-----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, VfSygtx5idPKSoBh5ED9GPSfjGthJC+ycz3V4+ooIRjUYFCv3WO2DRQOYbdNyCjL 8paQ21+rqqlhXXRbjC3y5w== 0001012870-02-000108.txt : 20020413 0001012870-02-000108.hdr.sgml : 20020413 ACCESSION NUMBER: 0001012870-02-000108 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20020111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERVIDEO INC CENTRAL INDEX KEY: 0001114084 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943300070 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-76640 FILM NUMBER: 2507947 BUSINESS ADDRESS: STREET 1: 47350 FREMONT BLVD CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106510888 MAIL ADDRESS: STREET 1: 47350 FREMONT BLVD CITY: FREMONT STATE: CA ZIP: 94538 S-1 1 ds1.txt FORM S-1 As filed with the Securities and Exchange Commission on January 11, 2002 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- INTERVIDEO, INC. (Exact name of Registrant as specified in its charter) ----------------- Delaware 7372 94-3300070 (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of IndustrialClassification Identification Number) Incorporation or Code Number) Organization) 47350 Fremont Boulevard Fremont, California 94538 (510) 651-0888 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ----------------- Steve Ro Chief Executive Officer InterVideo, Inc. 47350 Fremont Boulevard Fremont, California 94538 (510) 651-0888 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------- Copies to: Matthew W. Sonsini, Esq. Timothy R. Curry, Esq. Craig D. Norris, Esq. Evan B. Sloves, Esq. Christine S. Wong, Esq. Christine DeSanze, Esq. Ritu K. Tariyal, Esq. Brent D. Johnson, Esq. Barbara A. Wiseman, Esq. Brobeck, Phleger & Harrison LLP Wilson Sonsini Goodrich & Rosati, P.C. Two Embarcadero Place 650 Page Mill Road 2200 Geng Road Palo Alto, CA 94304 Palo Alto, CA 94303 (650) 493-9300 (650) 424-0160 ----------------- 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. [_] 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. [_] ----------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Aggregate Amount of Title of Each Class of Securities to be Registered Offering Price (1) Registration Fee - --------------------------------------------------------------------------------------- Common Stock $0.001 par value..................... $51,750,000 $12,369 - ---------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. ----------------- 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 that specifically states that this registration statement shall then 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 Securities and Exchange Commission, acting pursuant to Section 8(a), may determine. - -------------------------------------------------------------------------------- The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PRELIMINARY PROSPECTUS (Subject to Completion) January 11, 2002 - -------------------------------------------------------------------------------- Shares [LOGO] "Inter Video" Common Stock - -------------------------------------------------------------------------------- We are selling shares of our common stock. This is our initial public offering of shares of our common stock. No public market currently exists for any shares of our capital stock. We currently estimate that the initial public offering price of our common stock will be between $ and $ per share. We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "IVDO." Before buying any shares you should read the discussion of material risks of investing in our common stock in "Risk factors" beginning on page 5. 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.
Per Share Total - ------------------------------------------------------- Public offering price $ $ - ------------------------------------------------------- Underwriting discounts and commissions $ $ - ------------------------------------------------------- Proceeds, before expenses, to us $ $ - -------------------------------------------------------
The underwriters may also purchase up to shares of our common stock from us at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus. The underwriters may exercise this option only to cover over-allotments, if any. The underwriters are offering our common stock on a firm commitment basis as described under "Underwriting." Delivery of the shares will be made on or about , 2002. UBS Warburg CIBC World Markets - -------------------------------------------------------------------------------- Through and including , 2002 (25 days after the date of this prospectus), all dealers selling shares of our common stock, whether or not participating in this offering, may need to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. TABLE OF CONTENTS - -------------------------------------------------------------------------------- Prospectus summary..................... 1 Business.................................. 34 The offering........................... 3 Management................................ 46 Summary consolidated financial data.... 4 Related party transactions................ 56 Risk factors........................... 5 Principal stockholders.................... 58 Forward-looking information............ 19 Description of capital stock.............. 59 Use of proceeds........................ 19 Shares eligible for future sale........... 62 Dividend policy........................ 19 Underwriting.............................. 64 Capitalization......................... 20 Legal matters............................. 66 Dilution............................... 21 Experts................................... 66 Selected consolidated financial data... 22 Where you can find more information....... 66 Management's discussion and analysis of Index to consolidated financial statements F-1 financial condition and results of operations........................... 24
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Prospectus summary This summary highlights the information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk factors." OUR BUSINESS We are a leading provider of DVD software and offer a broad suite of advanced digital video and audio multimedia software products that allow users to record, edit, author, distribute and play digital multimedia content on personal computers, or PCs, and consumer electronics devices. We derive a substantial majority of our revenue from sales of our WinDVD product, a software DVD player for PCs. Our other major products include WinDVR, a digital video recorder, WinProducer, a video recording and editing software application, and WinRip, a digital music recorder and player. Our software is bundled with products sold by eight of the top ten PC original equipment manufacturers, or OEMs, ranked in terms of sales by IDC. Our OEM customers include Compaq Computer Corporation, Dell Products L.P., Fujitsu Limited, Fujitsu Siemens Computers GmbH, Hewlett-Packard Company, Medion AG, Sony Corporation and Toshiba Corporation. We sell our products to PC OEMs and PC peripherals manufacturers worldwide and offer our software in up to 26 languages. MARKET OPPORTUNITY Advances in digital technology enable the PC to serve as a versatile, feature-rich and reasonably priced digital entertainment platform. All PC multimedia hardware components require software to operate. As a result, multimedia software not only has become a necessary component of the PC, but also serves as an opportunity for OEMs to add value to their products, improve margins and differentiate their products from those of their competitors. As consumer electronics manufacturers migrate from dedicated hardware solutions to a PC architecture in order to provide lower cost and greater flexibility, we expect the market opportunity for multimedia software to grow in this market segment as well. We believe that all of these factors will create market opportunities for a complete multimedia software solution. THE INTERVIDEO SOLUTION We provide advanced digital video and audio multimedia software products that enable PC OEMs, consumer electronics manufacturers and PC peripherals manufacturers to add value to their products, improve margins and differentiate their products from those of their competitors. Key elements of our solution include the following: . A broad multimedia software solution for the PC. Our broad suite of software provides OEMs and consumers with a single source for a variety of multimedia functions. PCs running our integrated multimedia software can replace several expensive, dedicated hardware components such as separate DVD players, digital video recorders, or DVRs, MP3 players, compact disc, or CD, players and digital TV set-top boxes. . Core technology that operates on a variety of platforms. Our core technology is based on a layered architecture that allows our suite of products to operate on a variety of hardware and software platforms. WinDVD has been certified by Microsoft's Windows Hardware Quality Lab, or WHQL, as a Motion Video Device on more than 800 PC hardware and software configurations, which is more than any other PC DVD software provider. We believe that our approach also enables OEMs to offer their customers highly customized PCs with lower customer service costs. 1 . Layered architecture that we have adapted to new technologies and upgraded to incorporate new features. Our layered architecture enables us to respond and adapt to new technologies in an industry characterized by rapid change. Because our architecture has allowed us to efficiently develop new products incorporating additional functionality, such as digital video recording, we have provided our customers with the ability to increase the functionality of their products at a low cost and with relative ease, which has enabled them to differentiate their products from competitors' product offerings. OUR STRATEGY Our goal is to be the leading global provider of advanced digital video and audio multimedia software solutions for PCs, consumer electronics devices, PC peripherals, home networks and other emerging markets. Key elements of our strategy include the following: . Increase market penetration of our multimedia software. We will seek to increase our market share by aggressively pursuing additional OEM relationships, entering into creative marketing arrangements and exploiting new sales channels. We have recently implemented marketing arrangements with select OEMs under which we share revenue and intend to enter into similar arrangements with other OEMs. We also intend to expand the sale of our products through retail channels and through our Internet commerce sites. . Leverage existing and prospective OEM relationships to promote adoption of our new products. We plan to leverage our strong market position and integrated product suite to encourage our PC OEM customers to license additional software products and to encourage prospective PC OEMs to adopt our products. We have begun implementing this strategy with two of our largest customers, both of which first installed our WinDVD product on their PCs and have now added our WinDVR product. . Capitalize on emerging product markets. We intend to closely monitor evolving technologies and to identify additional markets for our products. We believe that we can adapt our technology effectively for use in a variety of emerging consumer electronics and network devices, such as cable and satellite TV set-top boxes, devices being developed for use within home networks and MPEG-4 wireless devices. . Maintain and enhance strategic relationships, and acquire complementary companies and technologies. We have established strategic relationships with several technology and market leaders, including Microsoft and Nvidia. We also intend to pursue acquisitions of complementary products, technologies and companies. . Continue to expand global presence. A substantial portion of our sales come from outside the United States, and we believe that significant revenue growth opportunities exist in Europe, Asia and elsewhere. We intend to continue to target OEMs and end users outside the United States to capitalize on this opportunity. COMPANY INFORMATION We were incorporated in California in April 1998 and intend to reincorporate in Delaware prior to the completion of this offering. Unless otherwise noted, the information in this prospectus assumes that the reincorporation has been completed. Our principal executive offices are located at 47350 Fremont Blvd., Fremont, CA 94538. Our telephone number is (510) 651-0888. Our web site is www.intervideo.com. The information found on our website is not a part of this prospectus. 2 The offering Common stock we are offering........... shares Common stock to be outstanding after this offering........................... shares Proposed Nasdaq National Market symbol. IVDO Use of proceeds........................ For general corporate purposes, including working capital, marketing, research and development and capital expenditures. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. See "Use of proceeds." Except as otherwise indicated, whenever we present the number of shares of our common stock outstanding, we have: . based this information on the shares outstanding as of December 31, 2001, excluding; . as of December 31, 2001, 5,367,700 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $0.61 per share; . as of December 31, 2001, 2,364,838 shares of common stock available for issuance under our existing stock option plan; and . an additional 800,000 shares of common stock reserved for issuance under our stock option plan and employee stock purchase plan adopted in connection with this offering; . given effect to the automatic conversion of our outstanding preferred stock into common stock upon completion of this offering; . assumed no exercise of options after December 31, 2001; and . assumed no exercise of the underwriters' over-allotment option. InterVideo and WinDVD are registered trademarks and WinDVR, WinProducer, WinDTV and WinRip are trademarks or service marks of InterVideo. This prospectus also contains brand names, trademarks and service marks of companies other than InterVideo, and these brand names, trademarks and service marks are the property of their respective holders. 3 Summary consolidated financial data Our summary consolidated financial data is presented in the following table to aid you in your analysis of a potential investment in our common stock. You should read this data in conjunction with "Management's discussion and analysis of financial condition and results of operations," our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus. Pro forma net loss per share applicable to common stockholders reflects the conversion of all outstanding preferred stock into common stock from the beginning of the period presented or at the date of original issuance, if later. The as adjusted balance sheet data reflects our receipt of the estimated net proceeds from the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share after deducting the estimated underwriting discounts and commissions and the estimated expenses of this offering.
Year ended Nine months ended December 31, September 30, Period from inception ---------------- ---------------- Consolidated statement of operations to December 31, data 1998(1) 1999(1) 2000(1) 2000(1) 2001 (in thousands, except per share data) (unaudited) - -------------------------------------------------------------------------------------------------- Revenue................................ $ -- $ 3,036 $15,426 $ 9,761 $23,673 Gross profit........................... -- 1,918 10,237 6,498 14,792 Operating expenses: Research and development............ 328 1,300 6,876 4,489 7,307 Sales and marketing................. -- 1,194 5,033 3,129 6,422 General and administrative.......... 199 773 2,667 1,645 2,225 Stock compensation (2).............. -- 53 1,411 906 1,612 Special charges (3)................. -- -- -- -- 3,068 Total operating expenses............... 527 3,320 15,987 10,169 20,634 Loss from operations................... $(527) $(1,402) $(5,750) $(3,671) $(5,842) Net loss............................... $(525) $(1,434) $(5,745) $(3,750) $(5,908) Net loss per common share, basic and diluted............................... $ -- $ (2.57) $ (2.19) $ (1.45) $ (1.70) Pro forma net loss per common share, basic and diluted (unaudited)......... $ (0.43) $ (0.25) $(0.38 ) Weighted average common shares outstanding, basic and diluted........ -- 559 2,625 2,593 3,472 Pro forma weighted average common shares outstanding, basic and diluted (unaudited)........................... 13,456 14,782 15,661
As of September 30, 2001 ------------------------ Actual As adjusted Consolidated balance sheet data (unaudited) (in thousands) ------------------------------------------------------------------------------- Cash and cash equivalents.......................... $11,596 $ Working capital.................................... 5,625 Total assets....................................... 20,050 Long-term obligations, net of current portion...... -- Total stockholders' equity......................... 10,712
- -------- (1)Excludes the results of operations of the Audio Visual Products Division of Formosoft International Inc., or AVPD, prior to our acquisition on June 7, 2000. See the financial statements of AVPD included elsewhere in this Prospectus, as well as the related unaudited pro forma condensed combined statement of operations of InterVideo for the year ended December 31, 2000 as if the acquisition of AVPD had been completed on January 1, 2000. (2)Stock compensation is allocated among the operating expense classifications as follows:
Year ended Nine months ended December 31, September 30, ------------ ----------------- 1999 2000 2000 2001 (unaudited) ----------------------------------------------------------------------- Research and development............... $14 $ 546 $341 $ 633 Sales and marketing.................... 3 521 358 398 General and administrative............. 36 344 207 581 --- ------ ---- ------ $53 $1,411 $906 $1,612 === ====== ==== ======
(3) See "Management's discussion and analysis of financial condition and results of operations" for further discussion of the special charges recorded in the nine months ended September 30, 2001. 4 - -------------------------------------------------------------------------------- Risk factors You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business. If any of the following risks actually occurs, our business could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS We have a history of losses, and we may never achieve profitability. We have incurred losses since our inception and have not achieved profitability. As of September 30, 2001, we had an accumulated deficit of $13.6 million. We expect to incur significant operating expenses over the next several years in connection with the continued development and expansion of our business. We may continue to lose money in future periods. Our expenses include research and development and marketing expenses relating to products that will not be introduced and will not generate revenue until later periods, if at all. Our future profitability will depend on generating increased revenue, and we may never achieve profitability. In addition, even if we achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. Our limited operating history and the rapidly evolving nature of our industry make the forecasting of our future results difficult. We were incorporated in April 1998 and began shipping our products in February 1999. Prior to February 1999, our operations consisted primarily of research and development efforts. As a result of our limited operating history, our historical financial and operating information is of limited value in predicting our future operating results. In addition, any evaluation of our business and prospects must be made in light of the risks and difficulties encountered by companies offering products or services in new and rapidly evolving markets. The license of software-based digital video and audio solutions for incorporation in products in the PC and consumer electronics industries is new, and it may be difficult to forecast the future growth rate, if any, or size of the market for our products. We may be unable to accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us. Our current and future expense levels are based largely on our investment plans and estimates of future revenue and are, to a large extent, fixed. As a result, we may fail to make accurate financial forecasts and adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which would harm our operating results. We expect our operating results to fluctuate on an annual and quarterly basis, which may result in volatility of our stock price. We expect our operating results to fluctuate on an annual and quarterly basis, which may cause our stock price to be volatile. Important factors, many of which are outside our control, that could cause our operating results to fluctuate include: . fluctuations in demand for, and sales of, our products and the PCs and consumer electronics devices with which our products are bundled; . timely and accurate reporting to us by our OEM customers of units shipped, which determines the timing and level of revenue received from these customers; . changes in the timing of orders or the completion of customer contracts with significant OEM customers; - -------------------------------------------------------------------------------- 5 Risk factors - -------------------------------------------------------------------------------- . competitive factors, including introductions of new products, product enhancements and the introduction of new technologies by our competitors and the entry of new competitors into the digital video and audio software markets; . changes in consumer demand for our products due to the marketing of alternative technologies by our OEM customers; . declines in selling prices of our products to our OEM customers or other customers; . market acceptance of new products developed by us; . changes in the relative portion of our revenue represented by our various products and customers; . the mix of international and U.S. revenue; . the costs of litigation and intellectual property protection; and . economic conditions specific to the PC, consumer electronics and related industries. Due to these and other factors, quarter-to-quarter comparisons of our operating results may not be meaningful, and you should not rely on our results for any one quarter as an indication of our future performance. In addition, our future operating results may fall below the expectations of public market analysts or investors. In this event, our stock price could decline significantly. We expect our product prices to decline, which could harm our operating results. We expect prices for our products to decline over the next few years. Because of competition from other software providers, competition in the PC industry and diminishing margins experienced by PC OEMs as a result of decreased selling prices and lower unit sales, we have reduced the prices we charge PC OEMs for our WinDVD product. We expect this trend to continue, which will make it more difficult to increase or maintain our revenue and may cause a decline in our gross margins, even if our WinDVD unit sales increase. If increases in our sales do not keep pace with anticipated price declines, our revenue will decline. Accordingly, our future success will depend in part on our ability to introduce and sell new products and upgrades to our existing products, which could increase our revenue and could improve our profit margins. We have received notices of claims, and may receive additional notices of claims in the future, regarding the alleged infringement of third parties' intellectual property rights that may result in restrictions or prohibitions on the sale of our products and cause us to pay license fees and damages. Some third parties claim to hold patents covering various aspects of DVD technology incorporated into our and our customers' products. Our digital video and audio products comply with industry DVD specifications. Some third parties have claimed that various aspects of DVD technology incorporated into our and our customers' products infringe upon patents held by them, including the following: . MPEG LA. DVD specifications include technology known as "MPEG-2" that governs the process of storing video input in digital form. A group of companies, comprised primarily of consumer electronics manufacturers, has formed a consortium known as "MPEG LA, LLC" to enforce the proprietary rights of member companies in patents covering certain aspects of MPEG-2 technology. MPEG LA, and certain members of the consortium, have notified us that they believe that our products infringe on patents owned by members of the consortium. In addition, MPEG LA, and certain members of the consortium, have notified a number of PC OEMs, including some of our customers, that they believe MPEG LA members' patents are infringed when those PC OEMs distribute products that incorporate MPEG-2 technology. - -------------------------------------------------------------------------------- 6 Risk factors - -------------------------------------------------------------------------------- . 6C. Another group of companies has formed a consortium known as "6C," formerly the DVD Patent License Program, to enforce the proprietary rights of holders of patents covering some aspects of DVD technology. 6C has notified us that we may need a license so that our products that incorporate DVD technology do not infringe patents owned by members of the consortium. In addition, 6C may demand that PC OEMs or other companies manufacturing or licensing DVD-related products, including our customers, pay license fees. We may be subject to additional third-party claims that our products violate the intellectual property rights of those parties. In addition to the claims described above, we may receive notices of claims of infringement of other parties' proprietary rights. Many companies aggressively use their patent portfolios to bring infringement claims against competitors and other parties. As a result, we may become a party to litigation in the future as a result of an alleged infringement of the intellectual property rights of others, including MPEG LA or 6C. In addition, we are aware that a consortium of companies, known as "3C," has been formed for the purpose of asserting the patent rights of its members covering some aspects of DVD technology. 3C may demand that PC OEMs or other companies manufacturing or licensing DVD-related products, including us and our customers, pay license fees and damages for the use of the technology covered by the 3C patents. Similarly, other parties have alleged that aspects of MPEG-2 and other multimedia technologies infringe upon patents held by them. We may be required to pay license fees and damages in the future if it is determined that our products infringe on patents owned by these third parties. In addition, other companies may form consortia in the future, similar to MPEG LA, 6C and 3C, to enforce their proprietary rights and these consortia may seek to enforce their patent rights against us and our customers. We may be required to pay substantial damages and may be restricted or prohibited from selling our products if it is proven that we violate the intellectual property rights of others. If MPEG LA, 6C, 3C or another third party proves that our technology infringes its proprietary rights, we may be required to pay substantial damages for past infringement and may be required to pay license fees or royalties on future sales of our products. MPEG LA has requested that we obtain a license from MPEG LA for the use of the technology covered by the MPEG LA patents. The MPEG LA license would require us to pay license fees when we sell our products directly to consumers or other end-user customers but not to our customers, such as PC OEMs, that incorporate those products into their own products. If we are required to pay license fees in the amounts that are currently published by, for example, MPEG LA and 6C for past sales to our large PC OEM customers, because such PC OEMs were not themselves licensed, such fees would exceed the revenue we have received from those customers. In addition, if it were proven that we willfully infringed on a third party's proprietary rights, we may be held liable for three times the amount of damages we would otherwise have to pay. In addition, intellectual property litigation may require us to: . stop selling, incorporating or using our products that use the infringed intellectual property; . obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available on commercially reasonable terms, if at all; and . redesign our products so as not to use the infringed intellectual property, which may not be technically or commercially feasible. Furthermore, the defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive to resolve and could require a significant portion of management's time. In addition, rather than litigating an infringement matter, we may determine that it is in our best interests to settle the matter. Terms of a settlement may include the payment of damages and our agreement to license - -------------------------------------------------------------------------------- 7 Risk factors - -------------------------------------------------------------------------------- technology in exchange for a license fee and ongoing royalties. These fees may be substantial. If we are forced to take any of the actions described above, defend against any claims from third parties or pay any license fees or damages, our business could be harmed. We may be liable to some of our customers for damages that they incur in connection with intellectual property claims. Some of our license agreements, including many of the agreements we have entered into with our large PC OEM customers, contain warranties of non-infringement and commitments to indemnify our customers against liability arising from infringement of third-party intellectual property, which may include such as the patents held by members of MPEG LA, 6C and 3C. These commitments may require us to indemnify or pay damages to our customers for all or a portion of any license fees or other damages, including attorneys' fees, they are required to pay or agree to pay these or other third parties. We have received notices asserting rights under the indemnification provisions and warranty provisions of our license agreements from several customers, including Acer Incorporated, Compaq, Dell, Gateway and Micron Electronics, Inc. Although MPEG LA has stated that some of our customers, including Compaq, Dell, Fujitsu Limited, Gateway, Inc., Hewlett-Packard, Sony and Toshiba, are currently MPEG LA licensees, not all of our PC OEM customers are current MPEG LA licensees. Even with respect to those PC OEM customers that may have become licensees, we may have liability to those customers for prior infringement and future royalty payments. If we are required to pay damages to our customers or indemnify our customers for damages they incur, our business could be harmed. If our customers are required to pay license fees in the amounts that are currently published by some claimants, and we are required to pay damages to our customers or indemnify our customers for such amounts, such payments would exceed our revenue from these customers. Even if a particular claim falls outside of our indemnity or warranty obligations to our customers, our customers may be entitled to additional contractual remedies against us. Furthermore, even if we are not liable to our customers, our customers may attempt to pass on to us the cost of any license fees or damages owed to third parties, by reducing the amounts they pay for our products. These price reductions could harm our business. We have accrued, and expect to continue to accrue, for liabilities relating to royalty and related intellectual property claims. Our actual liability may exceed the amount we have accrued or accrue in the future, which could harm our business. Because there is a small number of large PC OEMs, we have only a limited number of potential new large OEM customers for our WinDVD product, which will likely cause our revenue to grow at a slower rate than in recent periods. Our revenue growth has been achieved in large part due to sales of our WinDVD product to new, large PC OEM customers. Our software is bundled with products sold by eight of the top ten PC OEMs ranked in terms of sales by IDC. Because there is only a limited number of potential new, large PC OEM customers for our WinDVD product, we must derive any future revenue growth principally from increased sales of WinDVD or other products to existing PC OEMs and PC peripherals manufacturers and from sales to smaller regional PC OEMs and directly to consumers through retail channels and our websites. Because some of these other revenue opportunities are more fragmented than the PC OEM market and will take more time and effort to penetrate, we expect that our revenue will grow at a slower rate than in recent periods. We depend substantially on our relationships with a small number of PC OEMs, and our failure to maintain or expand these relationships would harm our business. The PC industry is highly concentrated, and we have derived a substantial portion of our revenue from sales of our products to a small number of PC OEMs. For the nine months ended September 30, 2001, - -------------------------------------------------------------------------------- 8 Risk factors - -------------------------------------------------------------------------------- our four largest customers accounted for a majority of our revenue, with Dell accounting for 31% and Fujitsu accounting for 12%. Compaq and Hewlett-Packard, which have announced an agreement to merge, together accounted for more than 10% of our revenue during that period. We expect that a small number of customers will account for a majority of our revenue and gross profit, if any, for the foreseeable future. If the PC industry continues to consolidate, the number of customers accounting for the majority of our revenue could decrease further. Our agreements with our customers typically do not contain minimum purchase commitments and are of limited duration or are terminable with little or no notice. The loss of any of these customers, or a material decrease in revenue from these customers, would harm our business. If our competitors offer our OEM customers more favorable terms than we do or if our competitors are able to take advantage of their existing relationships with these OEMs, then these OEMs may decline to include our software with their PCs. If we are unable to maintain or expand our relationships with PC OEMs, our business will suffer. As a result of our dependency on a small number of large PC OEMs, any problems those customers experience, or their failure to promote products that contain our software, may harm our business. As a result of our concentrated customer base, problems that our PC OEM customers experience may harm our business. Some of the factors that affect the business of our PC OEM customers, all of which are beyond our control, include: . the competition these customers face and the market acceptance of their products; . the engineering, marketing and management capabilities of these customers and the technical challenges that they face in developing their products; . the financial and other resources of these customers; . new governmental regulations or changes in taxes or tariffs applicable to these customers; and . the failure of third parties to develop and introduce content for DVD and other digital media applications in a timely fashion. The inability of our PC OEM customers to successfully address any of these risks could harm our business. In addition, we have little or no influence over the degree to which these customers promote products that incorporate our software or the prices at which these products are sold to end users. If our PC OEM customers fail to adequately promote products that incorporate our software, our business could suffer. We have derived a substantial majority of our revenue from the sale of our WinDVD product to PC OEMs, and these customers may not continue to purchase this product or we may fail to attract new customers for this product. We have derived a substantial majority of our revenue from the sale of our WinDVD product to PC OEMs. We expect that revenue from the sale of our WinDVD product to PC OEMs will continue to account for a substantial portion of our revenue for the foreseeable future. Accordingly, our business will suffer if our existing PC OEM customers do not continue to incorporate our WinDVD product into the PCs they sell or if we are unable to obtain new PC OEM customers for our WinDVD product. Continued slow growth, or negative growth, in the PC industry could harm our business. Our revenue depends in large part on the demand for our products by PC OEMs. The PC industry is currently experiencing slow or negative growth due to a general economic slowdown, market saturation and other factors. If slow or negative growth in the PC industry continues, demand for our products may - -------------------------------------------------------------------------------- 9 Risk factors - -------------------------------------------------------------------------------- decrease. Furthermore, if a reduction in demand for our products were to occur, we may not be able to reduce expenses commensurately, due in part to the continuing need for research and development. Accordingly, continued slow growth or negative growth in the PC industry could harm our business. Our success in generating revenue depends on the growth of the use of software solutions in the PC and consumer electronics industries. Our continued success in generating revenue depends on growth in the use of software solutions to add features and functionality to PCs and consumer electronics devices. Our software is currently used primarily in PCs, and we expect it to be useful for consumer electronics products. These markets are rapidly evolving, and it is difficult to predict their potential size or future growth rate. In addition, we are uncertain as to the extent to which products such as ours will be used in these markets in the future. Their market acceptance may be impacted by the performance, cost and availability of semiconductors that perform similar functions and the level of copy protection that can be attained and maintained in software products. Our success in generating revenue in these markets will depend on increased adoption of software solutions based on the same standards as ours. If the PC and consumer electronics markets adopt software solutions more slowly than we expect, or if content providers are dissatisfied with the level of copy protection available in software products, our growth would not likely continue, and our business would likely suffer. Most of our customers require that the combination of our software products and their PCs be certified by Microsoft's Windows Hardware Qualification Labs. If certification is not obtained, our revenue could decline or our customers may license a competitor's software. We sell most of our products through PC OEMs, which bundle our products with their hardware products. Before bundling and distribution, a product must be certified by Microsoft's Windows Hardware Qualification Labs on each PC platform. The certification process is entirely under Microsoft's control, and we may not obtain certification for any product on a timely basis or at all. Furthermore, Microsoft may change the requirements for certification at any time without notice. At various times in the past, Microsoft has changed standards applicable to our products, which has caused us to be out of compliance for periods of time. In the future, we may not be able to obtain necessary certification on a timely basis, if at all, for new PC models introduced by our customers, for any of our products under development or for existing products, if the current standards are changed. Any delays in receipt of, or failure to receive, such certification could cause our revenue to decline or our customers to license a competitor's software. Competition in our industry is intense and is likely to continue to increase, which could harm our business. Our industry is intensely competitive, and we expect competition to intensify in the future. Our competitors include: . software companies that offer digital video or audio applications; . companies offering hardware or semiconductor solutions as alternatives to our software products; and . operating system providers that may develop and integrate applications into their products. Additional competitors are likely to enter our industry in the future. We also face competition from the internal research and development departments of other software companies and PC and consumer electronics manufacturers, including some of our current customers. Some of our customers have the capability to integrate their operations vertically by developing their own software-based digital and audio solutions or by acquiring our competitors or the rights to develop competitive products or technologies, which may allow these customers to reduce their purchases or cease purchasing - -------------------------------------------------------------------------------- 10 Risk factors - -------------------------------------------------------------------------------- from us completely. Operating system providers with an established customer base, such as Microsoft, already offer products in the digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or are offered as upgrades to those operating systems at no additional charge. If Microsoft or other operating system providers develop or license digital video and audio solutions that compete directly with ours, and incorporate the solutions into their operating systems, our business could be harmed. We expect our current competitors to introduce improved products at lower prices, and we will need to do the same to remain competitive. We may not be able to compete successfully against either current or future competitors with respect to new or improved products. We believe that competitive pressures may result in price reductions, reduced margins and our loss of market share. Many of our current competitors and potential competitors have longer operating histories and significantly greater financial, technical, sales and marketing resources or greater name recognition than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, our competitors that have large market capitalizations or cash reserves are in a better position to acquire other companies in order to gain new technologies or products that may displace our products. Any of these potential acquisitions could give our competitors a strategic advantage. In addition, some of our current competitors and potential competitors have greater brand name recognition, a more extensive customer base, more developed distribution channels and broader product offerings, than we do. These companies can use their broader customer base and product offerings, or adopt aggressive pricing policies, to gain market share. Increased competition in the market may result in price reductions, decreased customer orders, reduced profit margins and loss of market share, any of which could harm our business. If we do not provide acceptable customer support, our reputation will suffer and it will be difficult to retain existing customers or to obtain new customers. We will need to continue to provide acceptable customer support to our customers. An inability to do so will harm our reputation and make it difficult to retain existing customers and generate new customers. Most of our experience to date has been with corporate customers, some of which require significant support when familiarizing themselves with the features and functionality of our products. We have limited experience with widespread distribution of our products directly to consumers, and we may not have adequate experience or personnel to provide the levels of support that these customers require. Our failure to provide adequate customer support for our products to either our corporate or consumer customers could damage our reputation in the marketplace and strain our relationships with customers. This could prevent us from retaining existing customers or obtaining new customers and could harm our reputation and brand. Our ability to achieve profitability will suffer if we fail to manage our growth effectively. Our success depends on our ability to manage effectively the growth of our operations. During 2000 and the first half of 2001, we experienced significant headcount growth, which exceeded the level that our revenue could support. In June 2001, we reduced our headcount by approximately 25%. We cannot be certain that our current cost structure is appropriate for the level of revenue that we generate. Furthermore, we expect to increase the scope of our operations for the foreseeable future. To manage the actual and expected growth of our operations and personnel, we will need to improve our operational and financial systems, procedures and controls. Our current and planned systems, procedures and controls may not be adequate to support our future operations and expected growth. For example, we have recently purchased sophisticated software to manage our financial systems, which may disrupt our operations if not implemented in an orderly manner. Delays or problems associated with any improvement or expansion of - -------------------------------------------------------------------------------- 11 Risk factors - -------------------------------------------------------------------------------- our operational systems and controls could harm our relationships with customers, reputation and brand and could also result in errors in our financial and other reporting. We license technology from third parties for use in our WinDVD and other standards-based products, and our business will suffer if we fail to maintain these license arrangements. We license technology for use in our WinDVD product, our WinRip product and other existing and planned products from third parties under agreements, some of which have a limited duration. For example, we have a license agreement with Dolby Laboratories for its audio technology and logo, a license agreement with the DVD Copy Control Association, Inc. for the content scrambling system designed to prevent the copying of DVDs, and various other license agreements relating to patents, know-how and trademarks that are important to various aspects of the development, marketing and sale of our products. If we fail to maintain these license arrangements, we might not be able to ship our products in their present forms and our business could be harmed. The loss of any of our strategic relationships would make it more difficult to design appealing products and keep pace with evolving industry standards, which could harm our business. We must design our software products to interoperate effectively with a variety of hardware and software products, including operating system software, graphics chips, DVD drives, PCs and PC chipsets. We depend on strategic relationships with software developers and manufacturers of these products to achieve our design objectives, to produce products that interoperate successfully, to provide us with information concerning customer preferences and evolving industry standards and trends, and to assist us in distributing our products to users. For example, we have been able to learn about future product lines being developed by some of our OEM customers in advance so that we were able to more efficiently design products that our customers, and the ultimate end users, find valuable. However, our agreements with these third parties do not ensure that such information will be provided to us or that these relationships will continue for a significant period of time. The loss of any one of these relationships could harm our business. Our products may have defects or may be incompatible with other software or components contained in our customers' products, which could cause us to lose customers, damage our reputation and create substantial costs. Defects, referred to in the software industry as "bugs," have been found in our products in the past, and may be found in the future. In addition, our products may fail to meet our customers' design specifications or be incompatible with other software or components contained in our customers' products, or our customers may change their design specifications or add additional third-party software or components after the production of our product. We may be required to devote significant financial resources and personnel to correct any defects. A failure to meet our customers' design specification often results in a loss of sales due to the length of time required to redesign the product. Our products may also be required to interface with defective third party software or components. If we are unable to detect or fix errors, or meet our customers' design specifications, our business and results of operations would suffer. We may experience seasonality in our business, which could cause our operating results to fluctuate. Our financial condition and results of operations are likely to be affected by seasonality in the future. Historically, PC OEMs have experienced their highest volume of sales during the year end holiday season. Because of the timing of our recognition of revenue associated with the sale of our products to OEMs, we expect to experience our highest revenue and operating income in the first quarter of each calendar year, followed by lower revenue and operating income in the second quarter of that year. To the extent our retail sales increase as a percentage of our revenue, we expect that revenue from retail sales in the fourth quarter will increase relative to other quarters. - -------------------------------------------------------------------------------- 12 Risk factors - -------------------------------------------------------------------------------- The market for our products is new and constantly changing. If we do not respond to changes in a timely manner, our products likely will no longer be competitive. The market for our products is characterized by rapid technological change, new and improved product introductions, changes in customer requirements and evolving industry standards. Our future success will depend to a substantial extent on our ability to develop, introduce and support cost-effective new products and technologies on a timely basis. If we fail to develop and deploy new cost-effective products and technologies or enhancements of existing products on a timely basis, or if we experience delays in the development, introduction or enhancement of our products and technologies, our products will no longer be competitive and our business will suffer. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We may not be able to identify, develop, manufacture, market or support new or enhanced products on a timely basis, if at all. Furthermore, our new products may never gain market acceptance, and we may not be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Our failure to respond to product announcements, technological changes or changes in industry standards would likely prevent our products from gaining market acceptance and harm our business. Our products are based primarily on a single operating system. If industry and customer preference in operating systems shifts, our products may not be compatible with other operating systems and our business could be harmed. Our revenue is highly dependent upon acceptance of products that are based on the Microsoft Windows operating system, which is currently the dominant operating system used in the PC industry. Microsoft could make changes to its operating system that could render our products incompatible. Other industry participants could develop different operating systems to replace the Windows operating system, and our products might not be compatible with those operating systems. If our products are not compatible with one or more of the operating systems with significant PC market share, we could be required to incur substantial costs and expend significant capital and other resources to adapt our products to one or more operating systems. There is no assurance that we would be able to adapt our products to changes made in the Windows operating system in the future or to a new operating system, and any failure to adapt to changes in operating systems by the PC industry could result in significant harm to our business. If we do not successfully establish strong brand identity in the PC and consumer electronics market, we may be unable to achieve widespread acceptance of our products. We believe that establishing and strengthening the InterVideo brand is critical to achieving widespread acceptance of our products and to establishing key strategic partnerships. The importance of brand recognition will increase as current and potential competitors enter the market with competing products. Our ability to promote and position our brand depends largely on the success of our marketing efforts and our ability to provide high quality products and customer support. These activities are expensive and we may not generate a corresponding increase in customers or revenue to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to attract new customers and compete effectively. Historically, we have relied primarily on a limited direct sales force, supported by third party manufacturers' representatives and distributors, to sell our products. Our sales strategy focuses primarily on our corporate customers bundling our products with their hardware and distributing our products through their own distribution channels. We rely on our customers' sales forces, marketing budgets and - -------------------------------------------------------------------------------- 13 Risk factors - -------------------------------------------------------------------------------- brand images to promote sales of bundled products. If our corporate customers fail to successfully market and sell their products bundled with our products, or if our relationship with our corporate customers are terminated, we may be unable to effectively market and distribute our products and services. We rely upon patents, trademarks, copyrights, trade secrets and license agreements to protect our proprietary rights, which afford only limited protection. Our success depends upon the ability to protect our proprietary rights. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as license and confidentiality agreements with our employees, customers, strategic partners and others to establish and protect our proprietary rights. The protection of patentable inventions is important to our future opportunities. We currently have one patent issued in Taiwan, and we have fifteen pending patent applications in various jurisdictions. It is possible that: . our pending patent applications may not result in the issuance of patents; . we may not apply for or obtain effective patent protection in every country in which we do business; . our patents may not be broad enough to protect our proprietary rights; . any issued patent could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from using the inventions claimed in those patents; . we may be required to grant cross-licenses to our patents in accordance with the terms of the agreements we enter into with customers or strategic partners; . for business reasons we may choose not enforce our patents against certain third parties; and . current and future competitors may independently develop similar technology, duplicate our products or design new products in a way that circumvents our patents. Existing copyright, trademark and trade secret laws and license and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our products is difficult. Any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue. Infringement claims and lawsuits would likely be expensive to resolve and would require management's time and resources and, therefore, could harm our business. Our success depends on retaining our key personnel, including our executive officers, the loss of any of whom could harm our business. Our success depends on the continued contributions of our senior management and other key engineering, sales and marketing and operations personnel. Competition for employees in our industry can be intense. We do not have employment agreements with, or key man life insurance policies covering, any of our executives. In addition, significant portions of the capital stock and options held by the members of our management are fully vested. There can be no assurance that we will retain our key employees or be able to hire replacements. Our loss of any key employee or an inability to replace lost key employees and add new key employees as we grow could harm our business. We rely on the accuracy of our customer's sales reports for collecting and reporting revenue. If these reports are not accurate, our reported revenue will be inaccurate. A substantial majority all of our revenue is generated by our PC OEM customers that pay us a license fee based upon the number of copies of our software they load onto the PCs that they sell. In collecting these - -------------------------------------------------------------------------------- 14 Risk factors - -------------------------------------------------------------------------------- fees, preparing our financial reports, projections and budgets and in directing our sales efforts and product development, we rely on our customers to accurately report the number of units licensed. We have never audited any of our customers to verify the accuracy of their reports or payments. Most of our license agreements permit us to audit our customers, but audits are expensive and time consuming and could harm our customer relationships. From time to time, customers have provided us with inaccurate reports, which resulted in us underreporting revenue for the associated period and recording a one-time credit in a future period. If any of our customer reports are inaccurate, the revenue we collect and report will be inaccurate and we may be required to make an adjustment to our revenue for a subsequent period, which could harm our business and credibility in the financial community. Our international operations may expose us to regulatory, financial and operational risks. Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. International sales accounted for 44% of our revenue in the nine months ended September 30, 2001, and we expect to continue to derive a significant portion of our revenue from sales outside of the United States. We intend to expand our international operations in the future. Significant management attention and financial resources are needed to develop our international sales, support and distribution channels and manufacturing. We may not be able to maintain international market demand for our products. Our future results could be harmed by a variety of factors related to international operations, including: . foreign currency exchange rate fluctuations; . seasonal fluctuations in sales; . changes in a specific country's or region's political or economic condition, particularly in emerging markets; . unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements; . trade protection measures and import or export licensing requirements; . potentially adverse tax consequences; . longer accounts receivable collection cycles and difficulties in collecting accounts receivables; . difficulty in managing widespread sales, development and manufacturing operations; and . less effective protection of intellectual property. Currently, most of our international sales are denominated in U.S. dollars. Therefore, a strengthening of the dollar could make our products less competitive in foreign markets. Our current distribution agreements shift foreign exchange risk to our foreign distributors. This exchange risk may harm the businesses of those distributors or make their engagement prohibitively expensive. We do not use derivative instruments to hedge foreign exchange risk. In the future, a portion of our international revenue and expenses may be denominated in foreign currencies. Accordingly, we could experience the risks of fluctuating currencies and may choose to engage in currency hedging activities. In addition, if we conduct sales in local currencies, we may engage in hedging activities, which may not be successful and could expose us to additional risks. In addition, we and certain of our OEM customers maintain significant operations in Asia. Any kind of economic, political or environmental instability in this region of the world can have a severe negative impact on our operating results due to the large concentration of production and sales activities in this region. We are also greatly impacted by the political, economic and military conditions in Taiwan. - -------------------------------------------------------------------------------- 15 Risk factors - -------------------------------------------------------------------------------- Taiwan and China are continuously engaged in political disputes and both countries have continued to conduct military exercises in or near the other's territorial waters and airspace. These disputes may continue and even escalate, resulting in an economic embargo, a disruption in shipping or even military hostilities. Our business and future operating results are subject to a broad range of uncertainties arising out of the recent terrorist attacks on the United States. Our business and operating results are subject to uncertainties arising out of the recent terrorist attacks in New York City and Washington, D.C. These uncertainties include the potential worsening or extension of the current global economic slowdown and the economic consequences of military action or additional terrorist activities. Any similar activity of this nature or even rumors of such activity in the future could harm our operating results and stock price. We may not be successful in overcoming problems encountered in connection with any acquisitions we may undertake, which could harm our business. In the past, we have made acquisitions. We expect to continue to review opportunities to buy or make investments in other businesses, products or technologies that would enhance our technical capabilities, complement our current products or expand the breadth of our markets or that may otherwise offer growth opportunities. Our continued acquisitions of businesses or technologies will require significant commitment of resources. We may be required to pay for any acquisitions with cash, but we cannot be certain that additional capital will be available to us on favorable terms, if at all. In lieu of paying cash, we could issue stock as consideration for an acquisition that would dilute existing stockholders' percentage ownership, incur substantial debt or assume contingent liabilities. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and investments also involve numerous risks, including: . problems assimilating the purchased operations, technologies or products; . problems maintaining uniform standards, procedures, controls and policies; . unanticipated costs associated with the acquisition; . diversion of management's attention from our core business; . adverse effects on existing business relationships with suppliers and customers; . risks associated with entering markets in which we have no or limited prior experience; and . potential loss of key employees of purchased organizations. We may require substantial additional capital, which may not be available on acceptable terms or at all. Our capital requirements will depend on many factors, including: . acceptance of, and demand for, our products; . the costs of developing new products; . the need to license new technology or to enter into license agreements for existing technology; . the extent to which we invest in new technology and research and development projects; . the number and timing of acquisitions; and . the costs associated with our expansion. - -------------------------------------------------------------------------------- 16 Risk factors - -------------------------------------------------------------------------------- To the extent the proceeds of this offering and our existing sources of cash and cash flow from operations are not sufficient to fund our activities, we may need to raise additional funds. If we issue additional stock to raise capital, your percentage ownership in us would be reduced. Additional financing may not be available when needed and, if such financing is available, it may not be available on terms acceptable to us. If we raise funds through debt financing, we will have to pay interest and may be subject to restrictive covenants, which could limit our ability to take advantage of future opportunities, respond to competitive pressures or unanticipated industry changes. If we cannot raise necessary additional capital on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated industry changes, any of which could have a negative impact on our business. RISKS RELATED TO THIS OFFERING There has been no prior public market for our common stock, and a public market may not develop. Prior to this offering, there has been no public market for our common stock. We cannot assure you that an active trading market will develop or be sustained or that the market price of our common stock will not decline. The initial public offering price for the shares of our common stock will be determined by us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. We do not know the extent to which investor interest will lead to the development of an active public market. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price which you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technology by using our shares as consideration. We expect our stock price to be volatile. The price at which our common stock will trade after this offering is likely to be highly volatile and may fluctuate substantially due to many factors, some of which are: . actual or anticipated fluctuations in our results of operations; . changes in securities analysts' expectations or our failure to meet those expectations; . developments with respect to intellectual property rights; . announcements of technological innovations or significant contracts by us or our competitors; . introduction of new products by us or our competitors; . commencement of or our involvement in litigation; . our sale of common stock or other securities in the future; . conditions and trends in technology industries; . changes in market valuation or earnings of our competitors; . the trading volume of our common stock; . changes in the estimation of the future size and growth rate of our markets; and . general economic conditions. In addition, the stock market has experienced significant price and volume fluctuations that has affected the market prices for the common stock of technology companies. In the past, these market fluctuations were often unrelated or disproportionate to the operating performance of these companies. Any significant fluctuations in the future might result in a significant decline in the market price of our common stock. - -------------------------------------------------------------------------------- 17 Risk factors - -------------------------------------------------------------------------------- We have implemented anti-takeover provisions that could discourage a third party from acquiring us and consequently decrease the market value of your investment. Our certificate of incorporation and bylaws contain provisions that may have the effect of delaying or preventing a change of control or changes in management that a stockholder might consider favorable. The certificate and bylaws, among other things, provide for a classified board of directors, require that stockholder actions occur at duly called meetings of the stockholders, limit who may call special meetings of stockholders and require advance notice of stockholder proposals and director nominations. These provisions, along with the provisions of the Delaware General Corporation Law, such as Section 203, prohibiting certain business combinations with an interested stockholder, may delay or impede a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in management could cause the market price of our common stock to decline. For more information about particular anti-takeover provisions, see "Description of capital stock." Because of their significant stock ownership, our officers and directors will be able to exert significant influence over our future direction. Executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately % of our outstanding common stock following the completion of this offering. These stockholders, if acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. See "Principal stockholders." Management will have broad discretion over the use of proceeds from this offering. The net proceeds from this offering will be used for working capital and other general corporate purposes. In particular, we intend to use the net proceeds of the offering for working capital, marketing, research and development, and capital expenditures. We may also use certain of the proceeds to acquire other products, technology or businesses that would complement our existing products, enhance our technological capabilities or expand our market coverage. We have not reserved or allocated the net proceeds for any specific transaction, and we cannot specify with certainty how we will use the net proceeds. Accordingly, our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce income or that lose value. Sales of substantial amounts of our common stock could harm the market price of our stock. A substantial amount of our shares will be eligible for sale shortly after this offering. If our stockholders sell substantial amounts of common stock in the public market soon after the lock-up period ends, the market price of our common stock could fall. Based on shares outstanding as of December 31, 2001, upon completion of this offering, we will have shares of common stock outstanding. Of these shares, the shares sold in this offering will be freely tradable. Another 16,119,962 shares will be eligible for sale in the public market 180 days from the date of this prospectus, substantially all of which are subject to lock-up agreements. UBS Warburg LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. The remaining 555,000 shares will be restricted securities that will become eligible for sale in the public market pursuant to Rule 144 at various dates in the future. The sale of a significant number of these shares could cause the price of our common stock to decline. See "Shares eligible for future sale" for more detailed information. - -------------------------------------------------------------------------------- 18 - -------------------------------------------------------------------------------- Forward-looking information This prospectus contains forward-looking statements. When used in this prospectus, the words "anticipate," "believe," "estimate," "will," "intend" and "expect" and similar expressions identify forward-looking statements. Although we believe that our plans, intentions and expectations reflected in those forward-looking statements are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied, by the forward-looking statements contained in this prospectus. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this prospectus, including under the heading "Risk factors." All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. Other than as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Use of proceeds We estimate that we will receive net proceeds of approximately $ million, or $ million if the underwriters exercise their over-allotment option in full, from this offering of our common stock, based on an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We expect to use the net proceeds of the offering for general corporate purposes, including working capital, marketing, research and development and capital expenditures. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have no commitments with respect to any acquisition or investment, and we are not involved in any negotiations with respect to any similar transaction. The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our product development efforts, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the balance of the net proceeds. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities. Dividend policy We have never declared or paid any cash dividends on our capital stock and do not intend to pay dividends in the foreseeable future. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. - -------------------------------------------------------------------------------- 19 - -------------------------------------------------------------------------------- Capitalization Our capitalization as of September 30, 2001 is set forth in the following table: . on an actual basis; . on a pro forma basis to reflect the conversion of all outstanding preferred stock into shares of our common stock; and . on the same pro forma basis as adjusted to give effect to the receipt of the estimated net proceeds from this offering, at an assumed initial public offering price of $ per share. The table does not include options outstanding as of September 30, 2001 to purchase 5,616,221 shares of our common stock with a weighted average exercise price of $0.65 per share. You should read this table in conjunction with "Management's discussion and analysis of financial condition and results of operations," our financial statements and the notes to those financial statements and "Description of capital stock."
September 30, 2001 --------------------------------- Pro forma Actual Pro forma as adjusted (in thousands, except share data) - --------------------------------------------------------------------------------------------------------------- Stockholders' equity: Convertible preferred stock, 13,000,000 shares authorized, 12,188,750 shares issued and outstanding, actual; 5,000,000 shares authorized, pro forma and pro forma as adjusted; no shares issued and outstanding, pro forma and pro forma as adjusted.......................................................... $ 21,186 $ -- $ -- -------- -------- ------ Common stock, 25,000,000 shares authorized, 4,312,483 shares issued and outstanding, actual; 150,000,000 shares authorized, pro forma and pro forma as adjusted; 16,501,233 shares issued and outstanding, pro forma; shares authorized, pro forma as adjusted; shares issued and outstanding, pro forma as adjusted...................................................... 6,098 27,284 Notes payable from employee................................................. (496) (496) Deferred stock compensation................................................. (2,310) (2,310) Accumulated other comprehensive loss........................................ (152) (152) Accumulated deficit......................................................... (13,614) (13,614) -------- -------- ------ Total stockholders' equity................................................ 10,712 10,712 -------- -------- ------ Total capitalization.................................................... $ 10,712 $ 10,712 $ ======== ======== ======
- -------------------------------------------------------------------------------- 20 - -------------------------------------------------------------------------------- Dilution Our pro forma net tangible book value as of September 30, 2001 was approximately $ per share of our common stock. Our net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of September 30, 2001. After giving effect to our sale in this offering of shares of our common stock at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of September 30, 2001 would have been $ per share of our common stock. This represents an immediate increase in net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to you. The following table illustrates this per share dilution:
Assumed initial public offering price per share...................... $ Pro forma net tangible book value per share before this offering.... $ Increase attributable to investors in this offering................. --- Pro forma net tangible book value per share after this offering...... ---- Dilution per share to investors in this offering..................... $ ====
The differences between our existing stockholders and investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid for both common and preferred stock is summarized on a pro forma basis, as of September 30, 2001 before underwriters' discount and offering expenses in the following table. The following table does not include 5,616,221 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $0.65 per share as of September 30, 2001. To the extent that outstanding options are exercised, there will be further dilution to new investors.
Shares purchased Total consideration Average ---------------- ----------------- price per Number Percent Amount Percent share (in thousands) -------------------------------------------------------------------------- Existing shareholders..... % $ % $ New investors............. ---- --- -- --- -- Total.................... % $ 100% $ ==== === == === ==
- -------------------------------------------------------------------------------- 21 - -------------------------------------------------------------------------------- Selected consolidated financial data The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and "Management's discussion and analysis of financial condition and results of operations" included elsewhere in this prospectus. The selected income statement data and balance sheet data are derived from our audited financial statements. The unaudited information has been prepared on the same basis as our audited financial statements and, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our operating results for these periods and our financial condition as of these dates. The pro forma data and the pro forma share and earnings per share data for September 30, 2001 gives effect to the conversion of all outstanding shares of preferred stock into common stock.
Year ended Nine months ended December 31, September 30, Period from inception ---------------- ---------------- April 28, 1998 to 1999(1) 2000(1) 2000(1) 2001 December 31, 1998(1) ------- ------- ------- ------- Consolidated statement of operations data (in thousands, except per share data) (unaudited) - ---------------------------------------------------------------------------------------------------------- Revenue....................................... $ -- $ 3,036 $15,426 $ 9,761 $23,673 Cost of revenue............................... -- 1,118 5,189 3,263 8,881 ----- ------- ------- ------- ------- Gross profit.............................. -- 1,918 10,237 6,498 14,792 Operating expenses: Research and development.................. 328 1,300 6,876 4,489 7,307 Sales and marketing....................... -- 1,194 5,033 3,129 6,422 General and administrative................ 199 773 2,667 1,645 2,225 Stock compensation (2).................... -- 53 1,411 906 1,612 Special charges (3)....................... -- -- -- -- 3,068 ----- ------- ------- ------- ------- Total operating expenses............... 527 3,320 15,987 10,169 20,634 ----- ------- ------- ------- ------- Loss from operations.......................... (527) (1,402) (5750) (3,671) (5,842) Other income (expense), net................... 2 32 557 303 443 ----- ------- ------- ------- ------- Loss before provision for income taxes........ (525) (1,370) (5,193) (3,368) (5,399) Provision for income taxes.................... -- 64 552 382 509 ----- ------- ------- ------- ------- Net loss.................................. $(525) $(1,434) $(5,745) $(3,750) $(5,908) ===== ======= ======= ======= ======= Net loss per common share, basic and diluted.. $ -- $ (2.57) $ (2.19) $ (1.45) $ (1.70) ===== ======= ======= ======= ======= Pro forma net loss per common share, basic and diluted (unaudited).......................... $ (0.43) $ (0.25) $ (0.38) ======= ======= ======= Weighted average common shares outstanding, basic and diluted............................ -- 559 2,625 2,593 3,472 ===== ======= ======= ======= ======= Pro forma weighted average common shares outstanding, basic and diluted (unaudited)... 13,456 14,782 15,661 ======= ======= =======
- -------------------------------------------------------------------------------- 22 Selected consolidated financial data - --------------------------------------------------------------------------------
As of December 31, As of --------------------- September 30, 1998 1999 2000 2001 Consolidated balance sheet data (in thousands) (unaudited) - -------------------------------------------------------------------------------------- Cash and cash equivalents........................ $ 195 $2,628 $14,668 $11,596 Working capital.................................. (190) 1,907 10,419 5,625 Total assets..................................... 362 3,817 22,134 20,050 Long-term obligations, net of current portion.... -- -- -- -- Convertible preferred stock...................... 488 4,476 21,286 21,186 Total stockholders' equity....................... (36) 2,634 15,189 10,712
- -------- (1) Excludes the results of operations of AVPD prior to its acquisition on June 7, 2000. See the financial statements of AVPD included elsewhere in this Prospectus, as well as the related unaudited pro forma condensed combined statement of operations of the Company for the year ended December 31, 2000 as if the acquisition of AVPD had been completed on January 1, 2000. (2) Stock compensation is allocated among the operating expense classifications as follows:
Year ended Nine months ended December 31, September 30, ------------ ------------------ 1999 2000 2000 2001 (in thousands) (unaudited) - ---------------------------------------------------------------------------------- Research and development......................... $14 $ 546 $ 341 $ 633 Sales and marketing.............................. 3 521 358 398 General and administrative....................... 36 344 207 581 --- ------- ------ ------ $53 $ 1,411 $ 906 $1,612 === ======= ====== ======
(3) See Management's discussion and analysis of financial condition and results of operations for further discussion of the special charges recorded in the nine months ended September 30, 2001. - -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- Management's discussion and analysis of financial condition and results of operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected consolidated financial data" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under "Risk factors" and elsewhere in this prospectus. OVERVIEW We are a leading provider of DVD software and offer a broad suite of advanced digital video and audio multimedia software products that allow users to record, edit, author, distribute and play digital multimedia content on PCs and consumer electronics devices. We derive a substantial majority of our revenue from sales of our WinDVD product, a software DVD player for PCs. Our other major products include WinDVR, a digital video recorder, WinProducer, a video recording and editing software application, and WinRip, a digital music recorder and player. We began operations in 1998 and shipped our first products in 1999. Our software is bundled with products sold by eight of the top ten PC OEMs ranked in terms of sales by IDC. Our OEM customers include Compaq, Dell, Fujitsu, Fujitsu Siemens, Hewlett-Packard, Medion, Sony and Toshiba. We sell our products to PC OEMs and PC peripherals manufacturers worldwide and offer our software in up to 26 languages. In addition, we sell our products directly to consumers through our websites, which currently operate in English, Japanese and Chinese, and through retail channels. We derive revenue primarily from the sale of software licenses to OEMs, which install our software onto PCs prior to delivery to consumers. We also derive revenue from the license of our software to manufacturers of PC peripherals that incorporate our products into their own products for distribution as well as sales directly to users through retail channels and our website. We recognize revenue generated from sales to OEMs, PC peripherals manufacturers and end users in accordance with Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended, under which revenue is recognized when evidence of an arrangement exists, delivery of the software has occurred, the fee is fixed and determinable and collection is probable. Most OEMs pay a license fee based on the amount of licensed software included in the products sold to their customers. OEMs pay these fees on a per unit basis, and we record associated revenue when we receive notification of the OEMs' sales of the licensed software to the user. The terms of our license agreements generally require the OEMs to notify us of sales of their products within 30 to 45 days after the end of the month or quarter in which the sales occur. As a result, we generally recognize revenue in the month or quarter following the sale of the product to the OEMs' customers. We expect prices for our products to decline over the next few years. Because of competition from other software providers, competition in the PC industry and diminishing margins experienced by PC OEMs as a result of decreased selling prices and lower unit sales, we have reduced the prices we charge PC OEMs for our WinDVD product. We expect this trend to continue, which will make it more difficult to increase or maintain our revenue and may cause a decline in our gross margins even if our WinDVD unit sales increase. Our revenue growth has been achieved in large part due to sales of our WinDVD product to new, large PC OEM customers. Because there is only a limited number of potential new, large PC OEM customers - -------------------------------------------------------------------------------- 24 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- for our WinDVD product, we must derive any future revenue growth principally from increased sales of WinDVD or other products to existing PC OEMs and PC peripherals manufacturers and from sales to smaller regional PC OEMs and directly to consumers through retail channels and our websites. Because some of these other revenue opportunities are more fragmented than the PC OEM market and will take more time and effort to penetrate, we expect that our revenue will grow at a slower rate than in recent periods. Due to concentration in the PC OEM industry, we derive a substantial portion of our revenue from a small number of customers. For the nine months ended September 30, 2001, our four largest customers accounted for a majority of our revenue. During that period, Dell and Fujitsu each accounted for more than 10% of our revenue. We expect that a small number of customers will continue to account for a majority of our revenue and gross profit for the foreseeable future. International sales accounted for 44% of our revenue in the nine months ended September 30, 2001. We expect to continue to derive a significant portion of our revenue from sales outside of the United States. Currently, most of our international sales are denominated in U.S. dollars. Therefore, a strengthening of the dollar could make our products less competitive in foreign markets. Our current distribution agreements shift foreign exchange risk to our foreign distributors. We do not use derivative instruments to hedge foreign exchange risk. In the future, a portion of our international revenue and expenses may be denominated in foreign currencies. In 2000, we started an Internet commerce sales initiative that allows users to purchase products from our website. For the nine months ended September 30, 2001, we derived 7% of our revenue from sales on our website. To increase our web-based sales in the future, we intend to increase investments in associated selling and marketing, capital equipment and research and development. Cost of revenue consists primarily of royalties paid or accrued for payment to third parties for technologies incorporated into our products as well as expenses incurred to manufacture, package and distribute our software products. Cost of revenue also includes estimated accruals for royalties due on technology for which we have no license and related intellectual property claims. We may adjust the rate at which we accrue these amounts in the future. Our gross profit is affected by many factors, including competitive pricing pressures, fluctuations in unit volumes, changes in third party license fees and changes in the mix of products sold and in our mix of distribution channels. Over the next several quarters, we expect our cost of revenue to increase as a percentage of revenue due to lower selling prices. Research and development expenses consist primarily of personnel and related costs, consulting expenses associated with the development of new products, technology license fees and quality assurance and testing. To date, we have not capitalized any research and development expenses. Sales and marketing expenses consist primarily of personnel and related costs, including salaries and commissions, travel expenses, commissions paid to third-party sales representatives and costs associated with trade shows, advertising and other marketing efforts, as well as technical support costs. Customer service and technical support costs include the costs associated with answering customer inquires and providing telephone assistance. In connection with the sale of some products, we provide a limited amount of free telephone support service to customers. This free service, also referred to as post-contract customer support, is included in sales and marketing expenses. We do not defer the recognition of any revenue associated with sales of these products, because the cost of providing this free support is insignificant. The support is provided within 90 days after the associated revenue is recognized, and enhancements are minimal and infrequent. - -------------------------------------------------------------------------------- 25 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- General and administrative expenses consist primarily of personnel and related costs, and support costs for finance, human resources, legal, operations, information systems and administration departments as well as professional fees. We recorded deferred stock compensation of $1.6 million for the nine months ended September 30, 2001, $3.5 million for the year ended December 31, 2000 and $218,000 for the year ended December 31, 1999. Deferred stock compensation represents the difference between the deemed fair market value of our common stock at the time of option grants during these periods and the exercise prices of these options. We amortize deferred stock compensation using a multiple option award valuation approach over the vesting periods of the applicable options, which is generally four years. See Note 8 of notes to consolidated financial statements. The amortization of deferred stock compensation for options granted through September 30, 2001 for the next four years totals $452,000 in the remaining three months of 2001, $1.1 million in 2002, $455,000 in 2003 and $132,000 in 2004. Interest income and other, net consists primarily of interest earned on our cash, cash equivalent and short-term investment balances, offset by other expenses. RESULTS OF OPERATIONS
Year ended Nine months ended December 31, September 30, ----------- ------------- 1999 2000 2000 2001 (unaudited) --------------------------------------------------------------------------- As a percentage of revenue: Revenue................................... 100% 100% 100% 100% Cost of revenue........................... 37 34 33 38 --- --- --- --- Gross margin........................... 63 66 67 62 --- --- --- --- Operating expenses: Research and development............... 43 45 46 31 Sales and marketing.................... 39 33 32 27 General and administrative............. 25 17 17 9 Stock compensation..................... 2 9 9 7 Special charges........................ -- -- -- 13 --- --- --- --- Total operating expenses............ 109 104 104 87 --- --- --- --- Operating loss...................... (46) (38) (37) (25) Other income (expense), net............... 1 4 3 2 --- --- --- --- Loss before provision for income taxes.... (45) (34) (34) (23) Provision for income taxes................ 2 4 4 2 --- --- --- --- Net loss............................ (47)% (38)% (38)% (25)% === === === ===
Comparison of nine months ended September 30, 2001 and 2000 Revenue Revenue increased 142% to $23.7 million for the nine months ended September 30, 2001 from $9.8 million for the nine months ended September 30, 2000. The growth in revenue resulted primarily from increased sales of our WinDVD product. Gross margin Gross margin decreased to 62% of revenue in the nine months ended September 30, 2001 from 67% in the nine months ended September 30, 2000. This decrease primarily resulted from decreased selling - -------------------------------------------------------------------------------- 26 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- prices of our products, which was partially offset by a decrease in the average royalty unit cost owed to third parties for incorporation of their technology into our products. Research and development Research and development expenses increased to $7.3 million, or 31% of revenue, for the nine months ended September 30, 2001 from $4.5 million, or 46% of revenue, for the nine months ended September 30, 2000. The increase in absolute dollars resulted primarily from increased personnel and consulting costs, facilities-related expenses and outside professional fees, which increase was partially offset by a special in-process research and development charge resulting from our acquisition of the Audio Visual Products Division of Formosoft International Inc., or AVPD, a developer of audio and video data, in 2000, as well as amortization expenses for goodwill and its related intangible assets recorded in the first nine months of 2000. We believe that a significant level of research and development expenses will be required to remain competitive, and, as a result, we intend to increase these expenses in absolute dollars in the future. Sales and marketing Sales and marketing expenses increased to $6.4 million, or 27% of revenue, for the nine months ended September 30, 2001 compared to $3.1 million, or 32% of revenue, for the nine months ended September 30, 2000. The increase in absolute dollars was primarily attributable to increased personnel costs, including hiring of additional sales and marketing personnel, as well as increased commission costs paid to third-party sales representatives, promotional expenses, consulting costs and facilities-related expenses to support our higher level of sales. We intend to actively market, sell and promote our products and further develop our brand name. Therefore, we expect expenses related to these programs to continue to increase in absolute dollars in the future. General and administrative General and administrative expenses increased to $2.2 million, or 9% of revenue, for the nine months ended September 30, 2001 from $1.6 million, or 17% of revenue, for the nine months ended September 30, 2000. The increase in absolute dollars was primarily attributable to increased personnel costs and professional services. We expect selling, general and administrative expenses to continue to increase in absolute dollars as we build our infrastructure to support our anticipated growth and operations as a public company. Stock-based compensation Stock-based compensation expenses increased to $1.6 million for the nine months ended September 30, 2001 from $906,000 for the nine months ended September 30, 2000. The stock-based compensation charges for the issuance of stock options will be amortized on an accelerated basis over the next four years. Special charges We incurred special charges of $3.1 million in the first nine months of 2001. Of the total charges, $850,000 related to a restructuring of our business, including severance and office closure costs, and was charged in the second quarter. The remaining $2.2 million was charged in the third quarter. Of this amount, $700,000 related to costs incurred in connection with our preparation for an initial public offering that we delayed for several months and $1.5 million related to advance licensing and promotional payments for which there will be no future benefit. Other income (expense), net Other income (expense), net primarily consists of interest income, offset by loss on fixed assets disposal and other expense, if any. Other income (expense), net increased to $443,000 for the nine months ended - -------------------------------------------------------------------------------- 27 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- September 30, 2001 from $303,000 for the nine months ended September 30, 2000. Interest income decreased to $405,000 for the nine months ended September 30, 2001 compared to $447,000 for the nine months ended September 30, 2000. This decrease in interest income was offset by a higher increase in non-operating expenses during the nine months ended September 30, 2000. This increase in non-operating expense was primarily due to recording a $134,000 loss on fixed assets disposed of during this period. No fixed assets were disposed of in the nine months ended September 30, 2001. Provision for income taxes The provision for income taxes increased to $509,000 in the nine months ended September 30, 2001 from $382,000 in the nine months ended September 30, 2000 due to higher foreign sales. Although we have not generated taxable income in the United States, we are subject to foreign withholding taxes in Japan and Taiwan. Comparison of years ended December 31, 2000 and 1999 Revenue Revenue increased 408% to $15.4 million for the year ended December 31, 2000 from $3.0 million for the year ended December 31, 1999. The growth in revenue resulted primarily from increased sales of our WinDVD product. Product sales in the years ended December 31, 2000 and 1999 were highly concentrated, with 49% of revenue in the year ended December 31, 2000 coming from five customers and 60% of revenue in the year ended December 31, 1999 coming from five customers. Gross margin Gross margin increased to 66% of revenue for the year ended December 31, 2000 compared to 63% for the year ended December 31, 1999. This was primarily due to a decrease in the average royalty unit cost owed to third parties for incorporation of their technology into our products, partially offset by a slight decrease in average selling prices. Research and development Research and development expenses increased to $6.9 million, or 45% of revenue, for the year ended December 31, 2000 from $1.3 million, or 43% of revenue, for the year ended December 31, 1999. This increase primarily resulted from additional personnel costs, higher consulting and professional fees, facilities related expenses, depreciation, travel costs and the licensing of certain software, all associated with our continued research and development efforts. In connection with the purchase of AVPD in 2000, we recorded a special in-process research and development charge of $700,000 as well as $292,000 of amortization expenses for goodwill and the related intangible assets. The value of the acquired in-process technology was computed using a discounted cash flow analysis rate of 35% on the anticipated income stream of the related product revenue. The discounted cash flow analysis was based on an estimate of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions. Sales and marketing Sales and marketing expenses increased to $5.0 million, or 33% of revenue, for the year ended December 31, 2000 from $1.2 million, or 39% of revenue, for the year ended December 31, 1999. The increase in absolute dollars was primarily attributable to increased personnel costs, including hiring of additional sales and marketing personnel, as well as increased promotional expenses, including trade shows and advertising, higher outside commission costs, professional fees, facilities-related expenses and travel expenses related to our higher level of sales. - -------------------------------------------------------------------------------- 28 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- General and administrative General and administrative expenses increased to $2.7 million, or 17% of revenue, for the year ended December 31, 2000 compared to $773,000, or 25% of revenue, for the year ended December 31, 1999. This increase was primarily attributable to increased personnel costs and professional fees. Stock-based compensation Stock-based compensation expenses increased to $1.4 million for the year ended December 31, 2000 compared to $53,000 for the year ended December 31, 1999. Other income (expense), net Other income (expense), net increased to $557,000 for the year ended December 31, 2000 from $32,000 for the year ended December 31, 1999. This increase was primarily attributable to an increase in interest income resulting from higher cash balances received from the sale of our preferred stock, which was partially offset by a disposal of fixed assets. Provision for income taxes Although we have not generated taxable income in the United States, our revenue from Japan and Taiwan is subject to withholding taxes in those countries. The provision for income taxes increased to $552,000 for the year ended December 31, 2000 from $64,000 for the year ended December 31, 1999. This increase was due to greater foreign sales. Comparison of years ended December 31, 1999 and 1998 Revenue We recognized revenue in the amount of $3.0 million for the year ended December 31, 1999 compared to $0 for the year ended December 31, 1998. This increase was due to the commencement of sales of our first product, WinDVD, in 1999. Gross margin Gross margin was 63% of revenue in the year ended December 31, 1999. Research and development Research and development expenses increased to $1.3 million for the year ended December 31, 1999 compared to $328,000 for the year ended December 31, 1998. This increase was primarily due to the hiring of additional engineers. Sales and marketing Sales and marketing expenses increased to $1.2 million for the year ended December 31, 1999 compared to $0 for the year ended December 31, 1998. This increase was primarily due to the hiring of sales and marketing personnel, outside commission costs, marketing activities, travel and trade shows. General and administrative General and administrative expenses increased to $773,000 for the year ended December 31, 1999 compared to $199,000 for the year ended December 31, 1998. This increase was due to higher personnel costs, facilities-related expenses and outside professional costs. - -------------------------------------------------------------------------------- 29 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- QUARTERLY RESULTS OF OPERATIONS The following tables set forth unaudited consolidated statements of operations data for the eight quarters ended September 30, 2001. The unaudited consolidated information for each of these quarters has been prepared on substantially the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in our opinion, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Historical results are not necessarily indicative of the results to be expected in the future, and results of the interim periods are not necessarily indicative of our results of operations for the entire year.
Three months ended ------------------------------------------------------------------------------------ Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, 1999 2000 2000 2000 2000 2001 2001 2001 (unaudited) (in thousands) - -------------------------------------------------------------------------------------------------------------------- Revenue........................ $1,725 $2,445 $ 3,171 $ 4,145 $ 5,665 $ 7,722 $ 7,725 $ 8,226 Cost of revenue................ 606 778 1,065 1,421 1,925 3,030 2,886 2,965 ------ ------ ------- ------- ------- ------- ------- ------- Gross profit................. 1,119 1,667 2,106 2,724 3,740 4,692 4,839 5,261 Operating expenses: Research and development.... 494 700 1,826 1,964 2,386 2,593 2,491 2,223 Sales and marketing......... 622 808 1,126 1,194 1,905 2,042 2,248 2,132 General and administrative.. 407 451 737 456 1,023 675 777 773 Stock compensation.......... 32 235 297 375 504 541 502 569 Special charges............. -- -- -- -- -- -- 850 2,218 ------ ------ ------- ------- ------- ------- ------- ------- Total operating expenses... 1,555 2,194 3,986 3,989 5,818 5,851 6,868 7,915 ------ ------ ------- ------- ------- ------- ------- ------- Loss from operations........... (436) (527) (1,880) (1,265) (2,078) (1,159) (2,029) (2,654) Other income (expense), net.... 10 (80) 199 185 253 178 114 151 ------ ------ ------- ------- ------- ------- ------- ------- Loss before income taxes....... (426) (607) (1,681) (1,080) (1,825) (981) (1,915) (2,503) Provision for income taxes..... 41 117 97 168 170 151 269 89 ------ ------ ------- ------- ------- ------- ------- ------- Net loss................... $ (467) $ (724) $(1,778) $(1,248) $(1,995) $(1,132) $(2,184) $(2,592) ====== ====== ======= ======= ======= ======= ======= =======
Over the eight quarters presented, our quarterly revenue grew to $8.2 million for the quarter ended September 30, 2001 from $1.7 million for the quarter ended December 31, 1999. Revenue has increased in each successive quarter as we have increased OEM sales of our products and expanded our product line. In the quarter ended June 30, 2001, revenue remained relatively constant compared to the prior quarter at $7.7 million due to lower average selling prices offset by increased unit sales. The growth over the periods presented was primarily the result of increased sales of our WinDVD product. Our gross profit has increased in absolute dollars in each successive quarter. Our gross margin fluctuated between quarters but generally decreased to 64% for the quarter ended September 30, 2001 from 65% for the quarter ended December 31, 1999. This decrease primarily resulted from declining selling prices partially offset by higher margin sales in Japan and decreased accruals for royalties on technology for which we have no license in 2001 for royalties owed to third parties. Our total operating expenses have increased in absolute dollars in each successive quarter referred to in the table above, except for the quarters ended September 30, 2000 and March 31, 2001, when total operating expenses remained relatively constant. The increases primarily resulted from increased research and development expenses to introduce new products and enhance existing products, increased selling and marketing costs associated with higher revenue levels, increased general and administrative expenses primarily associated with the hiring of key management and other personnel. The decrease in general and - -------------------------------------------------------------------------------- 30 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- administrative expenses from the second to the third quarter of 2000 was primarily due to a decline in professional and other miscellaneous expenses including communications expenses and bad debt. The increase in general and administrative expenses from the third to the fourth quarter of 2000 was primarily due to higher personnel expense from bonuses and outside professional fees, including fees paid to outside recruiters. The decrease in general and administrative expenses from the fourth quarter of 2000 to the first quarter of 2001 was primarily due to decreases in personnel expense and professional fees. The decrease in research and development expenses from the first quarter of 2001 to the second quarter of 2001 was primarily attributable to lower consulting expenses due to the completion of WinRip. In the second quarter of 2001, the company enacted a corporate restructuring and took a special charge of $850,000 associated with it. Excluding the special charge and stock compensation expense in the third quarter of 2001, research and development and sales and marketing declined and general and administrative remained constant due to the restructuring in the previous quarter. We expect our operating results to fluctuate on an annual and quarterly basis in the future due to a variety of factors, many of which are outside our control. The license of software-based digital video and audio solutions for incorporation in products in the PC and consumer electronics industries is new, and it may be difficult to predict the future growth rate, if any, or size of the market for our products. We may be unable to accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us. Our current and future expense levels are based largely on our investment plans and estimates of future revenue and are, to a large extent, fixed. As a result, we may fail to make accurate financial forecasts and adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which would harm our operating results. Due to these and other factors, quarter-to-quarter comparisons of our operating results may not be meaningful, and you should not rely on our results for any one quarter as an indication of our future performance. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private sales of convertible preferred stock, which generated gross proceeds of $21.2 million, and the sale of our products. At September 30, 2001, we had cash and cash equivalents of $11.6 million. Net cash used in operating activities was $1.5 million for the nine months ended September 30, 2001 and $1.7 million for the nine months ended September 30, 2000. Net cash used in operating activities was $330,000 in 2000, $573,000 in 1999 and $135,000 in 1998. Cash used in operating activities resulted primarily from net losses from operations in each period. Net cash used in investing activities was $1.6 million for the nine months ended September 30, 2001 and $4.2 million for the nine months ended September 30, 2000. Of the $1.6 million expended in 2001, $1.0 million was the final payment for the purchase of AVPD and the remainder was property and equipment purchases. Net cash used in investing activities was $4.4 million in 2000, $657,000 in 1999, and $159,000 in 1998. Of the $4.4 million used in 2000, $2.2 million was partial payment for the purchase of AVPD and $2.2 million was purchases of property and equipment. Cash used in investing activities in 1999 and 1998 was due to the purchases of property and equipment. Cash provided by financing activities for the nine months ended September 30, 2001 was $80,000, primarily due to the issuance of common stock upon the exercise of stock options. Cash provided by financing activities for the nine months ended September 30, 2000 was $16.9 million, primarily due to cash received from the sale of preferred stock. Cash provided by financing activities was $16.8 million in 2000, $3.7 million in 1999 and $489,000 in 1998. Cash provided by financing activities in 2000, 1999 and 1998 was primarily due to sales of - -------------------------------------------------------------------------------- 31 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- convertible preferred stock and, to a lesser extent, the issuance of common stock upon the exercise of stock options. We currently have no significant commitments for capital expenditures. We anticipate that we will increase our capital expenditures consistent with our anticipated growth in personnel and infrastructure, including facilities and systems. On June 7, 2000, we completed an acquisition of AVPD for approximately $3.2 million. AVPD was founded in 1997 and released is first product, GAMUT98, in August 1998. AVPD's second-generation product, GAMUT2000, was released in February 2000. The transaction was accounted for as a purchase. We paid $2.2 million during 2000 and an additional $1.0 million during 2001. We recorded approximately $2.5 million of goodwill and other identifiable intangible assets in connection with the acquisition, which are being amortized over a five-year period. In connection with implementing SFAS No. 142 (discussed below), we will cease amortization of the goodwill component of these assets commencing on January 1, 2002 and will perform an annual test of for impairment of the goodwill, as required by the standard. We believe that the net proceeds from the sale of common stock in this offering, together with our current cash and cash equivalents, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. To the extent the proceeds of this offering and our existing sources of cash and cash flow from operations are not sufficient to fund our activities, we will need to raise additional funds. If we issue additional stock to raise capital, your percentage ownership in us would be reduced. Additional financing may not be available when needed and, if such financing is available, it may not be available on terms acceptable to us. If we raise funds through debt financing, we will have to pay interest and may be subject to restrictive covenants, which could limit our ability to take advantage of future opportunities, respond to competitive pressures or unanticipated industry changes. In addition, although we have no present understandings, commitments or agreements with respect to any acquisitions of other businesses, services, products and technologies, we may from time to time evaluate potential acquisitions. These acquisitions may increase our capital requirements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Risk To date, all of our revenue has been denominated in U.S. dollars. We expect, however, to begin denominating revenue from selected international markets in the currency of the applicable market. As a result, our operating results may become subject to significant fluctuations based upon changes in the exchange rates of some currencies in relation to the U.S. dollar. Although we will continue to monitor our exposure to currency fluctuations and, when appropriate, may use financial hedging techniques to minimize the effect of these fluctuations, exchange rate fluctuations may harm our financial results. Interest Rate Risk We have limited exposure to financial market risks, including changes in interest rates. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term instruments. Due to the short-term nature of our investments, we believe that we are not exposed to any material market risk. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133 of Financial Accounting Standards, "Accounting for Derivative Instruments and Hedging Activities," which requires - -------------------------------------------------------------------------------- 32 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- companies to record derivative financial instruments on their balance sheets as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In July 1999, the Financial Accounting Standards Board issued Statement No. 137 of Financial Accounting Standards, "Accounting For Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which deferred the effective date of Statement No. 133 to the first fiscal quarter ending June 30, 2000. We will adopt Statement No. 133, as amended, in the first quarter of 2001. We do not believe that the adopting of this statement will have a material impact on our results of operations or financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. We believe we have complied with the guidance in SAB No. 101. In March 2000, the Financial Accounting Standards Board issued interpretation No. 44. "Accounting for Certain Transactions involving Stock Compensation--an interpretation of APB Opinion No. 25," or FIN 44. This interpretation clarifies the definition of employee for purposes of applying Accounting Practice Board Opinion No. 25. "Accounting for Stock issued to Employees," the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This interpretation is effective July 1, 2000, but certain conclusions in this interpretation cover specific events that occur after either December 15, 1998 or January 12, 2000. We believe that the impact of FIN 44 will not have a material effect on our financial position or results of operations. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These new standards are effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill will no longer be amortized, but will be subject to an annual impairment test. The standards also promulgate, among other things, new requirements for accounting for other intangible assets. We do not believe that these new standards will have a material impact on our financial position and results of operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This new standard is effective for fiscal years beginning after December 15, 2001. This new standard affirms and clarifies certain accounting for long-lived assets and broadens the application of discontinued operations treatment. We do not believe that these new standards will have a material impact on our financial position and results of operations. - -------------------------------------------------------------------------------- 33 - -------------------------------------------------------------------------------- Business COMPANY OVERVIEW We are a leading provider of DVD software and offer a broad suite of advanced digital video and audio multimedia software products that allow users to record, edit, author, distribute and play digital multimedia content on PCs and consumer electronics devices. Our multimedia software products bring the functionality of popular consumer electronics products such as the DVD player, the VCR and the MP3 player to PCs and other devices. We derive a substantial majority of our revenue from sales of our WinDVD product, a software DVD player for PCs. Our other major products include WinDVR, a digital video recorder, WinProducer, a video recording and editing software application, and WinRip, a digital music recorder and player. Our software is bundled with products sold by eight of the top ten PC OEMs ranked in terms of sales by IDC. Our OEM customers include Compaq, Dell, Fujitsu, Fujitsu Siemens, Hewlett-Packard, Medion, Sony and Toshiba. We sell our products to PC OEMs and PC peripherals manufacturers worldwide and offer our software in up to 26 languages. In addition, we sell our products directly to consumers through retail channels and our websites, which currently operate in English, Japanese and Chinese. We intend to expand our product offerings to include additional digital multimedia features, such as the ability to deliver digital video and audio through a home network and to wireless electronic devices. We believe that we have developed our core technologies and products to enable rapid migration to future consumer devices. INDUSTRY BACKGROUND Adoption and growth of digital technologies for multimedia content Consumers have rapidly adopted digital technologies for recording, editing, authoring, distributing and playing multimedia content, beginning with the CD and continuing with DVD technology. Manufacturers have incorporated these digital technologies into PCs and consumer electronics devices to meet this growing demand. According to the Consumer Electronics Association, the DVD player, which can be used for playing both CDs and DVDs, is the fastest growing consumer electronics product of all time. According to Adams Media Research, the penetration of all DVD players, including those on PCs, is expected to reach approximately 55% of U.S. households by the end of 2002. The functionality of multimedia hardware and software for the PC continues to grow. Users increasingly consider multimedia hardware and software to be necessary components of a PC. For instance, a large percentage of new PCs include DVD drives or other multimedia functionality. The Gartner Group estimates that the total market for PC DVD drives, combination DVD-ROM and CD-RW drives as well as DVD-writeable drives will grow from approximately 35 million units in 2000 to approximately 150 million units in 2005, a compound annual growth rate of approximately 34%. All of these hardware PC components or peripheral devices require software to function and must share operating standards with other components of the PC. The establishment of common standards by government and private organizations has helped drive the growth of digital technologies for multimedia content. The consumer electronic, computer, broadcast and telecommunications industries have recognized that broad consumer acceptance of products embodying new digital technologies depends upon the adoption of industry-wide technical and performance standards. The standards that have driven, and we believe will continue to drive, the growth of digital technologies for multimedia content include: . DVD format--digital encoding of high quality digital video and audio content on optically readable discs, with multiple language options, subtitle options and other navigation and entertainment features; - -------------------------------------------------------------------------------- 34 Business - -------------------------------------------------------------------------------- . MPEG-1--compression of still images and real-time, low-cost compression and decompression of moving images; . MPEG-2--compression of video and audio data for broadcast and playback applications used in DVD and HDTV; . MP3--compression of audio data for playback applications, technically referred to as MPEG-1 Layer 3; . MPEG-4--a developing standard for compression of video and audio under low transmission rates particularly used in wireless applications; and . Dolby Digital and Digital Theater Systems, or DTS--compression of audio for use in multi-channel digital surround sound systems. The personal computer as a digital multimedia platform PCs are well suited for high-quality multimedia entertainment and have emerged as a pervasive platform for digital multimedia technologies primarily due to improvements in storage technology and advances in microprocessor technology. In the mid-1980s, consumer electronics companies pioneered digital multimedia technologies, such as CD technology, which paved the way for the growth of high quality multimedia content. In recent years, DVD technology has emerged as an important format for portable distribution of high quality video and audio. DVDs can store up to 18 gigabytes of compressed data on a single disc. In comparison to hard disk drives, DVDs and DVD drives also offer a cost effective means of storing and playing professional broadcast-quality video and audio content. In addition, the increased capacity of hard disk drives and corresponding decrease in the cost of storage have enabled consumers to use the PC as a tool to manage multimedia content, which often requires large amounts of storage capacity. At the same time, the advent of high-powered, low-cost microprocessors has enabled consumers to record, edit, author, distribute and play high quality digital video and audio on PCs at a more reasonable cost. With the continuing improvements of PC performance relative to price, the PC is an increasingly attractive platform for digital multimedia. According to Gartner Dataquest, desktop PC configurations will include 3.5 GHz microprocessors, 512 MB of random access memory and 300GB of hard disk space by the end of 2002, and PCs with 2 GHz microprocessors will be considered low end by the end of 2002. The following are some of the specific benefits of using the PC as a universal platform for digital multimedia: . Ability to play multiple media formats. A single PC with the proper hardware and software can play most media formats, including movies, MP3s, CDs, games, television and streaming media. Because PCs can be bundled with complementary applications, the total cost to the user can be lower than buying each consumer electronics device separately. . Broad range of multimedia functionality. A PC can provide a variety of advanced multimedia hardware and software components. For instance, PCs not only can record and play digital multimedia content, but they can also be used to edit, author and distribute digital multimedia content. . Cost-effectiveness and convenience. As new multimedia features emerge, consumers can often simply download software upgrades, which are more cost-effective and convenient than purchasing a dedicated hardware device. In addition, software solutions enable PCs to perform the capabilities of several different media products on a single hardware platform. The proliferation of digital multimedia consumer electronics devices In addition to the rapid growth in popularity of PCs offering full-featured digital multimedia functionality, demand for consumer electronics devices that provide digital multimedia functions is also - -------------------------------------------------------------------------------- 35 Business - -------------------------------------------------------------------------------- growing rapidly. For instance, DVRs, also known as personal video recorders, or PVRs, which record and time shift television programming, are growing in popularity. According to IDC, the total PVR installed base will reach nearly 30 million by the end of 2005 from slightly over one million in 2001, representing a compound annual growth rate of 130%. As home networking becomes more popular, many of the functions of these dedicated devices may be incorporated into the PC and distributed through home consumer electronics devices called set-top boxes, which can receive signals from the central home computer acting as the home multimedia entertainment gateway. Market opportunity for a complete multimedia software solution Advances in digital technology enable the PC to serve as a versatile, feature-rich and reasonably priced digital entertainment platform. All PC multimedia hardware components require software to operate. As a result, multimedia software not only has become a necessary component of the PC, but also serves as an opportunity for OEMs to add value to their products, improve margins and differentiate their products from those of their competitors. As consumer electronics manufacturers migrate from dedicated hardware solutions to a PC architecture in order to provide lower cost and greater flexibility, we expect the market opportunity for multimedia software to grow in this market segment as well. We believe that all of these factors will create market opportunities for a complete multimedia software solution that: . consists of an integrated and interoperable suite of multimedia software products providing broad functionality; . works with a variety of PC operating systems and multimedia devices, thereby reducing costs and improving time to market for OEMs; and . can be upgraded rapidly to incorporate new features, technologies and products, thereby reducing development time and costs and mitigating the risk of obsolescence for consumers. THE INTERVIDEO SOLUTION We are a leading provider of DVD software, and we offer a broad suite of advanced digital video and audio multimedia software products that allow users to record, edit, author, distribute and play digital multimedia content on PCs and consumer electronics devices. We help PC OEMs, consumer electronics manufacturers and PC peripherals manufacturers add value to their products, improve margins and differentiate their products from those of their competitors. Key elements of our solution include the following: A broad multimedia software solution for the PC Our broad software suite provides OEMs and consumers with a single source for a variety of multimedia functions. PCs running our integrated multimedia software can replace several expensive dedicated hardware components such as separate DVD players, DVRs, MP3 players, CD players and digital television set-top boxes. Our multimedia software solution is compatible with a broad variety of highly customized PC configurations. Our products have a common look and feel and allow users to toggle quickly and seamlessly between multimedia functions, such as viewing TV and listening to music. Core technology that operates on a variety of platforms Our core technology is based on a layered architecture that allows our suite of products to operate on a variety of hardware and software platforms. Over 90% of our code is platform independent, which allows us to quickly port our existing products to new operating systems or hardware platforms. Our "single build" approach allows the current version of our software to be used with multiple Windows operating systems, including Windows 95, 98, NT4.0, 2000, ME and XP editions. We have also - -------------------------------------------------------------------------------- 36 Business - -------------------------------------------------------------------------------- developed versions of our key products for the Linux operating system. WinDVD has been certified by Microsoft's Windows Hardware Quality Lab, or WHQL, as a Motion Video Device on more than 800 PC hardware and software configurations, which is more than any other PC DVD software provider. In addition, our software is compatible with a broad range of multimedia hardware products, including specialized graphics chips, audio cards and DVD drives from various suppliers and in various configurations. We believe this is a significant benefit to OEMs because they do not have to undertake as time-consuming and cost-intensive a qualification process for each new combination of multimedia software and hardware. We believe that our approach also enables OEMs to offer their customers highly customized PCs with lower customer service costs than would be required if they had to support multiple builds. Layered architecture that we have adapted to new technologies and upgraded to incorporate new features Our layered architecture enables us to respond and adapt to new technologies in an industry characterized by rapid change. Because our modular components are arranged in layered structures, we can add new features to a product and create new products by plugging in new components into appropriate layers. For example, our WinDTV product reuses the WinDVD architecture with the addition of only a few components. Because we generally customize only a small portion of code in order to develop a new product, we have been able to meet OEM demand for a variety of new products efficiently. Moreover, because our architecture has allowed us to efficiently develop new products incorporating additional functionality, such as digital video recording, we have provided our customers with the ability to increase the functionality of their products at a low cost and with relative ease, which has enabled them to differentiate their products from competitors' product offerings. Our proprietary layered architecture also generally enables consumers to update or upgrade multimedia features and capabilities without replacing hardware components, which decreases the risk of obsolescence. OUR STRATEGY Our goal is to be the leading global provider of advanced digital video and audio multimedia software solutions for PCs, consumer electronics devices, PC peripherals, home networks and other emerging markets. Key elements of our strategy include the following: Increase market penetration of our multimedia software We will seek to increase our market share by aggressively pursuing additional OEM relationships, entering into creative marketing arrangements and exploiting new sales channels. With eight of the world's top ten PC OEMs ranked in terms of sales by IDC currently using WinDVD or our other products, we intend to target smaller OEMs that are leaders in their regional markets. We have recently implemented marketing arrangements with select OEMs under which we share revenue generated by user upgrades or new product purchases and intend to enter into similar arrangements with other OEMs. We also intend to expand the sale of our products through retail channels and through our Internet commerce sites. Leverage existing and prospective OEM relationships to promote adoption of new products We plan to leverage our strong market position and integrated product suite to encourage our PC OEM customers to license additional software products and to encourage prospective PC OEMs to adopt our products. We have begun implementing this strategy with two of our largest customers, both of which first installed our WinDVD product on their PCs and have now added our WinDVR product. We believe that existing and prospective OEM customers will find our broad suite of integrated products with similar user interfaces more attractive than discrete products with different user interfaces, because the similarity of the user interfaces allows end users to learn how to use the software more quickly and easily. We believe this reduces customer support calls to our OEMs, which, in turn, reduces their costs. - -------------------------------------------------------------------------------- 37 Business - -------------------------------------------------------------------------------- Capitalize on emerging product markets We believe that our flexible product design architecture allows us to respond rapidly to changes in technology, adapt our products to new hardware platforms and operating systems and develop new products in a cost-effective manner. We intend to closely monitor evolving technologies and to identify additional markets for our products. We believe that we can adapt our technology effectively for use in a variety of emerging consumer electronics and network devices, such as cable and satellite TV set-top boxes, devices being developed for use within home networks and MPEG-4 wireless devices. We are developing a home networking product that would allow the PC to be used as the central multimedia entertainment gateway for an entire household, eliminating the need for consumers to purchase redundant consumer electronics devices. Maintain and enhance strategic relationships, and acquire companies and technologies We have established strategic relationships with several technology and market leaders, including Microsoft and Nvidia. Under our arrangement with Microsoft, consumers are prompted automatically to download WinDVD when they upgrade from older Windows operating systems to the new Windows XP operating system. In addition, we licensed our WinDVD, WinDVR and WinRip solutions to Nvidia as the primary underlying multimedia software platform for Nvidia's Personal Cinema product. We intend to maintain existing and pursue additional strategic relationships with technology providers, such as providers of operating systems, microprocessors and graphic chips. We believe these relationships will continue to enable us to achieve our design objectives, produce interoperable products and provide information concerning customer preferences and evolving industry standards and trends. In addition, we intend to pursue acquisitions of complementary products, technologies and companies to gain further OEM penetration, capitalize on emerging product markets, maintain and extend our technology leadership and expand our global presence and distribution channels. Continue to expand global presence For the nine months ended September 30, 2001, more than 44% of our sales came from outside the United States. We believe that significant revenue growth opportunities exist in Europe, Asia and elsewhere. Accordingly, we intend to continue to target OEMs and end users outside the United States. We have established a presence in Taiwan and intend to open other regional offices in strategic locations to support our international marketing efforts. In addition, we expect to continue to develop foreign language software interfaces for our products and intend to increase our marketing efforts in Asia and Europe. We are also creating additional websites in different languages to facilitate direct sales to end users outside of the United States. - -------------------------------------------------------------------------------- 38 Business - -------------------------------------------------------------------------------- PRODUCTS We offer a broad suite of advanced digital video and audio software solutions. Our products are based on industry standards and incorporate a graphical user interface with a common look and feel. The following table lists the products that we currently license to OEMs, PC peripherals manufacturers and end users:
Product Function Compatible Operating Systems Introduction - -------------------------------------------------------------------------------- WinDVD DVD player software Windows 95, February 1999 98 Second Edition (SE), Millennium Edition (ME), NT 4.0, 2000, XP, Linux WinDVR Digital video recorder Windows 98SE, ME, 2000, XP September 2000 software WinCoder Real-time video encoder Windows 98SE, ME, 2000, XP March 2001 WinProducer Digital video editing, Windows 98SE, ME, 2000, XP July 2001 distribution and DVD authoring software WinRIP MP3 audio player, Windows 98SE, ME, 2000, XP February 2001 organizer and encoder WinDTV Digital TV software Windows 98SE, ME, 2000, XP July 2001
WinDVD--Our DVD player software We currently derive a substantial majority of our revenue from sales of our WinDVD product. WinDVD is bundled by manufacturers with PCs equipped with DVD drives and Microsoft Windows compatible software to enable those PCs to decode and play DVDs. WinDVD software allows users to enjoy the advantages of DVDs such as high picture quality, Dolby Digital and DTS surround sound audio decoding, multiple language and subtitle options, navigation and other entertainment options. Our user interface, which appears on the computer screen, resembles the controls for a stand-alone DVD player and other home electronics devices. WinDVD has been Microsoft WHQL certified as a Motion Video Device on more than 800 PC hardware and software configurations, which is more than any other PC DVD software provider. We have localized WinDVD in 26 different languages, including the most common languages in Europe, South America and Asia, including Japanese, Korean and both traditional and simplified Chinese. WinDVR--Our digital video recorder software Our WinDVR software permits PC users to create high-quality digital recordings of broadcast, cable and satellite television programming. Combined with a TV tuner card, WinDVR permits users to manage their television viewing experience by recording programs, movies or sporting events. Users also may utilize sophisticated time shifting features such as live TV pause, simultaneous record and playback, commercial skip, instant replay and multiple-channel preview. WinCoder--Our real-time video encoder Our WinCoder software permits PC users to record and edit digital video and audio feeds from video cameras, webcams, camcorders, DV camcorders and other PC-based video and audio input devices. WinCoder captures and compresses the video and audio from these sources into a standard format, MPEG-2, so that the content consumes far less space on the PC's hard drive or other storage medium. - -------------------------------------------------------------------------------- 39 Business - -------------------------------------------------------------------------------- WinProducer -- Our digital editing software WinProducer enables users to edit and create video clips and digital audio files. WinProducer provides an easy-to-use user interface using a drag-and-drop scheme combined with powerful video editing functions including transition effects, filters, scene change detection, overlays, text titling and music sound tracks. The software includes an integrated video capture capability that allows users to easily transfer external video materials to the PC from various devices including VCRs, camcorders, DV camcorders and webcams. Users can also edit and enhance home movies and transfer them to DVDs or Video CDs. In 2002, we expect to extend WinProducer to enable the transfer of video data to CD-RW or DVD writeable devices. WinRip -- Our audio player and encoder Our audio player and encoder software, WinRip, enables PC users to play and record MP3, Windows Media Audio, or WMA, format and WAV audio content and to play WMA and Musical Instrument Digital Interface, or MIDI, clips and audio CDs. WinRip provides the ability to move music from CDs to digital files, to access an online music database to automatically add information, such as artist and track names, to the "ripped" music files, and to turn digital music into audio CDs or to output files to portable devices. WinDTV -- Our digital TV software WinDTV enables PC users to watch high definition television, or HDTV, digital video broadcast, or DVB, or other digital video and audio input. With a digital TV tuner card and our WinDTV software, users can watch digital broadcasts on a PC or on a DTV-ready television set. WinDTV supports all 18 ATSC, or American Television Systems Committee, formats and DVB formats used in Europe and Asia. It also offers data-enhanced digital television for interactive DTV broadcasting on the PC. INTERVIDEO TECHNOLOGY PLATFORM Our technology platform incorporates the following principles: . Modular and layered design for greater expandability and reusability; . Generic design and portable implementation for greater platform independence; and . Utilization of industry standards whenever possible to promote market acceptance of our products. Our modular and layered design approach enhances product expandability and component reusability. Because we arrange modular components in layered structures, we can more quickly and efficiently add new features to a product by plugging in new components into appropriate layers. For example, we incorporated the Video CD feature into our WinDVD product with the addition of only a few new components. Similarly, we created our WinDTV product by reusing components of WinDVD. Because of component reusability, these products were developed with fewer resources and less time than would have been required to design them using entirely new components. As a result, we have been able to develop new products such as WinDVR, WinCoder, WinProducer and WinRip more efficiently and with less development time. Our flexible design approach and portable implementation allow our software to support a significant number of PC platforms and to work with a broad variety of PC configurations. Over 90% of the code that is used to implement our products is platform independent. As a result, we can efficiently port an existing product to a new operating system or hardware platform and cost-effectively support many customers and varied product lines. - -------------------------------------------------------------------------------- 40 Business - -------------------------------------------------------------------------------- CUSTOMERS Our customer base consists primarily of PC OEMs and manufacturers of PC peripherals that incorporate our software into their products. The following PC and peripherals manufacturers each contributed more than $400,000 in revenue for the nine months ended September 30, 2001: Canopus Co., Ltd. Compaq Computer Corporation Dell Products, L.P. Fujitsu Limited Fujitsu Siemens Computers GmbH Hewlett-Packard Company Medion AG Sony Corporation Toshiba Corporation Our software is bundled with products sold by eight of the top ten PC OEMs ranked in terms of sales by IDC. For the nine months ended September 30, 2001, our four largest customers accounted for a majority of our revenue, with Dell accounting for 31% and Fujitsu accounting for 12%. Compaq and Hewlett-Packard, which have announced an agreement to merge, together accounted for more than 10% of our revenue during that period. Our license agreements with customers are typically for a term of one or two years and do not contain any minimum volume commitments. Consumers may purchase products and product upgrades directly through our Internet commerce sites. Revenue derived from our Internet commerce sites accounted for 7% of our revenue in the first nine months of 2001. We also license our products to distributors that sell our products to consumers through retail distribution channels. SALES, MARKETING AND TECHNICAL SUPPORT Our sales and marketing strategy focuses on establishing and maintaining license arrangements with PC, peripherals and consumer electronics manufacturers. We license our digital multimedia solutions on a non-exclusive worldwide basis to PC, peripherals and consumer electronics manufacturers that sell products incorporating these technologies to end users. Members of our sales force, located in China, Japan, the Netherlands, Taiwan and the United States, work closely with our OEM customers to define and customize products, conduct on-site testing and provide engineering and field application engineering support. We have also established a network of independent sales representatives and manufacturing representatives in the United States, Asia and Europe to assist in OEM sales. We supplement our distribution channels through the Internet to increase direct contact with our customers, facilitate electronic sales of our products and sell associated products directly to consumers. We also distribute free trial versions of our software through consumer distribution channels, including media and computer magazines, corporate, educational and training DVD titles and on our Internet commerce site. We believe the technical support that we provide to OEMs represents an important part of our competitive advantage in maintaining strong relationships with these OEMs. We have built a customer support infrastructure composed of sales staff, program managers and quality assurance engineers. We have also created an efficient, cost-effective Internet-based system for the delivery of software and software fixes to OEMs. This infrastructure reduces duplication of effort and fosters better communication channels between the OEMs and ourselves. This infrastructure reduces our support costs by enabling us to provide customer support with a relatively small staff. - -------------------------------------------------------------------------------- 41 Business - -------------------------------------------------------------------------------- As a supplement to OEM customer support, our on-line technical support group provides direct customer support to users that purchase our products through retail channels or our website. Our on-line technical support group also trains the technical support groups of our OEM customers so that they can provide more effective telephone and on-line support for their customers. As of December 31, 2001, we had 40 sales, marketing and technical support personnel residing in our offices in Fremont, California; Taipei, Taiwan; Shenzhen, China; and Tokyo, Japan. RESEARCH AND DEVELOPMENT We have assembled a qualified team of engineers with core competencies in software architecture and development for the Windows, Windows CE and Linux operating systems and digital video and audio encoders and decoders. Our engineers are located in Fremont, California; Taipei, Taiwan; and Shenzhen, China. We will continue to focus our research and development activities on enhancing our existing products and developing new products to meet the evolving needs of our customers within the PC and the consumer electronics markets. We believe that interaction with our OEM customers throughout the product design process enables us to anticipate technology trends and focus our research and development efforts on addressing these emerging needs. We design products to meet our OEM customers' specifications and current industry standards and will continue to support emerging standards that are complementary to our product strategy. For example, we meet regularly with the Intel microprocessor architecture team, and they provide details about upcoming products and give us source code libraries of new microprocessor instructions that can help us anticipate future market trends and improve the performance and the capabilities of our multimedia software. We believe that our competitive position will depend in large part on our ability to develop new and enhanced digital entertainment solutions and our ability to meet the evolving and rapidly changing needs of PC, peripherals and consumer electronics manufacturers and consumers. We expect to increase our total research and development expenses in the future to provide resources for enhancement of existing and development of new product lines. As of December 31, 2001, we employed 86 research and development personnel in three offices. For the nine months ended September 30, 2001, our research and development expenditures totaled $7.3 million. Of the 69 research and development personnel who are engineers, 12 hold PhDs. We intend to recruit, hire and retain highly qualified engineers and technicians to support our further research and development efforts. COMPETITION Our industry is intensely competitive, and we expect competition to intensify in the future. Our competitors include software companies that offer digital video or audio applications, companies offering hardware or semiconductor solutions as alternatives to our software products and operating system providers that may develop and integrate applications into their products. Additional competitors are likely to enter our industry in the future. We also face competition from the internal research and development departments of other software companies and personal computer and consumer electronics manufacturers, including some of our current customers. Some of our customers have the capability to integrate their operations vertically by developing their own software-based digital and audio solutions or by acquiring our competitors or the rights to develop competitive products or - -------------------------------------------------------------------------------- 42 Business - -------------------------------------------------------------------------------- technologies, which may allow these customers to reduce their purchases or cease purchasing from us completely. Operating system providers with an established customer base, such as Microsoft, already offer products in the digital video and audio software markets. Some video and audio capabilities are built directly into their operating systems or are offered as upgrades to those operating systems at no additional charge. If Microsoft or other operating system providers developed or licensed digital video and audio solutions that compete directly with ours, and incorporate the solutions into their operating systems, our business could be harmed. We expect our current competitors to introduce improved products at lower prices, and we will need to do the same to remain competitive. We may not be able to compete successfully against either current or future competitors with respect to new or improved products. We believe that competitive pressures may result in price reductions, reduced margins and our loss of market share. Many of our current competitors and potential competitors have longer operating histories and significantly greater financial, technical, sales and marketing resources or greater name recognition than we do. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition, our competitors that have large market capitalizations or cash reserves are in a better position to acquire other companies in order to gain new technologies or products that may displace our products. Any of these potential acquisitions could give our competitors a strategic advantage. In addition, some of our current competitors and potential competitors have greater brand name recognition, a more extensive customer base, more developed distribution channels and broader product offerings, than we do. These companies can use their broader customer base and product offerings, or adopt aggressive pricing policies, to gain market share. Increased competition in the market may result in price reductions, decreased customer orders, reduced profit margins and loss of market share, any of which could harm our business. We believe the primary competitive factors impacting our business are the quality and reputation of products; the quality of the program management team; relationships with OEMs; compatibility with emerging industry standards; scope and responsiveness of service and technical support; ability to offer cost-effective products that balance performance and cost; timeliness and relevance of new product introductions; timeliness and quality of modifications and enhancements to existing products to comply with new and evolving hardware and software; technical innovation; breadth of product offerings; and price structure and business model characteristics. Although we believe our products compete favorably with respect to each of these factors, the market for our products is rapidly evolving, and we may not be able to maintain our competitive position against current and potential competitors, especially those with greater resources. INTELLECTUAL PROPERTY Our success depends upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as license and confidentiality agreements with, our employees, customers, strategic partners and others to establish and protect our proprietary rights. The protection of patentable inventions is important to our future opportunities. We currently have one patent issued in Taiwan, and we have fifteen pending patent applications in various jurisdictions, three of which are provisional. Existing patent copyright, trademark and trade secret laws and license and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our products is difficult. Any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive - -------------------------------------------------------------------------------- 43 Business - -------------------------------------------------------------------------------- advantage and a decrease in our revenue. Infringement claims and lawsuits would likely be expensive to resolve and would require management's time and resources, and, therefore, could harm our business. Our digital video and audio solutions comply with industry DVD specifications. Some third parties have claimed that various aspects of DVD technology incorporated into our and our customers' products infringe upon patents held by them, including MPEG LA, a consortium formed to enforce the proprietary rights of certain holders of patents covering certain aspects of MPEG-2 technology, and a consortium known as "6C," formed by separate groups of companies to enforce the proprietary rights of certain holders of patents covering some aspects of DVD technology. In addition to these claims, we may receive notices of claims of infringement of other parties' proprietary rights, including 3c, another consortium formed to enforce the proprietary rights of certain holders of patents covering some aspects of DVD technology. Many companies aggressively use their patent portfolios to bring infringement claims against competitors and other parties. As a result, we may become a party to litigation in the future as a result of an alleged infringement of the intellectual property rights of others, including MPEG LA, 6C or 3C. Similarly, other parties have alleged that aspects of MPEG-2 and other multimedia technologies infringe upon patents held by them. We may be required to pay license fees and damages in the future if it is determined that our products infringe on patents owned by these third parties. In addition, other companies may form consortia in the future, similar to MPEG LA, 6C and 3C, to enforce their proprietary rights and these consortia may seek to enforce their patent rights against us and our customers. If MPEG LA, 6C, 3C or another third party proves that our technology infringes its proprietary rights, we may be required to pay substantial damages for past infringement and may be required to pay license fees or royalties on future sales of our products. In addition, if it were proven that we actually infringed on a third party's proprietary rights, we may be held liable for three times of amount of damages we would otherwise have to pay. Intellectual property litigation may require us to stop selling our products, obtain a license from the owner of the infringed intellectual property or redesign our products. Some of our license agreements, including many of the agreements we have entered into with our large PC OEM customers, contain warranties of non-infringement and commitments to indemnify our customers against liability arising from infringement of third-party intellectual property which may include such as the patents held by members of MPEG LA, 6C and 3C. These commitments may require us to indemnify or pay damages to our customers for all or a portion of any license fees or other damages, including attorneys' fees, they are required to pay or agree to pay these or other third parties. If we are required to pay damages to our customers or indemnify our customers for damages they incur, our business could be harmed. See "Risk factors--We have received notice of claims, and may receive additional notices of claims in the future, regarding the alleged infringement of third parties intellectual properly rights that may result in restrictions or prohibitions on the sale of our products and cause us to pay license fees and damages." We license technology from Dolby Laboratories for the audio format that is used in all DVD-related products. We pay a royalty to Dolby on a lump-sum and per-unit shipped basis. The technology is comprised of Dolby Pro Logic, Dolby Digital AC-3, Virtual Technology, MLP Lossless, Dolby Digital AC-3 Audio System, Dolby Headphone System and other related technologies which create "theater quality" sound by routing audio signals from a DVD to different speakers in a multi-speaker setup. This technology from Dolby Laboratories is part of the industry standard DVD specification. We license encryption software technology from the DVD Copy Control Association, Inc. This technology is designed to provide protection for content encoded onto DVD discs. We pay DVD Copy Control Association, Inc. an annual license fee for this technology. If any of the licenses for the technologies and software described above terminate and are not renewed on commercially reasonable terms, our business could be harmed, and we could be prevented from shipping products using the MPEG2 standards. - -------------------------------------------------------------------------------- 44 Business - -------------------------------------------------------------------------------- EMPLOYEES As of December 31, 2001, we employed 156 people, of whom 73 worked in the United States and 83 worked in our various international locations. Of the U.S. employees, 18 were in sales and marketing, 38 were in research and development and 17 were in general and administration. Of the international employees, 22 were in sales and marketing, 48 were in research and development and 13 were in general and administration. FACILITIES We currently lease the following properties:
Location Primary Use Square Footage Date Lease Expires - --------------------------------------------------------------------------------------------------- Fremont, California Corporate/Research and Development/Sales 19,395 October 30, 2003 Tokyo, Japan Sales and Marketing 2,428 September 30, 2003 Shenzhen, China Research and Development/Sales and Marketing 6,058 May 31, 2003 Taipei, Taiwan Research and Development/Sales and Marketing 4,625 June 14, 2003
We believe that our existing space is adequate for our current operations. We believe that suitable replacement and additional space will be available in the future on commercially reasonable terms. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. - -------------------------------------------------------------------------------- 45 - -------------------------------------------------------------------------------- Management EXECUTIVE OFFICERS AND DIRECTORS Set forth below is information concerning our directors and executive officers as of December 31, 2001.
Name Age Position(s) - -------------------------------------------------------------------------------- Steve Ro................... 44 President, Chief Executive Officer and Director Randall Bambrough.......... 46 Chief Financial Officer Honda Shing................ 39 Chief Technology Officer Chinn Chin................. 41 Vice President of Engineering Raul Diaz.................. 39 Vice President of Marketing Jesse Lechuga.............. 42 Vice President of Sales George Haber(2)............ 48 Director Joseph Liu(1)(2)........... 50 Director Henry Shaw(1)(2)........... 47 Director Eli Sternheim(1)........... 56 Director
- -------- (1) Member of our compensation committee. (2) Member of our audit committee. Steve (Sencuo) Ro has served on our board of directors since July 1998 and has served as our President and Chief Executive Officer since April 1999. From April 1998 to November 2000, Mr. Ro served as Chairman and Chief Executive Officer of Rosun Technologies, Inc., a manufacturer of ADSL chipsets, and served as a director of Rosun Technologies until March 2001. Rosun Technologies filed for bankruptcy in November 2001. Mr. Ro was the co-founder of LuxSonor Semiconductors, a company that designs VCD and DVD semiconductors for the PC and consumer markets. Mr. Ro served as Vice President of Marketing and Sales at LuxSonor from August 1995 to April 1998. Prior to LuxSonor, Mr. Ro served as the Director of Sales and Marketing at NexGen Microsystems, Inc., a manufacturer of CPU chipsets, from January 1988 to August 1995. Mr. Ro holds an MBA from National University in San Jose, California and an MS in computer science from California State University at Chico. Randall Bambrough joined us in March 2001 as Chief Financial Officer. Prior to joining us, Mr. Bambrough was Chief Financial Officer at ViewGraphics, Incorporated (which was acquired by Optibase Ltd.), a provider of digital media transmission devices from June 2000 to March 2001. From January 1999 to June 2000, Mr. Bambrough was Chief Financial Officer at Decide.com, a company that sold consumer telecommunications products. Mr. Bambrough served as Chief Financial Officer and Secretary from August 1995 to January 1999 and in various senior financial management roles from June 1992 to July 1995 at Castelle, a manufacturer of specialized network devices. Mr. Bambrough earned a BS degree in business management from Brigham Young University, another BS in accounting from Weber State University and also holds an MBA from Utah State University. Honda Shing joined us in July 1998 as our Chief Technology Officer. From December 1995 to April 1998, Dr. Shing worked as an independent consultant developing tools for the rapid development of application software systems. From May 1992 to November 1995, Dr. Shing served as Senior Software Engineer at Unisys Corporation, a company that develops and markets computer hardware, software and services. Dr. Shing earned his PhD in computer science from Michigan State University. Chinn Chin has served as our Vice President of Engineering since July 1998. Mr. Chin was the Director of Software Engineering for LuxSonor Semiconductors from July 1996 to July 1998, where he was in - -------------------------------------------------------------------------------- 46 Management - -------------------------------------------------------------------------------- charge of firmware, chip verification and driver and application development. Mr. Chin holds a BS in computer engineering from National Chiao Tung University and an MS in computer science from California State University at Chico. Raul Diaz has served as our Vice President of Marketing since June 2001. He served as our Vice President of Business Development from September 1999 to June 2001. Mr. Diaz was the Senior Director of the Advanced Technology Lab Group, responsible for research and development relating to multimedia products, at STMicroelectronics, a semiconductor company, from July 1998 to September 1999. From June 1996 to June 1998, Mr. Diaz was the Director of Marketing at LuxSonor Semiconductors. From October 1988 to June 1996, Mr. Diaz served in many capacities at STMicroelectronics, most recently as the Director of Strategic Programs, where he was responsible for research and development relating to DVD products. Mr. Diaz earned his BS in electrical engineering from Yale University. Jesse Lechuga has served as our Vice President of Worldwide Sales since June 2001. Prior to that, Mr. Lechuga served as our Vice President of North America OEM Sales from November 2000 to June 2001. Prior to joining us, Mr. Lechuga served as the Vice President of Worldwide Sales at Rosun Technologies from May 2000 to November 2000. Rosun Technologies filed for bankruptcy in November 2001. Mr. Lechuga was Vice President of Business Development at Harman Multimedia, a company that specializes in audio products, where he was in charge of worldwide business development for JBL, Infinity and Harman/Kardon multimedia speakers, from October 1998 to May 2000. From August 1996 to September 30, 1998 Mr. Lechuga was Vice President of Sales and Marketing at Lite-On Peripherals, Inc., a company specializing in computer peripherals, where he was responsible for the sale and marketing of computer keyboards. Mr. Lechuga earned his BS in industrial engineering from California Polytechnic State University. George Haber has served on our board of directors since June 2001. Mr. Haber is the chairman of Mobilygen, a company that specializes in digital hardware and software development for the wireless communications and digital TV markets. In August 1997, Mr. Haber founded GigaPixel, a provider of 3-D graphics technology, and served as its President and Chief Executive Officer from August 1997 to September 2000. GigaPixel was subsequently acquired by 3Dfx. In 1993, Mr. Haber co-founded CompCore Multimedia, a provider of technology for multimedia compression, and served as its President and Chief Executive Officer from 1993 to 1996. CompCore Multimedia was subsequently merged with Zoran Corporation. From 1992 to 1993, he managed the SGI-Toshiba project which culminated in the 3-D engine for SGI's INDY-2 professional workstation. From 1989 to 1992, Mr. Haber was with Sun Microsystems as a project manager responsible for the design and integration of the floating-point unit in the UltraSPARC chip. Mr. Haber serves on the board of directors of Mobilygen. Mr. Haber received his BSEE from Technion Israel Institute of Technology. Joseph Liu has served on our board of directors since June 2001. Mr. Liu is one of the founders of Oplink Communications Inc., a company that manufactures fiber optic networking components and integrated optical modules, and served as its Chief Executive Officer from September 1999 to November 2001, Mr. Liu also served as Chairman of the Board of Oplink Communications from 1995 to May 2000 and from November 2001 to the present. From 1994 to August 1999, Mr. Liu was the General Partner of Techlink Technology Ventures. Prior to 1994, Mr. Liu spent ten years as Chairman and Chief Executive Officer of Techlink Semiconductor and Equipment Corp., a semiconductor equipment and technology company. In addition to serving on the boards of directors of Oplink Communications and Syscan, Inc., Mr. Liu also serves as a director for several privately-held companies involved in semiconductor integrated circuit - -------------------------------------------------------------------------------- 47 Management - -------------------------------------------------------------------------------- design and manufacturing. Mr. Liu received his BS from Chinese Cultural University in Taiwan and his MS from California State University, Chico. Henry Shaw has served on our board of directors since September 2000. Since August 1996, Mr. Shaw has served as the Executive Vice President of TCW/YFY Investment Partners (Taiwan), Ltd., which specializes in venture capital investment, where Mr. Shaw is responsible for assessing potential investments. Mr. Shaw was Vice President of Tanspac Capital Pte. Ltd., which specializes in regional equity investment, from 1993 to 1996 and the Chief Financial Officer of Mosel-Vitelic Inc., a publicly listed semiconductor memory company in Taiwan, from 1984 to 1993. Mr. Shaw serves on the board of directors of a number of companies in Taiwan, including Amtran Technology Co., Ltd, ABIT Computer Corporation, Taiwan Memory Technology Inc., and Prolink Microsystems Corporation. Mr. Shaw received his MBA from National Cheng-Chi University in Taiwan in 1978. Eliezer Sternheim has served on our board of directors since October 1999. Dr. Sternheim has investments in a portfolio of high tech startups and joined Redwood Venture Partners as venture partner in November 1999. Since June 1999, Dr. Sternheim has served as Chief Executive Officer of Elyon Inc., a provider of investment consulting services. Dr. Sternheim served as scientist at Avant!, a company specializing in electronic design automation software, from June 1998 to June 1999 where he was responsible for research and development. In 1991, Dr. Sternheim co-founded interHDL, an electronic design automation software company where he served as President and Chief Executive Officer from June 1996 to June 1997, and as its Chief Technology Officer from June 1997 to June 1998. In November 1998, interHDL was acquired by Avant! Corporation, a company specializing in electronic design automation software. Dr. Sternheim serves on the board of directors of Sparta Systems, Phonetact and Safetopia Corporation. Dr. Sternheim holds a PhD in electrical engineering from Carnegie Mellon University. BOARD COMPOSITION Our board of directors is composed of five members, including four directors who are not employees and who are otherwise independent. Following this offering, the directors will be divided into three classes, each serving staggered three year terms. Dr. Sternheim has been designated a Class I director whose term expires at the 2003 annual meeting of stockholders. Messrs. Haber and Shaw have been designated Class II directors whose terms expire at the 2004 annual meeting of stockholders. Messrs. Liu and Ro have been designated Class III directors whose terms expire at the 2005 annual meeting of stockholders. This classification of our board of directors may delay or prevent a change in control of our company or a change in our management. BOARD COMMITTEES . Audit committee--The audit committee of our board of directors is composed of Messrs. Haber, Liu and Shaw. The audit committee oversees and monitors our management and independent auditors and their activities with respect to our financial management and financial reporting process and reports to and advises our board of directors on financial matters. . Compensation committee--The compensation committee of our board of directors is composed of Messrs. Liu and Shaw and Dr. Sternheim. The compensation committee is responsible for designing, reviewing and recommending compensation arrangements for our directors, executive officers and employees, for administering various incentive compensation and benefit plans. Prior to the formation of a compensation committee, compensation decisions were be made by our entire board of directors. Our board of directors may establish other committees to facilitate the management of our business. - -------------------------------------------------------------------------------- 48 - -------------------------------------------------------------------------------- COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not have a compensation committee or other board committee performing equivalent functions in fiscal year 2001. Compensation for our executive officers was determined by the entire board of directors. All members of our board of directors, including Mr. Ro, who served as an executive officer in fiscal year 2001, participated in deliberations concerning executive officer compensation during fiscal year 2001. No interlocking relationship exists in connection with this offering, or has existed in the past, between our board of directors and the board of directors or compensation committee of any other company. DIRECTOR COMPENSATION We do not currently compensate our directors in cash for their service as members of our board of directors. Employee and non-employee directors are eligible to receive option grants under our 2002 Stock Option Plan as determined by our board of directors. In June 2001, we granted an option to purchase 50,000 shares of our common stock to Mr. Haber, an option to purchase 50,000 shares of our common stock to Mr. Liu and options to purchase 10,000 shares of our common stock to Mr. Shaw for their services as directors. Each of these options has an exercise price of $2.00 per share and vested immediately as to 50% of the shares subject to the option with the remainder vesting over a period of four years. All unvested shares will accelerate in the event of a change of control. In addition, Dr. Sternheim was paid $25,000 in consulting fees during each of the last two fiscal years under a contract that has since terminated. Our 2002 Stock Option Plan will also provide for the automatic grant of options to our non-employee directors. After the completion of this offering each new non-employee director will receive an initial option to purchase shares upon appointment to the board, except for those directors who become non-employee directors by ceasing to be employee directors. In addition, beginning in 2003, non-employee directors who have been directors for at least six months will receive a subsequent option to purchase shares following each annual meeting of our stockholders. All options granted under the automatic grant provisions will have a term of ten years and an exercise price equal to fair market value on the date of grant. Each initial option becomes exercisable as to of the shares subject to the option on the anniversary of the date of grant and becomes exercisable as to of the shares each full month thereafter, provided the non-employee director remains a service provider on such dates. Each subsequent option becomes exercisable as to 100% of the shares subject to the option on the first anniversary of the date of grant, provided the non-employee director remains a service provider on such date. - -------------------------------------------------------------------------------- 49 Management - -------------------------------------------------------------------------------- EXECUTIVE COMPENSATION Summary of cash and other compensation The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal year ended December 31, 2001 by our Chief Executive Officer and the four other most highly compensated executive officers whose total compensation exceeded $100,000 on an annualized basis during the fiscal year ended December 31, 2001. These individuals are referred to as the "named executive officers." Summary compensation table
Long-term compensation ------------ Awards ------------ Securities Annual compensation underlying All other Name and Principal Position Salary Bonus options compensation (1) - ------------------------------------------------------------------------------------------ Steve Ro............................... $150,000 $ -- -- $3,714 President and Chief Executive Officer Honda Shing............................ 150,000 3,000 -- 290 Chief Technology Officer Raul Diaz.............................. 140,000 20,000 -- 357 Vice President of Marketing Chinn Chin............................. 150,000 -- -- 300 Vice President of Engineering Jesse Lechuga.......................... 140,000 16,000 80,000 255 Vice President of Sales
- -------- (1) Represents life insurance premiums paid by us for policies under which we are not the beneficiary. Option grants in last fiscal year The following table sets forth information regarding options granted to our named executive officers during the fiscal year ended December 31, 2001. We have never granted any stock appreciation rights. All options were granted pursuant to the 1998 Stock Option Plan.
Individual grants -------------------------------------------------------- Potential realizable Number of Percent of value at assumed annual shares of total options rates of stock common stock granted to price appreciation underlying employees for option term (4) options in fiscal Exercise price Expiration ----------------------- Name granted year (2) per share (3) date 5% 10% - ----------------------------------------------------------------------------------------------------- Jesse Lechuga...... 80,000(1) 7.5% $2.00 1/5/11 $100,623 $254,999
- -------- (1) These options vest as to 25% of the shares at the end of Mr. Lechuga's first year of employment and as to 1/48 of the shares at the end of each successive month of employment. (2) The percentage of total options granted is based on an aggregate of 1,071,200 options granted by us during the fiscal year ended December 31, 2001 to our employees. (3) Options were granted with an exercise price per share equal to the fair market value of our common stock on the date of grant, as determined by our board of directors. (4) The potential realizable values are net of exercise price, but before the payment of taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of our future common stock prices. These amounts represent assumed rates of appreciation in the value of our common stock from the fair market value on the date of grant. Actual gains, if any, on stock option exercises are dependent on the future performance of our common stock and overall stock market conditions and the option holders continued service through the vesting period. - -------------------------------------------------------------------------------- 50 Management - -------------------------------------------------------------------------------- Aggregate option exercises during fiscal year 2001 and values at December 31, 2001 The following table sets forth the number of options exercised during the fiscal year ended December 31, 2001 and the value of unexercised options held by our named executive officers on December 31, 2001.
Number of shares of common stock underlying Value of unexercised unexercised options at in-the-money options Shares December 31, 2001 at December 31, 2001 acquired on Value ------------------------- ------------------------- Name exercise realized Exercisable Unexercisable Exercisable Unexercisable - -------------------------------------------------------------------------------------------------- Steve Ro................ -- $ -- 400,000 -- $ 304,000 $ -- Honda Shing............. -- -- 89,583 10,417 173,791 20,209 Raul Diaz............... -- -- 148,333 91,667 266,749 161,251 Chinn Chin.............. 100,000 195,000 1,583,333 166,667 3,087,499 325,001 Jesse Lechuga........... -- -- 26,666 53,334 -- --
- -------- (1) The value realized reflects the fair market value of our common stock underlying the option on the date of exercise, as determined by our board of directors, minus the exercise price of the option. (2) The value of unexercised in-the-money options is based on a value of $2.00 per share, the fair market value of our common stock as most recently determined by our board of directors prior to December 31, 2001. 1998 Stock Option Plan Our 1998 Stock Option Plan was adopted by our board of directors and approved by our stockholders in June 1998. Our 1998 Stock Option Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to our employees, and for the grant of nonstatutory stock options to our employees, directors and consultants. As of December 31, 2001, options to purchase 5,307,700 shares of common stock were outstanding and 2,364,838 shares were available for future grant under the plan. We will not grant any additional options under our 1998 Stock Option Plan following this offering. Instead we will grant options under our 2002 Stock Option Plan. The 1998 Stock Option Plan provides that in the event of a merger, consolidation or reorganization in which our company is not the surviving corporation, the successor corporation may assume all outstanding options or, after giving 30 days notice to the optionees, the options will terminate. Following a dissolution, liquidation or the sale of substantially all of the assets of our company, outstanding options will terminate upon an optionee's termination of employment with us. 2002 Stock Option Plan In connection with this offering, our board of directors intends to adopt the 2002 Stock Option Plan subject to the approval of our stockholders. Our 2002 Stock Option Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to our employees, and for the grant of nonstatutory stock options and stock purchase rights to our employees, directors and consultants. Number of Shares of Common Stock Available under the 2002 Stock Option Plan. We have reserved a total of 400,000 shares of our common stock for issuance pursuant to the 2002 Stock Option Plan plus (a) any shares which have been reserved but not issued under our 1998 Stock Option Plan as of the effective date of this offering, and (b) any shares returned to our 1998 Stock Option Plan on or after the effective date of this offering as a result of termination of options or the repurchase of unvested shares issued under the 1998 Stock Option Plan. In addition, our 2002 Stock Option Plan provides for annual increases in the number of shares available for issuance under our 2002 Stock Option Plan on the first day of each fiscal year, beginning with our fiscal year 2003, equal to the lesser of (i) 5% of the - -------------------------------------------------------------------------------- 51 Management - -------------------------------------------------------------------------------- outstanding shares of our common stock on the first day of the applicable fiscal year, (ii) 2,000,000 shares, or (iii) another amount as our board may determine. Administration of the 2002 Stock Option Plan. Our board of directors or, with respect to different groups of optionees, different committees appointed by our board, will administer the 2002 Stock Option Plan. In the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the committee will consist of two or more "outside directors" within the meaning of Section 162(m). The administrator has the power to determine the terms of the options and stock purchase rights granted, including the exercise price (which may be changed by the administrator after the date of grant), the number of shares subject to each option or stock purchase right, the exercisability of the options and stock purchase rights and the form of consideration payable upon exercise. The administrator has the authority to institute an option exchange program by which outstanding options are surrendered in exchange for options with a lower exercise price. Options. The administrator determines the exercise price of options granted under the 2002 Stock Option Plan, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) and all incentive stock options, the exercise price must be at least equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns 10% of the voting power of all classes of our outstanding capital stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the term of all other options. The terms of 2002 Stock Option Plan allows the administrator to grant options at exercise prices that are below, equal to or above market. No optionee may be granted an option to purchase more than 2,000,000 shares in any fiscal year. In connection with his or her initial service as an employee, an optionee may be granted an additional option to purchase up to 1,000,000 shares. After termination of one of our employees, directors or consultants, he or she may exercise his or her option for the period of time stated in the option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for three months. However, an option may never be exercised later than the expiration of its term. Stock Purchase Rights. Stock purchase rights, which represent the right to purchase our common stock, may be issued under our 2002 Stock Option Plan. The administrator determines the purchase price of stock purchase rights granted under our 2002 Stock Option Plan. Unless the administrator determines otherwise, a restricted stock purchase agreement, an agreement between us and an optionee which governs the terms of stock purchase rights, will grant us a repurchase option that we may exercise upon the voluntary or involuntary termination of the purchaser's service with us for any reason, including death or disability. The purchase price for shares we repurchase will generally be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The administrator determines the rate at which our repurchase option will lapse. The terms of our 2002 Stock Option Plan allows the administrator to issue stock purchase rights at purchase prices which are below, equal to or above market . Automatic Option Grants to Outside Directors. Our 2002 Stock Option Plan also provides for the automatic grant of options to our non-employee directors. Each non-employee director appointed to the board after the completion of this offering will receive an initial option to purchase shares upon such appointment except for those directors who become non-employee directors by ceasing to be - -------------------------------------------------------------------------------- 52 Management - -------------------------------------------------------------------------------- employee directors. In addition, beginning in 2003, non-employee directors who have been directors for at least six months will receive a subsequent option to purchase 10,000 shares following each annual meeting of our stockholders. All options granted under the automatic grant provisions have a term of ten years and an exercise price equal to fair market value on the date of grant. Each initial option becomes exercisable as to of the shares subject to the option on the anniversary of the date of grant and becomes exercisable as to of the shares each full month thereafter, provided the non-employee director remains a service provider on such dates. Each subsequent option becomes exercisable as to 100% of the shares subject to the option on the anniversary of the date of grant, provided the non-employee director remains a service provider on such date. Transferability of Options and Stock Purchase Rights. Our 2002 Stock Option Plan generally doesn't allow for the transfer of options or stock purchase rights and only the optionee may exercise an option or stock purchase right during his or her lifetime. Adjustments upon Change in Control. Our 2002 Stock Option Plan provides that in the event of a change of control, the successor corporation will assume or substitute each option or stock purchase right. If the outstanding options or stock purchase rights are not assumed or substituted, the administrator will provide notice to the optionee that he or she has the right to exercise the option or stock purchase right as to all of the shares subject to the option or stock purchase right, including shares which would not otherwise be exercisable, for a period of 15 days from the date of the notice. The option or stock purchase right will terminate upon the expiration of the 15-day period. In the event an outside director is terminated following a change in control, other than pursuant to a voluntary resignation, his or her options will fully vest and become immediately exercisable. Amendment and Termination of our 2002 Stock Option Plan. Our 2002 Stock Option Plan will automatically terminate in 2012, unless we terminate it sooner. In addition, the administrator has the authority to amend, suspend or terminate the 2002 Stock Option Plan provided such amendment does not impair the rights of any optionee. 2002 Employee Stock Purchase Plan Concurrently with this offering, we intend to establish an Employee Stock Purchase Plan. The 2002 Employee Stock Purchase Plan was adopted by our board in January 2002, subject to the approval of our stockholders. Number of Shares of Common Stock Available under the Plan. A total of 400,000 shares of our common stock will be made available for sale under the 2002 Employee Stock Purchase Plan. In addition, the plan provides for annual increases in the number of shares available for issuance under the plan on the first day of each fiscal year, beginning with our fiscal year 2003, equal to the lesser of (i) 1 1/2% of the outstanding shares of our common stock on the first day of the applicable fiscal year, (ii) 400,000 shares, or (iii) another amount as our board may determine. Administration of the Plan. Our board of directors or a committee established by our board will administer the 2002 Employee Stock Purchase Plan. Our board of directors or its committee has full and exclusive authority to interpret the terms of the plan and determine eligibility. Eligibility to Participate. Our employees and employees of designated subsidiaries are eligible to participate in the 2002 Employee Stock Purchase Plan if they are customarily employed for at least - -------------------------------------------------------------------------------- 53 Management - -------------------------------------------------------------------------------- 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock under the 2002 Employee Stock Purchase Plan if: . the employee immediately after grant owns stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock, or . if the employee's rights to purchase stock under all of our employee stock purchase plans accrues at a rate that exceeds $25,000 worth of stock for each calendar year. Offering Periods and Contributions. Our 2002 Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code and contains consecutive, overlapping 24-month offering periods. Each offering period includes four six-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which will commence on the first trading day on or after the effective date of this offering and will most likely end on the last trading day on or before May 1, 2004 and the second offering period which will commence on November 1, 2002. All eligible employees will be automatically enrolled in the first offering period, but payroll deductions and continued participation in the first offering period will not be determined until after the effective date of the Form S-8 registration statement which is intended to register the shares reserved for issuance under the plan. The plan permits participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation which includes a participant's base salary and commissions, but excludes all other compensation. A participant may purchase a maximum of 10,000 shares during a six-month purchase period. Purchase of Shares. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each six-month purchase period. The price is 85% of the lower of the fair market value of our common stock at the beginning of an offering period or at the end of a purchase period. If the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the current offering period following their purchase of shares on the purchase date and will be automatically re-enrolled in a new offering period. Participants may end their participation at any time during an offering period, and will be paid their payroll deductions to date. Participation ends automatically three months following termination of employment with us. Transferability of Rights. A participant may not transfer rights granted under the 2002 Employee Stock Purchase Plan other than by will, the laws of descent and distribution or as otherwise provided under the plan. Adjustments upon Change in Control. In the event of a change of control, a successor corporation may assume or substitute each outstanding option. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened, and a new exercise date will be set. In such event, the administrator will provide notice of the new exercise date to each optionee at least ten business days before the new exercise date. Amendment and Termination of the plan. The administrator has the authority to amend or terminate our plan, except that, subject to certain exceptions described in the 2002 Employee Stock Purchase Plan, no such action may adversely affect any outstanding rights to purchase stock under the plan. - -------------------------------------------------------------------------------- 54 Management - -------------------------------------------------------------------------------- EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS We entered into an agreement with Dr. Honda Shing that provides for full acceleration of all unvested shares of restricted common stock held by Dr. Shing in the event of a change of control. A change of control means the merger or consolidation of our company, or the sale of all or substantially all of our assets or stock, where less than 51% of the capital stock of the successor corporation is owned by persons who are holders of shares of our capital stock immediately before such merger, consolidation or sale. Under an agreement with Randall Bambrough, if Mr. Bambrough's employment is terminated without cause, or Mr. Bambrough leaves his employment for good reason, we are required to pay his base salary and benefits for a period of twelve (12) months. In addition, if such termination occurs prior to a change of control, the vesting of Mr. Bambrough's stock options will accelerate as to 50% of the unvested shares. If such termination occurs within twelve months after a change of control, all remaining unvested stock options will immediately vest. Change of control means a sale of substantially all our assets, a merger or consolidation in which we are not the surviving corporation or any transaction involving the transfer of greater than 50% of our voting power. 55 - -------------------------------------------------------------------------------- Related party transactions Other than compensation agreements and other arrangements, which are described as required in "Management," and the transactions described below, since January 1, 1999, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party; in which the amount involved exceeded or will exceed $60,000; and in which any director, executive officer, holder of 5% or more of any class of our voting stock or any member of their immediate family had or will have a direct or indirect material interest. INVESTORS RIGHTS AGREEMENT We have entered into an agreement with the holders of our preferred stock, including entities with which certain of our directors are affiliated, that provides the holders of the preferred stock certain rights relating to the registration of their shares of common stock issuable upon conversion of the preferred stock. These rights will survive this offering and will terminate at such time as all holders' securities can be sold within a six month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144, but in any event no later than July 2, 2007. INDEMNIFICATION AGREEMENTS We expect to enter into an indemnification agreement with each of our directors and officers prior to completing this offering. The indemnification agreements and our certificate of incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. RECENT OPTION GRANTS Since January 1, 1999, we have granted stock options to the following executive officers and directors:
Shares Date of underlying Exercise Term of Name grant options price option - ----------------------------------------------------------------------------- Eli Sternheim.......................... 3/15/99 50,000 $ .05 10 years Raul Diaz.............................. 3/15/99 40,000 .05 10 years Honda Shing............................ 3/15/99 100,000 .055 5 years Chinn Chin............................. 3/15/99 2,100,000 .05 10 years Steve Ro............................... 3/15/99 800,000 .055 5 years Eli Sternheim.......................... 6/1/99 100,000 .05 10 years Henry Shaw............................. 6/1/99 30,000 .05 10 years Steve Ro............................... 8/30/99 200,000 .275 5 years Raul Diaz.............................. 1/10/00 200,000 .25 10 years Henry Shaw............................. 7/1/00 40,000 2.00 10 years Steve Ro............................... 10/1/00 200,000 2.20 5 years Jesse Lechuga.......................... 1/5/01 80,000 2.00 10 years Randall Bambrough...................... 3/21/01 300,000 2.00 10 years George Haber........................... 6/15/01 50,000 2.00 10 years Joseph Liu............................. 6/15/01 50,000 2.00 10 years Henry Shaw............................. 6/15/01 10,000 2.00 10 years
Options for employees generally vest over four years. Options for directors generally vest immediately as to 50% of the shares with the remainder vesting over four years. - -------------------------------------------------------------------------------- 56 Related party transactions - -------------------------------------------------------------------------------- PRIVATE PLACEMENT FINANCINGS In July 1999, a trust for the benefit of Eli Sternheim, one of our directors, purchased 400,000 shares of Series C Preferred Stock at a price of $2.00 per share in connection with our Series C financing. In April 2000, a trust for the benefit of Dr. Sternheim purchased 162,500 shares of our Series D Preferred Stock at a price of $4.00 per share in connection with our Series D financing. These prices were the same as those paid by unaffiliated investors. INDEBTEDNESS OF MANAGEMENT In March 2001, in connection with the purchase by Randall Bambrough, our Chief Financial Officer, of 300,000 shares of our common stock, we loaned Mr. Bambrough $600,000 at an interest rate of 5.07%. This note is secured by the shares purchased and is full recourse. Principal and interest on the note become due and payable on the earlier of March 22, 2006 or the first anniversary of the termination of his employment. In December 2001, in connection with the purchase by each of George Haber and Joe Liu, two of our directors, of 50,000 shares of our common stock, we loaned each of Mr. Haber and Mr. Liu $100,000 at an interest rate of 5.07%. These notes are secured by the shares purchased and are full recourse. Principal and interest on the notes become due and payable on December 11, 2006 or the first anniversary of the termination of their service. It is our current policy that all transactions between us and our officers, directors, 5% stockholders and their affiliates will be entered into only if these transactions are approved by a majority of the disinterested directors, are on terms no less favorable to us than could be obtained from unaffiliated parties and are reasonably expected to benefit us. - -------------------------------------------------------------------------------- 57 - -------------------------------------------------------------------------------- Principal stockholders The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2001, as adjusted to reflect the sale of additional shares of our common stock in this offering and the automatic conversion of all shares of our preferred stock to shares of our common stock prior to the completion of this offering, for each of the following persons: . all named executive officers; . all directors; and . each person who is known by us to own beneficially five percent or more of our common stock assuming conversion of our preferred stock prior to this offering. Unless otherwise indicated, the address of each beneficial owner listed below is InterVideo, Inc., 47350 Fremont Boulevard, Fremont, CA 94538.
Percentage of shares beneficially owned (1) ---------------------- Number of shares Before After Name of Beneficial Owner beneficially owned offering offering - ------------------------------------------------------------------------------------------------------------------ Executive Officers and Directors Steve Ro (2)................................................... 1,200,000(2) 7.0% Honda Shing (3)................................................ 2,095,833(3) 12.5 Chinn Chin (4)................................................. 1,833,333(4) 10.0 Raul Diaz (5).................................................. 159,166(5) * Jesse Lechuga (6).............................................. 30,000(6) * Eli Sternheim (7).............................................. 562,500(7) 3.4 Henry Shaw (8)................................................. 56,666(8) * George Haber (9)............................................... 50,000(9) * Joe Liu (10)................................................... 50,000(10) * All directors and executive officers as a group (10 persons)... 6,145,830(11) 33.2 Other 5% Stockholders Spot Master Investment Limited................................. 3,850,000 23.1 6F, #16 Mucha St. Alley 9, Section 4 Mucha Wenshan District Taipei, Taiwan ROC
- -------- (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or become exercisable within 60 days of December 31, 2001 are considered to be beneficially owned by such person. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Each stockholder's percentage ownership in the following table is based upon 16,674,962 shares of common stock outstanding as of December 31, 2001 and shares of common stock outstanding immediately after the offering, in each case assuming conversion of all outstanding shares of preferred stock into common stock. Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder's name. The (*) indicates less than one percent ownership. (2) Includes 400,000 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (3) Includes 95,833 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (4) Includes 1,683,333 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (5) Represents 159,166 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (6) Includes 30,000 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (7) Represents 562,500 shares held by the Sternheim Trust UDT 12/22/98. (8) Includes 26,666 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (9) Includes 21,875 shares of our common stock subject to the Company's right of repurchase as of December 31, 2001. (10) Includes 21,875 shares of our common stock subject to the Company's right of repurchase as of December 31, 2001. (11) Includes 2,394,998 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001 and 275,000 shares subject to the Company's right of repurchase as of December 31, 2001. - -------------------------------------------------------------------------------- 58 - -------------------------------------------------------------------------------- Description of capital stock Upon completion of this offering, our authorized capital stock will consist of 150,000,000 shares of common stock, $0.001 par value and 5,000,000 shares of preferred stock, $0.001 par value. As of December 31, 2001 there were 16,674,962 shares of our common stock outstanding, as adjusted to reflect the conversion of all outstanding shares of our preferred stock into common stock on the closing of this offering, that were held of record by approximately 177 stockholders, and options to purchase 5,367,700 shares of common stock were outstanding. We will have a total of shares of common stock outstanding following this offering. The following description assumes the filing of an amended and restated certificate of incorporation and the conversion of all our preferred stock into common stock upon the closing of this offering. This description is only a summary. You should also refer to our certificate of incorporation and bylaws, both of which have been filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part. COMMON STOCK Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefor at the times and in the amounts as our board of directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of our company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. Our board of directors is divided into three classes, with each director serving a three-year term and one class being elected at each year's annual meeting of stockholders. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to our common stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Pursuant to our certificate of incorporation, our board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, optional or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. Our board of directors, without stockholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our common stock, and may adversely affect the voting and other rights of the holders of common stock. At present, we have no plans to issue any preferred stock following this offering. - -------------------------------------------------------------------------------- 59 Description of capital stock - -------------------------------------------------------------------------------- REGISTRATION RIGHTS Holders of 12,188,750 shares of our common stock are entitled to certain rights with respect to the registration of their shares under the Securities Act. Specifically, at any time that we plan to register our securities, these holders have a right to require that we include their securities in the registration at our expense, subject to specified limitations. Furthermore, under the terms of the agreement between us and these stockholders, to the extent that we are qualified under applicable SEC rules to register our shares for public resale on Form S-3 or a similar short form registration, if holders of at least 2% of our common stock request that their securities be registered, and provided that that the value of the securities requested to be registered is at least $500,000, we have agreed to use our best efforts to register such securities on Form S-3, subject to specified limitations. All fees, costs and expenses of the registrations mentioned above will be borne by us and all selling expenses, including underwriting discounts, selling commissions and stock transfer taxes, will be borne by the holders of the securities being registered. These registration rights terminate at such time as all such holders' securities can be sold within a six- month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 or on July 2, 2007. DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS Delaware Statute. We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, this statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date that the person became an interested stockholder unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. These provisions may have the effect of delaying, deferring or preventing a change in control of us without further action by our stockholders. Charter Provisions. Our amended and restated certificate of incorporation and bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a change in control of our company, including changes a stockholder might consider favorable. These could have the effect of decreasing the market price of our common stock. In particular, our amended and restated certificate of incorporation and bylaws, as applicable, among other things, will: . divide our board of directors into three separate classes serving staggered three-year terms; . provide that special meetings of stockholders can only be called by our board of directors, chairman of the board, chief executive officer or president (in the absence of a chief executive officer). In addition, the business permitted to be conducted at any special meeting of stockholders is limited to the business specified in the notice of such meeting to the stockholders; . provide for an advance notice procedure with regard to business to be brought before a meeting of stockholders; . eliminate the right of stockholders to act by written consent; . provide that vacancies on our board of directors may be filled by a majority of directors in office, although less than a quorum; and - -------------------------------------------------------------------------------- 60 Description of capital stock - -------------------------------------------------------------------------------- . allow our board of directors to issue shares of preferred stock with rights senior to those of the common stock and that otherwise could adversely affect the rights and powers, including voting rights, of the holders of common stock, without any further vote or action by the stockholders. These provisions may have the effect of discouraging a third party from acquiring us, even if doing so would be beneficial to our stockholders. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by them, and to discourage some types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage some tactics that may be used in proxy fights. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is . NASDAQ NATIONAL MARKET QUOTATION We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "IVDO." - -------------------------------------------------------------------------------- 61 - -------------------------------------------------------------------------------- Shares eligible for future sale Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. Upon completion of this offering, we will have outstanding shares of our common stock. Of these shares, the shares sold in the offering (plus any shares issued upon exercise of the underwriters' over-allotment option) will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act (generally, our officers, directors and 10% stockholders). Shares purchased by affiliates may generally only be sold pursuant to an effective registration statement under the Securities Act or in compliance with limitations of Rule 144 as described below. The remaining 16,674,962 shares outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. All of these shares are subject to lock-up agreements pursuant to which the stockholder has agreed not to offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of the underwriting agreement related to this offering without the prior written consent of UBS Warburg LLC. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold until such agreements expire or are waived by UBS Warburg LLC. Taking into account the lock-up agreements, and assuming UBS Warburg LLC does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: . beginning on the effective date of the offering, only the shares sold in this offering will be immediately available for sale in the public market; . an additional 16,119,962 shares will become eligible for sale pursuant to Rule 144 beginning on , 2002, 180 days after the date of the underwriting agreement related to this offering. Shares eligible to be sold by affiliates pursuant to Rule 144 are subject to volume restrictions as described below; and . an additional 555,000 shares will become eligible for sale in the public market pursuant to Rule 144 at various dates in the future. Immediately after the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under our stock option plans and our stock purchase plan. Based upon the number of shares subject to outstanding options as of December 31, 2001 and currently reserved for issuance under our stock plans, this registration statement would cover approximately 6,167,700 shares in addition to annual increases in the number of shares available under the stock option plans and stock purchase plan pursuant to the terms of such plans. Shares registered under the registration statement will generally be available for sale in the open market immediately after the 180-day lock-up agreements expire or earlier in UBS Warburg LLC's sole discretion. Holders of 12,188,750 shares of our common stock will be entitled to rights with respect to registration of these shares for sale in the public market. See "Description of Capital Stock--Registration Rights." Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the registration. - -------------------------------------------------------------------------------- 62 Shares eligible for future sale - -------------------------------------------------------------------------------- Rule 144. In general, under Rule 144 as currently in effect, and beginning after the expiration of the lock-up agreements, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: one percent of the number of shares of common stock then outstanding (which will equal approximately shares immediately after the offering) or the average weekly trading volume of the common stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate of us at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 Beginning 90 days after the effective date, any employee, officer or director of or consultant to us who purchased shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. - -------------------------------------------------------------------------------- 63 - -------------------------------------------------------------------------------- Underwriting We and the underwriters for the offering named below have entered into an underwriting agreement concerning the shares being offered. Subject to conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. UBS Warburg LLC and CIBC World Markets Corp. are the representatives of the underwriters.
Underwriter Number of Shares - ----------------------------------------------------------------------------- UBS Warburg LLC............................................ CIBC World Markets Corp.................................... -------- Total................................................ ========
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have a 30-day option to buy from us up to an additional shares at the initial public offering price less the underwriting discounts and commissions to cover these sales. If any shares are purchased under this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase up to an additional shares.
No Exercise Full Exercise - ---------------------------------------------------------------------------- Per share........................................ $ $ Total............................................ $ $
We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $ . Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock to be offered. We, each of our directors and officers, stockholders holding shares and each of our optionholders have agreed with the underwriters not to offer, sell, contract to sell, hedge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of the underwriting agreement without the prior written consent of UBS Warburg LLC. Among the factors that UBS Warburg LLC may consider in consenting to an early release of shares from this lock-up are the condition of the securities markets in general and the market price and trading activity of our common stock and the personal requirements of the subject stockholder in particular. UBS Warburg LLC has advised us that they have no present intention to release any of the shares subject to the lock-up agreements prior to the expiration of the lock-up period. - -------------------------------------------------------------------------------- 64 Underwriting - -------------------------------------------------------------------------------- Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated by us and the representatives. The principal factors to be considered in determining the initial public offering price will include: . the information set forth in this prospectus and otherwise available to the representatives; . the history and the prospects for the industry in which we compete; . the ability of our management; . our prospects for future earnings, the present state of our development and our current financial position; . the general condition of the securities markets at the time of this offering; and . recent market prices of, and demand for, publicly traded common stock of comparable companies. In connection with the offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from us in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. "Naked" short sales are any sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. We have agreed to indemnify the several underwriters against liabilities, including liabilities under the Securities Act and to contribute to payments that the underwriters may be required to make in respect thereof. - -------------------------------------------------------------------------------- 65 - -------------------------------------------------------------------------------- Legal matters Wilson Sonsini Goodrich & Rosati, a professional corporation, Palo Alto, California, will pass for us on the validity of the common stock offered hereby. Brobeck, Phleger & Harrison LLP, Palo Alto, California, is acting as counsel for the underwriters in connection with selected legal matters relating to the shares of common stock offered by this prospectus. Experts The consolidated balance sheets of InterVideo, Inc. as of December 31, 1999 and 2000 and the related consolidated statements of operations, shareholders' equity and cash flows for the period from inception (April 28, 1998) to December 31, 1998 and for the years ended December 31, 1999 and 2000 included in this prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving such reports. The balance sheets of Audit/Video Products Division of Formosoft International Inc. as of December 31, 1998 and 1999, and the related statements of operations and comprehensive loss, and cash flows for the period from April 14, 1998 (date of incorporation) to December 31, 1998 and for the year ended December 31, 1999 included in this prospectus have been audited by TN Soong & Co., a member firm of Andersen Worldwide, SC, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving such reports. Where you can find more information We filed a registration statement on Form S-1 under the Securities Act with the SEC to register the shares of our common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits to the registration statement. You should refer to the registration statement and the exhibits to the registration statement for more information about us and our common stock. Our statements in this prospectus concerning the contents of any document are not necessarily complete, and in each instance, we refer you to the copy of the document filed as an exhibit to the registration statement. Each statement about those documents is qualified in its entirety by this reference. Following the offering, we will become subject to the reporting requirements of the Securities Exchange Act of 1934. In accordance with that law, we will be required to file reports and other information with the SEC. The registration statement and exhibits, as well as those reports and other information when we file them, may be inspected without charge at the Public Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Copies of all or any part of the registration statement may be obtained from the SEC's offices upon payment of fees prescribed by the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of the site is http://www.sec.gov. - -------------------------------------------------------------------------------- 66 INTERVIDEO, INC. - -------------------------------------------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following financial statements are filed as part of this report: CONSOLIDATED FINANCIAL STATEMENTS OF INTERVIDEO, INC. Report of Independent Public Accountants................................... 2 Consolidated Balance Sheets................................................ 3 Consolidated Statements of Operations...................................... 4 Consolidated Statements of Shareholders' Equity............................ 5 Consolidated Statements of Cash Flows...................................... 6 Notes to Consolidated Financial Statements................................. 7 FINANCIAL STATEMENTS OF AUDIO/VISUAL PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL, INC. Report of Independent Public Accountants................................... 24 Balance Sheets............................................................. 25 Statements of Operations and Comprehensive Loss............................ 26 Statements of Cash Flows................................................... 27 Notes to Financial Statements.............................................. 28 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Basis of Presentation...................................................... 34 Unaudited Pro Forma Condensed Combined Statement of Operations............. 34
- -------------------------------------------------------------------------------- F-1 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of InterVideo, Inc.: We have audited the accompanying consolidated balance sheets of InterVideo, Inc. (the Company), a California corporation, as of December 31, 1999 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the period from inception (April 28, 1998) to December 31, 1998, and for the years ended December 31, 1999 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of InterVideo, Inc. as of December 31, 1999 and 2000, and the results of its operations and its cash flows for the period from inception (April 28, 1998) to December 31, 1998, and for the years ended December 31, 1999 and 2000, in conformity with accounting principles generally accepted in the United States. \s\ ARTHUR ANDERSEN LLP San Francisco, California May 23, 2001 - -------------------------------------------------------------------------------- F-2 INTERVIDEO, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
As of December 31, As of ----------------- September 30, 1999 2000 2001 - -------------------------------------------------------------------------------------------------------------- (unaudited) ASSETS Current assets: Cash and cash equivalents.............................................. $ 2,628 $14,668 $ 11,596 Accounts receivable, net of allowance for doubtful accounts of $42, $152 and $247, respectively........................................... 383 2,413 2,716 Prepaid expenses and other current assets.............................. 79 283 651 ------- ------- -------- Total current assets................................................ 3,090 17,364 14,963 Property and equipment, net................................................ 596 1,991 1,863 Other assets............................................................... 131 2,779 3,224 ------- ------- -------- Total assets........................................................ $ 3,817 $22,134 $ 20,050 ======= ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable....................................................... $ 131 $ 484 $ 223 Accrued liabilities.................................................... 1,052 6,434 8,683 Deposits............................................................... -- 27 432 ------- ------- -------- Total liabilities................................................... 1,183 6,945 9,338 ------- ------- -------- Shareholders' equity: Convertible preferred stock, no par value: aggregate liquidation preference of $21,355 at December 31, 2000; 13,000,000 shares authorized; 8,000,000, 12,213,750, and 12,188,750 shares issued and outstanding, respectively............................................. 4,476 21,286 21,186 Common stock, no par value: 25,000,000 shares authorized; 2,546,683 and 3,702,392, and 4,312,483 shares issued and outstanding, respectively.......................................................... 282 3,897 6,098 Notes receivable from officer.......................................... -- -- (496) Deferred stock compensation............................................ (165) (2,206) (2,310) Accumulated other comprehensive loss................................... -- (84) (152) Accumulated deficit.................................................... (1,959) (7,704) (13,614) ------- ------- -------- Total shareholders' equity.......................................... 2,634 15,189 10,712 ------- ------- -------- Total liabilities and shareholders' equity.......................... $ 3,817 $22,134 $ 20,050 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-3 INTERVIDEO, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts)
Period from Year ended Nine months ended inception December 31 September 30 (April 28, 1998) to ---------------- ---------------- December 31, 1998 1999 2000 2000 2001 - ----------------------------------------------------------------------------------------------------------- (unaudited) Revenue.......................................... $ -- $ 3,036 $15,426 $ 9,761 $23,673 Cost of revenue.................................. -- 1,118 5,189 3,263 8,881 ----- ------- ------- ------- ------- Gross profit................................. -- 1,918 10,237 6,498 14,792 Operating expenses: Research and development (1)................. 328 1,300 6,876 4,489 7,307 Sales and marketing (1)...................... -- 1,194 5,033 3,129 6,422 General and administrative (1)............... 199 773 2,667 1,645 2,225 Stock compensation........................... -- 53 1,411 906 1,612 Special charges.............................. -- -- -- -- 3,068 ----- ------- ------- ------- ------- Total operating expenses.................. 527 3,320 15,987 10,169 20,634 ----- ------- ------- ------- ------- Loss from operations............................. (527) (1,402) (5,750) (3,671) (5,842) Other income (expense), net...................... 2 32 557 303 443 ----- ------- ------- ------- ------- Loss before provision for income taxes........... (525) (1,370) (5,193) (3,368) (5,399) Provision for income taxes....................... -- 64 552 382 509 ----- ------- ------- ------- ------- Net loss..................................... $(525) $(1,434) $(5,745) $(3,750) $(5,908) ===== ======= ======= ======= ======= Net loss per common share, basic and diluted..... -- $ (2.57) $ (2.19) $ (1.45) $ (1.70) ===== ======= ======= ======= ======= Pro forma net loss per common share, basic and diluted (unaudited)............................. $ (0.43) (0.25) $ (0.38) ======= ======= ======= Weighted average common shares outstanding, basic and diluted..................................... -- 559 2,625 2,593 3,472 ===== ======= ======= ======= ======= Pro forma weighted average common shares outstanding, basic and diluted (unaudited)...... 13,456 14,782 15,661 ======= ======= =======
- -------- (1)Stock compensation is allocated among the operating expense classifications as follows:
Year ended Nine months ended December 31, September 30, ------------- ------------------- 1999 2000 2000 2001 (in thousands) (unaudited) - ------------------------------------------------------------------------------------ Research and development......................... $14 $ 546 $341 $ 633 Sales and marketing.............................. 3 521 358 398 General and administrative....................... 36 344 207 581 --- ------ ---- ------ $53 $1,411 $906 $1,612 === ====== ==== ======
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-4 INTERVIDEO, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share and per share amounts)
Convertible Preferred Stock Common stock ------------------ ---------------- Note Deferred stock Shares Amount Shares Amount Receivable Compensation - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, Inception (April 28, 1998)........................... -- $ -- -- $ -- -- $ -- Issuance of common stock..................................... -- -- 2,000,000 1 -- -- Issuance of Series A convertible preferred stock at $0.05 per share, net of issuance cost of $5,000....................... 5,000,000 245 -- -- -- -- Issuance of Series B convertible preferred stock at $0.25 per share, net of issuance cost of $7,000....................... 1,000,000 243 -- -- -- -- Net loss..................................................... -- -- -- -- -- -- ---------- ------- --------- ------ ---- ------- BALANCE, December 31, 1998.................................... 6,000,000 488 2,000,000 1 -- -- Issuance of Series C convertible preferred stock at $2.00 per share, net of issuance cost of $12,000...................... 2,000,000 3,988 -- -- -- -- Exercise of common stock options............................. -- -- 546,683 25 -- -- Issuance of common stock options to consultants and other nonemployees................................................ -- -- -- 38 -- -- Deferred stock compensation.................................. -- -- -- 218 -- (218) Amortization of deferred stock compensation expense.......... -- -- -- -- -- 53 Net loss..................................................... -- -- -- -- -- -- ---------- ------- --------- ------ ---- ------- BALANCE, December 31, 1999.................................... 8,000,000 4,476 2,546,683 282 -- (165) Issuance of Series D convertible preferred stock at $4.00 per share, net of issuance cost of $45,000...................... 4,213,750 16,810 -- -- -- -- Exercise of common stock options............................. -- -- 1,155,709 94 -- -- Issuance of common stock options to consultants and other nonemployees................................................ -- -- -- 69 -- -- Deferred stock compensation.................................. -- -- 3,452 -- (3,452) Amortization of deferred stock compensation expense.......... -- -- -- -- -- 1,411 Accumulated translation adjustment........................... -- -- -- -- -- -- Net loss..................................................... -- -- -- -- -- -- ---------- ------- --------- ------ ---- ------- BALANCE, December 31, 2000.................................... 12,213,750 21,286 3,702,392 3,897 -- (2,206) Exercise of common stock options............................. -- -- 310,091 80 -- Redemption Series D from AVPD Purchase....................... 25,000 (100) -- -- -- Issuance of common stock options to consultants and other nonemployees................................................ -- -- -- 15 -- Note Receivable from Officer................................. -- -- 300,000 600 (467) (133) Interest income for note receivable.......................... (29) Deferred stock compensation.................................. -- -- -- 1622 -- (1622) Amortization of deferred stock compensation expense.......... -- -- -- (118) -- 1,651 Accumulated translation adjustment........................... -- -- -- -- -- Net loss..................................................... -- -- -- -- -- ---------- ------- --------- ------ ---- ------- BALANCE, September 30, 2001 (unaudited)....................... 12,188,750 $21,186 4,312,483 $6,098 (496) $(2,310) ========== ======= ========= ====== ==== =======
Accumulated Other Total Comprehensive Accumulated Shareholders' Loss Deficit Equity (Deficit) - ----------------------------------------------------------------------------------------------------------- BALANCE, Inception (April 28, 1998)........................... $ -- $ -- $ -- Issuance of common stock..................................... -- -- 1 Issuance of Series A convertible preferred stock at $0.05 per share, net of issuance cost of $5,000....................... -- -- 245 Issuance of Series B convertible preferred stock at $0.25 per share, net of issuance cost of $7,000....................... -- -- 243 Net loss..................................................... -- (525) (525) ----- -------- ------- BALANCE, December 31, 1998.................................... -- (525) (36) Issuance of Series C convertible preferred stock at $2.00 per share, net of issuance cost of $12,000...................... -- -- 3,988 Exercise of common stock options............................. -- -- 25 Issuance of common stock options to consultants and other nonemployees................................................ -- -- 38 Deferred stock compensation.................................. -- -- -- Amortization of deferred stock compensation expense.......... -- -- 53 Net loss..................................................... -- (1,434) (1,434) ----- -------- ------- BALANCE, December 31, 1999.................................... -- (1,959) 2,634 Issuance of Series D convertible preferred stock at $4.00 per share, net of issuance cost of $45,000...................... -- -- 16,810 Exercise of common stock options............................. -- -- 94 Issuance of common stock options to consultants and other nonemployees................................................ -- -- 69 Deferred stock compensation.................................. -- Amortization of deferred stock compensation expense.......... -- -- 1,411 Accumulated translation adjustment........................... (84) -- (84) Net loss..................................................... -- (5,745) (5,745) ----- -------- ------- BALANCE, December 31, 2000.................................... (84) (7,704) 15,189 Exercise of common stock options............................. 80 Redemption Series D from AVPD Purchase....................... (100) Issuance of common stock options to consultants and other nonemployees................................................ 15 Note Receivable from Officer................................. -- Interest income for note receivable.......................... (29) Deferred stock compensation.................................. -- Amortization of deferred stock compensation expense.......... 1,535 Accumulated translation adjustment........................... (68) (68) Net loss..................................................... (5,908) (5,908) ----- -------- ------- BALANCE, September 30, 2001 (unaudited)....................... $(152) $(13,614) $10,712 ===== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-5 INTERVIDEO, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period from inception Nine months (April 28, 1998) Year ended ended to December 31, December 31, September 30, ---------------- ---------------- ----------------- 1998 1999 2000 2000 2001 - -------------------------------------------------------------------------------------------------------------------------- (unaudited) Cash flows from operating activities: Net loss....................................................... $(525) $(1,434) $(5,745) $(3,750) $(5,908) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................... 15 89 746 453 918 Long term investment reserve................................ -- -- -- -- 100 In-process research and development......................... -- -- 700 700 -- Deferred stock compensation................................. -- 53 1,411 986 1,612 Allowance for doubtful accounts............................. -- 42 110 50 95 Loss from disposal of assets................................ -- 16 112 134 109 Other....................................................... 38 69 -- (28) Changes in assets and liabilities: Inventory................................................ -- -- -- (6) (14) Accounts receivable...................................... -- (425) (2,149) (2,281) (398) Prepaid expenses and other current assets................ (13) (66) (204) (290) (354) Other assets............................................. (10) (21) (252) (78) (911) Accounts payable......................................... 8 123 353 260 (258) Accrued liabilities...................................... 40 1,012 4,492 2,117 3,224 Deposits................................................. 350 -- 27 36 336 ----- ------- ------- -------- ------- Net cash used in operating activities................. (135) (573) (330) (1,669) (1,477) ----- ------- ------- -------- ------- Cash flows from investing activities: Purchase of property and equipment............................. (159) (557) (1,976) (1,785) (617) Purchase of Audio Visual Products Division (AVPD).............. -- -- (2,200) (2,200) (1,000) Purchase of long-term investments.............................. -- (100) (200) (200) -- ----- ------- ------- -------- ------- Net cash used in investing activities................. (159) (657) (4,376) (4,185) (1,617) ----- ------- ------- -------- ------- Cash flows from financing activities: Proceeds from issuance of Series A preferred stock, net........ 245 -- -- -- -- Proceeds from issuance of Series B preferred stock, net........ 243 -- -- -- -- Proceeds from issuance of Series C preferred stock, net........ -- 3,638 -- -- -- Proceeds from issuance of Series D preferred stock, net........ -- -- 16,710 16,810 -- Proceeds from exercise of common stock options................. 1 25 94 61 80 ----- ------- ------- -------- ------- Net cash provided by financing activities............. 489 3,663 16,804 16,871 80 ----- ------- ------- -------- ------- Effect of change in exchange rates on cash........................ -- -- (58) (8) (58) Net increase in cash and cash equivalents......................... 195 2,433 12,040 11,009 (3,072) Cash and cash equivalents, beginning of Period.................... -- 195 2,628 2,628 14,668 ----- ------- ------- -------- ------- Cash and cash equivalents, end of period.......................... $ 195 $ 2,628 $14,668 $13,637 $11,596 ===== ======= ======= ======== ======= Supplementary disclosures of noncash investing and financing Activities: Conversion of deposit to Series C convertible preferred stock......................................................... -- $ 350 -- $ -- $ -- Issuance (repurchase) of Series D convertible preferred stock.. -- -- 100 -- (100) Note receivable................................................ -- -- -- -- 496
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-6 INTERVIDEO, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (information as of September 30, 2000 and 2001, is unaudited) 1. ORGANIZATION AND OPERATIONS: InterVideo, Inc. (the Company) is a leading provider of DVD software and offers a broad suite of advanced digital video and audio multimedia software products that allow users to record, edit, author, distribute and play digital multimedia content on personal computers, or PCs, and consumer electronics devices. The Company currently derives a substantial majority of its revenue from sales of its WinDVD product, a software DVD player for PCs. The Company's other major products include WinDVR, a digital video recorder, WinProducer, a video recording and editing software application, and WinRip, a digital music recorder and player. During the first quarter of 2000, the Company created wholly owned subsidiaries to market its products in Japan and Taiwan. The Taiwan subsidiary includes the business and assets acquired in June 2000 from the Audio Visual Products Division (AVPD) of Formosoft International, Inc., as discussed in Notes 4 and 14. In 1998, the Company was considered to be in the development stage, as it did not generate any revenues. It emerged from the development stage in 1999 and began to earn revenues from licensed software. The Company is subject to a number of risks associated with technology companies, including, but not limited to, a history of net losses; limited operating history; fluctuating operating results; third-party intellectual property claims; potential competition from larger more established companies; and dependence on key employees. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Foreign currency translation The functional currency of the Company's subsidiaries is the local currency. Accordingly, all assets and liabilities are translated into U.S. dollars at the current exchange rate at the applicable balance sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period. Gains and losses resulting from the translation of the financial statements are reported as a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in other income (expense). Through December 31, 2000, such transactions have not been material. Unaudited interim financial statements The accompanying consolidated financial statements as of September 30, 2001, and for the nine months ended September 30, 2000 and 2001, are unaudited, but in the opinion of management include all adjustments consisting of normal recurring adjustments necessary for a fair presentation of results for the interim periods. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted, although the Company believes that the disclosures included are adequate to make the information presented not misleading. Results for the nine months ended September 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. - -------------------------------------------------------------------------------- F-7 INTERVIDEO, INC. - -------------------------------------------------------------------------------- Unaudited pro forma presentation The unaudited pro forma basic and diluted net loss per common share and pro forma basic and diluted weighted average common shares outstanding, reflect the automatic conversion of all outstanding shares of convertible preferred stock into 12,188,750 shares of common stock, which will occur upon the closing of the Company's proposed initial public offering. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive income (loss) Comprehensive income is the total of net (loss) and all other nonowner changes in shareholders' equity. The Company's only component of other comprehensive income is net loss attributed to accumulated foreign currency translation adjustments. Such amounts are excluded from net loss and are reported in accumulated other comprehensive loss in the accompanying statements of shareholders' equity. Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 and its amendments establish accounting and reporting standards for derivatives and similar instruments, requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company implemented SFAS No. 133 on January 1, 2001. Since the Company does not engage in derivatives or hedging activities, SFAS No. 133 will not have a material impact on the Company's financial position or results of operations. In December 1998, the AICPA issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. This statement did not have a material impact on the financial condition or results of the Company's operations. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB 101 provides the SEC staff's views in applying accounting principles generally accepted in the United States to various revenue recognition issues. Management believes that the Company's revenue recognition policies are in compliance with the guidelines provided in SAB 101, and therefore the adoption of SAB 101 has not significantly affected the Company's results of operations. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for Certain Stock Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 provides guidance for certain issues that arise in applying Opinion 25. Management believes that the Company's policies are in compliance with the guidelines of FIN 44, and therefore the adoption of FIN 44 has not significantly affected the Company's results of operations. - -------------------------------------------------------------------------------- F-8 INTERVIDEO, INC. - -------------------------------------------------------------------------------- In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These new standards are effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill will no longer be amortized, but will be subject to an annual impairment test. The standards also promulgate, among other things, new requirements for accounting for other intangible assets. Management believes these new standards will not significantly affect the Company's results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. This new standard is effective for fiscal years beginning after December 15, 2001. This new standard affirms and clarifies certain accounting for long-lived assets and broadens the application of discontinued operations treatment. Management does not believe that these new standards will have a material impact on the Company's financial position and results of operations. Cash and cash equivalents For purposes of the consolidated balance sheets and statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in banks and money market accounts. Significant concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Three customers comprised approximately 46 percent of the accounts receivable at December 31, 1999. Five customers comprised approximately 53 percent of the accounts receivable at December 31, 2000. In 1999, certain customers individually accounted for 23 percent, 12 percent, and 12 percent of revenue. In 2000, one individual customer accounted for 21 percent of revenue. No other customers accounted for more than 10 percent of revenues in any period. Valuation accounts Below is a summary of the changes in the Company's allowance for doubtful accounts for the nine months ended September 30, 2001 and for the years ended December 31, 2000, and 1999.
Balance at Balance Allowance for Beginning of the at End of Doubt ful Accounts Period Additions Period ------------------ ---------------- ------------- --------- (amounts in thousands) December 31, 1999............. $ -- $ 42 $ 42 December 31, 2000............. $ 42 $110 $152 September 30, 2001 (unaudited) $152 $ 95 $247
- -------------------------------------------------------------------------------- F-9 INTERVIDEO, INC. Property and equipment Property and equipment are recorded at cost and are depreciated using the straight-line method based on estimated useful lives of between three and seven years. Depreciation expense for property and equipment was $86,000, $416,000, and $547,000 for the years ended December 31, 1999 and 2000, and for the nine months ended September 30, 2001, respectively. Property and equipment consists of the following as of December 31, 1999 and 2000, and September 30, 2001 (in thousands):
December 31, ------------- 1999 2000 ------------------------------------------------------- Equipment.............................. $ 308 $1,121 Furniture and fixtures................. 187 506 Purchased software..................... 202 682 Leasehold improvements................. -- 153 Construction in Process................ -- -- Other.................................. -- 46 ----- ------ 697 2,508 Less: Accumulated depreciation......... (101) (517) ----- ------ Property and equipment, net..... $ 596 $1,991 ===== ======
Goodwill and other intangible assets In connection with the acquisition of the business and assets of AVPD, the Company acquired certain intangible assets, including developed technology, an assembled work force, and goodwill. The purchase price of $3.0 million plus $200,000 in related costs was allocated to intangible assets acquired, based on their relative fair values. In connection with the allocation, a one-time in-process research and development charge of $700,000 was recorded. The remaining $2.5 million was allocated as follows: $1,000,000 to developed technology, $150,000 to the assembled work force, and $1,350,000 to goodwill. All of these intangibles are being amortized over five years. In performing this allocation, the Company considered, among other factors, AVPD's technology research and development projects in process at the date of acquisition. With regard to the in-process research and development projects, the Company considered factors such as the overall objectives of the project, progress towards the objectives at the time of acquisition, the uniqueness of the development projects, and contributions from existing technology and projects. The analysis of the assembled work force primarily considered the replacement cost associated with recruiting and training a work force with comparable experience and qualifications. The income approach was the primary technique utilized in valuing the purchased research and development. Each of the in-process research and development projects was identified and valued through detailed interviews and analysis of product development data provided by management concerning developmental projects, their respective stages of development, the time and resources needed to complete the projects, their expected income-generating ability and associated risks. Revenue projections used to value the developed technology and in-process research and development were based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by AVPD. The discount rate selected for developed and in-process technology was 30 percent and 35 percent, respectively. F-10 INTERVIDEO, INC. - -------------------------------------------------------------------------------- The Company believes that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from projected results. The most significant and uncertain assumptions relating to the in-process projects relate to the projected timing of completion and revenues attributable to each project. The Company performs a review of the value of its goodwill and intangible assets whenever events and circumstances indicate that impairment may have occurred. Indicators of impairment of such assets include, among other things, a failure to integrate the related products into our existing products or use the acquired assets as a basis to further develop the Company's product offerings. The Company does not believe that an impairment of any of its goodwill and intangible assets has occurred. In 2002, the Company will modify its impairment measurement policy to comply with SFAS No. 142, discussed above. Total amortization expense from June 7, 2000 (date of acquisition), to December 31, 2000, was $292,000. Revenue recognition The Company's revenue is derived from fees paid under software licenses granted primarily to OEMs and directly to end-users. The Company records revenue generated from these sales in accordance with SOP 97-2, "Software Revenue Recognition," as amended, under which revenue is recognized when evidence of an arrangement exists, delivery of the software has occurred, the fee is fixed and determinable, and collection is probable. Most OEMs pay a license fee based on the number of copies of licensed software included in the products sold to their customers. OEMs pay these fees on a per-unit basis, and the Company records associated revenue when it receives notification of the OEMs' sales of the licensed software to the end users. The terms of the license agreements generally require the OEMs to notify the Company of sales of their products within 30 to 45 days after the end of the month or quarter in which the sales occur. As a result, the Company generally recognizes revenue in the month or quarter following the sale of the product to the OEMs' customers. Cost of revenue Cost of revenue consists primarily of royalties paid to third parties for technologies incorporated into the Company's products as well as expenses incurred to manufacture, package and distribute the Company's software products. These amounts are accrued in the period of the related sales and are recorded as accrued liabilities. Software development costs Under SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," costs incurred in the research and development of software are expensed as incurred until technological feasibility has been established. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general marketability of the products are capitalized. The Company defines establishment of technological feasibility as the completion of a working model. The establishment of technological feasibility and the ongoing assessment of recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated - -------------------------------------------------------------------------------- F-11 INTERVIDEO, INC. - -------------------------------------------------------------------------------- economic life, and changes in software and hardware technologies. Amounts that were capitalizable under SFAS No. 86 were insignificant, and therefore no costs have been capitalized to date. Customer service and technical support Customer service and technical support costs include the costs associated with answering customer inquires and providing telephone assistance. In connection with the sale of certain products, the Company provides a limited amount of free telephone support service to customers. This free service, also referred to as post-contract customer support, is included in sales and marketing expenses. The Company does not defer the recognition of any revenue associated with sales of these products, because the cost of providing this free support is insignificant. The support is provided within 90 days after the associated revenue is recognized, and enhancements are minimal and infrequent. Net loss per share Basic net loss per common share is calculated by dividing net loss by the weighted average common shares outstanding during the period, less shares subject to repurchase. Diluted income per share is calculated by dividing the net income by the weighted average common shares outstanding, adjusted for all potential common shares, which includes shares issuable upon the exercise of outstanding common stock options, convertible preferred stock, warrants, and other contingent issuances of common stock. The Company has losses for all periods presented and, accordingly, has excluded all convertible preferred stock, outstanding stock options, and shares subject to repurchase from the calculation of diluted net loss per common share because all such securities are antidilutive for all periods presented.
Nine months ended Years ended December 31, September 30, ------------------------------------- ------------------------ 1998 1999 2000 2000 2001 - -------------------------------------------------------------------------------------------------------------- (unaudited) Net loss (in thousands)..................... $ (525) $ (1,434) $ (5,745) $ (3,750) $ (5,908) =========== =========== =========== =========== =========== Basic and diluted: Weighted average shares of common stock outstanding............... 2,000,000 2,155,508 3,581,208 3,565,653 4,233,825 Less: Weighted average shares subject to repurchase............... (2,000,000) (1,596,918) (956,056) (972,223) (761,426) ----------- ----------- ----------- ----------- ----------- Weighted average shares used in computing basic and diluted net loss per common share..................... -- 558,590 2,625,152 2,593,430 3,472,399 =========== =========== =========== =========== =========== Basic and diluted net loss per common share...................................... -- $ (2.57) $ (2.19) $ (1.45) $ (1.70) =========== =========== =========== =========== =========== Shares used above to compute basic and diluted net loss per common share.......... 558,590 2,625,152 2,593,430 3,472,399 =========== =========== =========== =========== Pro forma adjustment to reflect weighted average effect of assumed conversion of convertible preferred stock (unaudited)................................ 10,830,615 12,188,750 12,188,750 =========== =========== =========== Shares used in computing pro forma basic and diluted net loss per common share (unaudited).......................... 13,455,767 14,782,180 15,661,149 =========== =========== =========== Pro forma basic and diluted net loss per common share (unaudited)................... $ (0.43) (0.25) (0.38) =========== =========== ===========
- -------------------------------------------------------------------------------- F-12 INTERVIDEO, INC. - -------------------------------------------------------------------------------- Potentially dilutive securities include the following:
As of December 31 As of ------------------------------- September 30 1998 1999 2000 2001 - ------------------------------------------------------------------------------------- (unaudited) Common stock subject to repurchase..... 2,000,000 1,596,918 956,056 595,833 Options to purchase common stock....... -- 5,322,000 6,250,000 5,616,221 Series A preferred stock............... 5,000,000 5,000,000 5,000,000 5,000,000 Series B preferred stock............... 1,000,000 1,000,000 1,000,000 1,000,000 Series C preferred stock............... -- 2,000,000 2,000,000 2,000,000 Series D preferred stock............... -- -- 4,213,750 4,188,750 --------- ---------- ---------- ---------- Total............................ 8,000,000 14,918,918 19,419,806 18,400,804 ========= ========== ========== ==========
The common stock subject to repurchase was issued to a founder of the Company. Pursuant to SEC Staff Accounting Bulletin No. 98, convertible preferred stock and common stock issued or granted for nominal consideration prior to the anticipated effective date of an initial public offering must be included in the calculation of basic and diluted net loss per common share as if they had been outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration. Pro forma net loss per share (unaudited) The calculation of pro forma net loss per share assumes that all series of convertible shares have been converted into common stock as of the original issuance date. 3. SIGNIFICANT CONCENTRATIONS Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Three customers comprised of approximately 55% of the accounts receivable at December 31, 1999. Five customers comprised approximately 54% of the accounts receivable at December 31, 2000. In 1999, certain customers individually accounted for 23%, 12% and 12% of the revenue, respectively. In 2000, four customers accounted for 46% of sales. One individual customer accounted for 21% of sales. No other customers accounted for more than 10% of revenues in any period. - -------------------------------------------------------------------------------- F-13 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 4. OTHER ASSETS: Other assets consist of the following (in thousands):
As of December 31, ----------- 1999 2000 - --------------------------------------------------------------- Deposit.......................................... $ 31 $ 218 Investments...................................... 100 300 Assembled work force............................. -- 150 Purchased developed technology................... -- 1,000 Goodwill......................................... -- 1,339 Other............................................ -- 62 Less: Accumulated amortization................... -- (290) ---- ------ $131 $2,779 ==== ======
Goodwill arose from the acquisition of AVPD as discussed in Note 14. 5. ACCRUED LIABILITIES: Accrued liabilities consist of the following (in thousands):
As of December 31, As of ------------------- September 30, 1999 2000 2001 - ----------------------------------------------------------------------- (unaudited) Accrued payroll and related benefits $ 222 $ 927 $ 617 Royalties........................... 786 3,504 5,185 AVPD acquisition price payable...... - 900 -- Other............................... 44 1,103 2,881 -------- ---------- ------ Total........................ $ 1,052 $ 6,434 $8,683 ======== ========== ======
The Company accrued royalties of $3.5 million and $5.2 million (unaudited) as of December 31, 2000 and September 30, 2001, respectively. Approximately $2.6 million and $3.2 (unaudited), respectively, is for signed agreements. The remainder of approximately $900,000 at December 2000 and $2.0 (unaudited) at September 30, 2001 represents the amount of royalties payable based upon units sold under arrangements where it believes that it has a legal obligation and royalty amounts that the relevant patent holders have published. Should the final arrangements result in royalty rates significantly different from these assumptions, the business, operating results and financial condition of the Company could be materially and adversely affected. The Company has received notices of claims, and may receive notices of claims in the future, regarding the alleged infringement of third parties' Intellectual property rights that may result in restrictions or prohibitions on the sale of its products and cause it to pay license fees and damages. Some third parties claim to hold patents covering various aspects of DVD technology. Some third parties have claimed that various aspects of DVD technology incorporated into the Company and it's customers' products infringe upon patents held by them. The Company may be subject to additional third-party claims that its products violate the intellectual property rights of those parties. In addition to the claims described above, the Company may receive notices of claims of infringement of other parties' proprietary rights. Many companies aggressively use - -------------------------------------------------------------------------------- F-14 INTERVIDEO, INC. - -------------------------------------------------------------------------------- their patent portfolios to bring infringement claims against competitors and other parties. As a result, the Company may become a party to litigation in the future as a result of an alleged infringement of the intellectual property of others. The Company may be required to pay license fees and damages in the future if it is determined that its products infringe on patents owned by these third parties. The Company may be required to pay substantial damages and may be restricted or prohibited from selling its products if it is proven that it has violated the intellectual property rights of others. If a third party proves that the Company's technology infringes its proprietary rights, the Company may be required to pay substantial damages for past infringement and may be required to pay license fees or royalties on future sales of our products. In addition, if it were proven that the Company willfully infringed on a third party's proprietary rights, it may be held liable for three times the amount of damages it would otherwise have to pay. Intellectual property litigation may require the Company to: stop selling, incorporating or using its products that use the infringed intellectual property; obtain a license to make, sell or use the relevant technology from the owner of the infringed intellectual property, which license may not be available on commercially reasonable terms, if at all; and redesign its products so as not to use the infringed intellectual property, which may not be technically or commercially feasible. The defense of infringement claims and lawsuits, regardless of their outcome, would likely be expensive to resolve and could require a significant portion of management's time. Rather than litigating an infringement matter, the Company may determine that it is in its best interests to settle the claim. Terms of a settlement could include the payment of damages and an agreement to license technology in exchange for a license fee and ongoing royalties. These fees may be substantial. If the Company is forced to take any of the actions described above, defend against any claims from third parties or pay any license fees or damages, its business and financial position could be materially adversely affected. The Company may be liable to some of its customers for damages that they incur in connection with intellectual property claims. Some of its license agreements, including many of the agreements it has entered into with its large PC OEM customers, contain warranties of non-infringement and commitments to indemnify our customers against liability arising from infringement of third-party intellectual property. These commitments may require the Company to indemnify or pay damages to its customers for all or a portion of any license fees or other damages, including attorneys' fees, they are required to pay or agree to pay these or other third parties. The Company has received notices asserting rights under the indemnification provisions and warranty provisions of our license agreements with several customers. If the Company is required to pay damages to its customers or indemnify its customers for damages they incur, its business could be harmed. If customers are required to pay license fees in the amounts that are currently published by claimants, and the Company is required to pay damages to its customers or indemnify our customers for such amounts, such payments would exceed its revenue from such customers. Even if a particular claim falls outside of an indemnity or warranty obligation to its customers, the customers may be entitled to additional contractual remedies against the Company. Furthermore, even if the Company is not liable to its customers, they may attempt to pass on to the Company the cost of any license fees or damages owed to third parties, by reducing the amounts they pay for the Company's products. These price reductions could harm the Company's business. - -------------------------------------------------------------------------------- F-15 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 6. COMMITMENTS AND CONTINGENCIES: Lease commitments As of September 30, 2001, future minimum commitments under operating leases are as follows (in thousands):
Fiscal Year Lease ----------------------------------------------------------- ------ Three months ended December 31, 2001 (unaudited)........... $ 221 2002....................................................... 851 2003....................................................... 607 2004....................................................... - ------ $1,679 ======
Rent expense was $26,000, $113,000, $347,000, and $686,000 for the period from inception (April 28, 1998) to December 31, 1998, for the years ended December 31, 1999 and 2000, and for the nine months ended September 30, 2001 (unaudited), respectively, and is included in operating expenses on the accompanying statements of operations. 7. CONVERTIBLE PREFERRED STOCK: As of December 31, 2000, convertible preferred stock consists of the following, net of issuance costs (in thousands, except share amounts):
December 31, -------------- September 30, 1999 2000 2001 - ---------------------------------------------------------------------------------------------------- (unaudited) Series A: Authorized--5,000,000 shares...................................... Outstanding--5,000,000 shares; liquidation preference of $250..... $ 245 $ 245 $ 245 Series B: Authorized--1,000,000 shares...................................... Outstanding--1,000,000 shares; liquidation preference of $250..... 243 243 243 Series C: Authorized--2,000,000 shares...................................... Outstanding--2,000,000 shares; liquidation preference of $4,000... 3,988 3,988 3,988 Series D: Authorized--5,000,000 shares...................................... Outstanding--4,213,750 shares; liquidation preference of $16,855.......................................................... 16,810 16,710 ------ ------- ------- $4,476 $21,286 $21,186 ====== ======= =======
The rights, restrictions, and preferences of the convertible preferred stock are as follows: . Each share of convertible preferred stock is convertible, at the option of the holder, into such number of fully paid and nonassessable shares of common stock as is determined by dividing the number of shares outstanding by the initial conversion price of $0.05 per Series A, $0.25 per Series B, $2.00 per Series C, and $4.00 per Series D. Such initial conversion price shall be subject to adjustment. . Each share of convertible preferred stock will be automatically converted into shares of common stock at the then-effective conversion price on the effective date of a firm commitment to underwrite the public offering of the Company's common stock. - -------------------------------------------------------------------------------- F-16 INTERVIDEO, INC. - -------------------------------------------------------------------------------- . The holders of convertible preferred stock are entitled to the number of votes equal to the number of shares of common stock into which their shares of preferred stock would convert. . Each preferred stockholder is entitled to receive annual dividends at a rate of $0.005 per Series A shares, $0.025 per Series B shares, $0.20 per Series C shares, and $0.4 per Series D shares, when and if declared by the Board of Directors, prior to payment of dividends on common stock. Dividends are noncumulative. No dividends have been declared to date. . In the event of liquidation, dissolution, or winding up of the affairs of the Company, the holders of Series A, Series B, Series C, and Series D convertible preferred stock are entitled to receive a liquidation preference of $0.05 per Series A share, $0.25 per Series B share, $2.00 per Series C share, and $4.00 per Series D share, prior to any distribution to the holders of the common stock. After this distribution, all remaining assets of the Company will be distributed to all shareholders on a share for share basis. 8. COMMON STOCK: In May 1998, the Company issued 2,000,000 shares of common stock to one employee of the Company, all of which were subject to repurchase rights at the option of the Company. The shares are repurchasable at $.0005 per share in the event of termination of employment for any reason. The repurchase rights began to lapse 12 months after the vesting commencement date (May 15, 1998). Beginning on May 15, 1999, the remaining shares vest ratably each month over the remaining 36 months of the term. At December 31, 1999 and 2000, and for the nine months ended September 30, 2001, 792,000, 1,292,000 and 1,667,000 shares, respectively, had vested. In February 1999, the Board of Directors approved a two-for-one stock split of all common and preferred stock. All share and per share information has been retroactively adjusted to reflect the stock split. As of December 31, 2000, the Company had reserved shares of authorized but unissued common stock for the following: Conversion of Series A preferred stock..................... 5,000,000 Conversion of Series B preferred stock..................... 1,000,000 Conversion of Series C preferred stock..................... 2,000,000 Conversion of Series D preferred stock..................... 5,000,000 1998 Stock Option Plan..................................... 8,297,608 ---------- Total shares reserved................................ 21,297,608 ==========
9. STOCK OPTIONS: During 1998, the Company established the 1998 Stock Option Plan (the Plan) covering key employees and consultants of the Company. Under the terms of the Plan, incentive and nonstatutory stock options and stock purchase rights may be granted for up to 2,000,000 shares of the Company's authorized but unissued common stock. In 1999, the Company amended the Plan to grant up to 8,000,000 shares of the Company's authorized but unissued common stock. In 2000, the Company amended the Plan to grant up to 10,000,000 shares of the Company's authorized but unissued common stock. Options issued under the Plan generally have a maximum term of 10 years and vest over schedules determined by the Board of Directors. Options issued under the Plan to shareholders owning 10 percent of the total combined voting power of all classes of stock shall have a maximum term of five years from the date of grant. - -------------------------------------------------------------------------------- F-17 INTERVIDEO, INC. - -------------------------------------------------------------------------------- Nonstatutory stock options may be granted to employees and consultants at no less than 85 percent of the fair market value of the stock as determined by the Board of Directors at the date of grant. Incentive stock options may be granted only to employees at the fair market value of the stock at the date of the grant. Stock options granted to a person owning more than 10 percent of the total combined voting power of all classes of stock of the Company must be issued at 110 percent of the fair market value of the stock on the day of grant. During 2000, one employee was granted options to purchase 150,000 of common stock that are exercisable immediately after a change in control of the Company. Option activity is as follows:
Options Option Shares Issued Total activity Available for under Outstanding outside of Grant the Plan Options the Plan - ---------------------------------------------------------------------------- December 31, 1998....... 2,000,000 -- -- -- Authorized.......... 6,000,000 -- -- 158,000 Options granted..... (5,882,000) 5,822,000 5,880,000 58,000 Options exercised... -- (518,000) (547,000) (29,000) Options canceled.... 11,000 (11,000) (11,000) -- ---------- ---------- ---------- ------- December 31, 1999....... 2,189,000 5,293,000 5,322,000 29,000 Authorized.......... 2,000,000 -- -- -- Options granted..... (2,211,000) 2,211,000 2,311,000 100,000 Options exercised... -- (1,156,000) (1,156,000) -- Options canceled.... 227,000 (227,000) (227,000) -- ---------- ---------- ---------- ------- December 31, 2000....... 2,205,000 6,121,000 6,250,000 129,000 ========== ========== ========== =======
The following table summarizes the stock options outstanding and exercisable as of December 31, 2000:
Number of Options Weighted Average Options Range Outstanding at Remaining Weighted Exercisable as of of Exercise December 31, Contractual Life Average December 31, Prices 2000 (Years) Exercise Price 2000 - -------------------------------------------------------------------------------- $0.05 3,912,000 8.20 $0.05 2,499,000 0.25 916,000 9.00 0.25 485,000 2.00 1,222,000 9.50 2.00 20,000 2.20 200,000 4.75 2.20 200,000 - -------------------------------------------------------------------------------- $0.05-2.20 6,250,000 8.62 $0.53 3,204,000 - --------------------------------------------------------------------------------
----------------------------------------------------- SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair-value-based method of accounting for stock-based compensation plans and requires additional disclosures for those companies that elect not to adopt the new method of accounting. In accordance with the provision of SFAS No. 123, the Company has elected to apply APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Had compensation cost for the plans been determined consistent - -------------------------------------------------------------------------------- F-18 INTERVIDEO, INC. - -------------------------------------------------------------------------------- with SFAS No. 123, the Company's net loss would have been $525,000, $1,447,000 and $6,464,000 for the period from inception (April 28, 1998) to December 31, 1998, for the years ended December 31, 1999, and 2000. The weighted average fair value of options granted during 1999 and 2000 was $.06 and $1.47, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999 and 2000: risk-free interest rates ranging from 5.6 percent to 6.4 percent; expected dividend yields of zero; expected lives of four years beyond grant date; and expected volatility of 0 percent. Because the Black-Scholes option valuation model requires the input of subjective assumptions, the resulting pro forma compensation cost may not be representative of that to be expected in future periods. The Company also issues options to consultants and other nonemployees. Stock options issued to consultants and other nonemployees are valued under the provisions of SFAS No. 123. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999 and 2000: risk-free interest rates ranging from 5.6 percent to 6.5 percent; expected dividend yields of zero; expected lives of four years beyond grant date; and expected volatility of 70 percent. Because the Black-Scholes option valuation model requires the input of subjective assumptions, the resulting pro forma compensation cost may not be representative of that to be expected in future periods. The compensation expense related to these options was $0, $38,000, $65,000 and $15,000 in 1998, 1999, 2000 and for the nine months ended September 30, 2001, respectively, and is included in operating expenses in the accompanying statements of operations. Deferred stock compensation The Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and its related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recorded for the difference between market value and the exercise price. Expense associated with stock-based compensation is being amortized over the vesting period of the individual award consistent with the method described in FASB Interpretation No. 28. The value of warrants, options, or stock exchanged for services is expensed over the period benefited. To calculate the expense, the Company uses the more objectively determinable method between the fair value of the equity instrument based on the Black-Scholes pricing model or the value of the services. In connection with the grant of certain stock options to employees for the nine months ended September 30, 2001 and for the years ended December 31, 2000 and 1999, the Company recorded deferred stock compensation within shareholders' equity of $218,000 and $3,452,000, respectively, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of those options at the date of grant. Such amount is presented as a reduction of shareholders' equity and will be amortized over the vesting period of the applicable options using an accelerated method of amortization under FASB Interpretation No 28. The Company recorded amortization of deferred compensation expense of $53,000 and $1,411,000 for the years ended December 31, 1999 and 2000, respectively. Approximately $1,824,000 was expensed during the nine months ended September 30, 2001. 10. 401(K) PLAN: The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan provides for tax-deferred salary deductions and after-tax employee contributions. There have been no contributions made by the Company to date. - -------------------------------------------------------------------------------- F-19 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 11. Income Taxes: The Company applies the asset and liability approach to accounting for income taxes under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. The net deferred income tax asset consists of the following (in thousands):
December 31, -------------- 1999 2000 - ---------------------------------------------------------------------------- Deferred income tax assets: Federal net operating loss carryforwards................ $ 423 $ 1,412 State net operating loss carryforwards.................. 73 242 Start-up costs capitalized for tax...................... 143 110 Research and development credit......................... 18 500 Depreciation and amortization........................... (41) 150 Other temporary differences............................. 140 180 Other tax credits....................................... -- 627 ----- ------- 756 3,221 Valuation allowance..................................... (756) (3,221) ----- ------- Net deferred income tax asset........................... $ -- $ -- ===== =======
All deferred tax assets carried a 100% valuation allowance at September 30, 2001. Federal and state net operating loss carryforwards at December 31, 2000, were approximately $4,152,000 and $4,149,000, respectively. The federal net operating loss carryforwards expire on various dates through 2020, while the state net operating loss carryforwards expire beginning in 2006. The Company also has federal and state research and development tax credit carryforwards of approximately $251,000 and $249,000, respectively. The federal tax credit carryforwards expire on various dates through 2020, while the state tax credits carry forward indefinitely. The Company has provided an offsetting valuation allowance for the amount of these deferred income tax assets because of the uncertainty surrounding the realizability of such amounts. The Internal Revenue Code contains provisions that may limit the net operating losses and tax credit carryforward to be used in any given year upon the occurrence of certain events, including a significant change in ownership interest. The provision for income taxes from the expected tax benefit amount computed by applying the statutory federal income tax rate of 34 percent to loss before taxes is as follows:
December 31, ------------ 1999 2000 -------------------------------------------------------------------------- Federal statutory rate..................................... 34.0% 34.0% State taxes, net of federal benefit........................ 5.8 5.8 Foreign tax rates.......................................... 0.1 9.0 Change in valuation allowance.............................. (39.9) (39.8) ----- ----- Total................................................ 0.0% 9.0% ===== =====
- -------------------------------------------------------------------------------- F-20 INTERVIDEO, INC. - -------------------------------------------------------------------------------- The significant components of income tax expense for 1999 are as follows (in thousands):
Current Deferred Total - --------------------------------------------------------------- Federal.............................. $-- $(316) $(316) State................................ -- (82) (82) Foreign.............................. 64 -- 64 Valuation allowance.................. -- 398 398 --- ----- ----- Total income tax expense...... $64 $ -- $ 64 === ===== =====
The significant components of income tax expense for 2000 are as follows (in thousands):
Current Deferred Total - ----------------------------------------------------------------- Federal.............................. $ -- $(2,007) $(2,007) State................................ 1 (459) (458) Foreign.............................. 552 -- 552 Valuation allowance.................. -- 2,465 2,465 ---- ------- ------- Total income tax expense...... 553 (1) $ 552 ==== ======= =======
The Company has recorded a foreign income tax expense of $64,000 and $552,000 for the years ended December 31, 1999 and 2000, respectively. 12. RELATED-PARTY TRANSACTIONS: Prior to November 1999, the Company received limited administrative and accounting services from an affiliated company in which the Company's chief executive officer and his spouse (who is also a member of the Company's Board of Directors) have been significant shareholders. No amounts were charged to the Company by the affiliate for the services provided during the period from April 1998 to November 1999, and the Company has not recorded a charge for the fair value of the services received. 13. SEGMENT AND GEOGRAPHIC INFORMATION: Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is the chief executive officer of the Company. - -------------------------------------------------------------------------------- F-21 INTERVIDEO, INC. - -------------------------------------------------------------------------------- The Company has one operating segment: multimedia software. Sales of licenses to this software occur in three geographic locations. International revenues are based on the country in which the end-user is located. The following is a summary of international license by geographic region (in thousands):
Year ended Nine months December 31, ended ---------------- September 30, 1999 2000 2001 ----------------------------------------------------------------------- (unaudited) Americas............................... $1,398 $ 6,959 $13,242 Europe................................. 265 2,388 2,183 Asia: Japan............................... 543 2,931 5,676 Other Asia.......................... 830 3,148 2,572 ------ --------- ------- Total............................ $3,036 $15,426 $23,673 ====== ========= =======
14. ACQUISITION OF AVPD: On June 7, 2000, the Company completed the acquisition of the business and assets of AVPD, a developer of audio and video software products. AVPD was founded in 1998 and released its first product, GAMUT98, in August 1998. Its second-generation product, GAMUT2000, was released in February 2000. This purchase is intended to result in the combination of technological assets that will accelerate the Company's development and introduction of multimedia software products. The results of operations of AVPD are included in the consolidated statements of operations for the period from June 7, 2000, to December 31, 2000. The purchase cost of the acquisition was approximately $3.2 million and was accounted for as a purchase. Approximately $1,350,000 of the purchase price has been allocated to goodwill, $700,000 to in-process research and development, $150,000 to the assembled work force, and $1 million to developed technology. The Company recorded approximately $2.5 million of goodwill and other identifiable assets in connection with the acquisition, which are being amortized over a five-year period. The quarterly amortization expense will be approximately $125,000 in future periods. The Company paid $2.2 million during 2000 and accrued $1 million for payment in stock, with tentative delivery of 25,000 shares of common stock at the closing. In January 2001, in accordance with the provisions of the purchase agreement, the seller returned these shares and elected to redeem these shares and receive $1 million in U.S. dollars. Following is unaudited pro forma combined consolidated financial information, as though the acquisition had occurred on January 1, 1999, (amounts in thousands, except per share data):
Year ended December 31, ---------------- 1999 2000 ------------------------------------------------------------------------------ Net revenues............................................... $ 3,218 $15,575 Net loss................................................... $(2,252) $(6,553) Basic and diluted weighted average net loss per share...... $ (0.30) $ (0.49)
The pro forma net losses include amortization of goodwill and purchased intangibles of approximately $500,000 and $208,000 for each of the years ended December 31, 1999 and 2000, respectively. This - -------------------------------------------------------------------------------- F-22 INTERVIDEO, INC. - -------------------------------------------------------------------------------- unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations in future periods or the results that actually would have been realized. 15. SUBSEQUENT EVENT (UNAUDITED): In March 2001, the Company granted a senior executive an option to purchase 300,000 shares of common stock exercisable with a promissory note. These options were exercised at the time of grant and the Company recorded a note receivable and a reduction in shareholder's equity. The note bears interest at 5.07% per annum and is due on the earlier of March 22, 2006 or the first anniversary of the termination of services. The note is secured by the underlying stock and is with full recourse. The Company has imputed interest on the note in excess of the stated interest rate and has recorded a corresponding discount. This imputed interest will be recognized over the four year vesting term of the stock (which is subject to a right of repurchase) as additional compensation expense. The deemed market rate on the note is 10%. The Company records interest income at the deemed market rate. All interest is due upon maturity of the note. In June 2001, the Company granted to two directors of the Company options to purchase 50,000 shares of common stock exercisable with a promissory note. These options were exercised in December 2001. The notes bear interest at 5.07 percent per annum and become payable in full upon the earlier of December 11, 2006 or the first anniversary of the termination of services with the Company. These notes will be accounted for at the same deemed market rate and in the same manner as the note received in March 2000. In March 2001, the Company entered into an agreement with an Internet music service provider for exclusive marketing and promotion space. The agreement requires the Company to pay $1.1 million over 12 months and provide a $600,000 standby line of credit. In September 2001, the Company expensed $550,000 as they do not believe the asset to be realizable. In June 2001, the Company restructured the business and incurred $850,000 in severance and office closures costs. As of September 30, 2001 $449,000 has been accrued for future expenses related to the restructuring.
As of As of June 30, September 30, 2000 2001 ------------------------------------------------------------------------------- (unaudited) (unaudited) Severance........................................ $ 31 $ 2 Office Closures.................................. 488 447 ---- ---- Total...................................... $519 $449 ==== ====
- -------------------------------------------------------------------------------- F-23 INTERVIDEO, INC. - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Formosoft International Inc.: We have audited the accompanying balance sheets of the Audio/Video Products Division of Formosoft International Inc. as of December 31, 1998 and 1999, and the related statements of operations and comprehensive loss and cash flows for the period from April 14, 1998 (date of incorporation), to December 31, 1998, and for the year ended December 31, 1999. These financial statements are the responsibility of the Formosoft International Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Audio/Video Products Division of Formosoft International, Inc.as of December 31, 1998 and 1999, and the results of its operations and comprehensive loss and its cash flows for the period from April 14, 1998 (date of incorporation), to December 31, 1998, and for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. TN SOONG & CO. A Member Firm of Andersen Worldwide, SC Taipei, Taiwan, the Republic of China, March 19, 2001 - -------------------------------------------------------------------------------- F-24 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- BALANCE SHEETS (in thousands of U.S. dollars)
December 31, ------------ June 7, 1998 1999 2000 - ----------------------------------------------------------------------------------- ASSETS (unaudited) Current Assets: Accounts receivable................................ $ 24 $ -- $ 20 Related-party receivable: Formosa.................. -- 47 26 Inventory.......................................... 15 4 3 ----- ----- ----- Total current assets............................ 39 51 49 Computer Equipment, net................................ 15 17 19 OTHER ASSETS: Deferred pension cost.................... 3 -- -- ----- ----- ----- Total assets.................................... $ 57 $ 68 $ 68 ===== ===== ===== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes and accounts payable......................... $ 7 $ 22 $ 10 Accrued expenses and other current liabilities..... 34 68 59 ----- ----- ----- Total current liabilities....................... 41 90 69 Accrued Pension Cost................................... 3 6 10 Parent's Equity In Division............................ 174 464 600 ----- ----- ----- Total liabilities............................... 218 560 679 ----- ----- ----- Shareholders' Equity: Foreign currency translation adjustments........... (6) (19) (30) Accumulated deficit................................ (155) (473) (581) ----- ----- ----- Total shareholders' equity...................... (161) (492) (611) ----- ----- ----- Total liabilities and shareholders' equity...... $ 57 $ 68 $ 68 ===== ===== =====
The accompanying notes are an integral part of these statements. - -------------------------------------------------------------------------------- F-25 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands of U.S. dollars)
For the period from April 14,1998, For the year For the period to ended from December 31, December 31, January 1, 2000, 1998 1999 to June 7, 2000 - --------------------------------------------------------------------------------------------------- Sales............................................. $ 27 $ 182 $ 149 Cost of Sales..................................... -- (13) (1) ----- ----- ----- Gross profit............................... 27 169 148 ----- ----- ----- Operating Expenses: Research and development...................... 102 275 138 Selling, general, and administrative.......... 114 211 116 ----- ----- ----- Total operating expenses................... 216 486 254 ----- ----- ----- Loss from operations....................... (189) (317) (106) ----- ----- ----- Nonoperating Income (Loss): Foreign currency exchange loss................ -- (1) (2) Subsidy income................................ 34 -- -- ----- ----- ----- Total nonoperating income (loss), net...... 34 (1) (2) ----- ----- ----- Net loss................................ (155) (318) (108) Other Comprehensive Loss: Foreign currency translation adjustments...... (6) (13) (11) ----- ----- ----- Comprehensive loss......................... $(161) $(331) $(119) ===== ===== =====
The accompanying notes are an integral part of these statements. - -------------------------------------------------------------------------------- F-26 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars)
For the period For the period from For the year from April 14, 1998, ended January 1,2000, to December 31, December 31, to June 7, 2000 1998 1999 (unaudited) - ---------------------------------------------------------------------------------------------------------------------- Operating Activities: Net loss......................................................... $(155) $(318) $(108) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation.................................................. 3 8 9 Accrued pension cost.......................................... -- 6 4 Changes in operating assets and liabilities: Accounts receivable........................................ (24) 24 (20) Accounts receivable: related parties....................... -- (47) 21 Inventories................................................ (15) 11 1 Notes and accounts payable................................. 7 15 (12) Accrued expenses and other current liabilities............. 34 34 (9) ----- ----- ----- Net cash used in operating activities................... (150) (267) (114) ----- ----- ----- Investing and Financing Activities: Working capital from owner....................................... 174 290 136 Acquisitions of computer equipment............................... (17) (12) (10) ----- ----- ----- Net cash provided by investing and financing activities............................................. 157 278 126 ----- ----- ----- Effects of Change in Exchange Rate on Cash........................... $ (7) $ (11) $ (12) ===== ===== ===== Net Change in Cash................................................... $ -- $ -- $ -- ===== ===== =====
The accompanying notes are an integral part of these statements. - -------------------------------------------------------------------------------- F-27 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. GENERAL: Business On June 7, 2000, InterVideo Inc. acquired theAudio/Video Products Division (AVPD) of Formosoft International Inc. (Formosoft) in Taiwan in exchange for a cash payment of $3.2 million. The acquisition consisted of AVPD's business, including information equipment, intellectual property rights and products, and customers. AVPD's business was integrated with the businesses of Formosoft; consequently, the financial statements have been derived from the financial statements and accounting records of Formosoft and reflect significant assumptions and allocations. Moreover, AVPD relied on Formosoft and its other businesses for administrative, management, research, and other services. Accordingly, the financial statements do not necessarily reflect the financial position, results of operations, and cash flows of AVPD had it been a stand-alone company. AVPD is a developer of audio and video coding and decoding technologies. It develops and sells software that encodes, transcodes, and decodes digital audio and video data on a real-time basis. AVPDwas established at the same time when Formosoft was incorporated on April 14, 1998, and released its first software, GAMUT98, in August 1998, then its second-generation product, GAMUT2000, in February 2000. 2. BASIS OF PRESENTATION: AVPD's financial statements were "carved out" from the financial statements and accounting records of Formosoft using the historical results of operations and historical basis of assets and liabilities of AVPD's business activities. Management believes that the assumptions underlying the financial statements are reasonable. However, the financial statements included herein may not necessarily reflect what AVPD's results of operations, financial position, and cash flows would have been had AVPD been a stand-alone company during the periods presented. Because a direct ownership relationship did not exist among all the various divisions comprising Formosoft, Formosoft's net investment in AVPD is shown as "working capital from owner" in lieu of shareholders' equity in the financial statements. The financial statements include allocations of certain Formosoft expenses, assets, and liabilities, including the items described below. Costs of centralized general expenses Centralized general expenses are allocated based on headcounts for the respective periods and are reflected in selling, general and administrative, and research and development expenses. The general corporate expense allocation is primarily for cash management, rent, utilities, accounting, insurance, public relations, advertising, human resources, and data services. Management believes that costs of these services charged to AVPD are a reasonable representation of the costs that would have been incurred if AVPD had performed these functions as a stand-alone company. Basic research Research and development expenses were allocated based on the number of individuals conducting the research and development for AVPD. Management believes that the costs of this research charged to AVPD are a reasonable representation of the costs that would have been incurred if AVPD had performed this research as a stand-alone company. Following the acquisition by InterVideo, Inc., AVPD will satisfy its basic research requirements using its own resources or through purchased services. - -------------------------------------------------------------------------------- F-28 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- Sales and cost of sales Sales and costs of sales are clearly identifiable as applicable to AVPD's business. Income tax Income taxes are calculated as if AVPD was a stand-alone legal entity. Pension costs These costs are allocated based on AVPD's active employee population for each of the years presented. Cash and accounts receivable and payable Formosoft uses a centralized approach to cash management. As a result, Formosoft's cash, cash equivalents, or short-term investments have not been allocated in AVPD's financial statements. Receivables and payables in the financial statements are directly related to sales and purchases made by AVPD. No allowance for doubtful accounts was recorded in any period presented. Changes in investing and financing activities represent any funding required from Formosoft for working capital and acquisition or capital expenditure requirements. 3. ACCOUNTING POLICIES: Unaudited interim financial statements The interim financial information contained herein for the period from January 1, 2000, to June 7, 2000, is unaudited but, in the opinion of management, reflects all adjustments that are necessary for a fair presentation of the financial position, results of operations, and cash flows for the period presented. All adjustments are of a normal, recurring nature. Results of operations for interim periods presented herein are not necessarily indicative of results of operations for the entire year. Use of estimates Formosoft maintains its accounting books and records in conformity with accounting principles generally accepted in the Republic of China (ROC). The accompanying financial statements of AVPD have been "carved out" from the financial statements and accounting records of Formosoft and were then prepared to reflect its financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Concentration of credit risk Financial instruments that potentially subject AVPD to a concentration of credit risk consist primarily of accounts receivable. To mitigate this risk, AVPD performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for doubtful accounts receivable based upon review of the expected collectibility of individual accounts receivable. Fair value of financial instruments AVPD's financial instruments, including accounts receivable and notes and accounts payable, are carried at cost, which approximates fair value because of the short-term maturity of these instruments. Inventories Inventories consist solely of finished goods and are stated at the lower of weighted-average cost or market value. Market value represents net realizable value. - -------------------------------------------------------------------------------- F-29 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- Computer equipment Computer equipment is stated at cost less accumulated depreciation. The equipment is depreciated using the straight-line method based on estimated useful lives of over three years. Asset impairment Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," requires recognition of impairment of long-lived assets in the event the net book value of these assets exceeds the future undiscounted cash flows attributable in use to these assets. Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No impairment losses have been recorded in any period presented. Revenue recognition AVPD generates software revenues mainly from product licensing fees. Revenue from products licensed to original equipment manufacturers (OEMs) based on the number of sales by the OEMs is recorded when the OEMs ship the licensed products. Revenue from periodic software licenses, under which fees are paid on a recurring, periodic basis, is generally recognized ratably over the respective license periods. Revenue from packaged product sales to and through distributors and resellers is recorded when related products are shipped, provided that the license agreement has been signed, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. In December 1999, the United States Securities Exchange Commission (U.S. SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements.'' SAB No. 101 provides additional guidance on revenue recognition, as well as criteria for when revenue is generally realized and earned. AVPD's revenue recognition policies are fully compliant with SAB No. 101 for all periods presented. Research and development Research and development costs are expensed as incurred. In accordance with SFAS No. 86, AVPD has evaluated the establishment of technological feasibility of its various products during the development phase. Due to dynamic changes in the market, AVPD has concluded that it cannot determine, with any reasonable degree of accuracy, technological feasibility until the development phase of the project is nearly complete. The time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release is generally very short, and consequently, the amount that could be capitalized pursuant to SFAS No. 86 is not material to AVPD's financial position or results of operations. Therefore, AVPD charges all research and development expenses to operations in the period incurred. Pension costs Employees of AVPD are included in the Formosoft defined benefit pension plan. The plan covers all regular employees, and provides benefits based on length of service and salary levels upon retirement. Pension costs, including services costs, interest costs, projected return on plan assets, and amortization, are recorded on the basis of actuarial calculations in accordance with SFAS No. 87, "Employers' Accounting for Pension." Under SFAS No. 87, Formosoft recognizes a minimum pension liability equivalent to the unfunded accumulated benefit obligation. AVPD has been allocated its share of this pension liability based upon its employee population. Advertising costs Advertising costs are expensed as incurred. Advertising expense was $8,000 in 1998, $15,000 in 1999, and $160 (unaudited) for theperiod ended June 7, 2000. - -------------------------------------------------------------------------------- F-30 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- Income tax Formosoft is subject to income tax in the ROC. Therefore, the income tax of AVPD was calculated based on a separate tax return basis subject to income tax in the ROC. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance was provided for these deferred income tax assets because of the uncertainty surrounding the realizability of such amounts. Subsidy income AVPD received subsidy income from the Institute for Information Industry (III), a bureau of the ROC government, for qualified software development projects upon review and approval by III. The subsidy contract period was from July 1, 1998, to November 30, 1998. AVPD recognized subsidy income ratably over the term of the agreement. All related income was received in 1998. Foreign currency translations The functional currency of AVPD is the local currency, the New Taiwan dollar. Thus, foreign currency transactionsare recorded in New Taiwan dollars at the rates of exchange in effect when the transactionsoccur. Gains or losses, resulting from the application of different foreign exchange rates when cash in a foreign currency is converted into New Taiwan dollars or when foreign currency receivables and payables are settled, are credited or charged to income in the year of conversion or settlement. At year-end, the balances of foreign currency assets and liabilities are restated based on prevailing exchange rates, and any resulting gains or losses are credited or charged to income. The financial statements of AVPD are translated into U.S. dollars at the following exchange rates: (a) assets and liabilities--current rate and (b) income and expenses--weighted-average rate during the year. The resulting translation adjustment is recorded as a separate component of shareholders' equity. Comprehensive loss AVPD adopted the provisions of SFAS No. 130 "Reporting Comprehensive Income." Comprehensive income, as defined, includes all changes in equity during a period from nonowner sources. To date, a foreign currency translation adjustment is the only income component required to be reported in other comprehensive loss for AVPD. 4. COMPUTER EQUIPMENT, NET (amounts in thousands of US dollars):
December 31, ------------ June 7, 1998 1999 2000 - --------------------------------------------------------------------------- (unaudited) Computer equipment Cost.......................................... $18 $28 $36 Accumulated depreciation...................... 3 11 17 --- --- --- $15 $17 $19 === === ===
- -------------------------------------------------------------------------------- F-31 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (amounts in thousands of U.S. dollars):
December 31, ------------ June 7, 1998 1999 2000 - --------------------------------------------------------------------------- (unaudited) Salaries and bonus............................... $34 $65 $58 Others........................................... -- 3 1 --- --- --- $34 $68 $59 === === ===
6. RETIREMENT PLAN: Employees of AVPD are included in the Formosoft defined benefit pension plan. The plan covers substantially all of the employees in AVPD. Future retirement payments are based on the employee's salary level upon retirement and length of service with Formosoft. At the end of each year, an actuarial calculation is prepared in accordance with SFAS No. 87, "Employers' Accounting for Pensions." Based on this calculation, Formosoft transferred funds to the Central Trust of China, a government institution, equal to the projected benefit obligation. The plan was not funded at June 7, 2000. Accordingly, pension costs of $6,000 and $4,000 (unaudited) attributable to AVPD wererecorded for the year ended 1999 and for the period ended June 7, 2000, respectively. 7. INCOME TAX: No provision for income taxes has been recorded for any period presented, as AVPD has incurred net operating losses for tax purposes. Deferred tax assets and liabilities consist of the following (amounts in thousands of U.S. dollars):
December 31, ----------- June 7, 1998 1999 2000 - ---------------------------------------------------------------------------- (unaudited) Net operating loss carryforwards................. $ 31 $ 95 $ 116 Valuation allowance.............................. (31) (95) (116) ---- ---- ----- $ -- $ -- $ -- ==== ==== =====
AVPD provides a valuation allowance for deferred tax assets when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based on a number of factors (a lack of a history of profits; the market in which AVPD competes is intensely competitive; the industry is characterized by rapidly changing technology), management believes that there is sufficient uncertainty regarding the realization of deferred tax assets that a full valuation allowance is appropriate. These operating loss carryforwards are available to offset future taxable income and expire from 2003 to 2005 as if AVPD was a stand-alone legal entity. 8. RELATED-PARTY TRANSACTIONS: Sales made by AVPD to Formosa Industrial Computing, Inc. (Formosa), a shareholder and director of Formosoft, for the year ended December 31, 1999, and for the period ended June 7, 2000, amounted to $117,000 and $49,000 (unaudited), respectively. Since no other bundle contracts were signed by AVPD other than Formosa, market prices are not available for comparison. - -------------------------------------------------------------------------------- F-32 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- 9. SEGMENT INFORMATION: AVPD is engaged in a single industry segment--the development and marketing of audio and video coding and decoding software products. AVPD's revenues are all from ROC. Major customers that accounted for more than 10 percent of total revenues are as follows (amounts in thousands of U.S. dollars):
Years ended December 31, ------------------------------ Period ended 1998 1999 June 7, 2000 -------------- -------------- -------------- Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------ (unaudited) Customers: Softchina................. $22 79% $ 22 12% $20 13% Formosa................... -- -- 117 64 49 33 Hsing-Tech................ -- -- 30 16 78 52
- -------------------------------------------------------------------------------- F-33 - -------------------------------------------------------------------------------- Unaudited Pro Forma Condensed Combined Financial Statements Basis of Presentation In the opinion of our management, all adjustments necessary to fairly present this pro forma information have been made. The unaudited Pro Forma Condensed Combined Financial Statements are based upon, and should be read in connection with, the historical financial statements of InterVideo, Inc. and AVPD, and the respective notes to such financial statements presented elsewhere in this Prospectus. AVPD was acquired by InterVideo, Inc. on June 7, 2000 in a transaction accounted for as a purchase. The unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2000 are presented as if InterVideo, Inc. had completed the acquisition of AVPD as of January 1, 2000.
Year Ended December 31, 2000 - --------------------------------------------------------------------------------------------------------- InterVideo, Inc. Unaudited Pro Forma Condensed Combined Statement InterVideo, Pro Forma Pro Forma of Operations Inc. AVPD Adjustments (a) Combined - --------------------------------------------------------------------------------------------------------- (amounts in thousands, except share and per share data) Revenue................................ 15,426 149 15,575 Cost of revenue........................ (5,189) (1) (5,190) Gross profit........................... 10,237 148 10,385 Operating expenses: Research and development............ 6,876 138 208 7,222 Selling and marketing............... 5,033 5,033 General and administrative........... 2,667 116 2,783 Stock Compensation.................. 1,411 1,411 Special Charges..................... -- -- Total operating expense................ 15,987 254 208 16,449 Loss from operations................... (5,750) (106) (208) (6,064) Other income (expense)................. (557) (2) (555) Income taxes........................... (552) (552) Net loss............................... (5,745) (108) (208) (6,061) Net loss per share: Basic and diluted...................... (2.19) (2.31) Weighted average number of common shares outstanding: Basic and diluted...................... 2,625 2,625
- -------- (a) Represents the amortization of goodwill of $208 that would have been recorded for the period from January 1, 2000 to June 7, 2000, if the acquisition of AVPD occurred on January 1, 2000. Goodwill is amortized on a straight-line basis over a period of five years. No other significant fair value purchase price adjustments were recorded in connection with the acquisition of AVPD. - -------------------------------------------------------------------------------- F-34 Part II - -------------------------------------------------------------------------------- INFORMATION NOT REQUIRED IN PROSPECTUS Unless otherwise defined, all capitalized terms contained in this Part II shall have the meanings ascribed to them in the prospectus which forms a part of this registration statement. InterVideo is sometimes referred to in this Part II as the "registrant." Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee. Securities and Exchange Commission registration fees....... $12,369 NASD filing fee............................................ 5,675 Printing and engraving expenses............................ Legal fees and costs....................................... Accounting fees and costs.................................. Nasdaq National Market listing fees........................ Transfer agent and registrar fees and expenses............. Miscellaneous expenses..................................... ------- Total................................................... $ =======
Item 14. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). Article IX of the registrant's Amended and Restated Certificate of Incorporation (Exhibit 3.2 hereto) and Article IX of the registrant's Amended and Restated Bylaws (Exhibit 3.4 hereto) provide for indemnification of the registrant's directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The registrant intends to enter into agreements with its directors and officers that will require the registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as director or officers to the fullest extent not prohibited by law. The underwriting Agreement (Exhibit 1.1) provides for indemnification by the underwriters of the registrant, its directors and officers, and by the registrant of the underwriters, for certain liabilities, including liabilities arising under the Act and affords certain rights of contribution with respect thereto. Item 15. Recent Sales of Unregistered Securities. Since December 31, 1998, we have sold and issued the following unregistered securities: (1) From March 1999 to December 2001, we have granted stock options to purchase an aggregate of 9,043,400 shares of common stock at exercise prices ranging from $0.05 to $2.20 per share to employees, consultants, directors and other service providers pursuant to our 1998 Plan and pursuant to options granted outside of the 1998 Plan, which options total 218,750 shares. The options issued outside of the 1998 Plan were issued at exercise prices ranging from $0.05 to $0.25 per share to consultants to us. (2) From May to August 1999, we sold an aggregate of 2,000,000 shares of Series C preferred stock to 39 outside investors at a price of $2.00 per share for an aggregate purchase price of $4,000,000. - -------------------------------------------------------------------------------- II-1 Part II - -------------------------------------------------------------------------------- (3) From April 2000 to May 2000, we sold an aggregate of 4,188,750 shares of Series D preferred stock to 70 outside investors at a price of $4.00 per share for an aggregate purchase price of $16,655,000. All shares of the preferred stock are convertible into shares of common stock at the rate of one share of common stock for each share of preferred stock outstanding. The sales and issuances of securities described in paragraph (1) above were exempt from registration under Section 4(2) of the Securities Act by virtue of Rule 701 promulgated thereunder in that they were offered and sold either pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation, as provided by Rule 701. The sale and issuance of securities described in paragraphs (2) and (3) above were exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act, Regulation D and Regulation S promulgated thereunder. Item 16. Exhibits and Financial Statements Schedules. (a) Exhibits
Exhibit Number Description - ---------------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1* Amended and Restated Certificate of Incorporation, to be effective upon the reincorporation. 3.2* Amended and Restated Certificate of Incorporation, to be effective upon consummation of this offering. 3.3* Bylaws, to be effective upon the reincorporation. 3.4* Amended and Restated Bylaws, to be effective upon consummation of this offering. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati. 10.1 Registrant's 1998 Stock Option Plan and form of option agreement. 10.2* Registrant's 2002 Stock Plan and form of option agreement. 10.3* Registrant's 2002 Employee Stock Purchase Plan and form of subscription agreement. 10.4* Form of Directors and Officers' Indemnification Agreement. 10.5 Investor Rights Agreement, dated July 2, 1999, as amended, by and among the Registrant and the parties who are signatories thereto. 10.6*+ Digital Audio System License Agreement between the Registrant and Dolby Laboratories Licensing Corporation dated March 4, 1999. 10.7*+ CSS License Agreement between the Registrant and DVD Copy Control Association dated December 22, 2000. 10.8 Lease Agreement between the registrant and ProLogis Limited Partnership-1, dated December 7, 2000. 10.9 Employment offer letter with Randy Bambrough. 10.10 Form of Nonstatutory Stock Option Agreement for grants to Joe Liu and George Haber. 10.11 Nonstatutory Stock Option Agreement for Henry Shaw. 10.12* Form of Promissory Notes issued by George Haber, Joe Liu and Randall Bambrough. 10.13* Common Stock Purchase Agreement with Honda Shing, dated May 15, 1998. 21.1 Subsidiaries of the registrant. 23.1 Consent of Arthur Andersen. 23.2 Consent of TN Soong & Co. 23.3* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1). 24.1 Power of Attorney. Reference is made to Page II-4.
- -------- * To be filed by amendment. + Confidential treatment to be requested for a portion of this agreement. (b) Financial Statement Schedules. Schedules other than those referred to above have been omitted because they are not applicable or not required or because the information is included elsewhere in the Financial Statements or the notes thereto. - -------------------------------------------------------------------------------- II-2 Part II - -------------------------------------------------------------------------------- Item 17. Undertakings. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification 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 informed 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 expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned 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 registrant pursuant to Rule 424(b)(1), or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (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. - -------------------------------------------------------------------------------- II-3 Part II - -------------------------------------------------------------------------------- Signatures Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on January 11, 2002. INTERVIDEO, INC. By: /S/ STEVE RO ----------------------------------- Steve Ro, President Power of Attorney KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Steve Ro and Randall Bambrough, or either of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with 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, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons on January 11, 2002 in the capacities indicated. Signature Title ----------------------------------------------------------------------- /S/ STEVE RO President, Chief Executive Officer and Director --------------------- (Principal Executive Officer) Steve Ro /S/ RANDALL BAMBROUGH Chief Financial Officer (Principal Financial and --------------------- Accounting Officer) Randall Bambrough /S/ HENRY SHAW Director --------------------- Henry Shaw /S/ ELI STERNHEIM Director --------------------- Eli Sternheim /S/ GEORGE HABER Director --------------------- George Haber /S/ JOSEPH LIU Director --------------------- Joseph Liu - -------------------------------------------------------------------------------- II-4 - -------------------------------------------------------------------------------- Exhibit index
Exhibit Number Description - --------------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1* Amended and Restated Certificate of Incorporation, to be effective upon the reincorporation. 3.2* Amended and Restated Certificate of Incorporation, to be effective upon consummation of this offering. 3.3* Bylaws, to be effective upon the reincorporation. 3.4* Amended and Restated Bylaws, to be effective upon consummation of this offering. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati. 10.1 Registrant's 1998 Stock Option Plan and form of option agreement. 10.2* Registrant's 2002 Stock Plan and form of option agreement. 10.3* Registrant's 2002 Employee Stock Purchase Plan and form of subscription agreement. 10.4* Form of Directors and Officers' Indemnification Agreement. 10.5 Investor Rights Agreement, dated July 2, 1999, as amended, by and among the Registrant and the parties who are signatories thereto. 10.6*+ Digital Audio System License Agreement between the Registrant and Dolby Laboratories Licensing Corporation dated March 4, 1999. 10.7*+ CSS License Agreement between the Registrant and DVD Copy Control Association dated December 22, 2000. 10.8 Lease Agreement between the registrant and ProLogis Limited Partnership-1, dated December 7, 2000. 10.9 Employment offer letter with Randy Bambrough. 10.10 Form of Nonstatutory Stock Option Agreement for grants to Joe Liu and George Haber. 10.11 Nonstatutory Stock Option Agreement for Henry Shaw. 10.12* Form of Promissory Notes issued by George Haber, Joe Liu and Randall Bambrough. 10.13* Common Stock Purchase Agreement with Honda Shing, dated May 15, 1998. 21.1 Subsidiaries of the registrant. 23.1 Consent of Arthur Andersen. 23.2 Consent of TN Soong & Co. 23.3* Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1). 24.1 Power of Attorney. Reference is made to Page II-4.
- -------- * To be filed by amendment. + Confidential treatment to be requested for a portion of this agreement. - -------------------------------------------------------------------------------- EX-10.1 3 dex101.txt REGISTRANT'S 1998 STOCK OPTION PLAN EXHIBIT 10.1 INTERVIDEO, INC. 1998 STOCK OPTION PLAN ---------------------- Amended as of October, 2000 1. Purposes of this Plan. The purposes of this 1998 Stock Option Plan are --------------------- to attract and retain the best available personnel, to provide additional incentive to the Employees of the Company and its Subsidiaries, to promote the success of the Company's business and to enable the Employees to share in the growth and prosperity of the Company by providing them with an opportunity to purchase stock in the Company. Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written stock option agreement. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of the 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company, without par value. (d) "Company" shall mean InterVideo, Inc. a California corporation. (e) "Committee" shall mean the Committee appointed by the Board in accordance with Section 4 of this Plan, if one is appointed. (f) "Continuous Employment" or "Continuous Status as an Employee" shall mean the absence of any interruption or termination of employment or service as an Employee by or to the Company or any Parent or Subsidiary of the Company which now exists or is hereafter organized or acquired by or acquires the Company. Continuous Employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Board or in the event of transfers between locations of the Company or between the Company, its Parent, any of its Subsidiaries or its successors. (g) "Employee" shall mean any person, including officers and directors, employed by the Company, its Parent, any of its Subsidiaries or its successors; or, for purposes of eligibility for Nonstatutory Stock Options, any person employed by the Company, including officers and directors, or any consultant to, or director of, the Company, or any Parent or Subsidiary of the Company, whether or not such consultant or director is an employee of such entities. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor legislation. 1 (i) "Non Employee Director" shall mean a director who is a "Non Employee Director", as such term is defined under Rule 16b 3(b)3(i) promulgated pursuant to the Exchange Act and any applicable releases and opinions or the Securities and Exchange Commisions. (j) "Incentive Stock Option" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (k) "Nonstatutory Stock Option" shall mean an Option which is not an Incentive Stock Option. (l) "Option" shall mean a stock option granted pursuant to this Plan. (m) "Option Agreement" shall mean a written agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, evidencing an Option. (n) "Optioned Stock" shall mean the Common Stock subject to an Option. (o) "Optionee" shall mean an Employee who is granted an Option. (p) "Parent" shall mean a "parent corporation," whether now or hereafter existing, as defined in Sections 424(e) and (g) of the Code. (q) "Plan" shall mean this 1998 Stock Option Plan. (r) "Registration Date" shall mean the effective date of the first registration statement which is filed by the Company and declared effective pursuant to Section 12(g) of the Exchange Act, with respect to any class of the Company's securities. (s) "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor legislation. (t) "Share" or "Shares" shall mean the Common Stock, as adjusted in accordance with Section 11 of this Plan. (u) "Stock Purchase Agreement" shall mean an agreement in such form or forms as the Board (subject to the terms and conditions of this Plan) may from time to time approve, which is to be executed as a condition of purchasing Optioned Stock upon exercise of an Option. (v) "Subsidiary" shall mean a subsidiary corporation, whether now or hereafter existing, as defined in Sections 424(f) and (g) of the Code. 3. Stock Subject to this Plan. Subject to the provisions of Section 11 of -------------------------- this Plan, the maximum aggregate number of Shares which may be optioned and sold under this Plan is Ten Million (10,000,000) Shares. The Shares may be authorized, but unissued or reacquired 2 Shares other than reacquired shares delivered pursuant to Section 7(c)(iv) hereof as payment of consideration in the exercise of an option. If (a) an Option should expire or become unexercisable for any reason without having been exercised in full or (b) if the Company repurchases Shares from the Optionee pursuant to the terms of a Stock Purchase Agreement (provided that the Optionee did not receive benefits of ownership, such as dividends, which would destroy the exemption from the provisions of Section 16(b) of the Exchange Act provided by Rule 16b-3 promulgated pursuant to the Exchange Act), the unpurchased Shares or repurchased Shares, respectively, which were subject thereto shall, unless this Plan shall have been terminated, return to this Plan and become available for other Options under this Plan. The Company intends that as long as it is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, and is not an investment company registered or required to be registered under the Investment Company Act of 1940, as amended, all offers and sales of Options and Common Stock issuable upon exercise of any Option shall be exempt from registration under the provisions of Section 5 of the Securities Act, and this Plan shall be administered in such a manner so as to preserve such exemption. The Company intends for this Plan to constitute a written compensatory benefit plan within the meaning of Rule 701(b) of 17 CFR Section 230.701 ("Rule 701") promulgated by the Securities and Exchange Commission pursuant to the Securities Act. Unless otherwise designated by the Committee at the time an Option is granted, all options granted under this Plan by the Company, and the issuance of any Shares upon exercise thereof, are intended to be granted in reliance on Rule 701. 4. Administration of this Plan. --------------------------- (a) Procedure. This Plan shall be administered by the Board. The Board --------- may appoint a Committee consisting of two (2) or more members of the Board (or such greater number as is required to qualify for the exemption from the provisions of Section 16(b) of the Exchange Act provided by Rule 16b-3 promulgated pursuant to the Exchange Act) to administer this Plan on behalf of the Board, subject to such terms and conditions as the Board may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase the size of the Committee and appoint additional members of the Board thereto, remove members (with or without cause) and appoint new members of the Board in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and, thereafter, directly administer this Plan. Members of the Board or Committee who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of this Plan or the grant of Options pursuant to this Plan, except that no such member shall act upon the granting of an Option to such person nor shall any such members presence at a meeting of the Board of Directors establish the existence of a quorum at any meeting of the Board or the Committee during which action is taken with respect to the granting of an Option to him. (b) Procedure After Registration Date. Notwithstanding the provisions --------------------------------- of Section 4(a) above, after the Registration Date this Plan shall be administered either by: (i) the full Board, provided that at all times each member of the Board is a Non-Employee Director; or 3 (ii) a Committee which at all times consists solely of Board members who are Non Employee Directors. After the Registration Date, the Board shall take all action necessary to administer this Plan in accordance with the then-effective provisions of Rule 16b-3 promulgated under the Exchange Act, provided that any amendment to this Plan required for compliance with such provisions shall be made in accordance with Section 13 of this Plan. (c) Powers of the Board and/or Committee. Subject to the provisions of ------------------------------------ this Plan, the Committee or the Board, as appropriate, shall have the authority, in its discretion: (i) to grant Incentive Stock Options and Nonstatutory Stock Options; (ii) to determine, upon review of relevant information and in accordance with Section 7 of this Plan, the fair market value per Share; (iii) to determine the exercise price of the Options, which exercise price and type of consideration shall be determined in accordance with Section 7 of this Plan; (iv) to determine the Employees to whom, and the time or times at which, Options shall be granted, and the number of Shares to be subject to each Option; (v) to prescribe, amend and rescind rules and regulations relating to this Plan; (vi) to determine the terms and provisions of each Option Agreement and each Stock Purchase Agreement (each of which need not be identical with the terms of other Option Agreements and Stock Purchase Agreements) and, with the consent of the holder thereof, to modify or amend each Option Agreement and Stock Purchase Agreement; (vii) to determine whether a stock repurchase agreement or other agreement will be required to be executed by any Employee as a condition to the exercise of an Option, and to determine the terms and provisions of any such agreement (which need not be identical with the terms of any other such agreement) and, with the consent of the Optionee, to amend any such agreement; (viii) to interpret this Plan, the Option Agreements, the Stock Purchase Agreements or any agreement entered into with respect to the grant or exercise of Options; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board or to take such other actions as may be necessary or appropriate with respect to the Company's rights pursuant to Options or agreements relating to the grant or exercise thereof; and (x) to make such other determinations and establish such other procedures as it deems necessary or advisable for the administration of this Plan. (d) Effect of the Board's or Committee's Decision. All decisions, --------------------------------------------- determinations and interpretations of the Board or the Committee shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Options may be granted only to Employees. An Employee ----------- who has been granted an Option may, if such Employee is otherwise eligible, be granted additional Options. 6. Term of Plan. This Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board or its approval by vote of a majority of the outstanding shares of the Company's capital stock entitled to vote on the adoption of this Plan. This Plan shall continue in effect for a term of ten (10) years unless sooner terminated in accordance with the terms and provisions of this Plan. 7. Option Price and Consideration. ------------------------------ 4 (a) Exercise Price. The exercise price per Share for the Shares to be -------------- issued pursuant to the exercise of an Option shall be such price as is determined by the Board; provided, however, that such price shall in no event be -------- ------- less than eighty-five percent (85%) with respect to Nonstatutory Stock Options, and one hundred percent (100%) with respect to Incentive Stock Options, of the fair market value per Share on the date of grant. In the case of an Option granted to an Employee who, at the time the Option is granted, owns stock (as determined under Section 424(d) of the Code) constituting more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Parent or Subsidiaries, the exercise price per Share shall be no less than one hundred ten percent (110%) of the fair market value per Share on the date of grant. (b) Fair Market Value. The fair market value per Share on the date of ----------------- grant shall be determined by the Board in its sole discretion, exercised in good faith; provided, however, that where there is a public market for the Common -------- ------- Stock, the fair market value per Share shall be the average of the closing bid and asked prices of the Common Stock on the date of grant, as reported in The --- Wall Street Journal (or, if not so reported, as otherwise reported by the - ------------------- National Association of Securities Dealers Automated Quotations ("NASDAQ") System), or, in the event the Common Stock is listed on a stock exchange or on the NASDAQ System, the fair market value per Share shall be the closing price on the exchange or on the NASDAQ System as of the date of grant of the Option, as reported in The Wall Street Journal. ----------------------- (c) Payment of Consideration. The consideration to be paid for the ------------------------ Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory notes, Shares held by the Optionee for the requisite period necessary to avoid a charge to the Company's earnings for financial reporting purposes which have a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment. Subject to subparagraphs (i) through (iv) hereto, utilization of Shares as the method of payment may be completed by either (a) the tender of Shares then held by the Optionee, or (b) the withholding of Shares which would otherwise be issued pursuant to an Option pursuant to broker-dealer sale and remittance procedure described in subparagraph (iii) hereto. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration is deemed to be such as may be reasonably expected to benefit the Company. (i) If the consideration for the exercise of an Option is a promissory note, it shall be a full recourse promissory note executed by the Optionee, bearing interest at a rate which shall be sufficient to preclude the imputation of interest under the applicable provisions of the Code. Until such time as the promissory note has been paid in full, the Company may retain the Shares purchased upon exercise of the Option in escrow as security for payment of the promissory note. (ii) If the consideration for the exercise of an Option is the surrender of previously acquired and owned Shares, the Optionee will be required to make representations and warranties satisfactory to the Company regarding his title to the Shares used to effect the purchase, including, without limitation, representations and warranties that the Optionee has 5 good and marketable title to such Shares free and clear of any and all liens, encumbrances, charges, equities, claims, security interests, options or restrictions and has full power to deliver such Shares without obtaining the consent or approval of any person or governmental authority other than those which have already given consent or approval in a form satisfactory to the Company. The value of the Shares used to effect the purchase shall be the fair market value of those Shares as determined by the Board in its sole discretion, exercised in good faith. (iii) If the consideration for the exercise of an Option is to be paid through a broker-dealer sale and remittance procedure, the Optionee shall provide (1) irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and to remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased Shares plus all applicable Federal and State income and employment taxes required to be withheld by the Company in connection with such purchase and (2) written instructions to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction. (iv) If an Optionee is permitted to exercise an Option by delivering shares of the Company's Common Stock, the option agreement covering such Option may include provisions authorizing the Optionee to exercise the Option, in whole or in part, by: (1) delivering whole shares of the Company's Common Stock previously owned by such Optionee (whether or not acquired through the prior exercise of a stock option) having a fair market value equal to the option price; and/or (2) directing the Company to withhold from the Shares that would otherwise be issued upon exercise of the Option that number of whole Shares having a fair market value equal to the option price. Shares of the Company's Common Stock so delivered or withheld shall be valued at their fair market value on the date of exercise of the Option, as determined by the Committee and/or the Board, as appropriate. Any balance of the exercise price shall be paid in cash or by check or a promissory note, each in accordance with the terms of this Section 7. Any Shares delivered or withheld in accordance with this provision shall again become available for purposes of this Plan and for Options subsequently granted thereunder to the extent permissible pursuant to Section 3 of this Plan. 8. Options. ------- (a) Terms and Provisions of Options. As provided in Section 4 of this ------------------------------- Plan and subject to any limitations specified herein, the Board and/or Committee shall have the authority to determine the terms and provisions of any Option granted under this Plan or any agreement required to be executed in connection with the grant or exercise of an Option. Each Option granted pursuant to this Plan shall be evidenced by an Option Agreement. Options granted pursuant to this Plan are conditioned upon the Company obtaining any required permit or order from appropriate governmental agencies authorizing the Company to issue such Options and Shares issuable upon exercise thereof. (b) Term of Option. The term of each Option may be up to ten (10) --------------------- years from the date of grant thereof as determined by the Board upon the grant of the Option and specified in the Option Agreement, except that the term of an Option granted to an Employee 6 who, at the time the Option is granted, owns stock comprising more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Parent or Subsidiaries, shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. (c) Exercise of Option. ------------------ (i) Procedure for Exercise; Rights as a Shareholder. Any ----------------------------------------------- Option shall be exercisable at such times, in such installments and under such conditions as may be determined by the Board and specified in the Option Agreement, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of this Plan. An Option may be exercised in accordance with the provisions of this Plan as to all or any portion of the Shares then exercisable under an Option, from time to time during the term of the Option. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company at its principal business office in accordance with the terms of the Option Agreement by the person entitled to exercise the Option and, except when the broker-dealer sale and remittance procedure described in Section 7(c)(iii) hereto is used, full payment for the Shares with respect to which the Option is exercised has been received by the Company, accompanied by an executed Stock Purchase Agreement and any other agreements required by the terms of this Plan and/or the Option Agreement. Full payment may consist of such consideration and method of payment allowable under Section 7 of this Plan. Until the Option is properly exercised in accordance with the terms of this paragraph, no right to vote or receive dividends or any other rights as a stockholder exist with respect to the Optioned Stock. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Option is exercised, except as provided in Section 11 of this Plan. As soon as practicable after any proper exercise of an Option in accordance with the provisions of this Plan, the Company shall, without transfer or issue tax to the Optionee, deliver to the Optionee at the principal executive office of the Company or such other place as shall be mutually agreed upon between the Company and the Optionee, a certificate or certificates representing the Shares for which the Option shall have been exercised. The time of issuance and delivery of the certificate(s) representing the Shares for which the Option shall have been exercised may be postponed by the Company for such period as may be required by the Company, with reasonable diligence, to comply with any applicable listing requirements of any national or regional securities exchange or any law or regulation applicable to the issuance or delivery of such Shares. No Option may be exercised unless this Plan has been duly approved by the shareholders of the Company in accordance with applicable law. Notwithstanding anything to the contrary herein, the terms of a Stock Purchase Agreement required to be executed and delivered in connection with the exercise of an Option may require the certificate or certificates representing the Shares purchased upon exercise of an Option to be delivered and deposited with the Company as security for the Optionee's faithful performance of the terms of his Stock Purchase Agreement. 7 Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of this Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (ii) Termination of Status as an Employee. If an Optionee ------------------------------------ ceases to serve as an Employee for any reason other than death or disability and thereby terminates his Continuous Status as an Employee, such Optionee shall have the right to exercise the Option at any time within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Board at the time of granting the Option), following the date such Optionee ceases his Continuous Status as an Employee of the Company to the extent that such Optionee was entitled to exercise the Option at the date of such termination; provided, however, that no Option shall be exercisable after the -------- ------- expiration of the term set forth in the Option Agreement. To the extent that such Optionee was not entitled to exercise the Option at the date of such termination, or if such Optionee does not exercise such Option (which such Optionee was entitled to exercise) within the time specified herein, the Option shall terminate. (iii) Death or Disability of Optionee. If an Optionee ceases to ------------------------------- serve as an Employee due to death or disability and thereby terminates his Continuous Status as an Employee, the Option may be exercised at any time within six (6) months following the date of death or termination of employment due to disability, in the case of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, or, in the case of disability, by the Optionee, but in any case only to the extent the Optionee was entitled to exercise the Option at the date of his termination of employment by death or disability; provided, however, that no Option shall be -------- ------- exercisable after the expiration of the Option term set forth in the Option Agreement. To the extent that such Optionee was not entitled to exercise such Option at the date of his termination of employment by death or disability or if such Option is not exercised (to the extent it could be exercised) within the time specified herein, the Option shall terminate. (iv) Extension of Time to Exercise. Notwithstanding anything to ----------------------------- the contrary in this Section 8, the Board may at any time and from time to time prior to the termination of a Nonstatutory Stock Option, with the consent of the Optionee, extend the period of time during which the Optionee may exercise his Nonstatutory Stock Option following the date the Optionee ceases such Optionee's Continuous Status as an Employee; provided, however, that (1) the maximum period -------- ------- of time during which a Nonstatutory Stock Option shall be exercisable following such termination date shall not exceed an aggregate of six (6) months, (2) the Nonstatutory Stock Option shall not become exercisable after the expiration of the term of such Option as set forth in the Option Agreement as a result of such extension, and (3) notwithstanding any extension of time during which the Nonstatutory Stock Option may be exercised, such Option, unless otherwise amended by the Board, shall only be exercisable to the extent to which the Optionee was entitled to exercise it on the date Optionee ceased Continuous Status as an Employee. To the extent that such Optionee was not entitled to exercise the Option at the date of such termination, or if such Optionee does not exercise an Option which Optionee was entitled to exercise within the time specified herein, the Option shall terminate. 8 9. Limit on Value of Optioned Stock. No Incentive Stock Option may be -------------------------------- granted to an Employee if, as a result of such grant, the aggregate fair market value (determined at the time an Incentive Stock Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year under all incentive stock option plans of the Company, its Parents or its Subsidiaries, if any, exceeds One Hundred Thousand Dollars ($100,000). 10. Nontransferability of Options. Options granted under this Plan may not ----------------------------- be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner, either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of the Optionee only by such Optionee. 11. Adjustments Upon Changes in Capitalization or Merger. ---------------------------------------------------- (a) Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under this Plan but as to which no Options have yet been granted or which have been returned to this Plan upon cancellation or expiration of an Option or repurchase of shares from an Optionee upon termination of employment or service, as well as the exercise or purchase price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, combination or reclassification of the Common Stock, or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company (other than stock bonuses to Employees, including, without limitation, officers and directors); provided, however, that the conversion of any -------- ------- convertible securities of the Company shall not be deemed to have been effected without the receipt of consideration. Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to this Plan or an Option. (b) In the event of the merger, consolidation or reorganization of the Company with or into another corporation as a result of which the Company is not the surviving corporation or as a result of which the outstanding Shares are exchanged for or converted into cash or property or securities not of the Company, the Board may (i) make provision for the assumption of all outstanding Options by the successor corporation or a Parent or a Subsidiary thereof, or (ii) declare that outstanding Options shall terminate as of a date fixed by the Board which is at least thirty (30) days after the notice thereof to the Optionee, unless such thirty (30) day period is waived by the Optionee. In the event of a dissolution or liquidation of the Company or the sale of all or substantially all of the assets of the Company, the Company's outstanding Options shall terminate as to an Optionee upon termination of Continuous Status as an Employee. (c) No fractional shares of Common Stock shall be issuable on account of any 9 action described in this Section, and the aggregate number of shares into which Shares then covered by the Option, when changed as the result of such action, shall be reduced to the largest number of whole shares resulting from such action, unless the Board, in its sole discretion, shall determine to issue scrip certificates in respect to any fractional shares, which scrip certificates, in such event, shall be in a form and have such terms and conditions as the Board in its discretion shall prescribe. 12. Time of Granting Options. The date of grant of an Option shall be the ------------------------ date on which the Board makes the determination granting such Option; provided, -------- however, that if the Board determines that such grant shall be as of some future - ------- date, the date of grant shall be such future date. Notice of the determination shall be given to each Employee to whom an Option is so granted within a reasonable time after the date of such grant. 13. Amendment and Termination of this Plan. -------------------------------------- (a) Amendment and Termination. The Board may amend or terminate this ------------------------- Plan from time to time in such respects as the Board may deem advisable and shall make any amendments which may be required so that Options intended to be Incentive Stock Options shall at all times continue to be Incentive Stock Options for the purpose of the Code, except that, without approval of the holders of a majority of the outstanding shares of the Company's capital stock, no such revision or amendment shall: (i) Increase the number of Shares subject to this Plan, other than in connection with an adjustment under Section 11 of this Plan; (ii) Materially change the designation of the class of Employees eligible to be granted Options; (iii) Remove the administration of this Plan from the Board (other than to the Committee); (iv) Materially increase the benefits accruing to participants under this Plan; or (v) Extend the term of this Plan. (b) Effect of Amendment or Termination. Except as otherwise provided ---------------------------------- in Section 11, any amendment or termination of this Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company. 14. Conditions Upon Issuance of Shares. ---------------------------------- (a) Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall 10 comply with all relevant provisions of law, including, without limitation, the Securities Act as amended, the Exchange Act, applicable state securities laws, the rules and regulations promulgated thereunder, and the requirement of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an Option, the Board may require the person exercising such Option to execute an agreement with, and/or may require the person exercising such Option to make any representation and warranty to, the Company as may in the judgment of counsel to the Company be required under applicable law or regulation, including but not limited to a representation and warranty that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is appropriate under any of the aforementioned relevant provisions of law. 15. Reservation of Shares. The Company, during the term of this Plan, at --------------------- all times shall reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of this Plan. The Company, during the term of this Plan, shall use diligent efforts to seek to obtain from appropriate regulatory agencies any requisite authorization in order to issue and sell such number of Shares as shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain the requisite authorization(s) deemed by the Company's counsel to be necessary for the lawful issuance and sale of any Shares hereunder, or the inability of the Company to confirm to its satisfaction that any issuance and sale of any Shares hereunder will meet applicable legal requirements, shall relieve the Company of any liability in respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. Stock Option and Stock Purchase Agreements. Options shall be evidenced ------------------------------------------ by written stock option agreements in such form or forms as the Board shall approve from time to time. Upon the exercise of an Option, the Optionee shall sign and deliver to the Company a Stock Purchase Agreement (if required to be executed and delivered to the Company by an Optionee as a condition to the exercise of an Option) in such form or forms as the Board shall approve from time to time. 17. Shareholder Approval. Continuance of this Plan shall be subject to -------------------- approval by the shareholders of the Company within twelve (12) months before or after the date this Plan is adopted by the Board. If such shareholder approval is obtained at a duly held shareholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company entitled to vote thereon. All Options granted prior to shareholder approval of this Plan are subject to such approval, and if such approval is not obtained within twelve (12) months before or after the date this Plan is adopted by the Board all such Options shall expire and shall be of no further force or effect. 18. Taxes, Fees, Expenses and Withholding of Taxes. ---------------------------------------------- 11 (a) The Company shall pay all original issue and transfer taxes (but not income taxes, if any) with respect to the grant of Options and/or the issue and transfer of Shares pursuant to the exercise thereof, and all other fees and expenses necessarily incurred by the Company in connection therewith, and will from time to time use diligent efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto. (b) The grant of Options hereunder and the issuance of Shares pursuant to the exercise thereof is conditioned upon the Company's reservation of the right to withhold, in accordance with any applicable law, from any compensation payable to the Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of such Option or the sale of the Shares issued upon exercise thereof. To the extent that compensation or other amounts, if any, payable to the Optionee are insufficient to pay any taxes required to be so withheld, the Company may, in its sole discretion, require the Optionee, as a condition of the exercise of an Option, to pay in cash to the Company an amount sufficient to cover such tax liability or otherwise to make adequate provision for the Company's satisfaction of its withholding obligations under federal and state law. (c) The Board or the Committee may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of SEC Rule 16b-3 and interpretations thereof by the staff of the Securities and Exchange Commission) provide any or all holders of outstanding option grants under this Plan with the election to have the Company withhold, from the shares of Common Stock otherwise issuable upon the exercise of such options, one or more of such shares with an aggregate fair market value equal to the designated percentage (any multiple of 5% specified by the optionee) of the Federal and State income taxes ("Taxes") incurred in connection with the acquisition of such Shares. In lieu of such direct withholding, one or more optionees may also be granted the right to deliver shares of Common Stock to the Company in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the Fair Market Value on the applicable determination date for such Taxes or such other date required by the applicable safe-harbor provisions of SEC Rule 16b-3. 19. Liability of Company. The Company, its Parent or any Subsidiary which -------------------- is in existence or hereafter comes into existence shall not be liable to an Optionee or other person if it is determined for any reason by the Internal Revenue Service or any court having jurisdiction that any Options intended to be Incentive Stock Options granted hereunder do not qualify as incentive stock options within the meaning of Section 422 of the Code. 20. Information to Optionee. The Company shall provide without charge at ----------------------- least annually to each Optionee during the period his Option is outstanding a balance sheet and income statement of the Company. In the event that the Company provides annual reports or periodic reports to its shareholders during the period in which an Optionee's Option is outstanding, the Company shall provide to each Optionee a copy of each such report. 21. Notices. Any notice required or permitted hereunder shall be given in ------- writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States 12 mail, as first class, registered or certified mail, with postage and fees prepaid and addressed (i) if to the Company, at its principal place of business, attention: Secretary, or (ii) if to the Optionee at his address as set forth on the signature page of his Option Agreement, or at such other address as either party may from time to time designate in writing to other. It shall be the obligation of each Optionee and each transferee holding Shares purchased upon exercise of an Option to provide the Secretary of the Company, by letter mailed as provided hereinabove, with written notice of his direct mailing address. 22. No Enlargement of Employee Rights. This Plan is purely voluntary on --------------------------------- the part of the Company, and the continuance of this Plan shall not be deemed to constitute a contract between the Company and any Employee, or to be consideration for or a condition of the employment or service of any Employee. Nothing contained in this Plan shall be deemed to give any Employee the right to be retained in the employ or service of the Company, its Parent, Subsidiary or a successor corporation, or to interfere with the right of the Company or any such corporations to discharge or retire any Employee at any time with or without cause and with or without notice. No Employee shall have any right to or interest in Options authorized hereunder prior to the grant thereof to such Employee, and upon such grant such Employee shall have only such rights and interests as are expressly provided herein, subject, however, to all applicable provisions of the Company's Articles of Incorporation, as the same may be amended from time to time. 23. Legends on Certificates. ----------------------- (a) Federal Law. Unless an appropriate registration statement is filed ----------- pursuant to the Securities Act as amended, with respect to the Options and Shares issuable under this Plan, each document or certificate representing such Options or Shares shall be endorsed thereon with a legend substantially as follows: "THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." (b) California Legend. If required by the California Commissioner of ----------------- Corporations, each document or certificate representing the Options or Shares issuable under this Plan shall be endorsed thereon with a legend substantially as follows: 13 "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." (c) Additional Legends. Each document or certificate representing the ------------------ Options or Shares issuable under this Plan shall also contain legends as may be required under applicable blue sky laws or by any Stock Purchase Agreement or other agreement the execution of which is a condition to the exercise of an Option under this Plan. 24. Availability of Plan. A copy of this Plan shall be delivered to the -------------------- Secretary of the Company and shall be shown by him to any eligible person making reasonable inquiry concerning it. 25. Compliance with Exchange Act Rule 16b-3. With respect to persons --------------------------------------- subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3, promulgated pursuant to the Exchange Act, or its successors. To the extent any provision of this Plan or action by the Board or any Committee fails so to comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Board or any Committee. 26. Invalid Provisions. In the event that any provision of this Plan is ------------------ found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein as invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein. 27. Applicable Law. This Plan shall be governed by and construed in -------------- accordance with the laws of the State of California. 14 INTERVIDEO, INC. INCENTIVE STOCK OPTION AGREEMENT -------------------------------- (Standard Form) InterVideo, Inc., a California corporation (the "Company") hereby grants to __________(the "Optionee") an option to purchase a total of____________ shares of Common Stock (the "Shares") of the Company, at the price and on the terms set forth herein, and in all respects subject to the terms and provisions of the Company's 1998 Stock Option Plan, as amended (the "Plan") applicable to incentive stock options, which terms and provisions hereby are incorporated by reference herein. Unless the context herein otherwise requires, the terms defined in the Plan shall have the same meanings herein. 1. Nature of the Option. This Option is intended to be an incentive stock -------------------- option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Date of Grant; Term of Option. This Option is granted as of the grant ----------------------------- date set forth on the signature page of this Agreement, and it may not be exercised later than ten (10) years from such date. 3. Option Exercise Price. The exercise price for this Option is $2.00 per --------------------- Share, which price is not less than one hundred percent (100%) of the fair market value thereof on the date this Option was granted (or not less than one hundred ten percent (110%) of the fair market value thereof on the date this Option was granted, if the Optionee owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parents or subsidiaries). 4. Exercise of Option. This Option shall be exercisable during its term ------------------ only in accordance with the terms and provisions of the Plan and this Option as follows: (a) Right to Exercise. This Option shall vest and be exercisable, ----------------- cumulatively, during its term as to one fourth (1/4) of the Shares at the end of the first full twelve months of Continuous Status as an Employee of the Company following the Vesting Commencement Date (as set forth on the signature page hereof) and thereafter as to 1/48 of the Shares at the end of each successive one-month period of Continuous Status as an Employee of the Company after such initial twelve month period until the Shares are fully vested. (b) Method of Exercise. This Option shall be exercisable by written ------------------ notice which shall state the election to exercise this Option, the number of Shares in respect to which this Option is being exercised and such other representations and agreements as to Optionee's investment intent with respect to such Shares as may be required by the Company hereunder or pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company or such other person as may be designated by the Company. The written notice shall be accompanied by payment of 1 the purchase price and, at the Company's option, either (i) an executed investment representation statement acceptable to the Company (the "Investment Representation Statement") or (ii) an executed stock purchase agreement acceptable to the Company (the "Stock Purchase Agreement"). Payment of the purchase price shall be made by check or such other consideration and method of payment authorized by the Board pursuant to the Plan. The certificate or certificates for the Shares as to which this Option shall be exercised shall be registered in the name of Optionee and shall carry the legends set forth in the Plan, the Stock Purchase Agreement or the Investment Representation Statement, as applicable, and/or as required under applicable law. (c) Restrictions on Exercise. This Option may not be exercised if the ------------------------ issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 5. Investment Representations. In connection with the acquisition of this -------------------------- Option, Optionee represents and warrants as follows: (a) Investment Intent. Optionee is acquiring this Option, and upon ----------------- exercise of this Option, Optionee will be acquiring the Shares for investment for Optionee's own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. (b) Protection of Interests. Optionee, by reason of Optionee's ----------------------- business or financial experience, has the capacity to evaluate the merits and risks of purchasing Common Stock of the Company and to make an informed investment decision with respect thereto and to protect Optionee's interests in connection with the acquisition of this Option and the Shares. 6. Termination of Status as an Employee. If Optionee ceases to serve as ------------------------------------ an Employee for any reason other than death or disability and thereby terminates Optionee's Continuous Status as an Employee, Optionee shall have the right to exercise this Option at any time within thirty (30) days after the date of such termination to the extent that Optionee was entitled to exercise this Option at the date of such termination. If Optionee ceases to serve as an Employee due to death or disability, this Option may be exercised at any time within six (6) months after the date of death or termination of employment due to disability, in the case of death, by Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance, or, in the case of disability, by Optionee, but in any case only to the extent Optionee was entitled to exercise this Option at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of termination, or to the extent this Option is not exercised within the time specified herein, this Option shall terminate. Notwithstanding the foregoing, this Option shall not be exercisable after the expiration of the term set forth in paragraph 2 hereof. 7. Withholding Tax Liability. The Company reserves the right to withhold, ------------------------- in accordance with any applicable laws, from any compensation or other consideration payable to the Optionee any taxes required to be withheld by federal, state or local law as a result of the 2 grant or exercise of this Option or the sale or other disposition of the Shares issued upon exercise of this Option, and if such compensation or consideration is insufficient, the Company may require Optionee to pay to the Company an amount sufficient to cover such withholding tax liability. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the Shares acquired upon exercise of an incentive stock option. 8. Nontransferability of Option. This Option may not be sold, pledged, ---------------------------- assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law or otherwise, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of Optionee only by such Optionee. Subject to the foregoing and the terms of the Plan, the terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 9. Continuation of Employment. Neither this Option or the Plan nor any -------------------------- Option granted thereunder shall confer upon any Optionee any right to continue in the employment of the Company, its Parent, Subsidiary or a successor corporation or limit in any respect the right of the Company or any such corporations to discharge the Optionee at any time, with or without cause and with or without notice. 10. Limitations on Transfer. In addition to any other limitation on ----------------------- transfer created by applicable securities laws, Optionee will not sell, transfer, assign, encumber or otherwise dispose of (including, without limitation by operation of law) any of Optionee's right, title or interest in and to all or any portion of the Shares except as provided in this Section: (a) Right of First Refusal. In the event Optionee desires (or is ---------------------- required) to sell or transfer in any manner all or a portion of the Shares, the Optionee shall first offer such Shares for sale to the Company (or its assignee) at the same price, and upon the same terms (or reasonably similar terms) as those on which the Optionee is disposing of said Shares ("Right of First Refusal"). Optionee shall offer such Shares to the Company by delivering a written notice (the "Notice") to the Company stating (i) Optionee's bona fide intention to sell or otherwise transfer such Shares, (ii) the number of such Shares to be sold or otherwise transferred, (iii) the price for which Optionee proposes to sell such Shares and all additional terms and conditions, if any, of the sale or transfer and (iv) the name of the proposed buyer or transferee. Optionee shall attach to the Notice a copy of the written offer, if any, of the sale or transfer. In the event of a transfer not involving a sale of such Shares for a specific sum of money, or if, in the sole judgment of the Company's Board of Directors, the proposed transfer does not involve a price for the Shares negotiated by the Optionee and Optionee's proposed transferee in a bona fide "arm's length transaction," the price of the Shares shall be determined by the Company's Board of Directors in the manner specified in Section 10(c) below. Within thirty (30) days after the Company's receipt of the Notice (the "Acceptance Period"), the Company (or its assignee) may elect to purchase all of the Shares (or, with the consent of the Optionee, a portion thereof) to which the Notice refers, at the price per share (or at the fair market value of such Shares determined pursuant to paragraph 10(c) hereof in the case of a transfer other than a bona fide arms-length transaction) and on the same terms and conditions (or terms and conditions as similar as reasonably possible) as set forth in the 3 Notice. If the Company (or its assignee) elects to purchase such Shares hereunder, it shall notify Optionee either orally or in writing during the Acceptance Period of its intention to purchase all of such Shares (or, with the consent of Optionee, a portion thereof) and either (i) set a date and location for the closing of the transaction on or prior to the last day of the Acceptance Period, or at such later date as the parties may otherwise agree, at which time the Company (or its assignee) shall tender payment for the Shares or (ii) include payment for the Shares with the Company's notice to Optionee, if in writing, or deliver it to Optionee under separate cover. At such closing, the certificates representing the Shares so purchased shall be delivered to the Company and canceled or, in the case of payment by the Company by mail, such certificates shall be deemed to be canceled upon the date of such mailing of the Company's payment and, thereafter, shall be promptly returned by Optionee to the Company by certified or registered mail. Optionee hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Shares as to which the Right of First Refusal has been exercised from Optionee to the Company (or its assignee). Optionee further authorizes the Company to refuse, or to cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. If the Company (or its assignee) does not elect to purchase the Shares to which the Notice refers, Optionee may sell or otherwise transfer the Shares to the third party named in the Notice at the price and on the terms and conditions specified in the Notice or at a higher price, provided that such sale or transfer is consummated within sixty (60) days from either (i) the lapse of the Acceptance Period or (ii) the date of the Company's notice, whether written or oral, advising Optionee that it does not intend to purchase the Shares hereunder, whichever occurs first in time and provided, further, that any such sale or transfer is in accordance with all of the terms and conditions set forth in this Agreement. In the event the Shares are not disposed of by the Optionee within said 60-day period, such Shares shall once again be subject to the Right of First Refusal herein provided. (b) Involuntary Transfer. In the event of any transfer by operation -------------------- of law or other involuntary transfer (the "Involuntary Transfer"), of all, or a portion, of the Shares, the Company shall have an option to purchase all of the Shares transferred (the "Involuntary Transfer Option"). Upon such transfer, the Optionee and person acquiring the Shares shall promptly notify in writing the Secretary of the Company of such transfer. The Company (or its assignee) shall notify Optionee and the person acquiring the Shares as to whether the Company (or its assignee) wishes to purchase the Shares pursuant to the Involuntary Transfer Option within thirty (30) days after receipt by the Company of the written notice of the involuntary transfer of the Shares. If the Company (or its assignee) elects to purchase said Shares hereunder, it shall set a date for the closing of the transaction at a place specified by the Company (or its assignee) not later than thirty (30) days after receipt by the Company of the written notice of the involuntary transfer of the Shares, or at such later date as the parties may otherwise agree. At such closing, the Company (or its assignee) shall tender payment for the Shares and the certificates representing the Shares so purchased shall be canceled. Optionee hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Shares as to which the Involuntary Transfer Option has been exercised from the Optionee to the Company (or its assignee). Optionee further authorizes the Company to refuse, or to cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. (c) Determination of Price. With respect to Shares to be transferred ---------------------- pursuant to the Right of First Refusal where the price is not determined as a result of a bona fide arms- 4 length transaction by the Optionee under paragraph 10(a) or the Involuntary Transfer Option, the price per share shall be a price set by the Board of Directors of the Company that will reflect the then current fair market value of the Shares, as determined by the Board of Directors in good faith after giving consideration to the factors set forth in Section 260.140.50 of Title 10 of the California Code of Regulations or, upon the request of the Optionee, by an independent appraiser acceptable to both the Company and the Optionee; provided, that the Optionee shall be required to bear one-half of the cost of such independent appraiser. (d) Intra-family Transfers. Notwithstanding anything to the contrary ---------------------- contained herein, Optionee shall have the right, at any time and from time to time during Optionee's lifetime or upon Optionee's death, to transfer all or any portion of Optionee's Shares (the "Transferred Family Shares") to Optionee's spouse, any of Optionee's issue, ancestors or descendants, or a trust for the sole benefit of Optionee, Optionee's spouse, any of Optionee's issue, ancestors or descendants (any such individual or trust is hereinafter referred to as an "Intra-family Transferee"), provided that the Intra-family Transferee receiving the Transferred Family Shares executes a consent to be bound by the terms of this Agreement with respect to the Transferred Family Shares. The Transferred Family Shares shall be and remain subject to all of the terms and conditions of this Agreement as were applicable to such Shares immediately prior to their transfer pursuant to this Section 10(e); without limiting the foregoing, the obligations hereunder arising out of the possession or ownership of such Transferred Family Shares shall be binding upon the respective Intra-family Transferees. For purposes of exercising any rights under this Agreement, the Company's right to purchase the Shares of Optionee shall extend to any Shares owned by an Intra-family Transferee. (e) Restriction on Alienation. Any sale, transfer, encumbrance, or ------------------------- other disposition or purported sale, transfer, encumbrance or disposition of any of the Shares by Optionee, whether voluntarily, by operation of law or otherwise, shall be null and void unless the terms, conditions and provisions of this Agreement are strictly complied with. Optionee further authorizes the Company to refuse, or cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. (f) Assignment by Company. The Company's Right of First Refusal and --------------------- Involuntary Transfer Option may be assigned in whole or in part to any shareholder or shareholders of the Company. (g) Obligations Binding Upon Transferees. All transferees of Shares ------------------------------------ or any interest therein will receive and hold such Shares or interests subject to the provisions of this Agreement, including the Company's Right of First Refusal and Involuntary Transfer Option. Any sale or transfer of the Shares shall be void unless the provisions of this Agreement are met. (h) Termination of Rights. The Right of First Refusal and Involuntary --------------------- Transfer Option granted the Company by this paragraph 10 shall terminate at such time as a public market exists for the Company's Common Stock (or any other stock issued to purchasers in exchange for the Shares purchased under this Agreement). For the purpose of this Agreement, a "public market" shall be deemed to exist if the Common Stock is listed on a national securities exchange (as that term is used in the Securities Exchange Act of 1934, as amended), or the 5 Common Stock is traded on the over-the-counter market and prices are published on business days in a recognized financial journal. (i) Indebtedness. Any payment by the Company for purchase of shares ------------ from Optionee, may be made by cancellation of any indebtedness to Company from Optionee. (j) Legends. All certificates representing any Shares of the Company ------- purchased upon exercise of the Options shall have endorsed thereon the following legends, or substantially similar legends, in addition to any legends required by state securities laws, unless in the opinion of counsel such legends are no longer necessary: (1) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. (2) THESE SECURITIES ARE SUBJECT TO CERTAIN RESTRICTIONS, INCLUDING A RIGHT OF FIRST REFUSAL OF THE COMPANY, AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (k) Market Standoff Agreement. The Optionee, if requested by the ------------------------- Company and an underwriter of Common Stock (or other securities) of the Company, agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by Optionee during the period not to exceed one hundred and eighty (180) days as requested by the managing underwriter following the effective date of a registration statement of the Company filed under the Securities Act (as hereafter defined), provided that all officers and directors of the Company are required to enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or other securities) subject to the foregoing restriction until the end of such period. 11. The Plan. This Option is subject to, and the Company and Optionee -------- agree to be bound by, all of the terms and conditions of the Plan as such Plan may be amended from time to time in accordance with the terms thereof, provided that no such amendment shall deprive Optionee, without Optionee's consent, of this Option or any rights hereunder. Pursuant to the Plan, the Board of Directors of the Company is authorized to adopt rules and regulations not inconsistent with the Plan as it shall deem appropriate and proper. A copy of the Plan in its present form is available for inspection during business hours by Optionee or the persons entitled to exercise this Option at the Company's principal office. 6 12. Entire Agreement; Amendment. This Agreement contains the entire --------------------------- understanding between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous written or oral negotiations and agreements between them regarding the subject matter hereof. This Agreement may be amended only in writing signed by each of the parties hereto. Grant Date: ____________ Vesting Commencement Date: _____________ INTERVIDEO, INC. By: _____________________________ Title: _____________________________ 7 Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that Optionee has read and is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors or the Committee upon any questions arising under the Plan. Date: _______________ ______________________________________ Signature of Optionee ______________________________________ Address ______________________________________ City State Zip Code 8 THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXECUTION OF THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THIS OPTION AND THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY. 9 EX-10.5 4 dex105.txt INVESTOR RIGHTS AGREEMENT, DTD 7/2/1999 EXHIBIT 10.5 INTERVIDEO, INC. AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT July 2, 1999 INTERVIDEO, INC. AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT TABLE OF CONTENTS
1. CERTAIN DEFINITIONS ............................................... 1 1.1 "1934 Act" ............................................... 1 1.2 "Affiliate" .............................................. 1 1.3 "Commission" ............................................. 2 1.4 "Common Stock" ........................................... 2 1.5 "Conversion Shares" ...................................... 2 1.6 "Holder" or "Holders" .................................... 2 1.7 "Preferred Agreement" .................................... 2 1.8 "Preferred Stock" ........................................ 2 1.9 "Register", "Registered" and "Registration" .............. 2 1.10 "Registrable Securities" ................................. 2 1.11 "Registration Expenses" .................................. 2 1.12 "Restricted Securities" .................................. 2 1.13 "Securities" ............................................. 2 1.14 "Securities Act" ......................................... 2 1.15 "Selling Expenses" ....................................... 3 2. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH SECURITIES ACT .................................... 3 2.1 Restrictions on Transferability .......................... 3 2.2 Restrictive Legend ....................................... 3 2.3 Notice of Proposed Transfers ............................. 3 2.4 Company Registration ..................................... 4 2.5 S-3 Registrations ........................................ 5 2.6 Expenses of Registration ................................. 5 2.7 Registration Procedures .................................. 6 2.8 Indemnification .......................................... 6 2.9 Information by Holder .................................... 7 2.10 Rule 144 Reporting ....................................... 7 2.11 Assignment of Registration Rights ........................ 8 2.12 Termination of Registration Rights ....................... 8 2.13 "Market Stand-Off" Agreement ............................. 8 3. NEW ISSUANCE RIGHT OF FIRST REFUSAL ............................... 9 3.1 Right .................................................... 9 3.2 Notification ............................................. 9 3.3 Waiver ................................................... 9 3.4 Issuance ................................................. 10 3.5 Excluded Securities ...................................... 10 3.6 Termination .............................................. 10
i 3.7 Assignment ................................................... 10 4. FINANCIAL INFORMATION ............................................... 10 4.1 Financial Information ........................................ 10 4.2 Operating Plan ............................................... 11 4.3 Visitation Rights ............................................ 11 4.4 Assignment ................................................... 11 4.5 Termination .................................................. 11 5. MISCELLANEOUS ....................................................... 12 5.1 Governing Law ................................................ 12 5.2 Survival ..................................................... 12 5.3 Successors and Assigns ....................................... 12 5.4 Entire Agreement; Amendment .................................. 12 5.5 Notices, Etc ................................................. 12 5.6 Delay or Omissions ........................................... 12 5.7 Expenses ..................................................... 13 5.8 Counterparts ................................................. 13 5.9 Severability ................................................. 13 EXHIBIT A PREFERRED INVESTORS ................................................. 14
ii INTERVIDEO, INC. AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT This Amended and Restated Investors Rights Agreement is made as of July 2, 1999 (the "Agreement") by and among InterVideo, Inc., a California corporation (the "Company"), and each of the persons listed on Exhibit A to this --------- Agreement (the "Investors" or the "Holders"). RECITALS -------- A. The Company and certain of the Investors (the "Existing Holders") have previously entered into an Investors Rights Agreement dated as of June 29, 1998 and Amendment No.1 to the Investors Rights Agreement dated July 29, 1998, providing certain registration and other rights to the Existing Investors (the "Prior Agreement"). B. The Company desires to sell and issue to certain Investors (the "Additional Investors") and the Additional Investors desire to purchase up to an aggregate of 2,000,000 shares of Series C Preferred Stock (the "Shares") of the Company pursuant to the Preferred Agreement (as defined herein). C. To induce the Additional Investors to purchase shares of Series C Preferred Stock of the Company pursuant to the Preferred Agreement, the Company and the Existing Investors desire that the Company grant to the Additional Investors the registration and other rights set forth herein, and further desire to amend and restate the Prior Agreement as set forth below. D. The Company and all Investors agree that this Agreement will govern the registration and other rights of all Investors. In consideration of the foregoing and the promises and covenants contained herein, the parties agree as follows: SECTION 1 CERTAIN DEFINITIONS ------------------- As used in this Agreement the following terms shall have the following respective meanings: 1.1 "1934 Act" shall mean the Securities Exchange Act of 1934, as -------- amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 2 1.2 "Affiliate" shall mean any entity who is controlled by, who --------- controls or who is under common control with a person. 1.3 "Commission" shall mean the Securities and Exchange Commission or ---------- any other federal agency at the time administering the Securities Act. 1.4 "Common Stock" shall mean the Common Stock of the Company. ------------ 1.5 "Conversion Shares" means the Common Stock issued or issuable upon ----------------- conversion of the Preferred Stock. 1.6 "Holder" or "Holders" shall mean any person or persons owning or ------------------- having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 2 hereof. 1.7 "Preferred Agreement" shall collectively mean Preferred Stock ------------------- Subscription Agreements among the Company and the Investors under such subscription agreements. 1.8 "Preferred Stock" shall mean shares of the Company's Preferred --------------- Stock issued pursuant to the Preferred Agreement. 1.9 "Register", "Registered" and "Registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. 1.10 "Registrable Securities" shall mean (i) Conversion Shares and (ii) ---------------------- any Common Stock issued in respect of, in exchange for or in replacement of the Conversion Shares or other securities issued pursuant to the conversion of the Preferred Stock upon any stock split, stock combination, stock dividend, recapitalization, consolidation or similar event. Securities previously sold to the public pursuant to a registered public offering or Rule 144 of the Securities Act shall cease to be Registrable Securities. 1.11 "Registration Expenses" shall mean all expenses incurred in --------------------- complying with registrations, filings or qualifications under Sections 2.4 and 2.5 hereof, including, without limitation, all registration, qualification and filing fees, accounting fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company and Selling Expenses). 1.12 "Restricted Securities" shall mean the securities of the Company --------------------- required to bear the legend set forth in Section 2.2 hereof (or any similar legend). 1.13 "Securities" shall mean (i) the Company's equity or debt ---------- securities, (ii) rights, options or warrants to subscribe for, purchase or otherwise acquire any equity or debt security of the Company and (iii) any agreement or commitment to issue any of the foregoing. 3 1.14 "Securities Act" shall mean the Securities Act of 1933, as -------------- amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 1.15 "Selling Expenses" shall mean all underwriting discounts and ---------------- selling commissions applicable to the sale and all fees and disbursements of counsel for any Holder. SECTION 2 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; ---------------------------------------------- COMPLIANCE WITH SECURITIES ACT ------------------------------ 2.1 Restrictions on Transferability. The Preferred Stock and the ------------------------------- Conversion Shares shall not be transferable except upon the conditions specified in this Section 2, which conditions are intended to ensure compliance with the provisions of the Securities Act, or, in the case of Section 2.13 hereof, to assist in an orderly distribution. Each Investor will cause any proposed transferee of the Preferred Stock and the Conversion Shares held by such Investor to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Section 2 (including the "market stand-off" provisions of Section 2.13). 2.2 Restrictive Legend. Each certificate representing (i) the ------------------ Preferred Stock, (ii) Conversion Shares and (iii) any other securities issued in respect of the Preferred Stock or Conversion Shares or Common Stock issuable upon any stock split, stock combination, stock dividend, recapitalization, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 2.3 below) be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICE. 2.3 Notice of Proposed Transfers. The holder of each certificate ---------------------------- representing Restricted Securities agrees to comply in all respects with the provisions of this Section 2.3. Prior to any proposed transfer of any Restricted Securities (unless there is in effect a registration statement under the Securities Act covering the proposed transfer), the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice 4 shall describe the manner and circumstances of the proposed transfer in sufficient detail, and (except in transactions in compliance with Rule 144) shall be accompanied by either (i) a written opinion of legal counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred pursuant to the above shall bear the legend set forth in Section 2.2 above, except that such certificate shall not bear such restrictive legend, if in the opinion of counsel for the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act. 2.4 Company Registration. -------------------- (a) Registration. If at any time or from time to time, the Company ------------ shall determine to register any of its securities, either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than (i) a registration on Form S-8 (or a similar or successor form) relating solely to employee stock option, stock purchase or other benefit plans, or (ii) a registration on Form S-4 (or similar or successor form) relating solely to a Securities and Exchange Commission Rule 145 transaction, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within twenty (20) days after mailing of written notice by the Company, by any Holder or Holders, except as set forth in Section 2.4(b) below. (b) Underwriting. If the registration of which the Company gives ------------ notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 2.4(a)(i). In such event the right of any Holder to registration pursuant to Section 2.4 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 2.5, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit 5 the number of Registrable Securities to be included in the registration and underwriting, on a pro rata basis based on the total number of securities (including, without limitation, Registrable Securities) entitled to registration pursuant to registration rights granted to the participating Holders by the Company; provided, however, that no such reduction may reduce the number of securities being sold by the Company for its own account. The number of securities includable by any Holder or other person may, in the discretion of the underwriters, be rounded to the nearest one hundred (100) shares. No securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If the underwriter has not limited the number of shares to be underwritten for the Company's account and the account of the Holders, the Company may include securities for the account of employees, officers, directors and consultants. 2.5 S-3 Registrations. If the Company is requested (and qualifies ------------- under applicable SEC rules) to undertake a Form S-3 or equivalent short-form registration, regardless of its designation, and any related qualification or compliance, of its securities by the Holders of Registrable Securities holding in aggregate at least 2% of the Company's Common Stock for an offering estimated to result in aggregate offering proceeds of at least $500,000, net of allowances, discounts, and underwriting expenses, the Company shall promptly give notice of such proposed registration to all Holders of Registrable Securities and the Company shall, as expeditiously as possible, use its best efforts to effect the registration on Form S-3 of the Registerable Securities which the Company has been requested to register (i) in each request and (ii) in any response given within twenty (20) days to a notice from the Company pursuant to this Section 2.5. Notwithstanding the foregoing, however, such registration shall be subject to the following: (a) The Company shall not be required to effect more than one such registration pursuant to this Section 2.5 in any 12 month period. (b) The Company shall not be required to effect a registration pursuant to this Section 2.5 within one hundred eighty (180) days of the effective date of any registration referred to in Section 2.4. The Company may include in the registration under this Section 2.5 any other shares of Common Stock (including issued and outstanding shares of Common Stock as to which the holders thereof have contracted with the Company for "piggyback" registration rights) so long as the inclusion in such registration of such shares will not, in the opinion of the managing underwriter (or in the reasonable opinion of the Company in the event that the offering is not underwritten), interfere with the successful marketing in accordance with the intended method of sale or other disposition of all the shares of Registrable Securities sought to be registered by the Holder or Holders of Registrable Securities pursuant to this Section 2.5. If it is determined as provided above that there will be such interference, the other shares of Common Stock sought to 6 be included by the Company shall be excluded to the extent deemed necessary by the managing underwriter (or the Company if the offering is not underwritten), and all other shares of Common Stock held by other parties shall be excluded before the exclusion of any shares of Registrable Securities held by the Holders who desire to have their shares included in the registration and offering. If, as contemplated above, and after excluding all other shares of Common Stock held by other parties, shares of the Common Stock of the Holders are to be excluded, the number of shares of Common Stock of each participating Holder which are to be excluded shall be proportionate to the number of shares which such party is seeking to register. 2.6 Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to this Section 2 shall be borne by the Company; and, unless otherwise stated, all Selling Expenses relating to securities registered by the Holders shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. 2.7 Registration Procedures. In the case of each registration, ----------------------- qualification or compliance effected by the Company pursuant to this Section 2, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Keep such registration, qualification or compliance effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; and (b) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request. 2.8 Indemnification. --------------- (a) The Company will, and does hereby undertake to, indemnify and hold harmless each Holder, each of its officers, directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 2, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions in respect thereof), including settlement of any litigation, commenced or threatened, to which they may become subject under the Securities Act, the 1934 Act, or other federal or state law, arising out of or based on compliance with, any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus (preliminary or final), offering circular or other document or amendments thereto, or arising out of or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or arising out of or any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person 7 controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument executed by such Holder or underwriter expressly for use in connection with such registration. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless the Company, each of its directors and officers, agents and employees, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof to which they may become subject) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or amendments thereto, or any omission (or alleged omission) to state therein a material fact required to be stated therein in light of the circumstances in which they were made, or necessary to make the statements therein, not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument executed by such Holder expressly for use in connection with such registration; provided, however, that the obligations of such Holders hereunder shall be limited to an amount equal to the proceeds to each such Holder of Registrable Securities from the sale of such Registrable Securities as contemplated herein. (c) Each party entitled to indemnification under this Section 2.8 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall deliver written notice to the Indemnifying Party of commencement thereof. The Indemnifying Party, at its sole option, may participate in or assume the defense of any such claim or any litigation resulting therefrom with counsel reasonably satisfactory to the Indemnified Party, and the Indemnified Party may participate in such defense at Indemnified Party's expense. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 2 except to the extent that such failure to give notice shall materially adversely affect the Indemnifying Party in the defense of any such litigation. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional 8 term a release from all liability in respect to such claim or litigation by the claimant or plaintiff to such Indemnified Party. 2.9 Information by Holder. Each Holder of Registrable Securities --------------------- included in any registration shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 2. 2.10 Rule 144 Reporting. With a view to making available the benefits ------------------ of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, the Company agrees to: (a) Register its Common Stock under Section 12(g) of the 1934 Act, as amended, as soon as practicable, but in any event not later than ninety (90) days after the close of the Company's first fiscal year following the effective date of the first registration statement filed by the Company, relating to a public offering other than to employees of the Company under an employee option plan or employee stock purchase plan; (b) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (c) Will file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the 1934 Act (at any time after it has become subject to such reporting requirements); and (d) Furnish to the Holder, so long as Holder owns any Restricted Securities, written notice of the Company's qualification as a registrant, as soon as practicable after the such qualification; the Company further shall furnish forthwith upon request a written statement as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of its compliance with the Securities Act and the Securities Exchange Act (at any time after it has become subject to such reporting requirements); the Company shall provide forthwith upon written request a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing Purchaser to sell any such securities without registration. 2.11 Assignment of Registration Rights. The rights to cause the --------------------------------- Company to register securities and related rights granted each Investor under Section 2 may not be assigned except: (i) to a purchaser of more than 200,000 shares of the Common Stock (as determined in the manner contemplated by Section 3.1(b) below) purchased by an Investor, (ii) to a successor entity to an Investor pursuant to a reorganization or recapitalization of an Investor, (iii) to an Affiliate, (iv) to the partners of an Investor (provided that such holder owns at least 200,000 9 shares following such distribution) or (v) pursuant to an intervivos transfer to Investor's ancestors or descendants or spouse or to a trustee for their benefit; provided, that the Company receives notice within twenty (20) days following such assignment. 2.12 Termination of Registration Rights. The registration rights and ---------------------------------- related rights granted pursuant to Section 2 shall terminate as to each Holder (and permitted transferee under Section 2.12 above) upon the occurrence of any of the following: (a) Following the Company's first registered offering to the public, at such time as all Restricted Securities held by such Investor or permitted transferee can be sold within a given six (6) month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 (or its successor provision); or (b) Eight (8) years from the date of this Agreement. 2.13 "Market Stand-Off" Agreement. Any Holder of more than one percent --------------------------- (1%) of the outstanding Common Stock of the Company (determined in the manner of Section 3.1(b)), if required by the Company and an underwriter of Common Stock (or other securities) of the Company, shall agree not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Holder during the period not to exceed one hundred and eighty (180) days as requested by the managing underwriter following the effective date of the first registration statement of the Company filed under the Securities Act, provided that all officers, directors of the Company and holders of one percent (1%) or more of the Company's outstanding shares enter into similar agreements. Such agreement shall be in writing in the form satisfactory to the Company and such underwriter. The Company may impose a stop-transfer instruction with respect to the shares (or other securities) subject to the foregoing restriction until the end of such period. SECTION 3 NEW ISSUANCE RIGHT OF FIRST REFUSAL ----------------------------------- 3.1 Right. ----- (a) If, at any time prior to the expiration of the period set forth in Section 3.6 below, the Company should desire to issue any Securities in a transaction not registered under the Securities Act, it shall give each Investor the first right to purchase such Investor's Pro Rata Share (as defined below), of all of such Securities on the same terms and same price as the Company is willing to sell such Securities to any other person. Such Investor's "Pro Rata Share" of the Securities shall be equal to that percentage of the outstanding Common Stock of the Company held by such Investor, on the date of the Company's written notification referred to in Section 3.2 below. (b) For purposes of this Section 3.1, the Common Stock of the Company held by such Investor shall be adjusted for stock dividends, stock splits, stock combinations, recapitalizations and the like, and shall be deemed to include shares of Common Stock issued or 10 issuable upon conversion of the Preferred Stock or any other stock of the Company on an as-converted basis. 3.2 Notification. Prior to any sale or issuance by the Company of any ------------ Securities, the Company shall notify each Investor, in writing, of its intention to sell and issue such securities, setting forth in reasonable detail the terms, price and description under which it proposes to make such sale. Within fifteen (15) days there after, Investor shall notify the Company whether Investor exercises Investor's option and elects to purchase such Investor's Pro Rata Share (or any part thereof) of the Securities so offered. 3.3 Waiver. If, within fifteen (15) days after the Company gives ------ notice pursuant to Section 3.2 above, the Investor does not notify the Company that such Investor desires to purchase all of its Pro Rata Share of the Securities described in such notice upon the terms and conditions set forth therein, the Company may, during a period of ninety (90) days following the end of such fifteen (15) day period, sell and issue such Securities as to which Investor does not indicate a desire to purchase to another person upon the same terms and conditions as those set forth in the notice to Investor but at a price at least as great as the price offered to the Investors; provided, that failure by the Investor to exercise its option to purchase with respect to one offering, sale and issuance shall not affect its option to purchase Securities in any subsequent offering, sale and purchase. In the event the Company has not sold the Securities, or entered into a binding agreement to sell the Securities, within such ninety (90) day period, the Company shall not thereafter issue or sell any Securities without first offering such securities to Investor in the manner provided above. 3.4 Issuance. If an Investor gives the Company notice that such -------- Investor desires to purchase any of the Securities offered by the Company, payment for the Securities shall be by check or wire transfer, against delivery of the Securities at the executive offices of the Company within ten (10) days after giving the Company such notice, or if later, the closing date for the sale of such Securities. The Company shall take all such action as may be required by any regulatory authority in connection with the exercise by Investor of the right to purchase Securities as set forth in this Section 3, but the right of an Investor is subject to the Company's reasonable compliance with regulatory requirements. 3.5 Excluded Securities. The right of first refusal contained in this ------------------- Section 3 shall not apply to the following: (a) the issuance by the Company of (i) up to 6,000,000 shares of Common Stock to officers, directors, or employees of, or consultants or contractors to, the Company pursuant to a stock grant, option plan or purchase plan or other stock incentive program approved by the Company's Board of Directors of such person, (ii) any shares held by employees or consultants which were repurchased and reissued by the Company and (iii) any additional shares unanimously approved by the Board of Directors; (b) the issuance of Securities in connection with the acquisition of a third party, by merger, acquisition of more than fifty-one percent (51%) of the outstanding shares or substantially all of the assets of such third party; (c) the issuance of Common Stock of the Company upon conversion of the Preferred or upon conversion or exercise of any security which was not subject to the right of first refusal set forth in this Section 3 or for which the right of first refusal was not exercised; or (d) the issuance of Securities pursuant to any bank financing or leasing arrangements. 11 3.6 Termination. The right of first refusal contained in this Section ----------- 3 shall terminate as to an Investor upon the earlier of: (i) the time when such Investor ceases to own 100,000 shares of Common Stock (determined in the manner contemplated by Section 3.1(b) above); (ii) the closing of the Company's first underwritten public offering registered under the Securities Act; or (iii) eight (8) years after the date of this Agreement. 3.7 Assignment. The rights specified in this Section 3 may not be ---------- assigned except: (i) to a purchaser of more than 200,000 shares of Common Stock (as determined in the manner contemplated by Section 3.1(b) above); (ii) to an Affiliate; (iii) to a successor entity to an Investor pursuant to a reorganization or recapitalization of an Investor; (iv) to the partners of an Investor (provided that such holder owns at least 200,000 shares following such distribution) or (v) pursuant to an intervivos transfer to Investor's ancestors or descendants or spouse or to a trustee for their benefit; provided, that the Company receives notice within twenty (20) days following such assignment. SECTION 4 FINANCIAL INFORMATION --------------------- 4.1 Financial Information. The Company will mail the following --------------------- reports to Investor: (a) Within 90 days after the end of each fiscal year, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and consolidated statements of changes financial position of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles, all in reasonable detail and audited by independent public accountants selected by the Company; and (b) As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year, and in any event within forty-fifty (45) days thereafter, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and period and for the current fiscal year to day, prepared in accordance with generally accepted accounting principles (without footnotes) together with a comparison of such statements to the Company's operating plan then in effect to be prepared under Section 4.2 and to the prior fiscal year, together with operational and financial highlights. 4.2 Operating Plan. Within a reasonable time after the commencement -------------- of each fiscal year, the Company will furnish Investor with the Company's budget and operating plan (including projected balance sheets and profit and loss and cash flow statements) for such fiscal year. 4.3 Visitation Rights. Investor shall have the right to visit and ----------------- inspect any of the properties of the Company of any of its subsidiaries, including its and their books of account, and to discuss its and their affairs, finances and accounts with its and their officers, all at such 12 reasonable times and upon reasonable notice and as often as may be reasonably requested; provided, however, that the Company shall not be required at any time to disclose (i) any manufacturing or trade secret or secret process, or any information or data classified by the United States government, or (ii) other data the disclosure of which the Board of Directors of the Company reasonably believes may adversely affect the business of the Company. All confidential information obtained by Investor or its representative shall be kept confidential, shall not be disclosed to any third party and shall not be used by Investor for any purpose except for evaluation of Investor's equity investment in the Company. 4.4 Assignment. The rights granted pursuant to Section 4.1, 4.2 and ---------- 4.3 may be assigned by Investor (i) to a third party who acquires at least 200,000 shares of Common Stock of the Company (as adjusted for any stock splits, consolidations and the like) from Investor and who is not a competitor, or affiliated in any manner with a competitor, of the Company or (ii) to a successor entity to Investor pursuant to a reorganization of Investor; provided that the Company receives notice within twenty (20) days of such assignment. 4.5 Termination. The covenants set forth in Sections 4.1 through 4.3 ----------- shall terminate on and be of no further force or effect (i) upon the consummation of the Company's sale of its Common Stock in an underwritten public offering pursuant to an effective registration statement filed under the Securities Act; or (ii) as to any Investor when such Investor no longer holds at least 100,000 shares of Common Stock of the Company (determined in the amount of Section 3.1(b)). 13 SECTION 5 MISCELLANEOUS ------------- 5.1 Governing Law. This Agreement shall be governed in all respects ------------- by the laws of the State of California. 5.2 Survival. The representations, warranties, covenants and -------- agreements made herein shall survive any investigation made by any Investor and the closing of the transactions contemplated hereby. 5.3 Successors and Assigns. Except as otherwise provided herein, the ---------------------- provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 5.4 Entire Agreement; Amendment. --------------------------- (a) This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. This Agreement may only be amended or waived by a writing signed by all parties to this Agreement; provided, however, that holders of a majority of the Preferred Stock and the - -------- ------- Conversion Shares held by the Investors acting together may waive or amend, on behalf of all Investors, any provisions hereof benefitting Investors so long as the effect thereof will be that all such Investors will be treated equally. (b) The Company may add additional parties to this Agreement and to Exhibit A under this Agreement who execute counterparts of, or agree to be bound by, this Agreement, in connection with future Preferred Agreements, and such parties shall be treated as Investors in all respects; provided, that the Company shall provide prompt notice of such change to the Investors. 5.5 Notices, Etc. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to an Investor, at such Investor's address set forth on Exhibit ------- A, or at such other address as Investor shall have furnished to the Company in - - writing, or (b) if to any other holder of any Restricted Securities, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Restricted Securities who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors. If notice is provided by mail, notice shall be deemed to be given upon proper deposit in the mail (and if outside the United States, sent by airmail). 5.6 Delay or Omissions. No delay or omission to exercise any right, ------------------ power or remedy accruing to any holder of any Restricted Securities upon any breach or default of the 14 Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing or as provided in Section 4.5 of this Agreement. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 5.7 Expenses. Except as provided in Section 2, the Company and each -------- Investor shall bear its own expenses and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 5.8 Counterparts. This Agreement may be executed in any number of ------------ counterparts, all of which together shall constitute one instrument, and each of which may be executed by less than all of the parties to this Agreement. 5.9 Severability. In the event that any provision of this Agreement ------------ becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. The foregoing agreement is hereby executed as of the date first above written. INVESTORS: COMPANY: INTERVIDEO, INC. By:_______________________ By:____________________________ 15 EXHIBIT A PREFERRED INVESTORS ------------------- Existing Holders: - ----------------
Number of Number of Number of Shares of Shares of Shares of Name and Address Series A Preferred Series B Preferred Series C Preferred - ---------------- -------------------- ------------------- ------------------ Spot Master Investment Limited 5,000,000 #3 Lane 60, Chiu-Kang ST. Mucha, Wenshan Dist. Taipei, Taiwan R.O.C. Ming-Kai Tsai 800,000 No. 16-3, Chu Chun 2/nd/ Road Hsin-Chu City, Taiwan R.O.C. K. N. Chang 200,000 11F, No. 1 Lane 240 Kwon-Fu S. Road Taipei, Taiwan R.O.C. Additional Investors: - --------------------- Azam Corporation 75,000 1333 Lawrence Expressway, #201 Santa Clara, CA 95051 Leadtek Research Inc. 100,000 18F, No. 166, Chien-Yi Road Chung-Ho City Taipei Hsien, Taiwan, ROC ATTN: K. S. Lu Maxson Holdings Limited 100,000 2170 Century Park East, #704S Los Angeles, CA 90067 Nichimen America, Inc. 100,000 222 N. LaSalle Street, Suite 999 Chicago, Illinois 60601 ATTN: Ryuji Ishikawa Richmond Holdings Global Limited 115,000 20C, 60 Tun Hua South Road Sec.2, Taipei Taiwan, R.O.C.
16 Teraokakosan, Ltd. 12,500 1-3-8 Niitaka, Yodogawa-ku Osaka, Japan 532-0033 ATTN: Tatsuhiko Terada Chieh & Lily Chang Living Trust 50,000 375 Pepper Avenue Hillsborough, CA 94010 ATTN: Chieh Chang The Sternheim Trust UDT 12/22/98 400,000 3489 S. Court Street Palo Alto, CA 94306 ATTN: E. Sternheim Chen Hwa Chang 50,000 6F, #7, Lane 311, Alley 43, Sec. 2 Hoping E. Road Taipei, Taiwan, R.O.C. c/o Joe Liu - ----------- 40743 Rainwater Ct. Fremont, CA 94539 K. S. Chay 50,000 203 Wing A. Henderson Industrial Park Singapore 15954 Martin Cooper 50,000 100 Via De La Valle Del Mar, CA 92014 Chia Kok Hua 25,000 Blk 257 Bishan ST22 #07-323 Singapore, 347780 Ryuzo Kobayashi 25,000 9-34 Rokurokuso-cho, Ashiya-shi Hyogo, Japan 659-0011 Yoichi Kuga 12,500 8-1 Krekawa-cho, Ahiya-shi Hyogo, Japan 659-0051 Hideo Magata 12,500 3-6-18 Matsuzaki-cho Abeno-Ku Osaka, Japan 545-0053 Kenji Niwa 12,500 1-22 Manchidani-cho, Nishinomiya-shi Hyogo, Japan 659-0011
17 Tsutomu Ogishi 25,000 1532 San Gabriel Way San Jose, CA 95125 Kotaro Seto 12,500 4-17 Yamate-cho, Ashiya-shi Hyogo, Japan 659-0096 Shinji Shiotani 12,500 3-22-11 Midorigaoka, Toyonaka-shi Osaka, Japan 531-0071 James R. Tomihiro 25,000 5984 Gleneagles Circle San Jose, CA 95138 Doug Tsui 50,000 972 Michelangelo Drive Sunnyvale, CA 94087 Yao Wu 35,000 310 Zhang Yang Road Building #10, Room #501 Pudong, Shanghai China c/o Jeffrey Yao - --------------- 1572 Mallard Way Sunnyvale, CA 94087 Nichmen Electronic Components Corporation Hokoku Bldg., 9F, 6-8, Nakatsu 1-chome Kita-Ku, Osaka 531-0071 Japan
18 INTERVIDEO, INC. AMENDMENT NO. 1 TO THE AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT This Amendment No. 1 (the "Amendment") to the Amended and Restated Investor's Rights Agreement dated as of July 2, 1999 (the "Agreement"), attached as Exhibit I, is made as of this ______ day of March 2000 by and among --------- InterVideo, Inc., a California corporation (the "Company"), the persons listed on Exhibit A to the Agreement under the captions "Existing Holders" and --------- "Additional Investors" (collectively, the "Existing Investors"), and the additional individuals and/or entities listed on Exhibit II (the "New ---------- Investors"). The New Investors and the Existing Investors are collectively referred to as "Investors" for the purposes of the Agreement, as amended. RECITALS -------- A. The Company desires for those New Investors listed on Exhibit II under ---------- the caption "New Investors" to purchase the Company's Series D Preferred Stock pursuant to the Series D Preferred Stock Purchase Agreement of even date (as defined herein). B. As a condition thereof and to induce such investment, the Company and the Existing Investors are willing to enter into this Agreement. In consideration of the foregoing premises and the promises and covenants contained herein, the parties agree as follows: 1. Additional Parties to the Agreement ----------------------------------- The New Investors hereby enter into and become parties to the Agreement. Exhibit A to the Agreement is amended to include the New Investors on --------- Exhibit II to this Amendment and to add the number of shares of Preferred Stock - ---------- pursuant to this Amendment for all Investors. 2. Waiver ------ With regard to the Series D Preferred Financing in connection with which this Amendment No. 1 is being executed, the Existing Investors executing this Amendment No. 1, on behalf of all Existing Investors, hereby waive notice and compliance by the Company of the provisions under Section 3 of the Agreement. 3. Effect of Amendment ------------------- Section 3.5 of the Agreement is amended by deleting the word "or" which appears before subsection (d) and adding the following at the end of subsection (d): 1 "or (e) the issuance of Securities pursuant to a joint venture, research, development or product distribution agreement, licensing or a strategic relationship approved by the Board of Directors." Except as amended as set forth above, the Agreement shall continue in full force and effect. 4. Counterparts ------------ This Amendment may be executed in any number of counterparts, all of which together shall constitute one instrument, and each of which may be executed by less than all of the Investors, each of which shall be enforceable against Company and all Investors once this Amendment has been executed by the Company, the Existing Investors holding a majority of the shares listed on Exhibit A to the Agreement, and all of the New Investors listed on Exhibit II to - --------- ---------- this Amendment. This Amendment is hereby executed as of the date first above written. EXISTING INVESTOR: COMPANY: _______________________________ INTERVIDEO, INC. By:____________________________ By:______________________________ Title:_________________________ Title:___________________________ _______________________________ Print Investor Name NEW INVESTOR: By:____________________________ Title:_________________________ _______________________________ Print Investor Name 2 EXHIBIT I --------- AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT 3 EXHIBIT II ---------- NEW INVESTORS - -------------------------------------------------------------------------------- Name Shares Issued ================================================================================ Cardamon Class Ltd. 250,000 - -------------------------------------------------------------------------------- Wei Min Chang 10,000 - -------------------------------------------------------------------------------- Joey Chen 20,000 - -------------------------------------------------------------------------------- Chen Yi-Chen 25,000 - -------------------------------------------------------------------------------- Cheng, Chi Chen 25,000 - -------------------------------------------------------------------------------- Brian Chong 20,000 - -------------------------------------------------------------------------------- Chuang Chien-Chih 5,000 - -------------------------------------------------------------------------------- Concord III Venture Capital 50,000 - -------------------------------------------------------------------------------- Concord VI Venture Capital Co., Ltd. 50,000 - -------------------------------------------------------------------------------- Concord II Venture Capital Co., Ltd. 50,000 - -------------------------------------------------------------------------------- Concord IV Venture Co., Ltd. 50,000 - -------------------------------------------------------------------------------- Concord VII Venture Capital Co., Ltd. 50,000 - -------------------------------------------------------------------------------- Enrichment Venture Capital Corp. 150,000 - -------------------------------------------------------------------------------- Fubon Venture Capital Co., Ltd. 75,000 - -------------------------------------------------------------------------------- Goldman Asset Enterprises Ltd. 150,000 - -------------------------------------------------------------------------------- Hanbase Technologies, Inc. 250,000 - -------------------------------------------------------------------------------- Ho, Ai-Tang 25,000 - -------------------------------------------------------------------------------- Hsaio, Wei-Jung 10,000 - -------------------------------------------------------------------------------- Hsu Shan Ko 25,000 - -------------------------------------------------------------------------------- Huang Tsung Ming 25,000 - -------------------------------------------------------------------------------- Hung, Ruey-Lin 25,000 - -------------------------------------------------------------------------------- Chu Luk Wah Jackson 25,000 - -------------------------------------------------------------------------------- Kan Ming Shiang 37,500 - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- Name Shares Issued ================================================================================ Victor Kuan 37,500 - -------------------------------------------------------------------------------- Kuo Tai-Yuan 5,000 - -------------------------------------------------------------------------------- Ting-Ching Kuo 25,000 - -------------------------------------------------------------------------------- Lee, Chien-Ho 25,000 - -------------------------------------------------------------------------------- Mei-Kuei Leng 12,500 - -------------------------------------------------------------------------------- Alfonse Licata 10,000 - -------------------------------------------------------------------------------- Sharming Lin 2,500 - -------------------------------------------------------------------------------- Daniel T Y Ling IRA DTD 4/21/97 25,000 - -------------------------------------------------------------------------------- Liu, Bi-Lin 25,000 - -------------------------------------------------------------------------------- Paul Liu 25,000 - -------------------------------------------------------------------------------- Yu-Ching Liu 10,000 - -------------------------------------------------------------------------------- Hardy K.C. Lok 12,500 - -------------------------------------------------------------------------------- Cheng-Chong Lu 10,000 - -------------------------------------------------------------------------------- Steven Lucco 62,500 - -------------------------------------------------------------------------------- Minaji Hashimoto 25,000 - -------------------------------------------------------------------------------- Naluwan Corporation 20,000 - -------------------------------------------------------------------------------- NCTU Spring Venture Capital Co., Ltd. 75,000 - -------------------------------------------------------------------------------- Chi-Lei Ni 20,000 - -------------------------------------------------------------------------------- Nority Investment Limited 250,000 - -------------------------------------------------------------------------------- Pai, Chin-Chih 36,250 - -------------------------------------------------------------------------------- Chun Nan Pai 25,000 - -------------------------------------------------------------------------------- Ping-Yaw Peng 10,000 - -------------------------------------------------------------------------------- Phoenix International Management Holdings Limited 125,000 - -------------------------------------------------------------------------------- Prodeal Investment Co., Ltd. 25,000 - -------------------------------------------------------------------------------- Saiyed Atiq Raza and Noreen Tirmizi Raza, Trustees 250,000 N & A Raza Revocable Trust UAD 3/22/97 - -------------------------------------------------------------------------------- Rajvir Singh 250,000 - -------------------------------------------------------------------------------- 5 - -------------------------------------------------------------------------------- Name Shares Issued ================================================================================ SinoStar Venture Capital Co., Ltd. 75,000 - -------------------------------------------------------------------------------- The Sternheim E. Trust, UDT 12/22/98 162,500 - -------------------------------------------------------------------------------- Ta Ya Venture Capital Co., Ltd. 75,000 - -------------------------------------------------------------------------------- Taiwan Special Opportunities Fund III 750,000 - -------------------------------------------------------------------------------- TMO Investment Limited Partnership 25,000 - -------------------------------------------------------------------------------- Frank Tseng 12,500 - -------------------------------------------------------------------------------- Tien-Chun Tseng 25,000 - -------------------------------------------------------------------------------- Wu Kwei Hwa 10,000 - -------------------------------------------------------------------------------- Eng Tai Wu 25,000 - -------------------------------------------------------------------------------- Eric E. Wu 25,000 - -------------------------------------------------------------------------------- Her-Ching Wu 12,500 - -------------------------------------------------------------------------------- Jeff Y. Wu 25,000 - -------------------------------------------------------------------------------- TOTAL 4,023,750 - -------------------------------------------------------------------------------- 6 EX-10.8 5 dex108.txt LEASE AGREEMENT BETWEEN PROLOGIS DTD 12/7/2000 EXHIBIT 10.8 [California Net Lease] LEASE AGREEMENT THIS LEASE AGREEMENT is made this _______________day of _________________________, 2000, between ProLogis Limited Partnership-I, a Delaware limited partnership, ("Landlord"), and the Tenant named below. Tenant: InterVideo Inc., a California Corporation ------------------------------------------------------ Tenant's representative, Mr. Ken Boschwitz address, and phone no.: ------------------------------------------------------ 47350 Fremont Boulevard ------------------------------------------------------ Fremont, CA. 94538 ------------------------------------------------------ (510)651-0888 ------------------------------------------------------ ______________________________________________________ ______________________________________________________ Premises: That portion of the Building, containing approximately 19,395 rentable square feet, as determined by ------ Landlord and commonly known as 47350 Fremont Boulevard ----------------------- as shown on Exhibit A. Project: Spinnaker One ----------------------- Building: #14301 ------ Tenant's Proportionate Share of Project: 20.2% ---------------------------------- Tenant's Proportionate Share of Building: 74.6% ---------------------------------- Lease Term: Beginning on the Commencement Date and ending on the last day of the 36/th/ full calendar month thereafter. Commencement Date: November 1, 2000 ---------------------------------- Initial Monthly Base Rent: Thirty Two Thousand Nine Hundred Seventy One $32,971 ----------------------------------------------- Initial Estimated Monthly Operating 1. Common Area Charges: $1,008 Expense Payments: ------------ (estimates only and subject to adjustment 2. Taxes: $2,502 to actual costs and ------------ expenses according to the provisions of this 3. Insurance: $58 Lease) ----- 4. Management Fee: $213 ----- Initial Estimated Monthly Operating Expense Payments: $3,781 ====== Initial Monthly Base Rent and Operating Expense Payments: $36,752 Security Deposit: $38,693 Broker: N/A ------------------------------------------------------ Addenda: Addendum(s) I, II, III Exhibit(s) A, B, & C -------------------------------------------- 1. Granting Clause. In consideration of the obligation of Tenant to pay rent as herein provided and in consideration of the other terms, covenants, and conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord, the Premises, to have and to hold for the Lease Term, subject to the terms, covenants and conditions of this Lease. 2. Acceptance of Premises. Tenant shall accept the Premises in its condition as of the Commencement Date, subject to all applicable laws, ordinances, regulations, covenants and restrictions. Landlord has made no representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, and Tenant waives any implied warranty that the Premises are suitable for Tenant's intended purposes. Except as provided in Paragraph 10, in no event shall Landlord have any obligation for any defects in the Premises or any limitation on its use. The taking of possession of the Premises shall be conclusive evidence that Tenant accepts the Premises and that the Premises were in good condition at the time possession was taken except for items that are Landlord's responsibility under Paragraph 10 and any punchlist items agreed to in writing by Landlord and Tenant. 3. Use. The Premises shall be used only for the purpose of receiving, storing, shipping and selling (but limited to wholesale or mail order or web-based retail sales) products, materials and merchandise made and/or distributed by Tenant and for such other lawful purposes as may be incidental thereto; provided, however, with Landlord's prior written consent, Tenant may also use the Premises for light manufacturing. Tenant shall not conduct or give notice of any auction, liquidation, or going out of business sale on the Premises. Tenant will use the Premises in a careful, safe and proper manner and will not commit waste, overload the floor or structure of the Premises or subject the Premises to use that would damage the Premises. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the Premises, or take any other action that would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Landlord or any tenants of the Project. Outside storage, including without limitation, storage of trucks and other vehicles, is prohibited without Landlord's prior written consent. Tenant, at its sole expense, shall use and occupy the Premises in compliance with all laws, including, without limitation, the Americans With Disabilities Act, orders, judgments, ordinances, regulations, codes, directives, permits, licenses, covenants and restrictions now or hereafter applicable to the Premises (collectively, "Legal Requirements"). The Premises shall not be used as a place of public accommodation under the Americans With Disabilities Act or similar state statutes or local ordinances or any regulations promulgated thereunder, all as may be amended from time to time. Tenant shall, at its expense, make any alterations or modifications, within or without the Premises, that are required by Legal Requirements related to Tenant's use or occupation of the Premises. Tenant will not use or permit the Premises to be used for any purpose or in any manner that would void Tenant's or Landlord's insurance, increase the insurance risk, or cause the disallowance of any sprinkler credits. If any increase in the cost of any insurance on the Premises or the Project is caused by Tenant's use or occupation of the Premises, or because Tenant vacates the Premises, then Tenant shall pay the amount of such increase to Landlord. Any occupation of the Premises by Tenant prior to the Commencement Date shall be subject to all obligations of Tenant under this Lease. 4. Base Rent. Tenant shall pay Base Rent in the amount set forth above. The first month's Base Rent, the Security Deposit, and the first monthly installment of estimated Operating Expenses (as hereafter defined) shall be due and payable on the date hereof, and Tenant promises to pay to Landlord in advance, without demand, deduction or set-off, monthly installments of Base Rent on or before the first day of each calendar month succeeding the Commencement Date. Payments of Base Rent for any fractional calendar month shall be prorated. All payments required to be made by Tenant to Landlord hereunder shall be payable at such address as Landlord may specify from time to time by written notice delivered in accordance herewith. The obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any rent due hereunder except as may be expressly provided in this Lease. Tenant waives and releases all statutory liens and offset rights as to rent. If Tenant is delinquent in any monthly installment of Base Rent or of estimated Operating Expenses for more than 5 days, Tenant shall pay to Landlord on demand a late charge equal to 5 percent of such delinquent sum. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as a penalty. 5. Security Deposit. The Security Deposit shall be held by Landlord as security for the performance of Tenant's obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon each occurrence of an Event of Default (hereinafter defined), Landlord may use all or part of the Security Deposit to pay delinquent payments due under this Lease, and the cost of any damage, injury, expense or liability caused by such Event of Default, without prejudice to any other remedy provided herein or provided by law. Tenant shall pay Landlord on demand the amount that will restore the Security Deposit to its original amount. Landlord's obligation respecting the Security Deposit is that of a debtor, not a trustee; no interest shall accrue thereon. The Security Deposit shall be the property of Landlord, but shall be paid to Tenant when Tenant's obligations under this Lease have been completely fulfilled. Landlord shall be released from any obligation with respect to the Security Deposit upon transfer of this Lease and the Premises to a person or entity assuming Landlord's obligations under this Paragraph 5. 6. Operating Expense Payments. During each month of the Lease Term, on the same date that Base Rent is due, Tenant shall pay Landlord an amount equal to 1/12 of the annual cost, as estimated by Landlord from time to time, of Tenant's Proportionate Share (hereinafter defined) of Operating Expenses for the Project. Payments thereof for any fractional calendar month shall be prorated. The term "Operating Expenses" means all costs and expenses incurred by Landlord with respect to the ownership, maintenance, and operation of the Project including, but not limited to costs of: Taxes (hereinafter defined) and fees payable to tax consultants and attorneys for consultation and contesting taxes; insurance; utilities; maintenance, repair and replacement of all portions of the Project, including without limitation, paving and parking areas, roads, roofs, alleys, and driveways, mowing, landscaping, exterior painting, utility lines, heating, ventilation and air conditioning systems, lighting, electrical systems and other mechanical and building systems; amounts paid to contractors and subcontractors for work or services performed in connection with any of the foregoing; charges or assessments of any association to which the Project is subject; property management fees payable to a property manager, including any affiliate of Landlord, or if there is no property manager, an administration fee of 15 percent of Operating Expenses payable to Landlord; security services, if any; trash collection, sweeping and removal; and additions or alterations made by Landlord to the Project or the Building in order to comply with Legal Requirements (other than those expressly required herein to be made by Tenant) or that are appropriate to the continued operation of the Project or the Building as a bulk warehouse facility in the market area, provided that the cost of additions or alterations that are required to be capitalized for federal income tax purposes shall be amortized on a straight line basis over a period equal to the lesser of the useful life thereof for federal income tax purposes or 10 years. Operating Expenses do not include costs, or expenses, depreciation or amortization for capital repairs and capital replacements required to be made by Landlord under Paragraph 10 of this Lease, debt service under mortgages or ground rent under ground leases, costs of restoration to the extent of net insurance proceeds received by Landlord with respect thereto, leasing commissions, or the costs of renovating space for tenants. If Tenant's total payments of Operating Expenses for any year are less than Tenant's Proportionate Share of actual Operating Expenses for such year, then Tenant shall pay the difference to Landlord within 30 days after demand, and if more, then Landlord shall retain such excess and credit it against Tenant's next payments. For purposes of calculating Tenant's Proportionate Share of Operating Expenses, a year shall mean a calendar year except the first year, which shall begin on the Commencement Date, and the last year, which shall end on the expiration of this Lease. With respect to Operating Expenses which Landlord allocates to the entire Project, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Project as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Project; and, with respect to Operating Expenses which Landlord allocates only to the Building, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Building as reasonably adjusted by Landlord in the -2- future for changes in the physical size of the Premises or the Building. Landlord may equitably increase Tenant's Proportionate Share for any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Project or Building that includes the Premises or that varies with occupancy or use. The estimated Operating Expenses for the Premises set forth on the first page of this Lease are only estimates, and Landlord makes no guaranty or warranty that such estimates will be accurate. 7. Utilities. Tenant shall pay for all water, gas, electricity, heat, light, power, telephone, sewer, sprinkler services, refuse and trash collection, and other utilities and services used on the Premises, all maintenance charges for utilities, and any storm sewer charges or other similar charges for utilities imposed by any governmental entity or utility provider, together with any taxes, penalties, surcharges or the like pertaining to Tenant's use of the Premises. Landlord may cause at Tenant's expense any utilities to be separately metered or charged directly to Tenant by the provider. Tenant shall pay its share of all charges for jointly metered utilities based upon consumption, as reasonably determined by Landlord. No interruption or failure of utilities shall result in the termination of this Lease or the abatement of rent. Tenant agrees to limit use of water and sewer for normal restroom use. 8. Taxes. Landlord shall pay all taxes, assessments and governmental charges (collectively referred to as "Taxes") that accrue against the Project during the Lease Term, which shall be included as part of the Operating Expenses charged to Tenant. Landlord may contest by appropriate legal proceedings the amount, validity, or application of any Taxes or liens thereof. All capital levies or other taxes assessed or imposed on Landlord upon the rents payable to Landlord under this Lease and any franchise tax, any excise, transaction, sales or privilege tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents from the Premises and/or the Project or any portion thereof shall be paid by Tenant to Landlord monthly in estimated installments or upon demand, at the option of Landlord, as additional rent; provided, however, in no event shall Tenant be liable for any net income taxes imposed on Landlord unless such net income taxes are in substitution for any Taxes payable hereunder. If any such tax or excise is levied or assessed directly against Tenant, then Tenant shall be responsible for and shall pay the same at such times and in such manner as the taxing authority shall require. Tenant shall be liable for all taxes levied or assessed against any personal property or fixtures placed in the Premises, whether levied or assessed against Landlord or Tenant. 9. Insurance. Landlord shall maintain all risk property insurance covering the full replacement cost of the Building. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary, including, but not limited to, commercial liability insurance and rent loss insurance. All such insurance shall be included as part of the Operating Expenses charged to Tenant. The Project or Building may be included in a blanket policy (in which case the cost of such insurance allocable to the Project or Building will be determined by Landlord based upon the insurer's cost calculations). Tenant shall also reimburse Landlord for any increased premiums or additional insurance which Landlord reasonably deems necessary as a result of Tenant's use of the Premises. Tenant, at its expense, shall maintain during the Lease Term: all risk property insurance covering the full replacement cost of all property and improvements installed or placed in the Premises by Tenant at Tenant's expense; worker's compensation insurance with no less than the minimum limits required by law; employer's liability insurance with such limits as required by law; and commercial liability insurance, with a minimum limit of $1,000,000 per occurrence and a minimum umbrella limit of $1,000,000, for a total minimum combined general liability and umbrella limit of $2,000,000 (together with such additional umbrella coverage as Landlord may reasonably require) for property damage, personal injuries, or deaths of persons occurring in or about the Premises. Landlord may from time to time require reasonable increases in any such limits. The commercial liability policies shall name Landlord as an additional insured, insure on an occurrence and not a claims-made basis, be issued by insurance companies which are reasonably acceptable to Landlord, not be cancelable unless 30 days' prior written notice shall have been given to Landlord, contain a hostile fire endorsement and a contractual liability endorsement and provide primary coverage to Landlord (any policy issued to Landlord providing duplicate or similar coverage shall be deemed excess over Tenant's policies). Such policies or certificates thereof shall be delivered to Landlord by Tenant upon commencement of the Lease Term and upon each renewal of said insurance. The all risk property insurance obtained by Landlord and Tenant shall include a waiver of subrogation by the insurers and all rights based upon an assignment from its insured, against Landlord or Tenant, their officers, directors, employees, managers, agents, invitees and contractors, in connection with any loss or damage thereby insured against. Neither party nor its officers, directors, employees, managers, agents, invitees or contractors shall be liable to the other for loss or damage caused by any risk coverable by all risk property insurance, and each party waives any claims against the other party, and its officers, directors, employees, managers, agents, invitees and contractors for such loss or damage. The failure of a party to insure its property shall not void this waiver. Landlord and its agents, employees and contractors shall not be liable for, and Tenant hereby waives all claims against such parties for, business interruption and losses occasioned thereby sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon the Premises or the Project from any cause whatsoever, including without limitation, damage caused in whole or in part, directly or indirectly, by the negligence of Landlord or its agents, employees or contractors. 10. Landlord's Repairs. Landlord shall maintain, at its expense, the structural soundness of the roof, foundation, and exterior walls of the Building in good repair, reasonable wear and tear and uninsured losses and damages caused by Tenant, its agents and contractors excluded. The term "walls" as used in this Paragraph 10 shall not include windows, glass or plate glass, doors or overhead doors, special store fronts, dock bumpers, dock plates or levelers, or office entries. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Paragraph 10, after which Landlord shall have a reasonable opportunity to repair. 11. Tenant's Repairs. Landlord, at Tenant's expense as provided in Paragraph 6, shall maintain in good repair and condition the parking areas and other common areas of the Building, including, but not limited to driveways, alleys, landscape and grounds surrounding the Premises. Subject to Landlord's obligation in Paragraph 10 and subject to -3- Paragraphs 9 and 15, Tenant, at its expense, shall repair, replace and maintain in good condition all portions of the Premises and all areas, improvements and systems exclusively serving the Premises including, without limitation, dock and loading areas, truck doors, plumbing, water, and sewer lines up to points of common connection, fire sprinklers and fire protection systems, entries, doors, ceilings and roof membrane, windows, interior walls, and the interior side of demising walls, and heating, ventilation and air conditioning systems. Such repair and replacements include capital expenditures and repairs whose benefits may extend beyond the Term. Heating, ventilation and air conditioning systems and other mechanical and building systems serving the Premises shall be maintained at Tenant's expense pursuant to maintenance service contracts entered into by Tenant or, at Landlord's election, by Landlord. The scope of services and contractors under such maintenance contracts shall be reasonably approved by Landlord. At Landlord's request, Tenant shall enter into a joint maintenance agreement with any railroad that services the Premises. If Tenant fails to perform any repair or replacement for which it is responsible, Landlord may perform such work and be reimbursed by Tenant within 10 days after demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear the full cost of any repair or replacement to any part of the Building or Project that results from damage caused by Tenant, its agents, contractors, or invitees and any repair that benefits only the Premises. 12. Tenant-Made Alterations and Trade Fixtures. Any alterations, additions, or improvements made by or on behalf of Tenant to the Premises ("Tenant-Made Alterations") shall be subject to Landlord's prior written consent. Tenant shall cause, at its expense, all Tenant-Made Alterations to comply with insurance requirements and with Legal Requirements and shall construct at its expense any alteration or modification required by Legal Requirements as a result of any Tenant-Made Alterations. All Tenant-Made Alterations shall be constructed in a good and workmanlike manner by contractors reasonably acceptable to Landlord and only good grades of materials shall be used. All plans and specifications for any Tenant-Made Alterations shall be submitted to Landlord for its approval. Landlord may monitor construction of the Tenant-Made Alterations. Tenant shall reimburse Landlord for its costs in reviewing plans and specifications and in monitoring construction. Landlord's right to review plans and specifications and to monitor construction shall be solely for its own benefit, and Landlord shall have no duty to see that such plans and specifications or construction comply with applicable laws, codes, rules and regulations. Tenant shall provide Landlord with the identities and mailing addresses of all persons performing work or supplying materials, prior to beginning such construction, and Landlord may post on and about the Premises notices of non-responsibility pursuant to applicable law. Tenant shall furnish security or make other arrangements satisfactory to Landlord to assure payment for the completion of all work free and clear of liens and shall provide certificates of insurance for worker's compensation and other coverage in amounts and from an insurance company satisfactory to Landlord protecting Landlord against liability for personal injury or property damage during construction. Upon completion of any Tenant-Made Alterations, Tenant shall deliver to Landlord sworn statements setting forth the names of all contractors and subcontractors who did work on the Tenant-Made Alterations and final lien waivers from all such contractors and subcontractors. Upon surrender of the Premises, all Tenant-Made Alterations and any leasehold improvements constructed by Landlord or Tenant shall remain on the Premises as Landlord's property, except to the extent Landlord requires removal at Tenant's expense of any such items or Landlord and Tenant have otherwise agreed in writing in connection with Landlord's consent to any Tenant-Made Alterations. Tenant shall repair any damage caused by such removal. Tenant, at its own cost and expense and without Landlord's prior approval, may erect such shelves, bins, machinery and trade fixtures (collectively "Trade Fixtures") in the ordinary course of its business provided that such items do not alter the basic character of the Premises, do not overload or damage the Premises, and may be removed without injury to the Premises, and the construction, erection, and installation thereof complies with all Legal Requirements and with Landlord's requirements set forth above. Tenant shall remove its Trade Fixtures and shall repair any damage caused by such removal. 13. Signs. Tenant shall not make any changes to the exterior of the Premises, install any exterior lights, decorations, balloons, flags, pennants, banners, or painting, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior of the Premises, without Landlord's prior written consent. Upon surrender or vacation of the Premises, Tenant shall have removed all signs and repair, paint, and/or replace the building facia surface to which its signs are attached. Tenant shall obtain all applicable governmental permits and approvals for sign and exterior treatments. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall be subject to Landlord's approval and conform in all respects to Landlord's requirements. 14. Parking. Tenant shall be entitled to park in common with other tenants of the Project in those areas designated for nonreserved parking. Landlord may allocate parking spaces among Tenant and other tenants in the Project if Landlord determines that such parking facilities are becoming crowded. Landlord shall not be responsible for enforcing Tenant's parking rights against any third parties. 15. Restoration. If at any time during the Lease Term the Premises are damaged by a fire or other casualty, Landlord shall notify Tenant within 60 days after such damage as to the amount of time Landlord reasonably estimates it will take to restore the Premises. If the restoration time is estimated to exceed 6 months, either Landlord or Tenant may elect to terminate this Lease upon notice to the other party given no later than 30 days after Landlord's notice. If neither party elects to terminate this Lease or if Landlord estimates that restoration will take 6 months or less, then, subject to receipt of sufficient insurance proceeds, Landlord shall promptly restore the Premises excluding the improvements installed by Tenant or by Landlord and paid by Tenant, subject to delays arising from the collection of insurance proceeds or from Force Majeure events. Tenant at Tenant's expense shall promptly perform, subject to delays arising from the collection of insurance proceeds, or from Force Majeure events, all repairs or restoration not required to be done by Landlord and shall promptly re-enter the Premises and commence doing business in accordance with this Lease. Notwithstanding the foregoing, either party may terminate this Lease if the Premises are damaged during the last year of the Lease Term and Landlord reasonably estimates that it will take more than one month to repair such damage. Tenant shall pay to Landlord with respect to any damage to the Premises the amount of the commercially reasonable -4- deductible under Landlord's insurance policy within 10 days after presentment of Landlord's invoice. If the damage involves the premises of other tenants, Tenant shall pay the portion of the deductible that the cost of the restoration of the Premises bears to the total cost of restoration, as determined by Landlord. Base Rent and Operating Expenses shall be abated for the period of repair and restoration in the proportion which the area of the Premises, if any, which is not usable by Tenant bears to the total area of the Premises. Such abatement shall be the sole remedy of Tenant, and except as provided herein, Tenant waives any right to terminate the Lease by reason of damage or casualty loss. 16. Condemnation. If any part of the Premises or the Project should be taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof (a "Taking" or "Taken"), and the Taking would prevent or materially interfere with Tenant's use of the Premises or in Landlord's judgment would materially interfere with or impair its ownership or operation of the Project, then upon written notice by Landlord this Lease shall terminate and Base Rent shall be apportioned as of said date. If part of the Premises shall be Taken, and this Lease is not terminated as provided above, the Base Rent payable hereunder during the unexpired Lease Term shall be reduced to such extent as may be fair and reasonable under the circumstances. In the event of any such Taking, Landlord shall be entitled to receive the entire price or award from any such Taking without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any, in such award. Tenant shall have the right, to the extent that same shall not diminish Landlord's award, to make a separate claim against the condemning authority (but not Landlord) for such compensation as may be separately awarded or recoverable by Tenant for moving expenses and damage to Tenant's Trade Fixtures, if a separate award for such items is made to Tenant. 17. Assignment and Subletting. Without Landlord's prior written consent, which Landlord shall not unreasonably withhold, Tenant shall not assign this Lease or sublease the Premises or any part thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any concession or license within the Premises and any attempt to do any of the foregoing shall be void and of no effect. For purposes of this paragraph, a transfer of the ownership interests controlling Tenant shall be deemed an assignment of this Lease unless such ownership interests are publicly traded. Notwithstanding the above, Tenant may assign or sublet the Premises, or any part thereof, to any entity controlling Tenant, controlled by Tenant or under common control with Tenant (a "Tenant Affiliate"), without the prior written consent of Landlord. Tenant shall reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in connection with any assignment or sublease. Upon Landlord's receipt of Tenant's written notice of a desire to assign or sublet the Premises, or any part thereof (other than to a Tenant Affiliate), Landlord may, by giving written notice to Tenant within 30 days after receipt of Tenant's notice, terminate this Lease with respect to the space described in Tenant's notice, as of the date specified in Tenant's notice for the commencement of the proposed assignment or sublease. If Landlord so terminates the Lease, Landlord may enter into a lease directly with the proposed sublessee or assignee. Tenant may withdraw its notice to sublease or assign by notifying Landlord within 10 days after Landlord has given Tenant notice of such termination, in which case the Lease shall not terminate but shall continue. It shall be reasonable for the Landlord to withhold its consent to any assignment or sublease in any of the following instances: (i) an Event of Default has occurred and is continuing that would not be cured upon the proposed sublease or assignment; (ii) the assignee or sublessee does not have a net worth calculated according to generally accepted accounting principles at least equal to the greater of the net worth of Tenant immediately prior to such assignment or sublease or the net worth of the Tenant at the time it executed the Lease; (iii) the intended use of the Premises by the assignee or sublessee is not reasonably satisfactory to Landlord; (iv) the intended use of the Premises by the assignee or sublessee would materially increase the pedestrian or vehicular traffic to the Premises or the Project; (v) occupancy of the Premises by the assignee or sublessee would, in Landlord's opinion, violate an agreement binding upon Landlord or the Project with regard to the identity of tenants, usage in the Project, or similar matters; (vi) the identity or business reputation of the assignee or sublessee will, in the good faith judgment of Landlord, tend to damage the goodwill or reputation of the Project; (vii) the assignment or sublet is to another tenant in the Project and is at rates which are below those charged by Landlord for comparable space in the Project; (viii) in the case of a sublease, the subtenant has not acknowledged that the Lease controls over any inconsistent provision in the sublease; (ix) the proposed assignee or sublessee is a governmental agency; or Tenant and Landlord acknowledge that each of the foregoing criteria are reasonable as of the date of execution of this Lease. The foregoing criteria shall not exclude any other reasonable basis for Landlord to refuse its consent to such assignment or sublease. Any approved assignment or sublease shall be expressly subject to the terms and conditions of this Lease. Tenant shall provide to Landlord all information concerning the assignee or sublessee as Landlord may request. Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignments or sublettings). In the event that the rent due and payable by a sublessee or assignee (or a combination of the rental payable under such sublease or assignment plus any bonus or other consideration therefor or incident thereto) exceeds the rental payable under this Lease, then Tenant shall be bound and obligated to pay Landlord as additional rent hereunder 50% of all such excess rental and other excess consideration within 10 days following receipt thereof by Tenant. If this Lease be assigned or if the Premises be subleased (whether in whole or in part) or in the event of the mortgage, pledge, or hypothecation of Tenant's leasehold interest or grant of any concession or license within the Premises or if the Premises be occupied in whole or in part by anyone other than Tenant, then upon a default by Tenant hereunder Landlord may collect rent from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold interest was hypothecated, concessionee or licensee or other occupant and, except to the extent set forth in the preceding paragraph, apply the amount collected to the next rent payable hereunder; and all such rentals collected by Tenant shall be held in trust for Landlord and immediately forwarded to Landlord. No such transaction or collection of rent or -5- application thereof by Landlord, however, shall be deemed a waiver of these provisions or a release of Tenant from the further performance by Tenant of its covenants, duties, or obligations hereunder. 18. Indemnification. Except for the negligence of Landlord, its agents, employees or contractors, and to the extent permitted by law, Tenant agrees to indemnify, defend and hold harmless Landlord, and Landlord's agents, employees and contractors, from and against any and all losses, liabilities, damages, costs and expenses (including attorneys' fees) resulting from claims by third parties for injuries to any person and damage to or theft or misappropriation or loss of property occurring in or about the Project and arising from the use and occupancy of the Premises or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises or due to any other act or omission of Tenant, its subtenants, assignees, invitees, employees, contractors and agents. The furnishing of insurance required hereunder shall not be deemed to limit Tenant's obligations under this Paragraph 18. 19. Inspection and Access. Landlord and its agents, representatives, and contractors may enter the Premises at any reasonable time to inspect the Premises and to make such repairs as may be required or permitted pursuant to this Lease and for any other business purpose. Landlord and Landlord's representatives may enter the Premises during business hours for the purpose of showing the Premises to prospective purchasers and, during the last year of the Lease Term, to prospective tenants. Landlord may erect a suitable sign on the Premises stating the Premises are available to let or that the Project is available for sale. Landlord may grant easements, make public dedications, designate common areas and create restrictions on or about the Premises, provided that no such easement, dedication, designation or restriction materially interferes with Tenant's use or occupancy of the Premises. At Landlord's request, Tenant shall execute such instruments as may be necessary for such easements, dedications or restrictions. 20. Quiet Enjoyment. If Tenant shall perform all of the covenants and agreements herein required to be performed by Tenant, Tenant shall, subject to the terms of this Lease, at all times during the Lease Term, have peaceful and quiet enjoyment of the Premises against any person claiming by, through or under Landlord. 21. Surrender. Upon termination of the Lease Term or earlier termination of Tenant's right of possession, Tenant shall surrender the Premises to Landlord in the same condition as received, broom clean, ordinary wear and tear and casualty loss and condemnation covered by Paragraphs 15 and 16 excepted. Any Trade Fixtures, Tenant-Made Alterations and property not so removed by Tenant as permitted or required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property. All obligations of Tenant hereunder not fully performed as of the termination of the Lease Term shall survive the termination of the Lease Term, including without limitation, indemnity obligations, payment obligations with respect to Operating Expenses and obligations concerning the condition and repair of the Premises. 22. Holding Over. If Tenant retains possession of the Premises after the termination of the Lease Term, unless otherwise agreed in writing, such possession shall be subject to immediate termination by Landlord at any time, and all of the other terms and provisions of this Lease (excluding any expansion or renewal option or other similar right or option) shall be applicable during such holdover period, except that Tenant shall pay Landlord from time to time, upon demand, as Base Rent for the holdover period, an amount equal to 150% the Base Rent in effect on the termination date, computed on a monthly basis for each month or part thereof during such holding over. All other payments shall continue under the terms of this Lease. In addition, Tenant shall be liable for all damages incurred by Landlord as a result of such holding over. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided, and this Paragraph 22 shall not be construed as consent for Tenant to retain possession of the Premises. 23. Events of Default. Each of the following events shall be an event of default ("Event of Default") by Tenant under this Lease: (i) Tenant shall fail to pay any installment of Base Rent or any other payment required herein when due, and such failure shall continue for a period of 5 days from the date such payment was due. (ii) Tenant or any guarantor or surety of Tenant's obligations hereunder shall (A) make a general assignment for the benefit of creditors; (B) commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as a debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or of any substantial part of its property (collectively a "proceeding for relief"); (C) become the subject of any proceeding for relief which is not dismissed within 60 days of its filing or entry; or (D) die or suffer a legal disability (if Tenant, guarantor, or surety is an individual) or be dissolved or otherwise fail to maintain its legal existence (if Tenant, guarantor or surety is a corporation, partnership or other entity). (iii) Any insurance required to be maintained by Tenant pursuant to this Lease shall be cancelled or terminated or shall expire or shall be reduced or materially changed, except, in each case, as permitted in this Lease. (iv) Tenant shall not occupy or shall vacate the Premises or shall fail to continuously operate its business at the Premises for the permitted use set forth herein, whether or not Tenant is in monetary or other default under this Lease. (v) Tenant shall attempt or there shall occur any assignment, subleasing or other transfer of Tenant's interest in or with respect to this Lease except as otherwise permitted in this Lease. -6- (vi) Tenant shall fail to discharge any lien placed upon the Premises in violation of this Lease within 30 days after any such lien or encumbrance is filed against the Premises. (vii) Tenant shall fail to comply with any provision of this Lease other than those specifically referred to in this Paragraph 23, and except as otherwise expressly provided herein, such default shall continue for more than 30 days after Landlord shall have given Tenant written notice of such default. 24. Landlord's Remedies. Upon each occurrence of an Event of Default and so long as such Event of Default shall be continuing, Landlord may at any time thereafter at its election: terminate this Lease or Tenant's right of possession (but Tenant shall remain liable as hereinafter provided), and/or pursue any other remedies at law or in equity. Upon the termination of this Lease or termination of Tenant's right of possession, it shall be lawful for Landlord, without formal demand or notice of any kind, to re-enter the Premises by summary dispossession proceedings or any other action or proceeding authorized by law and to remove Tenant and all persons and property therefrom. If Landlord re-enters the Premises, Landlord shall have the right to keep in place and use, or remove and store, all of the furniture, fixtures and equipment at the Premises. Except as otherwise provided in the next paragraph, if Tenant breaches this Lease and abandons the Premises prior to the end of the term hereof, or if Tenant's right to possession is terminated by Landlord because of an Event of Default by Tenant under this Lease, this Lease shall terminate. Upon such termination, Landlord may recover from Tenant the following, as provided in Section 1951.2 of the Civil Code of California: (i) the worth at the time of award of the unpaid Base Rent and other charges under this Lease that had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the reasonable value of the unpaid Base Rent and other charges under this Lease which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of award by which the reasonable value of the unpaid Base Rent and other charges under this Lease for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or that in the ordinary course of things would be likely to result therefrom. As used herein, the following terms are defined: (a) The "worth at the time of award" of the amounts referred to in Sections (i) and (ii) is computed by allowing interest at the lesser of 18 percent per annum or the maximum lawful rate. The "worth at the time of award" of the amount referred to in Section (iii) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent; (b) The "time of award" as used in clauses (i), (ii), and (iii) above is the date on which judgment is entered by a court of competent jurisdiction; (c) The "reasonable value" of the amount referred to in clause (ii) above is computed by determining the mathematical product of (1) the "reasonable annual rental value" (as defined herein) and (2) the number of years, including fractional parts thereof, between the date of termination and the time of award. The "reasonable value" of the amount referred to in clause (iii) is computed by determining the mathematical product of (1) the annual Base Rent and other charges under this Lease and (2) the number of years including fractional parts thereof remaining in the balance of the term of this Lease after the time of award. Even though Tenant has breached this Lease and abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover rent as it becomes due. This remedy is intended to be the remedy described in California Civil Code Section 1951.4, and the following provision from such Civil Code Section is hereby repeated: "The Lessor has the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations)." Any such payments due Landlord shall be made upon demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any sums falling due from time to time. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect in writing to terminate this Lease for such previous breach. Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises and/or a termination of this Lease by Landlord, whether by agreement or by operation of law, it being understood that such surrender and/or termination can be effected only by the written agreement of Landlord and Tenant. Any law, usage, or custom to the contrary notwithstanding, Landlord shall have the right at all times to enforce the provisions of this Lease in strict accordance with the terms hereof; and the failure of Landlord at any time to enforce its rights under this Lease strictly in accordance with same shall not be construed as having created a custom in any way or manner contrary to the specific terms, provisions, and covenants of this Lease or as having modified the same. Tenant and Landlord further agree that forbearance or waiver by Landlord to enforce its rights pursuant to this Lease or at law or in equity, shall not be a waiver of Landlord's right to enforce one or more of its rights in connection with any subsequent default. A receipt by Landlord of rent or other payment with knowledge of the breach of any covenant hereof shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. To the greatest extent permitted by law, Tenant waives the service of notice of Landlord's intention to re-enter as provided for in any statute, or to institute legal proceedings to that end, and also waives all right of redemption in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge. The terms "enter," "re-enter," "entry" or "re-entry," as used in this Lease, are not restricted to their technical legal meanings. Any reletting of the Premises shall be on such terms and conditions as Landlord in its sole discretion may determine (including without limitation a term different than the remaining Lease Term, rental concessions, alterations and repair of the Premises, lease of less than the entire Premises to any tenant and leasing any or all other portions of the Project before reletting the Premises). Landlord shall not be liable, nor shall Tenant's obligations hereunder be diminished, because of Landlord's failure to relet the Premises or collect rent due in respect of such reletting. -7- 25 Tenant's Remedies/Limitation of Liability. Landlord shall not be in default hereunder unless Landlord fails to perform any of its obligations hereunder within 30 days after written notice from Tenant specifying such failure (unless such performance will, due to the nature of the obligation, require a period of time in excess of 30 days, then after such period of time as is reasonably necessary). All obligations of Landlord hereunder shall be construed as covenants, not conditions; and, except as may be otherwise expressly provided in this Lease, Tenant may not terminate this Lease for breach of Landlord's obligations hereunder. All obligations of Landlord under this Lease will be binding upon Landlord only during the period of its ownership of the Premises and not thereafter. The term "Landlord" in this Lease shall mean only the owner, for the time being of the Premises, and in the event of the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all obligations of Landlord thereafter accruing, but such obligations shall be binding during the Lease Term upon each new owner for the duration of such owner's ownership. Any liability of Landlord under this Lease shall be limited solely to its interest in the Project, and in no event shall any personal liability be asserted against Landlord in connection with this Lease nor shall any recourse be had to any other property or assets of Landlord. 26 Waiver of Jury Trial. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. 27 Subordination. This Lease and Tenant's interest and rights hereunder are and shall be subject and subordinate at all times to the lien of any first mortgage, now existing or hereafter created on or against the Project or the Premises, and all amendments, restatements, renewals, modifications, consolidations, refinancing, assignments and extensions thereof, without the necessity of any further instrument or act on the part of Tenant. Tenant agrees, at the election of the holder of any such mortgage, to attorn to any such holder. Tenant agrees upon demand to execute, acknowledge and deliver such instruments, confirming such subordination and such instruments of attornment as shall be requested by any such holder. Tenant hereby appoints Landlord attorney in fact for Tenant irrevocably (such power of attorney being coupled with an interest) to execute, acknowledge and deliver any such instrument and instruments for and in the name of the Tenant and to cause any such instrument to be recorded. Notwithstanding the foregoing, any such holder may at any time subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution, delivery or recording and in that event such holder shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution, delivery and recording of such mortgage and had been assigned to such holder. The term "mortgage" whenever used in this Lease shall be deemed to include deeds of trust, security assignments and any other encumbrances, and any reference to the "holder" of a mortgage shall be deemed to include the beneficiary under a deed of trust. 28 Mechanic's Liens. Tenant has no express or implied authority to create or place any lien or encumbrance of any kind upon, or in any manner to bind the interest of Landlord or Tenant in, the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises and that it will save and hold Landlord harmless from all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the interest of Landlord in the Premises or under this Lease. Tenant shall give Landlord immediate written notice of the placing of any lien or encumbrance against the Premises and cause such lien or encumbrance to be discharged within 30 days of the filing or recording thereof; provided, however, Tenant may contest such liens or encumbrances as long as such contest prevents foreclosure of the lien or encumbrance and Tenant causes such lien or encumbrance to be bonded or insured over in a manner satisfactory to Landlord within such 30 day period. 29 Estoppel Certificates. Tenant agrees, from time to time, within 10 days after request of Landlord, to execute and deliver to Landlord, or Landlord's designee, any estoppel certificate requested by Landlord, stating that this Lease is in full force and effect, the date to which rent has been paid, that Landlord is not in default hereunder (or specifying in detail the nature of Landlord's default), the termination date of this Lease and such other matters pertaining to this Lease as may be requested by Landlord. Tenant's obligation to furnish each estoppel certificate in a timely fashion is a material inducement for Landlord's execution of this Lease. No cure or grace period provided in this Lease shall apply to Tenant's obligations to timely deliver an estoppel certificate. Tenant hereby irrevocably appoints Landlord as its attorney in fact to execute on its behalf and in its name any such estoppel certificate if Tenant fails to execute and deliver the estoppel certificate within 10 days after Landlord's written request thereof. 30 Environmental Requirements. Except for Hazardous Material contained in products used by Tenant in de minimis quantities for ordinary cleaning and office purposes, Tenant shall not permit or cause any party to bring any Hazardous Material upon the Premises or transport, store, use, generate, manufacture or release any Hazardous Material in or about the Premises without Landlord's prior written consent. Tenant, at its sole cost and expense, shall operate its business in the Premises in strict compliance with all Environmental Requirements and shall remediate in manner satisfactory to Landlord any Hazardous Materials released on or from the Project by Tenant, its agents, employees, contractors, subtenants or invitees. Tenant shall complete and certify to disclosure statements as requested by Landlord from time to time relating to Tenant's transportation, storage, use, generation, manufacture, or release of Hazardous Materials on the Premises. The term "Environmental Requirements" means all applicable present and future statutes, regulations, ordinances, rules, codes, judgments, orders or other similar enactments of any governmental authority or agency regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the environment, including without limitation, the following: the Comprehensive Environmental Response, Compensation -8- and Liability Act; the Resource Conservation and Recovery Act; and all state and local counterparts thereto, and any regulations or policies promulgated or issued thereunder. The term "Hazardous Materials" means and includes any substance, material, waste, pollutant, or contaminant listed or defined as hazardous or toxic, under any Environmental Requirements, asbestos and petroleum, including crude oil or any fraction thereof, natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas). As defined in Environmental Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's "facility" and the "owner" of all Hazardous Materials brought on the Premises by Tenant, its agents, employees, contractors or invitees, and the wastes, by-products, or residues generated, resulting, or produced therefrom. Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all losses (including, without limitation, diminution in value of the Premises or the Project and loss of rental income from the Project), claims, demands, actions, suits, damages (including, without limitation, punitive damages), expenses (including, without limitation, remediation, removal, repair, corrective action, or cleanup expenses), and costs (including, without limitation, actual attorneys' fees, consultant fees or expert fees and including, without limitation, removal or management of any asbestos brought into the Premises or disturbed in breach of the requirements of this Paragraph 30, regardless of whether such removal or management is required by law) which are brought or recoverable against, or suffered or incurred by Landlord as a result of any release of Hazardous Materials for which Tenant is obligated to remediate as provided above or any other breach of the requirements under this Paragraph 30 by Tenant, its agents, employees, contractors, subtenants, assignees or invitees, regardless of whether Tenant had knowledge of such noncompliance. The obligations of Tenant under this Paragraph 30 shall survive any termination of this Lease. Landlord shall have access to, and a right to perform inspections and tests of, the Premises to determine Tenant's compliance with Environmental Requirements, its obligations under this Paragraph 30, or the environmental condition of the Premises. Access shall be granted to Landlord upon Landlord's prior notice to Tenant and at such times so as to minimize, so far as may be reasonable under the circumstances, any disturbance to Tenant's operations. Such inspections and tests shall be conducted at Landlord's expense, unless such inspections or tests reveal that Tenant has not complied with any Environmental Requirement, in which case Tenant shall reimburse Landlord for the reasonable cost of such inspection and tests. Landlord's receipt of or satisfaction with any environmental assessment in no way waives any rights that Landlord holds against Tenant. 31 Rules and Regulations. Tenant shall, at all times during the Lease Term and any extension thereof, comply with all reasonable rules and regulations at any time or from time to time established by Landlord covering use of the Premises and the Project. The current rules and regulations are attached hereto. In the event of any conflict between said rules and regulations and other provisions of this Lease, the other terms and provisions of this Lease shall control. Landlord shall not have any liability or obligation for the breach of any rules or regulations by other tenants in the Project. 32 Security Service. Tenant acknowledges and agrees that, while Landlord may patrol the Project, Landlord is not providing any security services with respect to the Premises and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises. 33 Force Majeure. Except for monetary obligations, Neither Landlord nor Tenant shall be held responsible for delays in the performance of its obligations hereunder when caused by strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, delay in issuance of permits, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of Landlord or Tenant ("Force Majeure"). 34 Entire Agreement. This Lease constitutes the complete agreement of Landlord and Tenant with respect to the subject matter hereof. No representations, inducements, promises or agreements, oral or written, have been made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not contained herein, and any prior agreements, promises, negotiations, or representations are superseded by this Lease. This Lease may not be amended except by an instrument in writing signed by both parties hereto. 35 Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby. It is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added, as a part of this Lease, a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 36 Brokers. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than the broker, if any, set forth on the first page of this Lease, and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. 37 Miscellaneous. (a) Any payments or charges due from Tenant to Landlord hereunder shall be considered rent for all purposes of this Lease. (b) If and when included within the term "Tenant," as used in this instrument, there is more than one person, firm or corporation, each shall be jointly and severally liable for the obligations of Tenant. -9- (c) All notices required or permitted to be given under this Lease shall be in writing and shall be sent by registered or certified mail, return receipt requested, or by a reputable national overnight courier service, postage prepaid, or by hand delivery addressed to the parties at their addresses below, and with a copy sent to Landlord at 14100 East 35th Place, Aurora, Colorado 80011. Either party may by notice given aforesaid change its address for all subsequent notices. Except where otherwise expressly provided to the contrary, notice shall be deemed given upon delivery. (d) Except as otherwise expressly provided in this Lease or as otherwise required by law, Landlord retains the absolute right to withhold any consent or approval. (e) At Landlord's request from time to time Tenant shall furnish Landlord with true and complete copies of its most recent annual and quarterly financial statements prepared by Tenant or Tenant's accountants and any other financial information or summaries that Tenant typically provides to its lenders or shareholders. (f) Neither this Lease nor a memorandum of lease shall be filed by or on behalf of Tenant in any public record. Landlord may prepare and file, and upon request by Landlord Tenant will execute, a memorandum of lease. (g) The normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any exhibits or amendments hereto. (h) The submission by Landlord to Tenant of this Lease shall have no binding force or effect, shall not constitute an option for the leasing of the Premises, nor confer any right or impose any obligations upon either party until execution of this Lease by both parties. (i) Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. (j) Any amount not paid by Tenant within 5 days after its due date in accordance with the terms of this Lease shall bear interest from such due date until paid in full at the lesser of the highest rate permitted by applicable law or 15 percent per year. It is expressly the intent of Landlord and Tenant at all times to comply with applicable law governing the maximum rate or amount of any interest payable on or in connection with this Lease. If applicable law is ever judicially interpreted so as to render usurious any interest called for under this Lease, or contracted for, charged, taken , reserved, or received with respect to this Lease, then it is Landlord's and Tenant's express intent that all excess amounts theretofore collected by Landlord be credited on the applicable obligation (or, if the obligation has been or would thereby be paid in full, refunded to Tenant), and the provisions of this Lease immediately shall be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. (k) Construction and interpretation of this Lease shall be governed by the laws of the state in which the Project is located, excluding any principles of conflicts of laws. (l) Time is of the essence as to the performance of Tenant's obligations under this Lease. (m) All exhibits and addenda attached hereto are hereby incorporated into this Lease and made a part hereof. In the event of any conflict between such exhibits or addenda and the terms of this Lease, such exhibits or addenda shall control. 38 Landlord's Lien/Security Interest. Tenant hereby grants Landlord a security interest, and this Lease constitutes a security agreement, within the meaning of and pursuant to the Uniform Commercial Code of the state in which the Premises are situated as to all of Tenant's property situate in, or upon, or used in connection with the Premises (except merchandise sold in the ordinary course of business) as security for all of Tenant's obligations hereunder, including, without limitation, the obligation to pay rent. Such personalty thus encumbered includes specifically all trade and other fixtures for the purpose of this Paragraph and inventory, equipment, contract rights, accounts receivable and the proceeds thereof. In order to perfect such security interest, Tenant shall execute such financing statements and file the same at Tenant's expense at the state and county Uniform Commercial Code filing offices as often as Landlord in its discretion shall require; and Tenant hereby irrevocably appoints Landlord its agent for the purpose of executing and filing such financing statements on Tenant's behalf as Landlord shall deem necessary. 39 Limitation of Liability of Trustees, Shareholders, and Officers of ProLogis Trust. Any obligation or liability whatsoever of ProLogis Trust, a Maryland real estate investment trust, which may arise at any time under this Lease or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction, or undertaking contemplated hereby shall not be personally binding upon, nor shall resort for the enforcement thereof be had to the property of, its trustees, directors, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort, or otherwise. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. -10- TENANT: LANDLORD: InterVideo, Inc., a California ProLogis Limited Partnership-I, a Delaware Corporation limited partnership - -------------------------------- By: ProLogis Trust, a Maryland real estate investment trust, General Partner By:_____________________________ Name:___________________________ Title:__________________________ By:_________________________________________ Ned K. Anderson Title: Managing Director Address: Address: 47350 Fremont Boulevard 47775 Fremont Boulevard Fremont, Ca. 94538 Fremont, CA 94538 -11- Rules and Regulations --------------------- 1 The sidewalk, entries, and driveways of the Project shall not be obstructed by Tenant, or its agents, or used by them for any purpose other than ingress and egress to and from the Premises. 2. Tenant shall not place any objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped areas or other areas outside of its Premises, or on the roof of the Project. 3. Except for seeing-eye dogs, no animals shall be allowed in the offices, halls, or corridors in the Project. 4. Tenant shall not disturb the occupants of the Project or adjoining buildings by the use of any radio or musical instrument or by the making of loud or improper noises. 5. If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will direct the electrician as to where and how the wires may be introduced; and, without such direction, no boring or cutting of wires will be permitted. Any such installation or connection shall be made at Tenant's expense. 6. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises, except as specifically approved in the Lease. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Project. 7. Parking any type of recreational vehicles is specifically prohibited on or about the Project. Except for the overnight parking of operative vehicles, no vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall be no "For Sale" or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord. 8. Tenant shall maintain the Premises free from rodents, insects and other pests. 9. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of the Rules and Regulations of the Project. 10 Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant by the janitors or any other employee or person. 11 Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, heating apparatus, or any other service equipment affecting the Premises. 12 Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and other vehicles, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises. 13 All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash enclosure areas, if any, provided for that purpose. 14 No auction, public or private, will be permitted on the Premises or the Project. 15 No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord. 16 The Premises shall not be used for lodging, sleeping or cooking or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No gaming devices shall be operated in the Premises. 17 Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electrical wiring in the Project and the Premises and the needs of other tenants, and shall not use more than such safe capacity. Landlord's consent to the installation of electric equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity. 18 Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage. 19 Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be transmitted beyond the Premises. -12- HVAC Maintenance/Service Contract Requirements ---------------------------------------------- A service contract with a Landlord approved HVAC contractor must become effective within thirty (30) days of occupancy and service visits should be performed on a quarterly basis. The following are the approved HVAC contractors: Thermoscape 510/445-0700 Phoenix Heating and Air Conditioning 408/487-0390 Cal-Air Conditioning 408/947-0155 We suggest that you send the following list to one of the above HVAC contractors to be assured that these items are included in the maintenance contract: 1. Adjust belt tension; 2. Lubricate all moving parts, as necessary; 3. Inspect and adjust all temperature and safety controls; 4. Check refrigeration system for leaks and operation; 5. Check refrigeration system for moisture; 6. Inspect compressor oil level and crank case heaters; 7. Check head pressure, suction pressure and oil pressure; 8. Inspect air filters and replace when necessary; 9. Check space conditions; 10. Check condensate drains and drain pans and clean, if necessary; 11. Inspect and adjust all valves; 12. Check and adjust dampers; 13. Run machine through complete cycle. Note: A certificate must be provided for our files not later than thirty (30) days after mutual execution hereof. Failure to provide such certificate or perform said services, when required, shall constitute material default of this lease. -13- ADDENDUM I BASE RENT ADJUSTMENTS --------------------- ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED _______________________, BETWEEN ProLogis Limited Partnership-I and InterVideo, Inc. Base Rent shall equal the following amounts for the respective periods set forth below: Period Monthly Base Rent ------ ----------------- 11/01/00 - 10/31/01 $32,971 11/01/01 - 10/31/02 $33,941 11/01/02 - 10/30/03 $34,911 ADDENDUM II -14- CONSTRUCTION ------------ (TURNKEY) ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED _________________, BETWEEN ProLogis Limited Partnership-I and InterVideo, Inc. (a) Landlord agrees to furnish or perform at Landlord's sole cost and expense those items of construction and those improvements (the "Tenant ------ Improvements") specified below: - ------------ Landlord shall insure that the HVAC systems are working properly throughout the space. (b) If Tenant shall desire any changes, Tenant shall so advise Landlord in writing and Landlord shall determine whether such changes can be made in a reasonable and feasible manner. Any and all costs of reviewing any requested changes, and any and all costs of making any changes to the Tenant Improvements which Tenant may request and which Landlord may agree to shall be at Tenant's sole cost and expense and shall be paid to Landlord upon demand and before execution of the change order. (c) Landlord shall proceed with and complete the construction of the Tenant Improvements. As soon as such improvements have been Substantially Completed, Landlord shall notify Tenant in writing of the date that the Tenant Improvements were Substantially Completed. Such date, unless an earlier date is specified as the Commencement Date in this Lease or otherwise agreed to in writing between Landlord and Tenant, shall be the "Commencement Date," unless ----------------- the completion of such improvements was delayed due to any act or omission of, or delay caused by, Tenant including, without limitation, Tenant's failure to approve plans, complete submittals or obtain permits within the time periods agreed to by the parties or as reasonably required by Landlord, in which case the Commencement Date shall be the date such improvements would have been completed but for the delays caused by Tenant. The Tenant Improvements shall be deemed substantially completed ("Substantially Completed") when, in the opinion of the construction manager (whether an employee or agent of Landlord or a third party construction manager), the Premises are substantially completed except for punch list items which do not prevent in any material way the use of the Premises for the purposes for which they were intended. After the Commencement Date Tenant shall, upon demand, execute and deliver to Landlord a letter of acceptance of delivery of the Premises. (d) The failure of Tenant to take possession of or to occupy the Premises shall not serve to relieve Tenant of obligations arising on the Commencement Date or delay the payment of rent by Tenant. Subject to applicable ordinances and building codes governing Tenant's right to occupy or perform in the Premises, Tenant shall be allowed to install its tenant improvements, machinery, equipment, fixtures, or other property on the Premises during the final stages of completion of construction provided that Tenant does not thereby interfere with the completion of construction or cause any labor dispute as a result of such installations, and provided further that Tenant does hereby agree to indemnify, defend, and hold Landlord harmless from any loss or damage to such property, and all liability, loss, or damage arising from any injury to the Project or the property of Landlord, its contractors, subcontractors, or materialmen, and any death or personal injury to any person or persons arising out of such installations, whether or not any such loss, damage, liability, death, or personal injury was caused by Landlord's negligence. Any such occupancy or performance in the Premises shall be in accordance with the provisions governing Tenant-Made Alterations and Trade Fixtures in the Lease, and shall be subject to Tenant providing to Landlord satisfactory evidence of insurance for personal injury and property damage related to such installations and satisfactory payment arrangements with respect to installations permitted hereunder. Delay in putting Tenant in possession of the Premises shall not serve to extend the term of this Lease or to make Landlord liable for any damages arising therefrom. (e) Except for incomplete punch list items, Tenant upon the Commencement Date shall have and hold the Premises as the same shall then be without any liability or obligation on the part of Landlord for making any further alterations or improvements of any kind in or about the Premises. ADDENDUM III LETTER OF CREDIT ---------------- -15- ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED __________________, 20_______, BETWEEN ProLogis Limited Partnership-I, a Delaware Limited Partnership and InterVideo, Inc. Upon execution of the Lease, Tenant shall provide Landlord a Letter of Credit in the amount of $116,000 which may be in the form of an unconditional, irrevocable letter of credit from a bank reasonably acceptable to Landlord. The primary purpose of the Letter of Credit is to reimburse Landlord for Leasing costs including but not limited to tenant improvements and additional security in the event of default. The letter of credit shall either provide that it does not expire until 60 days after the end of the Lease term or, if it is for less than the full term of the Lease, shall be renewed by Tenant at least 30 days prior to its expiration during the term of the Lease. The letter of credit shall provide that it may be drawn down upon by Landlord at any time Landlord delivers its site draft to the bank. If Landlord sells or conveys the Premises, Tenant shall, at Landlord's request, cooperate in having the letter of credit transferred to the purchaser. If the letter of credit is ever drawn upon by Landlord pursuant to the terms of the Lease and this Addendum, tenant shall within ten (10) days thereafter cause the letter of credit to be restored to its original amount. -16- FORM OF LETTER OF CREDIT [LETTERHEAD OF LETTER OF CREDIT BANK] [DATE] ProLogis Trust Attention: _______________ Re: Irrevocable Transferrable Letter of Credit No. ___________________________________ Beneficiary: By order of our client, ______________ (the "Applicant"), we hereby --------- establish this Irrevocable Transferrable Letter of Credit No. _______ in your favor for an amount up to but not exceeding the aggregate sum of ___________________ and No/100 Dollars ($_________) (as reduced from time to time in accordance with the terms hereof, the "Letter of Credit Amount"), ----------------------- effective immediately, and expiring on the close of business at our office at the address set forth above one year from the date hereof unless renewed as hereinafter provided. Funds under this Letter of Credit are available to you on or prior to the expiry date against presentation by you of your (i) sight drafts drawn on us in the form of Annex 1 hereto, indicating this Letter of Credit number and (ii) request in the form of Annex 2 hereto (such sight draft and request, together referred to as a "Drawing Request"), sight draft(s), completed and signed by one --------------- of your officers. Presentation of your Drawing Requests may be made by you to us at the address set forth above or may be made by facsimile transmission, to the following facsimile number _____________. You may present to us one or more Drawing Requests from time to time prior to the expiry date in an aggregate amount not to exceed the Letter of Credit Amount then in effect (it being understood that the honoring by us of each Drawing Request shall reduce the Letter of Credit Amount then in effect). This Letter of Credit will be automatically renewed for a one-year period upon the expiration date set forth above and upon each anniversary of such date, unless at least sixty (60) days prior to such expiration date, or prior to any anniversary of such date, we notify both you and the Applicant in writing by certified mail that we elect not to so renew the Letter of Credit. This Letter of Credit sets forth in full the terms of our undertaking and such undertaking shall not in any way be modified, amended or amplified by reference to any document or instrument referred to herein or in which this Letter of Credit is referred to or to which this Letter of Credit relates, and no such reference shall be deemed to incorporate herein by reference any document or instrument. All bank charges and commissions incurred in this transaction are for the Applicant's account. This Letter of Credit is transferrable by you and your successors and assigns any number of times in its entirety and not in part, but only by delivery to us of a Notice of Assignment in the form of Annex 3 hereto. We hereby agree with the drawers, endorsers, and bona fide holders of drafts drawn under and in compliance with the terms of this Letter of Credit that such drafts will be duly honored upon presentation to the drawee from our own funds and not the funds of the Applicant and shall be available to such drawers, endorsers, and bona fide holders, as the case may be, on or before noon, New York time, on the Business Day (defined below) next following the date on which such drafts are received by us. "Business Day" shall mean any day which is not a Saturday, Sunday or day on -17- which we are required or authorized by law to be closed in New York, New York. To the extent not inconsistent with the express terms hereof, this Letter of Credit shall be governed by, and construed in accordance with, the terms of the Uniform Customs and Practice for Commercial Documentary Credits (1993 Revision), I.C.C. Publication No. 500 (the "UCP 500") and as to matters not ------- governed by the UCP 500, this Letter of Credit shall be governed by and construed in accordance with the laws of the State of New York. Very truly yours, [NAME OF LETTER OF CREDIT BANK] By:________________________________________ Name: Title: -18- ANNEX 1 SIGHT DRAFT _______, 2000 For value received, at sight pay to the order of PROLOGIS TRUST, the sum of [Amount in words] [Amount in Figures] United States Dollars drawn under [Name of Letter of Credit Bank] Irrevocable Transferrable Letter of Credit No. ________ dated _________________, 2000. PROLOGIS TRUST By:______________________________________ Ned K. Anderson Title: Managing Director -19- ANNEX 2 DRAWING REQUEST _____________, 2000 [NAME AND ADDRESS OF LETTER OF CREDIT BANK] Re: Irrevocable Transferrable Letter of Credit No. ______ (the "Letter of Credit") ---------------- The undersigned (the "Beneficiary"), hereby certifies to [Name of Letter of ----------- Credit Bank] (the "Issuer") that: ------ (a) The Beneficiary is making a request for payment in lawful currency of the United States of America under Irrevocable Transferrable Letter of Credit No. _________ (the "Letter of Credit") in the amount of $ ______. (b) The Letter of Credit Amount (as defined in the Letter of Credit) as of the date hereof and prior to payment of the amount demanded in this Drawing Request is $_____. The amount requested by this Drawing Request does not exceed the Letter of Credit Amount. [(c) Demand is made for payment under the Letter of Credit as a result of the occurrence and continuation of an Event of Default (as defined in the Lease Agreement).] Please wire transfer the proceeds of the drawing to the following account of the Beneficiary at the financial institution indicated below: Unless otherwise defined, all capitalized terms used herein have the meanings provided in, or by reference in, the Letter of Credit. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Drawing Request as of the ___ day of _______________, 2000. PROLOGIS TRUST By: Name: Ned K. Anderson Title: Managing Director -20- ANNEX 3 NOTICE OF ASSIGNMENT ____________, 2000 [NAME AND ADDRESS OF LETTER OF CREDIT BANK] Re: Irrevocable Transferable Letter of Credit No. The undersigned (the "Beneficiary"), hereby notifies [Name of Letter of ----------- Credit Bank] (the "Issuer") that it has irrevocably assigned the ------ above-referenced Letter of Credit to ________ (the "Assignee") with an address -------- at ________________ effective as of the date the Issuer receives this Notice of Assignment. The Assignee acknowledges and agrees that the Letter of Credit Amount may have been reduced pursuant to the terms thereof, and that the Assignee is bound by any such reduction. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Notice of Assignment as of this _____ day of _______, 2000. PROLOGIS TRUST By: Ned K. Anderson Title: Managing Director Agreed: [Assignee] -21- EX-10.9 6 dex109.txt EMPLOYMENT OFFER LETTER WITH RANDY BAMBROUGH EXHIBIT 10.9 Feb. 27, 2001 Mr. Randall Bambrough 1868 Nakoma Court Fremont, CA 94539 Dear Mr. Bambrough: I am delighted to confirm our offer to you of employment with InterVideo Inc., a California corporation ("Company"), on the following terms: 1. Position. You will become a full-time employee of the Company, serving -------- initially in the position of Chief Financial Officer, reporting to Steve Ro, President. You understand that your responsibilities and duties may evolve over time. 2. Compensation. Your salary will be $15,000 per month ($180,000 per year on an ------------ annualized basis), payable in accordance with the Company's payroll practices. You will be eligible to receive a bonus equal to 20% of your base salary if the Company achieves certain financial and personal performance goals. 3. Benefits Policies. During your employment, you will be entitled to the ----------------- benefits generally available to employees under the Company's medical, dental and 401K savings programs, in accordance with their terms. You will also benefit from benefit policies adopted by the Company from time to time, such as sick leave, vacation, and disability policies. 4. Option Grant. Following commencement of employment, the grant of an ------------ immediately exercisable option to purchase up to 300,000 shares of Common Stock under the Company's stock option plan will be recommended to the Company's Board of Directors on your behalf. The Company will allow you to exercise your options with a five (5) year full recourse promissory note secured by your stock, subject to the Company's right to repurchase any unvested shares in the event that your employment is terminated. These and other terms associated with the option will be documented in a stock option agreement to be signed by you and the Company. All option grants are subject to approval by the Company's Board of Directors. The option exercise price will be equal to the fair market value of the shares at the date of grant. Under the plan, the option will vest as to one-eighth (1/8th) of the shares at the end of six (6) months of full-time employment, and vest as to one forty-eighth (1/48th) of such shares at the end of each full month during the following forty-two (42) month period. If your employment with the Company terminates for any reason prior to full vesting, the unvested portion shall terminate and you will have the right to exercise your option, to the extent vested, at any dine within thirty (30) days after the date of such termination at the exercise price set forth in your stock option agreement. The exercise of any options will be subject in all respects to the terms of your stock option agreement and the stock option plan. The stock option agreement will contain certain rights of first refusal by the Company in the event of any proposed transfer of shares you purchase to third parties. 5. General Policies. You agree that to the best of your ability and experience ---------------- you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you will devote all of your business time and attention to the business of the Company and the Company will be entitled to all of the benefits and profits arising from or incident to all such work, services and advice. During the term of your employment, you will not, whether directly or indirectly, render any services of a commercial or professional nature to any person or organization, whether for compensation or otherwise, without the prior written consent of the Board of Directors of the Company. 6. Proprietary Information Agreement. Upon commencement of your employment, you --------------------------------- will be required to sign the Company's standard employee proprietary information agreement relating to confidential information and the assignment of proprietary developments to the Company. 7. Proof of Right to Work. For purposes of federal immigration law, you will be ---------------------- required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. 8. Status. You must go through an introductory period" lasting ninety (90) ------ consecutive days, commencing on the date of your employment (the "Introductory Period"). The company will use this period to see if you are able to meet Company's standards. Successful completion of your Introductory Period is not a guarantee of continued employment. You also understand that your employment will be voluntary and at-wilL You are free to resign at any time, just as the Company is free to terminate your employment at any time with or without cause. However, if the Company terminates your employment for a reason other than "Cause" after the Introductory Period or if you leave the employment of the Company for "Good Reason" after the Introductory Period, the Company shall provide you with the following severance benefits: (i) continuation of your base salary for a period of twelve (12) months; (ii) payment of benefits available under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") for a period of twelve (12) months, after which you may be eligible for continued benefits at your own expense under COBRA; and (iii) if the termination occurs before a "Change of Control", you will be credited with additional vesting of the options granted to you in connection with your employment equal to fifty percent (50%) of all unvested shares. After the Introductory Period, if there is a Change of Control and the successor corporation terminates your employment within twelve (12) months of such Change in Control, all shares received pursuant to the option grant in Section 4 shall immediately vest. For the purposes of this employment letter agreement, the following terms have the following meanings: "Cause" shall mean: (i) indictment or conviction of any felony or of any crime involving dishonesty; (ii) participation in any fraud against the Company or any successor of the Company; (iii) breach of your duties to the Company or such successor, including willful misconduct, gross negligence, or -2- employee's continued substantial violations of his or her employment duties after employee has received a written demand for performance from the Company which specifically sets forth the factual basis for the Company's belief that employee has not substantially performed his or her duties; (iv) intentional damage to any property of the Company or such successor; or (v) your material breach of any element of the InterVideo's Proprietary Information and Inventions Agreement, including theft or other misappropriation of the Company's proprietary information. "Change of Control" shall mean (a) a sale of substantially all of the assets of the Company; (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation in which stockholders immediately before the merger or consolidation have, immediately after the merger or consolidation, have 50% or more of the voting power); (c) a reverse merger in which the company is the surviving corporation but the shares of the Company's common stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise (other than a reverse merger in which stockholders immediately before the merger have, immediately after the merger, have 50% or more of the voting power); or (d) any transaction or series of related transactions in which in excess of 50% of the Company's voting power is transferred. "Good Reason" shall mean any one of the following events: (i) material reduction of employee's rate of compensation; (ii) material reduction in employee's responsibilities', authority, title or duties; or (iii) material breach by the Company or any successor to the Company of any of the material provisions of this agreement. Please confirm your acceptance of this offer by signing the enclosed copy of this letter in the space provided below, and returning the signed copy to me within ten (10) days from the date of this letter. If there are any aspects of this offer that you would like clarified, please let me know. We are very pleased to make this offer to you and look forward to a mutually rewarding relationship. Very truly yours, _________________________________ Steve Ro President/CEO ACCEPTED: Name:____________________________ Date:____________________________ Start Date:______________________ -3- EX-10.10 7 dex1010.txt FORM OF NONSTATUTORY STOCK OPTION AGREEMENT EXHIBIT 10.10 INTERVIDEO, INC. FORM OF NONSTATUTORY STOCK OPTION AGREEMENT ------------------------------------------- (Immediate Exercise; 50% Vested; Acceleration upon Change in Control) Optionee: Joseph Liu Grant Date: June 15, 2001 ----------------------- ----------------------------- Vesting Commencement Date: June 15, 2001 ---------------- Shares: 50,000 ----------- Exercise Price: $2.00 ----------- InterVideo, Inc., a California corporation (the "Company"), hereby grants to the optionee named above (the "Optionee") an option to purchase the amount of shares of Common Stock set forth above (the "Shares") of the Company, at the Exercise Price set forth above and on the terms set forth herein, and in all respects subject to the terms and provisions of the Company's 1998 Stock Option Plan, as amended, (the "Plan") applicable to non-statutory stock options, which terms and provisions hereby are incorporated by reference herein. Unless the context herein otherwise requires, the terms defined in the Plan shall have the same meanings herein. 1. Nature of the Option. This Option is intended to be a non-statutory -------------------- stock option and is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or otherwise to qualify for any special tax benefits to Optionee. 2. Date of Grant; Term of Option. This Option is granted as of the Grant ----------------------------- Date set forth above, and it may not be exercised later than ten (10) years from such date. 3. Option Exercise Price. The exercise price for this Option is the ---------------------- Exercise Price per Share set forth above, which price is not less than eighty-five percent (85%) of the fair market value thereof on the date this Option was granted (or not less than one hundred ten percent (110%) of the fair market value thereof on the date this Option was granted, if the Optionee owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parents or subsidiaries). 4. Exercise of Option. This Option shall be exercisable during its term ------------------ only in accordance with the terms and provisions of the Plan and this Option as follows: (a) Right to Exercise. This Option shall be exercisable in full or in ----------------- part immediately upon the Grant Date, provided, however, that Shares which have not vested under Section 4(d) below shall be subject to the Repurchase Option set forth in Section 10(a) below, and all Shares shall be subject to all other transfer restrictions set forth in Section 10 below. (b) Method of Exercise. This Option shall be exercisable by written ------------------ notice which shall state the election to exercise this Option, the number of Shares in respect to which this Option is being exercised and such other representations and agreements as to Optionee's investment intent with respect to such Shares as may be required by the Company hereunder or pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company or such other person as may be designated by the Company. The written notice shall be accompanied by payment of the purchase price and an executed stock purchase agreement in the form attached as Exhibit A (the "Stock Purchase ---------- Agreement"). Payment of the purchase price shall be made by check or promissory note in the form as attached to the Stock Purchase Agreement. The certificate or certificates for the Shares as to which this Option shall be exercised shall be registered in the name of Optionee and shall carry the legends set forth in the Plan, the Stock Purchase Agreement and as required under applicable law. (c) Restrictions on Exercise. This Option may not be exercised if the ------------------------- issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. (d) Vesting. The Shares shall vest ("Vested Shares") as to one-half ------- (1/2) of such Shares as of the Vesting Commencement Date and thereafter as to 1/96 of the Shares at the end of each successive one-month period of Continuous Status as an Employee of the Company until the Shares are fully vested. The vesting shall occur regardless of whether or not this Option has been exercised in whole or in part. Until the Shares have vested, Optionee shall have no right to transfer or to convey such Shares. (e) Vesting Acceleration. Notwithstanding the vesting provisions of -------------------- Section 4(d), on the occurrence of the merger or consolidation of the Company into, or the sale of all or substantially all of the Company's assets or stock to, another corporation, all the Shares shall vest unless at least fifty-one percent (51%) of the capital stock of the successor corporation is owned by persons who are holders of shares of capital stock of the Company immediately before such merger, consolidation or sale. 5. Investment Representations. In connection with the acquisition of this -------------------------- Option, Optionee represents and warrants as follows: (a) Investment Intent. Optionee is acquiring this Option, and upon ----------------- exercise of this Option, Optionee will be acquiring the Shares for investment for Optionee's own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. 2 (b) Protection of Interests. Optionee, by reason of Optionee's ----------------------- business or financial experience, has the capacity to evaluate the merits and risks of purchasing Common Stock of the Company and to make an informed investment decision with respect thereto and to protect Optionee's interests in connection with the acquisition of this Option and the Shares. 6. Termination of Status as an Employee. If Optionee ceases to serve as ------------------------------------ an Employee for any reason other than death or disability and thereby terminates Optionee's Continuous Status as an Employee, Optionee shall have the right to exercise this Option at any time within thirty (30) days after the date of such termination to the extent that Optionee was entitled to exercise this Option at the date of such termination. If Optionee ceases to serve as an Employee due to death or disability, this Option may be exercised at any time within six (6) months after the date of death or termination of employment due to disability, in the case of death, by Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance, or, in the case of disability, by Optionee, but in any case only to the extent Optionee was entitled to exercise this Option at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of termination, or to the extent this Option is not exercised within the time specified herein, this Option shall terminate. Notwithstanding the foregoing, this Option shall not be exercisable after the expiration of the term set forth in Section 2 hereof. 7. Withholding Tax Liability. The Company reserves the right to withhold, ------------------------- in accordance with any applicable laws, from any compensation or other consideration payable to the Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of this Option or the sale or other disposition of the Shares issued upon exercise of this Option, and if such compensation or consideration is insufficient, the Company may require Optionee to pay to the Company an amount sufficient to cover such withholding tax liability. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the Shares acquired upon exercise of an incentive stock option. 8. Nontransferability of Option. This Option may not be sold, pledged, ---------------------------- assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law or otherwise, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of Optionee only by such Optionee. Subject to the foregoing and the terms of the Plan, the terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 9. Continuation of Employment. Neither this Option or the Plan nor any -------------------------- Option granted thereunder shall confer upon any Optionee any right to continue in the employment of the Company, its Parent, Subsidiary or a successor corporation or limit in any respect the right of the Company or any such corporations to discharge the Optionee at any time, with or without cause and with or without notice. 10. Limitations on Transfer. In addition to any other limitation on ----------------------- transfer created by applicable securities laws, Optionee will not sell, transfer, assign, encumber or otherwise dispose 3 of (including, without limitation by operation of law) any of Optionee's right, title or interest in and to all or any portion of the Shares except as provided in this Section: (a) Repurchase Option. In the event of termination of the Optionee's ----------------- full time employment with the Company for any reason, with or without cause, whether voluntarily or involuntarily, including by reason of death or disability (herein referred to as the "Termination"), upon the date of such Termination the Company shall have an irrevocable and exclusive option (the "Repurchase Option") to repurchase that number of Shares by which the aggregate number of Shares purchased by Optionee pursuant to this Option exceeds the number of Vested Shares, as determined upon the date of such Termination ("Unvested Shares"). The Company shall pay to Optionee the Original Issuance Price per Share multiplied by the number of Unvested Shares as to which the Company exercises the Repurchase Option (as adjusted for stock splits, stock dividends, combinations and the like) (the "Repurchase Price"). Within sixty (60) days following the last day upon which Optionee may purchase Shares pursuant to this Option, the Company shall notify Optionee as to whether it (or its assignee) wishes to purchase all or a portion of the Shares subject to the Repurchase Option. The Company shall obtain the consent of Optionee for the repurchase of a portion but not all of Optionee's Shares subject to the Repurchase Option. If the Company (or its assignee) elects to purchase such Shares, it shall notify Optionee in writing of its (or its assignee's) intention to purchase all or a portion of such Shares) at the Repurchase Price, and either (i) set a date and location for the closing of the transaction not later than thirty (30) days from the date of such notice, at which time the Company (or its assignee) shall tender payment for such Shares, or (ii) close the transaction by mail by including payment for such Shares with the Company's notice to Optionee. Payment for the Shares may be in the form of cash, check, cancellation of all or a portion of Optionee's indebtedness to the Company or any combination thereof. At such closing, the certificates representing the Shares so purchased shall be delivered to the Company and canceled (or the Shares transferred to the Company's assignee, if applicable) or, in the case of payment by the Company (or its assignee) by mail, such certificates shall be deemed canceled (or the Shares transferred to the Company's assignee, if applicable) as of the date of the mailing of the Company's notice and, thereafter, shall be promptly returned by Optionee to the Company by certified or registered mail. Shares subject to the Repurchase Option as to which the Company (or its assignee) has not exercised the Repurchase Option within sixty (60) days following the last day upon which Optionee may purchase Shares pursuant to this Option shall be released from the Repurchase Option. (b) Right of First Refusal. In the event Optionee desires (or is ---------------------- ptionee shall first offer such Shares for sale to the Company (or its assignee) at the same price, and upon the same terms (or reasonably similar terms) as those on which the Optionee is disposing of said Shares ("Right of First Refusal"). Optionee shall offer such Shares to the Company by delivering a written notice (the "Notice") to the Company stating (i) Optionee's bona fide intention to sell or otherwise transfer such Shares, (ii) the number of such Shares to be sold or otherwise transferred, (iii) the price for which Optionee proposes to sell such Shares and all additional terms and conditions, if any, of the sale or transfer and (iv) the name of the proposed buyer or transferee. Optionee shall 4 attach to the Notice a copy of the written offer, if any, of the sale or transfer. In the event of a transfer not involving a sale of such Shares for a specific sum of money, or if, in the sole judgment of the Company's Board of Directors, the proposed transfer does not involve a price for the Shares negotiated by the Optionee and Optionee's proposed transferee in a bona fide "arm's length transaction," the price of the Shares shall be determined by the Company's Board of Directors in the manner specified in Section 10(d) below. Within thirty (30) days after the Company's receipt of the Notice (the "Acceptance Period"), the Company (or its assignee) may elect to purchase all of the Shares (or, with the consent of the Optionee, a portion thereof) to which the Notice refers, at the price per share (or at the fair market value of such Shares determined pursuant to Section 10(d) hereof in the case of a transfer other than a bona fide arms-length transaction) and on the same terms and conditions (or terms and conditions as similar as reasonably possible) as set forth in the Notice. If the Company (or its assignee) elects to purchase such Shares hereunder, it shall notify Optionee either orally or in writing during the Acceptance Period of its intention to purchase all of such Shares (or, with the consent of Optionee, a portion thereof) and either (i) set a date and location for the closing of the transaction on or prior to the last day of the Acceptance Period, or at such later date as the parties may otherwise agree, at which time the Company (or its assignee) shall tender payment for the Shares or (ii) include payment for the Shares with the Company's notice to Optionee, if in writing, or deliver it to Optionee under separate cover. At such closing, the certificates representing the Shares so purchased shall be delivered to the Company and canceled or, in the case of payment by the Company by mail, such certificates shall be deemed to be canceled upon the date of such mailing of the Company's payment and, thereafter, shall be promptly returned by Optionee to the Company by certified or registered mail. Optionee hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Shares as to which the Right of First Refusal has been exercised from Optionee to the Company (or its assignee). Optionee further authorizes the Company to refuse, or to cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. If the Company (or its assignee) does not elect to purchase the Shares to which the Notice refers, Optionee may sell or otherwise transfer the Shares to the third party named in the Notice at the price and on the terms and conditions specified in the Notice or at a higher price, provided that such sale or transfer is consummated within sixty (60) days from either (i) the lapse of the Acceptance Period or (ii) the date of the Company's notice, whether written or oral, advising Optionee that it does not intend to purchase the Shares hereunder, whichever occurs first in time and provided, further, that any such sale or transfer is in accordance with all of the terms and conditions set forth in this Agreement. In the event the Shares are not disposed of by the Optionee within said 60-day period, such Shares shall once again be subject to the Right of First Refusal herein provided. (c) Involuntary Transfer. In the event of any transfer by operation -------------------- of law or other involuntary transfer (the "Involuntary Transfer"), of all, or a portion, of the Shares, the Company shall have an option to purchase all of the Shares transferred (the "Involuntary Transfer Option"). Upon such transfer, the Optionee and person acquiring the Shares shall 5 promptly notify in writing the Secretary of the Company of such transfer. The Company (or its assignee) shall notify Optionee and the person acquiring the Shares as to whether the Company (or its assignee) wishes to purchase the Shares pursuant to the Involuntary Transfer Option within thirty (30) days after receipt by the Company of the written notice of the involuntary transfer of the Shares. If the Company (or its assignee) elects to purchase said Shares hereunder, it shall set a date for the closing of the transaction at a place specified by the Company (or its assignee) not later than thirty (30) days after receipt by the Company of the written notice of the involuntary transfer of the Shares, or at such later date as the parties may otherwise agree. At such closing, the Company (or its assignee) shall tender payment for the Shares and the certificates representing the Shares so purchased shall be canceled. Optionee hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Shares as to which the Involuntary Transfer Option has been exercised from the Optionee to the Company (or its assignee). Optionee further authorizes the Company to refuse, or to cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. (d) Determination of Price. With respect to Shares to be ---------------------- transferred pursuant to the Right of First Refusal where the price is not determined as a result of a bona fide arms-length transaction by the Optionee under Section 10(b) or the Involuntary Transfer Option under Section 10(c), the price per share shall be a price set by the Board of Directors of the Company that will reflect the then current fair market value of the Shares, as determined by the Board of Directors in good faith after giving consideration to the factors set forth in Section 260.140.50 of Title 10 of the California Code of Regulations. (e) Intra-family Transfers. Optionee shall have the right, ---------------------- at any time and from time to time during Optionee's lifetime or upon Optionee's death, to transfer all or any portion of the Vested Shares (the "Transferred Family Shares") to Optionee's spouse, any of Optionee's or Optionee's spouse's issue, ancestors or descendants, or a trust for the sole benefit of Optionee, Optionee's spouse, any of Optionee's issue, ancestors or descendants (any such individual or trust is hereinafter referred to as an "Intra-family Transferee"), provided that the Intra-family Transferee receiving the Transferred Family Shares executes a consent to be bound by the terms of this Agreement with respect to the Transferred Family Shares. The Transferred Family Shares shall be and remain subject to all of the terms and conditions of this Agreement as were applicable to such Shares immediately prior to their transfer pursuant to this Section 10(e); without limiting the foregoing, the obligations hereunder arising out of the possession or ownership of such Transferred Family Shares shall be binding upon the respective Intra-family Transferees. For purposes of exercising any rights under this Agreement, the Company's right to purchase the Shares of Optionee shall extend to any Shares owned by an Intra-family Transferee. (f) Restriction on Alienation. Any sale, transfer, ------------------------- encumbrance, or other disposition or purported sale, transfer, encumbrance or disposition of any of the Shares by Optionee, whether voluntarily, by operation of law or otherwise, shall be null and void unless the terms, conditions and provisions of this Agreement are strictly complied with. Optionee further authorizes the Company to refuse, or cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. 6 (g) Assignment by Company. The Company's Repurchase Option, --------------------- Right of First Refusal and Involuntary Transfer Option may be assigned in whole or in part to any shareholder or shareholders of the Company. (h) Obligations Binding Upon Transferees. All transferees of ------------------------------------ Shares or any interest therein will receive and hold such Shares or interests subject to the provisions of this Agreement, including the Company's Repurchase Option, Right of First Refusal and Involuntary Transfer Option. Any sale or transfer of the Shares shall be void unless the provisions of this Agreement are met. (i) Termination of Rights. The Right of First Refusal and --------------------- Involuntary Transfer Option granted the Company by this Section 10 shall terminate at such time as a public market exists for the Company's Common Stock (or any other stock issued to purchasers in exchange for the Shares purchased under this Agreement). For the purpose of this Agreement, a "public market" shall be deemed to exist if the Common Stock is listed on a national securities exchange (as that term is used in the Securities Exchange Act of 1934, as amended), or the Common Stock is traded on the over-the-counter market and prices are published on business days in a recognized financial journal. (j) Indebtedness. Any payment by the Company for purchase of ----------- shares from Optionee, may be made by cancellation of any indebtedness to Company from Optionee. (k) Legends. All certificates representing any Shares of the ------- Company purchased upon exercise of the Options shall have endorsed thereon the following legends, or substantially similar legends, in addition to any legends required by state securities laws, unless in the opinion of counsel such legends are no longer necessary: (1) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. (2) THESE SECURITIES ARE SUBJECT TO CERTAIN RESTRICTIONS, INCLUDING A RIGHT OF FIRST REFUSAL OF THE COMPANY, AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (l) Market Standoff Agreement. The Optionee, if requested by ------------------------- the Company 7 and an underwriter of Common Stock (or other securities) of the Company, agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by Optionee during the period not to exceed one hundred and eighty (180) days as requested by the managing underwriter following the effective date of a registration statement of the Company filed under the Securities Act (as hereafter defined), provided that all officers and directors of the Company are required to enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or other securities) subject to the foregoing restriction until the end of such period. 11. The Plan. This Option is subject to, and the Company and Optionee -------- agree to be bound by, all of the terms and conditions of the Plan as such Plan may be amended from time to time in accordance with the terms thereof, provided that no such amendment shall deprive Optionee, without Optionee's consent, of this Option or any rights hereunder. Pursuant to the Plan, the Board of Directors of the Company is authorized to adopt rules and regulations not inconsistent with the Plan as it shall deem appropriate and proper. A copy of the Plan in its present form is available for inspection during business hours by Optionee or the persons entitled to exercise this Option at the Company's principal office. 8 12. Entire Agreement; Amendment. This Agreement contains the entire --------------------------- understanding between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous written or oral negotiations and agreements between them regarding the subject matter hereof. This Agreement may be amended only in writing signed by each of the parties hereto. InterVideo, Inc. By ________________________________ Name: Title: 9 Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that Optionee has read and is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors or the Committee upon any questions arising under the Plan. Date: ____________________________ OPTIONEE By ______________________________ Joseph Liu Address: 10 Exhibit A --------- Stock Purchase Agreement -11- EX-10.11 8 dex1011.txt NONSTATUTORY STOCK OPTION AGREEMENT FOR HENRY SHAW EXHIBIT 10.11 INTERVIDEO, INC. NONSTATUTORY STOCK OPTION AGREEMENT ----------------------------------- (50% immediately vested; acceleration upon change in control) InterVideo, Inc., a California corporation (the "Company") hereby grants to Henry Shaw (the "Optionee") an option to purchase a total of Ten Thousand (10,000) shares of Common Stock (the "Shares") of the Company, at the price and on the terms set forth herein, and in all respects subject to the terms and provisions of the Company's 1998 Stock Option Plan (the "Plan") applicable to incentive stock options, which terms and provisions hereby are incorporated by reference herein. Unless the context herein otherwise requires, the terms defined in the Plan shall have the same meanings herein. 1. Nature of the Option. This Option is intended to be an nonstatutory -------------------- stock option and is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or otherwise to qualify for any special tax benefits to Optionee. 2. Date of Grant; Term of Option. This Option is granted as of the grant ----------------------------- date set forth on the signature page of this Agreement, and it may not be exercised later than ten (10) years from such date. 3. Option Exercise Price. The exercise price for this Option is $2.00 per --------------------- Share, which price is not less than eighty-five percent (85%) of the fair market value thereof on the date this Option was granted (or not less than one hundred ten percent (110%) of the fair market value thereof on the date this Option was granted, if the Optionee owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parents or subsidiaries). 4. Exercise of Option. This Option shall be exercisable during its term ------------------ only in accordance with the terms and provisions of the Plan and this Option as follows: (a) Right to Exercise. This Option shall vest and be exercisable, ----------------- cumulatively, during its term as to one half (1/2) of the Shares as of the Vesting Commencement Date (as set forth on the signature page hereof) and thereafter as to 1/96 of the Shares at the end of each successive one-month period of Continuous Status as an Employee of the Company until the Shares are fully vested. (b) Method of Exercise. This Option shall be exercisable by written ------------------ notice which shall state the election to exercise this Option, the number of Shares in respect to which this Option is being exercised and such other representations and agreements as to Optionee's investment intent with respect to such Shares as may be required by the Company hereunder or -1- pursuant to the provisions of the Plan. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Secretary of the Company or such other person as may be designated by the Company. The written notice shall be accompanied by payment of the purchase price and, at the Company's option, either (i) an executed investment representation statement acceptable to the Company (the "Investment Representation Statement") or (ii) an executed stock purchase agreement acceptable to the Company (the "Stock Purchase Agreement"). Payment of the purchase price shall be made by check or such other consideration and method of payment authorized by the Board pursuant to the Plan. The certificate or certificates for the Shares as to which this Option shall be exercised shall be registered in the name of Optionee and shall carry the legends set forth in the Plan, the Stock Purchase Agreement or the Investment Representation Statement, as applicable, and/or as required under applicable law. (c) Restrictions on Exercise. This Option may not be exercised if the ------------------------ issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. (d) Vesting Acceleration. Notwithstanding the vesting provisions of -------------------- Section 4(a), on the occurrence of the merger or consolidation of the Company into, or the sale of all or substantially all of the Company's assets or stock to, another corporation, all the Shares shall vest and be immediately exercisable unless at least fifty-one percent (51%) of the capital stock of the successor corporation is owned by persons who are holders of shares of capital stock of the Company immediately before such merger, consolidation or sale. 5. Investment Representations. In connection with the acquisition of this -------------------------- Option, Optionee represents and warrants as follows: (a) Investment Intent. Optionee is acquiring this Option, and upon ----------------- exercise of this Option, Optionee will be acquiring the Shares for investment for Optionee's own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. (b) Protection of Interests. Optionee, by reason of Optionee's ----------------------- business or financial experience, has the capacity to evaluate the merits and risks of purchasing Common Stock of the Company and to make an informed investment decision with respect thereto and to protect Optionee's interests in connection with the acquisition of this Option and the Shares. 6. Termination of Status as a Consultant. If Optionee ceases to serve as ------------------------------------- a Consultant for any reason other than death or disability and thereby terminates Optionee's Continuous Status as a Consultant, Optionee shall have the right to exercise this Option at any time within thirty (30) days after the date of such termination to the extent that Optionee was entitled to exercise this Option at the date of such termination. If Optionee ceases to serve as a Consultant due to death or disability, this Option may be exercised at any time within six (6) -2- months after the date of death or termination of consulting relationship due to disability, in the case of death, by Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance, or, in the case of disability, by Optionee, but in any case only to the extent Optionee was entitled to exercise this Option at the date of such termination. To the extent that Optionee was not entitled to exercise this Option at the date of termination, or to the extent this Option is not exercised within the time specified herein, this Option shall terminate. Notwithstanding the foregoing, this Option shall not be exercisable after the expiration of the term set forth in paragraph 2 hereof. 7. Withholding Tax Liability. The Company reserves the right to withhold, ------------------------- in accordance with any applicable laws, from any compensation or other consideration payable to the Optionee any taxes required to be withheld by federal, state or local law as a result of the grant or exercise of this Option or the sale or other disposition of the Shares issued upon exercise of this Option, and if such compensation or consideration is insufficient, the Company may require Optionee to pay to the Company an amount sufficient to cover such withholding tax liability. The Optionee agrees to notify the Company immediately in the event of any disqualifying disposition (within the meaning of Section 421(b) of the Code) of the Shares acquired upon exercise of an incentive stock option. 8. Nontransferability of Option. This Option may not be sold, pledged, ---------------------------- assigned, hypothecated, gifted, transferred or disposed of in any manner either voluntarily or involuntarily by operation of law or otherwise, other than by will or by the laws of descent or distribution, and may be exercised during the lifetime of Optionee only by such Optionee. Subject to the foregoing and the terms of the Plan, the terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 9. Continuation of Consulting Relationship. Neither this Option or the --------------------------------------- Plan nor any Option granted thereunder shall confer upon any Optionee any right to continue in the consulting relationship of the Company, its Parent, Subsidiary or a successor corporation or limit in any respect the right of the Company or any such corporations to discharge the Optionee at any time, with or without cause and with or without notice. 10. Limitations on Transfer. In addition to any other limitation on ----------------------- transfer created by applicable securities laws, Optionee will not sell, transfer, assign, encumber or otherwise dispose of (including, without limitation by operation of law) any of Optionee's right, title or interest in and to all or any portion of the Shares except as provided in this Section: (a) Right of First Refusal. In the event Optionee desires (or is ---------------------- required) to sell or transfer in any manner all or a portion of the Shares, the Optionee shall first offer such Shares for sale to the Company (or its assignee) at the same price, and upon the same terms (or reasonably similar terms) as those on which the Optionee is disposing of said Shares ("Right of First Refusal"). Optionee shall offer such Shares to the Company by delivering a written notice (the "Notice") to the Company stating (i) Optionee's bona fide intention to sell or otherwise transfer such Shares, (ii) the number of such Shares to be sold or otherwise transferred, (iii) the price for which Optionee proposes to sell such Shares and all additional terms and conditions, if -3- any, of the sale or transfer and (iv) the name of the proposed buyer or transferee. Optionee shall attach to the Notice a copy of the written offer, if any, of the sale or transfer. In the event of a transfer not involving a sale of such Shares for a specific sum of money, or if, in the sole judgment of the Company's Board of Directors, the proposed transfer does not involve a price for the Shares negotiated by the Optionee and Optionee's proposed transferee in a bona fide "arm's length transaction," the price of the Shares shall be determined by the Company's Board of Directors in the manner specified in Section 10(c) below. Within thirty (30) days after the Company's receipt of the Notice (the "Acceptance Period"), the Company (or its assignee) may elect to purchase all of the Shares (or, with the consent of the Optionee, a portion thereof) to which the Notice refers, at the price per share (or at the fair market value of such Shares determined pursuant to paragraph 10(c) hereof in the case of a transfer other than a bona fide arms-length transaction) and on the same terms and conditions (or terms and conditions as similar as reasonably possible) as set forth in the Notice. If the Company (or its assignee) elects to purchase such Shares hereunder, it shall notify Optionee either orally or in writing during the Acceptance Period of its intention to purchase all of such Shares (or, with the consent of Optionee, a portion thereof) and either (i) set a date and location for the closing of the transaction on or prior to the last day of the Acceptance Period, or at such later date as the parties may otherwise agree, at which time the Company (or its assignee) shall tender payment for the Shares or (ii) include payment for the Shares with the Company's notice to Optionee, if in writing, or deliver it to Optionee under separate cover. At such closing, the certificates representing the Shares so purchased shall be delivered to the Company and canceled or, in the case of payment by the Company by mail, such certificates shall be deemed to be canceled upon the date of such mailing of the Company's payment and, thereafter, shall be promptly returned by Optionee to the Company by certified or registered mail. Optionee hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Shares as to which the Right of First Refusal has been exercised from Optionee to the Company (or its assignee). Optionee further authorizes the Company to refuse, or to cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. If the Company (or its assignee) does not elect to purchase the Shares to which the Notice refers, Optionee may sell or otherwise transfer the Shares to the third party named in the Notice at the price and on the terms and conditions specified in the Notice or at a higher price, provided that such sale or transfer is consummated within sixty (60) days from either (i) the lapse of the Acceptance Period or (ii) the date of the Company's notice, whether written or oral, advising Optionee that it does not intend to purchase the Shares hereunder, whichever occurs first in time and provided, further, that any such sale or transfer is in accordance with all of the terms and conditions set forth in this Agreement. In the event the Shares are not disposed of by the Optionee within said 60-day period, such Shares shall once again be subject to the Right of First Refusal herein provided. (b) Involuntary Transfer. In the event of any transfer by operation -------------------- of law or other involuntary transfer (the "Involuntary Transfer"), of all, or a portion, of the Shares, the Company shall have an option to purchase all of the Shares transferred (the "Involuntary Transfer Option"). Upon such transfer, the Optionee and person acquiring the Shares shall promptly notify in writing the Secretary of the Company of such transfer. The Company (or its -4- assignee) shall notify Optionee and the person acquiring the Shares as to whether the Company (or its assignee) wishes to purchase the Shares pursuant to the Involuntary Transfer Option within thirty (30) days after receipt by the Company of the written notice of the involuntary transfer of the Shares. If the Company (or its assignee) elects to purchase said Shares hereunder, it shall set a date for the closing of the transaction at a place specified by the Company (or its assignee) not later than thirty (30) days after receipt by the Company of the written notice of the involuntary transfer of the Shares, or at such later date as the parties may otherwise agree. At such closing, the Company (or its assignee) shall tender payment for the Shares and the certificates representing the Shares so purchased shall be canceled. Optionee hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Shares as to which the Involuntary Transfer Option has been exercised from the Optionee to the Company (or its assignee). Optionee further authorizes the Company to refuse, or to cause its Transfer Agent to refuse, to transfer or record any Shares to be transferred in violation of this Agreement. (c) Determination of Price. With respect to Shares to be transferred ---------------------- pursuant to the Right of First Refusal where the price is not determined as a result of a bona fide arms-length transaction by the Optionee under paragraph 10(a) or the Involuntary Transfer Option, the price per share shall be a price set by the Board of Directors of the Company that will reflect the then current fair market value of the Shares, as determined by the Board of Directors in good faith after giving consideration to the factors set forth in Section 260.140.50 of Title 10 of the California Code of Regulations or, upon the request of the Optionee, by an independent appraiser acceptable to both the Company and the Optionee; provided, that the Optionee shall be required to bear one-half of the cost of such independent appraiser. (d) Intra-family Transfers. Notwithstanding anything to the contrary ---------------------- contained herein, Optionee shall have the right, at any time and from time to time during Optionee's lifetime or upon Optionee's death, to transfer all or any portion of Optionee's Shares (the "Transferred Family Shares") to Optionee's spouse, any of Optionee's issue, ancestors or descendants, or a trust for the sole benefit of Optionee, Optionee's spouse, any of Optionee's issue, ancestors or descendants (any such individual or trust is hereinafter referred to as an "Intra-family Transferee"), provided that the Intra-family Transferee receiving the Transferred Family Shares executes a consent to be bound by the terms of this Agreement with respect to the Transferred Family Shares. The Transferred Family Shares shall be and remain subject to all of the terms and conditions of this Agreement as were applicable to such Shares immediately prior to their transfer pursuant to this Section 10(e); without limiting the foregoing, the obligations hereunder arising out of the possession or ownership of such Transferred Family Shares shall be binding upon the respective Intra-family Transferees. For purposes of exercising any rights under this Agreement, the Company's right to purchase the Shares of Optionee shall extend to any Shares owned by an Intra-family Transferee. (e) Restriction on Alienation. Any sale, transfer, encumbrance, or ------------------------- other disposition or purported sale, transfer, encumbrance or disposition of any of the Shares by Optionee, whether voluntarily, by operation of law or otherwise, shall be null and void unless the terms, conditions and provisions of this Agreement are strictly complied with. Optionee further authorizes the Company to refuse, or cause its Transfer Agent to refuse, to transfer or record any -5- Shares to be transferred in violation of this Agreement. (f) Assignment by Company. The Company's Right of First Refusal and --------------------- Involuntary Transfer Option may be assigned in whole or in part to any shareholder or shareholders of the Company. (g) Obligations Binding Upon Transferees. All transferees of Shares ------------------------------------ or any interest therein will receive and hold such Shares or interests subject to the provisions of this Agreement, including the Company's Right of First Refusal and Involuntary Transfer Option. Any sale or transfer of the Shares shall be void unless the provisions of this Agreement are met. (h) Termination of Rights. The Right of First Refusal and Involuntary --------------------- Transfer Option granted the Company by this paragraph 10 shall terminate at such time as a public market exists for the Company's Common Stock (or any other stock issued to purchasers in exchange for the Shares purchased under this Agreement). For the purpose of this Agreement, a "public market" shall be deemed to exist if the Common Stock is listed on a national securities exchange (as that term is used in the Securities Exchange Act of 1934, as amended), or the Common Stock is traded on the over-the-counter market and prices are published on business days in a recognized financial journal. (i) Indebtedness. Any payment by the Company for purchase of shares ------------ from Optionee, may be made by cancellation of any indebtedness to Company from Optionee. (j) Legends. All certificates representing any Shares of the Company ------- purchased upon exercise of the Options shall have endorsed thereon the following legends, or substantially similar legends, in addition to any legends required by state securities laws, unless in the opinion of counsel such legends are no longer necessary: (1) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. (2) THESE SECURITIES ARE SUBJECT TO CERTAIN RESTRICTIONS, INCLUDING A RIGHT OF FIRST REFUSAL OF THE COMPANY, AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (k) Market Standoff Agreement. The Optionee, if requested by the ------------------------- Company and an underwriter of Common Stock (or other securities) of the Company, agrees not -6- to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by Optionee during the period not to exceed one hundred and eighty (180) days as requested by the managing underwriter following the effective date of a registration statement of the Company filed under the Securities Act (as hereafter defined), provided that all officers and directors of the Company are required to enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or other securities) subject to the foregoing restriction until the end of such period. 11. The Plan. This Option is subject to, and the Company and Optionee -------- agree to be bound by, all of the terms and conditions of the Plan as such Plan may be amended from time to time in accordance with the terms thereof, provided that no such amendment shall deprive Optionee, without Optionee's consent, of this Option or any rights hereunder. Pursuant to the Plan, the Board of Directors of the Company is authorized to adopt rules and regulations not inconsistent with the Plan as it shall deem appropriate and proper. A copy of the Plan in its present form is available for inspection during business hours by Optionee or the persons entitled to exercise this Option at the Company's principal office. 12. Entire Agreement; Amendment. This Agreement contains the entire --------------------------- understanding between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous written or oral negotiations and agreements between them regarding the subject matter hereof. This Agreement may be amended only in writing signed by each of the parties hereto. Grant Date: June 15, 2001 ------------- Vesting Commencement Date: June 15, 2001 ------------- InterVideo, Inc. By: _________________________ Title: _________________________ -7- Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that Optionee has read and is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors or the Committee upon any questions arising under the Plan. Date: _______________ ______________________________ Signature of Optionee ______________________________ Address ______________________________ City State Zip Code -8- THIS OPTION AND THE SECURITIES WHICH MAY BE PURCHASED UPON EXECUTION OF THIS OPTION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE, TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE, TRANSFER OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES WHICH MAY BE PURCHASED UPON EXERCISE OF THIS OPTION MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A STOCK PURCHASE AGREEMENT TO BE ENTERED INTO BETWEEN THE HOLDER OF THIS OPTION AND THE COMPANY UPON EXERCISE OF THIS OPTION, A COPY OF WHICH AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY. -9- EX-21.1 9 dex211.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Subsidiaries InterVideo, Taiwan, Inc., incorporated in accordance with the Company Law of the Republic of China 1 EX-23.1 10 dex231.txt CONSENT OF ARTHUR ANDERSEN Exhibit 23.1 - -------------------------------------------------------------------------------- Consent of independent public accountants As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. /s/ ARTHUR ANDERSEN LLP San Francisco, California January 11, 2002 - -------------------------------------------------------------------------------- EX-23.2 11 dex232.txt CONSENT OF TN SOONG & CO. Exhibit 23.2 - -------------------------------------------------------------------------------- Consent of independent public accountants As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. /s/ TN Soong & Co. A Member Firm of Andersen Worldwide, SC Taipei, Taiwan, the Republic of China January 11, 2002 - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----