidated and of 50% or less owned persons accounted for by the equity method have been omitted because the registrant's proportionate share of the income from continuing operations before income taxes, and total assets of each such company is less than 20% of the respective consolidated amounts, and the investment in and advances to each company is less than 20% of consolidated total assets. F-1 Report of Independent Accountants --------------------------------- To the Shareholders and Board of Directors of Trend Micro Kabushiki Kaisha ("Trend Micro Incorporated"): In our opinion, the consolidated financial statements and financial statement schedule listed in the accompanying index present fairly, in all material respects, the financial position of Trend Micro Incorporated and its consolidated subsidiaries at 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 of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers PricewaterhouseCoopers Tokyo, Japan April 25, 2000 F-2 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Thousands of Thousands of yen U.S. dollars ----------------------------------- ---------------- December 31 ----------------------------------- December 31, 1998 1999 1999 --------------- --------------- ---------------- ASSETS Current assets: Cash and cash equivalents................................. (Yen) 9,396,477 (Yen)15,648,881 $ 153,180 Marketable securities..................................... 1,738,204 624,328 6,111 Notes and accounts receivable, trade...................... 4,474,510 6,057,172 59,291 Allowance for doubtful accounts and sales returns......... (338,881) (382,973) (3,749) Inventories............................................... 60,059 64,036 627 Deferred income taxes..................................... 394,922 922,061 9,026 Prepaid expenses and other current assets................. 449,271 771,577 7,553 --------------- --------------- ---------------- Total current assets............................ 16,174,562 23,705,082 232,039 --------------- --------------- ---------------- Investments and other assets: Securities investments.................................... 97,650 3,078,406 30,133 Investment in and advances to affiliate company........... - 70,144 687 Intangibles............................................... 438,366 440,252 4,309 Deferred income taxes..................................... 129,465 276,609 2,708 Other..................................................... 380,253 461,125 4,514 --------------- --------------- ---------------- 1,045,734 4,326,536 42,351 --------------- --------------- ---------------- Property and equipment: Office furniture and equipment............................ 637,442 998,126 9,770 Other properties.......................................... 128,747 222,094 2,174 --------------- -------------- ---------------- 766,189 1,220,220 11,944 Less: Accumulated depreciation............................ (270,775) (470,435) (4,605) --------------- -------------- ---------------- 495,414 749,785 7,339 --------------- --------------- ---------------- (Yen)17,715,710 (Yen)28,781,403 $ 281,729 =============== =============== ================
The accompanying notes are an integral part of these statements. F-3 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Thousands of U.S. Thousands of yen dollars ---------------------------------- ----------------- December 31 ---------------------------------- December 31, 1998 1999 1999 --------------- ---------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings............................................... (Yen) 71,720 (Yen) - $ - Notes payable, trade................................................ 116,951 137,803 1,349 Accounts payable, trade............................................. 296,438 578,332 5,661 Accounts payable, other............................................. 347,762 633,806 6,204 Withholding income taxes............................................ 441,903 119,791 1,173 Accrued expenses.................................................... 403,276 343,243 3,360 Accrued income and other taxes...................................... 847,254 981,899 9,611 Deferred revenue.................................................... 1,332,505 2,185,659 21,394 Other............................................................... 74,475 139,326 1,365 --------------- ---------------- ----------------- Total current liabilities................................... 3,932,284 5,119,859 50,117 --------------- ---------------- ----------------- Long-term liabilities: Long term debt...................................................... - 6,000,000 58,731 Deferred revenue.................................................... 140,049 226,365 2,216 Accrued pension and severance costs................................. 70,797 125,246 1,226 --------------- ---------------- ----------------- 210,846 6,351,611 62,173 --------------- ---------------- ----------------- Shareholders' equity: Common stock Authorized - 1998 72,000,000 shares ((Yen)50 par value) - 1999 83,000,000 shares ((Yen)50 par value) Issued and outstanding - 1998 62,506,800 shares.................................... 5,081,714 - 1999 64,842,900 shares.................................... 5,414,660 53,002 Additional paid-in capital......................................... 7,735,744 9,198,712 90,042 Legal reserve...................................................... 129,157 149,991 1,468 Deferred compensation.............................................. (481,331) (101,528) (994) Retained earnings.................................................. 1,164,100 3,082,302 30,171 Accumulated other comprehensive income - Net unrealized gain on debt and equity securities................ 234,598 215,922 2,114 Cumulative translation adjustments............................... (278,522) (632,988) (6,196) --------------- ---------------- ----------------- (43,924) (417,066) (4,082) --------------- ---------------- ----------------- Treasury stock, at cost (1998 - 5700 shares; 1999 - 875 shares).. (12,880) (17,138) (168) --------------- ---------------- ----------------- 13,572,580 17,309,933 169,439 --------------- ---------------- ----------------- Commitments and contingent liabilities.............................. - - - --------------- ---------------- ----------------- Total liabilities and shareholders' equity............. (Yen)17,715,710 (Yen) 28,781,403 $ 281,729 =============== ================ =================
The accompanying notes are an integral part of these statements. F-4 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Thousands of Thousands of yen U.S. dollars ------------------------------------------------------- ----------------- For the year ended For the year December 31 ended ------------------------------------------------------- December 31, 1997 1998 1999 1999 -------------- -------------- --------------- ----------------- Net sales.............................................. (Yen)7,397,979 (Yen)9,745,664 (Yen)13,633,170 $ 133,449 Cost of sales.......................................... 733,789 559,530 481,574 4,714 -------------- -------------- --------------- ----------------- Gross profit........................................ 6,664,190 9,186,134 13,151,596 128,735 -------------- -------------- --------------- ----------------- Operating expenses: Selling............................................. 1,315,492 1,617,759 2,239,594 21,922 Research and development............................ 557,001 960,156 994,340 9,733 General and administrative.......................... 2,755,435 4,994,937 5,985,740 58,592 -------------- -------------- --------------- ----------------- 4,627,928 7,572,852 9,219,674 90,247 -------------- -------------- --------------- ----------------- Operating income.................................... 2,036,262 1,613,282 3,931,922 38,488 -------------- -------------- --------------- ----------------- Other income (expenses): Interest income..................................... 46,203 44,620 148,487 1,453 Interest expense.................................... (34,984 (29,279) (66,526) (651) Gain on sales of marketable securities.............. - 146,310 280,532 2,746 Foreign exchange gain (loss), net................... 66,907 (70,934) (174,921) (1,712) Other income (expense), net......................... 3,508 (6,133) (120,298) (1,178) -------------- -------------- --------------- ----------------- 81,634 84,584 67,274 658 -------------- -------------- --------------- ----------------- Income before income taxes............................. 2,117,896 1,697,866 3,999,196 39,146 -------------- -------------- --------------- ----------------- Income taxes: Current............................................. 1,337,364 1,641,902 2,538,455 24,848 Deferred............................................ (70,919 (347,151) (688,988) (6,745) -------------- -------------- --------------- ----------------- 1,266,445 1,294,751 1,849,467 18,103 -------------- -------------- --------------- ----------------- Income before equity in losses of affiliated companies. 851,451 403,115 2,149,729 21,043 -------------- -------------- --------------- ----------------- Equity in losses of affiliated companies............... - - 2,356 23 Net income............................................. (Yen) 851,451 (Yen) 403,115 (Yen) 2,147,373 $ 21,020
Yen Yen Yen U.S. dollars ---------- --------- ---------- ------------ Per share data: Net income - basic................................. (Yen)15.77 (Yen)7.08 (Yen)33.79 $0.33 - diluted............................... -- 6.92 32.85 0.32 Cash dividends...................................... -- -- 3.33 0.03
The accompanying notes are an integral part of these statements. F-5 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Thousands of Thousands of yen U.S. dollars --------------------------------------------------- -------------- For the year For the year ended ended December 31 December 31, --------------------------------------------------- 1997 1998 1999 1999 -------------- -------------- -------------- -------------- Net income............................................ (Yen) 851,451 (Yen) 403,115 (Yen)2,147,373 $ 21,020 -------------- -------------- -------------- -------------- Other comprehensive income (loss), net of tax: Unrealized gain on debt and equity securities: Unrealized holding gains arising during period.. 116,840 366,657 168,711 1,651 Less reclassification adjustment for gains included in net income.................. -- (35,340) (204,017) (1,997) -------------- -------------- -------------- -------------- 116,840 331,317 (35,306) (346) Foreign currency translation adjustments........... (33,384) (138,397) (354,466) (3,470) -------------- -------------- -------------- -------------- Other comprehensive income, before tax................ 83,456 192,920 (389,772) (3,816) Income tax expense related to items of other comprehensive income............................... (59,467) (154,092) 16,630 163 -------------- -------------- -------------- -------------- Other comprehensive income, net of tax................ 23,989 38,828 (373,142) (3,653) -------------- -------------- -------------- -------------- Comprehensive income.................................. (Yen) 875,440 (Yen) 441,943 (Yen)1,774,231 $ 17,367 ============== ============== ============== ==============
The accompanying notes are an integral part of these statements. F-6 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Thousands of Thousands of yen U.S. dollars --------------------------------------------------- -------------- For the year ended December 31 December 31, --------------------------------------------------- 1997 1998 1999 1999 -------------- -------------- -------------- -------------- Common stock: Balance at beginning of year............................ (Yen) 697,575 (Yen) 900,000 (Yen)5,081,714 $ 49,743 New share offering...................................... - 4,038,078 - - Transfer of additional paid-in capital to common stock.. 202,425 - - - Exercise of stock purchase warrants..................... - 143,636 332,946 3,259 -------------- -------------- -------------- -------------- Balance at end of year.................................. 900,000 5,081,714 5,414,660 53,002 -------------- -------------- -------------- -------------- Additional paid-in capital: Balance at beginning of year............................ 667,575 465,150 7,735,744 75,722 New share offering...................................... - 6,175,578 - - Deferred compensation related to stock warrants......... - 878,798 - - -------------- -------------- -------------- -------------- Tax benefit from exercise of non-qualified stock warrants............................................. - 70,048 1,048,435 10,263 Gain on sales of treasury stock, net of tax............. - - 76,187 746 Transfer of additional paid-in capital to common stock.. (202,425) - - - Exercise of stock purchase warrants..................... - 146,170 338,346 3,311 -------------- -------------- -------------- -------------- Balance at end of year.................................. 465,150 7,735,744 9,198,712 90,042 -------------- -------------- -------------- -------------- Legal reserve: Balance at beginning of year............................ - - 129,157 1,264 Transfers from retained earnings........................ - 129,157 20,834 204 -------------- -------------- -------------- -------------- Balance at end of year.................................. - 129,157 149,991 1,468 -------------- -------------- -------------- -------------- Deferred compensation: Balance at beginning of year............................ - - (481,331) (4,712) Deferred compensation related to stock warrants......... - (878,798) - - Amortization of deferred compensation related to stock warrants..................................... - 397,467 379,803 3,718 -------------- -------------- -------------- -------------- Balance at end of year.................................. - (481,331) (101,528) (994) -------------- -------------- -------------- -------------- Retained earnings: Balance at beginning of year............................ 111,359 962,810 1,164,100 11,395 Net income.............................................. 851,451 403,115 2,147,373 21,020 Stock issue costs, net of tax........................... - (56,907) - - Transfers to legal reserve.............................. - (129,157) (20,834) (204) Cash Dividends ......................................... - - (208,337) (2,040) Loss on sales of treasury stock, net of tax............. - (15,761) - - -------------- -------------- -------------- -------------- Balance at end of year.................................. (Yen) 962,810 (Yen)1,164,100 (Yen)3,082,302 $ 30,171 -------------- -------------- -------------- -------------- Net unrealized gain on debt and equity securities: Balance at beginning of year............................ (Yen) - (Yen) 57,373 (Yen) 234,598 $ 2,297 Net change during the year.............................. 57,373 177,225 (18,676) (183) -------------- -------------- -------------- -------------- Balance at end of year.................................. 57,373 234,598 215,922 2,114 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these statements. F-7 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Cumulative translation adjustments: Balance at beginning of year.......................... (106,741) (140,125) (278,522) (2,726) Aggregate translation adjustments for the year........ (33,384) (138,397) (354,466) (3,470) -------------- -------------- -------------- -------------- Balance at end of year................................ (140,125) (278,522) (632,988) (6,196) -------------- -------------- -------------- -------------- Treasury stock, at cost: Balance at beginning of year.......................... - - (12,880) (126) Purchases of treasury stock........................... - (183,269) (1,260,011) (12,334) Sales of treasury stock............................... - 170,389 1,255,753 12,292 -------------- -------------- -------------- -------------- Balance at end of year................................ - (12,880) (17,138) (168) -------------- -------------- -------------- -------------- Total shareholders' equity...................... (Yen) 2,245,208 (Yen)13,572,580 (Yen)17,309,933 $ 169,439 ============== ============== ============== ==============
The accompanying notes are an integral part of these statements. F-8 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands of Thousands of yen U.S. dollars ----------------------------------------------------- ---------------- For the year For the year ended ended December 31 December 31, ----------------------------------------------------- 1997 1998 1999 1999 ---------------- ----------------- ------------------ ---------------- Cash flows from operating activities: Net income............................................... (Yen) 851,451 (Yen) 403,115 (Yen) 2,147,373 $ 21,020 Adjustments to reconcile net income to net cash provided by operating activities - Amortization of deferred compensation related to stock warrants...................................... - 397,467 379,803 3,718 Depreciation and amortization......................... 143,826 265,857 428,238 4,192 Pension and severance costs, less payments............ 17,546 41,541 58,579 573 Loss on disposal of fixed assets...................... 10,846 11,009 1,192 12 Deferred income taxes................................. (70,919) (347,151) (688,988) (6,745) Gain on sales of marketable securities................ - (146,310) (280,532) (2,746) Equity in losses of affiliated companies.............. - - 2,356 23 Changes in assets and liabilities: Increase in deferred revenue........................ 679,951 760,031 1,123,053 10,993 Increase in accounts receivable, net of allowances................................. (1,265,515) (2,066,603) (1,945,194) (19,040) (Increase) decrease in inventories.................. 1,185 2,750 (541) (5) Increase (decrease) in notes and accounts payable trade............................ (41,977) 57,960 377,869 3,699 Increase (decrease) in accrued income and other taxes....................................... 711,517 (326,889) 273,696 2,679 (Increase) decrease in other current assets......... 524,338 (13,613) (370,227) (3,624) Increase (decrease) in other current liabilities.... 360,384 672,749 (42,540) (417) (Increase) decrease in other assets................. (20,001) (249,949) 23,729 232 Other................................................. (20,855) (72,479) - - ------------- --------------- --------------- ------------- Net cash provided by (used in) operating activities......................... 1,881,777 (610,515) 1,487,866 14,564 ------------- --------------- --------------- ------------- Cash flows from investing activities: Payments for purchases of fixed assets................... (322,796) (440,304) (620,218) (6,070) Payments for acquisitions of software.................... (128,109) (190,464) (185,455) (1,815) Proceeds from sales of marketable securities............. - 321,011 2,388,480 23,380 Proceeds from maturities of marketable securities........ - - 1,101,846 10,785 Payments for purchases of marketable securities and security investments................................... (300,906) (1,200,826) (5,264,042) (51,528) Investments in affiliated companies...................... - - (72,500) (710) Other.................................................... (58,671) 59,850 92 1 ------------- --------------- --------------- ------------- Net cash used in investing activities ......... ((Yen)810,482) ((Yen)1,450,733) ((Yen)2,651,797) $ (25,957) ------------- --------------- --------------- -------------
The accompanying notes are an integral part of these statements. F-9 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands of Thousands of yen U.S. dollars ----------------------------------------------------- ----------------- For the year For the year ended ended December 31 December 31, ----------------------------------------------------- 1997 1998 1999 1999 ------------------ ----------------- ---------------- ----------------- Cash flows from financing activities: Issuance of common stock pursuant to new share offering, net of issuance costs........... (Yen) - (Yen)10,156,171 (Yen) - $ - Issuance of common stock pursuant to exercise of stock warrants............................................ - 287,514 671,292 6,571 Tax benefit from exercise of non-qualified stock warrants............................................ - 70,048 1,048,435 10,263 Proceeds from issuance of bonds....................... 908,523 609,615 6,000,000 58,731 Redemption of bonds................................... (908,523) (609,615) - - Decrease in short-term borrowings..................... (366,786) (76,145) (70,600) (691) Dividends paid........................................ - - (208,337) (2,040) Other................................................. (514) (28,641) 141,415 1,385 -------------- ----------------- --------------- ------------ Net cash provided by (used in) financing activities...... (367,300) 10,408,947 7,582,205 74,219 -------------- ----------------- --------------- ------------ Effect of exchange rate changes on cash and cash equivalents........................................... (45,979) (95,391) (165,870) (1,624) -------------- ----------------- --------------- ------------ Net increase in cash and cash equivalents................ 658,016 8,252,308 6,252,404 61,202 Cash and cash equivalents at beginning of year........... 486,153 1,144,169 9,396,477 91,978 -------------- ----------------- --------------- ------------ Cash and cash equivalents at end of year................. (Yen)1,144,169 (Yen) 9,396,477 (Yen)15,648,881 $ 153,180 ============== ================= =============== ============
The accompanying notes are an integral part of these statements. F-10 TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of operations Trend Micro Incorporated (the "parent company") and its subsidiaries (collectively "the Company") are primarily engaged in the development, production and sale of anti-virus software and providing management solutions for corporate computer systems. The Company is developing such software in Japan, Taiwan and the United States and its products are marketed by sales subsidiaries throughout the world. 2. Summary of significant accounting policies The parent company and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan, and its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the respective countries of their domicile. Certain adjustments and reclassifications, including those relating to the tax effects of temporary differences, valuation of debt and equity securities and revenue on post-contract support, have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America ("U.S. GAAP"). These adjustments were not recorded in the statutory books of account. The preparation of financial statements in conformity with U.S. GAAP 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. Significant accounting policies are as follows: Basis of consolidation The consolidated financial statements include the accounts of the parent company and those of its majority-owned subsidiaries. All intercompany transactions and accounts are eliminated on consolidation. Investments in affiliated companies (20 to 50 percent-owned companies) in which the ability to exercise significant influence exists are stated at cost plus equity in undistributed earnings (losses). Net consolidated income includes the company's equity in the current net earnings (losses) of such companies, after elimination of unrealized intercompany profit. The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable assets acquired and liabilities assumed based on fair values at the date of the acquisition. The unassigned residual value of the excess of the cost over the underlying net equity is recognized as goodwill and is amortized on the straight-line basis over a 5-year period except for minor items F-11 which are charged to income immediately. Goodwill at December 31, 1997, 1998 and 1999 was not significant. Translation of foreign currencies All asset and liability accounts of foreign subsidiaries are translated into Japanese yen at year-end rates of exchange and all income and expense accounts are translated at rates of exchange that approximate those prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a separate component of shareholders' equity. Foreign currency denominated receivables and payables are translated into Japanese yen at year-end rates of exchange and the resulting translation gains or losses are taken into current income. Revenue recognition The Company recognizes revenue from product licenses upon delivery of software when no significant vendor obligations remain and collection of the receivable, net of allowances for doubtful accounts and sales returns, is probable. The Company estimates and recognizes allowances for doubtful accounts and sales returns at the time of the related sale is recognized and treats them as revenue reductions. The portion of the license fee attributable to post-contract support is deferred and recognized as revenue over the license agreement term. Royalty revenues are recognized as earned unless collection of the related receivables is not assured. When collection is not assured, revenues are recognized as payments are received. Cash and cash equivalents Cash and cash equivalents include cash on hand, cash on deposit with banks and all highly liquid investments, with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates. Marketable securities Marketable securities consist of debt and equity securities. Debt and equity securities designated as available-for-sale are carried at fair value with unrealized gains or losses included as a component of shareholders' equity, net of applicable taxes. Debt securities designated as held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to net realizable value for other than temporary declines in market value. Realized gains and losses, which are determined on the average cost method, are reflected in income. Inventories Finished products and raw materials are valued at the lower of weighted average cost or net realizable value. F-12 Property and equipment Property and equipment are stated at cost. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation of property and equipment is computed on the declining-balance method for the parent company and on the straight-line method for foreign subsidiaries at rates based on estimated useful lives of the assets according to general class, type of construction and use. Estimated useful lives range from 3 to 5 years for office furniture and equipment, and from 4 to 24 for other properties. Long-lived assets The Company evaluates long-lived assets and certain identifiable other intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized, based on fair value of the asset. The fair value of the asset is determined using a discounted cash flows analysis. Intangibles Intangibles, which mainly consist of software development costs and purchased software rights, are amortized on a straight-line basis principally over a three-year period for software development costs and a five-year period for purchased software rights and other intangibles. Research and development costs and software development cost All costs relating to research and development to establish the technological feasibility of software products are expensed as incurred. Under the Company's software development process, technological feasibility is established on completing all substantial testing for the original English language version of the software. Local language versions of software, such as Japanese or Chinese, are produced from the English language version, by adding Japanese language or Chinese language related functions. Production costs for such local language versions of software product masters incurred subsequent to the availability of an original English language version software are capitalized. The production costs of the local language software product masters, which include direct labor and overhead costs, are amortized to cost of sales using the straight-line method over the current estimated economic lives of the products, generally up to three years. Management considers the Company's capitalized software development costs to be fully recoverable from future product sales. Management estimates are based upon supporting facts and circumstances, and may be significantly impacted based upon subsequent changes in business conditions. Stock-based compensation The Company accounts for its stock-based incentive awards in accordance with the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation". F-13 Income taxes The current provision for income taxes is computed based on the pretax income included in the consolidated statement of income. The asset and liability approach is used to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Net income per share Basic EPS is computed based on the average number of shares of common stock outstanding for the period. Diluted EPS assumes the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock. Net income per share is appropriately adjusted for any stock split and free distributions of common stock. Free distribution of common stock On occasion, the Company may make a free distribution of common stock to its shareholders which is accounted for either by a transfer of the applicable par value from additional paid-in capital to the common stock account or with no entry if free shares are distributed from the portion of previously issued shares accounted for as excess of par value in the common stock account. Under the Japanese Commercial Code, a stock dividend which is paid out of profits can be effected by an appropriation of retained earnings to the common stock account by resolution of the general shareholders' meeting, followed by a free distribution with respect to the amount as appropriated by resolution of the Board of Directors. Common stock issue costs Common stock issue costs are directly charged to retained earnings, net of tax, in the accompanying consolidated financial statements as the Japanese Commercial Code prohibits charging such stock issue costs to capital accounts, which is the prevailing practice in the United States of America. Comprehensive income Other comprehensive income refers to revenues, expenses, gains and losses that under Generally Accepted Accounting Principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as adjustments to shareholders' equity. The Company's other comprehensive income is primarily comprised of unrealized gains on debt and equity securities and foreign currency translation adjustments. Market and credit risks The anti-virus software market is characterized by rapid technological change and evolving industry standards in computer hardware and software technology. Further, the markets for the Company's products are highly competitive and rapidly changing. The Company could incur substantial operating losses if it is unable to offer products which address technological and market place change in the anti-virus software industry. F-14 Other financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, marketable securities and accounts receivable. The Company invests primarily in money market funds and marketable securities and places its investments with high quality financial institutions. The Company performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for uncollectible accounts receivable, if any, based upon the expected collectibility of accounts receivable. Recent pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative Instruments and Hedging Activities. FAS 133, as amended, is effective for all fiscal years beginning after June 15, 2000. FAS 133 requires that all derivative instruments be recognized as either assets or liabilities on the balance sheet, measured at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative qualifies as part of a hedge transaction and the type of hedge transaction. The portion of a derivative transaction not qualifying as a hedge will be recognized in earnings. The Company does not expect the adoption of FAS 133 to have a material impact on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company will adopt SAB 101 as required in the fiscal year beginning January 1, 2000. The Company does not expect the adoption of SAB 101 to have a material impact on the Company's financial position or results of operations. Reclassifications Certain prior year amounts have been reclassified to conform to the 1999 presentation. 3. U.S. dollar amounts U.S. dollar amounts presented in the financial statements are included solely for the convenience of the reader. These translations should not be construed as representations that the yen amounts actually represent, or have been or could be converted into U.S. dollars. As the amounts shown in U.S. dollars are for convenience only, the approximate current rate at December 31,1999 ((Yen)102.16 = U.S. $1) has been used for the purpose of presentation of the U.S. dollar amounts in the accompanying consolidated financial statements. F-15 4. Reconciliation of the difference between basic and diluted net income per share ("EPS") Reconciliation of the differences between basic and diluted EPS for the years ended December 31, 1997, 1998 and 1999, is as follows:
Thousands Thousands of yen of shares Yen ----------------- --------------- --------------- Weighted- Net average income shares EPS ----------------- --------------- --------------- For the year ended December 31, 1997 - ------------------------------------ Basic EPS: Net income available to common stock holders...... (Yen)851,451 54,000 (Yen)15.77 ------------ ------------ ------------ Effect of dilutive securities: Shares issuable from assumed exercise of stock warrants.................................. - - ------------ ------------ Diluted EPS: Net income for computation........................ (Yen)851,451 54,000 (Yen)15.77 ============ ============ ============= Thousands Thousands of yen of shares Yen ----------------- --------------- --------------- Weighted- Net average income shares EPS ----------------- --------------- --------------- For the year ended December 31, 1998 - ------------------------------------ Basic EPS: Net income available to common stock holders...... (Yen)403,115 56,970 (Yen) 7.08 ------------- ------------- ------------- Effect of dilutive securities: Shares issuable from assumed exercise of stock warrants.................................. - 1,269 ------------ ------------ Diluted EPS: Net income for computation........................ (Yen)403,115 58,239 (Yen) 6.92 ============ ============ ============= Thousands Thousands of yen of shares Yen Dollars ----------------- --------------- --------------- --------------- Weighted- Net average income shares EPS EPS ----------------- --------------- --------------- --------------- For the year ended December 31, 1999 - ------------------------------------ Basic EPS: Net income available to common stock holders...... (Yen)2,147,373 63,550 (Yen)33.79 $0.33 -------------- ------------ ----------- --------- Effect of dilutive securities: Shares issuable from assumed exercise of stock warrants.................................. - 1,826 -------------- ------------ Diluted EPS: Net income for computation........................ (Yen)2,147,373 65,376 (Yen)32.85 $0.32 ============== ============ =========== =========
F-16 5. Cash and cash equivalents Cash and cash equivalents as of December 31, 1998 and 1999 were comprised of:
Thousands of Thousands of yen U.S. dollars ------------------------------------- ----------------- December 31 December 31, ------------------------------------- 1998 1999 1999 ----------------- ------------------- ----------------- Cash................................... (Yen)1,744,449 (Yen)4,308,566 $ 42,175 Time deposits.......................... 2,040,315 11,340,284 111,005 Money market funds..................... 5,611,713 31 0 -------------- --------------- -------- (Yen)9,396,477 (Yen)15,648,881 $153,180 ============== =============== ========
6. Supplemental cash flow information Cash payments for income taxes were (Yen)594,331 thousand, (Yen)1,690,391 thousand and (Yen)2,247,816 thousand ($22,003 thousand) for the years ended December 31, 1997, 1998 and 1999, respectively; in these respective periods, interest payments were (Yen)48,544 thousand, (Yen)17,147 thousand and (Yen)2,417 thousand ($24 thousand). F-17 7. Marketable securities Cash equivalents, marketable securities and securities investments include money market funds, mutual funds and debt and equity securities for which the aggregate fair value, gross unrealized gains and losses and cost pertaining to "available-for-sale" investments as of December 31, 1998 and 1999, were as follows:
Thousands of yen ---------------------------------------------------------------------------- December 31, 1998 ---------------------------------------------------------------------------- Gross unrealized ------------------------------------- Cost Gains Losses Fair value ------------------ ----------------- ----------------- ----------------- Available for sale: Money market funds.......... (Yen) 5,611,713 (Yen) - (Yen) - (Yen) 5,611,713 Equity securities........... 186,870 450,508 - 637,378 Debt securities............. 1,200,826 - 2,350 1,198,476 ------------------ ----------------- ----------------- ----------------- Total.................. (Yen) 6,999,409 (Yen) 450,508 (Yen) 2,350 (Yen) 7,447,567 ================== ================= ================= ================= Thousands of yen ---------------------------------------------------------------------------- December 31, 1999 ---------------------------------------------------------------------------- Gross unrealized ------------------------------------- Cost Gains Losses Fair value ------------------ ----------------- ----------------- ----------------- Available for sale: Money market funds.......... (Yen) 31 (Yen) - (Yen) - (Yen) 31 Mutual funds................ 960,806 - - 960,806 Equity securities........... 529,076 412,392 - 941,468 Debt securities............. 1,800,000 460 - 1,800,460 ------------------ ----------------- ----------------- ----------------- Total.................. (Yen) 3,289,913 (Yen) 412,852 (Yen) - (Yen) 3,702,765 ================== ================= ================= ================= Thousands of U.S. dollars --------------------------------------------------------------------------- December 31, 1999 ---------------------------------------------------------------------------- Gross unrealized ------------------------------------- Cost Gains Losses Fair value ------------------ ----------------- ----------------- ----------------- Available for sale: Money market funds.......... $ - $ - $ - $ -- Mutual funds................ 9,405 - - 9,405 Equity securities........... 5,180 4,036 - 9,216 Debt securities............. 17,619 5 - 17,624 ------------------ ----------------- ----------------- ----------------- Total..................... $ 32,204 $ 4,041 $ - $ 36,245 ================== ================= ================= =================
Fair value of money market funds and mutual funds approximate cost due to the short-term maturities of the investments. F-18 The cost and fair value of "available-for sale" debt securities by contractual maturity at December 31, 1999, were as follows.:
Thousands of yen Thousands of U.S. dollars ------------------------------------ ------------------------------------- Available-for sale Available-for sale ------------------------------------ ------------------------------------- Cost Fair value Cost Fair value ------------------ --------------- ------------------ ----------------- Due within one year......... (Yen) 100,000 (Yen) 100,460 $ 978 $ 983 Due after one year.......... 1,700,000 1,700,000 16,641 16,641 ------------------ --------------- ----------------- ----------------- (Yen) 1,800,000 (Yen) 1,800,460 $ 17,619 $ 17,624 ================== =============== ================= =================
The net unrealized gain on "available-for-sale" securities included in the separate component of shareholders' equity, net of applicable taxes, increased by (Yen)57,373 thousand and (Yen)177,225 thousand during the years ended December 31, 1997 and 1998, respectively, and decreased by (Yen)18,676 thousand ($183 thousand) in the year ended December 31, 1999. Proceeds from sales of "available-for-sale" securities for the years ended December 31, 1998 and 1999 were (Yen)321,011 thousand and (Yen)2,388,480 thousand ($23,380 thousand), respectively. There were no such sales transactions for the year ended December 31,1997. Gross realized gains on sales of "available-for-sale" securities for the year ended December 31, 1998 and 1999 were (Yen)146,310 thousand and (Yen)280,532 thousand ($2,746 thousand), respectively. During the year ended December 31, 1999, the Company purchased a long-term investment security, issued by a nonpublic company in the ordinary course of business. The carrying amount of the investment in the nonpublic company was (Yen)417,600 thousand ($4,088 thousand) at December 31,1999. The corresponding fair value at that date was not computed as such estimation was not readily determinable. 8. Inventories Inventories as at December 31, 1998 and 1999 were (Yen)60,059 thousand and (Yen)64,036 thousand ($627 thousand), respectively, and mainly consisted of finished products and manuals. F-19 9. Investments in affiliated companies The investees accounted for using the equity method are NTT Data Security Corporation (20.0%) and SOFT TREND CAPITAL CORPORATION (20.0%) at December 31, 1999, which were established in the year ended December 31, 1999. Summarized financial information of the affiliated companies accounted for using the equity method is shown below:
Thousands of Thousands of yen U.S. dollars ------------------ ----------------- December 31, December 31, 1999 1999 ------------------ ----------------- Current assets.................................... (Yen) 1,778,451 $ 17,408 Non-current assets including property, plant and equipment.................................. 967,329 9,469 ------------------ ----------------- Total assets.................................. (Yen) 2,745,780 $ 26,877 ================== ================= Current liabilities............................... (Yen) 2,395,058 $ 23,444 Shareholders' equity.............................. 350,722 3,433 ------------------ ----------------- Total liabilities and shareholders' equity.... (Yen) 2,745,780 $ 26,877 ================== ================= Thousands of Thousands of yen U.S. dollars ------------------ ----------------- December 31, December 31, 1999 1999 ------------------ ----------------- Sales............................................. (Yen) 553,500 $ 5,418 ================== ================= Net loss.......................................... (Yen) 11,778 $ 115 ================== =================
A summary of transactions and balances with the affiliated companies accounted for by using the equity method is presented below;
Thousands of Thousands of yen U.S. dollars ------------------ ----------------- For the year For the year ended ended December 31, December 31, 1999 1999 ------------------ ----------------- Purchase.......................................... (Yen) 960,806 $ 9,405 ================== =================
F-20
Thousands of Thousands of yen U.S. dollars ------------------ ---------------- December 31, December 31, 1999 1999 ------------------ ---------------- Other receivables........................................ (Yen) 4,731 $ 46 ================== ================
10. Intangibles Intangibles comprise the following:
Thousands of Thousands of yen U.S. dollars ------------------------------------- ---------------- December 31 December 31, ------------------------------------- 1998 1999 1999 ----------------- ----------------- ---------------- Software development costs ............................ (Yen) 318,573 (Yen) 504,029 $ 4,934 Purchased software rights ............................. 144,093 144,093 1,410 Other ................................................. 133,472 137,331 1,344 ----------------- ----------------- ---------------- 596,138 785,453 7,688 Less - Accumulated amortization ...................... (157,772) (345,201) (3,379) ----------------- ----------------- ---------------- (Yen) 438,366 (Yen) 440,252 4,309 ================= ================= ================
11. Research and development costs and software development costs Research and development costs incurred until all substantial testing for the original English version product is complete are charged to income. Such research and development costs charged to income were (Yen)557,001 thousand, (Yen)960,156 thousand and (Yen)994,340 thousand ($9,733 thousand) for the years ended December 31, 1997, 1998 and 1999, respectively. Software development costs relating to the local language related functions, representing software development costs as shown in Note 10 above, after netting the related accumulated amortization, are capitalized and amortized to cost of sales as follows:
Thousands of U.S. Thousands of yen dollars ----------------------------------------- ---------------- Year ended Year ended December 31 December 31, ------------------------------------------ 1997 1998 1999 1999 -------------- ------------- ------------ --------------- Software development costs, net of accumulated amortization: Balance, beginning of year .............................. (Yen) 33,529 (Yen) 107,699 (Yen)250,734 $ 2,454 Additions, at cost ...................................... 94,580 190,464 185,455 1,815 Amortization for the year ............................... (20,410) (47,429) (131,292) (1,284) ------------- ------------- ------------ ---------- Balance, end of year..................................... (Yen) 107,699 (Yen) 250,734 (Yen)304,897 $ 2,985 ============= ============= ============ ==========
F-21 12. Transactions with related parties Stock Sale In December 1996, SOFTBANK purchased 18,900,000 shares of common stock of the Company from the Company's founders for approximately (Yen)185 per share, or an aggregate of (Yen)3.5 billion. At the time of the sale, the shares sold represented 35% of the Company's outstanding shares. Pursuant to a price adjustment provision in the stock sales/purchase agreement, SOFTBANK paid an additional (Yen)5 billion upon the Company's Japanese initial public offering, which occurred in August 1998. SOFTBANK sold 3,000,000 shares to an unaffiliated third party in September 1998 and, through Softbank America, Inc., a wholly- owned subsidiary of SOFTBANK, owned 15,900,000 shares, representing approximately a 25% equity ownership interest in the Company as of December 31,1998. In July, 1999, Softbank America, Inc. sold 12,750,000 shares to an unaffiliated third party and currently owns 3,150,000 shares, representing approximately a 4.9% equity ownership interest in the Company. Distribution Based on two distribution agreements between the Company and SOFTBANK, SOFTBANK was granted a non-exclusive right to distribute all of the Company's anti-virus software products in Japan. Individual sales of products to SOFTBANK under the agreements have been effected on a purchase-order basis. Account balances and transactions with SOFTBANK and its affiliated company are as follows:
Thousands of Thousands of yen U.S. dollars ----------------------------------------- December 31 December 31, ----------------------------------------- 1998 1999 1999 ---------------- ----------------- -------------- Accounts receivable, trade.................... (Yen) 847,431 (Yen) 852,004 $ 8,340 Accounts payable, other....................... 38,338 18,943 185 Sales for the year............................ 2,386,654 2,453,538 24,017 Purchases for the year........................ 167,609 - -
The Company believes that each of these transactions was negotiated on an arm's length basis on terms no less favorable to it than would have been available from third parties. The Company made rebate payments to SOFTBANK amounting to (Yen)5,400 thousand, (Yen)22,600 thousand and (Yen)97,758 thousand ($957 thousand) for the years ended December 31, 1997, 1998 and 1999, respectively. These rebate amounts were determined based on SOFTBANK's achievement of sales targets in the distribution agreements. The rebate payments were recorded as deductions of sales revenue on an accrual basis. F-22 13. Short-term borrowings and long-term debt Short-term borrowings at December 31, 1998 consisted of commercial papers of (Yen)71,720 thousand with interest rates ranging from 5.6% to 7.88% per annum, for which time deposits of (Yen)71,720 thousand were pledged as collateral. Such commercial papers have been repaid in the year ended December 31, 1999. At December 31, 1999, the Company had unused lines of credit amounting to (Yen)800,000 thousand ($7,831 thousand) related to bank overdraft and other short-term loan agreements. Under these overdraft agreements, the Company is authorized to obtain short-term financing at prevailing interest rates for periods not in excess of one year. Long term debt at December 31, 1999 consisted of unsecured bonds of (Yen)6,000,000 thousand ($58,731 thousand) due 2002 with interest rate of 2.5% per annum. issued in relation to the Company's 1999 incentive plan. On July 29, 1999, the Company issued (Yen)6,000,000 thousand ($58,731 thousand) with 6,000 detachable warrants. One warrant, which is exercisable from August 20, 1999, entitles the holder to subscribe (Yen)1 million ($10 thousand) for shares of common stock of the Company at (Yen)6,400 ($63) per share (subject to adjustment in certain circumstances). Upon issuance of the bonds, the Company bought all of these warrants and distributed such instruments at fair market value to the directors and certain employees of the Company and its subsidiaries excluding the subsidiary in the United States as a part of their remuneration. At December 31, 1999, all warrants were outstanding and will expire on July 22, 2002. 14. Stock warrants Based on the Company's 1997, 1998 and 1999 incentive plans, the Company issued the following bonds with detachable warrants to SOFTBANK.
1. Shareholders' meeting approval............. September 29, 1997 March 28, 1998 May 29, 1998 June 30, 1999 2. Date of bond issuance...................... October 17, 1997 April 15, 1998 June 15, 1998 July 29, 1999 3. Amount of each bond (Thousands of yen)......................... (Yen)908,523 (Yen)412,965 (Yen)196,650 (Yen)6,000,000 4. The date on which the bonds................ were fully redeemed........................ October 17, 1997 April 15, 1998 June 15, 1998 - 5. The exercise price per each warrant............................... (Yen)285 (Yen)285 (Yen)285 (Yen)6,400 6. Warrant exercise period.................... October 27, 1997 to April 27, 1998 June 25, 1998 to August 20, 1999 October 12, 2001 to April 5, 2002 June 7, 2002 to July 22, 2002 7. Number of the shares represented by warrants................................ 3,187,800 1,449,000 690,000 937,500 8. Outstanding as of December 31, 1998.......................... 2,319,000 1,029,300 597,300 - 9. Outstanding as of December 31, 1999.......................... 727,200 514,800 406,800 937,500
Upon issuance of each bond, the Company bought all of the warrants and distributed such instruments to the directors and certain employees of the Company and its subsidiaries as a part of their remuneration. These transactions were accounted for as issuance of debt to Softbank and separately as issuance of warrants to the directors and employees. The issuance of the warrants to the directors and employees was accounted for under APB 25. F-23 Warrant activity was as follows:
Thousands of shares represented by warrants ----------------------------------- Outstanding at December 31, 1996...................... 3,188 Granted............................................. - Exercised........................................... - Redeemed............................................ - ----------- Outstanding at December 31, 1997...................... 3,188 Granted............................................ 2,139 Exercised.......................................... (1,007) Redeemed........................................... (374) ----------- Outstanding at December 31, 1998...................... 3,946 Granted............................................ 937 Exercised.......................................... (2,336) Redeemed........................................... - ----------- Outstanding at December 31, 1999..................... 2,547 ===========
Balances are as follows:
Thousands of shares ----------------------------------- December 31 ----------------------------------- 1998 1999 ------------------ ---------------- Authorized and outstanding............... 3,946 2,547 Exercisable.............................. 2,010 1,308
For the above stock warrants granted on April 15, 1998 and June 15, 1998, management calculated deferred compensation expense of (Yen)878,798 thousand during fiscal 1998. Such deferred compensation will be amortized over the vesting period which is generally 24 months. Approximately (Yen)397,467 thousand and (Yen)379,803 thousand ($3,718 thousand) were amortized during fiscal 1998 and 1999, respectively. The grants of October 17, 1997 and July 29, 1999, with respect to which the vesting period is generally 24 months, did not result in deferred compensation. The subsidiary in the United States introduced the U.S. program of the 1999 incentive plan in July 1999. Under the U.S. program, STG Incentive Company L.L.C., a Delaware limited company organized for the program by three principal shareholders of the Company, grants stock options to purchase shares of the Company's common stock, which vest one year from the date of grant and which are exercisable for the 3 years subsequent to the vesting date, to directors and certain employees of the subsidiary in the United States. The grants of options to the directors and employees were accounted for under APB 25. Option activity under the U.S. program for the year ended December 31, 1999 was as follows: F-24
Thousands of shares represented by options ----------------------------------- Granted............................................ 810 Exercised.......................................... - Redeemed........................................... - ----------------- Outstanding at December 31, 1999...................... 810 =================
The exercise price per share for the options granted was determined as equivalent to the fair market value of the Company's shares at the time of the grants. The weighted average exercise price per share for the option granted for the year ended December 31, 1999 was (Yen)6,133 ($60.03). Consequently, the grants of the option did not result in deferred compensation. Certain pro forma disclosures In October 1995, SFAS 123 established a fair value based method of accounting for employee stock based compensation. Had compensation cost for the Company's stock warrants and the stock options under U.S. program been determined based on the fair value at the grant dates, as prescribed by SFAS 123, the Company's pro forma net income and net income per share would have been as follows:
Year ended December 31 ------------------------------------------------------------------------ 1997 1998 1999 1999 ------------------- ---------------- ----------------- ----------------- (in thousands, except per share data) Net income: As reported................ (Yen) 851,451 (Yen) 403,115 (Yen) 2,147,373 $ 21,020 Pro forma net income....... 851,451 147,610 1,698,432 16,552 Net income per share: As reported - Basic................... (Yen) 15.77 (Yen) 7.08 (Yen) 33.79 $ 0.33 Diluted................. -- 6.92 32.85 0.32 Pro forma net income - Basic................. (Yen) 15.77 (Yen) 2.59 (Yen) 26.73 $ 0.26 Diluted................. -- 2.53 25.98 0.25
The fair value of each warrant grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the years ended December 31, 1997, 1998 and 1999; expected life of two years, volatility of 88.6% and dividend yield of 0.0% for both periods of fiscal 1997 and 1998, expected life of three years, volatility of 25.8% and dividend yield of 0.0% for 1999; and risk-free interest rates ranging from 1.235% to 1.765% for options granted during the years ended December 31, 1997 and 1998, respectively, and the rate of 0.75% for options granted during the year ended December 31, 1999. The weighted average fair value per share of options granted above during fiscal 1998 and 1999 were (Yen)557 and (Yen)953 ($9.32), respectively. F-25 15. Employee benefit plans Pension and severance plans The parent company has an unfunded retirement allowance plan ("Plan") covering substantially all of its employees who meet eligibility requirements under the Plan. Under the Plan, employees whose service with the company is terminated are, under most circumstances, entitled to lump-sum severance indemnities, determined by reference to current basic rate of pay, length of service and conditions under which the termination occurs. Effective from March 1, 1998, the Taiwan subsidiary introduced a defined benefit pension plan which covers substantially all of its employees. Under the plan, only employees whose service exceeds 15 years or more and who are 55 years or older at the retirement date are entitled to receive benefits. Benefits awarded under the plan are based primarily on current rate of pay and length of service. Certain other subsidiaries have defined benefit pension plans or retirement plans, which cover substantially all of their employees, under which the cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on current rate of pay and length of service. Information regarding the defined benefit pension plans for the Company and its consolidated subsidiaries is shown below:
Thousands of Thousands of yen U.S. dollars ------------------------------------------------------ ----------------- December 31 December 31, ------------------------------------------------------ 1997 1998 1999 1999 ----------------- ----------------- ----------------- ----------------- Change in benefit obligation: Benefit obligation at beginning of year............ (Yen) 21,990 (Yen) 38,230 (Yen) 130,173 $ 1,275 Service cost....................................... 14,228 48,190 62,451 611 Interest cost...................................... 582 2,659 4,978 49 Amendments......................................... - 27,309 -- -- Actuarial (gain)/loss.............................. 1,989 21,035 (16,136) (158) Benefits paid...................................... (559) (7,250) (1,077) (11) Foreign currency exchange impacts.................. - -- (6,205) (61) ------------- --------------- --------------- ------------ Projected benefit obligation at end of year 38,230 130,173 174,184 1,705 ------------- --------------- --------------- ------------ Change in plan assets: Fair value of plan assets at beginning of year..... - -- (6,771) (66) Actual return on plan assets....................... - (33) (678) (7) Benefits paid...................................... - -- 1,077 11 Employer contribution.............................. - (6,738) (11,342) (111) Foreign currency exchange impacts.................. - -- 4,651 45 ------------- --------------- --------------- ------------ Fair value of plan assets at end of year... - (6,771) (13,063) (128) ------------- --------------- --------------- ------------ Funded status Unrecognized prior service cost....................... - (26,361) (24,802) (242) Unrecognized net actuarial loss....................... (1,989) (20,372) (6,313) (62) Unrecognized net transition obligation................ (6,984) (5,872) (4,760) (47) ------------- --------------- --------------- ------------ Accrued benefit cost.................................. (Yen) 29,257 (Yen) 70,797 (Yen) 125,246 $ 1,226 ============= =============== =============== ============
F-26
Thousands of yen ------------------------------------------------------ December 31 ------------------------------------------------------ 1997 1998 1999 ---------------- ----------------- ----------------- Weighted-average assumptions as of December 31: Discount rate.................................. 3.00% 4.60% 4.50% Expected return on plan assets................. -- 7.00% 6.50% Rate of compensation increase.................. 4.00% 4.00% 5.25%
Thousands of Thousands of yen U.S. dollars ------------------------------------------------------ ----------------- December 31 December 31, ------------------------------------------------------ 1997 1998 1999 1999 ----------------- ----------------- ----------------- ----------------- Components of net periodic benefit cost: Service cost........................................ (Yen) 14,228 (Yen) 48,190 (Yen) 62,451 $ 611 Interest cost....................................... 582 2,659 4,978 49 Expected return on plan assets...................... - (162) (808) (8) Amortization of unrecognized transition obligation.. 1,112 1,112 1,112 11 Amortization of prior service cost.................. - 948 1,130 11 Recognized actuarial loss........................... - -- 697 7 ----------------- --------------- ----------------- ------------- Net periodic pension cost........................... (Yen) 15,922 (Yen) 52,747 (Yen) 69,560 $ 681 ================= =============== ================= =============
Effective from July 1, 1998, the parent company's U.S. subsidiary had a 401(K) retirement plan which covers substantially all of its employees. Under the plan, employees contribute a certain percentage of their pre-tax salary up to the maximum dollar limitation prescribed by the Internal Revenue Code. Under the Japanese Commercial Code and local practice, the Company may make severance payments to a retired director or statutory auditor with shareholder approval, if the Company's management proposes such payments based on a resolution of the board of directors. However, the Company has no intention to make such a proposal. The Company does have an internal formula to determine the amounts of severance payments to directors and statutory auditors if the Company were to make such a proposal for statutory auditors. The Company has not recorded any liabilities relating to severance payments to directors and statutory auditors as of December 31, 1998 and 1999 since the Company has no liabilities to directors, and related liabilities to statutory auditors are insignificant. Post-retirement benefits other than pensions and post-employment benefits The Company does not provide health care and life insurance benefits to retired employees, nor does it provide benefits to former or inactive employees after employment but before retirement. F-27 16. Income taxes Income before income taxes and provision for income taxes comprise the following:
Thousands of Thousands of yen U.S. dollars ------------------------------------------------------------------------- Year ended Year ended December 31 December 31, -------------------------------------------------------- 1997 1998 1999 1999 ----------------- ------------------ ------------------ ----------------- Income before income taxes: Parent company.............................. (Yen) 1,062,335 (Yen) 934,475 (Yen) 2,541,761 $ 24,880 Foreign subsidiaries........................ 1,055,561 763,391 1,457,435 14,266 ---------------- --------------- ---------------- ------------- (Yen) 2,117,896 (Yen) 1,697,866 (Yen) 3,999,196 $ 39,146 ================ =============== ================ ============= Income taxes, current: Parent company.............................. (Yen) 1,121,141 (Yen) 1,276,505 (Yen) 1,245,851 $ 12,195 Foreign subsidiaries........................ 216,223 365,397 1,292,604 12,653 ---------------- --------------- ---------------- ------------- (Yen) 1,337,364 (Yen) 1,641,902 (Yen) 2,538,455 $ 24,848 ================ =============== ================ ============= Income taxes, deferred: Parent company.............................. (Yen) (69,256) (Yen) (360,324) (Yen) (34,536) $ (338) Foreign subsidiaries........................ (1,663) 13,173 (654,452) (6,407) ---------------- --------------- ---------------- ------------- (Yen) (70,919) (Yen) (347,151) (Yen) (688,988) $ (6,745) ================ =============== ================ =============
The Company is subject to a number of different income taxes which, in the aggregate, indicate a statutory tax rate in Japan of approximately 51.4% for the years ended December 31, 1997 and 1998, and approximately 47.7% for the year ended December 31, 1999. Amendments to Japanese tax regulations were enacted into law on March 31, 1998 and on March 24, 1999. As a result of these amendments, the statutory tax rate is to be reduced from approximately 51.4% to 47.7% effective from the Company's fiscal year beginning January 1, 1999 and from approximately 47.7% to 42.1% effective from the Company's fiscal year beginning January 1, 2000. F-28 Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows:
December 31 ----------------------------------------------------- 1997 1998 1999 --------------- ----------------- ---------------- Statutory tax rate:............................................. 51.4% 51.4% 47.7% Increase (reduction) in rate resulting from Different tax rates applied to foreign subsidiaries.................................... (6.7) (1.4) (3.5) Effect of change in normal statutory tax rate in Japan............................ - - 2.3 State income taxes, net of federal tax.................... - - (1.1) Permanent difference...................................... 0.8 4.5 2.5 Amortization of deferred compensation related to stock warrants............................... - 10.1 2.6 Current tax on undistributed earnings..................... 3.8 5.1 - Change in deferred tax valuation allowance................ - 10.3 (4.9) Tax effect on undistributed earnings in a subsidiary............................................ 13.2 - - Tax credit relating to research and development costs..... (3.8) (8.4) (1.4) Operating loss of subsidiaries............................ 1.2 3.6 - Other..................................................... (0.1) 1.1 2.0 --------- ----------- ---------- Effective income tax rate....................................... 59.8% 76.3% 46.2% ========= =========== ==========
The significant components of deferred income tax assets and liabilities at December 31, 1998 and 1999 were as follows:
Thousands of Thousands of yen U.S. dollars ------------------------------------- ----------------- December 31 December 31, ------------------------------------- 1998 1999 1999 ----------------- ----------------- ----------------- Deferred tax assets: Deferred revenue................................................ (Yen) 605,122 (Yen) 831,759 $ 8,142 Allowance for doubtful accounts and sales returns .............. 100,872 134,971 1,321 Accrued enterprise tax.......................................... 111,087 42,370 415 Accrued liabilities............................................. 69,073 76,150 745 Intercompany profit............................................. 79,398 52,932 518 Tax loss carry forward.......................................... 14,551 126,731 1,241 Other........................................................... 35,293 118,033 1,155 --------------- --------------- --------------- Gross deferred tax assets.................................... 1,015,396 1,382,946 13,537 Less: Valuation allowance................................... (212,051) (10,465) (102) --------------- --------------- --------------- 803,345 1,372,481 13,435 --------------- --------------- --------------- Deferred tax liabilities Unrealized gain on debt and equity securities................ (214,681) (173,811) (1,701) Deferred compensation........................................ (56,693) - - Other........................................................ (7,584) - - --------------- --------------- --------------- (278,958) (173,811) (1,701) --------------- --------------- --------------- Net deferred tax assets......................................... (Yen) 524,387 (Yen) 1,198,670 $ 11,734 =============== =============== ===============
F-29 Net deferred tax assets are included in the consolidated balance sheets as follows:
Thousands of Thousands of yen U.S. dollars --------------------------------------- ----------------- December 31 December 31 --------------------------------------- 1998 1999 1999 ------------------- ------------------ ----------------- Current assets-Deferred income taxes................... (Yen)394,922 (Yen) 922,061 $ 9,026 Other assets-Deferred income taxes..................... 129,465 276,609 2,708 ------------------- ------------------ ----------------- Net deferred tax assets................................ (Yen)524,387 (Yen)1,198,670 $11,734 =================== ================== =================
The valuation allowance mainly relates to deferred tax assets of consolidated subsidiaries with operating loss carry forwards for tax purposes that are not expected to be realized. The net changes in the total valuation allowance for the years ended December 31, 1997, 1998 and 1999 were increase of (Yen)9,048, (Yen)163,003 thousand and decrease of (Yen)201,586 thousand ($1,973 thousand), respectively. Operating loss carryforwards for tax purposes of a consolidated subsidiary at December 31, 1999 amounted to approximately (Yen)499,041 thousand ($4,885 thousand) and are available as an offset against future taxable income of the subsidiary. These carryforwards expire at various dates up to December 31, 2004. Realization is dependent on such subsidiaries generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets, less valuation allowance, will be realized. The amount of such net deferred tax assets considered realizable, however, could be changed in the near term if estimates of future taxable income during the carry forward period are changed. At December 31, 1999, no deferred income taxes have been provided on undistributed earnings of foreign subsidiaries not expected to be remitted in the foreseeable future totaling (Yen)1,060,648 thousand ($10,382 thousand), as management of the Company intends to reinvest undistributed earnings of the Company's foreign subsidiaries. The unrecognized deferred tax liabilities as of December 31, 1999 for such temporary differences amounted to (Yen)237,668 thousand ($2,326 thousand). 17. Shareholders' equity Changes in the number of shares of common stock outstanding have resulted from the following:
For the year ended December 31 ------------------------------------------------------- 1997 1998 1999 ----------------- ----------------- ------------------- Shares of common stock outstanding: Balance at beginning of year.................................... 54,000,000 54,000,000 62,506,800 New share offering.............................................. - 7,500,000 - Exercise of stock purchase warrants............................. - 1,006,800 2,336,100 ----------------- ----------------- ---------------- Balance at end of year.......................................... 54,000,000 62,506,800 64,842,900 ================= ================= ================
F-30 Based upon the board of directors' resolution on July 8, 1997, the Company made a free share distribution of 12,000 shares to the shareholders of record on September 1, 1997. This free distribution was made in the form of a stock split in the ratio of three-for-one, for which the transfer of the applicable par value of (Yen)202,425 thousand was made from additional paid-in capital to the common stock account in accordance with the Japanese Commercial Code. On January 1, 1998, in order to reduce the par value of its common stock, the former Trend Micro Incorporated merged into a dormant company, a consolidated subsidiary named K.K. International Media ("Media") which then changed its name to Trend Micro. At that time the par value of the Company's common stock was reduced from (Yen)50,000 to (Yen)500 per share. The merger was approved at the extraordinary shareholders' meeting on November 17, 1997, and took effect as of January 1, 1998. As a result of the merger, common stock was increased by (Yen)900,000 thousand, representing 1,800,000 shares at a par value of (Yen)500. At the same time, 20,000 shares (par value (Yen)500) of Media which were held by the Company were retired. As approved at an ordinary meeting of shareholders on March 28, 1998, each share of the Company's (Yen)500 par value common stock was split into 10 shares of par value (Yen)50 common stock. Also approved, an increase in the authorized number of shares from 7.2 million shares to 72 million shares. As approved at an ordinary meeting of shareholders on March 23,1999, the authorized number of shares were increased from 72 million shares to 83 million shares. Effective from August 18, 1998, the common stock of the Company was registered for trading in the Japanese Over-the-Counter Market. Upon the registration, 7,500,000 shares were issued based on the resolutions of the Board of Directors on July 28, 1998. As a result, the common stock account and the paid-in capital account of the Company increased by (Yen)4,038,078 thousand and (Yen)6,175,578 thousand, respectively. Upon exercise of stock warrants, 1,006,800 shares of common stock at an exercise price of (Yen)285 per share were issued and the common stock account and the additional paid-in capital account of the Company increased by (Yen)143,636 thousand and (Yen)146,170 thousand, respectively, in the year ended 1998. Upon exercise of stock warrants, 2,336,100 shares of common stock at an exercise price of (Yen)285 per share were issued and the common stock account and the additional paid-in capital account of the Company increased by (Yen)332,946 thousand ($3,259 thousand) and (Yen)338,346 thousand ($3,311 thousand), respectively, in the year ended 1999. On August 19, 1999, the board of directors of the Company decided and declared a stock split in the ratio of three-for-one for which the record date was September 30, 1999. All per share data in the consolidated financial statements have been adjusted to give effect to the stock split made on September 30, 1999. Under the Japanese Commercial Code, at least 50% of the issue price of new shares, with a minimum of the par value of those shares, is required to be designated as common stock. The portion which is to be designated as common stock is determined by resolution of the Board of Directors. Proceeds in excess of the amounts designated as common stock are credited to additional F-31 paid-in capital. The parent company may transfer portions of additional paid-in capital to common stock by resolution of the Board of Directors. Under the Japanese Commercial Code, the amount available for dividends is based on retained earnings as recorded on the books of the Company prepared in accordance with Japanese Commercial Code requirements. However, certain adjustments, not recorded on the Company's books, are reflected in the financial statements as described in Note 2. The Japanese Commercial Code provides that an amount equal to at least 10% of cash dividends and other distributions from retained earnings paid by the parent company and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriation is required when the legal reserve equals 25% of stated capital. The amounts of statutory retained earnings of the parent company available for the payments of dividends to stockholders as of December 31, 1998 and 1999 were (Yen)2,052,378 thousand, (Yen)2,866,888 thousand ($28,063 thousand), respectively. According to the Articles of Incorporation of the Taiwan subsidiary, the annual net income should be used initially to cover any accumulated deficit; then, 10% of the remaining annual net income should be set aside as legal reserve until it reaches 100% of contributed capital. Under the law in Taiwan, the legal reserve can be exclusively used to cover accumulated deficits or, if the balance of the reserve exceeds 50% of contributed capital, to increase capital (not to exceed 50% of the reserve balance) and shall not be used for any other purpose. When distributing retained earnings, the Taiwan subsidiary should distribute 0.5% of the total distribution as an employee bonus. The distribution of the retained earnings shall be made by a resolution passed by the Board of Directors and approved by the shareholders. The Japanese Commercial Code permits a Company to distribute profits by way of interim or year-end dividends under certain conditions. Year-end dividends of (Yen)208,337 thousand ($2,040 thousand) for the year ended December 31, 1998 were approved at a general stockholders' meeting held on March 11 1999. Such dividends are reflected in the accompanying consolidated financial statements for the year ended December 31, 1999. Total accumulated other comprehensive income as of December 31, 1997, 1998 and 1999, which in each case was a net debit balance, was (Yen)82,752 thousand, (Yen)43,924 thousand and (Yen)417,066 thousand ($4,081 thousand), respectively. 18. Financial instruments Other than marketable debt and equity securities, the Company's involvement in financial assets and liabilities with market risk is limited to cash and cash equivalents, notes and accounts receivable, short-term borrowings, notes and accounts payable and long-term debt. The Company has a policy not to utilize any derivative financial instruments with off-balance sheet risk. At December 31, 1998 and 1999, the carrying amounts of the Company's financial instruments approximated their fair values which were estimated based on the discounted amounts of future cash flows. F-32 19. Advertising costs Advertising costs are expensed as incurred. Advertising costs included in selling, general and administrative expenses were (Yen)1,192,109 thousand, (Yen)1,540,715 thousand and (Yen)2,164,630 thousand ($21,189 thousand) for the years ended December 31, 1997, 1998 and 1999, respectively. 20. Leased assets Rental expenses under operating leases for the years ended December 31, 1997, 1998 and 1999 were (Yen)122,571 thousand, (Yen)292,214 thousand and (Yen)422,727 thousand ($4,138 thousand), respectively. The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1999 are as follows: Thousands of Year ending December 31: Millions of yen U.S. dollars ------------------ ---------------- 2000.............................. (Yen)272,138 $2,664 2001.............................. 40,146 393 2002.............................. 22,687 222 2003.............................. 12,591 123 ------------------ ---------------- Total minimum future lease payments. (Yen)347,562 $3,402 ================== ================ 21. Commitments and contingent liabilities There were no significant commitments outstanding at December 31, 1999. In May 1997, Trend Micro Incorporated (TMI), the parent company's U.S. subsidiary, sued Network Associates (formerly McAfee Associates, Inc.) and Symantec in the U.S. Federal District Court for the Northern District of California alleging that their products infringe TMI's U.S. Patent No. 5,623,600 relating to a system and method for detecting computer viruses in a network environment and seeking injunctive relief and unspecified money damages. TMI settled its claims against Symantec in April 1998 by entering into a patent cross-license arrangement, which included an agreement to exchange certain virus samples. In June 1997, Network Associates denied infringement, alleging the Company's patent is invalid, and filed counterclaims against TMI alleging unfair competition, false advertising, trade libel and interference with prospective economic advantage. In April 2000, Network Associates filed suit against TMI in the U.S. Federal District Court for the Northern District of Texas, alleging that TMI's anti-virus software packages, including the Trend Virus Control System, infringes a Network Associates patent which was issued on February 22, 2000. The Company believes that the final disposition of these matters will not have a material adverse effect on the Company's business, financial condition or results of operations at this time. TMI is currently in negotiations with Network Associates to settle all outstanding litigation between the parties. The Company expects to reach agreement with Network Associates on terms that are acceptable to the Company. 22. Segment information The Company operates in the microcomputer software industry business segment. Net revenue is attributed to countries based on location of the Company and consolidated subsidiaries and long-lived assets for the years ended December 31, 1997, 1998 and 1999 are as follows: F-33 Geographic information -
Thousands of Thousands of yen U.S. dollars ---------------------------------------------------------- ----------------- Year ended Year ended December 31 December 31, ---------------------------------------------------------- 1997 1998 1999 1999 ------------------- ------------------ ------------------ ----------------- Net sales to external customers: Japan.............................. (Yen) 3,698,835 (Yen) 4,811,608 (Yen) 5,847,188 $ 57,236 U.S.A.............................. 1,061,159 1,866,747 3,830,589 37,496 Taiwan............................. 1,830,838 1,808,742 1,646,550 16,117 Europe............................. 427,781 813,962 1,825,699 17,871 Other.............................. 379,366 444,605 483,144 4,729 ---------------- --------------- --------------- ----------- Total......................... 7,397,979 (Yen) 9,745,664 (Yen) 13,633,170 $ 133,449 ================ =============== =============== =========== Long-lived assets: Japan.............................. 334,255 (Yen) 884,543 (Yen) 1,002,116 $ 9,809 U.S.A.............................. 130,216 147,469 320,497 3,137 Taiwan............................. 209,499 204,672 248,637 2,434 Europe............................. 38,355 38,333 52,779 517 Other.............................. 31,506 39,016 27,133 265 ---------------- --------------- --------------- ----------- Total......................... (Yen) 743,831 (Yen) 1,314,033 (Yen) 1,651,162 $ 16,162 ================ =============== =============== ===========
Intercompany sales between geographic areas are made at arms-length prices. Long-lived assets are those assets used in the geographic segment. Long-lived assets are included in the consolidated balance sheets as follows:
Thousands of Thousands of yen U.S. dollars ---------------------------------------------------------- ----------------- Year ended Year ended December 31 December 31, ---------------------------------------------------------- 1997 1998 1999 1999 ------------------- ------------------ ----------------- ----------------- Investments and other assets:: Intangibles.......................... (Yen) 260,759 (Yen) 438,366 (Yen) 440,252 $ 4,309 Other................................ 130,304 380,253 461,125 4,514 Property and equipment, less accumulated depreciation............. 352,768 495,414 749,785 7,339 ---------------- -------------- -------------- ----------- Tota1........................... (Yen) 743,831 (Yen)1,314,033 (Yen)1,651,162 $ 16,162 ================ ============== ============== ===========
Significant customers SOFTBANK and its affiliates accounted for more than 10% of net sales to external customers for the years ended December 31, 1997, 1998 and 1999. Net sales to SOFTBANK and its affiliates for the years ended December 31, 1997, 1998 and 1999 were (Yen)1,383,730 thousand, (Yen)2,386,654 thousand and (Yen)2,453,538 thousand ($24,017 thousand), respectively. F-34 23. Subsequent events Establishment of ipTrend Incorporated, new subsidiary On January 18, 2000, the Company established a new wholly-owned subsidiary in Japan with an initial capital of (Yen)490,000 thousand ($4,796 thousand), named ip Trend Incorporated (ipTrend). Subsequently, on February 24, 2000, the Company increased its investment in ip Trend by (Yen)1,510,000 thousand ($14,781 thousand). The Company intends to extend its business to the area of UNIX and Linux as an internet-based technology through ip Trend, which will manufacture and sell computer software for internet-based technology and provides related services. Acquisition of the shares of Nihon Unisoft Incorporated On February 29, 2000, the Company completed the acquisition of 1,600 shares (66.7%) of outstanding shares of Nippon Unisoft through ipTrend Inc., a wholly- owned subsidiary of the Company. Nippon Unisoft Incorporated, which has annual sales of approximately (Yen)1,484 millions ($14,546 thousand), has been a Japanese Unix software solution provider in the networking communications and Internet domain since November 1, 1983. The purpose of the acquisition is to develop the internet-based technology and to expand the sales of the products and services used by that technology. The acquisition will be accounted for as a purchase. As such, the excess of the purchase price over the fair value of the acquired net assets, which approximates (Yen)239,567 thousand ($2,345 thousand), will be recorded as goodwill of (Yen)1,360,433 thousand ($13,317). Unaudited pro forma information related to this acquisition is not included as the impact of this acquisition is not deemed to be material. F-35 SCHEDULE II TREND MICRO INCORPORATED AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Thousands of yen ---------------------------------------------------------------------------------------- Additions Balance at charged to Additions Balance at beginning costs and charged to Deductions Other end of of period expenses net sales (Note 1) (Note 2) period ------------ -------------- -------------- --------------- -------------- ------------- Year ended December 31, 1997: Allowance for doubtful accounts and sales returns....... (Yen) 76,818 (Yen) 97,973 (Yen) 35,787 (Yen) (6,325) (Yen) 492 (Yen) 204,745 ============ ============= ============ ============== ============ ============= Year ended December 31, 1998: Allowance for doubtful accounts and sales returns....... (Yen)204,745 (Yen) 192,922 (Yen) 22,227 (Yen) (52,657) (Yen)(28,356) (Yen) 338,881 ============ ============= ============ ============== ============ ============= Year ended December 31, 1999: Allowance for doubtful accounts and sales returns....... (Yen)338,881 (Yen) 97,102 (Yen)145,099 (Yen) (151,716) (Yen)(46,393) (Yen) 382,973 ============ ============= ============ ============== ============ =============
Notes: 1. Amounts written off. 2. Translation adjustment.
Thousands of yen --------------------------------------------------------------------------------- Balance at beginning of Balance at period Additions Deductions Other end of period ---------------- ---------------- --------------- ------------ -------------- Year ended December 31, 1997: Valuation allowance - Deferred tax assets............ (Yen) - (Yen) 49,048 (Yen) - (Yen) - (Yen) 49,048 ============== =============== ============== ============ ============== Year ended December 31, 1998: Valuation allowance - Deferred tax assets............ (Yen) 49,048 (Yen) 188,819 (Yen) - (Yen)(25,816) (Yen) 212,051 ============== =============== ============== ============ ============== Year ended December 31, 1999: Valuation allowance - Deferred tax assets............ (Yen) 212,051 (Yen) - (Yen) (198,599) (Yen) (2,987) (Yen) 10,465 ============== =============== ============== ============ ==============
F-36 Trend Micro Incorporated 810,000 Shares of Common Stock __________________________ PROSPECTUS __________________________ May 24, 2000 - -------------------------------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. We are not making an offer to sell the shares and ADSs offered hereby in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is current only as of its date. - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The expenses to be paid by Trend Micro in connection with the distribution of the securities being registered, other than underwriting discounts and commissions, are as follows. All of the amounts shown are estimates except for the SEC registration fee: Amount ------ SEC Registration Fee................................. $ 12,425 Legal Fees and Expenses.............................. 100,000 Accounting Fees and Expenses......................... 50,000 Option Agent, Transfer Agent and Registrar Fees and Expenses........................................ 10,000 Miscellaneous Expenses............................... 7,575 ----- Total........................................... $180,000 ======== Trend Micro will pay the costs and expenses in connection with the shares to be sold by STG Incentive Company L.L.C. Item 14. Indemnification of Directors and Officers Articles 254 and 280 of the Commercial Code of Japan make the provisions of Section 10, Chapter 2, Book III of the Civil Code applicable to the relationship between Trend Micro and its directors and statutory auditors, respectively. Section 10, among other things, provides in effect that: (1) Any director or statutory auditor of a company may demand advance payment of expenses which are considered necessary for the management of the affairs of such company entrusted to him; (2) If a director or a statutory auditor of a company has defrayed any expenses which are considered necessary for the management of the affairs of such company entrusted to him, he may demand reimbursement therefor from the company; (3) If a director or a statutory auditor has assumed an obligation necessary for the management of the affairs entrusted to him, he may require the company to perform in his place or, if it is not due, to furnish adequate security; and (4) If a director or a statutory auditor, without any fault on his part, sustains damage through the management of the affairs entrusted to him, he may demand compensation therefor from the company. Trend Micro has entered into agreements with its directors and certain of its executive officers that require Trend Micro to indemnify such persons against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or officer of Trend Micro or any of its affiliated enterprises, provided such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant. Indemnification may not be available for certain violations of U.S. federal securities law or actions brought under Japanese law and may be determined by the United States or Japanese courts to be unenforceable in such circumstances. Item 15. Recent Sales of Unregistered Securities For the period from January 1, 1996 to December 31, 1998, Trend Micro has sold unregistered securities as set forth below. The consideration paid to Trend Micro in each case was cash, unless otherwise indicated below. Share amounts and prices per share below are adjusted to reflect a one-into-three stock split effected on September 1, 1997, and a one-into-ten stock split effected on May 7, 1998. On October 15, 1996, Trend Micro issued and sold 54,000 shares at a per share price of approximately (Yen)7,833, in a subscription rights offering to existing shareholders. In such offering, each shareholder was entitled to purchase three shares for each share. Exemption is claimed under Regulation S under the Securities Act. On November 21, 1996, Trend Micro issued and sold 54,000 shares at a per share price of approximately (Yen)8,242, in a subscription rights offering to existing shareholders. In such offering, each shareholder was entitled to purchase three shares for every four shares then owned. Exemption is claimed under Regulation S under the Securities Act. On November 25, 1996, Trend Micro issued and sold 54,000 shares at a per share price of approximately (Yen)8,242, in a subscription rights offering to existing shareholders. In such offering, each shareholder was entitled to purchase three shares for every seven shares then owned. Exemption is claimed under Regulation S under the Securities Act. On October 17, 1997, Trend Micro issued unsecured bonds with detachable warrants to purchase an aggregate of 1,062,600 shares to certain employees and directors pursuant to the Trend Micro 1997 incentive plan. Exemption is claimed under Regulation S and Rule 701 under the Securities Act. In order to effect a 1-into-100 stock split, on January 1, 1998, Trend Micro merged with and into International Media K.K., a Japanese corporation ("International Media"). In the merger, 100 shares of International Media were exchanged for each outstanding share. Concurrently with such exchange, the corporate name of International Media was changed to "Trend Micro Incorporated." The issuance of such shares did not involve a "sale" of securities and, therefore, registration was not required. On April 15, 1998, Trend Micro issued unsecured bonds with detachable warrants to purchase an aggregate of 483,000 shares to certain employees and directors under the Trend Micro 1998 incentive plan. Exemption is claimed under Regulation S and Rule 701 under the Securities Act. On June 17, 1998, Trend Micro issued unsecured bonds with detachable warrants to purchase an aggregate of 230,000 shares to certain employees and directors pursuant to the Trend Micro 1998 incentive plan. Exemption is claimed pursuant to Regulation S and Rule 701 under the Securities Act. On August 18, 1998, Trend Micro issued and sold 2,500,000 shares in its initial public offering in Japan in an underwriting. The offering was managed by The Nomura Securities Co., Daiwa Securities, Nikko Securities, Merrill Lynch & Co. and four other underwriters. The aggregate initial offering price and the aggregate underwriting commission were (Yen)10,750,000,000 and (Yen)537,500,000, respectively. Exemption is claimed under Regulation S under the Securities Act. From time to time since September 1998 through April 2000, Trend Micro issued 3,596,175 shares upon the exercise of warrants under the Trend Micro 1997, 1998 and 1999 incentive plans. Exemption is claimed under Regulation S and Rule 701 under the Securities Act. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Exhibit Sequentially Number Document Numbered Page ============ ================================================================================= ======================= 3.1 Articles of Incorporation of Trend Micro 3.3+ Regulations of the Board of Directors 4.1+ Form of Deposit Agreement among Trend Micro, The Bank of New York, as Depositary, and the owners and holders of American Depositary Receipts (including the Form of ADR) 4.2+ Share Handling Regulations 5.1* Opinion and Consent of Mitsui, Yasuda, Wani & Maeda 8.1* Tax Opinion of Mitsui, Yasuda, Wani & Maeda (included in Exhibit 5.1) 8.2* Tax Opinion of Morrison & Foerster LLp 10.1+ Translation summary of Lease Agreement dated March 4, 1998, between Trend Micro Incorporated and Odakyu Dentetsu K.K. 10.2+ Lease Agreement dated July 8, 1997, between Trend Micro, Inc. and Hidalgo, Inc. 10.3+ 1997 incentive plan and related agreements 10.4+ April 1998 incentive plan and related agreements 10.5+ June 1998 incentive plan and related agreements 10.6* 1999 incentive plan and related agreements 10.7+ Form of Indemnification Agreement between Trend Micro and directors and officers 10.8++ Translation Summary of bond and warrant to be issued in connection with 1999 incentive plan 10.9+++ Basic Agreement on Continual Sale and Purchase of Goods dated October 1, 1999, between Trend Micro Incorporated and SOFTBANK COMMERCE CORP., and related agreements 10.10 Agreements relating to Acquisition of Nihon Unisoft Corporation 11.1+ Statement regarding calculation of net income (loss) per share 21.1 Subsidiaries of the Registrant 23.1* Consent of Mitsui, Yasuda, Wani & Maeda (included in Exhibit 5.1) 23.2* Consent of Morrison & Foerster LLP (included in Exhibit 8.2) 23.3 Consent of PricewaterhouseCoopers 24.1 Power of Attorney (included in Page II-5).
+ Incorporated by reference to the corresponding exhibit to the Company's Form F-1 Registration Statement (File No. 333-10486) filed on June 22, 1999. ++ Incorporated by reference to the corresponding exhibit to the Company's Amendment No. 2 to the Form F-1 Registration Statement (File No. 333-10486) filed on July 2, 1999. +++ Confidential Treatment being requested for a portion of these documents. * Incorporated by reference to the corresponding exhibit to the Company's Form F-1 Registration Statement (File No. 333-10586) filed on July 8, 1999. (b) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts Schedules other than those listed above have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes. Item 17. Undertakings The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for purposes of determining any liability under the Securities Act of 1933, each post-effective amendment 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) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of Regulation S-X throughout this continuous offering. (5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as express in the Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the issuer pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, 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 duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tokyo, Japan on the 24th day of May, 2000. Trend Micro Incorporated By: /s/ CHANG MING-JANG ----------------------- Name: Chang Ming-Jang Title: Representative Director; President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Chang Ming-Jang, Lai Kwok-To and Hiroyuki Nakanishi, and each of them, as his true and lawful attorneys-in- fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended and all post- effective amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, 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 and necessary to be done in connection therewith 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 attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ CHANG MING-JANG Representative Director; President, Chief Executive May 24, 2000 - --------------------------------- Chang Ming-Jang Officer and Chairman of the Board Principal Executive Officer) Director and Authorized - --------------------------------- Lai Kwok-To Representative in the United States May , 2000 /s/ YOSHITAKA KITAO Director - --------------------------------- Yoshitaka Kitao May 24, 2000 /s/ HIROYUKI NAKANISHI Director and Chief Executive Officer - --------------------------------- May 24, 2000 Hiroyuki Nakanishi /s/ TOSHIHIRO WATANABE Director - --------------------------------- May 24, 2000 Toshihiro Watanabe Director, Chief Technology Officer - --------------------------------- Chen Yi-Fen and Executive Vice President May , 2000
EXHIBIT INDEX
Exhibit Sequentially Number Document Numbered Page ============= ============================================================================= ============= 3.1 Articles of Incorporation of Trend Micro 3.3+ Regulations of the Board of Directors 4.1+ Form of Deposit Agreement among Trend Micro, The Bank of New York, as Depositary, and the owners and holders of American Depositary Receipts (including the Form of ADR) 4.2+ Share Handling Regulations 5.1* Opinion and Consent of Mitsui, Yasuda, Wani & Maeda 8.1* Tax Opinion of Mitsui, Yasuda, Wani & Maeda (included in Exhibit 5.1) 8.2* Tax Opinion of Morrison & Foerster LLP 10.1+ Translation summary of Lease Agreement dated March 4, 1998, between Trend Micro Incorporated and Odakyu Dentetsu K.K. 10.2+ Lease Agreement dated July 8, 1997, between Trend Micro, Inc. and Hidalgo, Inc. 10.3+ 1997 incentive plan and related agreements 10.4+ April 1998 incentive plan and related agreements 10.5+ June 1998 incentive plan and related agreements 10.6* 1999 incentive plan and related agreements 10.7+ Form of Indemnification Agreement between Trend Micro and directors and officers 10.8++ Translation Summary of bond and warrant to be issued in connection with 1999 incentive plan 10.9+++ Basic Agreement on Continual Sale and Purchase of Goods dated October 1, 1999, between Trend Micro Incorporated and SOFTBANK COMMERCE CORP., and related agreements 10.10 Agreements relating to Acquisition of Nihon Unisoft Corporation 11.1+ Statement regarding calculation of net income (loss) per share 21.1 Subsidiaries of the Registrant 23.1* Consent of Mitsui, Yasuda, Wani & Maeda (included in Exhibit 5.1) 23.2* Consent of Morrison & Foerster LLP (included in Exhibit 8.2) 23.3 Consent of PricewaterhouseCoopers 24.1 Power of Attorney (included in Page II-5).
______________________________ + Incorporated by reference to the corresponding exhibit to the Company's Form F-1 Registration Statement (File No. 333-10486) filed on June 22, 1999. ++ Incorporated by reference to the corresponding exhibit to the Company's Amendment No. 2 to the Form F-1 Registration Statement (File No. 333-10486) filed on July 2, 1999. +++ Confidential treatment being requested for a portion of these documents. * Incorporated by reference to the corresponding exhibit to the Company's Form F-1 Registration Statement (File No. 333-10586) filed on July 8, 1999. EX-3.1 2 ARTICLES OF INCORPORATION OF TREND MICRO EXHIBIT 3.1 (Translation) --------------------------------- ARTICLES OF INCORPORATION --------------------------------- Trend Micro, Incorporated Established: March 19, 1965 Partially Amended: March 13, 1996 Partially Amended: October 24, 1997 Partially Amended: January 1, 1998 Partially Amended: May 7, 1998 ARTICLES OF INCORPORATION Contents
PAGE ---- Article 1. Corporate Name............................................... 3 Article 2. Purposes..................................................... 3 Article 3. Location of Head Office...................................... 3 Article 4. Method of Placing Public Notice.............................. 3 Article 5. Total Number of Shares to be Issued.......................... 4 Article 6. Par Value of Par-value Shares................................ 4 Article 7. Number of Shares Constituting One Unit....................... 4 Article 8. Transfer Agent............................................... 4 Article 9. Share Handling Regulations................................... 4 Article 10. Record Date.................................................. 5 Article 11. Amortization of stock by Directors' resolution............... 5 Article 12. Convocation.................................................. 5 Article 13. Chairman..................................................... 5 Article 14. Method of Resolution......................................... 5 Article 15. Exercise of Voting Rights by Proxy........................... 6 Article 16. Minutes...................................................... 6 Article 17. Number of Directors.......................................... 6 Article 18. Election of Directors........................................ 6 Article 19. Term of Office of Directors.................................. 6 Article 20. Convocation and Chairman of the Board of Directors........... 7 Article 21. Directors with Special Titles................................ 7 Article 22. Representative Directors..................................... 7 Article 23. Method of Resolution of the Board of Directors............... 7 Article 24. Minutes of the Board of Directors............................ 7 Article 25. Regulations of the Board of Directors........................ 7 Article 26. Remuneration and Retirement Allowances of Directors.......... 7 Article 27. Number of Statutory Auditors................................. 8 Article 28. Election of Statutory Auditors............................... 8 Article 29. Term of Office of Statutory Auditors......................... 8 Article 30. Standing Statutory Auditor................................... 8 Article 31. Notice of Convocation of Meetings of the Board of Statutory Auditors..................................................... 8
i Article 32. Method of Resolution of the Board of Statutory Auditors...... 8 Article 33. Minutes of the Board of Statutory Auditors................... 8 Article 34. Regulations of the Board of Statutory Auditors............... 9 Article 35. Remuneration and Retirement Allowances of Statutory Auditors. 9 Article 36. Fiscal Year.................................................. 9 Article 37. Dividends.................................................... 9 Article 38. Interim Dividends............................................ 9 Article 39. Conversion of Convertible Bonds and Dividends or Interim Dividends Thereon........................................... 9 Article 40. Prescription Period of Dividends............................. 9
ii ARTICLES OF INCORPORATION OF TREND MICRO INCORPORATED CHAPTER I GENERAL PROVISIONS ARTICLE 1. Corporate Name The corporate name of the Company shall be "Trend Micro Kabushiki Kaisha" and in English it shall be "Trend Micro, Incorporated." ARTICLE 2. Purposes The purposes of the Company shall be to engage in the following businesses: 1. Manufacture, sale, import and export of electronic components; 2. Manufacture, sale, import and export of household electric appliances; 3. Manufacture, sale, import and export of communications equipment; 4. Manufacture, sale, import and export of medical equipment; 5. Design, sale, import and export of computer software; 6. Design, sale, import and export of computer hardware and related products; and, 7. Any other business incidental to any of the preceding items. ARTICLE 3. Location of Head Office The head office of the Company shall be located in Shibuya-ku, Tokyo. ARTICLE 4. Method of Placing Public Notice Public notices of the Company shall be placed in the Nihon Keizai Shimbun. CHAPTER II SHARES ARTICLE 5. Total Number of Shares to be Issued The total number of shares to be issued by the Company shall be two hundred and fifty million (250,000,000). However, in the event stock is amortized, this shall be reduced by the corresponding number of shares. ARTICLE 6. Par Value of Par-value Shares The par value of each par-value share issued by the Company shall be fifty Japanese yen ((Yen)50). ARTICLE 7. Number of Shares Constituting One Unit The number of shares constituting one unit of the Company shall be five hundred (500). ARTICLE 8. Transfer Agent 1. The Company shall appoint a transfer agent in respect of its shares. 2. The transfer agent and its business handling office shall be determined by resolution of the Board of Directors. 3. The register of shareholders (including register of beneficial shareholders, likewise hereinafter) of the Company shall be kept at the business handling office of the transfer agent, and the Company shall cause the transfer agent to handle registration of transfer of shares, the take up of shares not constituting one unit, the receipt of beneficial shareholders' notices and any other business pertaining to the shares and the Company itself shall not handle these matters. ARTICLE 9. Share Handling Regulations The denominations of share certificates of the Company, registration of transfer of shares, take up of shares not constituting one unit, receipt of beneficial shareholders' notices and any other matters concerning shares and share handling fees shall be governed by the Share Handling Regulations established by resolution of the Board of Directors. ARTICLE 10. Record Date 1. The shareholders (including beneficial shareholders, likewise hereinafter) appearing in the final register of shareholders of the Company as of the last day of each fiscal year shall be entitled to exercise their rights at the ordinary general meeting of shareholders relating to the relevant accounts. 2. In addition to the preceding paragraph, the Company may, if necessary, determine the shareholders or registered pledgees appearing in the final register of shareholders as of a certain date to be entitled to exercise their rights by giving prior public notice in accordance with a resolution of the Board of Directors. ARTICLE 11. Amortization of stock by Directors' resolution 1. After March 11, 1999, by a resolution of Board of Directors the Company may use its profit to buy back and amortize a maximum of 800,000 shares of its own stock. 2. In addition to the preceding paragraph, after March 11, 1999, by a resolution of Board of Directors the Company may use its capital reserve to buy back and amortize its own stock to a maximum of 4,000,000 shares or shares corresponding to a maximum total purchase price of 5.5 billion yen. CHAPTER III GENERAL MEETING OF SHAREHOLDERS ARTICLE 12. Convocation An ordinary general meeting of shareholders of the Company shall be convened in March each year and an extraordinary general meeting of shareholders may be convened whenever necessary. ARTICLE 13. Chairman The chairman of a general meeting of shareholders shall be a person selected in advance from the Company's directors, shareholders employees or advisory counsel by Board of Directors. When such person is unable to so act, another person determined in accordance with an order predetermined by resolution of the Board of Directors shall act as chairman. ARTICLE 14. Method of Resolution Unless otherwise provided by laws and ordinances or these Articles of Incorporation, resolutions of general meeting of shareholders shall be adopted by a majority vote of the voting rights of shareholders present at the meeting. ARTICLE 15. Exercise of Voting Rights by Proxy 1. A shareholder may exercise his/her voting rights through a proxy who is also a shareholder of the Company having voting rights. 2. In case of the preceding paragraph, the proxy shall be required to file with the Company a document evidencing his/her authority each time he/she acts as proxy. ARTICLE 16. Minutes The substance of proceedings at a general meeting of shareholders and the results thereof shall be recorded in the minutes of the meeting which shall bear the names and seals of the chairman and the directors present thereat. CHAPTER IV DIRECTORS AND THE BOARD OF DIRECTORS ARTICLE 17. Number of Directors The Company shall have not more than eight (8) directors. ARTICLE 18. Election of Directors 1. Directors of the Company shall be elected at a general meeting of shareholders. 2. Resolution for election of directors shall be adopted by a majority vote at a general meeting of shareholders at which shareholders who hold shares representing one-third (1/3) or more of the total number of issued shares with voting rights are present. 3. With respect to the resolution for election of directors, cumulative voting shall not be adopted. ARTICLE 19. Term of Office of Directors 1. The term of office of directors shall expire at the conclusion of the ordinary general meeting of shareholders with respect to the last closing of accounts within two (2) years after their assumption of office. 2. The term of office of any director elected to fill a vacancy due to early retirement shall be the same as the remainder of the term of office of the retired director. 3. The term of office of any director elected due to increase in number of directors shall be the same as the remainder of the term of office of the other directors in office. ARTICLE 20. Convocation and Chairman of the Board of Directors 1. The President and Director shall convene and act as chairman of the Board of Directors. When the President and Director is unable to so act, one of the other directors determined in accordance with an order predetermined by the Board of Directors shall act in his/her place. 2. Notice of convocation of a meeting of the Board of Directors shall be sent to each director and statutory auditor at least three (3) days prior to the date set for such meeting; provided, however, that in case of urgency such period may be shortened. ARTICLE 21. Directors with Special Titles By resolution of the Board of Directors, the Company may, from among the Directors, appoint one President and Director and, if necessary, one or more Vice President and Directors, Senior Managing Directors and Managing Directors. ARTICLE 22. Representative Directors 1. The President and Director shall represent the Company and control the business of the Company. 2. By resolution of the Board of Directors, the Company may elect the director who represents the Company from among the directors with special titles provided in the preceding Article. ARTICLE 23. Method of Resolution of the Board of Directors Resolution of the Board of Directors shall be adopted by a majority of the directors present at a meeting at which majority of the directors are present. ARTICLE 24. Minutes of the Board of Directors The substance of proceedings at a meeting of the Board of Directors and the results thereof shall be recorded in the minutes of the meeting which shall bear the names and seals of the directors and statutory auditors present thereat. ARTICLE 25. Regulations of the Board of Directors Matters concerning the Board of Directors shall be governed by the Regulations of the Board of Directors established by resolution of the Board of Directors in addition to laws and ordinances and these Articles of Incorporation. ARTICLE 26. Remuneration and Retirement Allowances of Directors Remuneration and retirement allowances of directors shall be determined by resolution of a general meeting of shareholders. CHAPTER V STATUTORY AUDITORS AND THE BOARD OF STATUTORY AUDITORS ARTICLE 27. Number of Statutory Auditors The Company shall have not more than four (4) statutory auditors. ARTICLE 28. Election of Statutory Auditors 1. Statutory auditors of the Company shall be elected at a general meeting of shareholders. 2. Resolution for election of statutory auditors shall be adopted by a majority vote at a general meeting of shareholders at which shareholders who hold shares representing one-third (1/3) or more of the total number of issued shares with voting rights are present. ARTICLE 29. Term of Office of Statutory Auditors 1. The term of office of statutory auditors shall expire at the conclusion of the ordinary general meeting of shareholders with respect to the last closing of accounts within three (3) years after their assumption of office. 2. The term of office of any statutory auditor elected to fill a vacancy due to early retirement shall be the same as the remainder of the term of office of the retired statutory auditor. ARTICLE 30. Standing Statutory Auditor Standing statutory auditor shall be appointed from among the statutory auditors. ARTICLE 31. Notice of Convocation of Meetings of the Board of Statutory Auditors Notice of convocation of a meeting of the Board of Statutory Auditors shall be sent to each statutory auditor at least three (3) days prior to the date set for such meeting; provided, however, that in case of urgency such period may be shortened. ARTICLE 32. Method of Resolution of the Board of Statutory Auditors Unless otherwise provided by laws and ordinances, resolutions of the Board of Statutory Auditors shall be adopted by a majority of the statutory auditors. ARTICLE 33. Minutes of the Board of Statutory Auditors The substance of proceedings at a meeting of the Board of Statutory Auditors and the results thereof shall be recorded in the minutes of the meeting which shall bear the names and seals of the statutory auditors present thereat. ARTICLE 34. Regulations of the Board of Statutory Auditors Matters concerning the Board of Statutory Auditors shall be governed by the Regulations of the Board of Statutory Auditors established by resolution of the Board of Statutory Auditors in addition to laws and ordinances and these Articles of Incorporation. ARTICLE 35. Remuneration and Retirement Allowances of Statutory Auditors The remuneration and retirement allowances of statutory auditors shall be determined by resolution of a general meeting of shareholders. CHAPTER VI ACCOUNTS ARTICLE 36. Fiscal Year The fiscal year of the Company shall be from January 1 through December 31 of each year and the account shall be settled on the last day of the fiscal year. ARTICLE 37. Dividends Dividends of the Company shall be paid to shareholders or registered pledgees appearing in the final register of shareholders of the Company as of December 31 of each year. ARTICLE 38. Interim Dividends The Company may, upon resolution of the Board of Directors, make pecuniary distribution provided for in Article 293-5 of the Commercial Code (hereinafter referred to as the "interim dividends") to shareholders or registered pledgees appearing in the final register of shareholders of the Company as of June 30 of each year. ARTICLE 39. Conversion of Convertible Bonds and Dividends or Interim Dividends Thereon The first dividends or interim dividends on shares issued upon conversion of convertible bonds shall be paid on an assumption that the conversion has taken place on January 1 for claims made during a period from January 1 through June 30 and on July 1 for claims made during a period from July 1 through December 31. ARTICLE 40. Prescription Period of Dividends 1. In case dividends or interim dividends remain unclaimed for three (3) years after the date of commencement of payment, the Company shall be relieved from the obligation of payment thereof. 2. Unclaimed dividends or interim dividends shall not bear any interest. We hereby certify that the above is the Articles of Incorporation of the Company currently in effect. Date: Chang Ming Jang President and Representative Director Trend Micro Incorporated EX-10.9 3 BASIC AGREEMENT ON CONTINUAL SALE AND PURCHASE EXHIBIT 10.9 Agreement No._________ ---------------------- - --------------- Revenue Stamp (Yen)4000 - --------------- Note: Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the SEC under Rule 406. The omitted confidential material has been confidentially submitted separately with the SEC. Basic Agreement on Continual Sale and Purchase of Goods (Translation) October 1, 1999 Seller: Trend Micro Incorporated Odakyu Southern Tower 10F 2-2-1 Yoyogi Shibuya-ku, Tokyo Representative Director Chang Ming Jang Buyer: SOFTBANK COMMERCE CORP. 24-1 Nihonbashi-Hakozaki-cho Chuo-ku, Tokyo Representative Director Ken Miyauchi This Agreement is entered by and between Trend Micro Incorporated (the "Seller") and SOFTBANK COMMERCE CORP. (the "Buyer" or, collectively with the Seller, the "Parties"), concerning continual sale and purchase of goods between the Parties. 1. Scope of the Agreement 1.1 Any matter provided herein shall be equally applicable to any and all Sale and Purchase Agreements to be executed between the Parties during the term of this Agreement pursuant to Article 5 hereof ("Individual Agreement"). 1.2 Upon execution of the Agreement, any previous agreements entered between the Parties concerning the Buyer's placement of orders for goods with the Seller ("Old Agreements"), such as "Basic Agreement on Continual Purchase and Sale of Goods", shall lose effect in their entirety. 1.3 This Agreement shall apply to the rights and obligations relating to the Individual Agreement that have arisen between the Parties under the Old Agreement. 1.4 Any reference made to the Old Agreement in any memorandum executed between the Parties pursuant to the Old Agreement shall mean reference to this Agreement. 2. Definitions As used in this Agreement, unless otherwise provided, the following terms shall have the following meanings: (1) "Goods" means any software for personal computers ("PCs"), PCs, peripheral equipment for PCs or similar Goods, and supplies relating thereto, that are or will be manufactured or sold within the Territory by the Seller. Provided, however, that Goods shall include items, other than those mentioned above, as may be determined by the Parties in writing. (2) "Territory" means Japan and other areas as may be determined by the Parties in writing. 3. Purpose The Seller shall continually sell Goods to the Buyer under the terms and conditions set forth herein, and the Buyer shall purchase and sell such Goods within the Territory. 4. Sale Price 4.1 The Seller shall sell Goods to the Buyer at the price set forth in a separate Memorandum to be entered into between the Parties. 4.2 The Buyer shall determine the Good's selling prices to its customers. (including, but not limited to, Buyer's affiliated companies, and the resellers or end users the Buyer conducts business with.) 5. Individual Contracts 5.1 The name, quantity, place and date of delivery of Goods, and other terms necessary to effect the sale and purchase between the Parties, except those provided herein, shall be set forth in the Individual Agreement to be executed between the Parties. 5.2 The Individual Agreement mentioned in the preceding paragraph shall take effect when the Seller expresses to the Buyer of its acceptance of the order upon Seller's receipt of the Buyer's order form (including orders by fax), or when the Seller fails to express its intention either within the same day of its receipt of Buyer's order, or by 10:00 a.m. the following day. In either case, the Seller shall notify the Buyer of the date of delivery of the Goods specified in the Individual Agreement simultaneously with the notification to accept the order. Provided, however, to the extent that the Seller has already stopped manufacturing the Goods as of the Seller's receipt of Buyer's order form, or that any one of the events set forth in Article 22 herein has occurred to the Seller, the Seller may refuse to execute the Individual Agreement. In cases where the Seller deems it difficult to accept the order for other reasons, the Seller shall immediately so notify the Buyer in writing, and the Parties shall consult with each other in good faith to discuss the possibility of changing relevant terms of agreement. 6. Inspection of Delivery 6.1 The Seller shall deliver the Goods and the statement of delivery, prepared in a form specified by the Buyer, to the Buyer by bringing or sending the foregoing to the warehouse or other place as specified by the Buyer. The Buyer shall promptly inspect the Goods after receiving the delivery thereof. Goods are deemed to have been received upon passing such inspection. The Seller shall, at its own expense and on its own responsibility and within the time period specified by the Buyer, take back the Goods which have failed to pass the above inspection and the quantity which has exceeded the amount stipulated in the Individual Agreement, and if necessary, replace rejected Goods. 6.2 When the Seller fails to take back the rejected Goods or the quantity which has exceeded the amount specified in the Individual Agreement ("Excess Delivery") within the time period set forth in the preceding paragraph, the Buyer may send back the foregoing to the Seller at the Seller's expense. 6.3 The Buyer shall keep the rejected Goods or Excess Delivery in its custody with the same care as it uses to its own property, and in cases where the rejected Goods or Excess Delivery was damaged due to causes not attributable to the Buyer, the Seller shall bear such damage. 7. Delayed Delivery 7.1 When it is deemed impossible to deliver the Goods by the delivery date specified in the Individual Agreement due to causes attributable to the Seller, the Seller shall promptly inform the Buyer of, including causes thereof, in writing and seek instructions from the Buyer. 7.2 Where it is impossible to deliver the Goods by the date specified in the Individual Agreement due to causes attributable to the Seller, the Buyer shall have the right to claim damages for delayed delivery at the rate of [*]. Notwithstanding the payment of the foregoing damages, the Seller shall not be released from the liability set forth in Article 23 herein. 7.3 Where the delivery is delayed for causes not attributable to the Buyer, the Buyer may terminate the Individual Agreement with respect to such Goods. 8. Transfer of Title 8.1 The title of Goods shall be transferred upon completion of the inspection set forth in Article 6 herein. 8.2 Where the Goods are software products, the title to the media of the software alone shall transfer as set forth in the preceding paragraph, and the right to use the software and other rights shall be directly licensed to end users by the licensor ("Original Licensor") pursuant to the license or other agreement entered into between the Buyer or the Original Licensor. 9. Risk of Loss The Seller shall be liable for any loss, impairment or other damage which occurred in the Goods prior to completion of inspection, except where causes of such loss, impairment or other damage are attributable to the Buyer. The Buyer shall be liable for any loss, impairment or other damage which occurred in the Goods after completion of inspection, except where causes of such loss, impairment or other damage are attributable to the Seller. * Confidential Treatment Requested 10. Payment Terms 10.1 The Buyer shall pay to the Seller the price for the Goods passing the inspection, which have been received by the fifteenth day of each month (hereinafter the "Amount Due"), by remitting the said amount to a bank account designated by the Seller no later than the end of the second month following each Closing Date. The remittance fee shall be borne by the Seller. Provided, however, the Buyer can setoff the payment of the Amount Due against the amount received by the Seller for the Goods returned to the Seller by the Buyer ("Amount to be Returned"), if there is such Amount to be Returned as of the fifteenth day of the said month. In cases where the Amount to be returned exceeds the Amount Due, the Seller shall pay the difference into the bank account designated by the Buyer no later than the end of the second month from thereof. 10.2 In cases where the fractions of one yen arise in relation to the computation of the consumption tax, the said fractions shall be discarded. 10.3 The Seller shall promptly confirm the sum of the Amount paid, and if any discrepancies in the sum are found (if there has been a miscalculation), the Seller shall promptly contact the Buyer, and the Parties shall quickly resolve the matter through discussion. Where no protest has been lodged within 6 months of the Seller's receipt of the Amount, the Seller shall no longer be able to claim a miscalculation. 11. Promise of Setoff If the Seller is under any monetary obligations to the Buyer, the Buyer can at any time offset such obligations against the Buyer's monetary obligations to the Seller under this Agreement to the extent of the corresponding amount to his obligations. 12. Return of Goods Matters relating to return of Goods shall be set forth in the Memorandum to be executed between the Parties. 13. Rebates Matters relating to rebates on Goods shall be set forth in the Memorandum to be executed between the Parties. 14. Warranty of Quality and Function 14.1 The Seller warrants that the Goods have no defects in their quality and function. 14.2 In cases where the Buyer, its customer, or other third party has suffered damage due to defective Goods or where the Buyer has received claims or complaints relating to the Goods from its customers, the Seller shall, at its own expense and responsibility, resolve the issue by replacing such defective Goods, payment of damages or other appropriate measures within one year from the receipt of the Goods, and hold the Buy harmless, provided, however, that the Seller shall keep the Buyer advised of the status of resolution and act under instructions, if any, from the Buyer. 14.3 In the event the Buyer or its customer is forced to pay damages to any third party based on the claims or complaints mentioned in 14.2 above, the Seller shall indemnify such Buyer or its customer, as applicable, against any and all damages and costs arising out of or incurred in contesting to any claim relating to such disputes. (including litigation costs, attorney's fees and other professional fees) 14.4 The Seller shall bear all expenses for shipment, processing of returns and such other costs as the Buyer incurs in connection with the Buyer's recall or replacement of Goods attributable to a fault in the Goods. 14.5 Even after the lapse of one year from the receipt of Goods, upon detection of latent defects arising from the willfulness or gross negligence of the Seller, the Seller shall be liable for the obligations set forth in 14.2, 14.3 and 14.3 hereof. 15. Product Liability 15.1 The Seller warrants that the Goods contain no defects under Article 2 paragraph 2 of the Product Liability Law. ("Defects") 15.2 The Buyer shall notify the Seller of any dispute resulting from Defects arising between the Buyer or its customer and other third party, and the Seller shall, at its own expense, provide cooperation and support as necessary for the Buyer or its customer to resolve thereof. 15.3 In the event the Buyer or its customer has been forced to indemnify any third party for damages arising out of the Defects of Goods as set forth in the preceding paragraph, the Seller shall indemnify such Buyer or its customer, as applicable, against any and all damages and costs arising out of or incurred in contesting to any claim relating to such disputes. (including litigation costs, attorney's fees and other professional fees) 15.4 The Seller shall bear all expenses for shipment, processing of returns and such other costs as the Buyer incurs in connection with the Buyer's recall or replacement of Goods attributable to a defect in the Goods. 16. Warranty of Copyrights, etc. 16.1 The Seller warrants that the Goods do not infringe upon industrial property rights, (including the rights based on the publication of unexamined applications), copyright, circuit layout right, and other intellectual property right of a third party (collectively, the "Intellectual Property Rights") in Japan or any other country. 16.2 In the event any infringement claims of an Intellectual Property Right has occurred or is threatened to occur relating to the Goods of the Seller, the Seller shall promptly inform the Buyer thereof. 16.3 In the event any infringement claims of an Intellectual Property Right has occurred or is threatened to occur to the Buyer or its customer relating to the Goods of the Seller, the Seller shall, at its own cost and responsibility, resolve such issues. Furthermore, in the event the Buyer or its customer has been forced to indemnify the third party for damages arising out of the Defects of Goods, the Seller shall indemnify such Buyer or its customer, as applicable, against any and all damages and costs arising out of or incurred in contesting to any claim relating to such disputes. (including litigation costs, attorney's fees and other professional fees). 16.4 The Seller shall bear all expenses for shipment, processing of returns and such other costs as the Buyer incurs in connection with the Buyer's recall or replacement of Goods resulting from the fact that the Seller's Goods infringed Intellectual Property Right of a third party. 17. Sales Support 17.1 The Seller shall, at its own expense, prepare and provide products for the Buyer for demonstration merchandise, product manuals, and catalogues and such other items as necessary for marketing activities relating to the Goods. 17.2 Upon the Buyer's request, the Seller shall, at its own expense, provide technical support services necessary for the Buyer's timely distribution of the Goods to the Buyer or such other third party as may be designated by the Buyer. 17.3 The Seller shall permit the Buyer and its customers to use the trademarks of the Buyer and the Goods only in promotional materials such as advertisements, materials, and catalogs prepared by the Buyer and its customers relating to sales activities for the Goods. Provided, however, upon the Seller's request, the Buyer shall affix an appropriate proprietary notice indicating the Seller's rightful ownership over such trademarks. 18. New Products and Upgrades 18.1 When the Seller plans to sell a new product or an upgrade to the Goods sold, the Seller shall promptly notify the Buyer thereof or introduce such products to the Buyer in advance. 18.2 In the case of the preceding paragraph, unless otherwise agreed upon between the Parties, the Buyer may return at any time the entire inventory of old Goods held by the Buyer and its customers. The expenses incurred by the Buyer in connection with the return of Goods including transportation expenses shall be borne by the Seller. 19. Observance of Statutes, Standards, etc. 19.1 The Seller's performance of the Agreement and Individual Agreements shall be in compliance with applicable laws, rules and standards of Japan and other countries. The Seller shall also abide by the Foreign Exchange and Foreign Trade Control Law, Export Trade Control Order, and order and ministerial ordinances concerning foreign exchange control (collectively, the "Foreign Exchange Control Laws"), and export trade control laws and regulations of the United States and other countries. (collectively, the "U.S. Export Trade Control Law") 19.2 In cases where the Buyer requests the Seller to submit a report or materials in relation to the preceding paragraph, the Seller shall promptly comply with this request. 19.3 The Seller shall have following obligations relating to the U.S. Export Trade Control Law: (1) In cases where relevant regulations or conditions exist in the U.S. Export Trade Control Law in regard to the Goods for which a quotation has been requested by the Seller or on which an Individual Agreement is to be executed by the Parties, the Seller shall so indicate in the quotation or the written acknowledgement of order, as applicable; (2) When the Buyer specifies the destination country of export (re- export) pursuant to (1) above and there is an agreement between the Parties that such destination country of export (re-export) is included in the Territory pursuant to Article 2(2) herein, the Seller shall confirm whether such destination country of export (re-export) is a destination of export (re-export) approved under the U.S. Export Trade Control Law, and promptly report thereof to the Buyer. If such destination country of export (re-export) is not an approved destination country and the Buyer requests the Seller to obtain the approval of the government organizations of the countries concerned, the Seller shall accept such request and promptly obtain such approval; and (3) Notwithstanding the above, in the event that it is found after the Individual Agreement is executed by the Parties that applicable regulations or conditions exist, or that such destination country is not an approved destination country of export (re-export), the Seller shall promptly notify the Buyer in writing thereof. 20. Confidentiality 20.1 Neither Party shall, without a prior written consent of the other party, disclose or leak to a third party any part of this Agreement (including Memorandum or Appendixes) or information disclosed by the other party in connection with this Agreement. Furthermore, neither party shall use such information unless it is necessary in order to perform its obligations hereunder or to exercise its rights hereunder. Regardless of the foregoing, either Parties may disclose such information for justifiable reasons including in compliance with an order issued by governmental authorities, provided that the disclosing party shall promptly notify the other party thereof prior to such disclosure. 20.2 The provisions set forth in 20.1 above shall not apply to any information: (1) that was already in the public domain at the time of disclosure; (2) that becomes publicly known after it is disclosed through no fault of the receiving party; (3) that has been rightfully in the possession of the receiving party prior to the disclosure; (4) that was legally disclosed by a third party to the receiving party free of duty of confidentiality; or (5) that was independently developed by the receiving party without using or making reference to the confidential information of the disclosing party. (6) that was indicated not to be confidential by the disclosing party. 21. Term of Agreement 21.1 This Agreement shall become effective as of the date of execution and, unless cancelled or terminated in accordance with the provisions herein, remain in force until March 31, 2000. The term of this Agreement shall automatically renew for one year term unless one party delivers written notice to the other party no later than one month prior to the end of the current term of its intent not to renew this Agreement, and the same shall apply thereafter. 21.2 Without regard to the provisions set forth in the preceding paragraph, the Agreement shall become null and void upon its date of expiration if no dealings are made between the Parties pursuant to the Agreement during the term stipulated in the preceding paragraph. 22. Termination Without Cause If any of the following events occurs to the Seller, the Buyer may immediately terminate this Agreement in whole or in part, without issuing a warning or tender of performance of its obligation. Furthermore, the Buyer may claim damages against the Seller upon such termination: (1) breach by the Seller of any of the terms set forth herein; (2) suspension of payment of debts or filing of petition for bankruptcy, commencement of composition of creditors, corporate reorganization proceedings, company arrangement or special liquidation of the Seller; (3) an action by the Clearing House for suspension of the Seller's business transactions with financial institutions; (4) issuance of an order or notice of attachment, temporary attachment, disposition, public auction of the Sellers property, or sanction against the Seller for tax arrearage or other act of public power; (5) a resolution of the Seller for the reduction of capital, discontinuance of business, dissolution or change of organization; (6) the Seller's failure to perform any of its obligations to the Buyer; (7) the Seller's material breach of trust; or (8) the Seller's financial condition has become deteriorated or is reasonably believed to deteriorate. 23. Damages 23.1 Either party shall be liable for any damage suffered by the other party due to causes attributable to itself, regardless of whether such damages could occur under ordinary circumstances or special circumstances, to the extent that such damage was foreseen or foreseeable at the time of performance of its obligations hereunder. 23.2 The damages set forth 23.1 above shall include all expenses incurred in seeking the other party's performance of its obligations hereunder, as well as reasonable attorney's fees relating to court proceedings including litigation. 24. Effect of Termination 24.1 Upon termination of this Agreement by cancellation or expiration of the term or for any other cause, any of the Individual Agreements which are current as of the time of such termination shall also terminate unless otherwise agreed between the Parties. 24.2 Termination of this Agreement, whether by cancellation or expiration of the term or for any other cause, shall not accelerate the performance of the Buyer's obligation to the Seller. 24.3 In the event this Agreement is terminated, the Buyer may, at its own discretion, dispose such Goods of the Seller as may be held in custody of the Buyer pursuant to Article 6 herein and apportion the proceeds therefrom less the disposal expenses to the satisfaction of the Seller's obligations, if any. 24.4 In the event that this Agreement is terminated, the Buyer shall be entitled to return all the Goods in its inventory to the Seller. The same shall apply to the Goods returned to the Buyer by its customers within one year from the date of termination or expiration of this Agreement. 24.5 In the event of return of the Goods pursuant to 24.4 above, the Seller shall return the price of the Goods already paid by the Buyer, by remitting to a bank account specified by the Buyer no later than the fifth day of the following month the amount for the Goods returned by the end of the month. 24.6 Notwithstanding the termination of this Agreement by cancellation or expiration of the term or for any other cause, the provisions of Article 11 (Promise of Setoff), Article 14 (Warranty of Quality and Function), Article 15 (Product Liability), Article 16 (Warranty of Copyrights, etc.), Article 19 (Observance of Statutes, Standards, etc.), Article 20 (Confidentiality), Article 24 (Effect of Termination), and Article 27 (Jurisdiction) shall remain in full force and effect. 25. No Assignment The Seller shall not assign, or pledge as collateral, any of the rights or obligations hereunder to any third party without the written consent of the Buyer. 26. Notification The Seller shall notify the Buyer in writing of any of the following: (1) any change of its bank account for remittance and the name of the holder thereof; (2) establishment, relocation or closure of its head office or branch office; (3) change of its representative directors; or (4) material change in its business or likeliness of such material change. 27. Jurisdiction In the event any dispute arises between the Parties relating to the Agreement or Individual Agreement, the District Court or the Summary Court having jurisdiction over the area in which the head office of the Buyer is located shall have exclusive jurisdiction as the court of first instance. 28. Amendment This Agreement may be amended only by a written agreement signed and sealed by the representative officer of the Parties. If there is any discrepancy between the provisions of the Agreement and the Individual Agreement, such provision shall be null and void. 29. Mutual Consultation If any doubts arise in connection with this Agreement, the Parties shall consult with each other in good faith to resolve such issue. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed in duplicate, affixing their names and seals thereto and each party retaining one copy. Confirmation Trend Micro Incorporated ('Seller') and SOFTBANK COMMERCE CORP. ('Buyer') enter into this written Confirmation (hereinafter, the 'Confirmation'), pursuant to the Basic Agreement on Continual Sale and Purchase of Goods (hereinafter, the 'Original Agreement') entered into as of October 1, 1999 between Seller and Purchaser. Article 1. (Ratio of Retail Price to Purchase Price) Unless otherwise agreed in writing by the Parties, the ratio of the Retail Price to the Purchase Price provided in Article 4.1 of the Basic Agreement shall be as set forth below. The ratio of the Retail Price to the Purchase Price of the Goods of the Seller shall be determined with respect to each item of the Goods upon mutual consultation between the Parties. Article 2. Return of the Goods Unless otherwise agreed in writing by the Parties, Return of the Goods provided in Article 12 of the Basic Agreement shall be as set forth below. Each party shall, when necessary, consult with each other to agree on return of the Goods purchased by the Buyer from the Seller. The Buyer may, in accordance with such agreement, return such Goods as it purchased from the Seller. No later than the end of the [*] after the month in which such return of Goods occurred, the Seller shall make a cash payment into the bank account designated by the Buyer in the amount the Seller has received from the Buyer in connection the Goods subsequently returned by the Buyer to the Seller by the fifteenth day of the month thereof. This section does not apply to certain Goods concerning which return the Basic Agreement states otherwise. Article 3. Rebates Unless otherwise agreed in writing by the Parties, rebates on the Goods as provided in Article 13 of the Basic Agreement shall be as set forth below. (1) The Seller shall pay rebates in accordance with the terms provided in this Article 3 (1) herein. Rebates shall be [*], less returns. ("Net Purchase Price") (2) The Seller shall pay to the Buyer the rebate calculated in accordance with Article 3(1) above. Rebate payments shall be effected, and shall be deducted from the Buyer's payments to the Seller due in the following month such rebate is calculated. Where the amount of rebates exceed the Buyer's payments to the Seller, the Seller shall pay the difference into the bank account designated by the Buyer no later than the date specified by the Buyer. *Confidential Treatment Requested Article 4. Term The Memorandum shall become effective on the date as written below and remain effective until the termination of the Basic Agreement. Dated: October 1, 1999 Seller: Trend Micro Incorporated 10th Floor Odakyu Southern Tower 2 - 2 - 1 Yoyogi, Shibuya-ku, Tokyo Chang Ming Jang Representative Director Buyer SOFTBANK COMMERCE CORP. 24-1 Nihonbashi-Hakozaki-cho Chuo-ku, Tokyo Ken Miyauchi Representative Director MEMORANDUM CONCERNING SALES PROMOTIONS FEES SOFTBANK COMMERCE CORP. ("Softbank") and Trend Micro Kabushiki Kaisha ("Trend Micro") shall manage Sales Promotion Fees for the year 2000 as follows. Article 1. Purpose of Memorandum Trend Micro shall pay Softbank the Sales Promotion Fees defined in Article 3 as compensation for business support activities. Article 2. Term This memorandum shall be valid for 1 year from January 2000. Article 3. Stock Target The value of the yearly Stock Purchase Target for Trend Micro's products shall be [*] yen. 1 The [*] breakdown of the yearly Stock Purchase Target shall be as per below: [*] 2 Products The Products included shall be licenses and packages for InterScan VirusWall, InterScan eManager, InterScan for MS-Exchange, InterScan for LotusNotes, Trend VCS, ServerProtect and VirusBuster Corporate Edition. Article 4. Method for calculating Sales Promotion Fees. Upon attainment of the Stock Purchase Targets defined in Section 3 - 1 [*], the Sales Promotion Fees shall be calculated per below. However, in the event the [*] Stock Purchase Target has not been attained, the Stock Purchase Target shall be reviewed on a [*] basis, and upon attainment of the [*] Stock Purchase Target, the corresponding Sales Promotion Fees shall be paid. 1 [*]% attainment: Sales Promotion Fees shall be [*]% of the total value of purchase. 2 [*]% attainment: Sales Promotion Fees shall be [*]% of the total value of purchase. * Confidential Treatment Requested Article 5. Payment 3 Payment shall be made from the Sales Promotion Fees calculated in Article 4 for business support activities described in the attachment to be determined by mutual consultation between both parties. 4 Payment shall be made upon Trend Micro receiving an invoice from Softbank. The payment terms of Trend Micro shall as a rule be by the 20/th/ day of the [*] after receipt of the invoice. 5 Payment by Trend Micro shall be made to the payment account specified in the Softbank invoice. Article 6. Penalties In the event that any of the Products included in the calculations made for the Sales Promotions Fees are returned within a year of sale, Trend Micro shall deduct the value of the returned Product from the vale of total value of purchase, and the Sales Promotion Fees shall be recalculated. In the event a discrepancy arises in the amount payable to Trend Micro, Softbank shall be requested to repay the difference or change the amount of payment. However, replacements shall not be considered returned Product for the purposes of this Memorandum. Article 7. Obligations of Softbank To facilitate the calculation of costs incurred, Softbank shall be obliged to submit monthly Product inventories and sales reports, in response to a monthly request from Trend Micro. Article 8. Cancellation and Termination 1 In the event that any of the following occurs on the part of either party, the other party may immediately terminate this Memorandum without notice. i) When payments have been halted, or when petitioning for bankruptcy, or commencement of composition of creditors or procedures for corporate rearrangement, corporate reorganization, or special liquidation. ii) When a suspension has been effected by a clearing house. iii) In the event of some other material breach of faith which will preclude the Memorandum being continued. 2 Softbank or Trend Micro may terminate this Memorandum, when the other party fails to fulfill any of its obligations under this Memorandum, and further fails to correct the same within a reasonable period after preemptory notice from the other party * Confidential Treatment Requested Article 9. Consultation In the event there is doubt concerning the interpretation of this Memorandum, Softbank and Trend Micro shall resolve the same by good-faith mutual consultation. IN WITNESS WHEREOF, two originals hereof are created, and upon the names and seals of each of Softbank and Trend Micro, each shall retain one original hereof. Date: Softbank Representative: Corporate name: Address: Trend Micro Officer in charge: Shingo Koya, General Manager Business Partners Department Sales and Marketing Headquarters Corporate name: Trend Micro Kabushiki Kaisha Address: Odakyu Southern Tower, 10F 2-2-1 Yoyogi, Shibuya-ku, Tokyo-to. (Attachment) Description of Business Support February 22, 2000
- -------------------------------------------------------------------------------------------------- Preparation of Sales Promotion product Materials such as catalogues etc. (with joint logo) - -------------------------------------------------------------------------------------------------- Acquisition of Certification TCAE/TCSE - -------------------------------------------------------------------------------------------------- Campaign Directed at Softbank employees and sales agents with the purpose of sales promotion - -------------------------------------------------------------------------------------------------- Seminar Includes introduction to Trend Micro products; Purpose - to expand sales - -------------------------------------------------------------------------------------------------- Matters to note Business support activities other to those described above shall be determined through mutual consultation by both parties - -------------------------------------------------------------------------------------------------- (attached materials) none - --------------------------------------------------------------------------------------------------
Trend Micro Kabushiki Kaisha. MEMORANDUM CONCERNING AGREEMENT TRANSFER Trend Micro Incorporated ("Trend Micro") and SOFTBANK E-COMMERCE Corp. (formerly Softbank Commerce; hereinafter "SOFTBANK E-COMMERCE") hereby agree to the following concerning the transfer of the agreement to be conducted pursuant to the transfer of business of Softbank eCommerce scheduled to take place on April 1, 2000. Article 1. Transfer of Agreement 1. Softbank eCommerce shall, by a resolution of an Extraordinary General Meeting of Shareholders convened on December 24, 1999 ("Extraordinary General Meeting"), transfer the Soft Network businesses to the Transferee designated in the same resolution, SOFTBANK COMMERCE Corp. (to be established in March 2000; hereinafter "the Transferee"), and shall transfer to the Transferee the status of the parties to, and the rights and obligations under any transaction agreements entered into between the two parties which have been executed by and are still valid on the Effective Date stipulated in Article 3 ("the Agreements"). 2. Trend Micro shall consent to the agreement transfer ("Agreement Transfer") described in the preceding paragraph. Article 2. Agreement by the Transferee Immediately after the Transferee has been duly incorporated, SOFTBANK E-COMMERCE shall cause the Transferee to furnish Trend Micro and SOFTBANK E-COMMERCE with documentation stating its consent to, in accordance with the contents of this Memorandum, accept the Agreements and all rights and obligations thereunder, and accord SOFTBANK E-COMMERCE with the rights to receive as settlement agent in accordance with Article 5. Article 3. Effective Date The Agreement Transfer shall become effective upon the following two provisions being satisfied (scheduled to be April 1, 2000; hereinafter "the Effective Date"). 1. The submission of written consent as described in the preceding article from the Transferee. 2. The transfer of the business operations by SOFTBANK E-COMMERCE to the Transferee following the necessary license and permission being obtained from the relevant authorities pursuant to a resolution of the Extraordinary General Meeting. Article 4. Effect of Transfer The status of the parties to the Agreements, all rights and duties thereunder (including all mortgages, guarantor rights, rights to claim compensation and the like) as well as obligations arising therefrom shall pass from SOFTBANK E-COMMERCE to the Transferee in their entirety. Provided however, SOFTBANK E-COMMERCE shall remain liable to jointly and severally perform with the Transferee any of the following obligations with regard to Trend Micro: 1. All obligations under Individual Agreements concluded between Trend Micro and SOFTBANK E-COMMERCE prior to the Agreement Transfer pursuant to Master Agreements included in the Agreements; 2. Obligations where either of the following had been determined prior to the Agreement Transfer. i. Amount of obligation; ii. Type and quantity of goods; 3. Damages arising from default on the agreements on the part of SOFTBANK E-COMMERCE prior to the Agreement Transfer; 4. Obligations agreed to by both parties separately in writing other to those specified in the preceding paragraphs. Article 5. Acquisition of Rights to Receive as Settlement Agent SOFTBANK E-COMMERCE shall be accorded by the Transferee the rights to act as agent with regard to receipt of settlements for all claims transferred to the Transferee from SOFTBANK E-COMMERCE pursuant this Memorandum, and therefore, after the Effective Date Trend Micro may make settlements with either SOFTBANK E-COMMERCE or the Transferee. Article 6. Mutual Consultation If any doubts arise in connection with matters not defined in this Memorandum, the parties shall resolve such by good faith mutual consultation. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed in duplicate, and each party shall retain one copy hereof. March 31, 2000 Trend Micro Incorporated - ------------------ Revenue stamp Representative Director (Yen)200 Chang Ming Jang - ------------------ Odakyu Southern Tower 10F 2-2-1 Yoyogi Shibuya-ku, Tokyo 151-8583 [seal] SOFTBANK E-COMMERCE CORP. Representative Director Ken Miyauchi 24-1 Nihonbashi-Hakozaki-cho Chuo-ku, Tokyo [seal] EX-10.10 4 AGREEMENTS RELATING TO ACQUISITION EXHIBIT 10.10 STOCK PURCHASE AND SALE AGREEMENT TREND MICRO INCORPORATED (hereinafter, "Trend Micro"), TOMOO YAMADA (hereinafter, "Yamada"), and NIHON UNISOFT CORPORATION (hereinafter, "Nihon Unisoft") hereby execute this agreement as follows (hereinafter, this "Agreement") concerning the purchase and sale and like matters of Nihon Unisoft shares held by Yamada to Trend Micro. Article 1 Purchase and Sale of Shares 1. Yamada, in accordance with the terms and conditions contained in this Agreement, shall sell to Trend Micro the shares of Nihon Unisoft in the manner noted hereunder, and Trend Micro shall purchase the same from Yamada (hereinafter, the shares set forth below as subject to the purchase and sale shall be referred to as the "Shares"). Within 6 business days after the date of execution of this Agreement, Yamada shall deliver to Trend Micro share certificates which represent the Shares. Par-value common stock 266 shares --- Par-value per share 50,000 yen ------ Purchase price amount per share 1,000,000 yen --------- 2. Trend Micro shall divide the total purchase price of the Shares of 266,000,000 yen into two installments, and shall make payment thereof by ----------- remitting to a bank account prescribed by Yamada: 1) 75% of the total price within 6 business days after receiving the share certificates representing the Shares from Yamada, and 2) 25% of the total price within 6 months after receiving the share certificate(s) representing the Shares from Yamada. Interest at the rate of 5% per annum shall accrue on the purchase price of the Shares. 3. Upon acquisition of the Shares, Trend Micro, as a shareholder of Nihon Unisoft, shall demand that Nihon Unisoft pay each of its employees an amount equal to one month of their respective pay as a special bonus. Article 2 Representations and Warranties 1. Yamada and Nihon Unisoft hereby make the following representations and warranties. 1) Nihon Unisoft is a legally established and legally operated kabushiki gaisha stock company. 2) At the time of the execution of this Agreement, Yamada validly holds title and ownership with regard to all the certificates representing the Shares, and no lien or security rights shall be established upon said certificates as of the time of delivery thereof to Trend Micro. 3) The approval of the Board of Directors at Nihon Unisoft and all other procedures required under laws, ordinances and the articles of incorporation have been legally completed with regard to transfer of the Shares pursuant to this Agreement. 4) At the time of the execution of this Agreement, the total number of common stock shares issued and outstanding of Nihon Unisoft is 2,400 shares, there are no existing convertible bonds or bonds with new share acquisition rights or the like, and further, there does not exist any latent or potential shares pursuant to subscription rights to new shares or the like. 5) For the period following the execution of this Agreement until Trend Micro takes delivery of the stock certificates representing the Shares, Nihon Unisoft shall not issue new shares, convertible bonds, or bonds with new share acquisition rights without obtaining the prior written consent of Trend Micro. 6) No false entries were included in the business reports, balance sheets, income statements, accompanying details and specifications, and monthly settlement statements issued in the business years from 1996 through 1999, as well as the most recent business plan. 7) As of the execution date of this Agreement, Nihon Unisoft is not a party to litigation, a provisional attachment, or a provisional disposition case. 2. Trend Micro may immediately cancel this Agreement in the event Yamada violates the provisions of the preceding Article. In addition, in such instances, Trend Micro may seek jointly and severally from Yamada and Nihon Unisoft compensation of damages suffered as the result of such breach. Article 3 Designation of Purchase Parties Trend Micro may, at its own discretion, designated its subsidiary companies as the parties purchasing the Shares. In such instances, Yamada and Nihon Unisoft shall treat the subsidiaries designated by Trend Micro as the concerned parties. Article 4 Confidentiality Trend Micro, Yamada and Nihon Unisoft shall exercise the same degree of care afforded their own confidential information with regard to the existence and content of this Agreement as well as the confidential information of the other parties obtained with regard to this Agreement, and shall not disclose or divulge the same to a third party without the prior written consent of all other parties. Article 5 Cancellation of Agreement In the event any party is in breach of this Agreement, and fails to correct said breach within 10 days after written notice from another party requesting the correction thereof, the other party may cancel this Agreement. However, the exercise of the cancellation right under this Article shall not preclude the seeking of compensation of damages. Article 6 Assignment The parties to this Agreement may not transfer their rights or obligations under this Agreement to a third party without the prior written consent of the other parties. Article 7 Nullification of Prior Agreement All parties to this Agreement hereby agree that, simultaneously with execution of this Agreement, that certain "Stock Purchase and Sale Agreement " executed by and among Trend Micro, Yamada and Nihon Unisoft on January 25, 2000 shall be null and void. Article 8 Agreed Jurisdiction Trend Micro, Yamada and Nihon Unisoft hereby agree that the Tokyo District Court shall be the court of first instance having exclusive jurisdiction over all disputes arising from or in relation to this Agreement. IN WITNESS of this Agreement, three originals hereof are created, and upon the names and seals of each of Trend Micro, Yamada and Nihon Unisoft, one original hereof shall be retained by each. February 22, 2000 Odakyu Southern Tower 10F. 2-2-1 Yoyogi, Shibuya-ku, Tokyo Trend Micro Incorporated Chang Ming Jung, Representative Director Yamada: Nihon Unisoft: STOCK PURCHASE AND SALE AGREEMENT TREND MICRO INCORPORATED (hereinafter, "Trend Micro"), INFOS (hereinafter, "InfoS"), and NIHON UNISOFT CORPORATION (hereinafter, "Nihon Unisoft") hereby execute this agreement as follows (hereinafter, this "Agreement") concerning the purchase and sale and like matters of Nihon Unisoft shares held by InfoS to Trend Micro. Article 1 Purchase and Sale of Shares 1. InfoS, in accordance with the terms and conditions contained in this Agreement, shall sell to Trend Micro the shares of Nihon Unisoft in the manner noted hereunder, and Trend Micro shall purchase the same from InfoS (hereinafter, the shares set forth below as subject to the purchase and sale shall be referred to as the "Shares"). Within 6 business days after the date of execution of this Agreement, InfoS shall deliver to Trend Micro share certificates which represent the Shares. Par-value common stock 1,334 shares ----- Par-value per share 50,000 yen ------ Purchase price amount per share 1,000,000 yen --------- 2. Trend Micro shall divide the total purchase price of the Shares of 1,334,000,000 yen into two installments, and shall make payment thereof by ------------- remitting to a bank account prescribed by InfoS: 1) 75% of the total price within 6 business days after receiving the share certificates representing the Shares from InfoS, and 2) 25% of the total price within 6 months after receiving the share certificate(s) representing the Shares from InfoS. Interest at the rate of 5% per annum shall accrue on the purchase price of the Shares. Article 2 Representations and Warranties 1. InfoS and Nihon Unisoft hereby make the following representations and warranties. 1) Nihon Unisoft is a legally established and legally operated kabushiki gaisha stock company. 2) At the time of the execution of this Agreement, InfoS validly holds title and ownership with regard to all the certificates representing the Shares, and no lien or security rights shall be established upon said certificates as of the time of delivery thereof to Trend Micro. 3) The approval of the Board of Directors at Nihon Unisoft and all other procedures required under laws, ordinances and the articles of incorporation have been legally completed with regard to transfer of the Shares pursuant to this Agreement. 4) At the time of the execution of this Agreement, the total number of common stock shares issued and outstanding of Nihon Unisoft is 2,400 shares, there are no existing convertible bonds or bonds with new share acquisition rights or the like, and further, there does not exist any latent or potential shares pursuant to subscription rights to new shares or the like. 5) For the period following the execution of this Agreement until Trend Micro takes delivery of the stock certificates representing the Shares, Nihon Unisoft shall not issue new shares, convertible bonds, or bonds with new share acquisition rights without obtaining the prior written consent of Trend Micro. 6) No false entries were included in the business reports, balance sheets, income statements, accompanying details and specifications, and monthly settlement statements issued in the business years from 1996 through 1999, as well as the most recent business plan. 7) As of the execution date of this Agreement, Nihon Unisoft is not a party to litigation, a provisional attachment, or a provisional disposition case. 2. Trend Micro may immediately cancel this Agreement in the event InfoS violates the provisions of the preceding Article. In addition, in such instances, Trend Micro may seek jointly and severally from InfoS and Nihon Unisoft compensation of damages suffered as the result of such breach. Article 3 Designation of Purchase Parties Trend Micro may, at its own discretion, designated its subsidiary companies as the parties purchasing the Shares. In such instances, InfoS and Nihon Unisoft shall treat the subsidiaries designated by Trend Micro as the concerned parties. Article 4 Confidentiality Trend Micro, InfoS and Nihon Unisoft shall exercise the same degree of care afforded their own confidential information with regard to the existence and content of this Agreement as well as the confidential information of the other parties obtained with regard to this Agreement, and shall not disclose or divulge the same to a third party without the prior written consent of all other parties. Article 5 Cancellation of Agreement In the event any party is in breach of this Agreement, and fails to correct said breach within 10 days after written notice from another party requesting the correction thereof, the other party may cancel this Agreement. However, the exercise of the cancellation right under this Article shall not preclude the seeking of compensation of damages. Article 6 Assignment The parties to this Agreement may not transfer their rights or obligations under this Agreement to a third party without the prior written consent of the other parties. Article 7 Nullification of Prior Agreement All parties to this Agreement hereby agree that, simultaneously with execution of this Agreement, that certain "Stock Purchase and Sale Agreement " executed by and among Trend Micro, InfoS and Nihon Unisoft on January 25, 2000 shall be null and void. Article 8 Agreed Jurisdiction Trend Micro, InfoS and Nihon Unisoft hereby agree that the Tokyo District Court shall be the court of first instance having exclusive jurisdiction over all disputes arising from or in relation to this Agreement. IN WITNESS of this Agreement, three originals hereof are created, and upon the names and seals of each of Trend Micro, InfoS and Nihon Unisoft, one original hereof shall be retained by each. February 22, 2000 Odakyu Southern Tower 10F. 2-2-1 Yoyogi, Shibuya-ku, Tokyo Trend Micro Incorporated Chang Ming Jung, Representative Director InfoS: Nihon Unisoft: EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 TREND MICRO SUBSIDIARIES 1. Trend Micro Incorporated (Taiwan) 2. Trend Micro Inc. (U.S.A.) 3. Trend Korea Inc. (South Korea) 4. Trend Micro Deutschland GmbH (Germany) 5 Trend Micro Europe Srl (Italy) 6. Trend Micro Australia Pty. Ltd. (Australia) 7. Trend Micro do Brasil, Ltda. (Brazil) 8. Trend Micro France S.A. (France) 9. Trend Micro Hong Kong Limited (Hong Kong) 10. Trend Micro Incorporated Sdn. Bhd. (Malaysia) 11. Trend Micro (UK) LTD (United Kingdom) 12. Trend Latinoamerica de Mexico S.A. de c.v. (Mexico) 13. ipTrend, Incorporated (Japan) 14. Nihon Unisoft Corporation (Japan) EX-23.3 6 CONSENT OF PRICEWATERHOUSECOOPERS EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Amendment to the Registration Statement on Form F-1 of our report dated April 25, 2000 relating to the financial statements and the Financial Statement Schedule II of Trend Micro Incorporated, which appear in such Amendment to the Registration Statement. We also consent to the references to us under the headings "Summary Consolidated Financial Information", "Selected Consolidated Financial Information" and "Experts" in such Amendment to the Registration Statement. /s/ PricewaterhouseCoopers PricewaterhouseCoopers Tokyo, Japan May 24, 2000 -----END PRIVACY-ENHANCED MESSAGE-----