-----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, SNjUJMeaRWPqdv0SnUj0Tg7OND9WtiBV4ikXHmHlGAfQfVTXTkgyYPMFfHf7HeVl FdNfESc57w1LiOYnWHcYRw== 0001012870-02-001980.txt : 20020426 0001012870-02-001980.hdr.sgml : 20020426 ACCESSION NUMBER: 0001012870-02-001980 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERVIDEO INC CENTRAL INDEX KEY: 0001114084 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943300070 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-76640 FILM NUMBER: 02623318 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/A 1 ds1a.txt AMENDMENT NO. 3 TO FORM S-1 As filed with the Securities and Exchange Commission on April 26, 2002 Registration No. 333-76640 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- AMENDMENT NO. 3 TO 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 Industrial Identification Number) Incorporation or Classification 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. Brent D. Johnson, Esq. Ritu K. Tariyal, Esq. Brobeck, Phleger & Harrison LLP Barbara A. Wiseman, Esq. 2000 University Ave. Wilson Sonsini Goodrich & Rosati, P.C. East Palo Alto, CA 94303 650 Page Mill Road (650) 331-8000 Palo Alto, CA 94304 (650) 493-9300 ----------------- 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 Proposed Number of Maximum Maximum Title of Each Class of Securities to be Shares Offering Price Aggregate Amount of Registered Registered (1) Per Share (2) Offering Price (2) Registration Fee (3) - ------------------------------------------------------------------------------------------------------------------ Common Stock $0.001 par value............... 4,025,000 $14.00 $56,350,000 $5,185 - ------------------------------------------------------------------------------------------------------------------
(1) Includes 525,000 shares subject to the underwriters' over-allotment option. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. (3) A registration fee of $12,369 was paid with the initial filing. The registration fee paid with the initial filing was calculated using a fee rate of .000239 of the aggregate offering amount at that time, $51,750,000. Subsequent to such filing, the fee rate was retroactively reduced to .000092, resulting in a reduced fee of $4,761. The listed registration fee of $5,185 includes a fee of $424 relating to an increase in the aggregate offering amount of $4,600,000. ----------------- 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) April 26, 2002 - -------------------------------------------------------------------------------- 3,500,000 Shares [LOGO] "Inter Video" Common Stock - -------------------------------------------------------------------------------- We are selling 3,500,000 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 $12.00 and $14.00 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 6. 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 525,000 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 Raymond James EDGAR DESCRIPTION OF INSIDE FRONT COVER ARTWORK The InterVideo logo appears in the middle of the page. Images of InterVideo's WinDVD, WinDVR and WinDTV products appear above the logo. Images of InterVideo's WinCoder, WinRip and WinProducer products appear below the logo. - -------------------------------------------------------------------------------- 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.................................. 42 The offering........................... 4 Management................................ 54 Summary consolidated financial data.... 5 Related party transactions................ 64 Risk factors........................... 6 Principal stockholders.................... 66 Forward-looking information............ 21 Description of capital stock.............. 67 Use of proceeds........................ 22 Shares eligible for future sale........... 70 Dividend policy........................ 22 Underwriting.............................. 72 Capitalization......................... 23 Legal matters............................. 74 Dilution............................... 24 Experts................................... 74 Selected consolidated financial data... 25 Where you can find more information....... 74 Management's discussion and analysis of Index to consolidated financial statements F-1 financial condition and results of operations........................... 27
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, consumer electronics manufacturers and PC peripherals manufacturers worldwide and offer our software in up to 27 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 reduce the cost and increase the flexibility of their products, 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 we believe 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, integrated multimedia software solution for the PC. Our broad suite of software provides OEMs and consumers with a single solution 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 layered architecture 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 in a short time frame, which we believe 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 joint 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 websites. ... Leverage existing and prospective OEM relationships to promote adoption of our new products. We plan to leverage our strong market position and broad, 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 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, and intend to maintain and enhance these relationships. 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 for our business in Europe, Asia and elsewhere. We intend to continue to target OEMs and end users outside the United States to capitalize on these opportunities. 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 website is www.intervideo.com. The information found on our website is not a part of this prospectus. 2 RECENT OPERATING RESULTS The following table sets forth selected unaudited quarterly consolidated financial information for the quarter ended March 31, 2002. The unaudited quarterly consolidated financial information 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 this period. Historical results are not necessarily indicative of the results to be expected in the future, and results of this period are not necessarily indicative of our results of operations for the entire year.
Three months ended March 31, 2002 (unaudited) (in thousands) - ----------------------------------------------------------------------------------- Revenue......................................................... $10,860 Direct product costs............................................ 3,899 Cost of settlement of intellectual property matters............. 103 ------- Cost of revenue.............................................. 4,002 ------- Gross profit............................................... 6,858 Operating expenses: Research and development..................................... 2,023 Sales and marketing.......................................... 1,768 General and administrative................................... 896 Stock compensation........................................... 725 ------- Total operating expenses................................... 5,412 ------- Income from operations.......................................... 1,446 Other income, net............................................... 84 ------- Net income before income taxes.................................. 1,530 Provision for income taxes...................................... 414 ------- Net income................................................. $ 1,116 ======= Net income per share, basic..................................... $ 0.60 ======= Pro forma net income per share, basic........................... $ 0.15 ======= Net income per share, diluted................................... $ 0.12 ======= Weighted average common shares outstanding, basic............... 1,859 ======= Pro forma weighted average common shares outstanding, basic..... 7,222 ======= Weighted average common shares outstanding, diluted............. 9,262 =======
Revenue for the quarter ended March 31, 2002 was $10.9 million, an increase of 8% from revenue of $10.1 million for the quarter ended December 31, 2001. The growth in revenue resulted primarily from increased sales of our WinDVD product in Japan and North America. Product gross margin, which represents revenue minus direct product costs, increased to 64% of revenue from 63% in the previous quarter. The increase in product gross margin was primarily due to lower third-party royalty costs. The quarter ended March 31, 2002 included cost of settlement of intellectual property matters of $103,000 related to our settlement with MPEG LA. Operating expenses for the quarter ended March 31, 2002 were $5.4 million, an increase of 7% from $5.1 million in the prior quarter. The increase in dollar amount was primarily due to increased stock compensation expenses, salaries and payroll related expenses, and professional fees, partially offset by a decrease in license fees paid for intellectual property used in research and development. 3 The offering Common stock we are offering........... 3,500,000 shares Common stock to be outstanding after this offering........................ 11,122,974 shares Proposed Nasdaq National Market symbol. IVDO Use of proceeds........................ For general corporate purposes, including working capital 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, 2,361,791 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.40 per share; . as of December 31, 2001, 1,040,535 shares of common stock available for issuance under our existing stock option plan; . an additional 352,000 shares of common stock reserved for issuance under our stock option plan and employee stock purchase plan adopted in connection with this offering; ... included 286,000 shares of common stock issuable upon conversion of shares of preferred stock issued to Dell in April 2002; ... given effect to a 0.44-for-one reverse stock split of our common stock to be effected prior to the completion of 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 stock 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. 4 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 3,500,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share after deducting the estimated underwriting discounts and commissions and the estimated expenses of this offering.
Year ended December 31, ---------------------------------- 1999(1) 2000(1) 2001 Consolidated statement of operations data (in thousands, except per share data) - -------------------------------------------------------------------------------------------------------------- Revenue................................................................ $ 3,036 $15,426 $33,763 Direct product costs................................................... 1,118 5,361 12,908 Cost of settlement of intellectual property matters.................... -- -- 4,233 Cost of impairment of software license agreement....................... -- -- 958 ------- ------- ------- Gross profit........................................................... 1,918 10,065 15,664 Operating expenses: Research and development........................................... 1,300 6,585 9,117 Sales and marketing................................................ 1,194 4,978 7,896 General and administrative......................................... 773 2,667 2,990 Stock compensation(2).............................................. 53 1,411 2,063 Other operating expenses(3)........................................ -- 174 2,408 ------- ------- ------- Total operating expenses............................................... 3,320 15,815 24,474 ------- ------- ------- Loss from operations................................................... $(1,402) $(5,750) $(8,810) ------- ------- ------- Net loss............................................................... $(1,434) $(5,745) $(9,177) ------- ------- ------- Net loss per common share, basic and diluted........................... $ (5.83) $ (4.97) $ (5.99) Pro forma net loss per common share, basic and diluted (unaudited)..... $ (1.33) Weighted average common shares outstanding, basic and diluted.......... 246 1,155 1,532 Pro forma weighted average common shares outstanding, basic and diluted (unaudited)........................................................... 6,895
As of December 31, 2001 ----------------------- Actual As adjusted Consolidated balance sheet data (in thousands) ---------------------------------------------------------------------------- Cash and cash equivalents.......................... $14,348 $54,763 Working capital.................................... 3,447 43,862 Total assets....................................... 22,153 62,568 Long-term obligations, net of current portion...... -- -- Total stockholders' equity......................... 7,959 48,374
- -------- (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 December 31, ------------------------ 1999 2000 2001 (in thousands) ----------------------------------------------------------------- Research and development............... $14 $ 546 $ 756 Sales and marketing.................... 3 521 535 General and administrative............. 36 344 772 --- ------ ------ $53 $1,411 $2,063 === ====== ======
(3)See "Selected Consolidated Financial Data" and "Consolidated Financial Statements." 5 - -------------------------------------------------------------------------------- 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 not sustain profitability or achieve profitability on an annual basis. We have incurred losses since our inception and have only achieved profitability in our most recent fiscal quarter ended March 31, 2002. As of December 31, 2001, we had an accumulated deficit of $16.9 million. We expect to incur significant operating expenses over the next several years in connection with the continued development and expansion of our business. 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. We may never achieve profitability on an annual basis. Even if we achieve profitability on an annual basis, 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. Licensing software-based digital video and audio solutions for incorporation in products in the PC and consumer electronics industries is new, and it is 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 we may be unable to 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; - -------------------------------------------------------------------------------- 6 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 domestic revenue; ... the costs of litigation and intellectual property claims, including the settlement of claims based upon our violation or alleged violation of others' intellectual property rights; 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 standard 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 March 2002, we entered into a license agreement with MPEG LA pursuant to which we obtained a license, retroactive to our inception, to MPEG LA's patents necessary to the MPEG-2 standard in exchange for a cash payment - -------------------------------------------------------------------------------- 7 Risk factors - -------------------------------------------------------------------------------- and our agreement to make ongoing royalty payments. 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. We are aware that a number of PC OEMs, including some of our customers, have settled the MPEG LA claims and entered into license agreements with MPEG LA. ... 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. ... Others. Other third parties, including Nissim Corporation, have notified a number of PC OEMs, including some of our customers, that they believe their patents are infringed when these PC OEMs distribute products that incorporate their technology. 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 6C or Nissim. 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 or be prohibited from selling our products 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 6C, 3C, Nissim 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. If we are required to pay license fees in the amounts that are currently published by, for example, 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 and may cause us to expend significant resources. - -------------------------------------------------------------------------------- 8 Risk factors - -------------------------------------------------------------------------------- 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 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, such as the patents held by members of MPEG LA, 6C, 3C and Nissim. 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 from several of our customers asserting that we are required to indemnify them under our agreements with them, or providing notice that they have received from third parties infringement claims that are related to our product. These customers include Acer Incorporated, Afreey Inc., Compaq, Dell, Gateway, Inc., Fujitsu Limited, Hewlett-Packard, Micron Electronics, Inc. and Sharp. Although MPEG LA has stated that some of our customers, including Compaq, Dell, Fujitsu Limited, Gateway, Hewlett-Packard, Sony and Toshiba, are currently MPEG LA licensees, not all of our PC OEM customers are current MPEG LA licensees. Notwithstanding the fact that we have signed a license agreement with MPEG LA, we may continue to be liable to some of our customers for amounts that those customers pay or have paid to MPEG LA in settlement of any claims of infringement brought by MPEG LA against those customers. 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. In April 2002, we agreed to a settlement with Dell concerning certain amounts that Dell alleged we owed to it as a result of Dell's prior settlements with MPEG LA and Nissim of certain infringement claims brought against Dell by these parties. Without admitting any liability to Dell, we issued shares of preferred stock convertible into 286,000 shares of our common stock to Dell in settlement of all past and future claims that Dell might have against us based upon the alleged infringement of certain patents held by MPEG LA and Nissim. We accounted for the issuance of these shares as a charge to our cost of revenue under cost of settlement of intellectual property matters for the year ended December 31, 2001 in an amount equal to the fair market value of the shares, or $3.7 million. See "Management's discussion and analysis of financial condition and results of operations." In addition, we have accrued $2.2 million at December 31, 2001 for liabilities relating to royalty and related intellectual property claims and expect to continue to accrue for such liabilities in the future. Our actual liability may exceed the amount we have accrued or accrue in the future, which could harm our business. - -------------------------------------------------------------------------------- 9 Risk factors - -------------------------------------------------------------------------------- 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 year ended December 31, 2001, our four largest customers accounted for a majority of our revenue, with Dell accounting for 29% 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. In addition, as of December 31, 2001, our three largest customers accounted for 56% of our accounts receivable. 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 not 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. - -------------------------------------------------------------------------------- 10 Risk factors - -------------------------------------------------------------------------------- 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 derived approximately 90% of our revenue during the year ended December 31, 2001 from the sale of our WinDVD product, primarily 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 decrease. Furthermore, if a reduction in demand for our products occurs, 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 software 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. Our products are based primarily on the Microsoft Windows operating system, and most of our customers require that the combination of our software products and their PCs be certified by Microsoft's Windows Hardware Qualification Labs. Accordingly, we are dependent on Microsoft, which exposes us to risks, particularly if Microsoft chooses to compete with us in the future. Our products are based primarily on the Microsoft Windows operating system. If industry and customer preferences in operating systems shift, 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 operating systems to replace the - -------------------------------------------------------------------------------- 11 Risk factors - -------------------------------------------------------------------------------- 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 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. 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. Because Microsoft provides OEMs that purchase the Windows operating system a financial incentive to obtain certification by Microsoft's Windows Hardware Qualification Labs, or WHQL, most of our customers require WHQL certification for our products on each PC platform before bundling and distribution. 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 caused us to be out of compliance for a period 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. If Microsoft develops or licenses digital video and audio solutions that compete directly with ours, our business could suffer. Microsoft currently offers 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 develops or licenses digital video and audio solutions that compete directly with ours and incorporates the solutions into its operating system, or otherwise changes its operating system or its Windows Hardware Qualification Labs standards to render our products incompatible, our business could be harmed. 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. Our primary competitor is Cyberlink Corporation. 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 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. - -------------------------------------------------------------------------------- 12 Risk factors - -------------------------------------------------------------------------------- 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 acquire 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 acquire 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 intend to increase sales of our products directly to consumers. 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 and brand in the marketplace and strain our relationships with customers. This could prevent us from retaining existing customers or obtaining new customers. 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, and our operations may be disrupted if we do not implement this software in an orderly manner. Delays or problems associated with any improvement or expansion of 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. - -------------------------------------------------------------------------------- 13 Risk factors - -------------------------------------------------------------------------------- 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. We are obligated to pay royalties under each of the Dolby and DVD Copy Control Association agreements, and Dolby and DVD Copy Control Association may each terminate its license if we breach any material provision of the license or if other events occur, as specified in the license agreement. 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, we generally do not have any agreements with these third parties to ensure that such information will be provided to us, and these relationships may not continue in the future. 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. - -------------------------------------------------------------------------------- 14 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. 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 relationships. 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 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 27 pending patent applications in various jurisdictions. It is possible that: ... our pending patent applications may not result in the issuance of patents; - -------------------------------------------------------------------------------- 15 Risk factors - -------------------------------------------------------------------------------- ... 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 to 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 vested, and some of our executives are parties to agreements that provide for the acceleration of the vesting of a portion of their unvested shares and options under certain circumstances in connection with a change of control. 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 customers' sales reports for collecting and reporting revenue. If these reports are not accurate, our reported revenue will be inaccurate. A substantial majority 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 bundle with the PCs that they sell. In collecting these 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 approximately 45% of our revenue for the year ended - -------------------------------------------------------------------------------- 16 Risk factors - -------------------------------------------------------------------------------- December 31, 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 them less willing to carry and sell our products. 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 may be greatly impacted by the political, economic and military conditions in Taiwan. Taiwan and China are 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 terrorist attacks on the United States. Our business and operating results are subject to uncertainties arising out of the terrorist attacks on the United States. 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. - -------------------------------------------------------------------------------- 17 Risk factors - -------------------------------------------------------------------------------- We may not be successful in addressing 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. 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 on terms acceptable to us or at all. 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. - -------------------------------------------------------------------------------- 18 Risk factors - -------------------------------------------------------------------------------- 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. 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, - -------------------------------------------------------------------------------- 19 Risk factors - -------------------------------------------------------------------------------- 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 20.9% 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 11,122,974 shares of common stock outstanding. Of these shares, the 3,500,000 shares sold in this offering will be freely tradable. Another 7,323,774 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 299,200 shares are restricted securities that will become eligible for sale in the public market pursuant to Rule 144 at various dates in the future. In addition, 286,000 shares of common stock held by Dell are subject to a two-year lock-up period. Of these shares, 71,500 shares shall be released from the lock-up agreement 180 days from the date of this prospectus and an additional 35,750 shares shall be released each 90 days thereafter, such that all of the shares shall be released from the lock-up agreement two years following the date of this prospectus. 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. Our financial statements are audited by Arthur Andersen LLP, which has been indicted by the Department of Justice, and we may need to change auditors, which would be expensive and could have other adverse consequences. Our financial statements for the year ended December 31, 2001 were audited by Arthur Andersen. Arthur Andersen has been indicted by the Department of Justice on federal obstruction of justice charges arising from the government's investigation of Enron Corporation. The SEC has stated that it will - -------------------------------------------------------------------------------- 20 Risk factors - -------------------------------------------------------------------------------- continue accepting financial statements audited, and interim financial statements reviewed, by Arthur Andersen, so long as Arthur Andersen makes certain representations concerning audit quality controls. If Arthur Andersen is unable to meet SEC auditing requirements or is otherwise unable to perform required audit-related services for us in a timely manner in the future, or if our board of directors decides that it is in our and our stockholders' best interests to disengage Arthur Andersen, we may have reduced access to capital markets, we could incur significant costs and delays in filing audited financial statements and we may be unable to satisfy our SEC filing requirements (including meeting requirements that are necessary for continued listing on Nasdaq and that permit sales of stock pursuant to Rule 144), any of which could harm our business. Certain investors, including significant mutual funds and institutional investors, may choose not to hold or invest in securities of issuers that engage Arthur Andersen as auditors or that do not have then current financial reports available. Furthermore, relief that may be available to stockholders under the federal securities laws against auditing firms may not be available as a practical matter against Arthur Andersen should it cease to operate or be financially impaired. 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. - -------------------------------------------------------------------------------- 21 - -------------------------------------------------------------------------------- Use of proceeds We estimate that we will receive net proceeds of approximately $40.4 million, or $46.8 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 $13.00 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 and capital expenditures. We have not yet allocated any specific amounts for these purposes. However, we currently anticipate that we will spend between $9 million and $11 million for sales and marketing expenses, between $9 million and $11 million for research and product development activities and between $4 million and $5 million for general and administrative expenses, during the year ending December 31, 2002 and between $1 million and $3 million on capital expenditures during that year associated with infrastructure upgrades and expansion of our business. 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. - -------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- Capitalization Our capitalization as of December 31, 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 $13.00 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."
December 31, 2001 --------------------------------- Pro forma Actual Pro forma as adjusted (in thousands, except share data) - ------------------------------------------------------------------------------------ Long-term obligations, excluding current portion. $ -- $ -- $ -- Stockholder's equity: Convertible preferred stock, 13,000,000 shares authorized, 12,188,750 shares issued and outstanding, actual; 13,000,000 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, 1,973,924 shares issued and outstanding, actual; 150,000,000 shares authorized, pro forma and pro forma as adjusted; 7,336,974 shares issued and outstanding, pro forma; shares authorized, pro forma as adjusted; 10,836,974 shares issued and outstanding, pro forma as adjusted.............. 6,579 27,765 68,180 Notes receivable from officers and directors..... (667) (667) (667) Deferred stock compensation...................... (2,070) (2,070) (2,070) Accumulated other comprehensive loss............. (188) (188) (188) Accumulated deficit.............................. (16,881) (16,881) (16,881) -------- -------- --------- Total stockholder's equity.................... 7,959 7,959 48,374 -------- -------- --------- Total capitalization....................... $ 7,959 $ 7,959 $ 48,374 ======== ======== =========
- -------------------------------------------------------------------------------- 23 - -------------------------------------------------------------------------------- Dilution Our pro forma net tangible book value as of December 31, 2001 was approximately $0.82 per share of our common stock. Our pro forma 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 December 31, 2001 (including shares of common stock issuable upon conversion of outstanding preferred stock and shares issued to Dell in April 2002). After giving effect to our sale in this offering of shares of our common stock at an assumed initial public offering price of $13.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of December 31, 2001 would have been $4.20 per share of our common stock. This represents an immediate increase in net tangible book value of $3.38 per share to our existing stockholders and an immediate dilution of $8.80 per share to you. The following table illustrates this per share dilution: Assumed initial public offering price per share...................... $13.00 Pro forma net tangible book value per share before this offering.... $0.82 Increase attributable to investors in this offering................. 3.38 ----- Pro forma net tangible book value per share after this offering...... 4.20 ------ Dilution per share to investors in this offering..................... $ 8.80 ======
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 December 31, 2001 before underwriters' discount and offering expenses in the following table. The following table does not include 2,361,791 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.40 per share as of December 31, 2001. To the extent that outstanding options are exercised, there will be further dilution to new investors.
Average Shares purchased Total consideration price per ----------------------------------------- Number Percent Amount Percent share (in thousands) ------------------------------------------------------------------------------ Existing shareholders..... 7,622,974 68.5% $26,011,299 36.4% $ 3.41 New investors............. 3,500,000 31.5 45,500,000 63.6 13.00 ---------- ----- ----------- ----- Total.................... 11,122,974 100.0% $71,511,299 100.0% ========== ===== =========== =====
- -------------------------------------------------------------------------------- 24 - -------------------------------------------------------------------------------- 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 consolidated statement of operations data and balance sheet data are derived from our audited financial statements. The pro forma data and the pro forma share and earnings per share data for the year ended December 31, 2001 gives effect to the conversion of all outstanding shares of preferred stock into common stock.
Year ended December 31, ---------------------------------- 1999(1) 2000(1) 2001 Consolidated statement of operations data (in thousands, except per share data) - ------------------------------------------------------------------------------------------------------ Revenue................................................... $ 3,036 $15,426 $33,763 Direct product costs...................................... 1,118 5,361 12,908 Cost of settlement of intellectual property matters....... -- -- 4,233 Cost of impairment of software license agreement.......... -- -- 958 ------- ------- ------- Cost of Revenue........................................ 1,118 5,361 18,099 ------- ------- ------- Gross profit........................................... 1,918 10,065 15,664 Operating expenses: Research and development............................... 1,300 6,585 9,117 Sales and marketing.................................... 1,194 4,978 7,896 General and administrative............................. 773 2,667 2,990 Stock compensation(2).................................. 53 1,411 2,063 Amortization of goodwill............................... -- 174 298 Cost of delayed public offering........................ -- -- 710 Impairment of promotional agreement.................... -- -- 550 Restructuring.......................................... -- -- 850 ------- ------- ------- Total operating expenses............................ 3,320 15,815 24,474 ------- ------- ------- Loss from operations...................................... (1,402) (5,750) (8,810) Other income, net......................................... 32 557 557 ------- ------- ------- Loss before provision for income taxes.................... (1,370) (5,193) (8,253) Provision for income taxes................................ 64 552 924 ------- ------- ------- Net loss............................................... $(1,434) $(5,745) $(9,177) ======= ======= ======= Net loss per common share, basic and diluted.............. $ (5.83) $ (4.97) $ (5.99) ======= ======= ======= Pro forma net loss per common share, basic and diluted (unaudited).............................................. $ (1.33) ======= Weighted average common shares outstanding, basic and diluted.................................................. 246 1,155 1,532 ======= ======= ======= Pro forma weighted average common shares outstanding, basic and diluted (unaudited)............................ 6,895 =======
- -------------------------------------------------------------------------------- 25 Selected consolidated financial data - --------------------------------------------------------------------------------
As of December 31, ------------------ 2000 2001 Consolidated balance sheet data (in thousands) --------------------------------------------------------------------- Cash and cash equivalents........................ $14,668 $14,348 Working capital.................................. 10,419 3,447 Total assets..................................... 22,134 22,153 Long-term obligations, net of current portion.... -- -- Convertible preferred stock...................... 21,286 21,186 Total stockholders' equity....................... 15,189 7,959
- -------- (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 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 December 31, ---------------------------- 1999 2000 2001 (in thousands) ----------------------------------------------------------------------------- Research and development............... $14 $ 546 $ 756 Sales and marketing.................... 3 521 535 General and administrative............. 36 344 772 --- ------ ------ $53 $1,411 $2,063 === ====== ======
- -------------------------------------------------------------------------------- 26 - -------------------------------------------------------------------------------- Management's discussion and analysis of financial condition and results of operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected consolidated financial data" and our consolidated financial statements and related notes 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, consumer electronics manufacturers and PC peripherals manufacturers worldwide and offer our software in up to 27 languages. In addition, we sell our products directly to consumers through our websites, which currently operate in English, French, German, 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 consumer electronics manufacturers and 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 reasonably assured. Under the terms of our license agreements with OEMs, they are entitled only to unspecified upgrades on a when and if available basis, prior to sell through to end users. Under the terms of our revenue recognition policy, we recognize revenue based on evidence of products being sold by the OEMs. We do not have any obligation to provide upgrades to the OEMs' customers. Accordingly, we do not defer any revenue as we no longer have an obligation once the OEM's products have been shipped and we have recorded revenue. Under the terms of the OEM license agreements, the OEM will qualify the software on its then current platform. Once the software has been qualified, the OEM will begin to ship products, and report sales to us, at which point we will record revenue. The OEM will have the right to return the software prior to it being qualified. Once the software has been shipped, the OEM does not have a right of return to us. Therefore, we do not maintain a returns reserve related to OEM sales. Under the terms of our OEM license agreements, the OEM has certain inspection and acceptance rights. These rights lapse once the product has been qualified and the shipment reported to us. Therefore we do not believe that these acceptance rights impact the amount or timing of revenue recognition. - -------------------------------------------------------------------------------- 27 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- 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. End-user sales are primarily sales made directly from our website. There are no unspecified upgrade rights related to these sales, we do not offer specified upgrade rights to any class of customer. The end users who purchase our software from our website do not have rights of return. 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 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 year ended December 31, 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. We derived approximately 90% of our revenue during the year ended December 31, 2001 from the sale of our WinDVD product, primarily 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. International sales accounted for 45% of our revenue for the year ended December 31, 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 websites. For the year ended December 31, 2001, we derived 8% of our revenue from sales on our websites. 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. - -------------------------------------------------------------------------------- 28 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- Cost of revenue consists of three components: direct product costs, cost of settlement of intellectual property matters and cost of impairment of software license agreement. Direct product costs consist primarily of royalties paid or accrued for payment to third parties for technologies incorporated into our products, expenses incurred to manufacture, package and distribute our software products, the amortization of developed technology and costs associated with end-user customer support. Customer service and technical support costs include the costs associated with answering end-user 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. 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. Direct product costs also include 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. Over the next several quarters, we expect our direct product costs to increase as a percentage of revenue due to lower selling prices. Cost of settlement of intellectual property matters consists of amounts accrued for settlement of alleged infringement of certain patents used in our and our customers' products in periods prior to December 31, 2001. We reached a settlement with one customer for shares of preferred stock convertible into 286,000 shares of our common stock upon the closing of this offering with a total value of $3.7 million. We issued these shares in April 2002. We also have paid, or expect to pay, approximately $515,000 in cash to other parties for settlement of similar claims. Cost of impairment of software license agreement consists of royalty payments for licensed technology, the benefit of which we have deemed unrealizable. 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. 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. 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. For the years ended December 31, 2001, 2000 and 1999, we recorded deferred stock compensation of $1.8 million, $3.5 million and $218,000. 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, as stock-based compensation expense, 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 March 31, 2002 for the next four years totals $2.6 million in 2002, $1.1 million in 2003, $454,000 in 2004 and $109,000 in 2005. - -------------------------------------------------------------------------------- 29 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- We completed the acquisition of the business and assets of AVPD, a developer of audio and video software products, in 2000. The purchase cost of the acquisition was $3.2 million, including legal, valuation and accounting fees of $200,000, and was accounted for as a purchase. The purchase price was allocated as follows: $700,000 to in-process research and development, $1.4 million to goodwill, $150,000 to the assembled work force and $1.0 million to developed technology. Goodwill and other intangibles are amortized on the straight-line method over their estimated useful life of five years. Total amortization expense was $290,000 and $498,000 for the years ended December 31, 2000 and 2001. Amortization expense related to developed technology is charged to cost of revenue in the amount of $116,000 and $200,000 for the years ended December 31, 2000 and 2001. We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), on January 1, 2002. As required by this statement, effective January 1, 2002, we no longer amortize goodwill, but will evaluate it for impairment at least annually. Goodwill with a net book value of approximately of $1.0 million at December 31, 2001 will be subject to the provisions of SFAS No. 142. Interest income and other, net consists primarily of interest earned on our cash and cash equivalent balances, offset by other expenses. RESULTS OF OPERATIONS
Year ended December 31, -------------------- 1999 2000 2001 ------------------------------------------------------------------ As a percentage of revenue: Revenue................................... 100 % 100 % 100 % Direct product costs...................... 37 35 38 Cost of settlement of intellectual property matters......................... -- -- 13 Cost of impairment of software license agreement................................ -- -- 3 --- --- --- Cost of revenue........................ 37 35 54 --- --- --- Gross margin........................ 63 65 46 --- --- --- Operating expenses: Research and development............... 43 43 27 Sales and marketing.................... 39 32 23 General and administrative............. 25 17 9 Stock compensation..................... 2 9 6 Amortization of goodwill............... -- 1 1 Cost of delayed public offering........ -- -- 2 Impairment of promotional agreement.... -- -- 2 Restructuring.......................... -- -- 3 --- --- --- Total operating expenses............ 109 102 73 --- --- --- Operating loss...................... (46) (37) (27) Other income, net......................... 1 4 2 --- --- --- Loss before provision for income taxes.... (45) (33) (25) Provision for income taxes................ 2 4 2 --- --- --- Net loss............................ (47)% (37)% (27)% === === ===
Comparison of years ended December 31, 2001 and 2000 Revenue Revenue increased 119% to $33.8 million for the year ended December 31, 2001 from $15.4 million for the year ended December 31, 2000. The growth in revenue resulted primarily from increased sales of our WinDVD product. - -------------------------------------------------------------------------------- 30 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- Gross margin Gross margin decreased to 46% of revenue in the year ended December 31, 2001 from 65% in the year ended December 31, 2000. The decrease in gross margin resulted from an increase in cost of revenue to $18.1 million for the year ended December 31, 2001 from $5.4 million for the year ended December 31, 2000. Direct product costs increased to $12.9 million, or 38% of revenue, for the year ended December 31, 2001 from $5.4 million, or 35% of revenue, for the year ended December 31, 2000. This increase was primarily due to increased average royalty unit costs owed to third parties for incorporation of their technology into our products. Costs of settlement of intellectual property matters increased to $4.2 million, or 13% of revenue, for the year ended December 31, 2001 from $0 for the year ended December 31, 2000. Cost of settlement of intellectual property matters in the year ended December 31, 2001 consisted of amounts accrued in settlement with certain OEM customers and patent holders for intellectual property claims. These settlement payments are for past liabilities, and we believe we have no future obligations to these customers related to the matters covered by those settlement agreements. However, we may be subject to additional claims in the future for which we will have to accrue and pay additional amounts. See "Risk factors--Risk related to our business--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." In December 2000, we entered into a license agreement providing for an aggregate of $1.1 million of minimum royalty payments through October 31, 2002. We recognized the associated expense under the agreement based on the number of customer registrations received during the relevant period. As of September 30, 2001, we had expensed approximately $35,000 of royalty payments based on customer registrations through that date. In September 2001, we determined that a large portion of the minimum royalty payments would be unrealizable. Accordingly, we recorded a cost of impairment of software license agreement of $958,000 in the third quarter of 2001, of which $613,000 related to royalty payments already made and $345,000 related to future liabilities under the agreement. We expect to record the remaining $57,000 related to this agreement as a direct product cost during 2002. Research and development Research and development expenses increased to $9.1 million, or 27% of revenue, for the year ended December 31, 2001 from $6.6 million, or 43% of revenue, for the year ended December 31, 2000. The increase in absolute dollars resulted primarily from increased personnel and consulting costs, facilities-related expenses, and outside professional fees. Research and development expenses for the year ended December 31, 2000 include a special in-process research and development charge resulting from the AVPD acquisition. 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 $7.9 million, or 23% of revenue, for the year ended December 31, 2001 compared to $5.0 million, or 32% of revenue, for the year ended December 31, 2000. The increase in absolute dollars was primarily attributable to supporting our higher level of sales, which included higher personnel costs, commission costs paid to third-party sales representatives, promotional expenses, consulting costs and facilities-related expenses. 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 $3.0 million, or 9% of revenue, for the year ended December 31, 2001 from $2.7 million, or 17% of revenue, for the year ended December 31, 2000. The - -------------------------------------------------------------------------------- 31 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- increase in absolute dollars was primarily attributable to increased personnel costs and professional services. We expect 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 $2.1 million for the year ended December 31, 2001 from $1.4 million for the year ended December 31, 2000. The stock-based compensation charges for the issuance of stock options will be amortized on an accelerated basis over the next four years. Amortization of goodwill The amortization of goodwill increased to $298,000 for the year ended December 31, 2001 from $174,000 for the year ended December 31, 2000. The year ended December 31, 2000 includes seven months of amortization expense compared to twelve months included in the year ended December 31, 2001. Cost of delayed public offering During the year ended December 31, 2001, we incurred $710,000 of professional costs in connection with the preparation of our initial public offering. In September 2001, this offering was delayed and all costs were expensed. Impairment of promotional agreement During the third quarter of 2001, we accelerated the amortization for promotion costs of our WinRip product that have been deemed unrealizable, recording a total charge of $550,000. In March 2001, we entered into a promotional agreement with an online music provider for exclusive marketing and promotion space. In accordance with the agreement, we are required to pay $1.1 million over 12 months and provide a $600,000 standby line of credit. During the period from March 2001 to August 2001, we incurred $550,000 for promotional costs, which have been recorded in sales and marketing expenses. Based on the results of the promotion, we believe that the remaining $550,000 of promotional expense is unrealizable. Restructuring We incurred a one-time restructuring charge of $850,000 in the year ended December 31, 2001, related to a restructuring of our business that occurred in the second quarter. During the second quarter of 2001, management approved a restructuring plan to reduce our workforce and consolidate offices to align our cost structure with our projected revenue growth and economic and industry conditions at the time. A one-time charge of $850,000 related to this plan was recorded in operating expenses in the second quarter. This charge included $257,000 related to employee terminations and $593,000 related to office closures. As of December 31, 2001, the remaining accrual was $307,000 related to the future payment of restructuring expenses, of which $2,000 related to employee terminations and $305,000 related to office closures. This restructuring eliminated approximately 25% of our worldwide employee workforce, including employees in research and development, sales and marketing and general and administrative. This plan is expected to result in annual savings of nearly $3.0 million. The estimated cost savings have been calculated based upon expected cost reductions related to employee terminations and reduced facilities expenses. We will continue to manage our operating expenses relative to expected revenue growth and will undertake additional cost-cutting actions if necessary to optimize profitability. - -------------------------------------------------------------------------------- 32 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- Other income, net Other income, net primarily consists of interest income, offset by loss on fixed assets disposal and other expense, if any. Other income, net remained consistent at $557,000 for the years ended December 31, 2001 and 2000. Interest income decreased to $481,000 for the year ended December 31, 2001 compared to $652,000 for the year ended December 31, 2000. This decrease in interest income was primarily attributable to lower average cash and cash equivalent balances offset by an increase in non-operating expenses for the year ended December 31, 2000. This increase in non-operating expense in 2000 was primarily due to recording a $134,000 loss on fixed assets disposed during this period. No significant fixed assets were disposed of in the year ended December 31, 2001 excluding assets disposed of as a result of restructuring. Provision for income taxes The provision for income taxes increased to $924,000 in the year ended December 31, 2001 from $552,000 in the year ended December 31, 2000 due to higher withholding tax generated from foreign sales in Japan and Taiwan and taxable income generated in our Japanese subsidiary. 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 52% 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 65% 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 $6.6 million, or 43% 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 our continued research and development efforts including increase in personnel costs, consulting and professional fees, facilities related expenses, travel costs and the licensing of certain software. In connection with the purchase of AVPD in 2000, we recorded a special in-process research and development charge of $700,000. 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 32% 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 support our higher level of sales, including increased personnel costs, promotional expenses, outside commission costs, professional fees, facilities-related expenses and travel expenses. - -------------------------------------------------------------------------------- 33 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. Amortization of goodwill The amortization of goodwill increased to $174,000 for the year ended December 31, 2000 from $0 for the year ended December 31, 1999. We started to amortize goodwill in June 2000, after completion of the AVPD purchase. Other income, net Other income, 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. - -------------------------------------------------------------------------------- 34 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited consolidated statements of operations data for the eight quarters ended December 31, 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 --------------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 2000 2000 2000 2000 2001 2001 2001 2001 (unaudited) (in thousands) - ------------------------------------------------------------------------------------------------------------------- Revenue........................ $2,445 $ 3,171 $ 4,145 $ 5,665 $ 7,722 $ 7,725 $ 8,226 $10,090 Direct product costs........... 788 1,095 1,485 1,993 3,114 2,974 3,058 3,762 Cost of settlement of intellectual property matters. -- -- -- -- -- -- -- 4,233 Cost of impairment of software license agreement.... -- -- -- -- -- -- 958 -- ------ ------- ------- ------- ------- ------- ------- ------- Cost of revenue............. 788 1,095 1,485 1,993 3,114 2,974 4,016 7,995 ------ ------- ------- ------- ------- ------- ------- ------- Gross profit............... 1,657 2,076 2,660 3,672 4,608 4,751 4,210 2,095 Operating expenses: Research and development.... 699 1,785 1,840 2,261 2,469 2,368 2,098 2,182 Sales and marketing......... 799 1,112 1,180 1,887 2,008 2,211 2,088 1,589 General and administrative.. 451 737 456 1,023 675 777 773 765 Stock compensation.......... 235 297 375 504 541 502 569 451 Amortization of goodwill.... -- 25 74 75 74 74 74 76 Cost of delayed public offering................... -- -- -- -- -- -- 710 -- Impairment of promotional agreement.................. -- -- -- -- -- -- 550 -- Restructuring............... -- -- -- -- -- 850 -- -- ------ ------- ------- ------- ------- ------- ------- ------- Total operating expenses... 2,184 3,956 3,925 5,750 5,767 6,782 6,862 5,063 ------ ------- ------- ------- ------- ------- ------- ------- Loss from operations........... (527) (1,880) (1,265) (2,078) (1,159) (2,031) (2,652) (2,968) Other income (expense), net.... (80) 199 185 253 178 114 151 114 ------ ------- ------- ------- ------- ------- ------- ------- Loss before income taxes....... (607) (1,681) (1,080) (1,825) (981) (1,917) (2,501) (2,854) Provision for income taxes..... 117 97 168 170 151 269 89 415 ------ ------- ------- ------- ------- ------- ------- ------- Net loss................... $ (724) $(1,778) $(1,248) $(1,995) $(1,132) $(2,186) $(2,590) $(3,269) ====== ======= ======= ======= ======= ======= ======= =======
Over the eight quarters presented, our quarterly revenue grew to $10.1 million for the quarter ended December 31, 2001 from $2.4 million for the quarter ended March 31, 2000. Revenue has increased in each successive quarter as we have increased OEM and retail 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 product gross profit, excluding charges for cost of impairment of software license agreement and cost of settlement of intellectual property matters, increased in absolute dollars in each successive quarter. Our product gross margin, excluding the two charges mentioned above, fluctuated between quarters but generally decreased to 63% for the quarter ended December 31, 2001 from 68% for the - -------------------------------------------------------------------------------- 35 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- quarter ended March 31, 2000. This decrease primarily resulted from declining selling prices partially offset by higher margin sales in Japan in 2001. Overall gross profit declined in the quarters ended September 30, 2001 and December 31, 2001. Overall gross margin for the quarter ended September 30, 2001 was 51%, with the decrease primarily resulting from a charge of $958,000 relating to the impairment of a software license agreement. Overall gross margin for the quarter ended December 31, 2001 was 21%, with the decrease primarily resulting from a charge of $4.2 million relating to the settlement of intellectual property matters. Without these charges, our gross margin for the quarters ended September 30, 2001 and December 31, 2001 would have been 63%. 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, and for the quarter ended December 31, 2001, when total operating expenses declined primarily due to a decrease in marketing activities such as trade show and other promotional activities and the absence of non-recurring charges. The overall 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 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, we enacted a corporate restructuring and recorded an associated charge of $850,000. In the third quarter of 2001, we recorded a charge of $710,000 related to a delayed public offering and $550,000 related to the impairment of a promotional agreement. 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. 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 is 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. - -------------------------------------------------------------------------------- 36 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- 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 December 31, 2001, we had cash and cash equivalents of $14.3 million. Net cash provided by operating activities was $1.4 million for the year ended December 31, 2001. This primarily resulted from the sales of our WinDVD product. Net cash used in operating activities was $330,000 in 2000 and $573,000 in 1999. Cash used in operating activities resulted primarily from net losses from operations in each period. Net cash used in investing activities was $1.7 million for the year ended December 31, 2001. Of the $1.7 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 and $657,000 in 1999. 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 and long-term investments. Cash used in investing activities in 1999 was due to the purchases of property and equipment and long-term investment. Cash provided by financing activities for the year ended December 31, 2001 was $111,000, primarily due to the issuance of common stock upon the exercise of stock options. Cash provided by financing activities was $16.8 million in 2000 and $3.7 million in 1999. Cash provided by financing activities in 2000 and 1999 was primarily due to sales of 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. 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. CRITICAL ACCOUNTING POLICIES Our critical accounting policies are as follows: Revenue recognition Our revenue is derived from fees paid under software licenses granted primarily to OEMs, distributors, and directly to end users. We record 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 - -------------------------------------------------------------------------------- 37 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- arrangement exists, delivery of the software has occurred, the fee is fixed and determinable, and collectibility is reasonably assured. We sell to OEMs and directly to end users. Under the terms of our license agreements with the OEMs, they are entitled only to unspecified upgrades on a when and if available basis prior to sell through to end users. Under the terms of our revenue recognition policy, we recognize revenue based on evidence of products being sold by the OEMs. We do not have any obligation to provide upgrades to the OEMs' customers. Accordingly, we do not defer any revenue as we no longer have an obligation once an OEM's product has been shipped and we have recorded revenue. Under the terms of each OEM license agreement, the OEM will "qualify" the software on its then current platform. The OEM will have the right to return the software prior to it being qualified. Once the software has been qualified, the OEM will begin to ship product and report sales to us at which point we will record revenue. Once it has been shipped, the OEM does not have a right of return to us. Therefore, we do not maintain a returns reserve related to OEM sales. 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 we record associated revenue when we receive 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 us of sales of our 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 sales of the product to the OEMs' customers. Sales to end users are primarily made directly through our website. There are no unspecified upgrade rights related to these sales. We do not offer specified upgrade rights to any class of customer. The end users who purchase our software from our website do not have rights of return. We believe that this revenue recognition policy is supported by reasonable and appropriate assumptions and that a different methodology would not result in material differences in either timing or amount of revenue recognized. Valuation of accounts receivable We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required. Impairment of long-lived assets When events and circumstances warrant a review, we evaluate the carrying value of long-lived assets to be held and used. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such an asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced by the cost to dispose of such assets. Impairment of goodwill and other intangible assets We perform a review of the value of goodwill and intangible assets whenever events and circumstances indicate that impairment may have occurred. Indicators of impairment of such assets include, among - -------------------------------------------------------------------------------- 38 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- other things, a failure to integrate the related products into our existing products or use the acquired assets as a basis to further develop our product offerings. We do not believe that an impairment of any of our goodwill and intangible assets has occurred. In 2002, we will modify our impairment measurement policy to comply with SFAS No. 142, discussed below under "Recent Accounting Pronouncements." Accruals for unsigned agreements We utilize technology in our products for which we do not currently hold, or have not in the past held, a license. We have accrued amounts for such usage as a component of cost of revenue based upon units sold under arrangements where we believe that we have a probable and estimatable legal obligation and upon published rates for such amounts. We recognized expense of approximately $900,000 and $1.3 million for the year ended December 31, 2000 and 2001, respectively. These published rates have remained consistent but are expected to decrease in the future which will impact the accrual in future periods. It is not known when agreements will ultimately be signed. Should the final arrangements result in royalty rates significantly different from these assumptions, our business could be harmed. Determination of fair value of options granted to employees We have recorded stock-based compensation charges representing the difference between the deemed fair value of our common stock for accounting purposes and the option exercise price. We determined the deemed fair value based upon several factors including our operating performance, significant events in our history, issuances of our convertible preferred stock, trends in the broad market for technology stocks and the expected valuation we would obtain in an initial public offering. We recorded stock-based deferred compensation of $218,000, $3.5 million, and $1.8 million and amortization of such expense of $53,000, $1.4 million and $2.0 million in the years ended December 31, 1999, 2000 and 2001, respectively. Had different assumptions or criteria been used to determine the deemed fair value of the stock options, materially different amounts of stock-based compensation could have been reported. Valuation allowance for deferred tax assets We provided a valuation allowance of $3.2 million and $6.9 million against the entire amount of our deferred tax assets as of December 31, 2000 and 2001, respectively. The valuation allowance was recorded given the losses we incurred through December 31, 2001 and our uncertainties regarding future operating profitability and taxable income. Had we assumed that our deferred tax assets were fully realizable, deferred tax benefits of $2.5 million and $3.6 million would have been recognized in the statements of operations for the years ended December 31, 2000 and 2001, respectively. DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS As of December 31, 2001, for each fiscal year described below, future minimum commitments under operating leases are as follows (in thousands):
Fiscal Year Lease ------------------------------------------------------------------- 2002........................................................ $ 851 2003........................................................ 607 2004........................................................ -- 2005........................................................ -- ------ $1,458 ======
We have no other fixed contractual obligations or commercial commitments that are not already accrued for in our financial statements. - -------------------------------------------------------------------------------- 39 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- DISCLOSURES ABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES See "Related party transactions" for a discussion of transactions with related and certain other parties. 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 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 adopted Statement No. 133, as amended, in the first quarter of 2001. Because we do not engage in derivatives or hedging activities, the adoption of SFAS No. 133 did not have a material impact on our financial position or results of operations. 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 - -------------------------------------------------------------------------------- 40 Management's discussion and analysis of financial condition and results of operations - -------------------------------------------------------------------------------- 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 June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. We will adopt SFAS No. 143 effective December 31, 2002 and do not expect to 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. - -------------------------------------------------------------------------------- 41 - -------------------------------------------------------------------------------- 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 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 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, consumer electronic manufacturers and PC peripherals manufacturers worldwide and offer our software in up to 27 languages. In addition, we sell our products directly to consumers through retail channels and our websites, which currently operate in English, French, German, 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 the core technologies and products to enable rapid migration to future consumer devices. We began operations in 1998 and shipped our first products in 1999. In 2000, we completed the acquisition of the business and assets of AVPD, a developer of audio and video software products. 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. 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. Gartner Dataquest 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 - -------------------------------------------------------------------------------- 42 Business - -------------------------------------------------------------------------------- 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; ... 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. - -------------------------------------------------------------------------------- 43 Business - -------------------------------------------------------------------------------- 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 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, we believe that 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 reduce the cost and increase the flexibility of their products, 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, integrated multimedia software solution for the PC Our broad software suite provides OEMs and consumers with a single solution 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 - -------------------------------------------------------------------------------- 44 Business - -------------------------------------------------------------------------------- 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 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 layered architecture 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 in a short time frame, which we believe 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 joint 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 websites. Leverage existing and prospective OEM relationships to promote adoption of new products We plan to leverage our strong market position and broad, 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 - -------------------------------------------------------------------------------- 45 Business - -------------------------------------------------------------------------------- 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. 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 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 year ended December 31, 2001, 45% of our sales came from outside the United States. We believe that significant revenue growth opportunities for our business 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 China, Japan and 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. - -------------------------------------------------------------------------------- 46 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. Our OEM customers bundle WinDVD 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 offer WinDVD in 27 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. - -------------------------------------------------------------------------------- 47 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. WinProducer also enables 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. - -------------------------------------------------------------------------------- 48 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 $600,000 in revenue for the year ended December 31, 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 year ended December 31, 2001, our four largest customers accounted for a majority of our revenue, with Dell accounting for 29% 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 websites accounted for 8% of our revenue in 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 assistance 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 assistance 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 enables us to provide technical assistance to OEMs with a relatively small staff. Our on-line technical support group provides direct customer support to users that purchase our products through retail channels or our websites. Our on-line technical support group also trains the - -------------------------------------------------------------------------------- 49 Business - -------------------------------------------------------------------------------- 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 periodically with members of 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 year ended December 31, 2001, our research and development expenditures totaled $9.1 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 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 - -------------------------------------------------------------------------------- 50 Business - -------------------------------------------------------------------------------- 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 competitive position. We currently have one patent issued in Taiwan, and we have 27 pending patent applications in various jurisdictions. 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 detecting and preventing 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 revenue and some of our competitive advantage. Infringement claims and lawsuits to protect our proprietary rights would likely be expensive to resolve and would require management's time and resources, and, therefore, could harm our business. - -------------------------------------------------------------------------------- 51 Business - -------------------------------------------------------------------------------- Our digital video and audio solutions comply with industry standard 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 a separate group of companies to enforce the proprietary rights of certain holders of patents covering some aspects of DVD technology. In March 2002, we entered into a license agreement with MPEG LA pursuant to which we obtained a license, retroactive to our inception, to MPEG LA's patents related to the MPEG-2 standard in exchange for a cash payment and our agreement to make ongoing royalty payments. In addition to these claims, we may receive notices of claims of infringement of other parties' proprietary rights, including Nissim or 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 6C, 3C or Nissim. 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 or be prohibited from selling our products 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 6C, 3C, Nissim 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. If we are required to pay license fees in the amounts that are currently published by, for example, 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 of amount of damages we would otherwise have to pay. In addition, 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, such as the patents held by members of MPEG LA, 6C, 3C and Nissim. 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. 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. Notwithstanding the fact that we have signed a license agreement with MPEG LA, we may continue to be liable to some of our customers for amounts that those customers pay or have paid to MPEG LA in settlement of any claims of infringement brought by MPEG LA against those customers. In April 2002, we agreed to a settlement with Dell concerning certain amounts that Dell alleged we owed to it as a result of Dell's prior settlements with MPEG LA and Nissim of certain infringement claims brought against Dell by these parties. Without admitting any liability to Dell, we issued shares of - -------------------------------------------------------------------------------- 52 Business - -------------------------------------------------------------------------------- preferred stock convertible into 286,000 shares of our common stock upon the closing of this offering to Dell in settlement of all past and future claims that Dell might have against us based upon the alleged infringement of certain patents held by MPEG LA and Nissim. We accounted for the issuance of these shares as a charge to our cost of revenue under cost of settlement of intellectual property matters for the year ended December 31, 2001 in an amount equal to the fair market value of the shares, or $3.7 million. See "Management's discussion and analysis of financial condition and results of operations;" and "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 MPEG-2 standards. 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 Torrance, California Research and Development/Sales and Marketing 5,567 September 1, 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. - -------------------------------------------------------------------------------- 53 - -------------------------------------------------------------------------------- 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
- -------- (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 (which was acquired by Cirrus Logic, Inc.), 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. (which went public in 1995 and was later acquired by Advanced Micro Devices, 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 charge of firmware, chip verification and driver and application development. Mr. Chin holds a BS in - -------------------------------------------------------------------------------- 54 Management - -------------------------------------------------------------------------------- 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 design and manufacturing. Mr. Liu received his BS from Chinese Cultural University in Taiwan and his MS from California State University, Chico. - -------------------------------------------------------------------------------- 55 Management - -------------------------------------------------------------------------------- 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. 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. Mr. Haber has been designated a Class I director whose term expires at the 2003 annual meeting of stockholders. Mr. Shaw has been designated a Class II director whose term expires 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. 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. - -------------------------------------------------------------------------------- 56 Management - -------------------------------------------------------------------------------- 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 22,000 shares of our common stock to Mr. Haber, an option to purchase 22,000 shares of our common stock to Mr. Liu and options to purchase 4,400 shares of our common stock to Mr. Shaw for their services as directors. Each of these options has an exercise price of $4.55 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. Eli Sternheim, a former director, 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 16,500 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 4,400 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 5,500 of the shares subject to the option on the first anniversary of the date of grant and becomes exercisable as to 458 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. - -------------------------------------------------------------------------------- 57 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 ------------ Annual compensation Securities ---------------- 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 35,200 255 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...... 35,200(1) 8.4% $4.55 1/5/11 $585,222 $1,026,737
- -------- (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 421,608 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 date of grant based on the assumed initial public offering price of $13.00 per share. 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. - -------------------------------------------------------------------------------- 58 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................ -- $ -- 176,000 -- $ 345,000 $ -- Honda Shing............. -- -- 39,416 4,583 174,239 20,261 Raul Diaz............... -- -- 65,266 40,333 266,749 161,251 Chinn Chin.............. 44,000 195,000 696,666 73,333 2,892,479 325,001 Jesse Lechuga........... -- -- 11,733 23,466 51,999 104,001
- -------- (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 the assumed initial public offering price of $13.00 per share. 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 2,335,391 shares of common stock were outstanding and 1,040,535 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 176,000 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 outstanding shares of our common stock on the first day of the applicable fiscal year, (ii) 880,000 shares, or (iii) another amount as our board may determine. - -------------------------------------------------------------------------------- 59 Management - -------------------------------------------------------------------------------- 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 880,000 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 440,000 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 16,500 shares upon such appointment 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 4,400 shares following each annual meeting of our stockholders. - -------------------------------------------------------------------------------- 60 Management - -------------------------------------------------------------------------------- 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 5,500 of the shares subject to the option on the first anniversary of the date of grant and becomes exercisable as to 458 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 176,000 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) 176,000 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 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 - -------------------------------------------------------------------------------- 61 Management - -------------------------------------------------------------------------------- ... 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, bonuses and commissions, but excludes all other compensation. A participant may purchase a maximum of 4,400 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 upon 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. - -------------------------------------------------------------------------------- 62 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 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. We have entered into change of control agreements with Steve Ro, Chinn Chin, Raul Diaz and Jesse Lechuga to provide for full acceleration of all unvested options in the event the employee is involuntarily terminated without cause or for good reason within one month prior to or 13 months following a change of control. A change of control means a plan of complete liquidation, a sale of all or substantially all of our assets or a merger or consolidation involving the transfer of more than 50% of the total voting power represented by our then outstanding voting securities. - -------------------------------------------------------------------------------- 63 - -------------------------------------------------------------------------------- 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 22,000 $0.12 10 years Raul Diaz.............................. 3/15/99 17,600 0.12 10 years Honda Shing............................ 3/15/99 44,000 0.13 5 years Chinn Chin............................. 3/15/99 924,000 0.12 10 years Steve Ro............................... 3/15/99 352,000 0.13 5 years Eli Sternheim.......................... 6/1/99 44,000 0.12 10 years Henry Shaw............................. 6/1/99 13,200 0.12 10 years Steve Ro............................... 8/30/99 88,000 0.63 5 years Raul Diaz.............................. 1/10/00 88,000 0.57 10 years Henry Shaw............................. 7/1/00 17,600 4.55 10 years Steve Ro............................... 10/1/00 88,000 5.00 5 years Jesse Lechuga.......................... 1/5/01 35,200 4.55 10 years Randall Bambrough...................... 3/21/01 132,000 4.55 10 years George Haber........................... 6/15/01 22,000 4.55 10 years Joseph Liu............................. 6/15/01 22,000 4.55 10 years Henry Shaw............................. 6/15/01 4,400 4.55 10 years Chinn Chin............................. 1/10/02 22,000 6.82 10 years Raul Diaz.............................. 1/10/02 22,000 6.82 10 years Steve Ro............................... 1/10/02 66,000 7.50 5 years Randall Bambrough...................... 1/10/02 22,000 6.82 10 years Honda Shing............................ 1/10/02 22,000 6.82 10 years Jesse Lechuga.......................... 1/10/02 13,200 6.82 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. - -------------------------------------------------------------------------------- 64 Related party transactions - -------------------------------------------------------------------------------- PRIVATE PLACEMENT FINANCINGS In July 1999, a trust for the benefit of Eli Sternheim, a former director, purchased shares of Series C Preferred Stock convertible into 176,000 shares of common stock at an effective price of $4.55 per share in connection with our Series C financing. In April 2000, a trust for the benefit of Dr. Sternheim purchased shares of our Series D Preferred Stock convertible into 71,000 shares of common stock at an effective price of $9.09 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 132,000 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 22,000 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. Our board of directors has approved a loan to Honda Shing, our Chief Technology Officer, of $100,000 at an interest rate of 10%. The loan will be full recourse and will be secured by the shares of common stock held by Mr. Shing. Principal and interest on the note shall become due and payable one year from the date of issuance. MISCELLANEOUS During 2001, we provided services to Fundwatch Global Financial Ltd. for approximately $51,000. In addition, during 2001 we sold equipment to Fundwatch Global Financial for approximately $80,000. The chief executive officer of Fundwatch Global Financial Ltd. is the brother of Steve Ro, our chief executive officer. - -------------------------------------------------------------------------------- 65 - -------------------------------------------------------------------------------- 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 3,500,00 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)....................................................... 528,000 6.8% 4.7% Honda Shing(3).................................................... 922,167 12.0 8.3 Chinn Chin(4)..................................................... 806,667 9.6 6.8 Raul Diaz(5)...................................................... 70,033 * * Jesse Lechuga(6).................................................. 13,200 * * Henry Shaw(7)..................................................... 24,933 * * George Haber(8)................................................... 22,000 * * Joe Liu(9)........................................................ 22,000 * * All directors and executive officers as a group (9 persons)(10)... 2,540,099 29.3 20.9 Other 5% Stockholders Spot Master Investment Limited(11)................................ 1,694,000 22.2 15.2 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 7,622,974 shares of common stock outstanding as of December 31, 2001, including shares issued to Dell in April 2002, and 11,122,974 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 176,000 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (3) Includes 42,167 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (4) Includes 740,667 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (5) Represents 70,033 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (6) Includes 13,200 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (7) Includes 11,733 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001. (8) Includes 9,625 shares of our common stock subject to our right of repurchase as of December 31, 2001. (9) Includes 9,625 shares of our common stock subject to our right of repurchase as of December 31, 2001. (10) Includes 1,053,799 shares of our common stock issuable under options exercisable within 60 days of December 31, 2001 and 121,000 shares subject to our right of repurchase as of December 31, 2001. (11) Li-Chun Lo, Steve Ro's brother, has the sole voting and dispositive powers over the shares held of record by Spot Master Investment Limited. - -------------------------------------------------------------------------------- 66 Description of capital stock - -------------------------------------------------------------------------------- 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. Prior to this offering, there were 7,622,974 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 2,361,791 shares of common stock were outstanding. We will have a total of 11,122,974 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. - -------------------------------------------------------------------------------- 67 Description of capital stock - -------------------------------------------------------------------------------- REGISTRATION RIGHTS Holders of 5,649,050 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 ... 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. - -------------------------------------------------------------------------------- 68 Description of capital stock - -------------------------------------------------------------------------------- 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 American Stock Transfer & Trust Company. NASDAQ NATIONAL MARKET QUOTATION We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "IVDO." - -------------------------------------------------------------------------------- 69 - -------------------------------------------------------------------------------- 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 11,122,974 shares of our common stock. Of these shares, the 3,500,000 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 7,622,974 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 7,323,774 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 299,200 shares will become eligible for sale in the public market pursuant to Rule 144 at various dates in the future. In addition, 286,000 shares of common stock held by Dell are subject to a two-year lock-up period. Of these shares, 71,500 shares shall be released from the lock-up agreement 180 days from the date of this prospectus and an additional 35,750 shares shall be released each 90 days thereafter, such that all of the shares shall be released from the lock-up agreement two years following the date of this prospectus. 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 3,727,926 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. - -------------------------------------------------------------------------------- 70 Shares eligible for future sale - -------------------------------------------------------------------------------- Holders of 5,649,050 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. 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 111,230 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. - -------------------------------------------------------------------------------- 71 - -------------------------------------------------------------------------------- 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, CIBC World Markets Corp. and Raymond James & Associates, Inc. are the representatives of the underwriters.
Underwriter Number of Shares - ---------------------------------------------------------------------------- UBS Warburg LLC............................................ CIBC World Markets Corp.................................... Raymond James & Associates, Inc............................ --------- Total................................................ 3,500,000 =========
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 525,000 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 525,000 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 $1,900,000. 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, officers and stockholders holding 7,215,974 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. In addition, Dell, which holds 286,000 shares of common stock, has entered into a lock-up agreement with us pursuant to which 71,500 shares become eligible for sale 180 days from the date of this - -------------------------------------------------------------------------------- 72 Underwriting - -------------------------------------------------------------------------------- prospectus and an additional 35,750 shares become eligible for sale each 90 days thereafter, such that all of the shares held by Dell become eligible for sale two years following the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price, up to 150,000 shares of our common stock being offered for sale to our customers and business partners. At the discretion of our management, other parties, including our employees, may participate in this reserved shares program. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. 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. - -------------------------------------------------------------------------------- 73 - -------------------------------------------------------------------------------- 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, East 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, 2000 and 2001 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1999, 2000 and 2001 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., an associated member firm of Deloitte Touche Tohmatsu and formerly 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. TN Soong & Co. has not consented to the inclusion of their report in this prospectus, and we have dispensed with the requirement to file their consent in reliance upon Rule 437a of the Securities Act. Because TN Soong & Co. has not consented to the inclusion of their report in this prospectus, you will not be able to recover against TN Soong & Co. under Section 11 of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by TN Soong & Co. or any omissions to state a material fact required to be stated therein. 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. - -------------------------------------------------------------------------------- 74 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................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Stockholders' Equity............................ F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7 FINANCIAL STATEMENTS OF AUDIO/VISUAL PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL, INC. Report of Independent Public Accountants................................... F-26 Balance Sheets............................................................. F-27 Statements of Operations and Comprehensive Loss............................ F-28 Statements of Cash Flows................................................... F-29 Notes to Financial Statements.............................................. F-30 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Basis of Presentation...................................................... F-36 Unaudited Pro Forma Condensed Combined Statement of Operations............. F-36
- -------------------------------------------------------------------------------- F-1 INTERVIDEO, INC. - -------------------------------------------------------------------------------- After the reverse stock split discussed in Note 2 to the accompanying consolidated financial statements is effected, we expect to be in a position to render the following audit report. /s/ ARTHUR ANDERSEN LLP San Francisco, California, April 26, 2002 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of InterVideo, Inc.: We have audited the accompanying consolidated balance sheets of InterVideo, Inc. (a California corporation) as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1999, 2000 and 2001. 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, 2000 and 2001, and the results of its operations and its cash flows for the years ended December 31, 1999, 2000 and 2001, in conformity with accounting principles generally accepted in the United States. San Francisco, California - -------------------------------------------------------------------------------- F-2 INTERVIDEO, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
Pro Forma - ------------ As of December 31, ----------------- December 31, 2000 2001 2001 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents..................................................... $14,668 $ 14,348 Accounts receivable, net of allowance for doubtful accounts of $152 and $319, respectively........................................................... 2,413 2,753 Prepaid expenses and other current assets..................................... 283 540 ------- -------- Total current assets....................................................... 17,364 17,641 Property and equipment, net....................................................... 1,991 1,725 Other assets...................................................................... 2,779 2,787 ------- -------- Total assets............................................................... $22,134 $ 22,153 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 484 $ 594 Accrued liabilities........................................................... 6,461 13,600 ------- -------- Total liabilities.......................................................... 6,945 14,194 ------- -------- Stockholders' equity: Convertible preferred stock, no par value: aggregate liquidation preference of $21,255 at December 31, 2001; 13,000,000 shares authorized; 12,213,750, 12,188,750 and zero shares issued and outstanding, respectively................................................................. 21,286 21,186 $ -- Common stock, no par value: 25,000,000 shares authorized; 1,629,050 1,973,924 and 7,336,974 shares issued and outstanding, respectively.......... 3,897 6,579 27,765 Notes receivable from officer and directors................................... -- (667) (667) Deferred stock compensation................................................... (2,206) (2,070) (2,070) Accumulated other comprehensive loss.......................................... (84) (188) (188) Accumulated deficit........................................................... (7,704) (16,881) (16,881) ------- -------- -------- Total stockholders' equity................................................. 15,189 7,959 $ 7,959 ------- -------- ======== Total liabilities and stockholders' equity................................. $22,134 $ 22,153 ======= ========
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)
Year ended December 31, ------------------------- 1999 2000 2001 - -------------------------------------------------------------------------------------------------- Revenue................................................................ $ 3,036 $15,426 $33,763 Direct product costs................................................... 1,118 5,361 12,908 Cost of settlement of intellectual property matters.................... -- -- 4,233 Cost of impairment of software license agreement....................... -- -- 958 ------- ------- ------- Cost of revenue.................................................... 1,118 5,361 18,099 ------- ------- ------- Gross profit.................................................... 1,918 10,065 15,664 Operating expenses: Research and development(1)........................................ 1,300 6,585 9,117 Sales and marketing(1)............................................. 1,194 4,978 7,896 General and administrative(1)...................................... 773 2,667 2,990 Stock compensation................................................. 53 1,411 2,063 Amortization of goodwill........................................... -- 174 298 Cost of delayed public offering.................................... -- -- 710 Impairment of promotional agreement................................ -- -- 550 Restructuring...................................................... -- -- 850 ------- ------- ------- Total operating expenses........................................ 3,320 15,815 24,474 ------- ------- ------- Loss from operations................................................... (1,402) (5,750) (8,810) Other income, net...................................................... 32 557 557 ------- ------- ------- Loss before provision for income taxes................................. (1,370) (5,193) (8,253) Provision for income taxes............................................. 64 552 924 ------- ------- ------- Net loss........................................................... $(1,434) $(5,745) $(9,177) ======= ======= ======= Net loss per common share, basic and diluted........................... $ (5.83) $ (4.97) $ (5.99) ======= ======= ======= Pro forma net loss per common share, basic and diluted (unaudited)..... $ (1.33) ======= Weighted average common shares outstanding, basic and diluted.......... 246 1,155 1,532 ======= ======= ======= Pro forma weighted average common shares outstanding, basic and diluted (unaudited)........................................................... 6,895 =======
- -------- (1)Stock compensation is allocated among the operating expense classifications as follows:
Year ended December 31, ----------------------- 1999 2000 2001 (in thousands) -------------------------------------------------------------------------- Research and development......................... $14 $ 546 $ 756 Sales and marketing.............................. 3 521 535 General and administrative....................... 36 344 772 --- ------ ------ $53 $1,411 $2,063 === ====== ======
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-4 INTERVIDEO, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts)
Notes Accum- Receivable ulated Total Convertible from Deferred Other Stock- Compre- Preferred Stock Common Stock Officer Stock Compre- Accum- holders' hensive ------------------- ---------------- and Compen- hensive ulated Equity Loss For Shares Amount Shares Amount Directors sation Loss Deficit (Deficit) the Year - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1998... 6,000,000 $ 488 880,000 $ 1 $ -- $ -- $ -- $ (525) $ (36) Issuance of Series C convertible preferred stock, net of issuance cost of $12..................... 2,000,000 3,988 -- -- -- -- -- -- 3,988 Exercise of common stock options.................... -- -- 240,540 25 -- -- -- -- 25 Issuance of common stock options to consultants and other nonemployees......... -- -- -- 38 -- -- -- -- 38 Deferred stock compensation. -- -- -- 218 -- (218) -- -- -- Amortization of deferred stock compensation expense. -- -- -- -- -- 53 -- -- 53 Net loss.................... -- -- -- -- -- -- -- (1,434) (1,434) $(1,434) ---------- ------- --------- ------ ----- ------- ----- -------- ------- ------- BALANCE, December 31, 1999... 8,000,000 4,476 1,120,540 282 -- (165) -- (1,959) 2,634 $(1,434) ======= Issuance of Series D convertible preferred stock, net of issuance cost of $45..................... 4,213,750 16,810 -- -- -- -- -- -- 16,810 Exercise of common stock options.................... -- -- 508,510 94 -- -- -- -- 94 Issuance of common stock options to consultants and other nonemployees......... -- -- -- 69 -- -- -- -- 69 Deferred stock compensation. -- -- 3,452 -- (3,452) -- -- -- Amortization of deferred stock compensation expense. -- -- -- -- -- 1,411 -- -- 1,411 Foreign currency translation adjustment................. -- -- -- -- -- -- (84) -- (84) $ (84) Net loss.................... -- -- -- -- -- -- -- (5,745) (5,745) (5,745) ---------- ------- --------- ------ ----- ------- ----- -------- ------- ------- BALANCE, December 31, 2000... 12,213,750 21,286 1,629,050 3,897 -- (2,206) (84) (7,704) 15,189 $(5,829) ======= Exercise of common stock options.................... -- -- 168,874 111 -- -- -- -- 111 Notes receivable from officer and directors for exercised options.................... -- -- 176,000 800 (623) (177) -- -- -- Redemption of Series D from AVPD Purchase.............. (25,000) (100) -- -- -- -- -- -- (100) Issuance of common stock options to consultants and other nonemployees......... -- -- -- 21 -- -- -- -- 21 Interest income on notes receivable for officer and directors.................. -- -- -- -- (44) -- -- -- (44) Deferred stock compensation. -- -- -- 1,750 -- (1,750) -- -- -- Amortization of deferred stock compensation expense. -- -- -- -- -- 2,063 -- -- 2,063 Foreign currency translation adjustment................. -- -- -- -- -- -- (104) -- (104) $ (104) Net loss.................... -- -- -- -- -- -- -- (9,177) (9,177) (9,177) ---------- ------- --------- ------ ----- ------- ----- -------- ------- ------- BALANCE, December 31, 2001... 12,188,750 $21,186 1,973,924 $6,579 $(667) $(2,070) $(188) $(16,881) $ 7,959 $(9,281) ========== ======= ========= ====== ===== ======= ===== ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-5 INTERVIDEO, INC. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, ------------------------- 1999 2000 2001 - --------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss...................................................................... $(1,434) $(5,745) $(9,177) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................................. 89 746 1,220 Cost of settlement of intellectual property matters........................ -- -- 3,718 Long term investment reserve............................................... -- -- 100 In-process research and development........................................ -- 700 -- Deferred stock compensation................................................ 53 1,411 2,063 Provision for doubtful accounts............................................ 42 110 185 Loss from disposal of assets............................................... 16 112 235 Other...................................................................... 38 69 (21) Changes in assets and liabilities: Accounts receivable..................................................... (425) (2,149) (522) Prepaid expenses and other current assets............................... (66) (204) (214) Other assets............................................................ (21) (252) (649) Accounts payable........................................................ 123 353 115 Accrued liabilities..................................................... 1,012 4,519 4,331 ------- ------- ------- Net cash provided by (used in) operating activities.................. (573) (330) 1,384 ------- ------- ------- Cash flows from investing activities: Purchase of property and equipment............................................ (557) (1,976) (712) Purchase of Audio Visual Products Division (AVPD)............................. -- (2,200) (1,000) Purchase of long-term investments............................................. (100) (200) -- ------- ------- ------- Net cash used in investing activities................................ (657) (4,376) (1,712) ------- ------- ------- Cash flows from financing activities: Proceeds from issuance of Series C preferred stock, net....................... 3,638 -- -- Proceeds from issuance of Series D preferred stock, net....................... -- 16,710 -- Proceeds from exercise of common stock options................................ 25 94 111 ------- ------- ------- Net cash provided by financing activities............................ 3,663 16,804 111 ------- ------- ------- Effect of change in exchange rates on cash........................................ -- (58) (103) ------- ------- ------- Net increase (decrease) in cash and cash equivalents.............................. 2,433 12,040 (320) Cash and cash equivalents, beginning of year...................................... 195 2,628 14,668 ------- ------- ------- Cash and cash equivalents, end of year............................................ $ 2,628 $14,668 $14,348 ======= ======= ======= 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) Notes receivable and accrued interest from officer and directors.............. -- -- 800
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-6 INTERVIDEO, INC. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 2001 1. ORGANIZATION AND BUSINESS: 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 in its product suite 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 Note 13. During the fourth quarter of 2001, the Company created a wholly owned subsidiary to market its products in China. 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; declining selling prices; third-party intellectual property claims; potential competition from larger more established companies; and dependence on key employees. The Company's fiscal year is a calendar year and therefore contains 52 weeks. 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. Revenue 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, 2001, such transactions have not been material. 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. Reverse stock split In April 2002, the Board of Directors approved a .44-for-one reverse stock split for the holders of common stock. This stock split has been retroactively reflected in the accompanying consolidated financial statements for all years presented. - -------------------------------------------------------------------------------- F-7 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 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, and commercial paper with an original maturity date of less than 90 days. Significant concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company generally does not require its customers to provide collateral or other security to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers' financial condition and maintains allowances for estimated potential bad debt losses. Two customers' accounts receivable balances were individually greater than 10% of total accounts receivable at December 31, 2000, and together comprised 29% of total accounts receivable. Three customers' accounts receivable balances were individually greater than 10% of total accounts receivable at December 31, 2001, and together comprised 56% of total accounts receivable. The following individual customers accounted for greater than 10% of revenue:
For the year ended December 31, --------------------------- 1999 2000 2001 - ----------------------------------------------------------------------- Customer A............................. 22% -- -- Customer B............................. 12% -- -- Customer C............................. 12% -- -- Customer D............................. -- 21% 29% Customer E............................. -- -- 12%
Valuation accounts The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required. Below is a summary of the changes in the Company's allowance for doubtful accounts for the years ended December 31, 2000 and 2001.
Balance at Balance Beginning of at End of the Period Additions Write-off the Period Allowance for Doubtful Accounts (amounts in thousands) - ------------------------------------------------------------------------------------ December 31, 2000...................... $ 42 $110 $-- $152 December 31, 2001...................... $152 $185 $18 $319
- -------------------------------------------------------------------------------- F-8 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 $721,000 for the years ended December 31, 1999, 2000, and 2001, respectively. Property and equipment consists of the following as of December 31, 2000 and 2001, (in thousands):
December 31, --------------- 2000 2001 --------------------------------------------------------- Equipment............................... $1,121 $ 1,240 Furniture and fixtures.................. 506 445 Purchased software...................... 682 693 Leasehold improvements.................. 153 173 Construction in process................. -- 274 Other................................... 46 46 ------ ------- 2,508 2,871 Less: Accumulated depreciation.......... (517) (1,146) ------ ------- Property and equipment, net...... $1,991 $ 1,725 ====== =======
Impairment of long-lived assets When events and circumstances warrant a review, the Company evaluates the carrying value of long-lived assets to be held and used. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such an asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced by the cost to dispose of such assets. Goodwill and other intangible assets Goodwill and other intangibles are amortized using the straight-line method over their estimated useful life of five years. 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 and cease amortizing goodwill to comply with SFAS No. 142, discussed below under "Recent accounting pronouncements." Revenue recognition The Company's revenue is derived from fees paid under software licenses granted primarily to OEMs, distributor, 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 collectibility is reasonably assured. Under the terms of the Company's license agreements with the OEMs, the OEMs are entitled only to unspecified upgrades on a when and if available basis prior to sell through to end users. Under the terms - -------------------------------------------------------------------------------- F-9 INTERVIDEO, INC. - -------------------------------------------------------------------------------- of the Company's revenue recognition policy, we recognize revenue based on evidence of products being sold by the OEMs. The Company does not have any obligation to provide upgrades to the OEMs' customers. Accordingly, the Company does not defer any revenue as the company no longer has an obligation once the OEM's product has been shipped and revenue has been recorded. Under the terms of each OEM license agreement, the OEM will "qualify" the software on its then current platform. (The OEM will have the right to return the software prior to being qualified.) Once the software has been qualified, the OEM will begin to ship product and report sales to the Company at which point revenue will be recorded. Once it has been shipped, the OEM does not have a right of return. Therefore the Company does not maintain a returns reserve related to OEM sales. 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. Under the terms of our OEM license agreements, the OEM has certain inspection and acceptance rights. These rights lapse once the product has been qualified and the shipment reported to the Company. Therefore the Company does not believe that these acceptance rights impact the amount or timing of revenue recognition. Sales to end users are primarily made directly through the Company's websites. There are no unspecified upgrade rights related to these sales. The Company does not offer specified upgrade rights to any class of customer. The endusers who purchase software from websites do not have rights of return. Cost of Revenue Cost of revenue is comprised of direct product cost, cost of settlement of intellectual property matters, and cost of impairment of software license agreement. Direct product cost consists primarily of royalties paid to third parties for technologies incorporated into the Company's products, expenses incurred to manufacture, package and distribute the Company's software products, the amortization of developed technology, and costs associated with post-contract customer support. These amounts are accrued in the period of the related sales and are included in accrued liabilities. Cost of settlement of intellectual property matters consists of amounts that the Company has agreed to pay to third parties in settlement of alleged infringement of certain patents used in the Company's and the customer's products in periods prior to December 31, 2001. Cost of impairment of software license agreement consists of royalty payments for a license royalty agreement that the Company has determined to be unrealizable. In December 2000, the Company entered into a software license agreement providing for an aggregate of $1.1 million of minimum royalty payments through October 2002. The associated expense is recognized as a direct product cost based upon the number of customer registrations received during the relevant period. As of September 30, 2001 $35,000 of royalty payments had been expensed based on customer registrations received through that date. In September 2001, the Company determined that a large portion of the minimum royalty payment - -------------------------------------------------------------------------------- F-10 INTERVIDEO, INC. - -------------------------------------------------------------------------------- would be unrealizable. Accordingly, $958,000 has been charged to cost of impairment of software license agreement of which $613,000 relates to royalty payments already made and $345,000 relate to future liabilities under the agreement. The remaining $57,000 will be recorded in direct product cost during 2002. 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 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 to end users of the Company's products. In connection with the sale of certain products, the Company provides a limited amount of free telephone support service to end users. This free service, also referred to as post-contract customer support ("PCS"), is included in cost of revenue. The Company does not defer the recognition of any revenue associated with sales to end users, because no separate charge is made for the PCS and PCS is provided within 90 days after the associated revenue is recognized. - -------------------------------------------------------------------------------- F-11 INTERVIDEO, INC. - -------------------------------------------------------------------------------- Net loss per share Basic net loss per common share is calculated by dividing net loss for the period 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 for the period 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 to the extent these shares are dilutive. 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. A reconciliation of the numerator and denominator used in the calculation of basic and dilutive net income (loss) per share available to common stockholders is as follows (in thousands, except for share and per share amounts):
Years ended December 31, --------------------------------- 1999 2000 2001 - ---------------------------------------------------------------------------------------------------------- Numerator Net loss (in thousands)................................................ $ (1,434) $ (5,745) $ (9,177) ========= ========== ========== Denominator Basic and diluted: Weighted average common shares outstanding......................... 948,424 1,575,730 1,839,423 Less: Weighted average unvested shares subject to repurchase..... (702,644) (420,666) (307,362) --------- ---------- ---------- Denominator on basic and diluted calculation....................... 245,780 1,155,064 1,532,061 ========= ========== ========== Basic and diluted net loss per share................................... $ (5.83) $ (4.97) $ (5.99) ========= ========== ========== Shares used above to compute basic and diluted net loss per share...... 245,780 1,155,064 1,532,061 ========= ========== Pro forma adjustment to reflect weighted average effect of assumed conversion of convertible preferred stock (unaudited)................. 5,363,050 ---------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited).............................................. 6,895,111 ========== Pro forma basic and diluted net loss per common share (unaudited)...... $ (1.33) ==========
The following table summarizes weighted average shares of common stock equivalents that are not included in the denominator used in the diluted net loss per share calculation because to do so would be antidilutive for the periods presented:
As of December 31, ----------------------------- Effect of Common Stock Equivalents 1999 2000 2001 --------------------------------------------------------------------- Common stock subject to repurchase..... 702,644 420,666 307,362 Options to purchase common stock....... 1,074,966 2,068,609 1,810,803 Series A preferred stock............... 2,200,000 2,200,000 2,200,000 Series B preferred stock............... 440,000 440,000 440,000 Series C preferred stock............... 441,206 880,000 880,000 Series D preferred stock............... -- 1,245,470 1,843,050 --------- --------- --------- Total............................ 4,858,816 7,254,745 7,481,215 ========= ========= =========
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 - -------------------------------------------------------------------------------- F-12 INTERVIDEO, INC. - -------------------------------------------------------------------------------- outstanding for all periods presented. To date, the Company has not made any issuances or grants for nominal consideration. Unaudited pro forma net loss per share 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 upon the completion of the Company's proposed initial public offering (using the if-converted method). Unaudited pro forma presentation The unaudited pro forma information in the accompanying consolidated balance sheet assumes the conversion of the outstanding shares of convertible preferred stock into 5,363,050 shares of common stock as though the completion of an initial public offering had occurred on December 31, 2001. Common shares resulting from such initial public offering and its related estimated net proceeds are excluded from such pro forma information. Stock based compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure requirement of SFAS No. 123, "Accounting for Stock Based Compensation." Options granted to consultants and other nonemployees are accounted for at fair value determined using the Black-Scholes method in accordance with the provision of SFAS No. 123 and EITF consensus No. 96-78, "Accounting for Instruments That Are Issued to Other Than Employees for Acquiring, or In Connection with Selling, Goods, or Services," which requires that such equity instruments are recorded at their fair value on the measurement date, typically the date of grant. Income tax The Company accounts for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. A valuation allowance is provided to reduce tax assets to an amount that would be reasonably realizable in the future periods. Comprehensive loss Comprehensive loss is the total of net loss and all other nonowner changes in shareholders' equity. The Company's only component of other comprehensive loss is net loss attributed to foreign currency translation adjustments. Such amounts are excluded from net loss and are reported in accumulated other comprehensive loss in the accompanying statements of operations and 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 - -------------------------------------------------------------------------------- F-13 INTERVIDEO, INC. - -------------------------------------------------------------------------------- an asset or liability measured at its fair value. The Company implemented SFAS No. 133 on January 1, 2001. Because the Company does not engage in derivatives or hedging activities, SFAS No. 133 did not have a material impact on the Company's financial position or 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 (Opinion 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. In June 2001, the FASB issued 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 June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company will adopt SFAS No. 143 effective December 31, 2002, and does not expect it to have a material impact on the Company's financial position and 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. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the presentation of the year ended December 31, 2001. 3. OTHER ASSETS: Other assets consist of the following (in thousands):
As of December 31, ----------------- 2000 2001 - -------------------------------------------------------------------- Deposits......................................... $ 218 $ 886 Investments...................................... 300 200 Assembled work force............................. 150 150 Purchased developed technology................... 1,000 1,000 Goodwill......................................... 1,339 1,339 Other............................................ 62 -- Less: Accumulated amortization................... (290) (788) ------ ------ $2,779 $2,787 ====== ======
Goodwill arose from the acquisition of AVPD as discussed in Note 13. - -------------------------------------------------------------------------------- F-14 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 4. ACCRUED LIABILITIES: Accrued liabilities consist of the following (in thousands):
As of December 31, ------------------ 2000 2001 - ------------------------------------------------------------------------------ Accrued payroll and related benefits....................... $ 927 $ 1,097 Royalties for signed agreements............................ 2,604 3,722 Accruals for unsigned agreements........................... 900 2,250 Accrued settlement of intellectual property claims......... -- 4,233 AVPD acquisition price payable............................. 900 -- Accrued promotion.......................................... -- 600 Accrued restructuring...................................... -- 307 Other...................................................... 1,130 1,391 ---------- ------- Total................................................ $ 6,461 $13,600 ========== =======
During the year ended December 31, 2001, the Company accrued $4.2 million for payment of settlement of alleged contributory infringement of certain patents allegedly used in the Company's products or its customers' products. The Company has agreed to pay to one customer a settlement of shares of preferred stock convertible into 286,000 shares of our common stock upon the closing of this offering, with a total value of approximately $3.7 million for claims relating to products sold prior to December 31, 2001. The Company expects to issue these shares in 2002. The Company also expects to pay approximately $515,000 in cash to other parties for settlement of similar claims. There can be no assurance that there will not be additional claims in the future. During the years ended December 31, 2000 and 2001, the Company accrued $900,000 and $1.4 million respectively, for royalties for unsigned agreements. These accruals represent amounts payable based upon (i) units sold under arrangements where the Company believes that is has a probable and estimatable legal obligation times (ii) royalty unit price that the relevant patent holders have published. These published amounts have remained consistent but are expected to decrease in the future which will impact the accrual in future periods. It is not known when agreements will ultimately be signed, if ever. 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's and its 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 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 - -------------------------------------------------------------------------------- F-15 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 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 its 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 and may cause the Company to expend significant resources. 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 and 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 its 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 its 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. 5. COMMITMENTS AND CONTINGENCIES: Lease commitments As of December 31, 2001, future minimum commitments under operating leases are as follows (in thousands):
Fiscal Year Lease ----------------------------------------------------------- ------ 2002....................................................... $ 851 2003....................................................... 607 2004....................................................... -- 2005....................................................... -- ------ $1,458 ======
- -------------------------------------------------------------------------------- F-16 INTERVIDEO, INC. - -------------------------------------------------------------------------------- Rent expense was $113,000, $347,000 and $898,000 for the years ended December 31, 1999, 2000 and 2001, respectively, and is included in operating expenses on the accompanying statements of operations. 6. CONVERTIBLE PREFERRED STOCK: As of December 31, 2001, convertible preferred stock consists of the following, net of issuance costs (in thousands, except share amounts):
December 31, --------------- 2000 2001 - --------------------------------------------------------------------------------------- Series A: Authorized--5,000,000 shares....................................... Outstanding--5,000,000 shares; liquidation preference of $250...... $ 245 $ 245 Series B: Authorized--1,000,000 shares....................................... Outstanding--1,000,000 shares; liquidation preference of $250...... 243 243 Series C: Authorized--2,000,000 shares....................................... Outstanding--2,000,000 shares; liquidation preference of $4,000.... 3,988 3,988 Series D: Authorized--5,000,000 shares....................................... Outstanding--4,188,750 shares; liquidation preference of $16,755... 16,810 16,710 ------- ------- $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. ... 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 stockholders on a share for share basis (assuming conversion of all outstanding preferred stock into common stock). - -------------------------------------------------------------------------------- F-17 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 7. COMMON STOCK: In May 1998, the Company issued 880,000 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 $0.00114 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, 2000 and 2001, 348,333, 568,333 and 788,333 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, 2001, the Company had reserved shares of authorized but unissued common stock for the following: Conversion of Series A preferred stock..................... 2,200,000 Conversion of Series B preferred stock..................... 440,000 Conversion of Series C preferred stock..................... 880,000 Conversion of Series D preferred stock..................... 2,200,000 Stock Options......................................... 3,402,326 --------- Total shares reserved................................ 9,122,326 =========
8. 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 880,000 shares of the Company's authorized but unissued common stock. In 1999, the Company amended the Plan to grant up to 3,520,000 shares of the Company's authorized but unissued common stock. In 2000, the Company amended the Plan to grant up to 4,400,000 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 stockholders 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. 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. The Company granted 425,194, 129,800 and 1,320 nonstatutory stock options to consultants in 1999, 2000 and 2001, respectively. The options either vest immediately or over four years. - -------------------------------------------------------------------------------- F-18 INTERVIDEO, INC. - -------------------------------------------------------------------------------- Option activity is as follows:
Option Option Shares Activity Activity Total Available for Under Outside of Outstanding Grant the Plan the Plan Options - ------------------------------------------------------------------------------------------ December 31, 1998...................... 880,000 -- -- -- Authorized.......................... 2,640,000 -- -- -- Options granted..................... (2,561,504) 2,561,504 25,850 2,587,354 Options exercised................... -- (227,890) (12,650) (240,540) Options canceled.................... 4,400 (4,400) -- (4,400) ---------- --------- ------- --------- December 31, 1999...................... 962,896 2,329,214 13,200 2,342,414 Authorized.......................... 880,000 -- -- -- Options granted..................... (972,664) 972,664 44,000 1,016,664 Options exercised................... -- (508,510) -- (508,510) Options canceled.................... 99,743 (99,743) -- (99,743) ---------- --------- ------- --------- December 31, 2000...................... 969,975 2,693,625 57,200 2,750,825 Authorized.......................... -- -- -- -- Options granted..................... (444,928) 444,928 26,400 471,328 Options exercised................... -- (287,674) (57,200) (344,874) Options canceled.................... 515,488 (515,488) -- (515,488) ---------- --------- ------- --------- December 31, 2001...................... 1,040,535 2,335,391 26,400 2,361,791 ========== ========= ======= =========
The following table summarizes the stock options outstanding and exercisable as of December 31, 2001:
Weighted Average Number of Options Remaining Options Outstanding at Contractual Life Weighted Average Exercisable as of Range of Exercise Prices December 31, 2001 (Years) Exercise Price December 31, 2001 - ---------------------------------------------------------------------------------------------- $0.11-0.13 1,438,929 7.26 $0.11 1,252,122 0.57-0.63 279,586 7.89 0.59 190,880 4.55-5.00 643,276 8.89 4.61 257,892 - ------------------------ ----------------- ---------------- ---------------- ----------------- $0.11-5.00 2,361,791 7.78 $1.40 1,700,894 ======================== ================= ================ ================ =================
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 with SFAS No. 123, pro forma net loss would be as follows:
Year ended December 31, -------------------------- 1999 2000 2001 ----------------------------------------------------------------------------- Net Loss: As reported................................... $(1,434) $(5,745) $ (9,177) ======= ======= ======== Pro Forma..................................... $(1,447) $(6,464) $(11,062) ======= ======= ======== Net loss per share--Basic and Diluted: As reported................................... $ (5.83) $ (4.97) $ (5.99) ======= ======= ======== Pro Forma..................................... $ (5.88) $ (5.60) $ (7.22) ======= ======= ========
- -------------------------------------------------------------------------------- F-19 INTERVIDEO, INC. - -------------------------------------------------------------------------------- The weighted average exercise price of options granted during 1999, 2000 and 2001 was $0.14, $3.35 and $4.30, 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, 2000 and 2001: 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 zero percent. 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 $38,000, $69,000 and $21,000 for the years ended December 31, 1999, 2000 and 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 using an accelerated method of amortization 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 years ended December 31, 1999, 2000 and 2001, the Company recorded deferred stock compensation within stockholders' equity of $218,000, $3.4 million and $1.7 million, 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 stockholders' 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, $1.4 million and $2 million for the years ended December 31, 1999, 2000 and 2001, respectively. Notes receivable from officer and directors In March 2001, the Company granted a senior executive an option to purchase 132,000 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 stockholder'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 - -------------------------------------------------------------------------------- F-20 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 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 two directors of the Company options to each purchase 22,000 shares of common stock exercisable with a promissory note. These options were exercised in December 2001. The notes bear interest at 5.07% 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 2001. 9. 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. 10. 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, ---------------- 2000 2001 - ----------------------------------------------------------------------------- Deferred income tax assets: Federal net operating loss carryforwards................ $ 1,412 $ 1,231 State net operating loss carryforwards.................. 242 127 Start-up costs capitalized for tax...................... 110 74 Research and development credit......................... 500 961 Depreciation and amortization........................... 150 1,091 Other temporary differences............................. 180 3,276 Other tax credits....................................... 627 107 ------- ------- 3,221 6,867 Valuation allowance..................................... (3,221) (6,867) ------- ------- Net deferred income tax asset........................... $ -- $ -- ======= =======
All deferred tax assets carried a 100% valuation allowance at December 31, 2000 and 2001. Federal and state net operating loss carryforwards at December 31, 2001, were approximately $3.6 million and $2.2 million, respectively. The federal net operating loss carryforwards expire on various dates through 2021, 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 $476,000 and $485,000, respectively. The federal tax credit carryforwards expire on various dates through 2021, 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. - -------------------------------------------------------------------------------- F-21 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 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 2001 - -------------------------------------------------------------------------------- Federal statutory rate..................................... 34.0% 34.0% 34.0% State taxes, net of federal benefit........................ 5.8 5.8 5.8 Foreign tax rates.......................................... 0.1 9.0 22.3 Change in valuation allowance.............................. (39.9) (39.8) (39.8) ----- ----- ----- Total................................................ 0.0% 9.0% 22.3% ===== ===== =====
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 significant components of income tax expense for 2001 are as follows (in thousands):
Current Deferred Total ---------------------------------------------------------------- Federal.............................. $ -- $(2,906) $(2,906) State................................ -- (740) (740) Foreign.............................. 924 -- 924 Valuation allowance.................. -- 3,646 3,646 ---- ------- ------- Total income tax expense...... $924 $ -- $ 924 ==== ======= =======
11. 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 stockholders. 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. - -------------------------------------------------------------------------------- F-22 INTERVIDEO, INC. - -------------------------------------------------------------------------------- The Company provided services to Fundwatch Global Financial Ltd. that amounted to approximately $20,000 and $51,000 in 2000 and 2001, respectively, and sold equipment to Fundwatch Global Financial for approximately $80,000 in 2001. Fundwatch Global Financial's chief executive officer is the brother of the Company's chief executive officer. 12. 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. 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 revenue by geographic region (in thousands):
Year ended December 31, ----------------------- 1999 2000 2001 --------------------------------------------------------------- Americas............................... $1,398 $ 6,959 $18,622 Europe................................. 265 2,388 3,824 Asia: Japan............................... 543 2,931 8,579 Other Asia.......................... 830 3,148 2,738 ------ ------- ------- Total............................ $3,036 $15,426 $33,763 ====== ======= =======
13. 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 GAMUT technological assets that would accelerate the Company's development and introduction of next generation 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, and for the year ended December 31, 2001. The purchase cost of the acquisition was $3.2 million, including legal, valuation and accounting fees of $200,000, and was accounted for as a purchase. The Company paid $2.2 million during 2000 and accrued $1 million for payment in stock, with tentative delivery of 11,000 shares of preferred stock at the closing. In January 2001, in accordance with the provisions of the purchase agreement, the seller returned these shares and received $1 million in U.S. dollars. The purchase price was allocated as follows: $700,000 to in-process research and development, $1.3 million to goodwill, $150,000 to assembled work force, and $1 million to developed technology. 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. - -------------------------------------------------------------------------------- F-23 INTERVIDEO, INC. - -------------------------------------------------------------------------------- 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. 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. All of the in-process technology projects acquired from AVPD were completed by the end of 2000 and incorporated into the Company's WinRip product, which began shipping in February 2001. Total amortization expense was $290,000 and $498,000 for the years ended December 31, 2000 and 2001. 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) $(6,061) Basic and diluted weighted average net loss per share...... $ (9.15) $ (5.25)
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 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. 14. IMPAIRMENT OF PROMOTIONAL AGREEMENT: In March 2001 the Company entered into a promotional agreement with an online music provider for exclusive marketing and promotion space. In accordance with the agreement, the Company is required to pay $1.1 million over 12 months and provide a $600,000 standby letter of credit. During the period from March 2001 to August 2001, the Company incurred $550,000 for promotional costs, which have been recorded in sales and marketing expense. Based on the results of the promotion, the Company determined that there was minimal future promotional benefit to be derived from this contract, even though the payments had been made or were still due. The Company has classified the remaining $550,000 of promotional expense separately as impairment of promotional agreement. 15. RESTRUCTURING: During the second quarter of 2001, the Company approved a restructuring plan to reduce its workforce and consolidate offices to align its cost structure with the Company's projected revenue growth and - -------------------------------------------------------------------------------- F-24 INTERVIDEO, INC. - -------------------------------------------------------------------------------- economic and industry conditions at the time. A one-time charge of $850,000 related to this plan was recorded in operating expense in the second quarter. This charge included $257,000 related to employee terminations and $593,000 related to office closures. This restructuring eliminated approximately 25% of the Company's worldwide employee workforce, including employees in research and development, sales and marketing and general and administrative. This plan is expected to result in annual savings of approximately $3.0 million. The estimated cost savings have been calculated based upon expected cost reductions related to employee termination and reduced facilities expenses. Accrued restructuring expenses related to the future payment of restructuring expenses are as follow (in thousands):
As of December 31, 2001 -------------------------------------------------------------- Severance........................................ $ 2 Office closures.................................. 305 ---- Total...................................... $307 ====
16. SUBSEQUENT EVENTS: Approval to file registration statement In January 2002, the Board of Directors of the Company approved the filing of a registration statement by the Company under the Securities Act of 1933 relating to an initial public offering of the Company's common stock. Stock option issuances In January 2002, the Company granted to employees and consultants options to purchase 248,996 and 88,000 shares of common stock at an exercise price of $6.82 and $7.50 per share respectively. These options have a term of up to 10 years and the options either vest immediately or over four years from the date of grant. In connection with these options, deferred stock compensation of $2.1 million has been recorded. In March 2002, the Company granted to employees and consultants options to purchase 79,816 shares of common stock at an exercise price of $9.09 per share. These options have a term of up to 10 years and the options vest over four years from the date of grant. In connection with these options, deferred stock compensation of $355,000 has been recorded. In April 2002, the Company granted to employees and consultants options to purchase 21,340 shares of common stock at an exercise price of $11.36 per share. These options have a term of up to 10 years and the options vest over four years from the date of grant. In connection with these options, deferred stock compensation of $44,000 has been recorded. The Board of Directors has approved a loan Honda Shing $100,000 at an interest rate of 10%. The loan will be full recourse and will be secured by the shares of common stock held by Mr. Shing. Principal and interest on the note shall become due and payable one year from the date of issuance. Reincorporation In April 2002, the Board of Directors approved the Company's plans to reincorporate in Delaware prior to the completion of this offering. - -------------------------------------------------------------------------------- F-25 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-26 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- BALANCE SHEETS (in thousands of U.S. dollars)
December 31, ------------ June 7, 1998 1999 2000 (unaudited) - ---------------------------------------------------------------------------------- ASSETS 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-27 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands of U.S. dollars)
For the period from For the period April 14, For the year from 1998 to ended January 1, December 31, December 31, 2000 to 1998 1999 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-28 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS (in thousands of U.S. dollars)
For the period from April 14, For the year For the period 1998 to ended from December 31, December 31, January 1, 2000 1998 1999 to June 7, 2000 (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-29 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. GENERAL: Business On June 7, 2000, InterVideo Inc. acquired the Audio/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. AVPD was 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-30 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-31 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. - -------------------------------------------------------------------------------- F-32 AUDIO/VIDEO PRODUCTS DIVISION OF FORMOSOFT INTERNATIONAL INC. - -------------------------------------------------------------------------------- Advertising costs Advertising costs are expensed as incurred. Advertising expense was $8,000 in 1998, $15,000 in 1999, and $160 (unaudited) for the period ended June 7, 2000. 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 transactions are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. 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-33 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 were recorded 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-34 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-35 - -------------------------------------------------------------------------------- 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, Pro Forma Pro Forma Inc. AVPD Adjustments(a) Combined InterVideo, Inc. Unaudited pro forma condensed combined statement of operations (amounts in thousands, except share and per share data) - ------------------------------------------------------------------------------------------------- Revenue................................. $15,426 149 $15,575 Cost of revenue......................... $ (5,361) (1) (208) $(5,570) Gross profit............................ $10,065 148 (208) $10,005 Operating expenses: Research and development............ $ 6,585 138 $ 6,723 Selling and marketing............... $ 4,978 $ 4,978 General and administrative.......... $ 2,667 116 $ 2,783 Stock compensation.................. $ 1,411 $ 1,411 Amortization of goodwill............ $ 174 $ 174 Total operating expense................. $ 15,815 254 $16,069 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................... $ (4.97) $ (5.25) Weighted average number of common shares outstanding: Basic and diluted................... 1,155 1,155
- -------- (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-36 [LOGO] InterVideo 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....... $ 5,185 NASD filing fee............................................ 6,135 Printing and engraving expenses............................ 300,000 Legal fees and costs....................................... 800,000 Accounting fees and costs.................................. 400,000 Nasdaq National Market listing fees........................ 100,000 Transfer agent and registrar fees and expenses............. 15,000 Road show expenses......................................... 250,000 Miscellaneous expenses..................................... 23,680 ---------- Total................................................... $1,900,000 ==========
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 certain 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 for 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: In April, 2002, the registrant declared a stock split in the amount of .44 shares for every share of common stock outstanding, carried out on a certificate-by-certificate basis. All references to shares of common stock in this Registration Statement reflect this stock split. (1) From March 1999 to December 2001, we have granted stock options to purchase an aggregate of 3,979,096 shares of common stock at exercise prices ranging from $0.11 to $5.00 per share to employees, consultants and directors pursuant to our 1998 Plan. In addition, we have granted stock options to purchase an aggregate of 96,250 shares of common stock outside of the 1998 Plan. The options issued - -------------------------------------------------------------------------------- II-1 Part II - -------------------------------------------------------------------------------- outside of the 1998 Plan were issued at exercise prices ranging from $0.11 to $0.57 per share to consultants and other service providers (including the registrant's former legal counsel and financial advisors). (2) From May to August 1999, we sold an aggregate of 2,000,000 shares of Series C preferred stock convertible into 880,000 shares of common stock, to 39 investors, 26 of which are non-U.S. persons, at a price of $2.00 per share for an aggregate purchase price of $4,000,000. (3) From April 2000 to June 2000, we sold an aggregate of 4,213,750 shares of Series D preferred stock, convertible into 1,854,050 shares of common stock, to 68 investors, 54 of which are non-U.S. persons, at a price of $4.00 per share for an aggregate purchase price of $16,855,000. 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. (4) In April, 2002, we issued shares of Series D Preferred Stock, convertible into 286,000 shares of common stock, to Dell Products, L.P., pursuant to a settlement and release agreement between the registrant and Dell Products, L.P. Of the securities described in paragraph (1) above, 135,850 shares were exempt from registration under Section 4(2) of the Securities Act and 3,939,496 shares were exempt by virtue of Rule 701 in that they were offered and sold either pursuant to a written compensatory benefit plan or pursuant to a written contract relating to compensation. The sale and issuance of securities described in paragraphs (2) and (3) and (4) above were sold to accredited or sophisticated persons and were exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act, Regulation D and Regulation S. 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 Randall 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.
- -------------------------------------------------------------------------------- II-2 Part II - --------------------------------------------------------------------------------
Exhibit Number Description - -------------------------------------------------------------------------------------------------------------- 10.14+ Software License Agreement between the registrant and Dell Products L.P., dated August 4, 1999, as amended. 10.15 Settlement Agreement and Release between the registrant and Dell Products, L.P., dated April 26, 2002. 21.1** Subsidiaries of the registrant. 23.1 Consent of Arthur Andersen. 23.2 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1). 24.1** Power of Attorney. 99.1 Letter from the registrant to the Securities and Exchange Commission dated April 26, 2002.
- -------- **Previously filed. + Confidential treatment 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. 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 Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on April 26, 2002. INTERVIDEO, INC. By: /s/ RANDALL BAMBROUGH ----------------------------------- Randall Bambrough, Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed by the following persons on April 26, 2002 in the capacities indicated. Signature Title ----------------------------------------------------------------------------- * President, Chief Executive Officer and -------------------------------------- Director Steve Ro (Principal Executive Officer) /s/ RANDALL BAMBROUGH Chief Financial Officer (Principal -------------------------------------- Financial and Accounting Officer) Randall Bambrough * Director -------------------------------------- Henry Shaw * Director -------------------------------------- George Haber * Director -------------------------------------- Joseph Liu *By: /s/ RANDALL BAMBROUGH _________________________________ Randall Bambrough ATTORNEY-IN-FACT - -------------------------------------------------------------------------------- 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 Randall 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. 10.14+ Software License Agreement between the registrant and Dell Products L.P., dated August 4, 1999, as amended. 10.15 Settlement Agreement and Release between the registrant and Dell Products, L.P., dated April 26, 2002. 21.1** Subsidiaries of the registrant. 23.1 Consent of Arthur Andersen. 23.2 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1). 24.1** Power of Attorney. 99.1 Letter from the registrant to the Securities and Exchange Commission dated April 26, 2002.
- -------- **Previously filed. + Confidential treatment requested for a portion of this agreement. - -------------------------------------------------------------------------------- EX-1.1 3 dex11.txt FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 [_____________] Shares Common Stock ($0.001 Par Value) UNDERWRITING AGREEMENT _______________, 2002 UNDERWRITING AGREEMENT ____________ ___, 2002 UBS Warburg LLC CIBC World Markets Corp. Raymond James & Associates, Inc. As representatives of the several underwriters named in Schedule A hereto ---------- c/o UBS Warburg LLC 299 Park Avenue New York, New York 10171-0026 Ladies and Gentlemen: InterVideo, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the underwriters named in Schedule A annexed hereto (the ---------- "Underwriters") an aggregate of [________________] shares (the "Firm Shares") of Common Stock, $0.001 par value (the "Common Stock"), of the Company. In addition, solely for the purpose of covering over-allotments, the Company proposes to grant to the Underwriters the option to purchase from the Company up to an additional [_____________] shares of Common Stock (the "Additional Shares"). The Firm Shares and the Additional Shares are hereinafter collectively sometimes referred to as the "Shares." The Shares are described in the Prospectus which is referred to below. The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively called the "Act"), with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1, (File No. 333-76640) including a prospectus, relating to the Shares. The Company has furnished to you, for use by the Underwriters and by dealers, copies of one or more preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") relating to the Shares. Except where the context otherwise requires, the registration statement, as amended when it becomes effective, including all documents filed as a part thereof, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430(A) under the Act and also including any registration statement filed pursuant to Rule 462(b) under the Act, is herein called the Registration Statement, and the prospectus, in the form filed by the Company with the Commission pursuant to Rule 424(b) under the Act on or before the second business day after the date hereof (or such earlier time as may be required under the Act) or, if no such filing is required, the form of final prospectus included in the Registration Statement at the time it became effective, is herein called the Prospectus. The Company and the Underwriters agree as follows: 1. Sale and Purchase. Upon the basis of the warranties and representations ----------------- and subject to the terms and conditions herein set forth, the Company agrees to sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Company the aggregate number of Firm Shares set forth opposite the name of such Underwriter in Schedule A annexed ---------- hereto, in each case at a purchase price of $[______] per Share. The Company is advised by you that the Underwriters intend (i) to make a public offering of their respective portions of the Firm Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Firm Shares upon the terms set forth in the Prospectus. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine. In addition, the Company hereby grants to the several Underwriters the option to purchase, and upon the basis of the warranties and representations and subject to the terms and conditions herein set forth, the Underwriters shall have the right to purchase, severally and not jointly, from the Company, ratably in accordance with the number of Firm Shares to be purchased by each of them (subject to such adjustment as you shall determine to avoid fractional shares), all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares. This option may be exercised by you on behalf of the several Underwriters at any time on or before the thirtieth day following the date hereof, by written notice to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, and the date and time when the Additional Shares are to be delivered (such date and time being herein referred to as the "Additional Time of Purchase"); provided, however, that the Additional Time of Purchase shall not be earlier - -------- ------- than the Time of Purchase (as defined below) nor earlier than the second business day1 after the date on which the option shall have been exercised nor later than the tenth business day after the date on which the option shall have been exercised. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same proportion to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the total ---------- number of Firm Shares (subject, in each case, to such adjustment as you may determine to eliminate fractional shares). - ----------------- /(1)/ As used herein "business day" shall mean a day on which the New York Stock Exchange is open for trading. 2 2. Payment and Delivery. Payment of the purchase price for the Firm Shares -------------------- shall be made to the Company by Federal (same-day) funds wire transfer, against delivery of the Firm Shares to you through the facilities of the Depository Trust Company ("DTC") for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York City time, on [______________], 2002 (unless another time shall be agreed to by you and the Company or unless postponed in accordance with the provisions of Section 8 hereof). The time at which such payment and delivery are actually made is hereinafter sometimes called the "Time of Purchase." Certificates for the Firm Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify no later than the second business day preceding the Time of Purchase. For the purpose of expediting the checking of the certificates for the Firm Shares by you, the Company agrees to make such certificates available to you for such purpose at least two full business days preceding the Time of Purchase. Payment of the purchase price for the Additional Shares shall be made at the Additional Time of Purchase in the same manner and at the same office as the payment for the Firm Shares. Certificates for the Additional Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify no later than the business day preceding the Additional Time of Purchase. For the purpose of expediting the checking of the certificates for the Additional Shares by you, the Company agrees to make such certificates available to you for such purpose at least one full business day preceding the Additional Time of Purchase. 3. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to each of the Underwriters that: (a) the Company has not received, and has no notice of, any order of the Commission preventing or suspending the use of any Preliminary Prospectus, or instituting or threatening proceedings for that purpose, and each Preliminary Prospectus filed after January 11, 2002, at the time of filing thereof, conformed in all material respects to the requirements of the Act and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and when the Registration Statement became effective, the Registration Statement and the Prospectus complied in all material respects with the provisions of the Act, and the Registration Statement does not and, as amended or supplemented, if applicable, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, and any amendments or supplements thereto, if applicable, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; any statutes, regulations, legal or governmental proceedings, contracts, leases or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement have been so described or filed; provided, however, that the Company makes no warranty or representation with - -------- ------- respect to 3 any statement contained in the Registration Statement, any Preliminary Prospectus or the Prospectus in reliance upon and in conformity with information concerning the Underwriters and furnished in writing by or on behalf of any Underwriter through you to the Company expressly for use in the Registration Statement, a Preliminary Prospectus or the Prospectus; and the Company has not distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectuses or the Prospectus; (b) as of the date of this Agreement (except for shares issued upon the exercise of stock options after [December 31, 2001] and the issuance of [_____________] shares to Dell Products, L.P. ("Dell")), the Company has the authorized and outstanding capitalization as set forth in the section of the Prospectus entitled "Capitalization" under the "Actual" column and, as of the Time of Purchase and the Additional Time of Purchase, as the case may be (following the filing of an amended and restated certificate of incorporation, as contemplated by the Prospectus), the Company shall have the authorized capitalization as set forth under the heading entitled "Pro Forma As Adjusted" in the section of the Prospectus entitled "Capitalization"; other than as described in the Prospectus and except for stock options granted under the Company's 1998 Stock Option Plan, no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Company are outstanding; all of the issued and outstanding shares of capital stock including Common Stock and Preferred Stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable, have been issued in compliance with all federal and state securities laws and were not issued in violation of any preemptive right, co-sale right, right of first refusal or similar right; (c) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus; (d) the Company is duly qualified to do business as a foreign corporation in good standing in each jurisdiction where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, properties, financial condition or results of operation of the Company and its Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse Effect"). The Company has no subsidiaries (as defined in Rule 405 of the rules and regulations under the Act) other than Digital Technology Corp. (the "Significant Subsidiary"), InterVideo Japan, KK, InterVideo Digital Technology (Europe) b.v., InterVideo (BVI) Holding, Ltd. and InterVideo Digital Technology (Shenzhen) Co. Ltd. (collectively, including the Significant Subsidiary, the "Subsidiaries"); the Company owns 100% of the outstanding capital stock of each of the Subsidiaries other than a de minimis number of shares held by employees or former employees of the Subsidiaries for the purposes of qualifying under local laws and other than the outstanding capital stock of InterVideo Digital Technology (Shenzhen) Co. Ltd. which is 100% 4 owned by InterVideo (BVI) Holding, Ltd.; other than the Subsidiaries, the Company does not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity; complete and correct copies of the charter documents, certificates or articles of incorporation and of the bylaws of the Company and the Significant Subsidiary and all amendments thereto have been delivered to you, and except as set forth in the exhibits to the Registration Statement no changes therein will be made subsequent to the date hereof and prior to the Time of Purchase or, if later, the Additional Time of Purchase; each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; each Subsidiary is duly qualified to do business as a foreign corporation in good standing in each jurisdiction where the ownership or leasing of the properties or the conduct of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect; all of the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and (except as otherwise described in this Section 3(d)) are owned by the Company subject to no security interest, other encumbrance or adverse claims; no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Subsidiaries are outstanding; (e) the Company and each of its Subsidiaries are in compliance in all material respects with the laws, orders, rules, regulations and directives issued or administered by each jurisdiction applicable to it, except where non-compliance will not singly or in the aggregate result in a Material Adverse Effect; (f) the agreement and plan of merger dated as of [____________], 2002 (the "Reincorporation Agreement") entered into by the Company in connection with the merger of InterVideo, Inc., a California corporation (the "California Corporation"), with and into the Company (the "Reincorporation") was duly and validly authorized, executed and delivered by the Company, and at the time of execution and filing constituted a valid and binding obligation of each of the Company and the California Corporation, enforceable in accordance with its terms, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally, or by general equitable principles. The Reincorporation has been validly effected in accordance with the laws of the states of California and Delaware; (g) neither the Company nor any of its Subsidiaries is in breach of, or in default under (nor has any event occurred which with notice, lapse of time, or both would result in any breach of, or constitute a default under), (A) its respective charter or bylaws or (B) any obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, bank loan 5 or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their properties is bound, except in the case of (B) above for breaches and defaults that would not have a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the issuance and sale of the Shares and the consummation of the transactions contemplated hereby will not conflict with, or result in any breach of or constitute a default under (nor constitute any event which with notice, lapse of time, or both would result in any breach of, or constitute a default under), (C) any provisions of the charter or bylaws, of the Company or the Significant Subsidiary or (D) any provision of any license, indenture, mortgage, deed of trust, bank loan or credit agreement or other evidence of indebtedness, or any lease, contract or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or their respective properties may be bound or affected, or (E) any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company or any of its Subsidiaries, except in the case of (D) and (E) for breaches and defaults that would not have a Material Adverse Effect; (h) this Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as rights to indemnity may be limited by applicable federal or state securities laws and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally, or by general equitable principles; (i) the capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Prospectus and the certificates for the Shares are in due and proper form and the holders of the Shares will not be subject to personal liability solely by reason of being such holders; (j) the Shares have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued and fully paid and non-assessable; (k) no approval, authorization, consent or order of or filing with any national, state or local governmental or regulatory commission, board, body, authority or agency is required in connection with the issuance and sale of the Shares or the consummation by the Company of the transaction as contemplated hereby other than registration of the Shares under the Act and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters or under the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD") and except for such approvals, authorizations, consents, orders or filings that, if not obtained or made, would not have a material 6 impact on the consummation by the Company of the transaction as contemplated hereby. No approval, authorization, consent or order of or filing with any foreign governmental or regulatory commission, board, body, authority or agency is required in connection with the issuance and sale of the portion of the Shares that are being sold pursuant to the directed share program other than filings which have been made or will be made in the applicable time period; (l) no person has any right, contractual or otherwise, to cause the Company to issue to it, or register pursuant to the Act, any shares of capital stock of the Company that is triggered by the issue and sale of the Shares to the Underwriters hereunder, nor does any person have preemptive rights, co-sale rights, rights of first refusal or other rights to purchase any of the Shares other than those that have been expressly waived prior to the date hereof; (m) Arthur Andersen, whose report on the consolidated financial statements of the Company and its subsidiaries is filed with the Commission as part of the Registration Statement and Prospectus, are independent public accountants as required by the Act; and TN Soong & Co, a member firm of Andersen Worldwide, SC, whose report on the financial statements of the Audio/Video Products Division of Formosoft International Inc. is filed with the Commission as part of the Registration Statement and Prospectus, are independent public accountants as required by the Act; (n) each of the Company and its Subsidiaries has all necessary licenses, authorizations, consents and approvals and has made all necessary filings required under any federal, state, local or foreign law, regulation or rule, and has obtained all necessary authorizations, consents and approvals from other persons, in order to conduct its respective business, except for such licenses, authorizations, consents, approvals or filings that, if not obtained or made, would not have a Material Adverse Effect; neither the Company nor any of its Subsidiaries is in violation of, or in default under, any such license, authorization, consent or approval or any federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company or any of its Subsidiaries the effect of which could have a Material Adverse Effect; (o) except in each case as described in the Prospectus, there are no actions, suits, claims, investigations or proceedings pending or threatened to which the Company or any of its Subsidiaries or any of their respective officers is a party or of which any of their respective properties is subject at law or in equity, or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which could reasonably be expected to result in a judgment, decree or order having a Material Adverse Effect or prevent consummation of the transactions contemplated hereby; 7 (p) the audited financial statements and summary consolidated financial data included in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Company and its Subsidiaries as of the dates indicated and the consolidated results of operations and cash flows of the Company and the Subsidiaries for the periods specified; the financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved; the audited financial statements and summary consolidated financial data included in the Registration Statement and the Prospectus present fairly the consolidated financial position of the Audio/Video Products Division of Formosoft International Inc. as of the dates indicated and the consolidated results of operations and cash flows of the Audio/Video Products Division of Formosoft International Inc. for the periods specified; the financial statements of the Audio/Video Products Division of Formosoft International Inc. have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved; (q) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been (i) any material adverse change, or any development which, in the Company's reasonable judgment, is likely to cause a material adverse change, in the business, properties or assets described or referred to in the Registration Statement and the Prospectus, or the results of operations, condition (financial or otherwise), business or operations of the Company and its Subsidiaries taken as a whole, (ii) any transaction which is material to the Company or its Subsidiaries taken as a whole, except transactions in the ordinary course of business, (iii) any obligation, direct or contingent, which is material to the Company and its Subsidiaries taken as a whole, incurred by the Company or its Subsidiaries, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock (other than upon the issuance of stock options under the Company's 1998 Stock Option Plan or exercise of outstanding stock options) or outstanding indebtedness of the Company or its Subsidiaries, except the incurrence or discharge of indebtedness in the ordinary course of business or (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company. (r) during the six months prior to the date hereof, neither the Company nor any person acting on behalf of the Company has offered or sold to any person any capital stock of the Company, other than (i) the Shares, (ii) options to purchase shares of Common Stock or Common Stock issued upon the exercise of outstanding stock options, (iii) to Dell or (iv) under restrictions and other circumstances so as to ensure that such offers or sales do not become integrated into the offer and sale of the Shares; (s) the Company has obtained the agreement (in the form approved by you) (the "Lock-Up Agreements") of each of its directors, officers, optionholders and holders of at least [___]% of its outstanding Common Stock and Preferred Stock (on an as converted basis) not to sell, offer to sell, contract to sell, hypothecate, grant any option to sell or otherwise dispose of, directly or 8 indirectly, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to purchase Common Stock for a period of 180 days after the date of the Prospectus. Any remaining shares not subject to the Lock-Up Agreements are subject to embedded lock-ups substantially similar to the Lock-up Agreements and the Company has imposed stop transfer instructions with respect to such shares and will not cancel such stop transfer instructions prior to the end of the 180 day period without the prior written consent of UBS Warburg LLC; (t) the Company is not and, after giving effect to the offering and sale of the Shares, will not be an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (u) the Company and its Subsidiaries have good and marketable title to all property (real and personal) described in the Prospectus as being owned by them, free and clear of all liens, claims, security interests or other encumbrances or defects except such as are described in the Prospectus and except as would not individually or in the aggregate have a Material Adverse Effect. All the property being held under lease by the Company and its Subsidiaries is held thereby under valid, subsisting and enforceable leases, except where the failure to so hold such lease would not have a Material Adverse Effect; (v) the Company and its Subsidiaries, taken as a whole, are insured by insurers of recognized financial responsibility against such losses and risks and in such amount as are customary in the business in which they are engaged. All policies of insurance insuring the Company, the Subsidiaries or any of their businesses, material assets, employees, officers and directors are in full force and effect, and each of the Company and each of its Subsidiaries is in compliance with the terms of such policies, except where the failure to be in compliance would not have a Material Adverse Effect. There are no material claims by the Company or any of its Subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; (w) the Company has received the written consent to the use of all statistical and market-related data included in the Prospectus from appropriate sources to the extent required; (x) Except as described in the Prospectus, the Company owns or has obtained licenses (which licenses are enforceable against the Company and, to the Company's knowledge, the other parties thereto) for the patents, patent applications, inventions, technology, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information systems or procedures), trademarks, trademark registrations, service marks, service mark registrations, mask work rights, trade names, copyrights, and other rights (collectively, the 9 "Intellectual Property") described in the Prospectus as being owned or used by or licensed to the Company or its Subsidiaries. Except for matters relating to third parties expressly identified and named under the captions in the Prospectus entitled "Risk factors--Risks Related to our Business--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" or "Business--Intellectual Property" (together, the "Intellectual Property Sections") or otherwise disclosed to the representatives of the Underwriters, the Company and its Subsidiaries own or have obtained licenses, or can acquire licenses on reasonable terms that will not have a Material Adverse Effect, all Intellectual Property necessary for the conduct of their respective businesses as currently conducted or proposed to be conducted as described in the Prospectus. Each employee of and consultant to the Company and its Subsidiaries has entered into a confidentiality and invention assignment agreement in favor of the Company or the related Subsidiary as a condition of his or her employment or retention in service, except where failure to enter into such an agreement will not have a Material Adverse Effect. Except for matters relating to third parties expressly identified and named under the Intellectual Property Sections of the Prospectus or otherwise disclosed to the representatives of the Underwriters: (i) to the Company's knowledge, there are no rights of third parties to any Intellectual Property owned by or licensed to the Company or its Subsidiaries that conflict with the rights of the Company or its Subsidiaries related to such Intellectual Property that would have a Material Adverse Effect; (ii) there is no infringement by third parties of any Intellectual Property owned by or exclusively licensed to the Company or its Subsidiaries that would have a Material Adverse Effect; (iii) other than in connection with assertions or inquiries made by patent office examiners in the ordinary course of the prosecution of the Company's patent applications, to the knowledge of the Company, there is no pending or threatened action, suit, proceeding or claim by others challenging the Company's or any of its Subsidiaries' rights in or to any Intellectual Property that would have a Material Adverse Effect, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (iv) other than in connection with assertions or inquiries made by patent office examiners in the ordinary course of the prosecution of the Company's patent applications, to the knowledge of the Company, there is no pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of any Intellectual Property owned by or licensed to the Company or its Subsidiaries that would have a Material Adverse Effect, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (v) to the knowledge of the Company, there is no pending or threatened action, suit, proceeding or claim by others that the Company or any of its Subsidiaries infringes or otherwise violates, or would infringe or otherwise violate upon commercialization of its products and product candidates described in the Prospectus, any patent, trademark, copyright, trade secret or other proprietary rights of others, and there are no facts which would form a reasonable basis for any action, suit, proceeding or claim by others that the Company or any of its Subsidiaries infringes or otherwise violates, or would infringe or otherwise violate upon commercialization of its products and product candidates described in the Prospectus, any patent, trademark, copyright, trade secret or other proprietary rights of others that would have a Material Adverse Effect; and (vi) to the Company's knowledge there is no patent or patent application which contains claims that interfere with any Intellectual Property described in the 10 Prospectus as being owned by or licensed to the Company or any of its Subsidiaries or that is necessary for the conduct of their respective businesses as currently or contemplated to be conducted that would have a Material Adverse Effect; (y) neither the Company nor any of its Subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants, nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which violation individually or in the aggregate could reasonably be expected to result in a Material Adverse Effect; (z) the Company and the Subsidiaries, taken as a whole, maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) records (including sales contracts) are kept in accordance with management's general or specific authorization and true and accurate copies are provided to the Company's independent auditors; (iii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iv) access to assets is permitted only in accordance with management's general or specific authorization; and (v) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences; (aa) each of the Company and its Subsidiaries has filed all federal, state, local and foreign tax returns and tax forms required to be filed, except where failure to so file would not have a Material Adverse Effect. Such returns and forms are complete and correct in all material respects, and all taxes shown by such returns or otherwise assessed that are due or payable have been paid, except such taxes as are being contested in good faith and as to which adequate reserves have been provided. All payroll withholdings required to be made by the Company and each of its Subsidiaries with respect to employees have been made, except where failure to make such withholdings would not have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and each of its Subsidiaries in respect of any tax liability for any year not finally determined are, in management's determination, adequate to meet any assessments or reassessments for additional taxes. There have been no tax deficiencies asserted and, to the knowledge of the Company, no tax deficiency might be reasonably asserted or threatened against the Company or any of its Subsidiaries which individually or in the aggregate could have a Material Adverse Effect; and (bb) immediately after the Time of Purchase, no shares of preferred stock of the Company shall be issued and outstanding, and no holder of any shares of capital stock, securities 11 convertible into or exchangeable or exercisable for capital stock or options, warrants or other rights to purchase capital stock or any other securities of the Company shall have any existing or future right to acquire any shares of preferred stock of the Company. In addition, any certificate signed by any executive officer of the Company delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Shares shall be deemed to be a representation and warranty by the Company, as to matters covered thereby, to each Underwriter. 4. Certain Covenants of the Company. The Company hereby agrees: -------------------------------- (a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states as you may designate and to maintain such qualifications in effect so long as required for the distribution of the Shares; provided that the Company shall not be required to qualify as a foreign - -------- corporation (unless it is already so qualified) or to consent to the service of process under the laws of any such state (except service of process with respect to the offering and sale of the Shares); and to promptly advise you of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (b) to make available to the Underwriters in New York City, as soon as practicable after the Registration Statement becomes effective, and thereafter from time to time to furnish to the Underwriters, as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may request for the purposes contemplated by the Act; in case any Underwriter is required to deliver a prospectus within the nine-month period referred to in Section 10(a)(3) of the Act in connection with the sale of the Shares, the Company will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; (c) to advise you promptly and (if requested by you) to confirm such advice in writing, (i) if Rule 430A under the Act is not used, when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner under such Rules); (d) to advise you promptly, and (if requested by you) to confirm such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order suspending the effectiveness of the Registration 12 Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible; to advise you promptly of any proposal to amend or supplement the Registration Statement or Prospectus and to file no such amendment or supplement to which you shall object in writing; (e) to file promptly all reports and any definitive proxy or information statement required to be filed by the Company with the Commission and otherwise take all actions in order to comply with the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the shares; (f) if necessary or appropriate, to file a registration statement pursuant to Rule 462(b) under the Act; (g) to furnish to you and, upon request, to each of the other Underwriters for a period of five years from the date of this Agreement (i) copies of any reports or other communications which the Company shall send to its stockholders or shall from time to time publish or publicly disseminate, (ii) copies of all annual, quarterly and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar form as may be designated by the Commission, (iii) copies of documents or reports filed with any national securities exchange or authorized quotation system on which any class of securities of the Company is listed, and (iv) such other information as you may reasonably request regarding the Company or any of its Subsidiaries, in each case as soon as such communications, documents or information becomes available; (h) to advise the Underwriters promptly of the happening of any event known to the Company within the time during which a Prospectus relating to the Shares is required to be delivered under the Act which, in the judgment of the Company, would require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading and, during such time, to prepare and furnish, at the Company's expense, to the Underwriters promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change and to furnish you a copy of such proposed amendment or supplement before filing any such amendment or supplement with the Commission; (i) to make generally available to its security holders, and to deliver to you, an earnings statement of the Company (which will satisfy the provisions of Section 11(a) of the Act) covering a period of twelve months beginning after the effective date of the Registration Statement (as defined in Rule 158(c) of the Act) as soon as is reasonably practicable after the termination of such twelve-month period but not later than eighteen months after such effective date; (j) to furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, shareholders' equity and of 13 cash flow of the Company for such fiscal year), accompanied by a copy of the certificate or report thereon of nationally recognized independent certified public accountants; (k) to furnish to you three (3) signed copies of the Registration Statement, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto) and sufficient conformed copies of the foregoing (other than exhibits) for distribution of a copy to each of the other Underwriters; (l) to furnish to you as early as practicable prior to the Time of Purchase and the Additional Time of Purchase, as the case may be, but not later than two business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements, if any, of the Company and its Subsidiaries which have been reviewed by the Company's independent certified public accountants, as stated in their letter to be furnished pursuant to Section 6(d) hereof; (m) to apply the net proceeds from the sale of the Shares in the manner set forth under the caption "Use of Proceeds" in the Prospectus; (n) to furnish to you, before filing with the Commission subsequent to the effective date of the Registration Statement and during the period referred to in paragraph (e) above, a copy of any document proposed to be filed pursuant to Section 13, 14 or 15(d) of the Exchange Act; (o) not to issue, sell, offer or agree to sell, contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of capital stock or securities convertible into or exchangeable or exercisable for capital stock or warrants or other rights to purchase capital stock or any other securities of the Company that are substantially similar to capital stock or permit the registration under the Act of any shares of capital stock, without the prior written consent of UBS Warburg LLC, except (i) for the registration of the Shares and the sales to the Underwriters pursuant to this Agreement, (ii) except for issuances of Common Stock or options to purchase Common Stock pursuant to employee benefit plans described in Prospectus for a period of 180 days after the date hereof and (iii) in connection with any acquisition of, or merger with, another company or the acquisition of any assets of another company; provided, however, that with respect to (iii), any such acquisition or merger involves an amount of the Company's securities that is less than or equal to five percent (5%) of the Company's outstanding share capital, which shall be measured at the time a definitive agreement is signed in connection with such acquisition, merger or strategic transaction; and provided, further, that it shall be a condition to the closing of any such transaction that any person or entity who becomes a holder of the Company's Common Stock or any securities substantially similar to the Common Stock, including but not limited to any securities convertible into or exchangeable for, or that represents the right to receive Common Stock or any such securities, shall execute a Lock-Up Agreement; (p) to use its best efforts to cause the Common Stock to be included for quotation on the Nasdaq National Market; 14 (q) to pay all costs, expenses, fees and taxes (other than any transfer taxes and fees and disbursements of counsel for the Underwriters except as set forth under Section 5 hereof and (iii), (iv) and (vi) below) in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (ii) the registration, issuance, sale and delivery of the Shares, (iii) the word processing and/or printing of this Agreement, any Agreement Among Underwriters, any dealer agreements, any Statements of Information, any Powers of Attorney and any closing documents (including compilations thereof) and the reproduction and/or printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (iv) the qualification of the Shares for offering and sale under state laws and the determination of their eligibility for investment under state law as aforesaid (including the reasonable legal fees and filing fees and other disbursements of counsel to the Underwriters) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to the Underwriters and to dealers, (v) any listing of the Shares on any securities exchange or qualification of the Shares for quotation on the Nasdaq Stock Market and any registration thereof under the Exchange Act, (vi) the filing for review of the public offering of the Shares by the NASD, including reasonable attorneys' fees related thereto, and (vii) the performance of the Company's other obligations hereunder; and (r) not to waive any lock-up provisions in any agreements it has with Dell without the prior written consent of UBS Warburg LLC. 5. Reimbursement of Underwriters' Expenses. If the Shares are not delivered --------------------------------------- for any reason other than the default by one or more of the Underwriters in its or their respective obligations hereunder, the Company shall, in addition to paying the amounts described in Section 4(q) hereof, reimburse the Underwriters for all of their out-of-pocket expenses, including the fees and disbursements of their counsel. 6. Conditions of Underwriters' Obligations. The several obligations of the --------------------------------------- Underwriters hereunder are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof and at the Time of Purchase (and the several obligations of the Underwriters at the Additional Time of Purchase are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof and at the Time of Purchase (unless previously waived) and at the Additional Time of Purchase, as the case may be), the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (s) The Company shall furnish to you at the Time of Purchase and at the Additional Time of Purchase, as the case may be, a written opinion of Wilson Sonsini Goodrich & Rosati, P.C., counsel for the Company, addressed to the Underwriters, and dated the Time of Purchase or the 15 Additional Time of Purchase, as the case may be, with reproduced copies for each of the other Underwriters and in form satisfactory to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, stating that: (i) the Company is duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus (and any supplement thereto), to execute and deliver the Underwriting Agreement and to issue, sell and deliver the Shares as therein contemplated; (ii) the Company is duly qualified to transact business in the states of Delaware and California; (iii) the Underwriting Agreement has been duly authorized, executed and delivered by the Company and the Company has corporate power and authority to enter into the Underwriting Agreement and authorize, issue and sell the Shares as contemplated by the Underwriting Agreement; (iv) the authorized, issued and outstanding capital stock as of [December 31, 2001] was as set forth under the "Actual" column under heading "Capitalization" in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and to our knowledge are fully paid and non-assessable and conform to the description thereof contained in the Prospectus; (v) to our knowledge, except as described in the Prospectus, there are no outstanding securities of the Company convertible or exchangeable into, or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of a similar character in writing obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into, or evidencing the right to purchase or subscribe for, any shares of such stock. The stockholders of the Company have no preemptive rights pursuant to the Company's charter or bylaws; (vi) the Shares to be sold by the Company have been duly authorized, and, when issued and delivered in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable; (vii) the Shares, when issued, will, to our knowledge, be free of contractual preemptive rights, rights of first refusal and similar rights; the certificates for the Shares are in due and proper form and conform in all material respects to the requirements of the Delaware General Corporation Law; 16 (viii) we do not know of any legal or governmental proceedings pending or overtly threatened in writing against the Company, or to which the Company is a party or of which any property of the Company is the subject which are required to be described in the Prospectus that are not so described; (ix) [reserved]; (x) the statements set forth under the caption "Description of capital stock" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions in all material respects; the statements set forth under the captions "Risk factors--Risks Related to our Business--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" (solely with respect to statements relating to the license agreement with MPEG LA and the settlement agreement with Dell); "Risk Factors--Risks Relating to this Offering--We have implemented anti-takeover provisions that could discourage a third party from acquiring us and consequently decrease the market value of your investment;" "Business--Intellectual Property" (solely with respect to statements relating to the license agreement with MPEG LA and the settlement agreement with Dell); "--Legal Proceedings;" "Management--Executive Compensation--1998 Stock Option Plan;" "--2002 Stock Option Plan;" "--2002 Employee Stock Purchase Plan;" "Related Party Transactions;" "Shares eligible for future sale" and "Underwriting" (to the extent it is a description of this Agreement) in the Prospectus, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, have been reviewed by us, are correct in all material respects and fairly summarize the matters referred to therein to the extent required by the Act; (xi) other than as set forth in the Prospectus or expressly waived in writing, there are no contracts, agreements or understandings known to us between the Company and any person granting such person the right, contractual or otherwise, to cause the Company to sell, or to permit them to underwrite the sale of, any of the capital stock of the Company or to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement; (xii) the Registration Statement and all post-effective amendments, if any, were declared effective under the Act and the Prospectus was filed with the Commission pursuant to Rule 424(b) under the Act; to our knowledge, no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued, and no proceedings for that purpose have been instituted or are pending or, to our knowledge, are contemplated under the Act; 17 (xiii) no approval, authorization, consent or order of or filing with any governmental or regulatory commission, board, body, authority, agency or court is required in connection with the issuance and sale of the Shares and consummation by the Company of the transactions contemplated hereby other than registration of the Shares under the Act (except such counsel need express no opinion as to any necessary qualification under the state securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters); (xiv) the execution, delivery and performance of the Underwriting Agreement by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not result in any breach or violation of, or constitute a default under (nor constitute any event which with notice, lapse of time, or both, would result in any breach of or constitute a default under), any provisions of the charter or bylaws of the Company or under any agreement or instrument filed as an exhibit to the Registration Statement pursuant to Item 601 of Regulation S-K to which the Company is a party or by which the Company is bound, or under any statute, regulation or rule or any decree, judgment or order known to us to be customarily applicable to the Company and transactions of this nature; (xv) we do not know of any contracts, licenses, agreements, leases or documents of a character required to be filed as exhibits to the Registration Statement which are not described or filed as required; (xvi) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940, as amended; (xvii) the Shares have been approved for quotation on the Nasdaq National Market upon issuance as contemplated by the Underwriting Agreement; (xviii) the execution and delivery of the Agreement and Plan of Merger (the "Merger Agreement"), dated ______________, 2002 between the Company and InterVideo, Inc., a California corporation (the "California Corporation"), effecting the reincorporation of the California Corporation under the laws of the State of Delaware, was duly authorized by all necessary corporate action on the part of each of the California Corporation and the Company; and (xix) each of the California Corporation and the Company had all corporate power and authority necessary to execute and file the Certificate of Ownership and Merger with the Secretary of State of the State of California and the Secretary of State of the State of Delaware and to consummate the merger of the California Corporation with and into the Company contemplated by the Merger Agreement, and the 18 Merger Agreement at the time of execution and immediately prior to the effectiveness of the Merger constituted a valid and binding obligation of each of the California Corporation and the Company, subject to the effect of (x) bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent transfer or other similar federal or state laws affecting the rights of creditors and (y) general principles of equity. In addition, such counsel shall state that it has participated in conferences with certain officers and other representatives of the Company, its intellectual property counsel, the Representatives, counsel for the Underwriters and the independent certified public accountants of the Company, at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed. Such counsel shall state that, although it does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus except for those referred to in paragraph [(x)] above, no facts have come to its attention that have caused it to believe that, (i) as of its effective date and as of the date hereof, the Registration Statement or any amendment thereto (other than the financial statements and related schedules and the financial and statistical data derived from such financial statements or schedules, as to which such counsel need express no belief) contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, or (ii) as of its issue date or as of the date hereof, the Prospectus or any amendment or supplement thereto (other than the financial statements and related schedules and the financial and statistical data derived from such financial statements or schedules, as to which such counsel need express no belief) contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In addition, such counsel shall confirm that each of the Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements and related schedules and the financial and statistical data derived from such financial statements or schedules, as to which it need express no belief) as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations. In rendering such opinion, such counsel may state that their opinion is limited to the federal laws of the United States, the Delaware General Corporation Law and the laws of the State of California. (b) The Company shall furnish to you at the Time of Purchase and at the Additional Time of Purchase, as the case may be, (i) an opinion of Coudert Brothers LLP in the form set forth in Annex A attached hereto, (iii) an opinion ------- of Knobbe Martens, Olson and Bear in the form set forth in Annex B attached ------- hereto and (iv) an opinion of Crosby, Heafey, Roach & May in the form set forth in Annex C attached hereto, each special counsel for the Company on certain ------- intellectual property matters, addressed to the Underwriters, and dated the Time of Purchase or the Additional Time of Purchase, as the case may be, with reproduced copies for each of the other Underwriters. 19 (c) The Company shall furnish to you at the Time of Purchase and at the Additional Time of Purchase, as the case may be, a written opinion of Lee and Li, counsel for the Significant Subsidiary, addressed to the Underwriters, and dated the Time of Purchase or the Additional Time of Purchase, as the case may be, with reproduced copies for each of the other Underwriters and in form satisfactory to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, stating that: (i) the Significant Subsidiary is duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with corporate power and authority to own, lease and operate its properties and conduct its business; (ii) the Significant Subsidiary is duly qualified to transact business in its jurisdiction of incorporation and [_________________]; (iii) we do not know of any legal or governmental proceedings pending or threatened against the Significant Subsidiary, or to which the Significant Subsidiary is a party or of which any property of the Significant Subsidiary is the subject which are required to be described in the Prospectus that are not so described; (iv) all of the outstanding shares of capital stock of the Significant Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable and, except as otherwise stated in the Prospectus, are owned by the Company, subject to no security interest, other encumbrance or adverse claim; to our knowledge, no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligation into shares of capital stock or ownership interests in the Significant Subsidiary are outstanding; and (v) the execution, delivery and performance of the Underwriting Agreement by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not result in any breach or violation of, or constitute a default under (nor constitute any event which with notice, lapse of time, or both, would result in any breach of or constitute a default under), any provisions of the charter or bylaws of the Significant Subsidiary or under any material agreement or instrument to which the Significant Subsidiary is a party or by which the Significant Subsidiary is bound, or under any statute, regulation or rule or any decree, judgment or order known to us and applicable to the Significant Subsidiary or any of its properties. (d) You shall have received from Arthur Andersen LLP, letters dated, respectively, the date of this Agreement and the Time of Purchase and Additional Time of Purchase, as the case may be, and addressed to the Underwriters (with reproduced copies for each of the Underwriters) in the forms heretofore approved by UBS Warburg LLC; and you shall have received from TN Soong & Co., a member firm of Andersen Worldwide, SC, letters dated, respectively, the date of this Agreement and the Time of Purchase and Additional Time of 20 Purchase, as the case may be, and addressed to the Underwriters (with reproduced copies for each of the Underwriters) in the forms heretofore approved by UBS Warburg LLC. (e) The Company shall have complied with the provisions of Section 4(b) hereof with respect to the furnishing of copies of the Prospectus as soon as practicable after the Registration Statement becomes effective. (f) You shall have received at the Time of Purchase and at the Additional Time of Purchase, as the case may be, the favorable opinion of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, dated the Time of Purchase or the Additional Time of Purchase, as the case may be, as to the matters referred to in subparagraphs (iii), (vi), and (xii) of paragraph (a) of this Section 6. In addition, such counsel shall state that such counsel have participated in conferences with officers and other representatives of the Company, counsel for the Company, representatives of the independent public accountants of the Company and representatives of the Underwriters at which the contents of the Registration Statement and Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the foregoing (relying as to materiality to a large extent upon the opinions of officers and other representatives of the Company), no facts have come to the attention of such counsel which lead them to believe that the Registration Statement or any amendment thereto at the time such Registration Statement or amendment became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of its date or any supplement thereto as of its date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no comment with respect to the financial statements and schedules and other financial and statistical data derived therefrom included in the Registration Statement or Prospectus). (g) No amendment or supplement to the Registration Statement or Prospectus shall have been filed prior to the time the Registration Statement becomes effective to which you had objected in writing. (h) The Registration Statement shall have become effective, or if Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the Act, at or before 5:00 P.M., New York City time, on the second full business day after the date of this Agreement); provided, however, that the Company and you and any group of Underwriters, - -------- ------- including you, who have agreed hereunder to purchase in the aggregate at least 50% of the Firm Shares may from time to time agree on a later date. 21 (i) Prior to the Time of Purchase or the Additional Time of Purchase, as the case may be, (i) no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act or proceedings initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement and all amendments thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (iii) the Prospectus and all amendments or supplements thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. (j) Between the time of execution of this Agreement and the Time of Purchase or the Additional Time of Purchase, as the case may be, (i) no material and unfavorable change, financial or otherwise (other than as referred to in the Registration Statement and Prospectus), in the business or condition of the Company and its Subsidiaries taken as a whole shall occur or become known and (ii) no transaction which is material and unfavorable to the Company shall have been entered into by the Company or any of its Subsidiaries. (k) The Company will, at the Time of Purchase or Additional Time of Purchase, as the case may be, deliver to you a certificate of two of its executive officers to the effect that the representations and warranties of the Company as set forth in this Agreement are true and correct as of each such date, that the Company shall perform such of its obligations under this Agreement as are to be performed at or before the Time of Purchase and at or before the Additional Time of Purchase, as the case may be, and the conditions set forth in paragraphs (h) and (i) of this Section 6 have been met. (l) You shall have received the Lock-Up Agreements, dated the date of this Agreement, from each of the directors, officers, optionholders and holders of at least [____]% of the Company's outstanding Common Stock and Preferred Stock (on an as converted basis) to the effect that such persons shall not sell, offer or agree to sell, contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock of the Company or securities convertible into or exchangeable or exercisable for Common Stock or warrants or other rights to purchase Common Stock for a period of 180 days after the date of the Prospectus without the prior written consent of UBS Warburg LLC. Any remaining shares will have stop transfer instructions imposed on them until the end of the 180 day period which stop transfer instructions may not be canceled without the prior written consent of UBS Warburg LLC. (m) The Company shall have furnished to you such other documents and certificates as to the accuracy and completeness of any statement in the Registration Statement and the Prospectus as of the Time of Purchase and the Additional Time of Purchase, as the case may be, as you may reasonably request. 22 (n) The Shares shall have been approved for quotation on the Nasdaq National Market, subject only to notice of issuance at or prior to the Time of Purchase or the Additional Time of Purchase, as the case may be. (o) Between the time of execution of this Agreement and the Time of Purchase or Additional Time of Purchase, as the case may be, there shall not have occurred any downgrading, nor shall any notice or announcement have been given or made of (i) any intended or potential downgrading or (ii) any review or possible change that does not indicate an improvement, in the rating accorded any securities of or guaranteed by the Company or any of its Subsidiaries by any "nationally recognized statistical rating organization" as that term is defined in Rule 436(g)(2) under the Act. 7. Effective Date of Agreement; Termination. This Agreement shall become ---------------------------------------- effective (i) if Rule 430A under the Act is not used, when you shall have received notification of the effectiveness of the Registration Statement, or (ii) if Rule 430A under the Act is used, when the parties hereto have executed and delivered this Agreement. The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of you or any group of Underwriters (which may include you) which has agreed to purchase in the aggregate at least 50% of the Firm Shares, if, since the time of execution of this Agreement or the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there has been any material adverse and unfavorable change, financial or otherwise (other than as referred to in the Registration Statement and Prospectus), in the operations, business or condition of the Company and its Subsidiaries taken as a whole, which would, in your judgment or in the judgment of such group of Underwriters, make it impracticable to market the Shares; or (ii) there shall have occurred any downgrading, or any notice shall have been given of (x) any intended or potential downgrading or (y) any review or possible change that does not indicate an improvement, in the rating accorded any securities of or guaranteed by the Company or any of its Subsidiaries by any "nationally recognized statistical rating organization" as that term is defined in Rule 436(g)(2) under the Act; or (iii) if, at any time prior to the Time of Purchase or, with respect to the purchase of any Additional Shares, the Additional Time of Purchase, as the case may be, trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market shall have been suspended or limitations or minimum prices shall have been established on the New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market, or if a banking moratorium shall have been declared either by the United States or New York State authorities; or (iv) if the United States shall have declared war in accordance with its constitutional processes or there shall have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on the financial markets of the United States as, in your judgment or in the judgment of such group of Underwriters, to make it impracticable to market the Shares. 23 If you or any group of Underwriters elects to terminate this Agreement as provided in this Section 7, the Company and each other Underwriter shall be notified promptly by letter, facsimile or email. If the sale to the Underwriters of the Shares, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement or if such sale is not carried out because the Company shall be unable to comply with any of the terms of this Agreement, the Company shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 4(q), 5 and 9 hereof), and the Underwriters shall be under no obligation or liability to the Company under this Agreement (except to the extent provided in Section 9 hereof) or to one another hereunder. 8. Increase in Underwriters' Commitments. Subject to Sections 6 and 7, if ------------------------------------- any Underwriter shall default in its obligation to take up and pay for the Firm Shares to be purchased by it hereunder (otherwise than for reasons sufficient to justify the termination of this Agreement under the provisions of Section 7 hereof) and if the number of Firm Shares which all Underwriters so defaulting shall have agreed but failed to take up and pay for does not exceed 10% of the total number of Firm Shares, the non-defaulting Underwriters shall take up and pay for (in addition to the number of Firm Shares they are obligated to purchase pursuant to Section 1 hereof) the number of Firm Shares agreed to be purchased by all such defaulting Underwriters, as hereinafter provided. Such Shares shall be taken up and paid for by such non-defaulting Underwriter or Underwriters in such amount or amounts as you may designate with the consent of each Underwriter so designated or, in the event no such designation is made, such Shares shall be taken up and paid for by all non-defaulting Underwriters pro rata in proportion to the aggregate number of Firm Shares set opposite the names of such non-defaulting Underwriters in Schedule A. ---------- Without relieving any defaulting Underwriter from its obligations hereunder, the Company agrees with the non-defaulting Underwriters that the Company will not sell any Firm Shares hereunder unless all of the Firm Shares are purchased by the Underwriters (or by substituted Underwriters selected by you with the approval of the Company or selected by the Company with your approval). If a new Underwriter or Underwriters are substituted by the Underwriters or by the Company for a defaulting Underwriter or Underwriters in accordance with the foregoing provision, the Company or you shall have the right to postpone the Time of Purchase for a period not exceeding seven business days in order that any necessary changes in the Registration Statement and Prospectus and other documents may be effected. The term Underwriter as used in this Agreement shall refer to and include any Underwriter substituted under this Section 8 with like effect as if such substituted Underwriter had originally been named in Schedule A. ---------- 24 If the aggregate number of Shares which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the total number of Shares which all Underwriters agreed to purchase hereunder, and if neither the non-defaulting Underwriters nor the Company shall make arrangements within the seven business day period stated above for the purchase of all the Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter except for the expenses to be borne by the Company pursuant to Section 4 (q) above and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 9. Indemnity and Contribution. -------------------------- (a) The Company agrees to indemnify, defend and hold harmless each Underwriter, its partners, directors and officers, and any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or any such person may incur under the Act, the Exchange Act, common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) or in a Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in either such Registration Statement or Prospectus or necessary to make the statements made therein not misleading, except insofar as any such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of any Underwriter through you to the Company expressly for use with reference to such Underwriter in such Registration Statement or such Prospectus or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading; provided, however, that the foregoing indemnity agreement with -------- ------- respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such loss, damage, expense, liability or claim purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented) was timely furnished by the Company to such Underwriter and the Prospectus (as then amended or supplemented) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, damage, expense, liability or claim. 25 If any action, suit or proceeding (together, a "Proceeding") is brought against an Underwriter or any such person in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such Underwriter or such person shall promptly notify the Company in writing of the institution of such Proceeding and the Company shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission -------- ------- to so notify the Company shall not relieve the Company from any liability which the Company may have to any Underwriter or any such person or otherwise. Such Underwriter or such controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter or of such person unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such Proceeding or the Company shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from, additional to or in conflict with those available to the Company (in which case the Company shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the Company and paid as incurred (it being understood, however, that the Company shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). The Company shall not be liable for any settlement of any such Proceeding effected without its written consent but if settled with the written consent of the Company, the Company agrees to indemnify and hold harmless any Underwriter and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party. (b) Each Underwriter, severally and not jointly, agrees to indemnify, defend and hold harmless the Company, its directors and officers, and any person who controls the 26 Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, the Company or any such person may incur under the Act, the Exchange Act, common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of such Underwriter through you to the Company expressly for use with reference to such Underwriter in the Registration Statement (or in the Registration Statement as amended by or on behalf of any post-effective amendment thereof by the Company) or in the Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or Prospectus or necessary to make such information not misleading. If any Proceeding is brought against the Company or any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Company or such person shall promptly notify such Underwriter in writing of the institution of such Proceeding and such Underwriter shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses, provided, however, that the omission to so -------- ------- notify such Underwriter shall not relieve such Underwriter, from any liability which such Underwriter may have to the Company or any such person or otherwise. The Company or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company or such person unless the employment of such counsel shall have been authorized in writing by such Underwriter in connection with the defense of such Proceeding or such Underwriter shall not have employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to or in conflict with those available to such Underwriter (in which case such Underwriter shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but such Underwriter may employ counsel and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, that such Underwriter shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). No Underwriter shall be liable for any settlement of any such Proceeding effected without the written consent of such Underwriter but if settled with the written consent of such Underwriter, such Underwriter agrees to indemnify and hold harmless the Company and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, 27 (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding. (c) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsections (a) and (b) of this Section 9 in respect of any losses, damage, expenses, liabilities or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering price of the shares. The relative fault of the Company on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any claim or Proceeding. (d) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (c) above. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damage which such Underwriter has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission. 28 No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. (e) The indemnity and contribution agreements contained in this Section 9 and the covenants, warranties and representations of the Company contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter, its partners, directors or officers or any person (including each partner, officer or director of such person) who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf of the Company, its directors or officers or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the issuance and delivery of the Shares. The Company and each Underwriter agree promptly to notify each other commencement of any Proceeding against it and, in the case of the Company, against any of the Company's officers or directors in connection with the issuance and sale of the Shares, or in connection with the Registration Statement or Prospectus. 10. Notices. Except as otherwise herein provided, all statements, requests, ------- notices and agreements shall be in writing or by telegram and, if to the Underwriters, shall be sufficient in all respects if delivered or sent to UBS Warburg LLC, 299 Park Avenue, New York, N.Y. 10171-0026, Attention: Syndicate Department and, if to the Company, shall be sufficient in all respects if delivered or sent to the Company at the offices of the Company at 47350 Fremont Blvd., Fremont, CA 94538, Attention: Chief Financial Officer. 11. Governing Law; Construction. This Agreement and any claim, counterclaim --------------------------- or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim"), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 12. Submission to Jurisdiction. Except as set forth below, no Claim may be -------------------------- commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and the Company consents to the jurisdiction of such courts and personal service with respect thereto. The Company hereby consents to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against UBS Warburg LLC or any indemnified party. Each of UBS Warburg LLC and the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. The Company agrees that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the 29 Company and may be enforced in any other courts in the jurisdiction of which the Company is or may be subject, by suit upon such judgment. 13. Parties at Interest. The Agreement herein set forth has been and is ------------------- made solely for the benefit of the Underwriters and the Company and to the extent provided in Section 9 hereof the controlling persons, directors and officers referred to in such section, and their respective successors, assigns, heirs, pursuant representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement. 14. Counterparts. This Agreement may be signed by the parties in one or ------------ more counterparts which together shall constitute one and the same agreement among the parties. 15. Successors and Assigns. This Agreement shall be binding upon the ---------------------- Underwriters and the Company and their successors and assigns and any successor or assign of any substantial portion of the Company's and any of the Underwriters' respective businesses and/or assets. 16. Miscellaneous. UBS Warburg LLC, an indirect, wholly owned subsidiary of ------------- UBS AG, is not a bank and is separate from any affiliated bank, including any U.S. branch or agency of UBS AG. Because UBS Warburg LLC is a separately incorporated entity, it is solely responsible for its own contractual obligations and commitments, including obligations with respect to sales and purchases of securities. Securities sold, offered or recommended by UBS Warburg LLC are not deposits, are not insured by the Federal Deposit Insurance Corporation, are not guaranteed by a branch or agency, and are not otherwise an obligation or responsibility of a branch or agency. A lending affiliate of UBS Warburg LLC may have lending relationships with issuers of securities underwritten or privately placed by UBS Warburg LLC. To the extent required under the securities laws, prospectuses and other disclosure documents for securities underwritten or privately placed by UBS Warburg LLC will disclose the existence of any such lending relationships and whether the proceeds of the issue will be used to repay debts owed to affiliates of UBS Warburg LLC. 30 If the foregoing correctly sets forth the understanding among the Company and the Underwriters, please so indicate in the space provided below for the purpose, whereupon this letter and your acceptance shall constitute a binding agreement among the Company and the Underwriters, severally. Very truly yours, INTERVIDEO, INC. By:__________________________________ Name:________________________________ Title:_______________________________ Accepted and agreed to as of the date first above written, on behalf of themselves and the other several Underwriters named in Schedule A - ---------- UBS WARBURG LLC ___________________________________________ ___________________________________________ By: UBS WARBURG LLC By: ______________________________________ Title: By: ______________________________________ Title: 31 SCHEDULE A Underwriter Number of Firm Shares - ----------- --------------------- UBS WARBURG LLC [___________] CIBC WORLD MARKETS CORP. [___________] RAYMOND JAMES & ASSOCIATES, INC. [___________] Total [___________] ============= BPH DRAFT 4/17/02 ANNEX A ------- Opinion of Patent Counsel Coudert Brothers LLP shall state that they served as special counsel to the Company with respect to patents and proprietary rights, and shall opine that: 1. On behalf of the Company, we have prepared and filed eight patent applications in the United States and eight patent applications internationally, each of which is listed on Exhibit A hereto (the "Coudert-filed Patents"). To --------- the best of our knowledge and belief, all of the inventors' rights in the Coudert-filed Patents have been assigned to the Company or, with respect to the Coudert-filed Patents listed on Exhibit B, the inventors are obligated to assign --------- their rights to the Company and the execution of appropriate assignments are currently in process. Nothing has come to our attention that there is any claim of any party other than the Company to any ownership interest or lien with respect to any of the Coudert-filed Patents. 2. To the best of our knowledge and belief, (a) there are no governmental proceedings pending relating to patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of the Company and (b) no such proceedings are threatened by governmental authorities. 3. We have no knowledge of any facts which would preclude the Company from having clear title to the Coudert-filed Patent. We are not aware of any facts which form a basis for a finding of unenforceability or invalidity of the Coudert-filed Patents. 4. We are not aware of any material fact with respect to the Coudert-filed Patents that (a) would preclude the issuance of patents with respect to such applications or (b) would lead us to conclude that such patents, when issued, would not be valid and enforceable in accordance with applicable regulations. ANNEX B Opinion of Patent Counsel Knobbe Martens, Olson and Bear shall state that they served as special counsel to the Company with respect to patents and proprietary rights, and shall opine that: 1. [_______] provisional patent applications listed on listed in Exhibit A --------- hereto (the "Applications"), have been filed on behalf of the Company by Counsel and Counsel has not represented the Company with respect to any other patents or patent applications. To Counsel's actual knowledge and belief, there is no claim of any party other than the Company to any ownership interest or lien with respect to the Applications. 2. To Counsel's actual knowledge and belief, (a) there are no legal or governmental proceedings pending relating to patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of the Company and (b) no such proceedings are threatened or contemplated by governmental authorities. 3. Counsel does not know of any contracts or other documents, relating to the Applications of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus, that are not filed or described as required. 4. Counsel has no actual knowledge of any facts which would preclude the Company from having clear title to the Applications. In rendering this opinion, Counsel has relied on certain factual representations of the Company and Counsel has not independently verified the accuracy and completeness of such representations. As Counsel's representation of the Company has been limited to the filing of the Applications, Counsel cannot opine on the accuracy or completeness of the statements in the Registration Statement and the Prospectus. Counsel has not been requested to nor has Counsel performed any clearance searches for the Company. Counsel has not been requested to nor has Counsel performed any investigation into any ownership issues with relation to the Applications for the Company. 2 ANNEX C Opinion of Patent Counsel Crosby, Heafey, Roach & May shall state that they served as special counsel to the Company with respect to patents and proprietary rights, and shall opine that: 1. We have filed on behalf and in the name of the Company with the United States Patent and Trademark Office ("USPTO") the patent applications listed on the attached Exhibit A to this letter (the "Applications") and we have not --------- represented the Company with respect to any other patents or patent applications. To the best of our knowledge, written assignments to the Applications have been executed and delivered by all named inventors, and the assignments have been recorded as noted in Exhibit A with the USPTO. To the best --------- of our knowledge, there are no claims of third parties to any ownership interest in or lien on any of the Applications. 2. We have acted as special counsel to the Company for the matters listed in Exhibits A and B only. To the best of our knowledge, the statements in the Registration Statement and the Prospectus under the captions "Risk Factors--RISKS RELATED TO OUR BUSINESS--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" (other than the last paragraph thereof, for which we provide no confirmation) and in the third and fourth paragraphs of "Business--INTELLECTUAL PROPERTY", taken together with the statements in attached Exhibit B, are accurate and complete summaries of the matters described --------- in such sections. 3. Nothing has come to our attention that causes us to believe that the above-identified portions of the Registration Statement at the time such Registration Statement became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the above-identified portions of the Prospectus or any supplement thereto, at the date of such Prospectus or supplement contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make therein, in light of the circumstances under which they were made, not misleading. 4. To the best of our knowledge, there are no legal or governmental proceedings pending relating to patent rights, trade secrets, trademarks, service marks or other proprietary information or materials of the Company. Except as noted in the Registration Statement, the Prospectus, and the attached Exhibit B, to the best of our knowledge, there are no other threatened or - --------- ----- contemplated proceedings. 5. We are not aware of any infringement by third-parties of any of the Company's patents, trade secrets, trademarks, service marks or other proprietary information or materials. 3 6. Except as described in the Registration Statement, Prospectus and Exhibit B, we are not aware of any infringement or other violations by the - --------- Company of any patents, trade secrets, trademarks, service marks or other proprietary information or materials of others. 7. We are not aware of any facts which would preclude the Company from having clear title to the Applications. 8. We are not aware of any reason that would preclude the Applications from issuing as patents, or any reason that any patents, if and when issued by the USPTO, would not be valid and enforceable. 4 EX-3.1 4 dex31.txt AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF INTERVIDEO, INC. (a Delaware corporation) (effective upon the merger of InterVideo, Inc., a California corporation, with and into InterVideo, Inc., a Delaware corporation) ARTICLE I The name of the corporation is InterVideo, Inc. ARTICLE II The address of the corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (a) (i) This corporation is authorized to issue two classes of shares to be designated respectively Preferred Stock, par value $0.001 per share ("Preferred") and Common Stock, par value $0.001 per share ("Common"). The total number of shares of Preferred this corporation shall have authority to issue is 13,000,000 and the total number of shares of Common the corporation shall have authority to issue is 25,000,000. (ii) The Preferred authorized by this Certificate of Incorporation shall be issued in one or more series. The first series of Preferred shall be designated Series A Preferred Stock (the "Series A Preferred") and shall consist of Five Million (5,000,000) shares. The second series of Preferred shall be designated Series B Preferred Stock (the "Series B Preferred") and shall consist of One Million (1,000,000) shares and the third series of Preferred shall be designated Series C Preferred Stock (the "Series C Preferred") shall consist of Two Million (2,000,000) shares, and the fourth series of Preferred shall be designated Series D Preferred Stock (the "Series D Preferred") and shall consist of Five Million (5,000,000) shares. The shares of each series of Preferred have the rights, preferences, privileges and restrictions set forth in paragraph (b) below. The Board of Directors is authorized to fix the number of shares of any other series, and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any such series of Preferred, and, within the limitations and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any such series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares in any such series subsequent to the issue of shares of that series. (b) The relative rights, preferences, privileges and restrictions granted to or imposed upon the respective classes and series of the shares of capital stock or the holders thereof are as follows: Section 1. General Definitions. For purposes of this Article, the --------- ------------------- following definitions shall apply: A. "Junior Shares" shall mean all Common and any other shares of this --------------- corporation other than the Preferred. B. "Subsidiary" shall mean any corporation at least 50% of whose ----------- outstanding voting shares shall at the time be owned by the corporation and/or one or more of such subsidiaries. Section 2. Dividend Rights of Preferred. The holders of the Preferred shall --------- ---------------------------- be entitled to receive, out of any funds legally available therefor, cash dividends in the amount of (i) $.005 per share on each outstanding share of Series A Preferred, (ii) $.025 per share on each outstanding share of Series B Preferred, (iii) $.20 per share on each outstanding share of Series C Preferred and (iv) $0.32 per share on each outstanding share of Series D Preferred payable in preference and priority to any payment of any dividend on Junior Shares, when, if and as declared by the Board of Directors. The right to such dividends on the Preferred shall not be cumulative, and no right shall accrue to holders of Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year. In the event that the corporation shall have declared and unpaid dividends outstanding immediately prior to, and in the event of, a conversion of Preferred (as provided in Section 5 hereof), the corporation shall pay in cash to the holder(s) of the Preferred subject to such conversion, the full amount of any such dividends. Section 3. Liquidation Preference. --------- ---------------------- (a) In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of the Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Junior Shares by reason of their ownership thereof, (i) the amount of $.05 per share for each share of Series A Preferred then held by them, (ii) the amount of $0.25 per share for each share of Series B Preferred then held by them, (iii) the amount of $2.00 per share for each share of Series C Preferred then held by them and (iv) the amount of $4.00 per share for each share of Series D Preferred then held by them and, in addition, an amount equal to all declared but unpaid dividends on each of the respective series of Preferred. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Preferred shall be insufficient to permit the payment of the full preferential amount to such holders, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Preferred in -2- proportion to the respective preferential amounts fixed for such series upon a liquidation, dissolution or winding up of the corporation. After full payment has been made to the holders of the Preferred of the foregoing amounts to which they shall be entitled, the holders of Junior Shares and the Preferred shall share pro rata in all remaining assets of the corporation on a share for share basis. (b) For purposes of this Section 3, a liquidation, dissolution or winding up of the corporation shall be deemed to be occasioned by, or to include, the corporation's sale of all or substantially all of its assets, or the acquisition of the corporation by another entity by means of merger or consolidation resulting in the exchange of the outstanding shares of the corporation for securities or consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary. (c) For purposes of this Section 3, if the distributions or consideration received by the shareholders of the Corporation is other than cash, its value will be deemed to be its fair market value as determined in good faith by the Board of Directors of the Corporation. In the case of publicly traded securities listed on an exchange, fair market value shall mean the average last closing sale price as reported by such exchange or by a consolidated transaction reporting system for the five-day period immediately preceding the date of such distribution. In the case of publicly traded securities not listed on an exchange, fair market value shall mean the average last closing bid price as reported by the National Association of Securities Dealers Automatic Quotation System, Inc. or such successor or similar organization, for the five-day period immediately preceding the date of such distribution. Section 4. Redemption. --------- ---------- The shares of Preferred are not redeemable in whole or in part. Section 5. Conversion. The holders of Preferred shall have conversion --------- ---------- rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Preferred, at the option of its ---------------- holder, at the office of the corporation or any transfer agent for the Preferred, at any time after the date of issuance of such share, shall be convertible into such number of fully paid and nonassessable shares of Common as is determined by dividing (i) $.05 for each share of Series A Preferred, (ii) $0.25 for each share of Series B Preferred, (iii) $2.00 for each share of Series C Preferred, and (iv) $4.00 for each share of Series D Preferred, by the Conversion Price in effect at the time of the conversion. The initial Conversion Price shall be (i) .1136 for each share of Series A Preferred per share of Common, (ii) .5682 for each share of Series B Preferred per share of Common, (iii) 4.545 for each share of Series C Preferred per share of Common, and (iv) 9.091 for each share of Series D Preferred per share of Common. Such initial Conversion Price shall be subject to adjustment as hereinafter provided. (b) Automatic Conversion. Each share of Preferred automatically shall -------------------- be converted into shares of Common at the then effective Conversion Price on the effective date of a firm commitment underwritten public offering pursuant to an effective registration statement under -3- the Securities Act of 1933, as amended, covering the offer and sale of Common for the account of the corporation to the public, provided that the aggregate gross proceeds to the Company are $5,000,000 or more. (c) Mechanics of Conversion. No fractional shares of Common shall be ----------------------- issued upon conversion of any share of Preferred. In lieu of any fractional share to which the holder would otherwise be entitled (after aggregating all shares into which shares of Series A Preferred held by such holder could be converted), the corporation shall pay cash equal to such fraction multiplied by the then fair market value of the Common, as determined by the Board of Directors. Before any holder of Preferred shall be entitled to convert the same into full shares of Common, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred, and shall give written notice to the corporation at such office that he elects to convert the same. The corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred, a certificate or certificates for the number of shares of Common to which he shall be entitled, together with a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred to be converted, or in the case of automatic conversion, on the effective date of the offering as provided in Section 5(b) above, and the person or persons entitled to receive the shares of Common issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common on such date. (d) Adjustment for Stock Splits and Combinations. If the corporation -------------------------------------------- at any time or from time to time effects a subdivision of the outstanding Common, the Conversion Price then in effect immediately before that subdivision shall be proportionately decreased, and conversely, if the corporation at any time or from time to time combines the outstanding shares of Common, the Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 5(d) shall become effective at the close of business on the date the subdivision or combination becomes effective. Notwithstanding the foregoing, the Conversion Price shall undergo no further adjustment in connection with the reverse stock split effected pursuant to the Agreement and Plan of Merger of InterVideo, Inc. a Delaware corporation and InterVideo, Inc., a California corporation, dated _______, 2002. (e) Adjustment for Certain Dividends and Distributions. In the event -------------------------------------------------- the corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common entitled to receive, a dividend or other distribution payable in additional shares of Common, then and in each such event the Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (1) the numerator of which is the total number of shares of Common issued and outstanding immediately prior to the time of such issuance on the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common issued and outstanding immediately prior to the time of such issuance on the close of business on such record date, plus the number of shares of Common issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed -4- therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 5(e) as of the time of actual payment of such dividends or distributions. (f) Adjustments for Other Dividends and Distributions. In the event ------------------------------------------------- the corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common entitled to receive, a dividend or other distribution payable in securities of the corporation other than shares of Common, then and in each such event provision shall be made so that the holders of the Preferred shall receive upon conversion thereof, in addition to the number of shares of Common receivable thereupon, the amount of securities of the corporation which they would have received had their Preferred been converted into Common on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period, under this Section 5(f) with respect to the rights of the holders of Preferred. (g) Adjustments for Reclassification, Exchange and Substitution. If ----------------------------------------------------------- the Common issuable upon the conversion of the Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or a stock dividend or a reorganization, merger, consolidation or sale of assets, as provided for elsewhere in this Section 5), then and in any such event each holder of Preferred shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common into which such shares of Preferred might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (h) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Conversion Price pursuant to this Section 5, the corporation at its expense promptly shall compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The corporation shall, upon the written request at any time of any holder of Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common and the amount, if any, of other property which at the time would be received upon the conversion of Series A Preferred. (i) Notices of Record Date. In the event that the corporation shall ---------------------- propose at any time: (1) to declare any dividend or distribution upon its Common, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; -5- (2) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (3) to effect any reclassification or recapitalization of its outstanding Common involving a change in the Common; or (4) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, the corporation shall send to the holders of the Preferred: (1) at least ten (10) days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights and a description thereof (and specifying the date on which the holders of Common shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (3) and (4) above; and (2) in the case of the matters referred to in (3) and (4) above, at least ten (10) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common shall be entitled to exchange their Common for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of Preferred at the address for each such holder as shown on the books of the corporation. Section 6. Voting Rights. --------- ------------- (a) General. Except as otherwise required by law on this Section 6, ------- each share of Common issued and outstanding shall have one vote and each share of Preferred issued and outstanding shall have the number of votes equal to the number of whole Common shares into which the Preferred is convertible (after aggregating all shares of Preferred held by a holder), as adjusted from time to time pursuant to Section 5 hereof. (b) Voting for the Election of Directors. Voting together as a ------------------------------------ separate class, the holders of the shares of Series C Preferred shall be entitled to elect one (1) director of the corporation, and the holders of the shares of Common, Series A Preferred, Series B Preferred, and Series D Preferred, voting together, shall be entitled to elect the balance of the directors of the corporation at each election of directors. In the case of any vacancy in the office of a director occurring among the directors elected by the holders of either the Series C Preferred or by the holders of the Common, Series A Preferred, Series B Preferred and Series D Preferred (for purposes of this Section 6(b)), the vacancy shall be filled by the vote of the holders of a majority of the shares of such class or classes of stock. Any director who shall have been elected by the holders of either the Series C Preferred, or the Common, Series A Preferred, Series B Preferred, and the Series D Preferred, may be removed during the term of office, either with or without cause by, and only by, -6- the affirmative vote of the holders of the shares of such class or classes of stock who elected such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the holders of such class or classes of stock represented at such meeting (provided a quorum of such holders is present) or pursuant to such written consent. Section 7. Covenants. In addition to any other rights provided by law, so --------- --------- long as any shares of Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than a majority of such outstanding shares of Preferred voting as a class (except in the case of Sections 7(a), (b) and (d) below, of the holders of not less than a majority of such outstanding shares of the series affected): (a) amend or repeal any provision of, or add any provision to, the Corporation's Certificate of Incorporation or Bylaws, if such action would adversely alter or change the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, such series of Preferred; (b) authorize or issue shares of any class or series having any preference or priority as to dividends or assets superior to or on a parity with the existing series of Preferred; (c) pay or declare any dividend on any Junior Shares (except dividends payable solely in shares of Common Stock) while the Preferred remains outstanding; (d) reclassify any securities into shares having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of any series of Preferred; (e) merge, consolidate or reorganize with any other corporation (except for a merger or consolidation after the consummation of which the shareholders of the Corporation own in excess of 51% of the voting securities of the surviving corporation or its parent corporation); (f) liquidate or sell or convey or otherwise dispose of all or substantially all of the property or business of this Corporation or any subsidiary of this Corporation (other than pursuant to a banking transaction in the ordinary course of business); or (g) effect any recapitalization. Section 8. Consent for Certain Repurchases of Common Stock Deemed to --------- --------------------------------------------------------- Distributions. Each holder of an outstanding share of Preferred shall be deemed - ------------- to have consented, for purposes of Section 502, 503 and 506 of the General Corporation Law, to distributions made by the corporation in connection with the repurchase of shares of Common issued to or held by employees or consultants upon termination of their employment or services pursuant to agreements providing for the right of said repurchase between the corporation and such persons. -7- Section 9. Residual Rights. All rights accruing to the outstanding shares --------- ---------------- of the corporation not expressly provided for to the contrary herein shall be vested in the Common. ARTICLE V The number of directors that constitutes the entire Board of Directors of the corporation shall be determined in the manner set forth in the Bylaws of the corporation. Vacancies occurring on the Board of Directors for any reason and newly created directorships resulting from an increase in the authorized number of directors may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, or by a sole remaining director. ARTICLE VI In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the corporation is expressly authorized to adopt, amend or repeal the Bylaws of the corporation. ARTICLE VII The election of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. ARTICLE VIII (a) Limitation of Director's Liability. To the fullest extent permitted by the General Corporation Law of Delaware as the same exists or may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (b) Indemnification of Directors and Officers. To the fullest extent permitted by applicable law, the corporation is authorized to provide indemnification of, and advancement of expenses to, directors, officers, employees, other agents of the corporation and any other persons to which the General Corporation Law of Delaware permits the corporation to provide indemnification. (c) Repeal or Modification. Any repeal or modification of this Article VIII, by amendment of such section or by operation of law, shall not adversely affect any right or protection of a director, officer, employee or other agent of the corporation existing at the time of, or increase the liability of any such person with respect to any acts or omissions in their capacity as a director, officer, employee, or other agent of the corporation occurring prior to such repeal or modification. ARTICLE IX The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -8- IN WITNESS WHEREOF, InterVideo, Inc. has caused this Restated Certificate of Incorporation to be signed by the President and Chief Executive Officer of the corporation on this ____ day of ___________, 2002. By: ----------------------------------- Steve Ro President and Chief Executive Officer -9- EX-3.2 5 dex32.txt AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION INTERVIDEO, INC. InterVideo, Inc. a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: A. The corporation was originally incorporated under the name of InterVideo, Inc. and the original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on January 15, 2002. B. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware (the "DGCL"), this Amended and Restated Certificate of Incorporation restates and amends the provisions of the Amended and Restated Certificate of Incorporation of the corporation. C. This Amended and Restated Certificate of Incorporation has been duly approved by the Board of Directors of the corporation in accordance with Sections 242 and 245 of the DGCL. D. This Amended and Restated Certificate of Incorporation has been duly approved by the written consent of the stockholders of the corporation in accordance with Sections 228, 242 and 245 of the DGCL. E. The Certificate of Incorporation of the corporation is hereby amended and restated in its entirety to read as follows: ARTICLE I The name of the corporation is InterVideo, Inc. ARTICLE II The address of the corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL. ARTICLE IV The corporation shall have authority to issue shares as follows: 150,000,000 shares of Common Stock, par value $0.001 per share. Each share of Common Stock shall entitle the holder thereof to one (1) vote on each matter submitted to a vote at a meeting of stockholders. 5,000,000 shares of Preferred Stock, par value $0.001 per share, which may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the Board of Directors (authority to do so being hereby expressly vested in the Board of Directors). The Board of Directors is further authorized, subject to limitations prescribed by law, to fix by resolution or resolutions the designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of Preferred Stock, including without limitation authority to fix by resolution or resolutions the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and liquidation preferences of any such series, and the number of shares constituting any such series and the designation thereof, or any of the foregoing. The Board of Directors is further authorized to increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any series, the number of which was fixed by it, subsequent to the issuance of shares of such series then outstanding, subject to the powers, preferences and rights, and the qualifications, limitations and restrictions thereof stated in the Certificate of Incorporation or the resolution of the Board of Directors originally fixing the number of shares of such series. If the number of shares of any series is so decreased, then the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V The number of directors that constitutes the entire Board of Directors of the corporation shall be determined in the manner set forth in the Bylaws of the corporation. At each annual meeting of stockholders, directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the DGCL. The directors of the corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the first annual meeting of the stockholders following the effective date of this corporation's initial public offering (the "Effective Date"), the term of office of the initial Class II directors shall expire at the second annual meeting of the stockholders following the Effective Date and the term of office of the initial Class III directors shall expire at the third annual meeting of the stockholders following the Effective Date. At each annual meeting of stockholders, commencing with the first annual meeting of stockholders following the Effective Date, each of the successors elected to replace the directors of a Class whose term shall have expired at such annual meeting shall be elected to hold office until the third annual meeting next succeeding his or her election and until his or her respective successor shall have been duly elected and qualified. -2- Notwithstanding the foregoing provisions of this Article, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation, or removal. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any director may be removed from office by the stockholders of the corporation only for cause. Vacancies occurring on the Board of Directors for any reason and newly created directorships resulting from an increase in the authorized number of directors may be filled by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, or by a sole remaining director. A person so elected by the Board of Directors to fill a vacancy or newly created directorship shall hold office until the next election of the Class for which such director shall have been chosen and until his or her successor shall have been duly elected and qualified. ARTICLE VI In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the corporation is expressly authorized to adopt, amend or repeal the Bylaws of the corporation. ARTICLE VII The election of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. ARTICLE VIII No action shall be taken by the stockholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws, and no action shall be taken by the stockholders by written consent. ARTICLE IX To the fullest extent permitted by the General Corporation Law of Delaware or any other applicable law as the same exists or may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders and shall otherwise be indemnified by the corporation for monetary damages for any action taken, or any failure to take any action, as a director. The corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he or she or his or her testator or intestate is or was a director or officer of the corporation or any predecessor of the corporation or serves or served at any other enterprise as a director, officer, employee or agent at the request of the corporation or any predecessor to the corporation. To the fullest extent permitted by applicable law, the corporation is authorized to provide indemnification of, and advancement of expenses to, directors, officers, -3- employees, other agents of the corporation and any other persons to which the General Corporation Law of Delaware permits the corporation to provide indemnification. Neither any amendment nor repeal of this Article IX, nor the adoption of any provision of this corporation's Certificate of Incorporation inconsistent with this Article IX, shall eliminate or reduce the effect of this Article IX in respect of any matter occurring, or any cause of action, suit or claim accruing or arising or that, but for this Article IX, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE X Except as provided in Article IX above, the corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -4- IN WITNESS WHEREOF, InterVideo, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by the President and Chief Executive Officer of the corporation on this ____ day of _________, 2002. By: ----------------------------------------- Steve Ro President and Chief Executive Officer -5- EX-5.1 6 dex51.txt OPINION OF WILSON SONSINI GOODRICH & ROSATI Exhibit 5.1 April 26, 2002 InterVideo, Inc. 47350 Fremont Boulevard Fremont, California 94538 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1, as amended, filed by InterVideo, Inc., a California corporation that intends to reincorporate into Delaware (the "Company"), with the Securities and Exchange Commission in connection with the registration under the Securities Act of 1933, as amended, of 4,025,000 shares of the Company's Common Stock (subject an over-allotment option up to 525,000 shares of the Company's Common Stock granted to the underwriters) (the "Shares"). The Shares are to be sold to the underwriters for resale to the public as described in the Registration Statement and pursuant to the Underwriting Agreement filed as an exhibit thereto. As legal counsel to the Company, we have examined the proceedings proposed to be taken in connection with said sale and issuance of the Shares. Based upon the foregoing, we are of the opinion that the Shares, when issued in the manner described in the Registration Statement, will be duly authorized, validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendment thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation /s/ Wilson Sonsini Goodrich & Rosati EX-10.2 7 dex102.txt REGISTRANT'S 2002 STOCK PLAN EXHIBIT 10.2 INTERVIDEO, INC. 2002 STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this 2002 Stock Option Plan are: -------------------- . to attract and retain the best available personnel for positions of substantial responsibility, . to provide additional incentive to Employees, Directors and Consultants, and . to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as shall ------------- be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the --------------- administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. ----- (d) "Change in Control" means the occurrence of any of the following ----------------- events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company's assets; (iii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation. (e) "Code" means the Internal Revenue Code of 1986, as amended. Any ---- reference to a section of the Code herein shall be a reference to any successor or amended section of the Code. (f) "Committee" means a committee appointed by the Board in --------- accordance with Section 4 of the Plan. (g) "Common Stock" means the common stock of the Company. ------------ (h) "Company" means InterVideo, Inc., a Delaware corporation. ------- (i) "Consultant" means any natural person, including an advisor, ---------- engaged by the Company or a Parent or Subsidiary to render services to such entity. (j) "Director" means a member of the Board. -------- (k) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, -------- employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (n) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall -2- be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "Inside Director" means a Director who is an Employee. --------------- (q) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option. (r) "Notice of Grant" means a written or electronic notice evidencing --------------- certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (s) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (t) "Option" means a stock option granted pursuant to the Plan. ------ (u) "Option Agreement" means an agreement between the Company and an ---------------- Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (v) "Option Exchange Program" means a program whereby outstanding ----------------------- Options are surrendered in exchange for Options with a lower exercise price. (w) "Optioned Stock" means the Common Stock subject to an Option or -------------- Stock Purchase Right. (x) "Optionee" means the holder of an outstanding Option or Stock -------- Purchase Right granted under the Plan. (y) "Outside Director" means a Director who is not an Employee. ---------------- (z) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (aa) "Plan" means this 2002 Stock Option Plan. ---- (bb) "Registration Date" means 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. -3- (cc) "Restricted Stock" means shares of Common Stock acquired pursuant ---------------- to a grant of Stock Purchase Rights under Section 12 of the Plan. (dd) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (ee) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any ---------- successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (ff) "Section 16(b)" means Section 16(b) of the Exchange Act. ------------- (gg) "Service Provider" means an Employee, Director or Consultant. ---------------- (hh) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 15 of the Plan. (ii) "Stock Purchase Right" means the right to purchase Common Stock -------------------- pursuant to Section 12 of the Plan, as evidenced by a Notice of Grant. (jj) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. The maximum aggregate number of Shares that ------------------------- may be optioned and sold under the Plan consists of (a) the 176,000 Shares initially reserved for issuance under the Plan, (b) any Shares which have been reserved but not issued under the Company's 1998 Stock Option Plan (the "1998 Plan"), as of the Registration Date, (c) any Shares returned to the 1998 Plan as a result of termination of options or repurchase, at the purchase price per Share, of unvested Shares issued under the 1998 Plan, on or after the Registration Date, and (d) an annual increase to be added on the first day of the Company's fiscal year beginning in fiscal year 2003, equal to the lesser of (i) 880,000 shares, (ii) 5% of the outstanding shares on such date or (iii) an amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. Subject to the following paragraph, the maximum aggregate number of Shares that may be optioned and sold under the Plan pursuant to subsections (a), (b) and (c) shall not exceed the sum of subsections (a), (b) and (c). If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under -------- the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if unvested Shares are repurchased by the Company at their original purchase price or, if less than their original purchase price, their fair market value, such Shares shall become available for future grant under the Plan. -4- 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Multiple Administrative Bodies. Different Committees with ------------------------------ respect to different groups of Service Providers may administer the Plan. (ii) Section 162(m). To the extent that the Administrator -------------- determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify ---------- transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the -------------------- Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; -5- (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 17(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's ---------------------------------- decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may ----------- be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. ----------- (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. -6- (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 880,000 Shares. (ii) In connection with his or her initial service as an Employee, a Service Provider may be granted Options to purchase up to an additional 440,000 Shares, which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change described in Section 15(a). (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 15), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 21 of the Plan, the Plan shall become ------------ effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 17 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option -------------- Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares to be -------------- issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. -7- (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is --------------------------------- granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the --------------------- acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which, in the case of Shares acquired from the Company, (A) have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) 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; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. -8- An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 15 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ------------------------------------------------- ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service ---------------------- Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, ----------------- the Option may be exercised following the Optionee's death within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's designated beneficiary, provided such beneficiary has been designated prior to Optionee's death in a form acceptable to the Administrator. If no such -9- beneficiary has been designated by the Optionee, then such Option may be exercised by the personal representative of the Optionee's estate or by the person(s) to whom the Option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following Optionee's death. If, at the time of death, Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 11. Leaves of Absence. Unless the Administrator provides otherwise, ----------------- vesting of Options and Stock Purchase Rights granted hereunder shall be suspended during any unpaid leave of absence. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. 12. Stock Purchase Rights. --------------------- (a) Rights to Purchase. Stock Purchase Rights may be issued either ------------------ alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, ----------------- the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall ---------------- contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Stockholder. Once the Stock Purchase Right is ----------------------- exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. -10- No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan. 13. Transferability of Options and Stock Purchase Rights. Unless ---------------------------------------------------- determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 14. Formula Option Grants to Outside Directors. All grants of Options to ------------------------------------------ Outside Directors pursuant to this Section shall be automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (a) All Options granted pursuant to this Section shall be Nonstatutory Stock Options and, except as otherwise provided herein, shall be subject to the other terms and conditions of the Plan. (b) No person shall have any discretion to select which Outside Directors shall be granted Options under this Section or to determine the number of Shares to be covered by such Options. (c) Each person who first becomes an Outside Director following the Registration Date shall be automatically granted an Option to purchase 16,500 Shares (the "First Option") on or about the date on which such person first becomes an Outside Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy; provided, however, that an Inside Director who ceases to be an Inside Director but who remains a Director shall not receive a First Option. (d) Each Outside Director shall be automatically granted an Option to purchase 4,400 Shares (a "Subsequent Option") on each date of the annual meeting of the stockholders of the Company beginning in 2003, if as of such date, he or she shall have served on the Board for at least the preceding six (6) months. (e) Notwithstanding the provisions of subsections (c) and (d) hereof, any exercise of an Option granted before the Company has obtained stockholder approval of the Plan in accordance with Section 21 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 21 hereof. (f) The terms of each Option granted pursuant to this Section shall be as follows: (i) the term of the Option shall be ten (10) years. (ii) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. -11- (iii) subject to Section 15 hereof, the First Option shall vest and become exercisable as to 33 1/3% of the Shares subject to the Option on the first anniversary of its date of grant, and as to 1/36 of the Shares subject to the Option each full month thereafter, provided that the Optionee continues to serve as a Service Provider on such dates. (iv) subject to Section 15 hereof, the Subsequent Option shall vest and become exercisable as to 100% of the Shares subject to the Option on the anniversary of its date of grant, provided that the Optionee continues to serve as a Service Provider on such date. 15. Adjustments, Dissolution or Liquidation or Change in Control. ------------------------------------------------------------ (a) Adjustments. In the event that any dividend or other distribution ----------- (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares such that an adjustment is determined by the Administrator (in its sole discretion) to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator shall, in such manner as it may deem equitable, adjust the number and class of Shares which may be delivered under the Plan, the number, class, and price of Shares covered by each outstanding Option and Stock Purchase Right, and the numerical Share limits of Sections 3, 6, and 14. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Change in Control. In the event of a Change in Control, each ----------------- outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a Change in Control, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable (subject to the consummation of the Change of Control) for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. With respect to Options granted to an Outside Director that are assumed or substituted for, if following such assumption or substitution the Optionee's status as a Director or a director of the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the Optionee, then the Optionee shall fully vest in and have the right to exercise the -12- Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. For the purposes of this subsection (c), the Option or Stock Purchase Right shall be considered assumed if, following the Change in Control, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) received in the Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control. 16. Date of Grant. The date of grant of an Option or Stock Purchase Right ------------- shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 17. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Administrator may at any time ------------------------- amend, alter, suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder -------------------- approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, ---------------------------------- suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 18. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to the ---------------- exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an -------------------------- Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock -13- Purchase Right to represent and warrant at the time of any such exercise 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 required. 19. Inability to Obtain Authority. The inability of the Company to obtain ----------------------------- authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 20. Reservation of Shares. The Company, during the term of this Plan, will --------------------- at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 21. Stockholder Approval. The Plan shall be subject to approval by the -------------------- stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws. 22. Withholding. The Company's obligation to deliver Shares pursuant to ----------- any Options or Stock Purchase Rights granted under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. -14- INTERVIDEO, INC. 2002 STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT ---------------------------- [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number ________________________________ Date of Grant ________________________________ Vesting Commencement Date ________________________________ Exercise Price per Share $_______________________________ Total Number of Shares Granted ________________________________ Total Exercise Price $_______________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: ________________________________ Vesting Schedule: ---------------- This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter on the same day of the month as the Vesting Commencement Date, subject to the Optionee continuing to be a Service Provider on such dates. Termination Period: ------------------ This Option may be exercised for three months after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for twelve months after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT --------- A. Grant of Option. --------------- The Administrator hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 17(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). B. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its term ----------------- in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of ------------------ an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be properly completed by the Optionee and delivered to the [____________] of the Company [(or his or her designee)]. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- C. Method of Payment. ----------------- Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: 1. cash; or 2. check; or 3. consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan][; or 4. surrender of other Shares which, in the case of Shares acquired from the Company, (i) have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. D. Non-Transferability of Option. ----------------------------- This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. E. Term of Option. -------------- This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. F. Tax Consequences. ---------------- Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. G. Exercising the Option. --------------------- 1. Nonstatutory Stock Option. The Optionee may incur regular federal ------------------------- income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. -3- 2. Incentive Stock Option. If this Option qualifies as an ISO, the ---------------------- Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. 3. Disposition of Shares. --------------------- (a) NSO. If the Optionee holds NSO Shares for at least one --- year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (b) ISO. If the Optionee holds ISO Shares for at least one --- year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the ------------------------------------------------- Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. H. Entire Agreement; Governing Law. ------------------------------- The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of the State of California. I. NO GUARANTEE OF CONTINUED SERVICE. ---------------------------------- OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING -4- SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: INTERVIDEO, INC. _____________________________________ _____________________________________ Signature By _____________________________________ _____________________________________ Print Name Title _____________________________________ Residence Address _____________________________________ -5- EXHIBIT A --------- INTERVIDEO, INC. 2002 STOCK OPTION PLAN EXERCISE NOTICE InterVideo, Inc. [Address] Attention: [Title] 1. Exercise of Option. Effective as of today, ________________, _____, ------------------ the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of InterVideo, Inc. (the "Company") under and pursuant to the 2002 Stock Option Plan (the "Plan") and the Stock Option Agreement dated, _____ (the "Option Agreement"). The purchase price for the Shares shall be $_____, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the ------------------- full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser ---------------------------- has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the --------------------- appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 15 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer ---------------- adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are ------------------------------- incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of the State of California. Submitted by: Accepted by: PURCHASER: INTERVIDEO, INC. _____________________________________ _____________________________________ Signature By _____________________________________ _____________________________________ Print Name Its Address: Address: - ------- ------- _____________________________________ INTERVIDEO, INC. _____________________________________ [address] _____________________________________ Date Received -2- INTERVIDEO, INC. 2002 STOCK OPTION PLAN NOTICE OF GRANT OF STOCK PURCHASE RIGHT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice of Grant. [Grantee's Name and Address] You have been granted the right to purchase Common Stock of the Company, subject to the Company's Repurchase Option and your ongoing status as a Service Provider (as described in the Plan and the attached Restricted Stock Purchase Agreement), as follows: Grant Number ____________________________ Date of Grant ____________________________ Price Per Share $___________________________ Total Number of Shares Subject ____________________________ to This Stock Purchase Right Expiration Date: ____________________________ YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By your signature and the signature of the Company's representative below, you and the Company agree that this Stock Purchase Right is granted under and governed by the terms and conditions of the 2002 Stock Option Plan and the Restricted Stock Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a part of this document. You further agree to execute the attached Restricted Stock Purchase Agreement as a condition to purchasing any shares under this Stock Purchase Right. GRANTEE: INTERVIDEO, INC. _____________________________________ _____________________________________ Signature By _____________________________________ _____________________________________ Print Name Title EXHIBIT A-1 ----------- INTERVIDEO, INC. 2002 STOCK OPTION PLAN RESTRICTED STOCK PURCHASE AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Purchase Agreement. WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is a Service Provider, and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in order to give the Purchaser an opportunity to acquire an equity interest in the Company as an incentive for the Purchaser to participate in the affairs of the Company, the Administrator has granted to the Purchaser a Stock Purchase Right subject to the terms and conditions of the Plan and the Notice of Grant, which are incorporated herein by reference, and pursuant to this Restricted Stock Purchase Agreement (the "Agreement"). NOW THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and ------------- the Purchaser hereby agrees to purchase shares of the Company's Common Stock (the "Shares"), at the per Share purchase price and as otherwise described in the Notice of Grant. 2. Payment of Purchase Price. The purchase price for the Shares may be ------------------------- paid by delivery to the Company at the time of execution of this Agreement of cash, a check, or some combination thereof. 3. Repurchase Option. ----------------- (a) In the event the Purchaser ceases to be a Service Provider for any or no reason (including death or disability) before all of the Shares are released from the Company's Repurchase Option (see Section 4), the Company shall, upon the date of such termination (as reasonably fixed and determined by the Company) have an irrevocable, exclusive option (the "Repurchase Option") for a period of sixty (60) days from such date to repurchase up to that number of shares which constitute the Unreleased Shares (as defined in Section 4) at the original purchase price per share (the "Repurchase Price"). The Repurchase Option shall be exercised by the Company by delivering written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at the Company's option, (i) by delivering to the Purchaser or the Purchaser's executor a check in the amount of the aggregate Repurchase Price, or (ii) by canceling an amount of the Purchaser's indebtedness to the Company equal to the aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals the aggregate Repurchase Price. Upon delivery of such notice and the payment of the aggregate Repurchase Price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. (b) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's purchase rights under this Agreement and purchase all or a part of such Shares. If the Fair Market Value of the Shares to be repurchased on the date of such designation or assignment (the "Repurchase FMV") exceeds the aggregate Repurchase Price of such Shares, then each such designee or assignee shall pay the Company cash equal to the difference between the Repurchase FMV and the aggregate Repurchase Price of such Shares. 4. Release of Shares From Repurchase Option. ---------------------------------------- (a) _______________________ percent (______%) of the Shares shall be released from the Company's Repurchase Option [one year] after the Date of Grant and __________________ percent (______%) of the Shares [at the end of each month ------------------------ thereafter], provided that the Purchaser does not cease to be a Service Provider - ---------- prior to the date of any such release. (b) Any of the Shares that have not yet been released from the Repurchase Option are referred to herein as "Unreleased Shares." (c) The Shares that have been released from the Repurchase Option shall be delivered to the Purchaser at the Purchaser's request (see Section 6). 5. Restriction on Transfer. Except for the escrow described in Section 6 ----------------------- or the transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until such Shares are released from the Company's Repurchase Option in accordance with the provisions of this Agreement, other than by will or the laws of descent and distribution. 6. Escrow of Shares. ---------------- (a) To ensure the availability for delivery of the Purchaser's Unreleased Shares upon repurchase by the Company pursuant to the Repurchase Option, the Purchaser shall, upon execution of this Agreement, deliver and deposit with an escrow holder designated by the Company (the "Escrow Holder") the share certificates representing the Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached hereto as Exhibit A-3, until such time as the Company's Repurchase Option expires. -2- (b) The Escrow Holder shall not be liable for any act it may do or omit to do with respect to holding the Unreleased Shares in escrow while acting in good faith and in the exercise of its judgment. (c) If the Company or any assignee exercises the Repurchase Option hereunder, the Escrow Holder, upon receipt of written notice of such exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the Repurchase Option has been exercised or expires unexercised or a portion of the Shares has been released from the Repurchase Option, upon request the Escrow Holder shall promptly cause a new certificate to be issued for the released Shares and shall deliver the certificate to the Company or the Purchaser, as the case may be. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to the Shares while they are held in escrow, including without limitation, the right to vote the Shares and to receive any cash dividends declared thereon. If, from time to time during the term of the Repurchase Option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Repurchase Option. 7. Legends. The share certificate evidencing the Shares, if any, issued ------- hereunder shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 8. Adjustment for Stock Split. All references to the number of Shares and -------------------------- the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares that may be made by the Company after the date of this Agreement. 9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own ---------------- tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the purchase price for the Shares and the Fair Market Value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the -3- right of the Company to buy back the Shares pursuant to the Repurchase Option. The Purchaser understands that the Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Repurchase Option expires by filing an election under Section 83(b) of the Code with the IRS within 30 days from the date of purchase. The form for making this election is attached as Exhibit A-4 hereto. THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF. 10. General Provisions. ------------------ (a) This Agreement shall be governed by the internal substantive laws, but not the choice of law rules of the State of California. This Agreement, subject to the terms and conditions of the Plan and the Notice of Grant, represents the entire agreement between the parties with respect to the purchase of the Shares by the Purchaser. Subject to Section 17(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party hereto. (c) The rights of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, nor prevent that party from thereafter enforcing any other provision of this Agreement. The rights granted both parties hereunder are cumulative and shall not constitute a waiver of either party's right to assert any other legal remedy available to it. (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING -4- SERVICE AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By Purchaser's signature below, Purchaser represents that he or she is familiar with the terms and provisions of the Plan, and hereby accepts this Agreement subject to all of the terms and provisions thereof. Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Purchaser agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Purchaser further agrees to notify the Company upon any change in the residence indicated in the Notice of Grant. DATED: ______________________________ PURCHASER: INTERVIDEO, INC. _____________________________________ _____________________________________ Signature By _____________________________________ _____________________________________ Print Name Title -5- EXHIBIT A-2 ----------- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, _______________________________, hereby sell, assign and transfer unto ________________________________________________ (__________) shares of the Common Stock of InterVideo, Inc., standing in my name of the books of ___________________________________ said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement (the "Agreement") between________________________ and the undersigned dated ______________, _____. Dated: _______________, _____ Signature:______________________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise the Repurchase Option, as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. EXHIBIT A-3 ----------- JOINT ESCROW INSTRUCTIONS __________________, ____ Corporate Secretary InterVideo, Inc. [address] Dear __________: As Escrow Agent for both InterVideo, Inc., a Delaware corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively as the "Company") exercises the Company's Repurchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's Repurchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's Repurchase Option has been exercised, you shall deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's Repurchase Option. Within 90 days after Purchaser ceases to be a Service Provider, you shall deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's Repurchase Option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. -2- 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. 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 Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: InterVideo, Inc. [address] PURCHASER: ____________________________ ____________________________ ____________________________ ESCROW AGENT: Corporate Secretary InterVideo, Inc. [address] 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. -3- 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the internal substantive laws, but not the choice of law rules, of the State of California. Very truly yours, INTERVIDEO, INC. _____________________________________ By _____________________________________ Title PURCHASER: _____________________________________ Signature _____________________________________ Print Name ESCROW AGENT: _____________________________________ Corporate Secretary -4- EXHIBIT A-4 ----------- ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with his or her receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME: TAXPAYER: SPOUSE: ADDRESS: IDENTIFICATION NO.: TAXPAYER: SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: ________ shares (the "Shares") of the Common Stock of InterVideo, Inc. (the "Company"). 3. The date on which the property was transferred is: _________________, ____. 4. The property is subject to the following restrictions: The Shares may be repurchased by the Company, or its assignee, upon certain events. This right lapses with regard to a portion of the Shares based on the continued performance of services by the taxpayer over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $__________. 6. The amount (if any) paid for such property is: $___________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked - -------------------------------------------------------------------------- except with the consent of the Commissioner. - -------------------------------------------- Dated: _________________, ____ _______________________________________ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated: _________________, ____ _______________________________________ Spouse of Taxpayer EX-10.3 8 dex103.txt REGISTRANT'S 2002 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.3 INTERVIDEO, INC. 2002 EMPLOYEE STOCK PURCHASE PLAN The following constitutes the provisions of the 2002 Employee Stock Purchase Plan of InterVideo, Inc. 1. Purpose. The purpose of the Plan is to provide Employees with an opportunity to purchase Common Stock through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan, accordingly, shall be construed so as to extend and limit Plan participation in a manner that is consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Administrator" means the Board or any committee thereof ------------- designated by the Board in accordance with Section 14. (b) "Board" means the Board of Directors of the Company. ----- (c) "Change of Control" means the occurrence of any of the following ----------------- events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company's assets; or (iii) The consummation of a merger or consolidation of the Company, with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company, or such surviving entity or its parent outstanding immediately after such merger or consolidation. (iv) A change in the composition of the Board, as a result of which fewer than a majority of the Directors are Incumbent Directors. "Incumbent Directors" means Directors who either (A) are Directors as of the effective date of the Plan (pursuant to Section 23), or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those Directors whose election or nomination was not in connection with any transaction described in subsections (i), (ii) or (iii) or in connection with an actual or threatened proxy contest relating to the election of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. Any ---- reference to a section of the Code herein shall be a reference to any successor or amended section of the Code. (e) "Common Stock" means the common stock of the Company. ------------ (f) "Company" means InterVideo, Inc., a Delaware corporation. ------- (g) "Compensation" means an Employee's base straight time gross ------------ earnings, bonuses and commissions (to the extent such commissions are an integral, recurring part of compensation), but exclusive of payments for incentive compensation, overtime, shift premium and other compensation. (h) "Designated Subsidiary" means any Subsidiary that has been --------------------- designated by the Administrator from time to time in its sole discretion as eligible to participate in the Plan. (i) "Director" means a member of the Board. -------- (j) "Employee" means any individual who is a common law employee of an -------- Employer and is customarily employed for at least twenty (20) hours per week and more than five (5) months in any calendar year by the Employer. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Employer. Where the period of leave exceeds ninety (90) days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (k) "Employer" means any one or all of the Company and its Designated -------- Subsidiaries. (l) "Enrollment Date" means the first Trading Day of each Offering --------------- Period. (m) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended, including the rules and regulations promulgated thereunder. (n) "Exercise Date" means the first Trading Day on or after May 1 and ------------- November 1 of each year. The first Exercise Date under the Plan shall be November 1, 2002. (o) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for the Common Stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; -2- (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (iii) In the absence of an established market for the Common Stock, its Fair Market Value shall be determined in good faith by the Administrator, or; (iv) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus deemed to be included within the registration statement on Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Common Stock (the "Registration Statement"). (p) "Offering Periods" means the periods of approximately twenty-four ---------------- (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the first Trading Day on or after the May 1 and November 1 Offering Period commencement date approximately twenty-four months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the first Trading Day on or after the earlier of (i) May 1, 2004 or (ii) twenty-seven (27) months from the beginning of the first Offering Period; and provided, further, that the second Offering Period under the Plan shall commence on November 1, 2002. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (q) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (r) "Plan" means this 2002 Employee Stock Purchase Plan. ---- (s) "Purchase Period" means the approximately six (6) month period --------------- commencing on one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (t) "Purchase Price" means an amount equal to eighty-five percent -------------- (85%) of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be adjusted by the Administrator pursuant to Section 20. (u) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. (v) "Trading Day" means a day on which the U.S. national stock ----------- exchanges and the Nasdaq System are open for trading. -3- 3. Eligibility. ----------- (a) First Offering Period. Any individual who is an Employee --------------------- immediately prior to the first Offering Period under the Plan shall be automatically enrolled in the first Offering Period. (b) Subsequent Offering Periods. Any individual who is an --------------------------- Employee as of the Enrollment Date of any future Offering Period shall be eligible to participate in such Offering Period, subject to the requirements of Section 5. (c) Limitations. Any provisions of the Plan to the contrary ----------- notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company or any Parent or Subsidiary of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Parent or Subsidiary of the Company, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans (as defined in Section 423 of the Code) of the Company or any Parent or Subsidiary of the Company accrues at a rate which exceeds twenty-five thousand dollars ($25,000) worth of stock (determined at the Fair Market Value of the stock at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, ---------------- overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 of each year, or on such other date as the Administrator shall determine, and continuing thereafter until terminated in accordance with Section 20; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the first Trading Day on or after the earlier of (i) May 1, 2004 or (ii) twenty-seven (27) months from the beginning of the first Offering Period; and provided, further, that the second Offering Period under the Plan shall commence on November 1, 2002. The Administrator shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. ------------- (a) First Offering Period. An Employee who has become a --------------------- participant in the first Offering Period under the Plan pursuant to Section 3(a) shall be entitled to continue his or her participation in such Offering Period only if he or she submits to the Company's payroll office (or its designee) a properly completed subscription agreement authorizing payroll deductions in the form provided by the Administrator for such purpose (i) no earlier than the effective date of the filing of the Company's Registration Statement on Form S-8 with respect to the shares of Common Stock issuable under the Plan (the "Effective Date") and (ii) no later than five (5) business days from the Effective Date (the "Enrollment Window"). A participant's failure to submit the subscription agreement during the Enrollment Window pursuant to this Section 5(a) shall result in the automatic termination of his or her participation in the first Offering Period under the Plan. -4- (b) Subsequent Offering Periods. An Employee who is eligible to --------------------------- participate in the Plan pursuant to Section 3(b) may become a participant by (i) submitting to the Company's payroll office (or its designee), on or before a date prescribed by the Administrator prior to an applicable Enrollment Date, a properly completed subscription agreement authorizing payroll deductions in the form provided by the Administrator for such purpose, or (ii) following an electronic or other enrollment procedure prescribed by the Administrator. 6. Payroll Deductions. ------------------ (a) At the time a participant enrolls in the Plan pursuant to Section 5, he or she shall elect to have payroll deductions made on each payday during the Offering Period in an amount not exceeding 15% of the Compensation which he or she receives on each such payday. (b) Payroll deductions authorized by a participant shall commence on the first payday following the Enrollment Date and shall end on the last payday in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10; provided, however, that for the first Offering Period under the Plan, payroll deductions shall commence on the first payday on or following the end of the Enrollment Window. (c) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (d) A participant may discontinue his or her participation in the Plan as provided in Section 10, or may change the rate of his or her payroll deductions during the Offering Period by (i) properly completing and submitting to the Company's payroll office (or its designee), on or before a date prescribed by the Administrator prior to an applicable Exercise Date, a new subscription agreement authorizing the change in payroll deduction rate in the form provided by the Administrator for such purpose, or (ii) following an electronic or other procedure prescribed by the Administrator; provided, however, that a participant may only make one payroll deduction change during each Purchase Period. If a participant has not followed such procedures to change the rate of payroll deductions, the rate of his or her payroll deductions shall continue at the originally elected rate throughout the Offering Period and future Offering Periods (unless terminated as provided in Section 10). The Administrator may, in its sole discretion, limit the nature and/or number of payroll deduction rate changes that may be made by participants during any Offering Period. Any change in payroll deduction rate made pursuant to this Section 6(d) shall be effective as of the first full payroll period following five (5) business days after the date on which the change is made by the participant (unless the Administrator, in its sole discretion, elects to process a given change in payroll deduction rate more quickly). (e) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(c), a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate originally elected by the participant effective as of the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. -5- (f) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, --------------- each Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of Common Stock determined by dividing such participant's payroll deductions accumulated prior to such Exercise Date and retained in the participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall a participant be permitted to purchase during each Purchase Period more than 4,400 shares of Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(c) and 13. The Employee may accept the grant of such option (i) with respect to the first Offering Period under the Plan, by submitting a properly completed subscription agreement in accordance with the requirements of Section 5(a) on or before the last day of the Enrollment Window, and (ii) with respect to any future Offering Period under the Plan, by electing to participate in the Plan in accordance with the requirements of Section 5(b). The Administrator may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of Common Stock that a participant may purchase during each Purchase Period of such Offering Period. Exercise of the option shall occur as provided in Section 8, unless the participant has withdrawn pursuant to Section 10. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. ------------------ (a) Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of shares of Common Stock shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares of Common Stock shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. (b) Notwithstanding any contrary Plan provision, if the Administrator determines that, on a given Exercise Date, the number of shares of Common Stock with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the number of shares of Common Stock available for sale under the Plan on such Exercise Date, the Administrator may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares -6- of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20. The Company may make pro rata allocation of the shares of Common Stock available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional shares of Common Stock for issuance under the Plan by the Company's shareholders subsequent to such Enrollment Date. 9. Delivery. As soon as administratively practicable after each -------- Exercise Date on which a purchase of shares of Common Stock occurs, the Company shall arrange the delivery to each participant, as appropriate, the shares purchased upon exercise of his or her option in a form determined by the Administrator (in its sole discretion) and pursuant to rules established by the Administrator. No participant shall have any voting, dividend, or other shareholder rights with respect to shares of Common Stock subject to any option granted under the Plan until such shares have been purchased and delivered to the participant as provided in this Section 9. 10. Withdrawal. ---------- (a) Under procedures established by the Administrator, a participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by (i) submitting to the Company's payroll office (or its designee) a written notice of withdrawal in the form prescribed by the Administrator for such purpose, or (ii) following an electronic or other withdrawal procedure prescribed by the Administrator. All of the participant's payroll deductions credited to his or her account shall be paid to such participant as promptly as practicable after the effective date of his or her withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant re-enrolls in the Plan in accordance with the provisions of Section 5. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an ------------------------- Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to purchase shares of Common Stock under the Plan shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who -7- receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 13. Stock. ----- (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19, the maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be 176,000 shares plus an annual increase to be added on the first day of the Company's fiscal year beginning in fiscal year 2003, equal to the lesser of (i) 176,000 shares, (ii) 1 1/2% of the outstanding shares on such date or (iii) an amount determined by the Board. (b) Shares of Common Stock to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a -------------- committee of members of the Board who shall be appointed from time to time by, and shall serve at the pleasure of, the Board. The Administrator shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. The Administrator, in its sole discretion and on such terms and conditions as it may provide, may delegate to one or more individuals all or any part of its authority and powers under the Plan. Every finding, decision and determination made by the Administrator (or its designee) shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. -------------------------- (a) A participant may designate a beneficiary who is to receive any shares of Common Stock and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may designate a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. (c) All beneficiary designations under this Section 15 shall be made in such form and manner as the Administrator may prescribe from time to time. -8- 16. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares of Common Stock under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw from an Offering Period in accordance with Section 10. 17. Use of Funds. All payroll deductions received or held by the ------------ Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. Until shares of Common Stock are issued under the Plan (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), a participant shall only have the rights of an unsecured creditor with respect to such shares. 18. Reports. Individual accounts shall be maintained for each ------- participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares of Common Stock purchased and the remaining cash balance, if any. 19. Adjustments, Dissolution, Liquidation or Change of Control. ---------------------------------------------------------- (a) Adjustments. In the event that any dividend or other ----------- distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the Company, or other change in the corporate structure of the Company affecting the Common Stock such that an adjustment is determined by the Administrator (in its sole discretion) to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Administrator shall, in such manner as it may deem equitable, adjust the number and class of Common Stock which may be delivered under the Plan, the Purchase Price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised, and the numerical limits of Sections 7 and 13. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10. (c) Change of Control. In the event of a Change of Control, each ----------------- outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to -9- assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed Change of Control. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10. 20. Amendment or Termination. ------------------------ (a) The Administrator may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19, no such termination can affect options previously granted under the Plan, provided that an Offering Period may be terminated by the Administrator on any Exercise Date if the Administrator determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 19 and this Section 20, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Administrator shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Administrator determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (iii) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. -10- 21. Notices. All notices or other communications by a participant to ------- the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares of Common Stock shall ---------------------------------- not be issued with respect to an option under the Plan unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, including the rules and regulations promulgated thereunder, the Exchange Act and the requirements 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. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise 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 required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect until terminated under Section 20. 24. Automatic Transfer to Low Price Offering Period. To the extent ----------------------------------------------- permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period. -11- SAMPLE SUBSCRIPTION AGREEMENT ----------------------------- INTERVIDEO, INC. 2002 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Offering Date:___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ____________________ hereby elects to participate in the InterVideo, Inc. 2002 Employee Stock Purchase Plan (the "Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 1 to 15%) during the Offering Period in accordance with the Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Plan. I understand that my participation in the Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Plan. 5. Shares of Common Stock purchased for me under the Plan should be issued in the name(s) of Employee or Employee and Spouse only. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days -------------------------------------------------------------- after the date of any disposition of my shares and I will make adequate ----------------------------------------------------------------------- provision for Federal, state or other tax withholding obligations, if any, -------------------------------------------------------------------------- which arise upon the disposition of the Common Stock. The Company may, but ---------------------------------------------------- will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and/or shares due me under the Plan: NAME: (Please print)___________________________________________________ (First) (Middle) (Last) _________________________ ________________________________________ Relationship _________________________ ________________________________________ Percentage Benefit (Address) NAME: (please print) ----------------------------------------------------------------------- (First) (Middle) (Last) _________________________ ________________________________________ Relationship _________________________ ________________________________________ Percentage of Benefit (Address) -2- Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ ____________________________________ Signature of Employee ____________________________________ Spouse's Signature (If beneficiary other than spouse) -3- SAMPLE WITHDRAWAL NOTICE ------------------------ INTERVIDEO, INC. 2002 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the InterVideo, Inc. 2002 Employee Stock Purchase Plan which began on ____________, ______ (the "Offering Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: ____________________________________ ____________________________________ ____________________________________ Signature: ____________________________________ Date:_______________________________ EX-10.14 9 dex1014.txt SOFTWARE LICENSE AGREEMENT CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS OMITTED INFORMATION HAS BEEN REPLACED BY [*]. EXHIBIT 10.14 SOFTWARE LICENSING AGREEMENT THIS SOFTWARE LICENSE AGREEMENT is entered into as of this 4th day of August 1999 (hereinafter "Effective Date") by and between Dell Products L.P. (hereinafter "Dell") with its principal place of business at One Dell Way, Round Rock, Texas 78682, and Intervideo, Inc., a California corporation having a principal place of business at 47350 Fremont Blvd., Fremont, CA 94538 (hereinafter "Licensor"). 1.0 DEFINITIONS 1.1 Agreement shall mean this Software License Agreement and its Supplement. 1.2 Licensed Product(s) shall mean: (i) the software and documentation listed in the Supplement to this Software License Agreement and (ii) all improvements, corrections, modifications, alterations, revisions, extensions, upgrades, national language versions and/or enhancements to the software and/or documentation made during the term of this Agreement (hereinafter "Updates"). 1.3 Supplement shall mean the supplement executed under this Software License Agreement. The supplement shall describe the Licensed Product(s) and may include additional terms and conditions such as compensation, delivery schedules, technical contacts and other information related to the Licensed Product(s). The terms and conditions of this Software License Agreement shall apply to the Supplement. 2.0 OBJECT CODE LICENSE WITH SOURCE CODE ESCROW PROVISIONS 2.1 Licensor hereby grants to Dell a non-exclusive, worldwide, irrevocable right and license, under all copyrights, patents, patent applications, trade secrets and other necessary intellectual property rights, to: (i) use, make, execute, reproduce, display, perform and prepare derivative works of, the Licensed Product(s), in object code form, (ii) distribute, license, sublicense, sell, lease or otherwise transfer the Licensed Product(s), in object code form, as part of, in conjunction with, or for use with, Dell systems and (iii) authorize, license and sublicense third parties to do any, some or all of the foregoing. Dell shall have the option to distribute the Licensed Product(s) to end users pursuant to Dell's or Licensor's end user license agreement or the like, as updated from time to time. 2.2 The above grant includes, without limitation, the right and license to: (i) use Licensor's trade names, product names and trademarks in connection with the marketing and distribution of Licensed Product(s) and (ii) all pictorial, graphic and audio visual works including icons, screens and characters created as a result of execution of the Licensed Product(s). 2.3 Upon Dell's request, Licensor agrees to place into escrow the Licensed Product(s), in source code form, and all build tools and other materials necessary to enable Dell to maintain and service the Licensed Product(s) in object code from ("hereinafter Escrow Materials"). Dell shall be responsible for paying the escrow agent's fees. Dell agrees not to exercise its license to the Escrow Materials set forth below unless and until the Escrow Materials are released to Dell by the escrow agent. The escrow agent may only release the Escrow Materials to Dell under the following circumstances: (i) Licensor becomes insolvent, (ii) a claim of bankruptcy if filed by or on behalf of Licensor, (iii) Licensor makes an assignment for the benefit of a creditor or (iv) Licensor ceases to do business in the normal course. Under all circumstances, ownership of the Licensed Product shall remain with IVI. 2.4 Licensor hereby grants to Dell a non-exclusive, worldwide, irrevocable right and license, under all copyrights, patents, patent applications, trade secrets and other necessary intellectual property rights, to internally: (i) use, execute, reproduce, display, perform, prepare derivative works of, the Licensed Product(s), in source code form, for the purposes of enabling Dell to maintain, service and manufacture the Licensed Product(s) and (ii) authorize, license and sublicense third parties to do any, some or all of the foregoing on Dell's behalf. 3.0 COMPENSATION; PER COPY ROYALTIES 3.1 Dell will pay Licensor a [*] royalty as set forth in the Supplement for each copy of the Licensed Product(s) distributed by Dell for revenue. No [*] royalties shall be due for copies of the Licensed Product(s): (i) [*] (ii) used or distributed for demonstration, marketing or training purposes, (iii) distributed to a customer as a replacement for a defective copy or to fix an error, (iv) used to repair or maintain a customer's system, (v) used for backup or archival purposes, (vi) returned by a customer, (vii) used for manufacturing or testing purposes or (viii) distributed to an existing customers as an upgrade to their existing copy of the Licensed Product(s). 3.2 The [*] royalties set forth in the Supplement represents Dell's only financial obligations under this Agreement and includes all costs and fees. All payments shall be made in United States currency. Licensor acknowledges that there [*] royalty due under this Agreement and that any royalties received will be based solely on the criteria set forth above. Licensor acknowledges and agrees that Dell has the right to withhold any applicable taxes from any royalties due under this Agreement if required by any government agency. 3.3 Upon request, Dell shall submit royalty reports within [*] days after [*]. For the purposes of royalty reporting, as an example, Dell's fiscal quarters may be: Quarter 1 - February 1-April 30, Quarter 2-May 1-July 31, Quarter 3-August 1-October 31, and Quarter 4-November 1-January 31. 3.4 A nationally recognized accounting organization retained by Licensor and acceptable to Dell may have access to those records maintained by Dell that are necessary to determine whether Dell has paid the appropriate royalties based on net shipments by Licensed Product. Dell must receive at least sixty (60) or more days of advance written notice of Licensor's intent to audit. Such audit may only take place upon sixty (60) days written notice, during regular business hours and no more than once per calendar year. Only two (2) years of Dell records may be accessed from the date of audit, unless there is a substantial discrepancy which may affect additional year records. All records accessed during the audit shall be deemed Dell -2- confidential information and will be treated as such in accordance with the confidentiality agreement in place between the parties. If no such agreement is in place, the parties will negotiate in good faith the terms of such an agreement. 3.5 If the parties discover and agree that Dell has overpaid Licensor, Licensor shall refund the amount of the overpayment to Dell within forty-five (45) days after receipt of an invoice. If the parties discover and agree that Dell has underpaid Licensor, Dell will pay Licensor the amount of the underpayment within forty-five (45) days after receipt of an invoice. 4.0 PRE-DELIVERY TESTING, DELIVERY AND ACCEPTANCE 4.1 Prior to delivery, Licensor shall perform all testing necessary to ensure that the Licensed Product(s) comply with its written specifications and are compatibility with Dell systems. Licensor shall appoint a designated systems engineer who shall be available on a [*] basis to support Dell in all areas relating to the Licensed Product(s). Such [*] systems engineer will work with Dell on any modifications to the Licensed Product(s) necessary to fully support Dell's systems and their features. 4.2 Licensor shall, at its expense, deliver a master copy of the Licensed Product(s) to Dell in accordance with the schedule set forth in the Supplement. Licensor also shall, at its expense, deliver to Dell, within [*] days of Dell's request, all Updates to the Licensed Product(s) made during the term of this Agreement, Licensor shall inform Dell of the existence of a major Update at least [*] days prior to making such an Update generally available or within [*] for a minor Update. Upon Dell's request, Licensor shall provide Dell with a pre-release copy of any Update. Licensor shall deliver a master copy of its standard end user license agreement and a copy of the Licensed Product's written specifications at the same time Licensor delivers the Licensed Product(s). 4.3 Upon Dell's receipt of a Licensed Product, Dell shall have [*] days to conduct those tests that Dell deems appropriate to determine whether the Licensed Product: (i) complies with its written specifications, (ii) contains any defects and (iii) is compatible with Dell's systems. If Dell discovers a problem, Dell will notify Licensor and Licensor will have [*] to fix the problem and deliver a corrected version of the Licensed Product to Dell. Upon receipt of the corrected version, Dell will have [*] days to test the corrected version of the Licensed Product. If Dell determines that there is still a problem, Dell will have the option of rejecting the Licensed Product or agreeing upon a fix strategy with Licensor. If Dell rejects the Licensed Product, any payments previously made by Dell to Licensor relating to the Licensed Product, if any, shall be refunded in their entirety within [*] of Dell's rejection. If Dell decides to agree on a fix strategy, such decision shall not be deemed an acceptance of the Licensed Product. In fact, each version of the Licensed Product delivered to Dell, in accordance with the fix strategy, will go through the acceptance process set forth above. -3- 5.0 SUPPORT, TRAINING AND MAINTENANCE 5.1 Licensor shall, [*], train Dell personnel to set up, install, configure and operate the Licensed Product(s) and provide such other training to assist and enable Dell to fully perform and exercise its rights under this Agreement. Such training shall be completed [*] days prior to Dell's commercial introduction of the Licensed Product(s). Additional training periods for Updates shall also be provided [*] and within a mutually agreed upon time period. 5.2 During the term of this Agreement, Licensor shall, [*], provide to Dell ongoing technical support, maintenance and services for the Licensed Product(s). Should Licensor become aware of any reproducible errors or be notified by Dell or any errors in the Licensed Product(s), Licensor shall promptly take appropriate measures to correct such errors and provide such corrections in accordance with the time frames set forth below. Licensor shall provide, [*], assistance in correcting difficulties caused by errors, including, but not limited to, phone for Dell customer service staff. Licensor agrees to provide any other appropriate service to ensure the proper installation, operation, and functioning of the Licensed Product(s). 5.3 Dell will notify Licensor of any problems discovered with the Licensed Product(s). Such notification may be in writing or oral. Timely turnaround to software problem reports will be required. Problems must be fixed within the following timeframes: Major Defect Correction ------------ ---------- Licensor acknowledgment and description Work-around or patch within of course of action within [*] of [*]. notification by Dell. Minor Defect Correction ------------ ---------- Licensor acknowledgement and description Work around or patch of course of action within [*] of within [*]. notification by Dell. Major Defect is any problem with the use of Licensed Product(s) that either fully or partially impairs the use or operation of the Licensed Product by Dell or Dell's customers or licensees. Minor Defect is any problem that is outside of the Major Defect definition. 6.0 REPRESENTATIONS AND WARRANTIES On an ongoing basis, Licensor represents and warrants that: (a) the Licensed Product(s) will operate in accordance with its written specifications; (b) Licensor has [*] in the Licensed Product(s) to grant Dell the rights and licenses contained in this Agreement; -4- (c) the Licensed Product(s) [*] of any third party; (d) the Licensed Product(s) does not contain any known viruses, expiration, time-sensitive devices or other harmful code that would inhibit the end user's use of the Licensed Product(s) or Dell system; (e) if applicable, the Licensed Product(s) shall be able to accurately process date data (including, but not limited to, displaying, calculating, comparing, and sequencing) between the twentieth and twenty-first centuries; (f) if applicable, the Licensed Product(s) is certified by Microsoft as PC 9X compliant or Windows Logo certified; (g) Licensor and the Licensed Product(s) comply with all governmental laws, statutes, ordinances, administrative orders, rules and regulations and that Licensor has procured all necessary licensees and paid all fees and other charges required so that Dell can exercise the rights and license granted under this Agreement; (h) Licensor has obtained a waiver or agreement not to assert any moral rights from any person or entity having any moral rights with respect to the Licensed Product(s) and Licensor shall not assert any moral rights Licensor or its employees may have in the Licensed Product(s); (i) the Licensed Product(s) are not encrypted, nor do they contain encryption capability; (j) there is no restriction of any relevant governmental authority which prohibits the export of the Licensed Product(s) to countries outside the United States and Canada, other than those laws of the United States which prohibit exports generally to specified countries, currently: Libya, Cuba, Montenegro, North Korea, Serbia, Syria, Sudan, Iran and Iraq, as amended from time to time by the United States Government; and (k) Licensor has and will continue to comply with all applicable governmental laws, statutes, rules and regulations including, but not limited to, those related to export of product and technical data, and Licensor agrees that for any updates, upgrades and new products which are licensed to Dell pursuant to the terms of this Agreement. Licensor shall provide prior written notice of any facts which would make the foregoing representations untrue. In the event that Dell chooses to use Licensor's end user license agreement, Licensor hereby makes the following additional ongoing representations and warranties: (l) Licensor will warrant the Licensed Product(s) directly to the end-user in accordance with the terms and conditions set forth in Licensor's end-user license agreement; and (m) Licensor has agreed to honor all replacement requests received from Dell or end users under the terms of the end user license agreement pertaining to defective Licensed Product(s). 7.0 INDEMNIFICATION 7.1 Licensor shall indemnify, defend and hold harmless Dell, Dell Computer Corporation, Dell Computer Corporation's subsidiaries and affiliates and all of the foregoing entities' officers, directors, employees, agents, customers and licensees, and their successors and assigns, from -5- and against any and all claims, actions, suits, legal proceedings, demands, liabilities, damages, losses, judgments, settlements, costs and expenses, beyond the liability limitations listed in section 9.2, including attorney's fees, arising out of or in connection with any alleged or actual: (i) infringement by Licensor and/or the Licensed Product(s) of any copyright, patent, trade secret or other intellectual property rights or similar rights of any third party, except those listed in 7.4; (ii) breach by Licensor and/or the Licensed Product(s) of any other representation and/or warranties contained in this Agreement; and (iii) damage to any property, personal injury, death or any other damages or losses sustained by whomever suffered, resulting, or claimed to result, in whole or in part from any alleged or actual defect in the Licensed Product(s) whether latent or patent, including any alleged or actual improper construction or design or the failure of the Licensed Product(s) to comply with its written specifications or any express or implied warranties. 7.2 In the event that Dell becomes aware of any such claim, Dell shall: (i) notify Licensor of such claim, (ii) cooperate with Licensor in the defense thereof and (iii) obtain Licensor's approval prior to settling any such claim, provided such consent is not unreasonably withheld. 7.3.1 In addition to Licensor's obligations under Subsection 7.1 above, in the event that a claim of infringement is made with regard to the Licensed Product(s), Licensor shall, at its own expense, procure for Dell the right to exercise the rights and licenses granted to Dell under this Agreement or modify the Licensed Product(s) such that it is no longer infringing. 8.0 TERM AND TERMINATION OF AGREEMENT 8.1 Unless earlier terminated as provided below, the term of this Agreement shall be for three (3) years from the Effective Date and, unless either party gives thirty (30) days notice of non-renewal prior to the end of the initial term, this Agreement shall automatically renew for successive one (1) year periods. 8.2 If either party hereto materially breaches any of the terms and conditions of this Agreement, the other party may give written notice to the defaulting party specifying the actions or omissions which constitute a material breach of this Agreement, and in the event that any material breach so indicated shall not be remedied by the defaulting party within thirty (30) days after such notice, the party not in default may by further written notice to the defaulting party terminate this Agreement, and, except as expressly provided otherwise in this Agreement, this Agreement and all the rights and obligations contained herein shall terminate five (5) days after the defaulting party's receipt of such notice of termination. Failure of either party to so terminate this Agreement due to a material breach on the part of the other party shall not prejudice its rights to terminate for a subsequent material breach by the other. -6- 8.3 All licenses and sublicenses granted to customers and other licensees under this Agreement, and all provisions of Sections 6.0, 7.0, 8.0, 9.0, 10.0 and 11.0, shall survive any expiration or termination of this Agreement and shall bind the parties and their successors, heirs, assigns and legal representatives. In addition, Licensor's obligations under Section 4 and 5 shall survive for [*] after any expiration or termination of this Agreement in order for Dell to satisfy its then existing contractual obligations to its customers and licensees. Dell shall retain a limited license in accordance with Section 2 to use the Licensed Product(s) in order to satisfy such obligations and to exhaust its inventory of Licensed Product(s) existing at expiration or termination, provided that Dell's right to exhaust any such inventory shall not extend beyond [*] after expiration or termination. Thereafter, Dell agrees to return or destroy all additional copies of the Licensed Product(s) in its possession. 9.0 LIMITATION OF LIABILITIES 9.1 EXCEPT AS SET FORTH BELOW, NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES UNDER ANY PART OF THIS AGREEMENT EVEN IF ADVISED OR AWARE OF THE POSSIBILITY OF SUCH DAMAGES. 9.2 THE LIMITATIONS OF LIABILITY SET FORTH ABOVE, SHALL NOT APPLY TO ANY OF LICENSOR'S OBLIGATIONS OR LIABILITIES UNDER SECTION 6 "REPRESENTATIONS AND WARRANTIES" AND SECTION 7 "INDEMNIFICATION". LICENSEE'S SOLE AND TOTAL LIABILITY FOR ANY CAUSE OF ACTION SHALL BE LIMITED TO A MAXIMUM OF FIFTY PERCENT (50%) OF THE PAYMENTS PREVIOUSLY MADE OR DUE BY LICENSEE TO LICENSOR UNDER THIS AGREEMENT. 10.0 CONFIDENTIAL INFORMATION 10.1 The parties agree that information exchanged under this Agreement that is considered by either party to be confidential information will be subject to the terms and conditions of the non-disclosure agreement in place between the parties. If the parties have not executed a non-disclosure agreement, the parties will negotiate in good faith the terms of such an agreement. Licensor shall not provide to Dell any information that is considered confidential information of any third party. 11.0 MISCELLANEOUS 11.1 This Agreement shall in no way preclude Dell from independently developing, having developed or acquiring or marketing any products or services nor shall it in any way preclude Dell from entering into any similar agreement with any other party. 11.2 Dell shall have full freedom and flexibility in its decisions concerning the distribution and marketing of the Licensed Product(s) including, without limitation, the decision of whether or not to distribute or discontinue distribution of the Licensed Product(s). Dell does not guarantee that its marketing, of the Licensed Product(s) will be successful. -7- 11.3 Neither this Agreement or any rights or obligations contained therein, may be assigned or delegated by Licensor without the prior written consent of Dell. Such consent shall not be unreasonably be withheld. 11.4 Licensor is an independent contractor. Licensor is not a legal representative or agent of Dell, nor shall Licensor have the right or authority to create or incur any liability or any obligation of any kind, express or implied, against, or in the name of, or on behalf of Dell. 11.5 [*] 11.6 Licensor shall not publicize the existence of this Agreement with Dell nor refer to Dell in connection with any promotion or publication without the prior written approval of Dell. Further, Licensor shall not disclose the terms and conditions of this Agreement to any third party, including, but not limited to, any financial terms, except as required by law or with Dell's prior written consent. 11.7 Licensor shall comply with all applicable governmental laws, statutes, ordinances, administrative orders, rules and regulations including, without limitation, those related to the export of technical materials. Licensor shall provide Dell with prompt written notice of any export restrictions related to the Licensed Product(s). 11.8 Any and all written notices, communications and deliveries between Licensor and Dell with reference to this Agreement shall be deemed made on the date of mailing if sent by registered or certified mail to the respective address of the other party as follows: In the case of Dell: Dell Products L.P. One Dell Way BBP, Box 4 Round Rock, TX 78682 Attn: Strategic Commodity Manager Software Procurement In the case of Licensor: Intervideo 47350 Fremont Blvd. Fremont, CA 94538 Attn: Joe Monastiero VP of Marketing & Sales 11.9 This Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas, U.S.A. without regards for its rules of conflict of laws, as if this Agreement was executed in and fully performed within the State of Texas. Both parties hereby waive any -8- right to a trial by jury relating to any dispute arising under or in connection with this Agreement. 11.10 Should any provision herein be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be modified to reflect the intentions of the parties. All other terms and conditions shall remain in full force and effect. 11.11 No amendment, modification or waiver of any provision of this Agreement shall be effective unless set forth in a writing executed by an authorized representative of each party. No failure or delay by either party in exercising any right, power or remedy will operate as a waiver of any such right, power or remedy. No waiver of any provision of this Agreement shall constitute a continuing waiver or a waiver of any similar provision unless expressly set forth in a writing signed by an authorized representative of each party. 11.12 Since Dell transacts business with the United States government, Licensor must comply with the applicable federal laws and Federal Acquisition Regulations ("FARs") including the following: It is Dell's policy to take affirmative action to provide equal employment opportunity without regard to race, religion, color, national origin, age, sex, disability, veterans status or any other legally protected status. As a condition of doing business, Dell requires Licensor to practice equal opportunity employment and to comply with Executive Order 11246, as amended, Section 503 of the Rehabilitation Act of 1973, and Section 4212 of the Vietnam Era Veteran's Readjustment Assistance Act of 1974, all as amended, and the relevant Regulations and Orders of the U.S. Secretary of Labor. Additionally, to the extent required by applicable law, the following sections of Chapter 60 of Title 41 of the Code of Federal Regulations are incorporated by reference in this Agreement and each Order: 41 CFR 60-1.4(a); 41 CFR 60-1.8; 41 CFR 60-741; 41 CFR 60-250; 41 CFR 60-1.7; 41 CFR 60-1.40. It is the policy of the United States (FAR 52.219-8) that small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals and small business concerns owned and controlled by women shall have the maximum practicable opportunity to participate in performing contracts for any Federal agency. Licensor agrees to comply with this policy and to provide reporting of data as requested to the Small Business Liaison Officer, Dell Computer Corporation, One Dell Way, Round Rock, Texas, 78682. 11.13 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter contained herein, and merges all prior discussions and agreements, both oral and written, between the parties. Nothing in any purchase order, invoice, order acknowledgment, or other document of Licensor shall be of any effect whatsoever and may not affect, alter, or modify the terms and conditions of this Agreement. If the terms and -9- conditions of this Agreement conflict with any terms of a Dell purchase order relating to the Licensed Product(s), the terms and conditions of this Agreement shall govern. The terms and conditions set forth in Supplements are hereby incorporated into this Software License Agreement by reference. If the terms and conditions of this Software License Agreement conflict with any terms and conditions contained in a Supplement, the terms and conditions of the Supplement shall govern. IN WITNESS WHEREOF, the parties hereto have duly executed this Software License Agreement by their respective duly authorized officers to be effective as of the Effective Date as first written above. DELL PRODUCTS L.P. INTERVIDEO, INC. By: /s/ Sharon Peterson By: /s/ Joe Monastiero --------------------------------- -------------------------------- Title: Dir, WWSP Title: V.P. ------------------------------ ----------------------------- Date: 8/13/1999 Date: August 4th, 1999 ------------------------------- ------------------------------ -10- SOFTWARE LICENSING AGREEMENT THIS SUPPLEMENT is entered into as of this 4th day of August 1999 by and between Dell Products L.P. (hereinafter "Dell") with its principal place of business at One Dell Way, Round Rock, Texas 78682, and Intervideo, Inc., a California corporation having a principal place of business at 47350 Fremont Blvd., Fremont, CA 94538 (hereinafter "Licensor"). This Supplement provides additional terms and conditions to the above referenced Software License Agreement. All terms and conditions of the Software License Agreement apply to this Supplement and the terms and conditions of this Supplement are hereby incorporated by reference into the Software License Agreement. 1.0 DESCRIPTION OF LICENSED PRODUCT(S) I. Licensed Software: A. WinDVD(TM) Software is personal computer application software object code including modules for MPEG-2 video decode, Dolby Digital/MPEG audio decode, an audio/video synchronization engine, a DVD Navigator, Copy Protection Software, and a Graphical User Interface. Version delivered is to be used as a software bundle with Licensee's hardware products. B. Technical specifications: 1. Video Decoding Support A. Input Supported - MPEG-1 Video Decoding (ISO/IEC 11172) - MPEG-2 Video Decoding (ISO/IEC 13818) B. Video Output Supported - Up to 720 X 480 (NTSC) - Up to 720 X 576 (PAL) C. VGA Output Requirements For Licensee System - Direct Draw Support for HW video window - Color space conversion - Color key support D. Licensee System Requirements - Intel MMX processor (PII preferred) or compatible processor 2. Audio Decoding Support A. Dolby Digital AC-3 Input - 48 kHz sampling rate - 2 channel AC-3 encoded - 5.1 channel AC-3 encoded Output - 2 channel stereo decoded stream - 2 channel Pro-Logic encoded stream - 16 bit Class "C" Dolby Certification B. MPEG-1 Audio - MPEG 1 Audio Decoding (ISO/IEC 11172) 3. Decoder Licensed Software Configuration - MPEG 1 & 2 Video Decoding - Dolby Digital AC-3 audio decoding - MPEG-1 2 channel audio decoding - Video/Audio Synchronization - MP3 audio decoding - VCD 1.0/1.1/2.0 title playback 4. Navigation - Conforms substantially to the "DVD Specifications for read-only Disc Version 1.0 Part 3 Video Specifications." 5. Graphical User Interface A. Playback Control - Fast Forward - Volume Control - Fast Backward - Select drive - Next Chapter - Eject - Previous Chapter - Repeat - Stop - Smooth Slow Motion - Pause - Smooth Fast Forward - Help - Play - Time Line Search - Brightness Control - Keypad Input - Title/Chapter Loop B. Navigator Functions - Audio language selection - Parental control -2- - Viewing angle selection - Subtitle selection - Select Titles/Menus - Title - Root - Audio - Subtitle - Menu - Chapter 6. Copy Protection (Navigator use only) A. Regionalization - Supports DVD regionalization code B. Decryption - Substantially supports CSS de-scambling and tamper resistance requirements C. Macrovision Requirements - Required if NTSC encoder is used (Navigator implementation only) 7. Localization - IVI will provide support for English, Dutch, French, Spanish, German, Italian, Traditional Chinese and Japanese languages in our installation procedure and help files. 2.0 COMPENSATION OEM Bundled Pricing: --------------------------------------------------------------------------- Monthly Units Quarterly Units --------------------------------------------------------------------------- [*] - [*] [*] - [*] $[*] --------------------------------------------------------------------------- [*] - [*] [*] - [*] $[*] --------------------------------------------------------------------------- [*] - + [*] - + $[*] --------------------------------------------------------------------------- If InterVideo is to pass through the Dolby royalty to Dolby, please add $[*] for 2 channels. DellPlus Pricing: $[*] per unit. Dell will be responsible for all replication costs and cost of materials. 3.0 DELIVERY SCHEDULE Within 5 days of final qualification by Dell. -3- 4.0 TECHNICAL CONTACTS David Silva, Applications Engineer Chinn Chin, VP of Engineering Chris Grell, Program Manager IN WITNESS WHEREOF, the parties hereto have duly executed this Supplement to the above referenced Software License Agreement by their respective duly authorized officers. DELL PRODUCTS L.P. INTERVIDEO, INC. By: Sharon Peterson By: Joe Monastiero -------------------------------- -------------------------------- Title: Dir, WWSP Title: V.P. ----------------------------- ----------------------------- Date: 8/13/1999 Date: August 4th, 1999 ------------------------------ ------------------------------ -4- SOFTWARE LICENSING AGREEMENT Supplement Two THIS AMENDED AND RESTATED SUPPLEMENT Two is entered into as of this 31st day of July 2000 (the "Supplement") by and between Dell Products L.P. (hereinafter "Dell") with its principal place of business at One Dell Way, Round Rock, Texas 78682, and Intervideo, Inc., a California corporation having a principal place of business at 47350 Fremont Blvd., Fremont CA 94538 (hereinafter "Licensor"). Dell and Licensor are parties to a Software License Agreement entered into as of the 4th day of August 1999 (the "Software License Agreement") and a Supplement entered into as of the same date (the "First Supplement"). As of the date hereof, this Supplement Two will supercede the First Supplement. This Supplement provides additional terms and conditions to the above referenced Software License Agreement. All terms and conditions of the Software License Agreement apply to this Supplement and the terms and conditions of this Supplement are hereby incorporated by reference into the Software License Agreement. 1.0 DESCRIPTION OF LICENSED PRODUCT(S) I. Licensed Software: A. WinDVD(TM) Software is personal computer application software object code including modules for MPEG-2 video decode, Dolby Digital/MPEG audio decode, an audio/video synchronization engine, a DVD Navigator, Copy Protection Software, and a Graphic User Interface. Version delivered is to be used as a software bundle with Licensee's hardware products. B. Technical specifications: 1. Video Decoding Support A. Input Supported - MPEG-1 Video Decoding (ISO/IEC 11172) - MPEG-2 Video Decoding (ISO/IEC 13818) B. Video Output Supported - Up to 720 X 480 (NTSC) - Up to 720 X 576 (PAL) C. VGA Output Requirements For Licensee System - Direct Draw Support for HW video window - Color space conversion - Color key support D. Licensee System Requirements - Intel MMX processor (PII preferred) or compatible processor 2. Audio Decoding Support A. Dolby Digital AC-3 Input - 48kH sampling rate - 2 channel AC-3 encoded - 5.1 channel AC-3 encoded Output - 2 channel stereo decoded stream - 2 channel Pro-Logic encoded stream - 16 bit Class "C" Dolby Certification B. MPEG-1 Audio - MPEG-1 Audio Decoding (ISO/IEC 11172) 3. Decoder Licensed Software Configuration - MPEG 1 & 2 Video Decoding - Dolby Digital AC-3 audio decoding - MPEG-1 2 channel audio decoding - Video/Audio Synchronization - MP3 audio decoding - VCD 1.0/1.1/2.0 title playback 4. Navigation - Conforms substantially to the "DVD Specifications for read- only Disc Version 1.0 Part 3 Video Specifications". 5. Graphical User Interface A. Playback Control - Fast Forward - Volume Control - Fast Backward - Select drive -2- - Next Chapter - Eject - Previous Chapter - Repeat - Stop - Smooth Slow Motion - Pause - Smooth Fast Forward - Help - Play - Time Line Search - Brightness Control - Keypad Input - Title/Chapter Loop B. Navigator Functions - Audio language selection - Parental control - Viewing angle selection - Subtitle selection - Select Titles/Menus - Title - Root - Audio - Subtitle - Menu - Chapter 6. Copy Protection (Navigator use only) A. Regionalization - Supports DVD regionalization code B. Decryption - Substantially supports CSS de-scrambling and tamper resistance requirements C. Macrovision Requirement - Required if NTSC encoded is used (Navigator implementation only) 7. Localization - IVI will provide support for English, Dutch, French, Spanish, German, Italian, Traditional Chinese, Simplified Chinese, Brazilian Portuguese, Korean, Thai and Japanese languages in our installation procedure and help files. II. Licensed Software: A. WinDVD(TM) with Dolby Headphone Software is personal computer application software object code including modules for MPEG-2 video decode, Dolby Digital/MPEG audio decode, an audio/video synchronization engine, a DVD Navigator, Copy Protection Software, and a -3- Graphical User Interface. Version delivered is to be used as a software bundle with Licensee's hardware products. B. Technical specifications: 1. Video Decoding Support A. Input Supported - MPEG-1 Video Decoding (ISO/IEC 11172) - MPEG-2 Video Decoding (ISO/IEC 13818) B. Video Output Supported - Up to 720 X 480 (NTSC) - Up to 720 X 576 (PAL) C. VGA Output Requirements For Licensee System - Direct Draw Support for HW video window - Color space conversion - Color key support D. Licensee System Requirements - Intel MMX processor (PII preferred) or compatible processor 2. Audio Decoding Support A. Dolby Digital AC-3 Input - 48kH sampling rate - 2 channel AC-3 encoded - 5.1 channel AC-3 encoded Output - 2 channel stereo decoded stream - 2 channel Pro-Logic encoded stream - 16 bit Class "C" Dolby Certification - 5.1 channel AC-3 decoded stream - Dolby Headphone decoded stream B. MPEG-1 Audio - MPEG-1 Audio Decoding (ISO/IEC 11172) 4. Decoder Licensed Software Configuration - MPEG 1 & 2 Video Decoding -4- - Dolby Digital AC-3 audio decoding - MPEG-1 2 channel audio decoding - Video/Audio Synchronization - MP3 audio decoding - VCD 1.0/1.1/2.0 title playback - Dolby Headphone audio decoding 4. Navigation - Conforms substantially to the "DVD Specifications for read-only Disc Version 1.0 Part 3 Video Specifications". 5. Graphical User Interface A. Playback Control - Fast Forward - Volume Control - Fast Backward - Select drive - Next Chapter - Eject - Previous Chapter - Repeat - Stop - Smooth Slow Motion - Pause - Smooth Fast Forward - Help - Play - Time Line Search - Brightness Control - Keypad Input - Title/Chapter Loop B. Navigator Functions - Audio language selection - Parental control - Viewing angle selection - Subtitle selection - Select Titles/Menus - Title - Root - Audio - Subtitle - Menu - Chapter 6. Copy Protection (Navigator use only) A. Regionalization - Supports DVD regionalization code B. Decryption - Substantially supports CSS de-scrambling and tamper resistance requirements -5- C. Macrovision Requirement - Required if NTSC encoder is used (Navigator implementation only) 7. Localization - IVI will provide support for English, Dutch, French, Spanish, German, Italian, Traditional Chinese, Simplified Chinese, Brazilian Portuguese, Korean, Thai and Japanese languages in our installation procedure and help files. C. Exclusion from Source Code Escrow Provisions The definition of Licensed Product(s) in section 1.2 of the Software Licensing Agreement shall not include the Dolby Headphone processing software licensed to Licensor by Lake Technology Limited for purposes of section 2.3 and 2.4 of Software Licensing Agreement. 2.0 COMPENSATION OEM Bundled Pricing: Win DVD(TM) and WinDVD(TM)with Dolby Headphone - -------------------------------------------- Quarterly Units - -------------------------------------------- [*] - [*] $[*] - -------------------------------------------- [*] - [*] $[*] - -------------------------------------------- [*] - + $[*] - -------------------------------------------- The quantities for all Licensed Products shall be cumulative for the purpose of calculating royalties and shall be calculated on a quarterly basis. A Dolby royalty of $[*] per unit (for two channels) will be added to each WinDVD product which includes the applicable Dolby technology. An additional Dolby royalty of $[*] per unit will be added to each WinDVD(TM)with Dolby Headphone product which includes the applicable Dolby technology. The total Dolby royalty for WinDVD(TM)with Dolby Headphone product will be $[*]. DellPlus Pricing: Notwithstanding anything to the contrary in the Software License Agreement or this Supplement: The DellPlus price for the WinDVD(TM) products shall be $[*] per unit which includes the $[*] Dolby royalty. -6- The DellPlus price for the WinDVD(TM) with Dolby Headphone product shall be $[*] per unit which includes both the $[*] and $[*] Dolby royalties.] Dell will be responsible for all replication costs and cost of materials. Replacement Project: During the period of [*], Dell shall be able to (i) offer the Licensed Product as a [*] Upgrade for up to a maximum of [*] existing Dell Customers who previously purchased products from Dell incorporating DvD software from a supplier other than Licensor; and (ii) offer the Licensed Product as a no charge Upgrade to Dell Customers that accept Dell's offer to Upgrade their operating systems from Windows 98 to Windows Millennium Edition. Dell agrees that it will be responsible for Dolby royalties, if any, associated with such Upgrades. 3.0 DELIVERY SCHEDULE Within 5 days of final qualification by Dell. 4.0 TECHNICAL CONTACTS David Silva, Applications Engineer Chinn Chin, VP of Engineering Chris Grell, Program Manager 5.0 ADDITIONAL SUPPORT During the term of this Agreement, Licensor shall appoint a designated Program Manager who shall be available on a dedicated basis to support Dell in all areas relating to the Licensed Product(s). Dell acknowledges and agrees that Licensor shall have a reasonable period of time to [*] a Program Manager into the Dell account. Licensor will use its reasonable efforts to hire a Program Manager in one month and integrate the Program Manager hired into the Dell account within [*] from the date hereof. During the term of this Agreement, Licensor shall, [*], purchase sufficient quantities of Rev A versions of Dell computer systems and peripherals for all existing and newly released Dell computer systems and peripherals to provide timely ongoing technical support, development, maintenance and services for the Licensed Product(s). At a minimum, Licensor shall [*] [*] Dell platform. Notwithstanding anything herein to the contrary, in no event will Licensor be required to [*] more than [*] of Dell equipment per year for the foregoing purposes. 6.0 OBJECT AND SOURCE CODE LICENSE Licensor and Dell acknowledge and agree that for purposes of Section 2 of the Software License Agreement, the phrase "Dell systems" includes add-on DVD drives so that Dell may sell the Licensed Product(s) with DVD drives as Customer kits. -7- 7.0 SOFTWARE TESTING During the term of this Agreement, Licensor shall adhere to the following Doublebyte Testing for all Licensed Products. In the event Dell changes third party vendors for testing purposes, Dell will provide Licensor reasonable of said charge. Requirements For Doublebyte Testing at XXCAL 7/16/99 Dell is implementing a new requirement for all Doublebyte language testing prior to submission to Dell development. The scope of this testing is limited, at this time, to all Multimedia devices. Dell has selected XXCAL, Inc. as the 3/rd/ party vendor to conduct this testing. All MM suppliers that sell product to Dell will now be required to submit and pay for testing at XXCAL. This testing will encompass all Doublebyte languages required in the business award. Below is a breakdown of those requirements: 1. All suppliers submitting to XXCAL will be given a discounted rate on hourly testing. 2. A generic test plan for each commodity will be provided by Dell and will be updated periodically to reflect changes in testing methodology and to enhance test coverage. 3. Japanese language testing will include functional and translational testing. All other languages will be tested for translation only. 4. All HTML testing will be limited to text translation only, testing for format and links will be done by Dell's Information Development. 5. All costs for initial and regression testing will be incurred by the supplier. 6. All regression testing will be done at XXCAL unless capacity restraints at XXCAL adversely impact Dell's overall schedule. 7. Suppliers will provide XXCAL with their schedule for test submission as early in the process as possible to ensure proper scheduling and resource loading. 8. XXCAL will send results of testing to the supplier and to the appropriate Dell parties upon test completion. 9. Final signoff for acceptance into Dell will require approval signature from the appropriate Dell parties. 10. Suppliers will notify Dell procurement immediately if XXCAL is unable to commit to required schedule. 11. Current Doublebyte languages include but are not limited to Japanese, Traditional Chinese, Simplified Chinese, Thai and Korean. Those requirements will vary by product and will be defined in the business contract. The contact at XXCAL for testing is: -8- IN WITNESS WHEREOF, the parties hereto have duly executed this Supplement to the above referenced Software License Agreement by their respective duly authorized officers. DELL PRODUCTS L.P. INTERVIDEO, INC. By: /s/ Illegible By: /s/ Kenneth Boschwitz ------------------------------ ----------------------------- Title: VP WW Processing Title: VP & General Counsel --------------------------- -------------------------- Date: 8-31-00 Date: 30 August 2000 ---------------------------- --------------------------- -9- AMENDMENT ONE to SOFTWARE LICENSING AGREEMENT THIS AMENDMENT ONE is entered into as of this 5th day of May, 2001 ("Effective Date") by and between Dell Products L.P. (hereinafter "Dell") with its principal place of business at One Dell Way, Round Rock, Texas 78682, and Intervideo, Inc., a California corporation having a principal place of business at 47350 Fremont Blvd., Fremont, CA 94538 (hereinafter "Licensor"). Dell and Licensor are parties to a Software License Agreement entered into as of the 4/th/ day of August, 1999 and a Supplement Two to the Software License Agreement entered into as of the 31st day of July, 2000 (collectively the "Agreement"). This Amendment One ("Amendment") provides additional terms and conditions to the above referenced Software License Agreement. All terms and conditions of the Software License Agreement apply to this Amendment and the terms and conditions of this Amendment are hereby incorporated by reference into the Software License Agreement. In the event of a disagreement between the terms and conditions of the Amendment and the Agreement, the terms and conditions of this Amendment shall control. 1.0 DESCRIPTION OF LICENSED PRODUCT(S) Licensed Software: WinDVD and WinDVD with Dolby Headphone 2.0 COMPENSATION OEM Bundled Pricing: WinDVD(R) and WinDVD(R) with Dolby Headphone royalties will be as follows:
Additional Total Royalty Royalty with Additional for both 2 Licensed Dolby 2 Dolby royalty Channel and Volume in Product Channel if for Headphone Headphone Time Period units Royalty supported channel technology ----------- --------- -------- ------------ ------------- ------------- [*] [*] $[*] $[*] $[*] $[*] [*] [*] $[*] $[*] $[*] $[*] [*] [*] $[*] $[*] $[*] $[*] and thereafter
Notwithstanding, if Dell ships [*] or more units in [*], the Royalty for the Licensed Product will immediately decrease to $[*] per copy for that quarter and for subsequent quarters. For, example, if Dell ships [*] units in Q2, Dell's royalty shall be $[*] for the units shipped in [*] and subsequent quarters. 5.0 ADDITIONAL SUPPORT During the term of this Agreement, Licensor Shall provide Program Manager services to support Dell in all areas relating to the Licensed Product(s). Licensor will provide a "Lead Program Manager" who will involve as many people as necessary in order to quickly and effectively resolve current or future issues. Licensor is not required to appoint a Program Manager dedicated to Dell. During the term of this Agreement, [*] of Dell computer systems and peripherals for all existing and newly released Dell computer systems and peripherals to provide timely ongoing technical support, development, maintenance and services for the Licensed Product(s). At a minimum, Licensor shall [*] systems of each Dell platform. Notwithstanding anything herein to the contrary, in no event will Licensor be required to [*] more than $[*] of Dell equipment per year for the foregoing purposes. This Amendment sets forth the entire agreement and understanding of the parties relating to the subject matter contained herein, and merges all prior and discussions and agreements, both oral and written, between the parties. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment One to the above referenced Software License Agreement by their respective duly authorized officers. DELL PRODUCTS L.P. INTERVIDEO, INC. By: By: /s/ Jesse Lechuga ------------------------------------ --------------------------------- Title: Title: V.P. Sales --------------------------------- ------------------------------ Date: Date: 6/25/01 ---------------------------------- ------------------------------- -2- EX-10.15 10 dex1015.txt SETTLEMENT AGREEMENT AND RELEASE EXHIBIT 10.15 SETTLEMENT AGREEMENT & RELEASE This Settlement Agreement & Release is effective April 26, 2002 (the "Effective Date") between Dell Products, L.P. ("Dell") with its principal place -------------- ---- of business at One Dell Way, Round Rock, Texas 78682 and InterVideo, Inc., ("InterVideo") a Delaware corporation having its principal place of business at ---------- 47350 Fremont Blvd., Fremont, California 94538. Hereinafter, Dell and InterVideo shall be referred to collectively as the "Parties." ------- RECITALS WHEREAS, on August 4, 1999, Dell and InterVideo entered into a Software Licensing Agreement, as modified by the Supplement entered into on August 4, 1999, by Supplement Two, entered into on July 31, 2000, and by Amendment One, entered into May 5, 2001 (the foregoing, collectively, the "Original License ---------------- Agreement"); and - --------- WHEREAS, pursuant to the Original License Agreement, InterVideo made certain representations and warranties to Dell regarding the Products, and agreed to indemnify Dell against certain losses; WHEREAS, Dell has entered into certain agreements with the Claiming Parties (as defined below) to settle and release certain claims of infringement the Claiming Parties (as defined below) may have against Dell; WHEREAS, concurrently with the execution of this Settlement Agreement & Release, the Parties are entering into a Series D Preferred Stock Subscription Agreement, in the form attached hereto; and WHEREAS, the Parties desire to settle all claims Dell may have against InterVideo relating to Infringement (as defined below), pursuant to the terms and conditions set forth in this Agreement. AGREEMENT NOW THEREFORE, in consideration of the promises and mutual promises referred to in the Recitals and contained herein, and of other consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Definitions. ----------- 1.1 "Claiming Parties" means (i) Nissim Corporation, a Florida ---------------- corporation, (ii) Mr. Max Abecassis, an individual associated with Nissim Corporation, (iii) MPEG LA, L.L.C., a limited liability company organized and existing under the laws of Delaware, (iv) any past, present or future signatories to an agreement with MPEG LA, L.L.C. regarding intellectual property rights, to the extent that signatory licenses those rights to MPEG LA, L.L.C., or authorizes MPEG LA, L.L.C. to act on its behalf with respect to those rights, (v) any entities on behalf of which MPEG LA, L.L.C. threatens, alleges, or brings an Action (defined below) for any infringement of intellectual property rights, or has the right to do so, to the extent of the alleged infringement, and (vi) any affiliates, successors or assigns or any of the foregoing. 1.2 "Infringement" means any actual or alleged infringement, direct ------------ or indirect, by any Party or any third party, including without limitation (i) any infringement, direct or indirect, by Products (as defined below), alone or in combination with any Dell product or any other product, and (ii) any infringement, direct or indirect, by InterVideo or the other Released Parties (as defined below), Dell or the other Releasing Parties (as defined below), or any of Dell's customers or distributors. 1.4 "MPEG - 2 Patent Portfolio" means (a) the "MPEG-2 Essential Patent(s)" in the "MPEG-2 Patent Portfolio" as those terms are defined in that certain MPEG-2 Patent Portfolio License between Dell and MPEG LA, L.L.C. entered into December 31, 2001, which include those patents set forth at www.mpegla.com -------------- as of April 1, 2002 and attached to this Agreement as Schedule A, (b) any other patents of MPEG-LA that, as of the Effective Date, have been asserted against Dell or under which Dell is licensed. 1.5 "Nissim Patent Portfolio" means (a) United States Patents Number 5,434,678; 5,589,945; 5,634,849; 5,913,013; 6,151,444; and 6,208,805, (b) any other patents of Nissim or Mr. Max Abecassis that, as of the Effective Date, have been asserted against Dell or under which Dell is licensed. 1.6 "Products" means any software products licensed under the -------- Original License Agreement, or any of InterVideo's products distributed by Dell. 2. Attorneys' Fees. Each of the Parties hereby agrees to bear its own --------------- attorneys' fees and expenses incurred in connection with the dispute concerning the Infringement. 3. Release of All Claims. --------------------- 3.1 By this Agreement, Dell, on behalf of itself, and its present and former directors, officers, employees, attorneys, agents, customers, subsidiaries, licensees, representatives, and insurers, and its respective successors affiliates and assigns ("Releasing Parties"), hereby fully and ----------------- unconditionally releases and forever discharges InterVideo, and its present and former directors, officers, employees, attorneys, agents, representatives, and insurers, and its respective successors affiliates and assigns ("Released -------- Parties") from and against any and all indemnity obligations, claims, - ------- contentions, debts, liabilities, demands, promises, agreements, costs, expenses (including but not limited to attorneys' fees), damages, suits, legal proceedings, mediations, arbitrations, losses, judgments, settlements, actions or causes of action, or the like (collectively "Actions") of whatever kind or ------- nature, whether now known or unknown, and whether based on contract, breach of warranty, indemnity, tort, statutory or other legal, equitable theory of recovery, which Releasing Parties have, had, or may ever claim to have against the Released Parties, which relate to, arise from, or are connected with Infringement of the Nissim Patent Portfolio and the MPEG -2 Patent Portfolio, including, without limitation, the following (all of the foregoing and the following collectively the -2- "Released Matters"): (a) warranty claims under Section 6.0 of the Original ---------------- License Agreement that are related to Infringement of the MPEG-2 Patent Portfolio or Nissim Patent Portfolio, or (b) any rights or indemnity obligations, and related claims, under Section 7 of the Original License Agreement that are related to Infringement of the MPEG-2 Patent Portfolio or Nissim Patent Portfolio. 3.2 Dell represents and warrants that, as of the Effective Date, it has no knowledge or any actual or threatened claims of Infringement by any of the Claiming Parties other than those claims released hereunder. 3.3 In connection with the above, Dell acknowledges that it is aware that, after executing this Settlement Agreement & Release, it or its attorneys or agents may discover claims or facts in addition to or different from those which they now know or believe to exist with respect to the subject matter of this Settlement Agreement & Release or the Released Matters, but that it is Dell's intention to fully, finally and forever settle and release all of the Released Matters, and to finally and forever settle and release any other Actions, known or unknown, suspected or unsuspected, which now exist, may exist, or heretofore may have existed against the Released Parties relating to the Released Matters. In furtherance of this intention, the release herein given shall be and remain in effect as a full and complete release, notwithstanding the discovery or existence of any such additional or different claim(s) or fact(s) that may be asserted with respect to the Released Matters. 4. Warranty Against Assignment. The Parties, on behalf of their --------------------------- successors and assigns, hereby warrant and covenant that they have not transferred or assigned and prior to the Effective Date of this Settlement Agreement & Release, and will not transfer or assign to any third party (except under Section 9), any Actions or rights to bring Actions that they have or may have against any of the Released Parties or Releasing Parties, arising out of, or in connection with anything whatsoever relating to the Infringement or the Released Matters. 5. Compromise of Disputed Claims. This Settlement Agreement & Release is ----------------------------- a compromise of disputed claims and does not in any way constitute an admission by any Party of any liability or responsibility, past, present or future, for the Released Matters. 6. Entire Agreement; Modification. This Settlement Agreement & Release ------------------------------ and Series D Preferred Stock Subscription Agreement contains the entire agreement between the Parties relating to the subject matter contained herein. All prior or contemporaneous agreements, written or oral, between the Parties regarding the subject matter hereof are superseded by this Settlement Agreement & Release. It is understood that this Settlement Agreement & Release amends the Original License Agreement to exclude the Released Matters as a basis for any liability or responsibility under the Original License Agreement (including with respect to any activities and/or any actual or threatened claims arising either before or after the Effective Date hereof). This Settlement Agreement & Release may not be modified except by written document signed by an authorized representative of each Party. -3- 7. Force Majeure. No Party shall be liable for delays or defaults due to ------------- fire, windstorm, riot, act of God, act of the public enemy or other similar unforeseeable causes beyond the reasonable control and without the fault or negligence of the Party incurring such delay. 8. Waiver. No term of this Settlement Agreement & Release shall be ------ considered waived and no breach excused by any Party unless made in writing. No consent, waiver, or excuse by any Party, express or implied, shall constitute a subsequent consent, waiver or excuse. 9. Assignment. This Settlement Agreement & Release shall inure to the ---------- benefit of and shall be binding upon the respective successors and assigns, if any, of the Parties in its entirety, and may be assigned in connection with a merger, reorganization, change of control, or sale of all or substantially all of the assets to which this Settlement Agreement & Release relates; except that nothing in this section shall be construed to permit any assignment which would be unauthorized or void pursuant to any other part of this Settlement Agreement & Release. 10. Controlling Law. This Settlement Agreement & Release and all --------------- transactions under it shall be governed by the laws of the State of Texas. 11. Severability. If any provision of this Settlement Agreement & Release ------------ is held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. 12. Headings. The headings of the sections of this Settlement Agreement & -------- Release are for reference only and do not control the interpretation of any term or condition of this Settlement Agreement & Release. 13. Representation by Counsel. Each of the Parties hereto acknowledges that ------------------------- they have been represented by independent counsel of their choice throughout all negotiations that preceded the Settlement Agreement & Release, and this Settlement Agreement & Release has been executed with the consent and on the advice of such independent legal counsel. 14. Implementation of Settlement. The Parties hereby agree to use their ---------------------------- best efforts and good faith in carrying out all of the terms of this Settlement Agreement & Release. Each of the Parties hereby agrees and authorizes its respective counsel to execute any additional documents and take any similar procedural actions which reasonably may be required in order to consummate this Settlement Agreement & Release or otherwise to fulfill the intent of the Parties hereunder. 15. Authority to Execute Agreement. The Parties hereto warrant and ------------------------------ guarantee that each person whose signature appears hereon has been duly authorized and has full authority to execute this Settlement Agreement & Release on behalf of the person, persons or entity for whom such signature is indicated. 16. Signatories' Understanding. By executing this Settlement Agreement & -------------------------- Release, the Parties affirm that they are competent, that they have been represented by counsel, or had the -4- opportunity to be represented by counsel, and that they understand and accept the nature, terms and scope of this Settlement Agreement & Release. 17. Counterpart Signature; Facsimile Deliver. This Settlement Agreement & ---------------------------------------- Release may be executed in two or more counterparts and delivered by facsimile, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. IN WITNESS WHEREOF, the Parties hereto have duly executed this Settlement Agreement & Release by their respective duly authorized officers. DELL PRODUCTS, L.P. INTERVIDEO, INC. By: /s/ Scott Crawley By: /s/ Steve Ro ---------------------------------- ---------------------------------- Title: Director, Software Procurement Title: CEO ------------------------------- ------------------------------- Date: April 25, 2002 Date: April 26, 2002 -------------------------------- -------------------------------- -5- Schedule A: This is the list of patents covered by the MPEG-2 Patent Portfolio License as of April 1, 2002 CANON INC. US 4,982,270 JP 2,674,059 COLUMBIA UNIVERSITY US Re 35,093 CA 2,096,431-C DE 69129595 DE 69130329 FR 0564597 FR 0630157 GB 0564597 GB 0630157 JP 2,746,749 FRANCE TELECOM (CNET) US 4,796,087 DE 3767919 FI 86241 FR 2599577 GB 0248711 IT 0248711 SE 0248711 FUJITSU US 5,235,618 CA 2,029,320 DE 69030056.5 FR 0431319 GB 0431319 JP 2,787,599 GE TECHNOLOGY DEVELOPMENT, INC. US 4,706,260 US 4,813,056 DE 3855203 T2 FR 0395709 GB 0395709 HK 1,004,307 JP 2,790,509 SG 63561 US 5,426,464 US 5,486,864 CN 94105749 DE 69421444 ES 2,140,477 FR 0624983 GB 0624983 IT 0624983 KR 291492 MX 188411 RU 2,115,261 TR 28291 TW NI-092150 US 5,491,516 AT 167015 BR PI 9405710-9 DE 69410781.6 ES 2,117,252 FR 0679316 GB 0679316 IN 183230 IT 50123 BE 98 KR 282981 MX 187475 MY 109889-A PT 0679316 RU 2,115,258 SE 0679316 TR 27398 TW NI-66422 VN 526 US 5,600,376 IN 181018 US 5,796,743 KR 283710 MX 201309 MY 112121 TW NI-070615 GENERAL INSTRUMENT CORPORATION US 4,394,774+ US 4,698,672 US 5,068,724 AU 627421-B2 NO 179890-C TW NI-52990 US 5,091,782 AT 139402-T1 AU 627684-B2 CA 2,038,043-C DE 69120139-T2 DK 0451545 T3 ES 2088440-T3 FR 0451545 GB 0451545 GR 3020736 IT 0451545 NO 178419-C NO 178420-C TW NI-50643 US 5,093,720 + Expired December 15, 1998 HITACHI, LTD. JP 2,666,793 JP 2,907,072 JP 3,085,289 JP 3,173,508 KDDI CORPORATION JP 1,835,550 MATSUSHITA US Re 35,910 AU 612543-B2 CA 2,016,523-C CH 0397402 DE 69027710 ES 2091790 FR 0397402 GB 0397402 IT 0397402 JP 1,949,701 JP 2,695,244 KR 63,477 NL 0397402 SE 0397402 US Re 36,015 US Re 36,507 US 5,223,949 US 5,412,430 FR 0526163 GB 0526163 JP 2,699,703 NL 0526163 US 5,784,107 JP 2,684,941 JP 2,524,044 JP 2,794,899 JP 2,828,095 JP 2,899,478 MITSUBISHI US4,954,892 CA 2,000,156-C DE 68913508-T2 FR 0382892 GB 0382892 HK 1008133 IT 0382892 JP 2,100,607 KR 58,957 SE 0382892 US 5,072,295 AU 625476-B2 CA 2,023,543-C DE 69027820-T2 FI 98421-B FR 0414193 GB 0414193 HK 1008129 IT 0414193 JP 2,128,624 KR 77,808 NL 0414193 NO 306749 SE 0414193 SG 45452 US 5,949,489 CA 2,234,391 JP 2,924,431 JP 3,127,956 US 5,963,258 CA 2,234,387 SG 65597 US 5,970,175 NO 310,849 US 5,990,960 US 6,002,439 US 6,097,759 CA 2,327,489 NO 310,850 US 6,188,794 JP 1,869,940 JP 2,510,456 JP 2,577,745 JP 2,814,819 JP 2,924,430 CA 2,065,803 NO 307200 SG 64870 JP 3,019,827 NIPPON TELEGRAPH AND TELEPHONE CORPORATION (NTT) JP 1,939,084 JP 2,562,499 PHILIPS US 4,849,812 CN 1013425-B DE 3871998-T2 FR 0282135-B GB 0282135-B IT 0282135-B JP 2,534,534-B2 KR 9700364-B1 TW 29492-B US 4,901,075 AT 260748-B CN 1011459B DE 3750206-C0 FR 0260748-B GB 0260748-B IT 0260748-B JP 2,711,665 KR 118698 NL 0260748-B SE 0260748-B TW 35350-B US 5,021,879 DE 3855114-B FR 0290085-B GB 0290085-B JP 2,630,809-B US 5,027,206 AT E 131335 AU 634173-B BE 0359334-B CH 0359334-B CN 1018695-B DE 68925011-B ES 0359334-B FI 92127 FR 0359334 GB 0359334-B GR 0359334-B HK 96-1695-B IT 0359334-B JP 2,961,131 KR 153275 LU 0359334 NL 0359334 SE 0359334 SG 9692026 US 5,128,758 CA 2,018,031 JP 2,791,822 MX 172405-B US 5,179,442 CA 2,304,917 US 5,333,135 DE 69415698 FR 0609936 GB 0609936 KR 290326 MX 185421 US 5,606,539 AT E157830-B BE 0460751-B DE 69127504-B DK 0460751-B FR 0460751-B GB 0460751-B IT 0460751-B KR 239837 NL 0460751-B SE 0460751-B US 5,608,697 US 5,699,476 AU 641726 CA 2,036,585 DE 69109346.6 DK 0443676 FI 101442 FR 0443676 GB 0443676 HK 96-615 IT 0443676 NL 0443676 SE 0443676 SG 9690467.7 US 5,740,310 CA 2,043,670 US 5,844,867 ROBERT BOSCH GMBH DE 3769306 FR 0279053 GB 0279053 IT 0279053 NL 0279053 SAMSUNG ELECTRONICS CO., LTD. US 5,461,421 JP 3,159,853 KR 0166722 US 5,467,086 JP 2,665,127 KR 166716 US 5,654,706 DE 69321781 FR 0580454 GB 0580454 HK 1008711 KR 95,631 KR 132895 SANYO ELECTRIC CO., LTD. JP 2,812,446 SCIENTIFIC ATLANTA US 5,418,782 AU 683134 CA 2,180,363 JP 2,940,638 MX 190,776 US 5,420,866 AU 687844 CA 2,186,368 JP 2,940,639 US 5,457,701 AU 680680 CA 2,180,342 JP 2,937,301 SHARP KABUSHIKI KAISHA JP 2,951,861 SONY US Re 37,222 DE 69031107 DE 69033782 FR 0424026 FR 0713340 GB 0424026 GB 0713340 JP 3,159,310 US 4,864,393 DE 3854171-T2 GB 2205710-B2 US 5,191,436 DE 69127224 FR 0456433 GB 0456433 HK 1,014,415 JP 2,874,745 JP 2,877,225 JP 2,969,782 US 5,291,486 GB 2289194-B2 GB 2289195-B2 US 5,298,991 DE 69229153 FR 0527011 GB 0527011 US 5,343,248 JP 2,977,104 US 5,428,396 US 5,461,420 AU 672812 CN 45,549 US 5,481,553 AT 185663 AU 673244-B2 BE 0638218 BR 9404321-1 CH 0638218 DE 69421135 DK 0638218 EG 20330 ES 2,137,358 FR 0638218 GB 0638218 GR 3,032,133 HK 1,013,575 HU 217744 IE 0638218 IL 108787 IT 0638218 KR 287490 LU 0638218 MC 0638218 MX 197,778 MY 110794 NL 0638218 NZ 261907-B PL 173287 PT 0638218 RU 2,119,727 SE 0638218 TR 28436-B TW 66605-B US 5,510,840 AT 0573665 DE 69227185 FR 0573665 GB 0573665 IT 0573665 NL 0573665 US 5,539,466 AT 0598904 AU 662548-B2 DE 69229229 FR 0598904 GB 0598904 IT 0598904 US 5,543,847 US 5,559,557 AU 669209-B2 CN 58,202 HK 1,013,573 US 5,663,763 AU 667970 CN 56,083 US 5,666,461 AU 670288 CN 55,336 MY 109,945 TW 70,497 US 5,701,164 US 5,946,042 US 5,982,437 US 6,040,863 US 6,160,849 JP 2,712,645 TOSHIBA CORPORATION US 5,317,397 JP 2,883,585 US 5,424,779 JP 2,755,851 US 5,467,136 JP 2,758,378 US 5,742,344 JP 2,883,592 US 5,986,713 VICTOR COMPANY OF JAPAN, LIMITED (JVC) US Re 34,965 DE 69024235 DE 690308191 FR 0379217-B FR 0572046-B GB 0379217-B GB 0572046-B JP 2,072,546 JP 2,530,217 US Re 35,158 DE 69031045 FR 0584840-B GB 0584840-B JP 2,137,325 NL 0584840-B US Re 36,822 JP 2,962,012 US 5,175,618 DE 69123705 DE 69131257 FR 0484140-B FR 0683615 GB 0484140-B GB 0683615 JP 2,830,881 JP 2,921,755 KR 94554 GENERAL INSTRUMENT DE P3789373.8 removed as of October 1, 1999 FR 0266049 removed as of October 1, 1999 GB 0266049 removed as of October 1, 1999 IT 0266049 removed as of October 1, 1999 SONY GB 2289196 removed as of October 1, 1999 GB 2259229 removed as of October 1, 1999 VICTOR COMPANY OF JAPAN, LIMITED (JVC) DE 69012405 removed as of October 1, 1999 FR 0395440-B removed as of October 1, 1999 GB 0395440-B removed as of October 1, 1999 NL 0395440-B removed as of October 1, 1999 EX-23.1 11 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 April 26, 2002 - -------------------------------------------------------------------------------- EX-99.1 12 dex991.txt LETTER FROM THE REGISTRANT TO THE SEC Exhibit 99.1 [InterVideo Letterhead] April 26, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C., 20549 Ladies and Gentlemen: Arthur Andersen LLP has represented to InterVideo, Inc. that the audit completed for the year ended December 31, 2001 was subject to Arthur Andersen's quality control system for the United States accounting and auditing practice. Arthur Andersen has provided assurance to InterVideo, Inc. that the audit engagement was conducted in compliance with professional standards. Arthur Andersen has represented that the audit was conducted with the appropriate continuity and availability of personnel, both in the United States and at the Company's foreign affiliates, as well as the appropriate availability of national office consultation. Sincerely, /s/ Randall Bambrough Randall Bambrough Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----