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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2000
OR
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 0-22369
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BEA SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 77-0394711
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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2315 North First Street
San Jose, California 95131
(Address of Principal Executive Offices, Zip Code)
(408) 570-8000
(Registrant's telephone number, including area code)
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the closing
price at which the common equity was sold on March 31, 2000, as reported on
the Nasdaq National Market, was approximately $10,794,968,000. Shares of
common equity held by each officer and director have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status does not reflect a determination that such persons are affiliates for
any other purposes.
As of March 31, 2000, there were approximately 371,585,000 shares of the
Registrant's common stock outstanding, as adjusted to reflect the Registrant's
two-for-one stock split effected on April 24, 2000.
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BEA SYSTEMS, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2000
INDEX
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Page
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PART I.
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 7
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................... 8
Item 6. Selected Financial Data................................................................. 9
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.. 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 25
Item 8. Consolidated Financial Statements and Supplementary Data................................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 55
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 55
Signatures....................................................................................... 58
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PART I
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements in this Annual Report other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any statements of the plans and objectives for future
operations and any statement of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology are forward-looking
statements. Forward-looking statements include (i) in Item 1, all text under
the heading "Business--Strategy" and statements regarding continued hiring in
direct sales, support and professional services, devoting substantial
resources to product development, and continuing to license and acquire
software technologies and businesses, and (ii) in Item 7, statements regarding
additional acquisitions, return on investment, investing in services
offerings, expected timing and amount of amortization expenses, investment in
sales channel expansion and marketing programs, and future hiring. These
forward-looking statements involve risks and uncertainties, and it is
important to note that BEA's actual results could differ materially from those
projected or assumed in such forward-looking statements. Among the factors
that could cause actual results to differ materially are the factors detailed
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results."
All forward-looking statements and risk factors included in this document are
made as of the date hereof, based on information available to BEA as of the
date hereof, and BEA assumes no obligation to update any forward-looking
statement or risk factor. You should consult the risk factors listed from time
to time in the Company's Reports on Forms 10-Q and 8-K.
ITEM 1. BUSINESS.
Overview
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software that helps companies of all sizes build e-
commerce systems that extend investments in existing computer systems and
provide the foundation for running a successful integrated e-business. BEA's
products are marketed and sold worldwide through a network of BEA sales
offices, as well as hardware vendors, independent software vendors ("ISVs")
and systems integrators ("SIs") that are BEA partners and distributors. The
Company's products have been adopted in a wide variety of industries,
including commercial and investment banking, securities trading,
telecommunications, airlines, retail, manufacturing, package delivery,
insurance and government, in many cases using the Internet as a system
component. BEA's products serve as a platform or integration tool for
applications such as billing, provisioning, customer service, electronic funds
transfers, ATM networks, securities trading, Web-based banking, Internet
sales, supply chain management, scheduling and logistics, and hotel, airline
and rental car reservations. Licenses for BEA products are typically priced on
a per-user, per-application basis, but BEA also offers licenses priced per
server and time-based enterprise licenses.
The Company's core business has been providing infrastructure for high-
volume transaction systems, such as telecommunications billing applications,
commercial bank ATM networks and account management systems, credit card
billing systems and securities trading account management systems. These
distributed systems must scale to process high transaction volumes and
accommodate large numbers of users. As the Internet and e-commerce continue to
develop, increasing transaction loads are being placed on Web-based systems,
such as retail and business-to-business e-commerce sites. In addition, systems
that historically had been strictly internal are now being extended to the
Internet, such as telecommunications, bank and credit card account
information.
BEA provides an e-commerce transaction platform that is designed to address
this demand and help companies quickly develop and integrate e-business
initiatives and reliably deliver a wider range of dynamic, personalized
services.
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Industry Background
Over the past decade, the information systems of many large organizations
have evolved from traditional mainframe-based systems to distributed computing
environments. This evolution has been driven by the benefits offered by
distributed computing, including lower incremental technology costs, faster
application development and deployment, increased flexibility, and improved
access to business information. Despite these benefits, large-scale mission-
critical applications that enable and support fundamental business processes,
such as airline reservations, credit card processing, and customer billing and
support systems, have largely remained in mainframe environments. For several
decades, the high levels of reliability, scalability, security, manageability
and control required for these complex, transaction-intensive systems have
been provided by application server functionality included in the mainframe
operating system. Mainframe environments, however, suffer from several
shortcomings, including inflexibility, lengthy development and maintenance
cycles, and limited, character-based user interfaces. Increasingly, these
shortcomings are forcing many organizations to seek solutions, such as those
offered by BEA, that will enable them to overcome the limitations of
distributed computing for mission-critical applications while providing the
robust computing infrastructure previously unavailable outside the mainframe
environment.
In addition, many businesses are using the World Wide Web as a node of
these infrastructures. Businesses use the Internet as a means of selling
products to consumers and distributors, buying components or whole products
from suppliers, opening new customer accounts, scheduling service
installation, providing account information and customer care, enabling
reservations, funds transfers, bill payments and securities trading, and
gathering information about customers and their buying habits. Many businesses
also use intranets for functions such as inventory control, decision support,
logistics, reservations, customer care and provisioning, and sometimes use
extranets to make similar information and applications available to their
suppliers or distributors. Achieving the full benefits of the Internet and e-
commerce requires fully integrating business-to-consumer or business-to-
business Web-based applications with existing enterprise applications, such as
shipping, inventory control, billing, payroll, and general ledger. In order to
fully integrate these internal applications with Web-based systems, the
internal applications must be electronically linked to each other and must be
built on a flexible, reliable, scalable, secure infrastructure that can
connect to the Web and support the demanding loads that result from heavy
Internet traffic.
An e-commerce transaction involves much more than simply the purchase of an
item over the Web. In order to perform a single e-business transaction, a
robust e-commerce system must process several distinct computer transactions.
A typical e-commerce request, whether a consumer purchase, a corporate
procurement of supplies, or an information search, generates a series of
interconnected computer transactions. These computer transactions may include
determining whether the ordered item is in stock, determining where the item
is located, scheduling the item for shipping, processing payment and recording
the transaction in the Company's financial records. In addition, many Web
sites now gather information about users as they navigate the site. This
information is stored, identified with the particular user, and compared with
past behavior of the same and other users in order to personalize online
interaction by recommending specific merchandise, offering personalized
pricing, and displaying targeted advertising, all based on the user's profile.
As e-commerce grows, an increasing number of e-business transactions generates
increasing numbers of computer transactions, driving the demand for more
scalable and reliable systems for managing them.
BEA provides a broad family of cross-platform software and services for
creating robust, reliable, personalized e-commerce sites, for robust, reliable
back-end systems that support e-commerce sites and distributed operations, and
for integrating these environments. BEA's products and services enable
mission-critical, distributed applications to work seamlessly in
client/server, Internet and legacy environments. Customers use BEA products as
a deployment platform for Web-based applications, as a deployment platform for
custom and packaged applications, and as a means for robust enterprise
application integration ("EAI") among mainframe, client/server and Web-based
applications. BEA also provides Enterprise Java Bean ("EJB") based
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components that perform common e-commerce functions, such as personalization,
shopping cart, order tracking, inventory, and pricing. These components can be
rapidly assembled into Web-based applications, and the application
functionality provided by these components can easily be augmented with
additional Java-based components developed by the end user, a systems
integrator, a packaged application vendor, or BEA's consulting group.
Customers also rely on BEA professional services offerings to develop system
architectures, application designs, components or custom applications, to
customize packaged applications and to integrate applications. Using BEA
platforms, application components and services, BEA customers have been able
to create robust e-commerce sites in a matter of weeks.
Strategy
Our strategy is to extend our current leadership position in distributed
transaction processing and Java-based Web application servers by penetrating
new customer accounts, particularly e-commerce sites, through any of our three
product lines or our professional services, and then to proliferate within
those customers, servicing higher usage volumes and selling additional
products. Key elements of our strategy include:
. Increasing our direct and indirect sales capacity by hiring more direct
sales representatives and by partnering with hardware vendors, systems
integrators and value-added resellers. At the end of fiscal 2000, BEA
had over 340 quota-bearing sales representatives, a 70 percent increase
over the end of fiscal 1999.
. Continuing to aggressively promote the embedding of our Web application
server products in Web applications being developed by ISVs. ISVs who
build on BEA application server products become resellers of those
products, tied to sales of the ISV's packaged applications, and BEA
typically receives a royalty on those sales.
. Generating repeat business from existing customers through servicing
increasing usage volumes and selling additional products or services.
BEA often generates repeat business as customers increase their system
capacity, expand into new territories or lines of business, or increase
the number of applications installed on BEA platforms.
. Enhancing our technology leadership through research and development
efforts and through acquisition of complementary companies, products and
technologies, to strengthen our end-to-end e-commerce platform offering
and to offer increasing e-commerce application functionality. Through
BEA's research and development efforts or acquisitions, BEA has embraced
new standards, such as extensible markup language ("XML") and wireless
application protocol ("WAP"), and has added important features and
functionality to its product line. BEA products have won several key
industry awards and have received strong recommendations from key
industry analysts.
. Developing new services offerings that focus on accelerating delivery of
end-to-end e-commerce solutions based on robust transaction and
application platforms. BEA continues to enhance its services offerings
through acquisitions and aggressive hiring.
. Driving the continuing adoption of enterprise Java, object-based
solutions and e-commerce through development of products and
participation in standards-setting bodies. BEA believes that EJB,
object-based computing at the enterprise level, and electronic commerce
will be important drivers for boosting demand for BEA solutions. BEA is
participating in EJB standards setting groups, and is also providing the
most complete implementation of EJB available today.
Customers
The total number of licensees of BEA products and solutions is greater than
4,000 worldwide. BEA's target end-user customers are organizations with
sophisticated, high-end information systems with numerous, often
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geographically-dispersed, users and diverse, heterogeneous computing
environments. Typical customers are mainframe-reliant, have large-scale
client/server implementations that handle very high volumes of business
transactions, or have Web-based applications with large and unpredictable
usage volumes. No customer accounted for more than 10 percent of total
revenues in any of the fiscal years 2000, 1999 or 1998.
Sales and Marketing
BEA's sales strategy is to pursue opportunities worldwide within large
organizations and organizations that are establishing e-commerce businesses,
through its direct sales, professional services and technical support
organizations, complemented by indirect sales channels such as hardware OEMs,
ISVs and systems integrators. The Company currently intends to continue to add
to its direct sales, support and professional services organizations in major
worldwide markets.
Direct Sales Organization. BEA markets its software and services primarily
through its direct sales organization. As of January 31, 2000, BEA had over
1250 employees in consulting, training, sales, support and marketing,
including over 340 sales representatives, located in 70 offices in 29
countries. The Company typically uses a consultative, solution-oriented sales
model that entails the collaboration of technical and sales personnel to
formulate proposals to address specific customer requirements, often in
conjunction with hardware, software and services providers. Because the
Company's solutions are typically used as a platform or integration tool for
e-commerce initiatives or other applications that are critical to a customer's
business, the Company focuses its initial sales efforts on senior executives
and information technology department personnel who are responsible for such
initiatives and applications.
Targeting Developers. BEA also markets its software directly to system and
application developers. BEA makes trial developers copies of many of its
products available for free download over its Web site. Over 100,000 copies
were downloaded in fiscal 2000. In addition, BEA periodically provides
developer training and trial licenses through technical seminars in various
locations worldwide.
Strategic Relations. An important element of the Company's sales and
marketing strategy is to expand its relationships with third parties and
strategic partners to increase the market awareness, demand and acceptance of
BEA and its solutions. Partners have often generated and qualified sales
leads, made initial customer contacts, assessed needs and recommended use of
BEA solutions prior to BEA's introduction to the customer. A strategic partner
can provide customers with additional resources and expertise, especially in
vertical markets in which the partner has expertise, to help meet customers'
system definition and application development requirements. Types of strategic
alliances include:
System platform companies. BEA's partners often act as resellers of BEA
solutions, either under the BEA product name or integrated with the platform
vendor's own software products, or recommend BEA products to their customers
and prospects who are planning to implement high-end, mission-critical
applications and Web-based applications on their hardware platform.
Packaged application software developers. BEA licenses its software to
packaged application software vendors. These vendors embed BEA software as an
infrastructure for the applications they supply; giving these applications
increased distribution, scalability and portability across all platforms on
which the embedded BEA product runs. Customers can also easily integrate other
applications built using BEA solutions into these packaged applications.
Systems integrators and independent consultants. Systems integrators often
refer their customers to BEA, utilize BEA as a subcontractor in some
situations, and build custom solutions on BEA products. BEA also works
cooperatively with independent consulting organizations, often being referred
to prospective customers by professional services organizations with expertise
in high-end transactional applications.
Distributors. To supplement the efforts of its direct sales force, BEA uses
software distributors to sell its products in Europe, Asia, Latin America and,
to a lesser degree, North America. As of January 31, 2000, the Company was
represented by over 30 distributors.
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Professional Services. The Company believes that its professional services
organization plays a key role in facilitating initial license sales and
enabling customers to successfully architect, design, develop, deploy and
manage systems and applications. Fees for professional services are generally
charged on a time and materials basis and vary depending upon the nature and
extent of services to be performed.
Marketing. The Company's marketing efforts are directed at broadening the
demand for BEA products and solutions by increasing awareness of the benefits
of using the Company's products to build mission-critical distributed and Web-
based applications. Marketing efforts are also aimed at supporting the
Company's worldwide direct and indirect sales channels. Marketing personnel
engage in a variety of activities including conducting public relations and
product seminars, issuing newsletters, sending direct mailings, preparing
sales collateral and other marketing materials, coordinating the Company's
participation in industry trade shows, programs and forums, and establishing
and maintaining relationships with recognized industry analysts and press. The
Company's senior executives are frequent speakers at industry forums in many
of the major markets the Company serves.
Customer and Distributor Support
The Company believes that a high level of customer support is integral to
the successful marketing and sale of BEA solutions. Mission-critical
applications require rapid support response and problem resolution. The
Company's world-wide support and sales presence enhances its ability to
rapidly respond, and to handle support in local languages, which the Company
believes gives it an advantage over many of its competitors. The Company's
direct sales to customers include a basic level of support. Comprehensive 7x24
support contracts are also available, typically on an annual fee basis. In
addition, the Company offers introductory and advanced classes and training
programs at the Company's offices, customer sites and training centers
worldwide. Telephone hot line support is offered worldwide at either a
standard or around-the-clock level, depending on customer requirements. The
Company maintains product and technology experts on call at all times
worldwide and has support call centers located in San Jose, California; Paris,
France; Yokohama, Japan; Seoul, Korea and Brisbane, Australia.
Competition
The market for application server and integration software, and related
software components and services, is highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of this
marketplace. These competitors include operating system vendors such as IBM,
Sun Microsystems and database vendors such as Oracle. Microsoft has released
products that include certain application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including future
versions of Windows 2000. Oracle is the primary relational database vendor
offering products that are intended to serve as alternatives to our enterprise
application server and integration solutions. In addition, there are companies
offering and developing application server and integration software products
and related services that directly compete with products we offer. Further,
software development tool vendors typically emphasize the broad versatility of
their tool sets and, in some cases, offer complementary software that supports
these tools and performs basic application server and integration functions.
Last, internal development groups within prospective customers' organizations
may develop software and hardware systems that may substitute for those we
offer. A number of our competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and a larger installed base of
customers than us.
Our principal competitors currently include hardware vendors who bundle
their own application server and integration software products, or similar
products, with their computer systems and database vendors that advocate
client/server networks driven by the database server. IBM and Sun Microsystems
are the primary hardware vendors who offer a line of application server and
integration solutions for its customers. IBM's sale of application server and
integration functionality along with its IBM proprietary hardware systems
requires us to compete with IBM in its installed base, where IBM has certain
inherent advantages due to its significantly
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greater financial, technical, marketing and other resources, greater name
recognition and the integration of its enterprise application server and
integration functionality with its proprietary hardware and database systems.
These inherent advantages allow IBM to bundle, at a discounted price,
application functionality with computer hardware and software sales. Due to
these factors, if we do not differentiate our products based on functionality,
interoperability with non-IBM systems, performance and reliability, and
establish our products as more effective solutions to customers' needs our
revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in future versions of its Windows 2000
operating system. Microsoft has also introduced a product that includes
certain basic application server functionality. The bundling of competing
functionality in versions of Windows requires us to compete with Microsoft in
the Windows marketplace, where Microsoft has certain inherent advantages due
to its significantly greater financial, technical, marketing and other
resources, its greater name recognition, its substantial installed base and
the integration of its application server and integration functionality with
Windows. We need to differentiate our products from Microsoft's based on
scalability, functionality, interoperability with non-Microsoft platforms,
performance and reliability, and need to establish our products as more
effective solutions to customers' needs. We may not be able to successfully
differentiate our products from those offered by Microsoft, and Microsoft's
entry into the application server and integration market could materially
adversely affect our business, operating results and financial condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect our ability to sell additional software licenses and
maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require us to reduce the price of our
products and related services, which could materially adversely affect our
business, operating results and financial condition. We may not be able to
compete successfully against current and future competitors and any failure to
do so would have a material adverse effect upon our business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Impact Future
Operating Results--If we do not effectively compete with new and existing
competitors, our revenues and operating margins will decline."
Product Development
BEA's total research and development expenses were approximately $61.0
million, $42.6 million and $29.2 million in fiscal 2000, 1999 and 1998,
respectively. The Company believes that its success will depend largely upon
its ability to enhance existing products and develop or acquire new products
that meet the needs of the rapidly evolving application server and application
component marketplaces, and increasingly sophisticated and demanding
customers. The Company intends to continue to devote substantial resources to
expanding its product offerings, introducing new products and services, and
offering higher levels of integration among its products.
The Company has made substantial investments in technology acquisitions and
product development. BEA TUXEDO was originally developed by AT&T Bell Labs,
and had been revised by UNIX System Labs and Novell before BEA became the
developer of the product in February 1996. BEA WebLogic was acquired through
BEA's merger with WebLogic, Inc. in September 1998. Important additional
products and technologies were gained through other of the Company's
acquisitions. The Company intends to continue to consider the licensing and
acquisition of complementary software technologies and businesses where
appropriate. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results--
If we cannot successfully integrate our past and future acquisitions, our
revenues may decline and expenses may increase."
The Company's software development activities are conducted in various
sites throughout the United States including San Jose and San Francisco,
California; Dallas, Texas; Maynard, Massachussetts; Liberty Corners,
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New Jersey; and Nashua, New Hampshire. As of January 31, 2000, the Company had
a research and software development staff of over 340 professionals. The
Company intends to continue to recruit and hire experienced software
developers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors That May Impact Future Operating Results--
If the market for application servers, application integration and application
component software does not grow as quickly as we expect, our revenues will be
harmed."
Intellectual Property and Licenses
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of our patents and that our patents may not
provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In particular, we
have, in the past, provided certain hardware OEMs with access to our source
code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and
financial condition. It is difficult for us to police unauthorized use of our
products, and although we are unable to determine the extent to which piracy
of our software products exists, software piracy is a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. The protection of our proprietary rights may not
be adequate and our competitors could independently develop similar
technology, duplicate our products, or design around patents and other
intellectual property rights we hold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Factors That May
Impact Future Operating Results--If we fail to adequately protect our
intellectual property rights, competitors may use our technology and
trademarks, which could weaken our competitive position, reduce our revenues
and increase our costs."
Employees
As of January 31, 2000, BEA had approximately 1,900 full-time employees,
including 340 in research and development, 1250 in consulting, training,
sales, support and marketing and 330 in administration. None of BEA's
employees is represented by a collective bargaining agreement, and BEA has
never experienced any work stoppage. BEA considers its relations with its
employees to be good.
ITEM 2. PROPERTIES.
BEA's executive offices and those related to product development, corporate
marketing and administrative functions, totaling approximately 224,000 square
feet, are located in San Jose, California under leases expiring in 2007. The
Company has signed agreements to sublease approximately 87,000 square feet.
The Company also leases office space in various locations throughout the
United States for sales, support and development personnel and BEA's foreign
subsidiaries lease space for their operations. The Company owns substantially
all of the equipment used in its facilities, except equipment held under
capitalized lease arrangements. The Company believes its existing facilities
will be adequate to meet its anticipated needs for the foreseeable future. See
Note 16 of Notes to Consolidated Financial Statements for information
regarding the Company's lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently party to any material legal proceedings. The
Company is subject to legal proceedings and claims that arise in the ordinary
course of its business. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial
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position, results of operations, or liquidity of the Company, the ultimate
outcome of any litigation is uncertain. Were an unfavorable outcome to occur,
the impact could be material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 6, 2000, a special meeting of stockholders of BEA was held to
consider an amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock and Class B
Common Stock, par value $0.001 per share, which the Company is authorized to
issue to 1,035,000,000 shares. The Company's Board of Directors had previously
authorized a two-for-one stock split, to be effected in April 2000 in the form
of a stock dividend, conditional upon stockholder approved of the amendment.
The number of votes cast for the amendment was 285,882,348. The number of
votes cast against or withheld for the amendment was 14,852,742. The number of
abstentions and broker non-votes for the amendment was 37,712. The amendment
was approved.
PART II
Note: On each of December 19, 1999 and April 24, 2000, the Company effected
two-for-one common stock splits in the form of stock dividends. All common
stock share information and per share amounts in this Annual Report on Form
10-K have been retroactively adjusted to reflect the effects of the stock
splits.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Since its initial public offering on April 11, 1997, the Company's common
stock has traded on the Nasdaq National Market under the symbol "BEAS."
According to the Company's transfer agent, the Company had approximately 716
stockholders of record as of March 31, 2000. Because many of such shares are
held by brokers and other institutions on behalf of stockholders, the Company
is unable to estimate the total number of stockholders represented by these
record holders.
The following table sets forth the high and low sales prices, as adjusted
to reflect the two-for-one stock splits on each of December 19, 1999 and April
24, 2000, reported on the Nasdaq National Market for BEA common stock for the
periods indicated:
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Low High
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Fiscal year ended January 31, 2000:
Fourth Quarter.............................................. $11.46 $47.50
Third Quarter............................................... 5.25 11.60
Second Quarter.............................................. 3.67 8.03
First Quarter............................................... 3.33 4.63
Fiscal year ended January 31, 1999:
Fourth Quarter.............................................. $ 2.17 $ 6.63
Third Quarter............................................... 3.13 6.32
Second Quarter.............................................. 4.57 6.97
First Quarter............................................... 4.88 7.41
</TABLE>
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to invest cash generated from operations,
if any, to support the development of its business and does not anticipate
paying cash dividends for the foreseeable future. Payment of future dividends,
if any, will be at the discretion of the Company's Board of Directors after
taking into account various factors, including the Company's financial
condition, operating results and current and anticipated cash needs.
8
<PAGE>
During fiscal 2000, the Company had the following issuances of equity
securities that were not either registered under the Securities Act of 1933,
as amended, (the "Securities Act") or exempt from registration under
Regulation S of the Securities Act:
On November 19, 1999, the Company acquired The Theory Center ("TTC")
through the issuance of 7,270,828 shares of BEA common stock and the exchange
of TTC options for options to purchase 3,642,400 shares of BEA common stock.
In issuing such securities, the Company relied upon Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
In connection with each such transaction, the purchasers represented their
intention to acquire the securities for investment only and not with a view
to, or for sale in connection with, any distribution thereof, and appropriate
legends were affixed to the securities issued in such transactions. The
purchasers had adequate access to information about the Company.
In December 1999, the Company issued $550 million principal amount of 4%
Convertible Subordinated Notes due December 15, 2006 ("2006 Notes"), which are
convertible, at the option of the debt holders, into approximately 15,873,000
shares of common stock. Such notes were sold to Qualified Institutional
Buyers, as that term is defined in Rule 144A under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA:
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
As of or for the fiscal year ended January 31,
--------------------------------------------------
2000 1999(1) 1998(1) 1997(1) 1996
---------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ 464,410 $289,042 $166,447 $ 64,566 $ 5,133
Net loss................ (19,574) (51,582) (22,912) (87,834) (17,740)
Net loss per share,
basic and diluted...... (0.06) (0.18) (0.11) (2.21) (0.19)
Total assets............ 1,258,841 403,011 174,203 59,276 18,953
Long-term obligations... 578,489 250,112 766 49,540 4,287
Redeemable convertible
preferred stock........ - - - 83,120 24,448
</TABLE>
- --------
(1) Restated to include the results of Leader Group, Inc. and WebLogic, Inc.,
which were acquired in pooling of interests transactions.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software for e-commerce applications. BEA's products
and services enable scalable and reliable e-commerce applications to work
seamlessly in client/server, Internet, and legacy environments. BEA provides
transactional, messaging, and distributed object-based software, as well as an
industry-leading Java Web application server, for developing and deploying
these e-commerce applications and for connecting e-commerce applications to
legacy and mainframe applications. BEA also provides component-based
application solutions for delivering scalable and reliable e-commerce
applications. In addition to its broad software product line, BEA provides
complete solutions to its customers through its extensive alliance network,
and a full range of services, including consulting, training, and support.
BEA's revenues are derived from fees for software licenses, customer support,
education and consulting services.
Acquisitions. Since its inception, BEA has acquired several companies and
product lines, and distribution rights to product lines. Through these
acquisitions, BEA has added additional product lines, additional functionality
to its existing products, additional direct distribution capacity and
additional service capacity. These acquisitions have resulted in significant
charges to BEA's operating results in the periods in which the acquisitions
were completed and have added intangible assets to BEA's balance sheet, the
values of which are being amortized and charged to BEA's operating results
over periods ranging from eight to twenty quarters after completion of the
acquisitions. BEA's management views the e-commerce infrastructure software
market as growing but that companies serving that market are consolidating,
and that this consolidation presents an opportunity for BEA to further expand
its product lines and functionality, distribution capacity and service
offerings and to add new, related lines of business. BEA anticipates that it
will make additional, perhaps material, acquisitions in the future. The timing
of any such acquisitions is impossible to predict and the charges associated
with any such acquisitions could materially adversely affect BEA's results of
operations beginning in the periods in which any such acquisitions are
completed.
Investment in Distribution Channel. BEA has been and is currently investing
in building its sales capacity by aggressively hiring sales and technical
sales support personnel, as well as aggressively pursuing partnerships with
system platform companies, packaged application software developers, systems
integrators and independent consultants, independent software tool vendors,
and distributors. This investment results in an immediate increase in
expenses, especially in sales and marketing, although the return on such
investment, if any, is not anticipated to occur until future periods.
Product Development. In April 1999, BEA announced a project to develop and
market a set of solutions for enterprise application integration and
component-based application development, especially in the area of electronic
commerce. These efforts were significantly expanded with the acquisition of
The Theory Center, Inc. ("TTC") in November 1999, and the announcement of an
internal development project known as "Project E-Collaborate" in February
2000. BEA's planned investment in these efforts may affect BEA's anticipated
overall financial results, particularly services revenues as a percentage of
total revenues, cost of revenues as a percentage of total revenues, and
research and development expense as a percentage of total revenues, and may
create product transition concerns in BEA's customer base. In addition,
investment in these projects results in an immediate increase in expenses,
especially in research and development, although the return on such
investment, if any, is not anticipated to occur until future periods. These
expenses adversely affect BEA's operating results in the short-term and also
in the long-term if the anticipated benefits of such investment do not
materialize.
Change in Sales Cycles. Since mid fiscal 1999, BEA has experienced changes
in sales cycles for its products. In September 1998, BEA completed its merger
with WebLogic, Inc. ("WebLogic"), whose products tend to have a shorter sales
cycle than BEA products at that time. Beginning in the second half of fiscal
1999, an increasing number of BEA customers began negotiating licenses to use
BEA products as an architectural
10
<PAGE>
platform for several applications. These architectural commitments are larger
in scope and potential revenue than single project transactions. In some
cases, these architectural commitments have longer sales cycles than BEA's
typical transactions, both because of the customer's decision cycle in
adopting an architectural platform and because of heightened corporate
approval requirements for larger contracts. In some cases, architectural
commitment transactions have a shorter than usual sales cycle, in order for
the customer to proceed with development of the new applications. These
contrasting changes in the sales cycles and product mix may affect BEA's
future quarterly revenues, revenue mix and operating results.
Employer Payroll Taxes. The Company is subject to employer payroll taxes
when employees exercise stock options. These payroll taxes are assessed on the
stock option gain, which is the difference between the common stock price on
the date of exercise and the exercise price. The tax rate varies depending
upon the employees' taxing jurisdiction. Because we are unable to predict how
many stock options will be exercised, at what price and in which country, we
are unable to predict what, if any, expense will be recorded in a future
period.
Results of Operations
The following table sets forth BEA's revenues, cost of revenues, operating
expenses, interest expense and net loss as a percentage of total revenues for
the fiscal years ended January 31, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
Fiscal year ended
January 31,
---------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Revenues:
License fees..................................... 63.1 % 66.9 % 73.9 %
Services......................................... 36.9 33.1 26.1
----- ----- -----
Total revenues................................. 100.0 100.0 100.0
Cost of revenues:
Cost of license fees(1).......................... 2.2 1.7 2.0
Cost of services(1).............................. 57.1 59.8 62.7
Amortization of certain acquired intangible
assets.......................................... 6.5 8.1 6.8
----- ----- -----
Total cost of revenues......................... 29.0 29.0 24.7
----- ----- -----
Gross margin....................................... 71.0 71.0 75.3
Operating expenses:
Sales and marketing.............................. 45.5 48.1 46.7
Research and development......................... 13.1 14.7 17.5
General and administrative....................... 8.2 8.6 10.7
Amortization of goodwill......................... 3.4 1.0 0.3
Acquisition related charges...................... 0.7 14.6 9.6
----- ----- -----
Income (loss) from operations...................... 0.1 (16.0) (9.5)
Interest income (expense) and other, net........... (1.3) (0.2) (2.6)
----- ----- -----
Loss before provision for income taxes............. (1.2) (16.2) (12.1)
----- ----- -----
Provision for income taxes......................... 3.0 1.6 1.7
----- ----- -----
Net loss........................................... (4.2)% (17.8)% (13.8)%
===== ===== =====
</TABLE>
- --------
(1) Cost of license fees and cost of services are stated as a percentage of
license fees and services, respectively.
11
<PAGE>
Revenues
BEA's revenues are derived from fees for software licenses, consulting and
education services and customer support. Total revenues increased $175.4
million or 60.7 percent from fiscal 1999 to fiscal 2000, and $122.6 million or
73.7 percent from fiscal 1998 to fiscal 1999. These increases reflect
additional sales to existing customers, addition of new customer accounts,
increases in product and service offerings, and a number of strategic
acquisitions.
License Revenues. License revenues increased 51.3 percent from fiscal 1999
to fiscal 2000 and increased 57.3 percent from fiscal 1998 to fiscal 1999.
These increases were mainly due to continued customer and market acceptance of
the Company's products, expansion of the Company's direct sales force, and
introduction of new products and new versions of existing products.
Service Revenues. Service revenues increased 79.6 percent from fiscal 1999
to fiscal 2000 and increased 119.8 percent from fiscal 1998 to fiscal 1999.
Service revenues as a percentage of total revenues increased from 33.1 percent
in fiscal 1999 to 36.9 percent in fiscal 2000 and increased from 26.1 percent
in fiscal 1998 to 33.1 percent in fiscal 1999. The increases were primarily
due to increased charges for customer support resulting from increased license
sales, an increase in the types of consulting services sold by the Company,
and increased number of service personnel and consultants as a result of the
Company's increased focus on service offerings. We expect to continue
investing in our services offerings, especially consulting services.
International Revenues. International revenues accounted for $187.7 million
or 40.4 percent of total revenues in fiscal 2000 compared with $115.7 million
or 40.0 percent of total revenues in fiscal 1999 and $70.3 million or 42.2
percent in fiscal 1998. The increases were the result of expansion of the
Company's international sales force and the acquisition of foreign
distributors.
During fiscal 2000 and 1999, Europe, Middle East and Africa ("EMEA")
experienced a 50.4 and 107.4 percent revenue growth, respectively. Increased
revenues from EMEA were due to increased demand for our products in Europe as
well as growth of our European sales force. Asia/Pacific ("APAC") experienced
a 125.9 percent revenue growth and a 15.2 percent decline in revenue in fiscal
2000 and 1999, respectively. Increased revenues from APAC in fiscal 2000 were
due to increased demand for our products in Asia as well as growth of our Asia
sales force. Decreased revenues from APAC in fiscal 1999 were due to the
weakening of the Asian economy, which began in late fiscal 1998.
Cost of Revenues
Total cost of revenues represented 29.0 percent of total revenues in fiscal
2000 and 1999, and 24.7 percent in fiscal 1998, respectively. The increase in
fiscal 1999 was due to the increase in cost of services, which carry a
substantially higher cost of revenues than software licenses. Amortization
charges included in cost of revenues also contributed to the increase in
fiscal 1999, due to the Company's acquisition of TOP END from NCR Corporation.
Cost of Licenses. Cost of licenses includes expenses related to the
purchase of compact discs, costs associated with transferring the Company's
software to electronic media, the printing of user manuals, packaging and
distribution costs as well as royalties paid to third parties. Cost of
licenses represented 2.2 percent, 1.7 percent and 2.0 percent of license
revenues in fiscal 2000, 1999 and 1998, respectively. The decrease in fiscal
1999 as a percentage of license revenue was due to increased use of electronic
delivery. The increase in fiscal 2000 as a percentage of license revenue was
due to increased royalties paid to third parties, primarily resulting from
license agreements signed in the third quarter. We expect cost of licenses to
increase as a percentage of license revenue in fiscal 2001 because these
license agreements will be in place for the full year.
Cost of Services. Cost of services consists primarily of salaries and
benefits for consulting, education and product support personnel. Cost of
services represented 57.1 percent, 59.8 percent and 62.7 percent of service
12
<PAGE>
revenues in fiscal 2000, 1999 and 1998, respectively. Cost of services as a
percentage of service revenues decreased in fiscal 2000 and 1999 as a result
of spreading the fixed costs associated with the support centers over a larger
revenue base. If consulting revenues increase as a percentage of service
revenues, then cost of services could increase as a percentage of service
revenues in fiscal 2001.
Amortization of Certain Acquired Intangible Assets. The amortization of
certain acquired intangible assets, consisting of developed technology,
distribution rights, trademarks and tradenames, totaled $30.4 million,
$23.3 million and $11.3 million for fiscal 2000, 1999 and 1998, respectively.
The increase is primarily due to intangible assets resulting from a number of
strategic acquisitions, particularly the fiscal 2000 acquisition of TTC and
the fiscal 1999 acquisition of TOP END. In the future, amortization expense
associated with intangible assets recorded prior to January 31, 2000 is
expected to total $34.8 million, $13.9 million, $7.9 million, and $5.1 million
for the fiscal years ending January 31, 2001, 2002, 2003 and thereafter,
respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries,
benefits, sales commissions, travel and facility costs for the Company's sales
and marketing personnel. These expenses also include programs aimed at
increasing revenues, such as advertising, public relations, trade shows and
user conferences. Sales and marketing expenses increased 52.2 percent in
fiscal 2000 compared with fiscal 1999 and increased 78.6 percent in fiscal
1999 compared with fiscal 1998. These increases were due to increased
commissions on the Company's increased revenue base, the expansion of the
Company's direct sales force and an increase in marketing personnel and
programs. Sales and marketing expenses decreased as a percentage of revenues
to 45.5 percent in fiscal 2000 from 48.1 percent in fiscal 1999 due to
spreading the increased sales and marketing expenses over a greater revenue
base. The Company expects to continue to invest in sales channel expansion and
marketing programs to promote the Company's products and brand. Accordingly,
the Company expects sales and marketing expenses to continue to increase in
future periods.
Research and Development. Research and development expenses consist
primarily of salaries and benefits for software engineers, contract
development fees, costs of computer equipment used in software development and
facilities expenses. Total expenditures for research and development increased
43.2 percent in fiscal 2000 compared with fiscal 1999 and increased 46.1
percent in fiscal 1999 compared with fiscal 1998. These increases were
attributed to an increase in software development personnel and related
expenses. The Company expects to continue to commit substantial resources to
product development and engineering in future periods. As a result, the
Company expects research and development expenses to continue to increase in
future periods. Additionally, management intends to continue recruiting and
hiring experienced software development personnel and to consider the
licensing and acquisition of technologies complementary to the Company's
business.
General and Administrative. General and administrative expenses include
costs for the Company's human resources, finance, legal, information
technology, facilities and general management functions. General and
administrative expenses increased 52.9 percent in fiscal 2000 compared with
fiscal 1999 and increased 52.8 percent in fiscal 1999 compared with fiscal
1998. The increases in general and administrative expenses were attributed to
the expansion of the Company's support infrastructure, including information
systems and associated expenses necessary to manage the Company's growth.
Amortization of Goodwill. Goodwill and amortization of goodwill increased
in fiscal 2000 due to various acquisitions completed in fiscal 1999 and fiscal
2000. In the future, amortization of goodwill recorded prior to February 1,
2000 is expected to total $46.5 million, $37.9 million, $31.1 million and
$25.9 million in fiscal 2001, 2002, 2003 and thereafter, respectively.
Acquisition related charges. In connection with certain acquisitions, the
Company acquired and expensed the cost of a number of research projects and
products that were in process on the acquisition dates, in accordance with
generally accepted accounting principles. In fiscal 2000, acquisition related
charges were related to the write-off associated with the acquired in-process
research and development relating to the acquisition of TTC.
13
<PAGE>
In fiscal 1999, acquisition related charges were primarily related to the
write-off associated with the acquired in-process research and development
relating to the acquisition of TOP END. In fiscal 1998, acquisition related
charges were related to the write-off associated with the acquired in-process
research and development relating to the acquisition of certain products from
Digital Equipment Corporation.
In November 1999, BEA completed its merger with TTC. This resulted in the
issuance of approximately 10.9 million shares of BEA common stock and stock
options valued at approximately $156.9 million. The transaction was accounted
for as a purchase with $3.0 million allocated to in-process technology, $124.5
million to goodwill and the remaining $29.4 million representing other
intangible assets and liabilities assumed. The intangibles are being amortized
on a straight-line basis over lives ranging from two to four years.
An independent valuation of the purchased assets was performed to assist
the Company in determining the fair value of each identifiable tangible and
intangible asset and in allocating the purchase price among the acquired
assets, including the portion of the purchase price attributed to acquired in-
process research and development projects. Standard valuation procedures and
techniques were utilized in determining the fair value of the acquired
core/developed and in-process technology.
Core technology and in-process technology were identified and valued
through analysis of TTC's and BEA's current development projects, their
respective stage of development, the time and resources needed to complete
them, their expected income-generating ability, their target markets and the
associated risks.
The cost approach, which includes an analysis of the cost of reproducing or
replacing the asset, was the methodology utilized in valuing component
technology tools and assembled workforce. The income approach, which includes
an analysis of the markets, cash flows and risks associated with achieving
such cash flows, was the methodology utilized in valuing in-process
technology, completed technology, patents and non-compete agreements. Each
developmental project was evaluated to determine if there were any alternative
future uses. This evaluation consisted of a specific review of each project,
including the overall objectives of the project, progress toward such
objectives, and uniqueness of the project. The net after-tax cash flows
representing the cash flows generated by the respective core and in-process
technologies were then discounted to present value. The discount was based
upon an analysis of the weighted average cost of capital for the industry.
Interest Expense; Interest Income and Other, Net. Interest expense was
$20.4 million in fiscal 2000, compared to $10.4 million and $6.1 million in
fiscal 1999 and 1998, respectively. The increase in fiscal 2000 was due to a
higher average amount of outstanding borrowings, primarily due to the issuance
of $550 million 4% Convertible Subordinated Notes due December 15, 2006 ("2006
Notes") in fiscal 2000 and premiums paid in connection with the conversion of
a majority of the $250 million 4% Convertible Subordinated Notes due June 15,
2005 ("2005 Notes") which were outstanding for substantially all of fiscal
2000 but were issued during fiscal 1999. The increase in fiscal 1999 was due
to a higher average amount of outstanding borrowings, primarily due to the
issuance of the 2005 Notes. Interest income and other, net was $14.4 million,
$9.9 million and $1.7 million in fiscal 2000, 1999 and 1998, respectively. The
increase in interest income in fiscal 2000 and 1999 was due to the investment
of higher average cash, cash equivalents and short-term investment balances,
generated primarily from the Company's debt and equity offerings.
The Company has a hedging program to minimize the effect of foreign
exchange transaction gains and losses from recorded foreign currency-
denominated assets and liabilities. This program involves the use of forward
foreign exchange contracts in certain European and Asian currencies. The
Company does not currently hedge anticipated foreign currency-denominated
revenues and expenses not yet incurred. Gains (losses) on foreign currency
transactions, which are included in interest income and other, net, were
$(287,000), $340,000 and $(600,000) in fiscal 2000, 1999 and 1998,
respectively.
The Company's international operations generally consist of sales and
support organizations that generate revenues and incur service costs and
marketing, general and administrative expenses in local currencies. Product
costs, research and development, and corporate marketing and administrative
expenses are primarily incurred in
14
<PAGE>
U.S. dollars. Thus, a strengthening of local currencies against the U.S.
dollar has a positive influence on international revenues translated into
dollars and a negative effect on translated local costs and expenses. A
weakening of local currencies has a negative effect on translated
international revenues and a positive effect on translated local costs and
expenses. BEA's hedging program is intended to moderate the impact of exchange
rate changes on operating results and cash flow.
Provision for Income Taxes. Although the Company has experienced operating
losses to date, the Company has incurred income tax expense of approximately
$13.9 million, $4.9 million and $2.8 million for fiscal 2000, 1999 and 1998,
respectively. The income tax expense consists primarily of domestic minimum
taxes, foreign withholding taxes and foreign income tax expense incurred as a
result of local country profits. The increase in income taxes for fiscal 2000
relative to fiscal 1999 is primarily due to an overall increase in foreign
corporate income taxes and service revenues and an increase in domestic state
current taxes due to the book/tax differences in the amortization of acquired
intangibles and the timing of revenue recognition. The increase in income
taxes for fiscal 1999 relative to fiscal 1998 is primarily due to an overall
increase in foreign corporate income taxes.
Under Statement of Financial Accounting Standards No.109 Accounting for
Income Taxes ("FAS 109"), deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. FAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the available evidence, which
includes BEA's historical operating performance and the reported cumulative
net losses from prior years, the Company has provided a valuation allowance
against its net deferred tax assets to the extent they are dependent upon
future taxable income for realization. The Company intends to evaluate the
realizability of the deferred tax assets on a quarterly basis. A deferred tax
asset has been established in fiscal 2000 to the extent of refundable US
current federal income taxes payable. See Note 9 to the consolidated financial
statements.
Liquidity and Capital Resources
As of January 31, 2000, cash, cash equivalents and short-term investments
totaled $803.1 million, up from $236.5 million at January 31, 1999. The
increase in cash, cash equivalents and short-term investments was primarily
due to proceeds from the 2006 Notes and cash generated from operations.
Cash generated from operating activities rose to $95.2 million in fiscal
2000, compared with $27.4 million generated in fiscal 1999 and $2.4 million
generated in fiscal 1998.
Investing activities consumed $119.9 million in cash during fiscal 2000,
compared with $107.8 million and $15.0 million in fiscal 1999 and 1998,
respectively. Cash used for investing activities in fiscal 2000 was primarily
for a number of strategic acquisitions amounting to $66.0 million, capital
expenditures of $17.8 million and purchases of short-term investments of $38.0
million. Cash used for investing activities in fiscal 1999 was primarily for a
number of strategic acquisitions amounting to $99.4 million, capital
expenditures of $13.2 million and net sales of short-term investments of $4.8
million. Cash used for investing activities in fiscal 1998 was primarily for
short-term investment purchases of $8.7 million, capital expenditures of $3.3
million and $2.9 million for a number of strategic acquisitions.
The Company generated $554.2 million from financing activities in fiscal
2000, compared with $221.0 million and $100.4 million in fiscal 1999 and 1998,
respectively. The primary source of cash from financing activities in fiscal
2000 was the issuance of the $550 million 2006 Notes, net of $14.7 million
debt issuance costs. The primary source of cash from financing activities in
fiscal 1999 was the issuance of the $250 million 2005 Notes net of $5.3
million debt issuance costs. The main use of cash for financing activities in
fiscal 1999 was for the payment in full of the $38.7 million outstanding note
payable to Novell related to acquisition of distribution rights for Tuxedo.
The primary source of cash from financing activities in fiscal 1998 was from
the issuance of common and preferred stock, partially offset by payments on
the Company's outstanding notes payable and capital lease obligations.
15
<PAGE>
As of January 31, 2000, the Company's outstanding short and long-term debt
obligations were $582.9 million, up from $250.8 million at January 31, 1999.
At January 31, 2000, the Company's outstanding debt obligations consisted
principally of the $572.5 million of convertible notes and $10.5 million of
other short-term and long-term debt. During fiscal 2000, approximately $227.5
million of the 2005 Notes were converted into common stock. As of March 31,
2000, approximately 8.0 million shares of the 2005 Notes were converted into
common stock. In addition, the Company is committed to a total of $84.1
million of lease payments under operating leases through 2007.
In addition to normal operating expenses, cash requirements are anticipated
for financing anticipated growth, payment of outstanding debt obligations and
the acquisition or licensing of products and technologies complementary to the
Company's business. The Company believes that its existing cash, cash
equivalents, short-term investments and cash generated from operations, if
any, will be sufficient to satisfy its currently anticipated cash requirements
through January 31, 2001. However, the Company expects to make additional
acquisitions and may need to raise additional capital through future debt or
equity financing to the extent necessary to fund any such acquisitions. There
can be no assurance that additional financing will be available, at all, or on
terms favorable to the Company.
Year 2000 Compliance
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late fiscal 2000, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission-critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date
change. The Company expensed approximately $1.1 million during fiscal 2000 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company will continue to monitor its mission-critical computer applications
and those of its suppliers and vendors throughout fiscal 2001 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Effect of New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March 2000. BEA is required to adopt
the provisions of SAB 101 in its second fiscal quarter of 2000. The Company is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption; however, the Company does not expect the adoption of
SAB 101 to have a material impact to its financial position.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-9, which amends certain
provisions of SOP 97-2 and extends the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 until the beginning of BEA's fiscal
year 2001. The Company is currently evaluating the impact of SOP 98-9 on its
financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"), FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In July 1999, FAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Data of FASB Statement 133" ("FAS 137")
was issued. FAS
16
<PAGE>
137 deferred the effective date of FAS 133 until the first fiscal quarter of
fiscal years beginning after June 15, 2000. The Company expects to adopt FAS
133 effective February 1, 2001. The Company does not expect the adoption of
FAS 133 to have a material impact to its financial position on results of
operations.
Factors That May Impact Future Operating Results
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. All statements in this Annual Report other than statements of
historical fact are "forward-looking statements" for purposes of these
provisions, including any statements of the plans and objectives for future
operations and any statement of assumptions underlying any of the foregoing.
Statements that include the use of terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology are forward-looking
statements. Forward-looking statements include (i) in Item 1, all text under
the heading "Business-Strategy" and statements regarding continued hiring in
direct sales, support and professional services, devoting substantial
resources to product development, and continuing to license and acquire
software technologies and businesses, and (ii) in Item 7, statements regarding
additional acquisitions, return on investment, investing in service offerings,
expected timing and amount of amortization expenses, investment in sales
channel expansion and marketing programs, and future hiring. These forward-
looking statements involve risks and uncertainties, and it is important to
note that BEA's actual results could differ materially from those projected or
assumed in these forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
described in the risk factors below. All forward-looking statements and risk
factors included in this document are made as of the date hereof, based on
information available to BEA as of the date hereof, and BEA assumes no
obligation to update any forward-looking statement or risk factor. You should
consult the risk factors listed from time to time in the Company's Reports on
Forms 10-Q and 8-K.
Significant unanticipated fluctuations in our actual or anticipated quarterly
revenues and operating results may cause us not to meet securities analysts'
or investors' expectations and may result in a decline in our stock price.
Although we have had significant revenue growth in recent quarters, our
growth rates may not be sustainable. If our revenues, operating results,
earnings or future projections are below the levels expected by investors or
securities analysts, our stock price is likely to decline. Our stock price is
also subject to the volatility generally associated with Internet, software
and technology stocks and may also be affected by broader market trends
unrelated to our performance.
We expect to experience significant fluctuations in our future quarterly
revenues and operating results as a result of many factors, including:
. difficulty predicting the size and timing of customer orders
. introduction or enhancement of our products or our competitors' products
. the mix of our products and services sold and mix of distribution
channels
. general economic conditions, which can affect our customers' capital
investment levels and the length of our sales cycle
. changes in our competitors' product offerings and pricing policies, and
customer order deferrals in anticipation of new products and product
enhancements from BEA or competitors
. whether we are able to develop, introduce and market new products on a
timely basis
. any slowdown in use of the Internet for commerce
. recent hiring may prove excessive if growth rates are not maintained
. the structure, timing and integration of acquisitions of businesses,
products and technologies, including The Theory Center
. the terms and timing of financing activities
. market acceptance of our products
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. the lengthy sales cycle for our products
. technological changes in computer systems and environments
. whether we are able to successfully expand our sales and marketing
programs
. whether we are able to meet our customers' service requirements
. costs associated with acquisitions, including the acquisition of The
Theory Center
. the impact and duration of deteriorated economic and political
conditions in Asia
. loss of key personnel
. fluctuations in foreign currency exchange rates
. interpretations of the accounting pronouncements on software revenue
recognition.
As a result of all of these factors, we believe that quarterly revenues and
operating results are difficult to forecast and period-to-period comparisons
of our results of operations are not necessarily meaningful and should not be
relied upon as indications of trends or future performance.
An increasing portion of our revenues has been derived from large orders,
as customers deployed our products throughout their organizations or chose to
standardize on our products for their system architecture. Increases in the
dollar size of individual license transactions have also increased the risk of
fluctuation in future quarterly results. If we cannot generate large customer
orders, or customers delay or cancel such orders in a particular quarter, it
will have a material adverse effect on our revenues and, more significantly on
a percentage basis, our net income or loss in that quarter. Moreover, we
typically receive and fulfill a majority of our orders within the quarter,
with the substantial majority of our orders received in the last month of each
fiscal quarter. As a result, we may not learn of revenue shortfalls until late
in a fiscal quarter, after it is too late to adjust expenses for that quarter.
Additionally, our operating expenses are based in part on our expectations for
future revenues and are difficult to adjust in the short term. Any revenue
shortfall below our expectations could have an immediate and significant
adverse effect on our results of operations. Further, we are subject to
employer payroll taxes when our employees exercise their stock options. The
employer payroll taxes are assessed on each employee's gain, which is the
difference between the price of our common stock on the date of exercise and
the exercise price. During a particular period, these payroll taxes could be
material. These employer payroll taxes would be recorded as an expense and are
assessed at tax rates that varies depending upon the employee's taxing
jurisdiction in the period such options are exercised based on actual gains
realized by employees. However, because we are unable to predict how many
stock options will be exercised, at what price and in which country during any
particular period, we cannot predict, the amount, if any, of employer payroll
expense will be recorded in a future period or the impact on our future
financial results.
Although we use a standard license agreement, which meets the revenue
recognition criteria under current generally accepted accounting principles,
we must often negotiate and revise terms and conditions of this standard
agreement, particularly in larger license transactions. Negotiation of
mutually acceptable terms and conditions can extend the sales cycle and, in
certain situations, may require us to defer recognition of revenue on the
license. In addition, while we believe that we are in compliance with
Statement of Position 97-2, Software Revenues Recognition, ("SOP 97-2") and
SOP 98-4 and SOP 98-9, which amend certain provisions of SOP 97-2, the
American Institute of Certified Public Accountants has only issued some
implementation guidelines for these standards and the accounting profession is
still discussing a wide range of potential interpretations. These
implementation guidelines, once finalized, could lead to unanticipated changes
in our current revenue accounting practices that could cause us to recognize
lower revenue and profits.
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Our limited operating history and need to continue to integrate our
acquisitions makes it difficult to predict our future results
We were incorporated in January 1995 and therefore have a limited operating
history. We have generated revenues to date primarily from sales of BEA
TUXEDO, a software product to which we acquired worldwide distribution rights
in February 1996, and from BEA WebLogic, a software product which we acquired
in September 1998, and fees for software products and services related to
TUXEDO and WebLogic. We have also acquired a number of businesses,
technologies and products, most recently The Theory Center, which was acquired
in November 1999 and The Workflow Automation Corporation, which was acquired
in March 2000. Our limited operating history and the need to integrate a
number of separate and independent business operations subject our business to
numerous risks. At January 31, 2000, we had an accumulated deficit of
approximately $203.0 million. In addition, in connection with certain
acquisitions completed prior to January 31, 2000, we recorded approximately
$424.5 million as intangible assets and goodwill. Under Generally Accepted
Accounting Principles, intangible assets and goodwill are required to be
amortized in future periods. Approximately $221.4 million of these assets have
been amortized as of January 31, 2000 and we expect to amortize the remaining
approximately $203.1 million in future periods through our fiscal year ending
January 31, 2005. We expect to amortize $81.3 million of such intangible
assets and goodwill in the fiscal year ending January 31, 2001. A substantial
portion of the $156.9 million purchase price for The Theory Center has been
recorded as intangible assets and goodwill and amortized in the fiscal year
ended January 31, 2000 and will be amortized over future periods. If we
acquire additional businesses, products and technologies in the future, we may
report additional, potentially significant expenses. If future events cause
the impairment of any intangible assets acquired in our past or future
acquisitions, we may have to expense such assets sooner than we expect.
Because of our limited operating history and ongoing expenses associated with
our prior acquisitions, there can be no assurance that we will be profitable
in any future period and recent operating results should not be considered
indicative of future financial performance.
Our revenues are derived primarily from two main product and services lines,
and a decline in demand or prices for either could substantially adversely
affect our operating results
We currently derive the majority of our license and service revenues from
BEA TUXEDO and BEA WebLogic and from related products and services. Although
we expect these products and services to continue to account for the majority
of our revenues in the immediate future, we believe that BEA WebLogic will
become an increasingly important revenue source. As a result, factors
adversely affecting the pricing of or demand for BEA TUXEDO and BEA WebLogic,
such as competition, product performance or technological change, could have a
material adverse effect on our business and consolidated results of operations
and financial condition.
The price of our common stock may fluctuate significantly
The market price for our common stock may be affected by a number of
factors, including developments in the Internet, software or technology
industry, general market conditions and other factors, including factors
unrelated to our operating performance or our competitors' operating
performance. In addition, stock prices for BEA and many other companies in the
Internet, technology and emerging growth sectors have experienced wide
fluctuations including recent rapid rises and declines in their stock prices,
that have often been unrelated to the operating performance of such companies.
Such factors and fluctuations, as well as general economic, political and
market conditions, such as recessions, may materially adversely affect the
market price of our common stock.
If we cannot successfully integrate our past and future acquisitions, our
revenues may decline and expenses may increase
From our inception in January 1995, we have made several strategic
acquisitions. Integration of acquired companies, divisions and products
involves the assimilation of potentially conflicting operations and products,
which divert the attention of our management team and may have a material
adverse effect on our operating results in future quarters. We acquired Leader
Group, Inc. ("Leader Group") and a business unit of Penta
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Systems Technology, Inc. ("Penta") in the quarter ended April 30, 1998, NCR's
TOP END technology in June 1998, the Entersoft Systems Corporation
("Entersoft") in July 1998, WebLogic, Inc. ("WebLogic") in September 1998,
Component Systems, LLC in May 1999, Technology Resource Group, Inc. ("TRG") in
July 1999, Avitek, Inc. ("Avitek") in August 1999, and The Theory Center
("TTC") in November 1999. It is possible we may not achieve any of the
intended financial or strategic benefits of these transactions. While we
intend to make additional acquisitions in the future, there may not be
suitable companies, divisions or products available for acquisition. Our
acquisitions entail numerous risks, including the risk we will not
successfully assimilate the acquired operations and products, or retain key
employees of the acquired operations. There are also risks relating to the
diversion of our management's attention, and difficulties and uncertainties in
our ability to maintain the key business relationships the acquired entities
have established. In addition, if we undertake future acquisitions, we may
issue dilutive securities, assume or incur additional debt obligations, incur
large one-time expenses, and acquire intangible assets that would result in
significant future amortization expense. Any of these events could have a
material adverse effect on our business, operating results and financial
condition.
Recently, the Financial Accounting Standards Board ("FASB") voted to
eliminate pooling of interests accounting for acquisitions and the ability to
write-off in-process research and development has been limited by recent
pronouncements. The effect of these changes would be to increase the portion
of the purchase price for any future acquisitions that must be charged to
BEA's cost of revenues and operating expenses in the periods following any
such acquisitions. As a consequence, our results of operations in periods
following any such acquisitions could be materially adversely affected.
Although these changes would not directly affect the purchase price for any of
these acquisitions, they would have the effect of increasing the reported
expenses associated with any of these acquisitions. To that extent, these
changes may make it more difficult for us to acquire other companies, product
lines or technologies.
The lengthy sales cycle for our products makes our revenues susceptible to
substantial fluctuations
Our customers typically use our products to implement large, sophisticated
applications that are critical to their business, and their purchases are
often part of their implementation of a distributed or Web-based computing
environment. Customers evaluating our software products face complex decisions
regarding alternative approaches to the integration of enterprise
applications, competitive product offerings, rapidly changing software
technologies and limited internal resources due to other information systems
requirements. For these and other reasons, the sales cycle for our products is
lengthy and is subject to delays or cancellation over which we have little or
no control. We have experienced a significant increase in the number of
million and multi-million dollar license transactions. In some cases, this has
resulted in more extended customer evaluation and procurement processes, which
in turn have lengthened the overall sales cycle for our products. Moreover
during the second half of fiscal 1999, an increasing number of our customers
began negotiating licenses to use our enterprise application solutions as an
architectural platform for several applications. These architectural
commitments are larger in scope and potential revenue than single application
transactions. In some cases, these architectural commitments also have longer
sales cycles than our typical single application transactions, because of both
the customer's decision cycle in adopting an architectural platform and
heightened corporate approval requirements for larger contracts. We believe
general economic conditions that impact customers' capital investment
decisions also affect our sales cycles.
In addition, industry sources widely predicted that many corporations would
stop deploying new computer systems in late 1999 and early 2000, in order to
avoid disrupting their computer systems before the Year 2000. We have been
informed by some of our customers that they intended to freeze deploying new
computer systems in late December 1999 and early 2000. Furthermore, some of
our customers may have accelerated their purchases and deployments of our
products in advance of these freezes. These factors could cause an unusual
fluctuation in our orders, and our revenues could be materially reduced and
our operating results could be materially adversely affected, especially in
the first quarter of calendar 2000. Any significant change in customer buying
decisions or sales cycles for our products could have a material adverse
effect on our business, results of operations and financial condition.
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If we do not effectively compete with new and existing competitors, our
revenues and operating margins will decline
The market for application server and integration software, and related
software components and services, is highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of this
marketplace. These competitors include operating system vendors such as IBM,
Sun Microsystems and database vendors such as Oracle. Microsoft has released
products that include certain application server functionality and has
announced that it intends to include application server and integration
functionality in future versions of its operating systems, including future
versions of Windows 2000. Oracle is the primary relational database vendor
offering products that are intended to serve as alternatives to our enterprise
application server and integration solutions. In addition, there are companies
offering and developing application server and integration software products
and related services that directly compete with products we offer. Further,
software development tool vendors typically emphasize the broad versatility of
their tool sets and, in some cases, offer complementary software that supports
these tools and performs basic application server and integration functions.
Last, internal development groups within prospective customers' organizations
may develop software and hardware systems that may substitute for those we
offer. A number of our competitors and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, greater name recognition and a larger installed base of
customers than us.
Our principal competitors currently include hardware vendors who bundle
their own application server and integration software products, or similar
products, with their computer systems and database vendors that advocate
client/server networks driven by the database server. IBM and Sun Microsystems
are the primary hardware vendors who offer a line of application server and
integration solutions for its customers. IBM's sale of application server and
integration functionality along with its IBM proprietary hardware systems
requires us to compete with IBM in its installed base, where IBM has certain
inherent advantages due to its significantly greater financial, technical,
marketing and other resources, greater name recognition and the integration of
its enterprise application server and integration functionality with its
proprietary hardware and database systems. These inherent advantages allow IBM
to bundle, at a discounted price, application functionality with computer
hardware and software sales. Due to these factors, if we do not differentiate
our products based on functionality, interoperability with non-IBM systems,
performance and reliability, and establish our products as more effective
solutions to customers' needs our revenues and operating results will suffer.
Microsoft has announced that it intends to include certain application
server and integration functionality in future versions of its Windows 2000
operating system. Microsoft has also introduced a product that includes
certain basic application server functionality. The bundling of competing
functionality in versions of Windows requires us to compete with Microsoft in
the Windows marketplace, where Microsoft has certain inherent advantages due
to its significantly greater financial, technical, marketing and other
resources, its greater name recognition, its substantial installed base and
the integration of its application server and integration functionality with
Windows. We need to differentiate our products from Microsoft's based on
scalability, functionality, interoperability with non-Microsoft platforms,
performance and reliability, and need to establish our products as more
effective solutions to customers' needs. We may not be able to successfully
differentiate our products from those offered by Microsoft, and Microsoft's
entry into the application server and integration market could materially
adversely affect our business, operating results and financial condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could materially
adversely affect our ability to sell additional software licenses and
maintenance, consulting and support services on terms favorable to us.
Further, competitive pressures could require us to reduce the price of our
products and related services, which could materially adversely affect our
business, operating results and financial condition. We may not be able to
compete successfully against current and future competitors and any failure to
do so would have a material adverse effect upon our business, operating
results and financial condition.
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If we fail to adequately protect our intellectual property rights,
competitors may use our technology and trademarks, which could weaken our
competitive position, reduce our revenues and increase our costs
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. It is possible that other companies could successfully
challenge the validity or scope of our patents and that our patents may not
provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or develop similar technology independently. In particular, we
have, in the past, provided certain hardware OEMs with access to our source
code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and
financial condition. It is difficult for us to police unauthorized use of our
products, and although we are unable to determine the extent to which piracy
of our software products exists, software piracy is a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. The protection of our proprietary rights may not
be adequate and our competitors could independently develop similar
technology, duplicate our products, or design around patents and other
intellectual property rights we hold.
Third parties could assert that our software products and services infringe
their intellectual property rights, which could expose us to increased costs
and litigation
It is possible that third parties could claim our current or future
products infringe their rights. Any such claims, with or without merit, could
cause costly litigation that could absorb significant management time, which
could materially adversely effect our business, operating results and
financial condition. These types of claims might require us to enter into
royalty or license agreements. If required, we may not be able to obtain such
royalty or license agreements, or obtain them on terms acceptable to us, which
could have a material adverse effect upon our business, operating results and
financial condition.
Our international operations expose us to greater management, collections,
currency, intellectual property, regulatory and other risks
International revenues accounted for 40.4 percent, 40.0 percent and 42.2
percent of our consolidated revenues for the fiscal years ended January 31,
2000, 1999 and 1998, respectively. We sell our products and services through a
network of branches and subsidiaries located in 29 countries worldwide. In
addition, we also market through distributors. We believe that our success
depends upon continued expansion of our international operations. Our
international business is subject to a number of risks, including unexpected
changes in regulatory practices and tariffs, greater difficulties in staffing
and managing foreign operations, longer collection cycles, seasonality,
potential changes in tax laws, greater difficulty in protecting intellectual
property and the impact of fluctuating exchange rates between the US dollar
and foreign currencies in markets where we do business.
General economic and political conditions in these foreign markets may also
impact our international revenues. Since the late summer of 1997, a number of
Pacific Rim countries have experienced economic, banking and currency
difficulties that have led to economic downturns in those countries. Among
other things, the decline in value of Asian currencies, together with
difficulties obtaining credit, has resulted in a decline in the purchasing
power of our Asian customers, which in turn has resulted in the delay of
orders for our products from certain Asian customers and is likely to result
in further delays and, possibly the cancellation, of such orders. We
anticipate that weak Asian economic conditions may continue to adversely
impact our financial results. It is difficult for us to predict the extent of
the future impact of these conditions. There can be no assurances that these
factors and other factors will not have a material adverse effect on our
future international revenues and consequently on our business and
consolidated financial condition and results of operations.
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If we are unable to manage our growth, our business will suffer
We have continued to experience a period of rapid and substantial growth
that has placed, and if such growth continues would continue to place, a
strain on the Company's administrative and operational infrastructure. We have
increased the number of our employees from 120 employees in three offices in
the United States at January 31, 1996 to over 1,900 employees in over 70
offices in 29 countries at January 31, 2000. Our ability to manage our staff
and growth effectively requires us to continue to improve our operational,
financial and management controls, reporting systems and procedures. In this
regard, we are currently updating our management information systems to
integrate financial and other reporting among our multiple domestic and
foreign offices. In addition, we intend to continue to increase our staff
worldwide and to continue to improve the financial reporting and controls for
our global operations. It is possible we will not be able to successfully
implement improvements to our management information and control systems in an
efficient or timely manner and that, during the course of this implementation,
we could discover deficiencies in existing systems and controls. If we are
unable to manage growth effectively, our business, results of operations and
financial condition will be materially adversely affected.
If the market for application servers, application integration and
application component software does not grow as quickly as we expect, our
revenues will be harmed
We sell our products and services in the application server, application
integration and application component markets. These markets are emerging and
are characterized by continuing technological developments, evolving industry
standards and changing customer requirements. Our success is dependent in
large part on acceptance of our products by large customers with substantial
legacy mainframe systems, customers establishing a presence on the Web for
commerce, and developers of web-based commerce applications. Our future
financial performance will depend in large part on continued growth in the
number of companies extending their mainframe-based, mission-critical
applications to an enterprise-wide distributed computing environment and to
the Internet through the use of application server and integration technology.
There can be no assurance that the markets for application server and
integration technology and related services will continue to grow. If these
markets fail to grow or grow more slowly than we currently anticipate, or if
we experience increased competition in these markets, our business, results of
operations and financial condition will be adversely affected.
If we lose key personnel or cannot hire enough qualified personnel, it will
adversely affect our ability to manage our business, develop new products and
increase revenue
We believe our future success will depend upon our ability to attract and
retain highly skilled personnel including our founders, Messrs. William T.
Coleman III and Alfred S. Chuang, and other key members of management.
Competition for these types of employees is intense, and it is possible that
we will not be able to retain our key employees and that we will not be
successful in attracting, assimilating and retaining qualified candidates in
the future. As we seek to expand our global organization, the hiring of
qualified sales, technical and support personnel will be difficult due to the
limited number of qualified professionals. Failure to attract, assimilate and
retain key personnel would have a material adverse effect on our business,
results of operations and financial condition.
Our failure to maintain ongoing sales through distribution channels will
result in lower revenues
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as computer hardware
companies, packaged application software developers (ISVs), systems
integrators and independent consultants, independent software tool vendors and
distributors. Our ability to achieve revenue growth in the future will depend
in large part on our success in expanding our direct sales force and in
further establishing and expanding relationships with distributors, ISVs, OEMs
and systems integrators. In particular, a significant part of our strategy is
to embed our technology in products our ISV customers offer. We intend to seek
distribution arrangements with additional ISVs to embed our Web application
servers in their
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products. It is possible that we will not be able to successfully expand our
direct sales force or other distribution channels, secure license agreements
with additional ISVs on commercially reasonable terms or at all, and otherwise
further develop our relationships with indirect distribution channels.
Moreover, even if we succeed in these endeavors, it still may not increase our
revenues. If we invest resources in these types of expansion and our revenues
do not correspondingly increase, our business, results of operations and
financial condition will be materially and adversely affected.
We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing
efforts, particularly with respect to implementation and support of our
products as well as lead generation and assistance in the sales process. We
will need to expand our relationships with third parties in order to support
license revenue growth. Many such firms have similar, and often more
established, relationships with our principal competitors. It is possible that
these and other third parties will not provide the level and quality of
service required to meet the needs of our customers, that we will not be able
to maintain an effective, long term relationship with these third parties, and
that these third parties will not successfully meet the needs of our
customers.
If we do not develop and enhance new and existing products to keep pace with
technological, market and industry changes, our revenues may decline
The market for our products is highly fragmented, competitive with
alternative computing architectures, and characterized by continuing
technological developments, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable. As a result, our
success depends upon our ability to enhance existing products, respond to
changing customer requirements and develop and introduce in a timely manner
new products that keep pace with technological developments and emerging
industry standards. It is possible that our products will not adequately
address the changing needs of the marketplace and that we will not be
successful in developing and marketing enhancements to our existing products
or products incorporating new technology on a timely basis. Failure to develop
and introduce new products, or enhancements to existing products, in a timely
manner in response to changing market conditions or customer requirements,
will materially and adversely affect our business, results of operations and
financial condition.
If our products contain software defects, it could harm our revenues and
expose us to litigation
The software products we offer are internally complex and, despite
extensive testing and quality control, may contain errors or defects,
especially when we first introduce them. We may need to issue corrective
releases of our software products to fix any defects or errors. Any defects or
errors could also cause damage to our reputation, loss of revenues, product
returns or order cancellations, or lack of market acceptance of our products.
Accordingly, any defects or errors could have a material and adverse effect on
our business, results of operations and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in
our license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale
and support of our products entails the risk of such claims, which could be
substantial in light of customers' use of such products in mission-critical
applications. If a claimant brings a product liability claim against us, it
could have a material adverse effect on our business, results of operations
and financial condition.
Our products interoperate with many parts of complicated computer systems,
such as mainframes, servers, personal computers, application software,
databases, operating systems and data transformation software. Failure of any
one of these parts could cause all or large parts of computer systems to fail.
In such circumstances, it may be difficult to determine which part failed, and
it is likely that customers will bring a lawsuit against several
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suppliers. Even if our software is not at fault, we could suffer material
expense and material diversion of management time in defending any such
lawsuits.
We have a high debt balance and large interest obligations
At January 31, 2000, we had approximately $572.5 million of long-term
indebtedness in the form of convertible notes. As a result of this
indebtedness, we have substantial principal and interest payment obligations.
The degree to which we are leveraged could significantly harm our ability to
obtain financing for working capital, acquisitions or other purposes and could
make us more vulnerable to industry downturns and competitive pressures. Our
ability to meet our debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors
affecting our operations, many of which are beyond our control. In addition,
our earnings are insufficient to cover our fixed charges.
We will require substantial amounts of cash to fund scheduled payments of
interest on the notes, payment of the principal amount of the notes, payment
of principal and interest on our other indebtedness, future capital
expenditures and any increased working capital requirements. If we are unable
to meet our cash requirements out of cash flow from operations, there can be
no assurance that we will be able to obtain alternative financing. In the
absence of such financing, our ability to respond to changing business and
economic conditions, to make future acquisitions, to absorb adverse operating
results or to fund capital expenditures or increased working capital
requirements would be significantly reduced. If we do not generate sufficient
cash flow from operations to repay the notes at maturity, we could attempt to
refinance the notes; however, no assurance can be given that such a
refinancing would be available on terms acceptable to us, if at all. Any
failure by us to satisfy our obligations with respect to the notes at maturity
(with respect to payments of principal) or prior thereto (with respect to
payments of interest or required repurchases) would constitute a default under
the indenture and could cause a default under agreements governing our other
indebtedness.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Exchange
BEA's revenue originating outside the United States was 40.4 percent, 40.0
percent and 42.2 percent of total revenues in fiscal 2000, 1999 and 1998,
respectively. International revenues from each geographic sub-region were less
than 10 percent of total revenues. International sales are made mostly from
the Company's foreign sales subsidiaries in the local countries and are
typically denominated in the local currency of each country. These
subsidiaries also incur most of their expenses in the local currency.
Accordingly, foreign subsidiaries use the local currency as their functional
currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arise in part
from intercompany accounts in which certain costs of software development,
support and product marketing incurred in the United States are charged to the
Company's foreign subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary in order to
centralize foreign exchange risk with the parent company in the United States.
The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall financial results.
The Company has a program to reduce the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contacts in certain European and Asian currencies, principally the U.K.,
France, Germany, Finland,
25
<PAGE>
Sweden, Japan and Australia. A forward foreign exchange contract obligates the
Company to exchange predetermined amounts of specified foreign currencies at
specified exchange rates on specified dates or to make an equivalent U.S.
dollar payment equal to the value of such exchange. Each month the Company
marks to market the foreign exchange contracts based on the change in the
foreign exchange rates with any resulting gain or losses recorded in the
interest income and other, net line item.
The Company does not currently hedge anticipated foreign currency-
denominated revenues and expenses not yet incurred.
Interest Rates
The Company invests its cash in a variety of financial instruments,
consisting principally of investments in commercial paper, interest-bearing
demand deposit accounts with financial institutions, money market funds and
highly liquid debt securities of corporations, municipalities and the U.S.
Government. These investments are denominated in U.S. dollars. Cash balances
in foreign currencies overseas are operating balances and are only invested in
short-term time deposits of the local operating bank.
The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, ("FAS 115"). All of the cash
equivalents, short-term and long-term investments are treated as "available-
for-sale" under FAS 115. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates or the Company may suffer losses in principal if forced to sell
securities which have seen a decline in market value due to changes in
interest rates. However, the Company reduces its interest rate risk by
investing its cash in instruments with short maturities. At January 31, 2000
the average maturity of the Company's cash equivalents and short-term
investments was 14 days.
The table below presents the principal amount, related weighted average
interest rates and maturities for the Company's investment portfolio. Short-
term investments are all in fixed rate instruments. The principal amounts
approximate fair value at January 31, 2000.
Table of investment securities (in thousands):
<TABLE>
<CAPTION>
Principal Average
Amount Interest Rate
--------- -------------
<S> <C> <C>
Cash and cash equivalents............................ $763,294 5.81%
Restricted cash...................................... 1,631 5.45%
Short-term investments (0-1 years)................... 38,135 6.02%
--------
Total cash and investment securities............... $803,060
========
</TABLE>
26
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
BEA SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors......................... 28
Consolidated Balance Sheets as of January 31, 2000 and 1999............... 29
Consolidated Statements of Operations and Comprehensive Loss for the years
ended January 31, 2000, 1999 and 1998.................................... 30
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the years ended January 31, 2000, 1999
and 1998................................................................. 31
Consolidated Statements of Cash Flows for the years ended January 31,
2000, 1999 and 1998...................................................... 32
Notes to Consolidated Financial Statements................................ 33
</TABLE>
27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BEA Systems, Inc.
We have audited the accompanying consolidated balance sheets of BEA
Systems, Inc. as of January 31, 2000 and 1999 and the related consolidated
statements of operations and comprehensive loss, redeemable convertible
preferred stock and stockholders' equity (deficit), and cash flows for each of
the three years in the period ended January 31, 2000. Our audits also included
the financial statement schedule listed in the index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial position of BEA Systems,
Inc. at January 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 21, 2000 (except for Note 17 as to which the date is April 24, 2000)
28
<PAGE>
BEA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
January 31,
--------------------
2000 1999
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 763,294 $232,556
Restricted cash.......................................... 1,631 3,500
Short-term investments................................... 38,135 395
Accounts receivable, net of allowance for doubtful
accounts of $5,512 and $3,661 at January 31, 2000 and
1999, respectively...................................... 133,069 77,068
Other current assets..................................... 35,248 4,279
---------- --------
Total current assets................................... 971,377 317,798
Computer equipment, furniture and leasehold improvements,
net....................................................... 27,978 17,185
Goodwill, net of accumulated amortization of $19,200 and
$3,436 at January 31, 2000 and 1999, respectively......... 141,457 8,804
Acquired intangible assets, net............................ 61,600 50,097
Other long-term assets..................................... 56,429 9,127
---------- --------
Total assets........................................... $1,258,841 $403,011
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit......................... $ - $ 679
Accounts payable......................................... 14,848 7,615
Accrued liabilities...................................... 92,673 47,747
Accrued income taxes..................................... 27,021 5,991
Deferred revenues........................................ 96,537 33,784
Current portion of notes payable......................... 4,454 43
---------- --------
Total current liabilities.............................. 235,533 95,859
Notes payable and other long-term obligations.............. 6,005 112
Convertible subordinated notes............................. 572,484 250,000
Commitments and contingencies..............................
Stockholders' equity:
Preferred stock issuable in series-$0.001 par value,
20,000 shares authorized; no shares designated or issued
and outstanding......................................... - -
Common stock--$0.001 par value; 1,000,000 and 342,060
shares authorized at January 31, 2000 and 1999,
respectively; 290,568 and 235,280 shares issued and
outstanding at January 31, 2000 and 1999, respectively.. 290 235
Class B Common Stock--
$0.001 par value; 140,000 shares authorized; 71,296
shares issued and outstanding at January 31, 2000 and
1999.................................................... 71 71
Additional paid-in capital............................... 650,128 243,097
Accumulated deficit...................................... (202,951) (183,345)
Notes receivable from stockholders....................... (296) (544)
Deferred compensation.................................... (1,144) (1,880)
Accumulated other comprehensive loss..................... (1,279) (594)
---------- --------
Total stockholders' equity............................. 444,819 57,040
---------- --------
Total liabilities and stockholders' equity............. $1,258,841 $403,011
========== ========
</TABLE>
See accompanying notes
29
<PAGE>
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal year ended January
31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License fees................................... $292,855 $193,511 $122,987
Services....................................... 171,555 95,531 43,460
-------- -------- --------
Total revenues............................... 464,410 289,042 166,447
-------- -------- --------
Cost of revenues:
Cost of license fees........................... 6,445 3,225 2,435
Cost of services............................... 98,005 57,167 27,261
Amortization of certain acquired intangible
assets........................................ 30,391 23,290 11,336
-------- -------- --------
Total cost of revenues....................... 134,841 83,682 41,032
-------- -------- --------
Gross profit..................................... 329,569 205,360 125,415
Operating expenses:
Sales and marketing............................ 211,445 138,926 77,765
Research and development....................... 60,972 42,584 29,151
General and administrative..................... 38,065 24,900 17,776
Amortization of goodwill....................... 15,764 2,981 466
Acquisition-related charges.................... 3,000 42,244 16,000
-------- -------- --------
Total operating expenses..................... 329,246 251,635 141,158
-------- -------- --------
Income (loss) from operations.................... 323 (46,275) (15,743)
Interest expense................................. (20,417) (10,426) (6,054)
Interest income and other, net................... 14,437 9,975 1,729
-------- -------- --------
Loss before provision for income taxes........... (5,657) (46,726) (20,068)
Provision for income taxes....................... 13,917 4,856 2,844
-------- -------- --------
Net loss......................................... (19,574) (51,582) (22,912)
Other comprehensive income (loss):
Foreign currency translation adjustments....... (395) 5 (646)
Unrealized loss on available-for-sale
investments, net of income taxes.............. (290) (8) (19)
-------- -------- --------
Comprehensive loss............................... $(20,259) $(51,585) $(23,577)
======== ======== ========
Basic and diluted net loss per share............. $ (0.06) $ (0.18) $ (0.11)
======== ======== ========
Shares used in computing basic and diluted net
loss per share.................................. 310,817 280,988 210,764
======== ======== ========
</TABLE>
See accompanying notes
30
<PAGE>
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except shares)
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
Series B ----------------------------------------------------------------------------------------------------
redeemable Class
convertible B Notes Accumulated Total
preferred Preferred Common common Additional receivable other stockholders'
stock stock stock stock paid-in Accumulated from Deferred comprehensive equity
amount amount amount amount capital deficit stockholders compensation income (loss) (deficit)
----------- --------- ------ ------ ---------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31,
1997............ $ 20,780 $ 17 $ 57 $ - $ 32,694 $(106,879) $(544) $ (845) $ 74 $(75,426)
Issuance of
common stock,
net of issuance
costs of
$3,062.......... - - 51 - 138,156 (39) - - - 138,168
Common shares
issued under
stock option and
stock
purchase plans.. - - 7 - 3,887 (5) - - - 3,889
Issuance of
Series B
Preferred Stock,
net of issuance
costs of $10.... - 1 - - 989 - - - - 990
Issuance and
exercise of
common stock
warrants........ - - 1 - 790 (1) - - - 790
Accretion of
cumulative
dividends on
Series B
Redeemable
Convertible
Preferred
Stock........... 268 - - - - (268) - - - (268)
Conversion of
Series A and
Series B
Preferred
Stock........... (21,048) (17) 32 121 21,027 (115) - - - 21,048
Conversion of
debt
obligations..... - - 7 - 14,013 (5) - - - 14,015
Amortization of
deferred
compensation.... - - - - - - - 244 - 244
Cash
distributions to
Leader Group
Founders........ - - - - - (502) - - - (502)
Net loss........ - - - - - (22,912) - - - (22,912)
Foreign currency
translation
adjustment...... - - - - - - - - (646) (646)
Unrealized
losses on
available-for-
sale
investments, net
of tax.......... - - - - - - - - (19) (19)
-------- ---- ---- ---- -------- --------- ----- ------- ------- --------
Balance at
January 31,
1998............ - 1 155 121 211,556 (130,726) (544) (601) (591) 79,371
Issuance of
common stock.... - 3 - - 18,187 - - - - 18,190
Common shares
issued under
stock option and
stock
purchase plans.. - - 14 - 13,354 (10) - (1,650) - 11,708
Conversion of
preferred
stock........... - (4) 16 - - (12) - - - -
Conversion of
Series B and
Series A Common
Stock........... - - 50 (50) - - - - - -
Amortization of
deferred
compensation.... - - - - - - - 371 - 371
Cash
distributions to
Leader Group
Founders........ - - - - - (559) - - - (559)
Losses from
WebLogic for the
month ended
January 31,
1998............ - - - - - (456) - - - (456)
Net loss........ - - - - - (51,582) - - - (51,582)
Foreign currency
translation
adjustment...... - - - - - - - - 5 5
Unrealized
losses on
available-for-
sale
investments, net
of tax.......... - - - - - - - - (8) (8)
-------- ---- ---- ---- -------- --------- ----- ------- ------- --------
Balance at
January 31,
1999............ - - 235 71 243,097 (183,345) (544) (1,880) (594) 57,040
Issuance of
common stock.... - - 7 - 156,886 (4) - - - 156,889
Common shares
issued under
stock option and
stock
purchase plans.. - - 14 - 27,820 (11) - - - 27,823
Conversion of
debt
obligations..... - - 34 - 222,325 (17) - - - 222,342
Repayment of
notes receivable
from
shareholders.... - - - - - - 248 - - 248
Amortization of
deferred
compensation.... - - - - - - - 736 - 736
Net loss........ - - - - - (19,574) - - - (19,574)
Foreign currency
translation
adjustment...... - - - - - - - - (395) (395)
Unrealized
losses on
available-for-
sale
investments, net
of tax.......... - - - - - - - - (290) (290)
-------- ---- ---- ---- -------- --------- ----- ------- ------- --------
Balance at
January 31,
2000............ $ - $ - $290 $ 71 $650,128 $(202,951) $(296) $(1,144) $(1,279) $444,819
======== ==== ==== ==== ======== ========= ===== ======= ======= ========
</TABLE>
See accompanying notes
31
<PAGE>
BEA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal year ended January
31,
------------------------------
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net loss..................................... $ (19,574) $ (51,582) $(22,912)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.............. 7,309 4,377 2,586
Amortization of deferred compensation...... 736 371 244
Amortization of certain acquired intangible
assets and goodwill and write-off of in-
process research and development.......... 49,155 66,643 27,796
Debt conversion premium.................... 8,054 - -
Other...................................... 309 (614) 358
Changes in operating assets and
liabilities, net of business combinations:
Accounts receivable...................... (54,386) (28,856) (22,631)
Other current assets..................... (9,365) (923) 5,765
Other long-term assets................... (913) 311 53
Accounts payable......................... 6,688 1,706 2,039
Accrued liabilities...................... 44,942 17,189 2,842
Deferred revenues........................ 62,231 18,821 6,219
--------- --------- --------
Net cash provided by operating activities...... 95,186 27,443 2,359
--------- --------- --------
Investing activities:
Purchases of computer equipment, furniture
and leasehold improvements.................. (17,807) (13,188) (3,322)
Payments for business combinations, net of
cash acquired............................... (65,980) (99,432) (2,925)
Decrease in restricted cash.................. 1,869 - -
Purchases of available-for-sale short-term
investments................................. (38,030) (1,374) (8,708)
Sales of available-for-sale short-term
investments................................. - 6,187 -
--------- --------- --------
Net cash used in investing activities.......... (119,948) (107,807) (14,955)
--------- --------- --------
Financing activities:
Net payments under lines of credit........... (679) (1,200) (7,171)
Proceeds from convertible debt, notes payable
and capital lease obligations............... 535,352 244,698 6,123
Payments on shareholder notes receivable..... 248 - -
Payments on notes payable and capital lease
obligations................................. (498) (45,717) (41,143)
Distributions................................ - (559) (502)
Debt conversion premium...................... (8,054) - -
Proceeds from issuance of common and
preferred stock, net........................ 27,823 23,902 143,047
--------- --------- --------
Net cash provided by financing activities...... 554,192 221,124 100,354
--------- --------- --------
Net increase in cash and cash equivalents...... 529,430 140,760 87,758
Effect of exchange rate changes on cash........ 1,308 812 (646)
Cash and cash equivalents at beginning of
year.......................................... 232,556 90,984 3,872
--------- --------- --------
Cash and cash equivalents at end of year....... $ 763,294 $ 232,556 $ 90,984
========= ========= ========
</TABLE>
See accompanying notes
32
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Description of business
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of e-
commerce infrastructure software for e-commerce applications. BEA's products
and services enable scalable and reliable e-commerce applications to work
seamlessly in client/server, Internet, and legacy environments. BEA provides
transactional, messaging, and distributed object-based software, as well as a
Java Web application server, for developing and deploying these e-commerce
applications and for connecting e-commerce applications to legacy and
mainframe applications. BEA also provides component-based solutions for
delivering scalable and reliable e-commerce applications. In addition to its
broad software product line, BEA provides complete solutions to its customers
through its extensive partner network and a full range of services including
consulting, training, and support.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions
and balances have been eliminated. Operations of businesses acquired and
accounted for as purchases are consolidated as of the date of acquisition. On
April 30, 1998, the Company acquired Leader Group Inc. ("Leader Group") and on
September 30, 1998 acquired WebLogic, Inc. ("WebLogic") in merger transactions
accounted for as poolings of interests. All financial information for all
dates and periods prior to these mergers has been restated to reflect the
combined operations of the Company, Leader Group and WebLogic.
Use of estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ materially
from those estimates.
Foreign currencies
The assets and liabilities of foreign subsidiaries are translated from
their respective functional currencies at the rates in effect at the balance
sheet date while revenues and expense accounts are translated at weighted
average rates during the period. Foreign currency translation adjustments are
reflected as a separate component of accumulated other comprehensive income.
The Company hedges a portion of its exposure on certain intercompany
receivables and payables denominated in foreign currencies using forward
foreign exchange contracts, which are recorded at fair value based on spot
exchange rates at each balance sheet date. Gains and losses resulting from
exchange rate fluctuations on forward foreign exchange contracts are recorded
currently in interest and other expense and offset by corresponding gains and
losses on the foreign currency accounts being hedged. Net gains (losses)
resulting from foreign currency transactions, were approximately $(287,000),
$340,000 and $(600,000) in fiscal 2000, 1999 and 1998, respectively.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of highly liquid investments including
commercial paper, money market and taxable municipal bonds with maturities of
90 days or less from the date of purchase. The carrying amounts reported on
the consolidated balance sheets for cash and cash equivalents approximates
their fair market value.
33
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-term investments consist principally of commercial paper and time
deposits with remaining maturities of one year or less. The Company determines
the appropriate classification of its short-term investments at the time of
purchase and re-evaluates such designations as of each balance sheet date. All
short-term investments in the Company's portfolio are classified as
"available-for-sale" and are stated at fair market value, with the unrealized
gains and losses reported as a component of accumulated other comprehensive
income. The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income.
Concentration of credit risk
The Company invests its cash, cash equivalents and short-term investments
with financial institutions with high credit standing and, by policy, limits
the amounts invested with any one institution, type of security and issuer.
The Company sells its products to customers, typically large corporations,
in a variety of industries in the Americas, Europe and the Asia/Pacific
region. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended as deemed
appropriate, but generally requires no collateral. The Company maintains
reserves for estimated credit losses and, to date, such losses have been
within management's expectations. No customer accounted for more than 10
percent of total revenues in any of the fiscal years 2000, 1999 or 1998. There
were no customers that accounted for more than 10 percent of accounts
receivable as of January 31, 1999.
Computer equipment, furniture and leasehold improvements
Computer equipment, furniture and leasehold improvements are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
Assets under capital leases are amortized over the lesser of five years or the
life of the lease, while leasehold improvements are amortized over the shorter
of the estimated useful life or the lease term.
Acquired intangible assets and goodwill
Acquired intangible assets consist of purchased technology, purchased
software, distribution rights, patents, licenses, trademarks, non-compete
agreements, assembled workforce and customer base related to the Company's
acquisitions accounted for using the purchase method. Amortization of these
purchased intangibles and goodwill is calculated on the straight-line basis
over the respective estimated useful lives of the assets ranging from twenty-
four to sixty months. Amortization of purchased technology, purchased
software, distribution rights, patents, licenses, trademarks, non-compete
agreements, assembled workforce and customer base is included as a component
of cost of revenues, while amortization of goodwill is included in operating
expenses. Acquired in-process research and development without alternative
future use is charged to operations when acquired.
Long-lived assets
In accordance with Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed of ("FAS
121"), the Company identifies and records impairment losses, as circumstances
dictate, on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts
of those assets. No such impairments have been identified with respect to the
Company's long-lived assets, which consist primarily of acquired intangible
assets, computer equipment, furniture and leasehold improvements.
34
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Software development costs
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires
the capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model.
Costs incurred by the Company between the completion of the working model
and the point at which the product is ready for general release have been
insignificant. Accordingly, the Company has charged all such costs to research
and development expense in the period incurred.
Equity investments
The Company invests in equity instruments of privately-held companies for
business and strategic purposes. These investments are included in other long-
term assets and are accounted for under the cost method when ownership is less
than 20 percent and the Company does not have the ability to exercise
significant influence over operations. For these investments in privately-held
companies, the Company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. Investments in which ownership exceeds 20 percent, but which
are not majority-owned or controlled, are accounted for using the equity
method. Under the equity method, the Company's proportionate share of net
income or loss and amortization of the Company's net excess investment over
its equity in net assets is included in net income or loss.
Revenue recognition
The Company recognizes revenues in accordance with the American Institute
of Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition, as amended. Revenue from software license agreements is
recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, no significant vendor obligations are remaining to be
fulfilled, the fee is fixed or determinable, and collectibility is probable.
Services revenue includes consulting services, post-contract customer
support and training. Software maintenance agreements provide technical
support and the right to unspecified upgrades on an if-and-when available
basis. Consulting revenue and the related cost of services are recognized on a
time and materials basis; however, revenues from certain fixed-price contracts
are recognized on the percentage of completion basis, which involves the use
of estimates. Actual results could differ from those estimates and, as a
result, future gross margin on such contracts may be more or less than
anticipated. The amount of consulting contracts recognized on a percentage of
completion basis has not been material to date. Post-contract customer support
revenue is recognized ratably over the term of the support period (generally
one year) and training and other service revenues are recognized as the
related services are provided. The unrecognized portion of amounts paid in
advance for licenses and services is recorded as deferred revenues.
Stock-based compensation
The Company generally grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair market value of the
stock on the date of grant. As allowed under the Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation FAS 123,
the Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for stock awards to employees. Accordingly, no
compensation expense is recognized in the Company's financial statements in
connection with employee stock awards.
35
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net loss per share
The Company computes net loss per share under the provisions of Statement
of Financial Accounting Standard No. 128, Earnings per Share ("FAS 128").
Basic net loss per share is computed based on the weighted average number of
shares of the Company's common stock less the weighted average number of
shares subject to repurchase. Diluted net loss per share is computed based on
the weighted average number of shares of the Company's common stock and common
equivalent shares (stock options, warrants, convertible notes and preferred
stock), if dilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share computations (in thousands, except per share
data):
<TABLE>
<CAPTION>
Fiscal year ended January
31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Basic and diluted net loss per share:
Numerator:
Net loss................................... $(19,574) $(51,582) $(22,912)
Effect of Series B Redeemable Convertible
Preferred Stock dividends................. - - (268)
-------- -------- --------
Net loss available to common stockholders.. $(19,574) $(51,582) $(23,180)
======== ======== ========
Denominator:
Weighted average shares.................... 314,126 287,064 218,852
Weighted average shares subject to
repurchase................................ (3,309) (6,076) (8,088)
-------- -------- --------
Weighted average shares, net............... 310,817 280,988 210,764
-------- -------- --------
Basic and diluted net loss per share....... $ (0.06) $ (0.18) $ (0.11)
======== ======== ========
</TABLE>
The computation of diluted net loss per share for the fiscal years ended
January 31, 2000, 1999 and 1998 excludes the impact of options to purchase
52.3 million, 21.6 million and 23.7 million shares of common stock,
respectively; the conversion of the $550 million 4% Convertible Subordinated
Notes due December 15, 2006 ("2006 Notes") and the $250 million 4% Convertible
Subordinated Notes due June 15, 2005 ("2005 Notes"), which are convertible
into 15.8 million and 3.4 million shares of common stock, respectively; and
2.4 million shares of convertible preferred stock at January 31, 1998; as such
impact would be antidilutive for the periods presented.
Segment information
The Company follows Statement of Financial Accounting Standard No. 131,
Disclosures about Segments of an Enterprise and Related Information ("FAS
131"). FAS 131 establishes standards for reporting financial information about
operating segments in financial statements, as well as additional disclosures
about products and services, geographic areas, and major customers. The
Company operates in one operating segment.
Recent accounting pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March 2000. BEA is required to adopt
the provisions of SAB 101 in its second fiscal quarter of 2000. The Company is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption, however, the Company does not expect the adoption of
SAB 101 to have a material impact to its financial position.
36
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-9, which amends certain provisions
of Statement of Position ("SOP") 97-2 and extends the deferral of the
application of certain passages of SOP 97-2 provided by SOP 98-4 until the
beginning of BEA's fiscal year 2001. The Company is currently evaluating the
impact of SOP 98-9 on its financial statements and related disclosures.
In June 1998, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In July 1999, FAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Data of FASB Statement 133 ("FAS 137")
was issued. FAS 137 deferred the effective date of FAS 133 until the first
fiscal quarter of fiscal years beginning after June 15, 2000. The Company
expects to adopt FAS 133 effective February 1, 2001. The Company does not
expect the adoption of FAS 133 to have a material impact to its financial
position or results of operations.
2. Financial Instruments
Available-for-sale securities
The following is a summary of available-for-sale securities at January 31,
2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
January 31, 2000 January 31, 1999
----------------------------- -----------------------------
Gross Gross
Amortized unrealized Fair Amortized unrealized Fair
cost losses value cost losses value
--------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper........ $311,782 $(151) $311,631 $117,188 $(35) $117,153
Money market............ 446,106 - 446,106 82,476 - 82,476
Time deposits........... 602 - 602 3,895 - 3,895
-------- ----- -------- -------- ---- --------
$758,490 $(151) $758,339 $203,559 $(35) $203,524
======== ===== ======== ======== ==== ========
</TABLE>
Included in the above table are securities with fair values totaling $718.5
million and $199.6 million at January 31, 2000 and 1999, respectively, which
are classified as cash and cash equivalents and $39.8 million and $3.9 million
at January 31, 2000 and 1999, respectively, which are classified as restricted
cash and short-term investments in the accompanying consolidated balance
sheets. All short-term investments mature within six months. At January 31,
2000 and 1999, restricted cash includes cash equivalents of $1.4 million, none
in 1999, respectively, which collaterize standby letters of credit and
restricted time deposits of $250,000 and $3.5 million, respectively, which
collateralize borrowings (see Note 8).
37
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign currency contracts
The Company enters into forward foreign currency contracts to reduce the
exposure to foreign currency fluctuations as a result of certain intercompany
assets and liabilities denominated in foreign currencies. At January 31, 2000
and 1999, the Company had outstanding forward foreign currency contracts with
a notional amount of approximately $44.2 million and $20.0 million,
respectively. Substantially all of the Company's forward foreign currency
contracts have maturities of 90 days or less. The fair value of forward
foreign currency contracts is estimated based on the spot rate of each of the
various hedged currencies as of the end of the period.
The Company's forward foreign currency contracts notional amounts
outstanding at January 31, 2000 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
January 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Contracts to purchase foreign currency (sell U.S. dollars)
during the following year:
Euro dollars............................................ $21,800 $ -
British pounds.......................................... 10,300 1,600
German marks............................................ - 3,100
Japanese yen............................................ 2,700 2,500
French francs........................................... - 5,100
Swiss francs............................................ 2,800 100
Swedish krona........................................... 3,200 1,600
Finnish markka.......................................... - 2,600
Other................................................... 600 200
------- -------
$41,400 $16,800
======= =======
Contracts to sell foreign currency (purchase U.S. dollars)
during the following year:
Euro dollars............................................ $ 2,000 $ -
German marks............................................ - 300
Japanese yen............................................ - 600
Swiss francs............................................ - 400
Finnish markka.......................................... - 600
Other................................................... 800 1,300
------- -------
$ 2,800 $ 3,200
======= =======
</TABLE>
38
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
January 31,
--------------------------------------
2000 1999
------------------ ------------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........ $763,294 $763,294 $232,556 $232,556
Restricted cash.................. 1,631 1,631 3,500 3,500
Short-term investments........... 38,135 38,135 395 395
Financial liabilities:
Borrowings under lines of
credit.......................... - - 679 679
Notes payable, capital lease
obligations and other long-term
obligations (including current
portion)........................ 10,459 10,459 155 155
Convertible subordinated 2006
Notes........................... 550,000 598,200 - -
Convertible subordinated 2005
Notes........................... 22,484 128,400 250,000 183,500
Forward foreign currency
contracts....................... (780) (780) (206) (206)
</TABLE>
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented above are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The fair value of the 2005 and 2006 notes exceeds the carrying
amount at January 31, 2000, however, the Company's obligation to settle the
notes will at no time be greater than their face or carrying value unless a
discretionary debt conversion premium is negotiated with the holders of the
notes.
For certain of the Company's financial instruments, including cash and cash
equivalents, restricted cash, short-term investments, and notes payable, the
carrying amounts approximate fair value due to their short maturities. The
fair value of forward foreign currency contracts was based on the estimated
amount at which they could be settled based on quoted exchange rates. The fair
values of the convertible subordinated notes are estimated using quoted market
prices.
3. Computer Equipment, Furniture and Leasehold Improvements
Computer equipment, furniture and leasehold improvements consist of the
following (in thousands):
<TABLE>
<CAPTION>
January 31,
----------------
2000 1999
------- -------
<S> <C> <C>
Computer equipment......................................... $17,290 $ 8,953
Furniture and equipment.................................... 11,722 6,621
Leasehold improvements..................................... 13,269 8,273
Furniture and equipment under capital leases............... 1,510 1,789
------- -------
43,791 25,636
Accumulated depreciation and amortization.................. (15,813) (8,451)
------- -------
$27,978 $17,185
======= =======
</TABLE>
Accumulated amortization for furniture and equipment under capital leases
was approximately $936,000 and $693,000 at January 31, 2000 and 1999,
respectively.
39
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Business Combinations
The Theory Center
On November 19, 1999, BEA completed its acquisition of The Theory Center,
Inc. ("TTC"). Under the terms of the acquisition agreement, each outstanding
share of TTC common stock was converted into 0.7918276 shares of BEA common
stock. This resulted in the issuance of 7,270,828 shares of BEA common stock,
valued at $16.1875 per share. In addition, TTC options were exchanged for
options to purchase 3,642,400 shares of BEA common stock and TTC warrants were
exchanged for warrants to purchase 80,000 shares of BEA common stock. As of
January 31, 2000, approximately 763,436 shares were held in escrow, with
distributions in May 2000 and 2002. The transaction was accounted for as a
purchase. The total cost of the acquisition was approximately $156.9 million.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other tangible assets........................... $ 2,122
Liabilities assumed................................................ (6,495)
Acquired in-process research and development....................... 3,000
Goodwill........................................................... 124,493
Intangible assets.................................................. 33,800
--------
$156,920
========
</TABLE>
A valuation of the purchased assets was performed to assist in determining
the fair value of each identifiable tangible and intangible asset and in
allocating the purchase price among the acquired assets, including the portion
of the purchase price attributed to acquired in-process research and
development projects. Standard valuation procedures and techniques were
utilized in determining the fair value of the acquired core/developed and in-
process technology.
Core technology and in-process technology were identified and valued
through analysis of TTC's and BEA's current development projects, their
respective stage of development, the time and resources needed to complete
them, their expected income-generating ability, their target markets and the
associated risks.
The cost approach, which includes an analysis of the cost of reproducing or
replacing the asset, was the methodology utilized in valuing component
technology tools and assembled workforce. The income approach, which includes
an analysis of the markets, cash flows and risks associated with achieving
such cash flows, was the methodology utilized in valuing in-process
technology, completed technology, patents and non-compete agreements. Each
developmental project was evaluated to determine if there were any alternative
future uses. This evaluation consisted of a specific review of each project,
including the overall objectives of the project, progress toward such
objectives, and uniqueness of the project. The net after-tax cash flows
representing the cash flows generated by the respective core and in-process
technologies were then discounted to present value. The discount was based
upon an analysis of the weighted average cost of capital for the industry.
40
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental pro forma information reflecting the acquisition of TTC as if
it occurred at the beginning of each fiscal year (in thousands, unaudited):
<TABLE>
<CAPTION>
January 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue.................................................. $465,420 $289,042
Net loss................................................. (59,029) (86,980)
Net loss per share....................................... (0.19) (0.60)
</TABLE>
This pro forma information assumes that the acquisition of TTC occurred as
of the beginning of each fiscal period presented. Such information is not
necessarily representative of the actual results that would have occurred for
those periods.
WebLogic, Inc. and Leader Group, Inc.
On September 30, 1998 the Company issued 30,572,480 shares of its common
stock to acquire WebLogic, Inc., a San Francisco-based software company, in a
transaction accounted for as a pooling of interests. The Company's financial
statements include WebLogic's results of operations and cash flows for all
periods presented. Prior to pooling with BEA, WebLogic's fiscal year followed
the calendar year. Accordingly, the Company's consolidated financial
statements for the fiscal year ended January 31, 1998 include the financial
position of WebLogic as of December 31, 1997, and its statement of operations,
stockholders equity and cash flows for the year ended December 31, 1997.
On April 30, 1998, the Company issued 2,242,816 shares of its common stock
to acquire Leader Group, Inc., a Denver-based private company specializing in
consulting solutions for the development, deployment and delivery of mission-
critical distributed object applications, in a transaction accounted for as a
pooling of interests. The Company's consolidated financial statements include
the results of operations, financial position and cash flows of Leader Group
for the periods presented. In connection with the transaction, the Company
incurred approximately $491,000 in merger-related expenses consisting
primarily of legal and other professional fees in the first quarter of fiscal
year 1999.
As required by generally accepted accounting principles, the effect of
transactions between the Company, Leader Group and WebLogic prior to the
combination have been eliminated. There were no significant conforming
accounting adjustments.
TOP END
On June 16, 1998, the Company completed an Asset Purchase Agreement with
NCR Corporation ("NCR") under which the Company purchased the TOP END
enterprise middleware technology and product family for approximately $92.4
million in cash. The Company has accounted for the acquisition as a purchase
of assets. In connection with the purchase, the Company recorded a charge of
$38.3 million relating to acquired in-process research and development.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other intangible assets.......................... $ 7,907
Liabilities assumed................................................. (1,007)
Developed technology................................................ 39,500
Acquired in-process research and development........................ 38,300
Goodwill............................................................ 7,700
-------
$92,400
=======
</TABLE>
41
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Digital Equipment Corporation
On March 26, 1997, the Company completed an agreement with Digital
Equipment Corporation ("Digital") to acquire exclusive worldwide rights to
MessageQ, ObjectBroker and other related products. The purchase price
(including $308,000 direct acquisition costs) was approximately $20.1 million.
The acquisition was accounted for using the purchase method. Of the aggregate
consideration, $5.0 million was paid in cash on closing and aggregate payments
of $17.0 million were due pursuant to a convertible promissory note. Interest
was imputed on the convertible promissory note at 8 percent, which resulted in
the recorded liability of approximately $14.0 million on a present value
basis. In addition, the Company granted Digital a warrant to purchase
2,000,000 shares of common stock at a price of $1.50 per share.
The following is a summary of the purchase price allocation (in thousands):
<TABLE>
<S> <C>
Current assets and other tangible assets............................ $ 6,017
Liabilities assumed................................................. (6,247)
Acquired in-process research and development........................ 16,000
Developed technology................................................ 3,700
Goodwill............................................................ 613
-------
$20,083
=======
</TABLE>
In August 1997, the Company and Digital entered into an agreement whereby
the Company issued 3,703,700 shares of Common Stock and paid $4,925,000 in
full settlement of the convertible promissory note. Additionally, the Company
issued 1,456,088 shares of common stock to Digital in accordance with the
terms of Digital's exercise of the entire warrant as provided for in the
warrant agreement.
5. Acquired Intangible Assets
Acquired intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Purchased technology, distribution rights and other..... $123,751 $ 89,157
Trademarks and tradenames............................... 12,317 5,017
-------- --------
136,068 94,174
Accumulated amortization................................ (74,468) (44,077)
-------- --------
$ 61,600 $ 50,097
======== ========
</TABLE>
6. Other Long-Term Assets
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31,
--------------
2000 1999
------- ------
<S> <C> <C>
Equity investment in WebGain, Inc. .......................... $37,000 $ -
Other equity investments in private companies................ 1,060 -
Notes receivable from executive officers..................... 1,787 1,120
Debt issuance costs.......................................... 14,962 6,641
Long-term prepaids and deposits.............................. 1,349 1,216
Other long-term assets....................................... 271 150
------- ------
$56,429 $9,127
======= ======
</TABLE>
42
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 2000, the Company purchased 7,400,000 shares of WebGain, Inc.
Series A Preferred Stock for $37.0 million, representing a 48 percent
ownership interest. Warburg Pincus Equity Partners, L.P. and affiliated
entities, which are direct or indirect affiliates of BEA, hold the remaining
ownership of WebGain, Inc.
Notes receivable from executive officers of the Company are for the
financing of real property. These notes, which are secured by deeds of trust
on real property, bear interest at 7 percent per annum and are due and payable
on the earlier of dates ranging from January 1, 2001 to December 23, 2004 or
the termination of the executive's employment with the Company. The notes may
be repaid at any time prior to the due date. In March 2000, a note receivable,
for approximately $871,000, was repaid in full.
During fiscal 2000, the Company incurred $14.7 million debt issuance costs
in connection with the issuance of the 2006 Notes due December 15, 2006 (see
Note 8). The costs are being amortized to interest expense over 84 months, the
original life of the 2006 Notes. In fiscal 1999, the Company incurred $7.3
million debt issuance costs in connection with the issuance of the 2005 Notes
due June 15, 2005 (see Note 8). During fiscal 2000, approximately $227.5
million of the 2005 Notes were converted to common stock and related interest
of approximately $8.1 million was charged to interest expense. The remaining
costs are being amortized to interest expense on a straight-line basis, which
approximates the effective interest method over 84 months, the original life
of the 2005 Notes. The unamortized balance of debt issuance costs included in
other long-term assets at January 31, 2000 and 1999 were approximately $15.0
million and $6.6 million, respectively.
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31,
---------------
2000 1999
------- -------
<S> <C> <C>
Accrued payroll and related liabilities..................... $43,059 $32,120
Accrued sales taxes......................................... 11,230 3,871
Other accrued liabilities................................... 38,384 11,756
------- -------
$92,673 $47,747
======= =======
</TABLE>
8. Line of Credit, Notes Payable and Other Long-Term Obligations
Borrowings under lines of credit
At January 31, 2000, the Company had no borrowings under its line of credit
agreements. At January 31, 1999, the Company had outstanding $700,000,
pursuant to a revolving line of credit arrangement with commercial lenders in
Hong Kong. The maximum credit available under the arrangement was $2.5 million
and borrowings available under the line totaled approximately $1.8 million at
January 31, 1999. Borrowings under the credit arrangement bear interest at a
rate of 9.125 percent.
43
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes payable and other long-term obligations
Notes payable and other long-term obligations consist of the following (in
thousands):
<TABLE>
<CAPTION>
January 31,
-------------
2000 1999
------- ----
<S> <C> <C>
Capital lease obligations................................... $ - $ 88
Other notes payable......................................... 36 67
Acquisition-related liabilities............................. 9,600 -
Other long-term obligations................................. 823 -
------- ----
10,459 155
Less amounts due within one year............................ (4,454) (43)
------- ----
Notes payable and other long-term obligations due after one
year....................................................... $ 6,005 $112
======= ====
</TABLE>
Scheduled maturities of notes payable and other long-term obligations are
as follows (in thousands):
<TABLE>
<CAPTION>
Other long-
Notes term
payable obligations
------- -----------
<S> <C> <C>
January 31,
2001................................................... $21 $ 4,433
2002................................................... 15 5,947
2003................................................... - 21
2004................................................... - 22
--- -------
$36 $10,423
=== =======
</TABLE>
Convertible subordinated debt offerings
In December 1999, the Company completed the sale of the $550 million 4%
Convertible Subordinated Notes due December 15, 2006 ("2006 Notes") in an
offering to Qualified Institutional Buyers. The 2006 Notes are subordinated to
all existing and future senior indebtedness of the Company, and the principal
amount of the 2006 Notes is convertible at the option of the holder at any
time into common stock of the Company at a conversion rate of 28.86 shares per
$1,000 principal amount of 2006 Notes (equivalent to an approximate conversion
price of $34.65 per share). The 2006 Notes are redeemable at the option of the
Company in whole or in part at any time on or after December 20, 2002, in cash
plus accrued interest, if any, through the redemption date, subject to certain
events. Interest is payable semi-annually.
In June and July 1998, the Company completed the sale of the $250 million
4% Convertible Subordinated Notes due June 15, 2005 ("2005 Notes") in an
offering to Qualified Institutional Buyers. The 2005 Notes are subordinated to
all existing and future senior indebtedness of the Company, and the principal
amount of the 2005 Notes is convertible at the option of the holder at any
time into common stock of the Company at a conversion rate of 151.48 shares
per $1,000 principal amount of 2005 Notes (equivalent to an approximate
conversion price of $6.60 per share). The 2005 Notes are redeemable at the
option of the Company in whole or in part at any time on or after June 5,
2001, in cash plus accrued interest, if any, through the redemption date,
subject to certain events. Interest is payable semi-annually. During fiscal
2000, approximately $227.5 million of the 2005 Notes were converted to common
stock, leaving approximately $22.5 million as remaining principal. The Company
incurred $8.1 million of debt conversion premium, which was charged to
interest expense.
44
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The components of the provisions for income taxes consist of the following
(in thousands):
<TABLE>
<CAPTION>
January 31,
----------------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Federal:
Current............................................ $ 5,731 $1,420 $ 879
Deferred........................................... (3,800) - -
State:
Current............................................ 5,093 804 300
Foreign:
Current............................................ 6,893 2,632 1,665
------- ------ ------
Provision for income taxes....................... $13,917 $4,856 $2,844
======= ====== ======
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate (35 percent) to income tax
expense is as follows (in thousands):
<TABLE>
<CAPTION>
January 31,
---------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Tax benefit at U.S. statutory rate............ $ (1,980) $(16,355) $(7,023)
State income taxes, net of federal benefit.... 3,310 523 195
Nondeductible amortization of intangible
assets....................................... 2,336 6,511 2,720
Purchase adjustment........................... 11,830 - -
Valuation allowance........................... (16,585) 8,316 6,491
Unbenefitted foreign losses................... 5,173 3,442 -
Foreign income and withholding taxes.......... 6,893 1,056 397
Nondeductible transaction expenses............ 2,819 1,036 -
Other......................................... 121 327 64
-------- -------- -------
Provision for income taxes.................. $ 13,917 $ 4,856 $ 2,844
======== ======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
January 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue....................................... $ 8,486 $ 834
Accruals and reserves.................................. 13,195 5,915
Net operating loss carryforwards....................... 525 3,958
Property, equipment and intangible assets.............. 26,319 32,364
Other.................................................. - 1,332
-------- --------
Total deferred tax assets................................ 48,525 44,403
Valuation allowance...................................... (44,725) (44,403)
-------- --------
Net deferred tax assets.............................. $ 3,800 $ -
======== ========
</TABLE>
45
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Realization of deferred tax assets is primarily dependent on future taxable
income, if any, the timing and amount of which are uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax assets
dependent upon future taxable income at January 31, 2000 and 1999, has been
established to reflect these uncertainties. A deferred tax asset has been
established in fiscal 2000 to the extent of refundable U.S. current federal
income taxes payable. The valuation allowance increased by approximately
$322,000 and $16.6 million in fiscal years 2000 and 1999, respectively.
Approximately $25.5 million and $6.5 million of the valuation allowance at
January 31, 2000 and 1999, respectively, relates to tax benefits associated
with exercises of stock options which will reduce income taxes payable and be
credited to additional paid-in capital when realized.
As of January 31, 2000, the Company had federal net operating loss
carryforwards of approximately $1.5 million, which will expire in 2009 through
2019. Utilization of net operating loss carryforwards may be subject to
substantial limitations due to ownership change and other limitations provided
by the Internal Revenue Code and similar state provisions. These limitations
may result in the expiration of net operating loss carryforwards before full
utilization.
Pretax income (loss) from foreign operations was approximately $(25.2)
million, $(25.7) million and $8.5 million for fiscal 2000, 1999 and 1998,
respectively.
10. Series B Redeemable Convertible Preferred Stock
At January 31, 1997, the Company had outstanding 79,391,200 shares of
Series B Redeemable Convertible Preferred Stock (Series B Preferred Stock). At
the time of the Company's initial public offering of common stock in April
1997, all of the outstanding Series B Preferred Stock and accumulated
dividends were converted into common stock and Class B Common Stock.
46
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Stockholders' Equity
Share activity
The following table represents changes in shares of preferred and common
stock:
<TABLE>
<CAPTION>
Series B
redeemable
convertible Class B
preferred Preferred Common common
(in thousands) stock stock stock stock
- -------------- ----------- --------- ------- -------
<S> <C> <C> <C> <C>
Balance at January 31, 1997........... 79,392 69,644 56,920 -
Issuance of common stock, net of costs
of $3,062............................ - - 50,892 -
Shares issued under stock option and
stock purchase plans................. - - 7,248 -
Issuance of Series B Preferred Stock
net of issuance costs of $10......... - 1,428 - -
Issuance and exercise of common stock
warrants............................. - - 1,456 -
Conversion of Series A and Series B
Preferred Stock...................... (79,392) (68,664) 31,520 120,896
Conversion of debt obligations........ - - 6,972 -
------- ------- ------- -------
Balance at January 31, 1998........... - 2,408 155,008 120,896
Issuance of preferred and common
stock................................ - 14,476 764 -
Shares issued under stock option and
stock purchase plans................. - - 14,292 -
Repurchase of common shares........... - - (1,268) -
Conversion of preferred stock......... - (16,884) 16,884 -
Conversion of Class B Common Stock.... - - 49,600 (49,600)
------- ------- ------- -------
Balance at January 31, 1999........... - - 235,280 71,296
Issuance of common stock.............. - - 7,272 -
Shares issued under stock option and
stock purchase plans................. - - 13,552 -
Conversion of debt obligations........ - - 34,464 -
------- ------- ------- -------
Balance at January 31, 2000........... - - 290,568 71,296
======= ======= ======= =======
</TABLE>
Stock splits
In December 1999, the Company completed a two-for-one common stock split in
the form of a stock dividend. All common stock share information and per share
amounts in the accompanying consolidated financial statements and notes have
been retroactively adjusted to reflect the effect of the stock split.
Series A and B convertible preferred stock
In April 1997, the Company completed its initial public offering of common
stock. The offering generated net proceeds of approximately $27.7 million from
the sale of 21.6 million shares. In July 1997, the Company completed a follow-
on public offering of its common stock. The offering generated net proceeds of
approximately $110.4 million from the sale of 27.6 million shares of common
stock. At the time of the initial public offering in April 1997, all
outstanding shares of Series A Preferred Stock were converted into common
stock and Class B Common Stock.
At January 31, 1997, WebLogic had outstanding 980,000 shares of Series A
Preferred Stock and no Series B Preferred Stock. At January 31, 1998, WebLogic
had outstanding 980,000 shares of Series A Preferred Stock and 1.4 million
shares of Series B Preferred Stock. Upon the merger of BEA and WebLogic (see
Note 4) all outstanding shares of WebLogic Series A and B Preferred Stock at
January 31, 1998 were converted into approximately 2.4 million shares of BEA
common stock.
47
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common stock
In July 1999, the Company's stockholders approved an amendment to the
Company's certificate of Incorporation to increase the authorized shares of
common stock from 342,060,000 shares to 1,000,000,000 shares.
The Company has issued shares of its common stock to certain employees of
the Company, pursuant to which the Company has the right to repurchase shares
of common stock sold to such employees at the original issuance price upon the
employee's termination of employment. The repurchase option expires at the
rate of 1/48 of the total shares every month, subject to acceleration upon the
occurrence of certain events. As of January 31, 2000, approximately 3.3
million shares were subject to the Company's right of repurchase.
The Company has reserved shares of common stock for future issuance at
January 31, 2000 as follows (in thousands):
<TABLE>
<S> <C>
Shares reserved for Incentive Stock Option Plans.................... 103,614
Shares reserved for Employee Stock Purchase Plan.................... 6,492
Outstanding warrants................................................ 229
Shares reserved for conversion of convertible notes payable (2005
Notes and 2006 Notes).............................................. 19,279
-------
Total common stock reserved for future issuance................... 129,614
=======
</TABLE>
Outstanding warrants have exercise prices ranging from $0.31 to $0.56 per
share with expiration dates ranging from January 28, 2003 to September 24,
2004.
Class B common stock
In March 1997, BEA's Board of Directors authorized 140 million shares of an
additional class of common stock (Class B Common Stock). The Class B Common
Stock has the same rights, preferences, privileges and restrictions as the
common stock, except that each share of Class B Common Stock is convertible
into one share of common stock, has no voting rights except as required by
Delaware law and has no right to vote for the election of directors. The
shares of Class B Common Stock are convertible at the option of the holder
into common stock, so long as such conversion does not result in the
converting stockholder holding more than 49 percent of the Company's
outstanding voting securities. The shares of Class B Common Stock could be
automatically converted into a like number of shares of common stock upon the
occurrence of certain events.
Deferred compensation
In fiscal years 1997 and 1999, the Company recorded deferred compensation
of approximately $973,000 and $1,650,000, respectively, for certain common
stock options granted at prices below the deemed fair market value of the
Company's common stock on the date of grant. The amount of deferred
compensation is being amortized as compensation expense over the vesting
period of the underlying stock options. For the fiscal years ended January 31,
2000, 1999 and 1998, compensation expense recognized totaled $736,000,
$371,000 and $244,000, respectively.
Stockholder notes receivable
In September 1995, the Company issued 12,200,000 shares of common stock to
certain officers in exchange for cash of $325,000 and notes receivable of
$544,000. The notes receivable are issued on full recourse terms and bear
interest at 7 percent compounded semi-annually. The notes receivable are due
on September 28, 2000
48
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or within a specified period of time following termination of employment with
the Company. In fiscal 2000, $248,000 of these notes was repaid to the
Company.
12. Employee Benefit Plans
Stock option plans
Under the Company's stock option plans, incentive and nonqualified stock
options may be granted to eligible participants to purchase shares of the
Company's common stock. Options generally vest over a four-year period and
have terms of up to ten years. Annually, the number of shares available in the
plan is automatically increased by an amount up to 6.0 percent of the
outstanding shares of common stock on the last day of the immediately
preceding fiscal year less the number of shares of common stock added to the
stock purchase plan, not to exceed 24 million shares per fiscal year. The
exercise price of the stock options is determined by the Company's Board of
Directors on the date of grant and must be at least equal to the fair market
value of the stock on the grant date.
Upon the merger of BEA and WebLogic, all of the WebLogic outstanding stock
options were converted into BEA stock options. All such options were
immediately exercisable on the date of grant and are subject to vesting;
however, certain options became fully vested upon the merger. The Company has
the right to repurchase unvested shares, which right lapses ratably over the
vesting period.
Information with respect to option activity under the Company's stock
option plans are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Exercise price
Options price per per
(shares in thousands) outstanding share share
--------------------- ----------- ------------- --------
<S> <C> <C> <C>
Options outstanding at January 31,
1997................................... 27,900 $0.003-$ 1.50 $0.24
Granted............................... 24,236 $0.01 -$ 6.04 $1.50
Exercised............................. (7,360) $0.01 -$ 1.50 $0.09
Canceled.............................. (4,704) $0.01 -$ 5.00 $0.47
-------
Options outstanding at January 31,
1998................................... 40,072 $0.01 -$ 6.04 $1.00
Granted............................... 19,132 $2.50 -$ 7.04 $5.00
Exercised............................. (8,328) $0.03 -$ 5.00 $0.38
Canceled.............................. (4,660) $0.07 -$ 6.75 $3.60
-------
Options outstanding at January 31,
1999................................... 46,216 $0.03 -$ 7.04 $2.56
Granted............................... 42,746 $0.07 -$41.35 $8.56
Exercised............................. (10,235) $0.03 -$ 6.75 $1.62
Canceled.............................. (11,041) $0.03 -$34.97 $4.54
-------
Options outstanding at January 31,
2000................................... 67,686 $0.03 -$41.35 $6.17
=======
Options exercisable at January 31,
2000................................... 18,564 $0.03 -$41.35 $1.71
=======
Options available for grant at January
31, 2000............................... 35,927
=======
</TABLE>
The weighted average grant date fair value of stock options was $8.79,
$3.55 and $1.02 in fiscal years 2000, 1999 and 1998, respectively.
49
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The following table summarizes information about outstanding and
exercisable stock options at January 31, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- ---------------
Weighted
average
remaining Weighted Weighted
Number contractual average Number average
of life (in exercise of exercise
(shares in thousands) shares years) price shares price
--------------------- ------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
Range of per share exercise
prices
$ 0.03-$ 0.07................ 7,516 6.83 $ 0.07 6,526 $0.07
$ 0.12-$ 1.00................ 5,176 7.70 $ 0.38 4,350 $0.35
$ 1.50-$ 2.75................ 4,814 8.60 $ 1.70 2,568 $1.61
$ 2.88-$ 3.72................ 5,006 8.52 $ 3.36 870 $3.31
$ 3.75-$ 3.94................ 4,452 8.95 $ 3.82 474 $3.84
$ 3.97-$ 4.28................ 5,002 9.11 $ 4.04 36 $4.10
$ 4.33....................... 5,008 9.29 $ 4.33 14 $4.33
$ 4.41-$ 5.49................ 5,480 8.43 $ 5.05 1,798 $5.02
$ 5.50-$ 5.99................ 5,490 9.19 $ 5.77 634 $5.62
$ 6.03-$ 6.61................ 4,642 8.91 $ 6.23 1,208 $6.24
$ 6.72-$ 7.89................ 5,292 9.42 $ 6.91 86 $6.75
$ 8.24-$18.13................ 4,576 9.73 $11.55 - $ -
$20.32-$41.35................ 5,232 9.40 $29.35 - $ -
------ ------
67,686 18,564
====== ======
</TABLE>
Employee stock purchase plan
In March 1997, the Company's Stockholders approved an Employee Stock
Purchase Plan (the "Plan") for all employees meeting certain eligibility
criteria. Under the Plan, employees may purchase shares of the Company's
common stock, subject to certain limitations, at 85 percent of fair market
value as defined in the Plan. Annually, the number of shares available in the
Plan automatically increase by an amount equal to 6.0 percent of the
outstanding shares of common stock on the last day of the immediately
preceding fiscal year less the number of shares of common stock added to the
stock option plan, not to exceed 24 million shares per fiscal year. At January
31, 2000, 5.4 million shares had been issued under the Plan and 6.5 million
shares were reserved for issuance.
401(k) plan
The Company has a 401(k) Profit Sharing Plan (the "Plan") that allows
eligible employees to contribute up to 15 percent of their annual compensation
to the Plan, subject to certain limitations. The Company matches employee
contributions at a rate of 3 percent of salary, up to a maximum of $1,500.
Employee contributions vest immediately, whereas Company matching
contributions vest at a rate of 25 percent per year of employment. The Plan
also allows the Company to make discretionary contributions; however, none
have been made to date.
Accounting for stock-based compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under
50
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements.
Pro forma information regarding net loss and net loss per share is required
by FAS 123. This information is required to be determined as if the Company
had accounted for its employee stock options (including shares issued under
the Employee Stock Purchase Plan, collectively called "stock based awards")
granted subsequent to January 31, 1995, under the fair value method of that
statement. The fair value of the Company's stock based awards granted to
employees in fiscal years 1998 and 1997, prior to the Company's initial public
offering, was estimated using the minimum value method. Stock based awards
granted in fiscal years 2000, 1999 and 1998, subsequent to the Company's
initial public offerings, have been valued using the Black-Scholes option
pricing model. Among other things, the Black-Scholes model considers the
expected volatility of the Company's stock price, determined in accordance
with FAS 123, in arriving at an option valuation. The minimum value method
does not consider stock price volatility. Further, certain other assumptions
necessary to apply the Black-Scholes model may differ significantly from
assumptions used in calculating the value of stock based awards granted in
fiscal years 1998 and 1997 under the minimum value method.
The fair value of the Company's stock based awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Employee stock Employee stock
options purchase plan
---------------- ----------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)................. 4.30 4.71 4.50 .5 .5 .5
Risk-free interest rate.................. 5.93% 5.14% 6.12% 5.62% 5.10% 6.25%
Expected volatility...................... .81 .66 .60 .81 .66 .60
Dividends................................ - - - - - -
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected volatility of the stock
price. Because the Company's stock based awards have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
based awards.
For purposes of pro forma disclosures, the estimated fair value of the
above stock-based awards is amortized to expense over the awards' vesting
period. The Company's pro forma information follows (in thousands, except per
share amount):
<TABLE>
<CAPTION>
January 31,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss........................... $(61,707) $(86,884) $(25,713)
Pro forma basic and diluted net loss per
share....................................... $ (0.20) $ (0.31) $ (0.12)
</TABLE>
51
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Comprehensive Loss
The components of accumulated comprehensive loss are as follows (in
thousands):
<TABLE>
<CAPTION>
January 31,
--------------
2000 1999
------- -----
<S> <C> <C>
Foreign currency translation adjustment..................... $ (962) $(567)
Unrealized loss on available-for-sale investments, net of
tax of $124 and $12 in fiscal 2000 and 1999, respectively.. (317) (27)
------- -----
Total accumulated other comprehensive loss.................. $(1,279) $(594)
======= =====
</TABLE>
The related income tax effect allocated to each component of other
comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Income
Amount tax Amount
before (expense) net of
tax benefit taxes
------ --------- ------
<S> <C> <C> <C>
Fiscal 2000
Foreign currency translation adjustment......... $(395) $ - $(395)
Unrealized loss on available-for-sale
investments.................................... (414) 124 (290)
----- ---- -----
Total other comprehensive loss................ $(809) $124 $(685)
===== ==== =====
Fiscal 1999
Foreign currency translation adjustment......... $ 5 $ - $ 5
Unrealized loss on available-for-sale
investments.................................... (12) 4 (8)
----- ---- -----
Total other comprehensive loss................ $ (7) $ 4 $ (3)
===== ==== =====
Fiscal 1998
Foreign currency translation adjustment......... $(646) $ - $(646)
Unrealized loss on available-for-sale
investments.................................... (27) 8 (19)
----- ---- -----
Total other comprehensive loss................ $(673) $ 8 $(665)
===== ==== =====
</TABLE>
14. Industry and Geographic Segment Information
Information regarding the Company's operations by geographic areas at
January 31, 2000, 1999 and 1998 and for the fiscal years then ended is as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended January
31,
--------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Total revenues:
United States.................................. $276,755 $173,305 $ 96,170
Europe, Middle East and Africa................. 141,097 93,825 45,229
Asia/Pacific and other......................... 46,558 21,912 25,048
-------- -------- --------
$464,410 $289,042 $166,447
======== ======== ========
Long-lived assets (at end of year):
United States.................................. $264,865 $340,481 $127,849
Europe, Middle East and Africa................. 3,610 44,407 29,046
Asia/Pacific and other......................... 18,989 18,123 17,308
-------- -------- --------
$287,464 $403,011 $174,203
======== ======== ========
</TABLE>
52
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company assigns revenues and assets to geographic areas based on the
location from which the invoice is generated.
15. Supplemental Cash Flow Disclosures
Cash payments for interest were $11.0 million (exclusive of the debt
conversion premium of $8.1 million), $7.2 million and $6.2 million for fiscal
2000, 1999 and 1998, respectively. Cash payment for income taxes were
approximately $6.3 million, $1.6 million and $422,000 for fiscal 2000, 1999
and 1998, respectively. In fiscal 2000, the holders converted approximately
$227.5 million of the 2005 Notes into common stock. The value of stock issued
in business acquisitions for fiscal 2000 was $117.7 million.
16. Commitments and Contingencies
Operating Leases
The Company leases its facilities under operating lease arrangements. The
Company entered into agreements to sublease portions of this space. Certain of
the leases provide for specified annual rent increases as well as options to
extend the lease beyond the initial term.
Approximate annual minimum operating lease commitments and sublease rental
income are as follows (in thousands):
<TABLE>
<CAPTION>
Sublease
January 31, Commitments income
----------- ----------- --------
<S> <C> <C>
2001.................................................. $14,367 $3,716
2002.................................................. 12,114 1,299
2003.................................................. 11,341 369
2004.................................................. 10,907 43
2005.................................................. 9,804 -
Thereafter............................................ 25,530 -
------- ------
Total minimum lease payments........................ $84,063 $5,427
======= ======
</TABLE>
Total rent expense charged to operations for the fiscal years ended January
31, 2000, 1999 and 1998 was approximately $16.9 million, $11.8 million and
$6.0 million, respectively. Rental income for the facilities under sublease
was $3.6 million for the year ended January 31, 2000 and insignificant for the
years ended January 31, 1999 and 1998.
Litigation
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. While management currently believes the
amount of ultimate liability, if any, with respect to these actions will not
materially affect the financial position, results of operations, or liquidity
of the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to the Company.
Employer Payroll Taxes
The Company is subject to employer payroll taxes when employees exercise
stock options. The payroll taxes are assessed on the stock option gain, which
is the difference between the common stock price on the date of exercise and
the exercise price. The tax rate varies depending upon the employees' taxing
jurisdiction. The timing and amount of employer payroll taxes is directly
related to the timing and number of options exercised by employees, the gain
thereon and the tax rate in the applicable jurisdiction. During fiscal 2000,
the Company
53
<PAGE>
BEA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recorded employer payroll taxes related to stock option exercises of
approximately $2.0 million. Because the Company is unable to predict these
employer payroll taxes the Company is unable to predict what, if any, expense
will be recorded in a future period.
Related Party Transactions
During fiscal 2000, the Company extended two $5.0 million unsecured lines
of credit to certain officers of the Company. As of January 31, 2000, there
were no outstanding borrowings under the lines of credit.
17. Subsequent Events
In April 2000, the Company's stockholders approved an increase in the
number of authorized shares of common stock and Class B Common Stock to
1,035,000,000 shares.
In addition, in April 2000, the Company's Board of Directors approved a
two-for-one common stock split effected as a stock dividend. Shareholders of
record on April 7, 2000 (the record date) received a dividend of one share for
every share held on that date. The shares were distributed on April 24, 2000.
All share information and per share amounts in the accompanying consolidated
financial statements and notes have been retroactively adjusted to reflect the
effect of the stock split.
18. Subsequent Events (unaudited)
On March 21, 2000, the Company purchased Workflow Automation Corporation,
Inc. ("Workflow") through the issuance of 470,718 shares of BEA common stock,
valued at $49.41 per share. The acquisition will be accounted for using the
purchase method. While the Company expects a significant portion of the
purchase price to be allocated to intangible assets, the valuation of the
intangible assets and the allocation of the purchase price have not been
completed.
During March 2000, the Company made an additional $5.0 million investment
in WebGain, Inc. In April 2000, the Company issued an $18.0 million 8%
Convertible Note to WebGain, Inc., due April 2005. The Note is convertible, at
the option of the lender, at any time into Series A Preferred Stock.
Subsequent to these investments, the Company's ownership percentage remains at
48%.
On April 19, 2000, the Company completed its acquisition of The Object
People, Inc. ("TOP"). The purchase price was approximately $20.5 million in
cash. The acquisition will be accounted for using the purchase method and the
Company expects a significant portion of the purchase price to be allocated to
intangible assets.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report
(1) Index to Financial Statements
The index to the financial statements included in Part II, Item 8 of
this document is filed as part of this Report.
(2) Financial Statement Schedules
The financial statement schedule included in Part II, Item 8 of this
document is filed as part of this Report. All of the other schedules
are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or
related notes.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
2.1(5) Agreement and Plan of Reorganization among BEA Systems, Inc.,
WebLogic, Inc. and Charlotte acquisition Corp., dated as of
September 24, 1998
2.1(8) Asset Purchase Agreement by and between NCR Corporation and BEA
Systems, Inc.
3.1(3) Form of Registrant's Amended and Restated Certificate of
Incorporation
3.2(1) Registrant's Bylaws, as currently in effect along with
Certificate of Amendment of Bylaws
3.3 Form of Registrant's Amended and Restated Certificate of
Incorporation
4.1(1) Investor Rights Agreements by and among the Registrant and the
investors and the founders named therein
4.3(4) Form of Indenture Agreement for the 4% Convertible Notes due June
15, 2005
4.4(4) Form of Promissory Note for the 4% Convertible Notes due June 15,
2005
4.5(4) Form of Purchase Agreement for the 4% Convertible Notes due June
15, 2005
4.6(4) Form of Registration Rights Agreement for the 4% Convertible
Notes due June 15, 2005
4.7(9) Form of Indenture Agreement for the 4% Convertible Notes due
December 15, 2006
4.8(9) Form of Promissory Note for the 4% Convertible Notes due December
15, 2006
4.9(9) Form of Purchase Agreement for the 4% Convertible Notes due
December 15, 2006
4.10(9) Form of Registration Rights Agreement for the 4% Convertible
Notes due December 15, 2006
10.1(1)* Form of Indemnification Agreement between the Registrant and each
of its executive officers and directors
10.1(5) Agreement and Plan of Reorganization among BEA Systems, Inc. and
WebLogic, Inc. and Charlotte Acquisition Corp., dated as of
September 24, 1998.
10.1(7) Stock Purchase Agreement among BEA Systems, Inc. and Leader
Group, Inc., Jeffrey D. Peotler, Jeffrey M. Ryan, Kenneth R.
Allen and Shareholders.
10.1(1)* Employment Agreement between the Registrant and the three
founders dated as of September 28, 1995
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
10.2(1) Form of Promissory Notes entered into between the Registrant,
William T. Coleman III, Edward W. Scott, Jr. and Alfred S.
Chuang each dated September 28, 1995
10.3(1) Promissory Note secured by deed of trust entered into between
the Registrant and Edward W. Scott, Jr. and Cheryl S. Scott,
dated December 12, 1995
10.4(1) Agreement between the Registrant and Novell, dated January 24,
1996, and Amendments thereto
10.5(1) Lease Agreement between the Registrant and William H. and Leila
A. Cilker dated November 15, 1995 and First Amendment thereto
10.6(1) Stock Purchase Agreement between the Registrant and Warburg,
Pincus Ventures, L.P. dated September 28, 1995, and Amendments
thereto
10.7(1)* Registrant's 1995 Flexible Stock Incentive Plan, including forms
of agreements thereunder
10.8(3)* Registrant's 1997 Stock Incentive Plan, including forms of
agreements thereunder
10.9(3)* Registrant's 1997 Employee Stock Purchase Plan, including forms
of agreements thereunder
10.10(1) Subordinated Bridge Line of Credit between the Registrant and
Warburg, Pincus Ventures, L.P., dated January 22, 1997
10.11(2) License Agreement between the Registrant and Digital Equipment
Corporation, dated January 31, 1997 and Amendments thereto
10.12(2)* 1997 Management Bonus Plan
10.13(6) Lease agreement between the Registrant and Sobrado Interest III
for premise located at 2315 North First Street, San Jose, dated
December 26, 1997
10.14(6) Lease agreement between the Registrant and Sobrado Interest III
for premise located at 2345 North First Street, San Jose, dated
December 26, 1997
10.15 Employment Agreement between the Registrant and Alfred S. Chuang
dated as of September 1, 1999
10.16 Employment Agreement between the Registrant and William T.
Coleman III dated as of September 1, 1999
10.17 Promissory Note secured by deed of trust entered into between
the Registrant and Joe Menard and Laura Menard, dated December
15, 1999
10.18 Lease agreement between the Registrant and Russ Building for
premise located at 235 Montgomery Street, San Francisco, dated
September 24, 1999
10.19 First amendment to lease between the Registrant and Russ
Building for premise located at 235 Montgomery Street, San
Francisco, dated March 15, 2000
10.20 Registrant's 2000 Non-Qualified Stock Incentive Plan, including
forms of agreements thereunder
10.21 Promissory Note secured by deed of trust entered into between
the Registrant and Ivan Koon and Irene Li-Ping Chueng, dated
December 7, 1999
11.1 Statement re: computation of loss per share (included on page 36
of this Report)
12.1 Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedules
</TABLE>
- --------
(1) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2, filed January 31, 1997
56
<PAGE>
(2) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2/A, filed March 20, 1997
(3) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form SB-2/A, filed April 3, 1997
(4) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed September 9, 1998
(5) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed October 30, 1998
(6) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form 10-KSB, filed April 30, 1998
(7) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed August 10, 1998
(8) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form 8-K, filed June 30, 1998
(9) Incorporated by reference to such exhibit as filed in the Registrant's
Registration Statement on Form S-3, filed March 13, 2000.
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K and 8-K/A
Reports on Form 8-K and 8-K/A were filed by the Company during the last
quarter of the fiscal year ended January 31, 2000 for the acquisition of
The Theory Center. Proforma financial statements were filed on January 18,
2000 for the period ended October 31, 1999.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BEA Systems, Inc.
By: /s/ William T. Coleman III ___
William T. Coleman III
Chief Executive Officer and
Chairman of the Board
April 28, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ William T. Coleman III Chief Executive Officer April 28, 2000
------------------------------------ and Chairman of the
Board
William T. Coleman III
/s/ Alfred S. Chuang President, Chief April 28, 2000
------------------------------------ Operating Officer
Alfred S. Chuang and Director
/s/ William M. Klein Chief Financial Officer April 28, 2000
------------------------------------ and Executive Vice
President--
Administration
William M. Klein
/s/ Carol A. Bartz Director April 28, 2000
------------------------------------
Carol A. Bartz
/s/ Cary J. Davis Director April 28, 2000
------------------------------------
Cary J. Davis
/s/ Stewart K. P. Gross Director April 28, 2000
------------------------------------
Stewart K. P. Gross
/s/ William H. Janeway Director April 28, 2000
------------------------------------
William H. Janeway
/s/ Robert L. Joss Director April 28, 2000
------------------------------------
Robert L. Joss
/s/ Dean O. Morton Director April 28, 2000
------------------------------------
Dean O. Morton
</TABLE>
58
<PAGE>
BEA SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Year Ended January 31, 2000, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
beginning of end of
period Additions Deductions period
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
January 31, 2000
Allowance for doubtful
accounts............... $3,661 $3,312 $1,461 $5,512
January 31, 1999
Allowance for doubtful
accounts............... 2,033 2,806 1,178 3,661
January 31, 1998
Allowance for doubtful
accounts............... 1,098 1,336 401 2,033
</TABLE>
59
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BEA SYSTEMS, INC.
BEA Systems, Inc., a corporation organized and existing under the laws of
the State of Delaware, (the "Corporation") hereby certifies as follows:
FIRST: That, at a meeting of the Board of Directors of the Corporation
held on February 22, 2000, the Board of Directors adopted a resolution proposing
and declaring advisable the following amendment to the Amended and Restated
Certificate of Incorporation of the Corporation:
RESOLVED, that Article FOURTH of the Corporation's Amended and
Restated Certificate of Incorporation shall be amended, subject to
stockholder approval, to read in its entirety as follows:
"FOURTH: The Corporation is authorized to issue two classes of
shares, designated "Preferred Stock" and "Common Stock." The total number
of shares which the Corporation is authorized to issue is One Billion Forty
Million (1,040,000,000). One Billion Thirty-Five Million (1,035,000,000)
shares shall be Common Stock, $0.001 par value, (the "Common Stock"), of
which thirty-five million (35,000,000) shares are hereby designated Class B
Common Stock. Five million (5,000,000) shares shall be Preferred Stock,
$0.001 par value (the "Preferred Stock"). The undesignated shares of
Preferred Stock shall be issued from time to time in one or more series.
The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Amended and Restated Certificate of
Incorporation, to fix or alter the individual rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, the liquidation
preference of any wholly unissued shares of Preferred Stock, and the number
of shares constituting any such series and the designation thereof, or any
of them, and to increase or decrease the number of shares of any series
subsequent to the issue of shares of that series, but not below
<PAGE>
the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, 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."
SECOND: That the stockholders of the Corporation have approved at a
Special Meeting of Stockholders held on April 6, 2000 said amendment in
accordance with the provisions of Section 228 of the General Corporation Law of
the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
applicable provisions of Sections 242 and 228 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, BEA Systems, Inc. has caused this Certificate of
Amendment to Amended and Restated Certificate of Incorporation to be signed by
its Chief Executive Officer and attested to by its Secretary this 6th day of
April, 2000.
BEA SYSTEMS, INC.
By _______________________________________
William T. Coleman III
Chief Executive Officer
ATTEST:
__________________________
Robert Donohue
Secretary
<PAGE>
EXHIBIT 10.15
BEA SYSTEMS, INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, is entered into as of September 1, 1999, between
BEA Systems, Inc., a Delaware corporation (the "Company"), and Alfred S. Chuang
("Employee").
R E C I T A L S
---------------
A. Employee entered into an Employment Agreement with the Company dated
September 28, 1995 (the "1995 Agreement"), which expired on September 28, 1999.
B. Company desires to obtain the continued services of Employee, on its own
behalf and on behalf of all existing and future Affiliated Companies (defined to
mean any corporation or other business entity or entities that directly or
indirectly controls, is controlled by, or is under common control with the
Company), and Employee desires to secure continued employment from the Company
upon the following terms and conditions.
A G R E E M E N T
-----------------
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Position, Period of Employment.
------------------------------
(a) Period of Employment. The Company hereby employs Employee to
--------------------
render services to the Company in the position and with the duties and
responsibilities described in Section 1(b) for the period (the "Period of
Employment") commencing on the date of this Agreement and ending the earlier of
(i) May 17, 2003; or (ii) the date this Agreement is terminated in accordance
with Section 3 below.
(b) Position. Employee will serve as the Company's Board Member,
--------
President, Business Operations, and Chief Operating Officer (or in such other
position(s) as the Board of Directors of the Company (the "Board") shall
designate). Employee shall devote his full time and attention and his best
efforts to the performance of the services customarily incident to such office
and to such other services as may be reasonably requested by the Board.
(c) Other Activities. Except upon the prior written consent of the
----------------
Board, Employee, during the Period of Employment, will not (i) accept any other
employment; (ii) engage, directly or indirectly, in any other business activity
(whether or not pursued for pecuniary advantage) that is or may be competitive
with, or that might place him in a competing position to that of the Company or
any Affiliated Company, as determined in the discretion of the Board; or (iii)
engage in any work or business activity of any kind outside those of the
Company.
1
<PAGE>
2. Compensation, Benefits, Expenses.
--------------------------------
(a) Compensation. In consideration of the services to be rendered
------------
hereunder, including, without limitation, services to any Affiliated Company,
Employee shall be paid an annual salary of Three Hundred Thousand Dollars
($300,000.00), payable at the times and pursuant to the procedures regularly
established, and as they may be amended, by the Company during the Period of
Employment. This rate shall be reviewed annually on a calendar year basis, in
accordance with the Company's salary review practices, and adjusted in the sole
discretion of the Board of the Company to reflect increases in the cost of
living and such other increases as are awarded in accordance with the Company's
regular salary review practices for giving salary increases to similarly
situated employees.
(b) Stock Options. Employee is eligible to receive options ("Shares")
-------------
under the Company's 1997 Flexible Stock Incentive Plan (the "Option Plan") and
such other option plans as the Company may from time to time adopt, as approved
by the Board or a Committee (as defined in the Option Plan) thereof. Twenty-five
percent (25%) of the Shares subject to the Option Plan shall vest twelve months
after the date of an Award (as defined in the Option Plan) (the "Vesting
Commencement Date"), and 1/48 of the remaining Shares subject to the Option Plan
shall vest on each monthly anniversary of the Vesting Commencement Date
thereafter. On May 17, 1999, the Board granted Employee the option to purchase
500,000 shares of the common stock of the Company ("Common Stock") at an
exercise price of $17.3125 per share. Such options are transferable to the
extent provided in the agreement evidencing a grant of an Award and such
agreement is amended as described in Exhibit E.
(c) Bonus. Employee shall be eligible to participate in such bonus
-----
plans as the Company may from time to time adopt for the benefit of similarly
situated employees of the Company. Employee's right to receive any such bonus
shall be subject to the terms of any Company bonus plan for which he may become
a participant and the terms determined by the Board or a Committee thereof
designating him as a participant or granting him an Award thereunder.
(d) Vacation. Employee shall be entitled to vacation in accordance
--------
with the Company's vacation policies for similarly situated employees, as such
policies may be amended from time to time.
(e) Benefits. As he becomes eligible therefor, the Company shall
--------
provide Employee with the right to participate in and to receive benefits from
all present and future life, accident, disability, medical, pension, and savings
plans and all similar benefits made available generally to similarly situated
employees of the Company. The amount and extent of benefits to which Employee is
entitled shall be governed by the specific benefit plan, as it may be amended
from time to time.
(f) Expenses. The Company shall reimburse Employee for reasonable
--------
travel and other business expenses incurred by Employee in the performance of
his duties hereunder in accordance with the Company's general policies, as they
may be amended from time to time during the course of this Agreement.
2
<PAGE>
3. Termination of Employment.
-------------------------
(a) By Death. The Period of Employment shall terminate automatically
--------
upon the death of the Employee; provided however that the Company shall pay to
the Employee's beneficiaries or estate, as appropriate, the compensation to
which he is entitled pursuant to Sections 2(a) and 2(c) and the benefits to
which he is entitled pursuant to Section 2(e) shall continue through the end of
the Period of Employment, on the same time schedule as if Employee were living.
The level of bonus compensation payable pursuant to said Section 2(c) shall be
80% of the target bonus for Employee for the year of termination as reasonably
determined by the Board. Thereafter, the Company's obligations hereunder shall
terminate. Nothing in this Section shall affect any entitlement of the
Employee's heirs to the benefits of any life insurance plan.
(b) By Disability. If the Employee becomes "permanently disabled" as
-------------
determined for purposes of the disability insurance policy provided by the
Company for Employee, then, to the extent permitted by law, the Period of
Employment shall terminate as of the date that Employee shall be deemed to have
become "permanently disabled" for purposes of such disability insurance policy,
provided, however that, the compensation to which Employee is entitled pursuant
to Sections 2(a) and 2(c) (net of amounts paid to Employee pursuant to said
disability insurance policy) and the benefits to which he is entitled pursuant
to Section 2(e) shall continue through the end of the Period of Employment, on
the same time schedule as if Employee were not disabled. The amount of bonus
payable to Employee pursuant to this Section 3(b) shall be calculated in the
manner set forth in Section 3(a) above. Thereafter, the Company's obligations
hereunder shall terminate. Employee shall continue to be receive benefits under
any disability plan in which Employee is a participant to the extent permitted
under the applicable plan.
(c) By Company For Cause. The Company may terminate, without
--------------------
liability, the Period of Employment for Cause (as defined below) at any time
upon ten (10) days' advance written notice to Employee, unless the Company
terminates Employee's Period of Employment under Section 3(c)(ii) in which case
the Company shall provide thirty (30) days' advance written notice to Employee.
The Company shall pay Employee the compensation to which he is entitled pursuant
to Section 2(a) through the end of the notice period and thereafter the
Company's obligations hereunder shall terminate. The Company may terminate the
employment of the Employee and all of the Company's obligations under this
Agreement at any time for "cause" by giving the Employee notice of such
termination, with reasonable specificity of the details thereof. For the
purposes of this Section 3(c), "Cause" shall mean: (i) the Employee's material
misconduct which could reasonably be expected to have a material adverse effect
on the business and affairs of the Company, including but not limited to fraud,
misappropriation, embezzlement; (ii) the Employee's failure to substantially
perform his duties under this Agreement and such failure is not cured by
Employee within thirty (30) days written notice to Employee by the Board; (iii)
Employee is convicted of a felony, a crime involving moral turpitude, or
criminal act against the Company or any Affiliated Company thereof or any of the
assets of any of them; (iv) the Employee's willful breach of any material
provision of this Agreement or other agreements between the Employee and the
Company. A termination pursuant to Section 3(c) (i), (iv) shall take effect 10
days after the giving of the notice contemplated hereby unless the Employee
shall, during such 10-day period, remedy to the satisfaction of the Board of
Directors of the Company
3
<PAGE>
the misconduct or breach specified of such notice; provided, however, that such
-------- -------
termination shall take effect immediately upon giving of such notice if the
Board of Directors of the Company shall have determined that such misconduct or
breach is not remediable which determination shall be stated in such notice. A
determination pursuant to Section 3(c) (iii) shall take effect immediately upon
giving of the notice contemplated hereby.
(d) At Will by Employee. At any time and subject to Section 3(g)
-------------------
below, Employee may terminate the Period of Employment without cause, on written
notice to the Company. In the event Employee elects to terminate the Period of
Employment pursuant to this Section 3(d), Employee shall give the Company not
less than two (2) weeks notice of such termination. If the Employee terminates
his employment pursuant to this Section 3(d), the Company shall pay Employee the
compensation to which he is entitled pursuant to Section 2(a) through the end of
the notice period and thereafter all obligations of the Company shall terminate.
(e) At Will by the Company. At any time, the Company may terminate the
----------------------
Period of Employment for any reason, without cause, upon ten (10) days' written
notice to the Employee. In the event the Company elects to terminate the Period
of Employment pursuant to this Section 3(e), the Company shall retain Employee
as a consultant to the Company for a period commencing on the date of such
termination and continuing until the expiration of the Period of Employment (the
"Consultancy Period"), during which time Employee agrees to be available (which
may include availability via telephone) to perform certain consulting services
regarding the business of the Company which shall be mutually agreed upon
between the Company and Employee at mutually agreeable places and times. The
Company agrees that such consultancy work will not exceed 40 hours per week.
Employee shall continue to receive payment of his compensation under Sections
2(a), 2(c) and 2(f) during the Consultancy Period and his benefits described in
Section 2(e) as well as continued stock option vesting in accordance with
Employee's stock option agreement (unless Employee's stock options immediately
vest pursuant ot the terms of any applicable stock option agreement(s)), whether
the Company utilizes Employee's consulting services or not; provided that if (i)
-------- ----
any of the events listed in paragraph (c) of this Section 3 occur then the
Company's obligations hereunder shall be governed in accordance with the
applicable paragraph or (ii) Employee breaches Sections 3(h), 3(i) and/or 4
hereof, including a violation of his Proprietary Information and Inventions
Agreement (described at Section 4 below), then all of the Company's obligations
hereunder shall cease immediately. The amount of bonus payable to Employee
pursuant to this Section 3(e) shall be calculated in the manner set forth in
Section 3(a) above through the end of the Consultancy Period. Employee hereby
agrees that the Company may terminate the Period of Employment under this
Section 3(e) and subject to the provisions contained herein without regard (i)
to any general or specific policies (whether written or oral) of the Company
relating to the employment or termination of its employees, or (ii) to any
statements made to Employee, whether made orally or contained in any document
other than this Agreement, pertaining to Employee's relationship with the
Company. During the Consultancy Period, Employee agrees not to compete with the
business of the Company during such Consultancy Period as set forth in Section
3(i) hereof.
(f) Termination by Employee for Good Reason Following Corporate
-----------------------------------------------------------
Transaction. At any time following a Corporate Transaction (For purposes of this
- -----------
Agreement, a "Corporate Transaction" shall include any of the following
transactions to which the Company is a party: (i)
4
<PAGE>
a merger or consolidation in which the Company is not the surviving entity and
securities representing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities are transferred to holder
different from those who held such securities immediately prior to such merger;
(ii) the sale, transfer or other disposition of all or substantially all of the
assets of the Company in liquidation or dissolution of the Company; or (iii) any
reverse merger in which the Company is the surviving entity but in which
securities representing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities are transferred to holder
different from those who held such securities immediately prior to such merger.
In addition, a Corporate Transaction shall also include a Change of Control as
such is defined in the Option Plan and without limitation of Employee's rights
under Section 3(d) above, Employee may terminate the Period of Employment for
Good Reason (as defined below) on not less than two (2) weeks written notice to
the Company. In the event of a termination by Employee for Good Reason pursuant
to this Section 3(f), the Company shall retain Employee as a consultant to the
Company, subject to the same terms and conditions of the Consultancy Period set
forth in Section 3(e) above. The following shall constitute a termination by
Employee for "Good Reason" if: (i) without Employee's express written consent
there is an assignment to the Employee of any duties or the reduction of the
Employee's duties, either of which is materially inconsistent with Employee's
position or responsibilities with the Company in effect immediately prior to
such assignment, except in connection with the termination of the Period of
Employment for Cause, or due to disability or death; (ii) there is a reduction
by the Company in the Employee's annual salary then in effect other than a
reduction similar in percentage to a reduction generally applicable to similarly
situated employees of the Company; or (iii) a material reduction by the Company
in the kind or level of benefits provided to Employee under any benefit plan of
the Company in which the Employee is participating, including the bonus
described in Section 2(c), with the result that Employee's overall benefits
package is significantly reduced, unless similar reductions are made to the
overall benefits package of similarly situated employees of the Company; (iv)
there is a relocation of the Employee to a facility or a location more than 50
miles from the Company's present location, without the Employee's express
written consent; or (v) any material breach by the Company of any material
provision of this Agreement.
(g) Company Right to Require Consulting Services. In the event of a
--------------------------------------------
termination of the Period of Employment pursuant to Section 3(c) and 3(d) above,
the Company shall have the option, exercisable on written notice to Employee
within twenty (20) days following such termination of the Period of Employment,
to require Employee to provide consulting services upon the same terms provided
in Section 3(e) above, including without limitation, Employee's duties not to
compete with the Company as provided in Section 3(i), except that: (i) the
Company may thereafter terminate the Consultancy Period on thirty (30) days
notice to Employee; and (ii) the compensation payable to Employee during the
Consultancy Period shall be equal to Employee's salary payable pursuant to
Section 2(a) hereof as prorated and reduced to be equal to an hourly rate
(assuming forty (40) hours work weeks and forty-eight (48) full weeks of service
during a year), and Employee shall be so paid by the Company at such hourly rate
for such consulting services based on the greater of: (i) the actual number of
hours of consulting services provided by Employee; and (ii) ten (10) hours per
calendar month; provided, that if the Company requires in excess of twenty (20)
hours per week of consulting, then the Company shall compensate Employee and
provide benefits and bonuses as if Employee is working full time during the
Consultancy Period. The Company may require up to a maximum of forty (40) hours
5
<PAGE>
per week of consulting services. In the event that the Company requires less
than forty (40) hours of consulting services per week, then the Company may not
prevent Employee from accepting other employment or engaging in any work or
other activity of any kind during the Consultancy Period provided that such
employment, work or activity is not competitive with the core application server
business of the Company (as defined in Section 3(i) hereof) and Employee may
accept such other noncompetitive employment or engage in other noncompetitive
work or business activities during the Consultancy Period. The Company
acknowledges that once it chooses to require less than forty (40) hours per week
of consulting services from Employee that the Company may not later unilaterally
increase the consulting services required of Employee to forty (40) hours per
week or restrict Employee's ability to accept other noncompetitive employment or
engage in other noncompetitive work or activities without Employee's consent,
which may be withheld in Employee's discretion.
(h) Other Termination Obligations.
-----------------------------
(1) Employee hereby acknowledges and agrees that all personal
property, including, without limitation, all books, manuals, records, reports,
notes, contracts, computer files, lists, blueprints, and other documents, or
materials, or copies thereof, proprietary information, and equipment furnished
to or prepared by Employee in the course of or incident to his employment,
including, without limitation, records and any other materials pertaining to the
Company's proprietary information, belong to the Company and shall be promptly
returned to the Company upon termination of the Period of Employment. Following
termination, the Employee will not retain any written or other tangible material
containing any Proprietary Information or information pertaining to the
Company's proprietary information.
(2) Upon termination of the Period of Employment, the Employee
shall be deemed to have resigned from all offices and directorships then held
with the Company or any Affiliated Company.
(3) Employee agrees that he will not, either directly or
indirectly, for a period of two (2) years following the termination of the later
of the Period of Employment or the Consultancy Period: (i) contact, for purposes
of soliciting employment, any employee of the Company; or, (ii) contact for the
purpose of inducing any termination or breach of any contractual relationship
with the Company, any individual or entity that has a contractual relationship
with the Company.
(4) Employee agrees to comply with the covenant not to compete as
set forth in such Section 3(i).
(i) Covenant not to Compete. During the Consultancy Period, Employee
-----------------------
agrees not to compete with the business of the Company during such Consultancy
Period, anywhere within, from or into the countries listed in Exhibit A and from
---------
or into any additional countries where the Company does business at the time of
termination of Employee's employment. For purposes of this Section 3(i),
Employee shall be deemed to compete if he either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director
or in any other individual or representative capacity engages or participates,
or makes preparations to establish, any business that conducts the same or
substantially the same business as or is
6
<PAGE>
competitive with the business which is conducted by the Company on the date of
Employee's termination, including, without limitation, work relating to Encina,
Unikix, CICS/9000 and any activity engaged in by the Company during the twelve
months immediately preceding the date of termination of the Period of Employment
or any activity contemplated by the Company on the date of such termination.
Nothing contained in this Section 3(i) shall be construed to prohibit Employee
from purchasing and owning (directly or indirectly) up to one percent (1%) of
the capital stock or other securities of any corporation or other entity whose
stock or securities are traded on any national or regional securities exchange
or the national over-the- counter market and such ownership shall not constitute
a violation of this Section 3(i). In the event of a termination of the Period of
Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the
option, exercisable on written notice to Employee within twenty (20) days
following such termination of the Period of Employment, to require Employee to
provide consulting services upon the same terms provided in Section 3(g) above,
including without limitation, Employee's duties not to compete with the Company
as provided herein.
4. Proprietary Information Agreement. As a condition to his employment with
---------------------------------
the Company, Employee shall execute and deliver a copy of the Company's standard
form Employee Proprietary Information and Inventions Agreement in substantially
the form of Exhibit B attached hereto and incorporated herein. Any breach by
---------
Employee of such agreement shall be deemed a breach of this Agreement for
purposes of Section 3(c) hereof. Employee's obligations under such Employee
Proprietary Information and Inventions Agreement shall survive any termination
of the Period of Employment. Employee agrees to comply with the covenants
contained in Sections 3(h)(3)-(4) and 3(i) of this Agreement, in addition to any
and all covenants contained in the Employee Proprietary Information and
Inventions Agreement he executes in accordance with this Section 4.
5. Loan to Employee. The Company agrees to lend certain amounts to Employee
----------------
as provided below, which loan need not be secured by assets of Employee. Each
loan will be evidenced by a full recourse promissory note in substantially the
form attached hereto as Exhibit C.
---------
(a) Line of Credit. Employee shall be extended a line of credit for a
--------------
maximum of Five Million Dollars ($5,000,000.00) (the "Line of Credit"). All
advances are subject to the review of and approval by the Company's Chief
Financial Officer. Funds shall be advanced upon written notice for funds by
Employee to Company (the "Advance"). All funds together with interest from the
date of the Advance shall accrue at the applicable federal rate on the date of
the Advance, compounded semiannually and shall be due and payable within ninety
(90) days upon the earlier of (i) the date the prior 30 day average fair market
value of a share of the Common Stock of the Company increases by at least 50%
over the fair market value of a share of the Company's Common Stock on the date
of the Advance and (ii) the date of termination of employment pursuant to
Section 3. For purposes of this Section 5, the fair market value of a share of
the Common Stock of the Company shall mean the closing price for a share for the
last market trading day prior to the time of the determination (or, if no
closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by the Company to
be the primary market for the Common Stock as reported in The Wall Street
Journal or such other source as the Company deems reliable.
7
<PAGE>
6. Additional Bonus. Provided that the employee continues to be employed by
----------------
the Company, an additional bonus amount will be paid at the end of each calendar
quarter in the amount of $18,450 (gross) for the duration of this agreement.
7. Assignment; Successors and Assigns. Employee agrees that he will not
----------------------------------
assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or
involuntarily, or by operation of law, any rights or obligations under this
Agreement, nor shall Employee's rights be subject to encumbrance or the claims
of creditors. Any purported assignment, transfer, or delegation shall be null
and void. Nothing in this Agreement shall prevent the consolidation of the
Company with, or its merger into, any other corporation, or the sale by the
Company of all or substantially all of its properties or assets, or the
assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest or any Affiliated Company.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors, and permitted assigns, and shall not benefit any person or entity
other than those enumerated above. Without limitation of the foregoing, any such
successor in interest (including an entity which acquires substantially all the
assets and the business of the Company) in such acquisition transaction or any
Affiliated Company shall be bound by all of the terms and conditions of this
Agreement.
8. Notices. All notices or other communications required or permitted
-------
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
BEA Systems, Inc.
2315 North First Street
San Jose, CA 95151
Attn: Chief Financial Officer
or to the Employee at: Alfred S. Chuang
c/o Morrison & Foerster
755 Page Mill Rd.
Palo Alto, CA 94304
Notice of change of address shall be effective only when done in accordance with
this Section.
9. Entire Agreement. The terms of this Agreement are intended by the
----------------
parties to be the final expression of their agreement with respect to the
employment of Employee by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative, or other legal proceeding involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified, amended, or
-------------------
terminated except by an instrument in writing, signed by the Employee and by a
duly authorized representative of the Company other than Employee. By an
instrument in writing similarly executed, either party may waive compliance by
the other party with any provision of this
8
<PAGE>
Agreement that such other party was or is obligated to comply with or perform,
provided, however, that such waiver shall not operate as a waiver of, or
estoppel with respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy, or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power hereunder preclude any other or further exercise thereof
or the exercise of any other right, remedy, or power provided herein or by law
or in equity.
11. Severability; Enforcement. If any provision of this Agreement, or the
-------------------------
application thereof to any person, place, or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable, or void, the
remainder of this Agreement and such provisions as applied to other persons,
places, and circumstances shall remain in full force and effect. It is the
intention of the parties that the covenants contained in Section 3(i) shall be
enforced to the greatest extent in time, area, and degree of participation as is
permitted by the law of that jurisdiction whose law is found to be applicable to
any acts allegedly in breach of these covenants.
12. Governing Law. The validity, interpretation, enforceability, and
-------------
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
13. Employee Acknowledgment. Employee acknowledges (i) that he has
-----------------------
consulted with or has had the opportunity to consult with independent counsel of
his own choice concerning this Agreement and has been advised to do so by the
Company, and (ii) that he has read and understands the Agreement, is fully aware
of its legal effect, and has entered into it freely based on his own judgment.
14. Exclusive. Both parties agree that this Agreement shall provide the
---------
exclusive remedies for any breach by the Company of its terms.
9
<PAGE>
The parties have duly executed this Agreement as of the date first
written above.
COMPANY: EMPLOYEE:
BEA SYSTEMS, INC.
By: /s/ Robert F. Donohue /s/ Alfred S. Chuang
_________________________________ _______________________________
Alfred S. Chuang
Title: V.P., Legal & Secretary
______________________________
10
<PAGE>
EXHIBIT A
to
EMPLOYMENT AGREEMENT
--------------------
England
France
Germany
Japan
United States
11
<PAGE>
EXHIBIT B
BEA SYSTEMS, INC.
September, 1999
EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
---------------------------------------------------------
(Rev. 9/23/98)
In consideration of my employment by BEA Systems, Inc., a Delaware
corporation (the "Company"), I hereby agree to certain restrictions placed by
the Company on my use and development of information and technology of the
Company, as more fully set out below.
1. Proprietary Information.
-----------------------
(a) Confidential Restrictions. I understand that, in the course of my
-------------------------
work as an employee of the Company, I may have access to Proprietary
Information (as defined below) concerning the Company. I acknowledge
that the Company has developed, compiled, and otherwise obtained, often
at great expense, this information, which has great value to the
Company's business. I agree to hold in strict confidence and in trust
for the sole benefit of the Company all Proprietary Information and will
not disclose any Proprietary Information, directly or indirectly, to
anyone outside of the Company, or use, copy, publish, summarize, or
remove from Company premises such information (or remove from the
premises any other property of the Company) except (i) during my
employment to the extent necessary to carry out my responsibilities as
an employee of the Company or (ii) after termination of my employment,
as specifically authorized in writing by a duly authorized officer of
the Company. I further understand that the publication of any
Proprietary Information through literature or speeches must be approved
in advance in writing by a duly authorized officer of the Company.
(b) Proprietary Information Defined. I understand that the term
-------------------------------
"Proprietary Information" in this Agreement means all information and
any idea whether disclosed to, learned by or developed by me, pertaining
in any manner to the business of the Company or to the Company's
affiliates, consultants, or business associates, unless (i) the
information is or becomes publicly known through lawful means; (ii) the
information was rightfully in my possession or part of my general
knowledge prior to my employment by the Company; or (iii) the
information is disclosed to me without confidential or proprietary
restriction by a third party who rightfully possesses the information
(without confidential or proprietary restriction) and did not learn of
it, directly or indirectly, from the Company. I understand that this
definition includes information or ideas in any form, tangible or
intangible, including without limitation, all documents, books, papers,
drawings, models, sketches, and other data of any kind and description,
including electronic data recorded or retrieved by any means, that have
been or will be given to me by the Company (or any affiliate of it), as
well as written or
12
<PAGE>
verbal instructions or comments. I further understand that the Company
considers the following information to be included, without limitation, in
the definition of Proprietary Information: (A) schematics, techniques,
employee suggestions, development tools and processes, computer printouts,
computer programs, design drawings and manuals, electronic codes, formulas
and improvements; (B) information about costs, profits, markets, sales,
customers, potential customers targeted by the Company and bids; (C) plans
for future development and new product concepts, business marketing plans;
and (D) corporate organization, personnel files, salary ranges and
information about the compensation, equity and benefits provided to other
employees.
(c) Information Use. I agree that I will maintain at my work area or in other
---------------
places under my control only such Proprietary Information that I have a
current "need to know," and that I will return to the appropriate person or
location or otherwise properly dispose of Proprietary Information once my
need to know no longer exists. I agree that I will not make copies of
information unless I have a legitimate need for such copies in connection
with my work.
(d) Prior Actions and Knowledge. I hereby represent and warrant that from the
---------------------------
time of my first contact or communication with the Company I have held in
strict confidence and in trust for the sole benefit of the Company all
Proprietary Information and have not disclosed any Proprietary Information,
directly or indirectly, to anyone outside of the Company, or used, copied,
published, or summarized any Proprietary Information except to the extent
permitted by Section 1(a) above. Except as disclosed on Schedule A to this
---------
Agreement, I do not know anything about the Company's business or
Proprietary Information, other than information I have learned from the
Company in the course of being hired.
(e) Third Party Information. I recognize that the Company has received and in
-----------------------
the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain
the confidentiality of such information and to use it only for certain
limited purposes. I agree that I owe the Company and such third parties,
during the term of my employment and thereafter, a duty to hold all such
confidential or proprietary information in the strictest confidence and not
to disclose it to any person, firm, or corporation (except as necessary in
carrying out my work for the Company consistent with the Company's
agreement with such third party) or to use it for the benefit of anyone
other than for the Company or such third party (consistent with the
Company's agreement with such third party) without the express written
authorization of a duly authorized officer of the Company.
(f) Interference with Business. I hereby acknowledge that pursuit of the
--------------------------
activities forbidden by this paragraph 1(f) would necessarily involve the
use or disclosure of Proprietary Information in breach of paragraph 1(a),
but that proof of such breach would be extremely difficult. To forestall
such disclosure, use, and breach, I agree that for the term of this
Agreement and for a period of one (1) year after termination of my
employment with the Company, I shall not, for myself or any
13
<PAGE>
third party, directly or indirectly (i) divert or attempt to divert from
the Company (or any affiliate of it that might be formed) any business of
any kind in which it is engaged, including, without limitation, the
solicitation of or interference with any of its suppliers or customers or
(ii) solicit, recruit or encourage to leave their employment or recommend
for employment any person employed by the Company. Furthermore, I agree
that during the period of my employment with the Company I shall not engage
in any business activity that is or may be competitive with the Company,
except where I can prove that the action was taken without the use in any
way of Proprietary Information. I understand that this paragraph 1(f) does
not prevent me from working for a competitor following termination of my
employment with the Company as long as I am able to and do comply with the
provisions of this Agreement.
2. Inventions.
----------
(a) Defined; Statutory Notice. I understand that during the term of my
-------------------------
employment, there are certain restrictions on my development of
technology, ideas, and inventions, referred to in this Agreement as
"Invention Ideas." The term Invention Ideas means all ideas,
processes, inventions, technology, designs, formulas, discoveries,
patents, copyrights, and trademarks, and all improvements, rights, and
claims related to the foregoing, that are conceived, developed, or
reduced to practice by me alone or with others except to the extent
that California Labor Code Section 2870 lawfully prohibits the
assignment. I understand that Section 2870(a) provides:
Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in
an invention to his or her employer shall not apply to an invention
that the employee developed entirely on his or her own time without
using the employer's equipment, supplies, facilities, or trade secret
information except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(2) Result from any work performed by the employee for the employer.
(b) Disclosure. I agree to maintain adequate and current written
----------
records on the development of all Invention Ideas and to disclose
promptly to the Company all Invention Ideas and relevant records,
which records will remain the sole property of the Company. I further
agree that all information and records pertaining to any idea,
process, invention, technology, design, formula, discovery, patent,
copyright or trademark, that I do not believe to be an Invention Idea,
but is conceived, developed, or reduced to practice by me (alone or
with others) during my period of employment or during the one-year
period following termination of my employment, shall be promptly
disclosed to the Company (such disclosure to be
14
<PAGE>
received in confidence). The Company shall examine such information to
determine if in fact it is an Invention Idea subject to this Agreement.
(c) Assignment. I agree to assign to the Company, without further
----------
consideration, my entire right, title, and interest (throughout the United
States and in all foreign countries), free and clear of all liens and
encumbrances, in and to each Invention Idea, which shall be the sole
property of the Company, whether or not copyrightable or patentable. In
the event any Invention Idea shall be deemed by the Company to be
copyrightable or patentable or otherwise registrable, I will assist the
Company (at its expense) in obtaining letters patent or other applicable
registrations thereon and I will execute all documents and do all other
things (including testifying at the Company's expense) necessary or proper
to accomplish such registrations thereon and to vest the Company with full
title thereto. Should the Company be unable to secure my signature on any
document necessary to apply for, prosecute, obtain, or enforce any patent,
copyright, or other right or protection relating to any Invention Idea,
whether due to my mental or physical incapacity or any other cause, I
hereby irrevocably designate and appoint the Company and each of its duly
authorized officers and agents as my agent and attorney-in-fact, to act for
and in my behalf and stead, to execute and file any such document, and to
do all other lawfully permitted acts to further the prosecution, issuance,
and enforcement of patents, copyrights, or other rights or protection with
the same force and effect as if executed and delivered by me.
(d) Exclusions. Except as disclosed in Schedule A attached hereto and
---------- ----------
incorporated herein, there are no ideas, processes, inventions, technology,
writings, programs, designs, formulas, discoveries, patents, copyrights, or
trademarks, or improvements to the foregoing, that I wish to exclude from
the operation of this Agreement. To the best of my knowledge, there is no
existing contract in conflict with this Agreement or any other contract to
assign ideas, processes, inventions, technology, writings, programs,
designs, formulas, discoveries, patents, copyrights, or trademarks, or
improvements thereon, that is now in existence between me and any other
person or entity.
(a) License for Other Inventions. If, in the course of my employment, with the
-----------------------------
Company, I incorporate into Company property an invention owned by me or in
which I have an interest, the Company is granted a nonexclusive, royalty-
free, irrevocable, perpetual, worldwide license to make, modify, use and
sell my invention as part of and in connection with the Company property.
(e) Post-Termination Period. I acknowledge that because of the difficulty of
-----------------------
establishing when something is first conceived or developed by me, or
whether it results from access to Proprietary Information or the Company's
equipment, facilities, and data, I agree that any idea, process, invention,
technology, writing, program, design, formula, discovery, patent,
copyright, or trademark, or any improvement, rights, or claims related to
the foregoing, shall be presumed to be an Invention Idea if it is
conceived, developed, used, sold, exploited, or reduced to practice by me
or with my aid within one (1) year after my termination of
15
<PAGE>
employment with the Company. I can rebut the above presumption if I
prove that the idea, process, invention, technology, writing, program,
design, formula, discovery, patent, copyright, or trademark, or
improvement, right or claim, is not an Invention Idea as defined in
paragraph 2(a).
(f) California Labor Code. I understand that nothing in this Agreement is
---------------------
intended to expand the scope of protection provided me by Sections
2870 through 2872 of the California Labor Code.
3. Former or Conflicting Agreements. During my employment with the Company, I
--------------------------------
will not disclose to the Company, or use, or induce the Company to use, any
proprietary information or trade secrets of others. I represent and warrant
that I have returned all property and confidential information belonging to
all prior employers, if any. I further represent and warrant that my
employment by the Company and my performance of the terms of this Agreement
will not breach any agreement to keep in confidence proprietary information
acquired by me in confidence or in trust prior to my employment by the
Company. I have not entered into, and I agree I will not enter into, any
oral or written agreement in conflict with my obligations under this
Agreement.
4. Government Contracts. I understand that the Company has or may enter into
--------------------
contracts with the government under which certain intellectual property
rights will be required to be protected, assigned, licensed, or otherwise
transferred and I hereby agree to execute such other documents and
agreements as are necessary to enable the Company to meet its obligations
under any such government contracts.
5. Termination. I hereby acknowledge and agree that all personal property,
-----------
including, without limitation, all source code listings, books, manuals,
records, models, drawings, reports, notes, contracts, lists, blueprints,
and other documents or materials or copies thereof, all equipment furnished
to or prepared by me in the course of or incident to my employment, and all
Proprietary Information belong to the Company and will be promptly returned
to the Company upon termination of my employment with the Company.
Following my termination, I will not retain any written or other tangible
material containing any Proprietary Information or information pertaining
to any Invention Idea. I understand that my obligations contained herein
will survive the termination of my employment and that I will continue to
make all disclosures required of me by paragraph 2(b). In the event of the
termination of my employment, I agree, if requested by the Company, to sign
and deliver the Termination Certificate attached as Schedule B hereto and
----------
incorporated herein. I agree that after the termination of my employment
with the Company, I will not enter into any agreement that conflicts with
my obligations under this Agreement and will inform any subsequent
employers of my obligations under this Agreement.
6. NO IMPLIED EMPLOYMENT RIGHTS. I RECOGNIZE THAT NOTHING IN THIS AGREEMENT
----------------------------
SHALL BE CONSTRUED TO IMPLY THAT MY EMPLOYMENT IS GUARANTEED FOR ANY PERIOD
OF TIME EXCEPT AS OTHERWISE AGREED IN A WRITTEN AGREEMENT SIGNED BY A DULY
AUTHORIZED OFFICER OF THE COMPANY.
16
<PAGE>
7. Remedies. I recognize that nothing in this Agreement is intended to limit
--------
any remedy of the Company under the California Uniform Trade Secrets Act
and that I could face possible criminal and civil actions, resulting in
imprisonment and substantial monetary liability, if I misappropriate the
Company's trade secrets. In addition, I recognize that my violation of this
Agreement could cause the Company irreparable harm, the amount of which may
be extremely difficult to estimate, thus, making any remedy at law or in
damages inadequate. Therefore, I agree that the Company shall have the
right to apply to any court of competent jurisdiction for an order
restraining any breach or threatened breach of this Agreement and for any
other relief the Company deems appropriate. This right shall be in addition
to any other remedy available to the Company in law or equity.
8. Miscellaneous Provisions.
------------------------
(a) Assignment. I agree that the Company may assign to another person or
----------
entity any of its rights under this Agreement.
(b) Governing Law; Severability. The validity, interpretation,
---------------------------
enforceability, and performance of this Agreement shall be governed by
and construed in accordance with the laws of the State of California.
If any provision of this Agreement, or application thereof to any
person, place, or circumstance, shall be held by a court of competent
jurisdiction to be invalid, unenforceable, void or unconscionable,
such provision shall be enforced to the greatest extent permitted by
law and the remainder of this Agreement and such provision as applied
to other persons, places, and circumstances shall remain in full force
and effect.
(c) Entire Agreement. The terms of this Agreement are the final expression
----------------
of my agreement with respect to the subject matter hereof and may not
be contradicted by evidence of any prior or contemporaneous agreement.
This Agreement shall constitute the complete and exclusive statement
of its terms and no extrinsic evidence whatsoever may be introduced in
any judicial, administrative, or other legal proceeding involving this
Agreement.
(d) Amendment; Waivers. This Agreement can be amended or terminated only
-------------------
by a written agreement signed by a duly authorized officer of the
Company and me. No failure to exercise or delay in exercising any
right under this Agreement shall operate as a waiver thereof.
(a)
(e) Successors and Assigns. This Agreement shall be binding upon and shall
----------------------
inure to the benefit of me, my heirs, executors, administrators, and
successors, as well as the Company's successors and assigns.
(f) Application of this Agreement. I hereby agree that my obligations set
-----------------------------
forth in Sections 1 and 2 hereof and the definitions of Proprietary
Information and Invention Ideas contained therein shall be equally
applicable to Proprietary
17
<PAGE>
Information and Invention Ideas relating to any work performed by me
for the Company prior to the execution of this Agreement.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE
COMPLETELY NOTED ON SCHEDULE A TO THIS AGREEMENT ANY PROPRIETARY INFORMATION,
IDEAS, PROCESSES, INVENTIONS, TECHNOLOGY, WRITINGS, PROGRAMS, DESIGNS, FORMULAS,
DISCOVERIES, PATENTS, COPYRIGHTS, OR TRADEMARKS, OR IMPROVEMENTS, RIGHTS, OR
CLAIMS RELATING TO THE FOREGOING, THAT I DESIRE TO EXCLUDE FROM THIS AGREEMENT.
Date: 9-1-99 ALFRED CHUANG
------------------------ ------------------------------
Employee Name
/s/ Alfred Chuang
------------------------------
Employee Signature
18
<PAGE>
SCHEDULE A
----------
EMPLOYEE'S DISCLOSURE
---------------------
1. Proprietary Information. Except as set forth below, I acknowledge that at
-----------------------
this time I know nothing about the business or Proprietary Information of
BEA Systems, Inc., a Delaware corporation (the "Company"), other than
information I have learned from the Company in the course of being hired:
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
2. Prior Inventions. Except as set forth below, there are no ideas, processes,
----------------
inventions, technology, writings, programs, designs, formulas, discoveries,
patents, copyrights, or trademarks, or any claims, rights, or improvements
to the foregoing, that I wish to exclude from the operation of this
Agreement:
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Date: 9/1/99 Alfred Chuang
---------------------------- -------------------------
Employee Name
/s/ Alfred Chuang
-------------------------
Employee Signature
19
<PAGE>
SCHEDULE B
----------
TERMINATION CERTIFICATE CONCERNING
BEA SYSTEMS, INC.
PROPRIETARY INFORMATION AND INVENTIONS
--------------------------------------
This is to certify that I have returned all personal property of BEA
Systems, Inc., a Delaware corporation (the "Company"), including, without
limitation, all source code listings, books, manuals, records, models, drawings,
reports, notes, contracts, lists, blueprints, and other documents and materials,
Proprietary Information, and equipment furnished to or prepared by me in the
course of or incident to my employment with the Company, and that I did not make
or distribute any copies of the foregoing.
I further certify that I have reviewed the Employee Proprietary Information
and Inventions Agreement signed by me and that I have complied with and will
continue to comply with all of its terms, including, without limitation, (i) the
reporting of any idea, process, invention, technology, writing, program, design,
formula, discovery, patent, copyright, or trademark, or any improvement, rights,
or claims related to the foregoing, conceived or developed by me and covered by
the Agreement and (ii) the preservation as confidential of all Proprietary
Information pertaining to the Company. This certificate in no way limits my
responsibilities or the Company's rights under the Agreement.
On termination of my employment with the Company, I will be employed by
_____________________ [Name of New Employer] [in the ______________ division]
and I will be working in connection with the following projects:
[generally describe the projects]
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Date:
-------------------------- ------------------------
Employee Name
------------------------
Employee Signature
20
<PAGE>
Exhibit C - PROMISSORY NOTE
(Advance)
$5,000,000 September 1, 1999
San Jose, California
Pursuant to the terms of that certain Employment Agreement dated September
1, 1999 (the "Employment Agreement") between the undersigned Alfred S. Chuang
("Maker") and BEA Systems, Inc., a Delaware corporation (the " Company") at its
address 2315 North First Street San Jose, CA 95151, Maker, for value received,
promises to pay to the Company the principal sum of $5,000,000 with interest
from the date hereof at a rate of 7% per annum, compounded semiannually on the
unpaid balance of such principal sum.
Such principal and interest shall be due and payable within ninety (90)
days upon the earlier of (i) the date on which the prior 30 day average fair
market value of a share of the Common Stock of the Company increases by at least
50% over the fair market value of a share of the Company's Common Stock on the
date of hereof, and (ii) the date of termination of employment of Maker pursuant
to Section 3 of the Employment Agreement. The fair market value of a share of
the Common Stock of the Company shall be calculated as set forth in the
Employment Agreement. In the event of a Corporate Transaction as defined in the
Employment Agreement, all outstanding amounts due hereunder shall be forgiven
immediately prior to the consummation of such Corporate Transaction and this
Note shall be cancelled.
This Note evidences the Company's loan to the undersigned pursuant to the
terms of Section 5(a) of the Employment Agreement.
Interest shall be computed on the basis of a year of 360 days. All amounts
payable under this Note are payable in lawful money of the United States,
without notice, demand, offset or deduction. For purposes of interest accrual,
checks will constitute payment upon receipt.
The following occurrence shall constitute an "Event of Default" under this
Note: Maker shall fail to pay any payment of principal or interest, within ten
(10) days of receipt of notice of failure to pay amounts when due in accordance
with the terms hereof.
Upon the occurrence of any Event of Default hereunder, the entire unpaid
principal balance of this Note (including accrued interest) shall, at the option
of the Company and without notice or demand of any kind to Maker or any other
person, immediately become due and payable, and the Company shall have and may
exercise any and all rights and remedies available to it at law or in equity.
Maker promises to pay on demand all reasonable out-of-pocket costs of and
expenses of the Company in connection with the collection of amounts due
hereunder,
1
<PAGE>
including, without limitation, attorneys' fees incurred in connection
therewith, whether or not any lawsuit is ever filed with respect thereto.
Maker and any endorsers or guarantors of this Note for themselves, their
heirs, legal representatives, successors and assigns, respectively, severally
waive diligence, presentment, protest and demand and also notice of protest,
demand, dishonor and nonpayment of this Note.
This Note shall inure to the benefit of the Company and its successors and
assigns. The obligations of Maker hereunder shall not be assignable without the
consent of the Company.
This Note shall be governed by and construed in accordance with the laws of
the State of California. If there is a lawsuit on this Note, the parties agree
to submit to the jurisdiction of the courts of Santa Clara County, California.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as
of the date first above written.
MAKER
--------------------------------
2
<PAGE>
Exhibit E
AMENDMENT
TO
BEA SYSTEMS, INC.
1997 STOCK INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
This Amendment is made and dated as of September 1, 1999 by and between BEA
Systems, Inc., a Delaware corporation (the "Company") and Alfred S. Chuang
("Optionee") with respect to that certain stock option agreement dated May 17,
1999, between the Company and Optionee (the "Agreement") granted under the
Company's 1997 Stock Incentive Plan (the "Plan"):
RECITALS
WHEREAS, the Company and Optionee now desire to amend the Agreement to
provide for the full vesting of the Option upon a Change in Control or Corporate
Transaction (as defined in the Plan) of the Company provided that both of the
conditions, as specified below, are met:
1. That the initiation (e.g. Memo of Understanding ) of a business
combination resulting in a Change in Control occurs at least 6 months
from the effective date of this Agreement.
2. That there is a substantive change of responsibilities after or as a
result of a Change in Control.
NOW THEREFORE, the parties hereto agree as follows:
AGREEMENT
1. Vesting of Right to Exercise Option. The Vesting Schedule of the
-----------------------------------
Agreement, as set forth in the Notice of Stock Option Grant related thereto, is
hereby amended in its entirety to read as follows:
"Vesting Schedule:
Twenty-five percent (25%) of the Number of Shares shall vest and may
be exercised upon the first anniversary of the Date of Grant and an
additional 1/48th of the Number of Shares shall vest and may be exercised
upon the monthly anniversary of the Date of Grant thereafter; provided,
however, that all of the Number of Shares shall vest immediately if, as a
result of a Change in Control or Corporate Transaction (as defined in
<PAGE>
the Plan) which occurs as a result of a Memo of Understanding or similar
document executed by the Company and the acquiring party after March 1,
2000, Optionee's employment is terminated by the Company or a successor
company without "Cause" or voluntarily by the Optionee with "Good Reason"
following the Corporate Transaction or Change in Control.
For the purposes of this Agreement "Cause" and "Good Reason" have the
meanings set forth in Optionee's Employment Agreement dated September 1,
1999.
2. Agreement Continues. Except as specifically modified herein, the terms
-------------------
and conditions of the Agreement shall remain in full force and effect.
3. Definitions. Capitalized terms used herein shall have the meanings set
-----------
forth in the Agreement, unless otherwise specifically defined herein.
4. Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed on
its behalf, and Optionee has hereunto set Optionee's hand as of the day and year
first above written.
BEA SYSTEMS, INC.,
a Delaware corporation
By: /s/ Robert F. Donohue
---------------------------
Title: V.P. Legal & Secretary
-----------------------
Optionee:
/s/ Alfred S. Chuang
-----------------------------
Alfred S. Chuang
Address: 1305 Victoria Terrace
---------------------------
Sunnyvale, CA 94082
---------------------------
<PAGE>
EXHIBIT 10.16
BEA SYSTEMS, INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, is entered into as of September 1, 1999,
between BEA Systems, Inc., a Delaware corporation (the "Company"), and William
T. Coleman III ("Employee").
R E C I T A L S
---------------
A. Employee entered into an Employment Agreement with the Company
dated September 28, 1995 (the "1995 Agreement"), which expires on September 28,
1999.
B. Company desires to obtain the continued services of Employee, on
its own behalf and on behalf of all existing and future Affiliated Companies
(defined to mean any corporation or other business entity or entities that
directly or indirectly controls, is controlled by, or is under common control
with the Company), and Employee desires to secure continued employment from the
Company upon the following terms and conditions.
A G R E E M E N T
-----------------
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Position, Period of Employment.
------------------------------
(a) Period of Employment. The Company hereby employs Employee to
--------------------
render services to the Company in the position and with the duties and
responsibilities described in Section 1(b) for the period (the "Period of
Employment") commencing on the date of this Agreement and ending the earlier of
(i) July 31, 2003; or (ii) the date this Agreement is terminated in accordance
with Section 3 below.
(b) Position. Employee shall currently serve as the Company's CEO
--------
(or in such other position(s) as the Board of Directors of the Company (the
"Board") shall designate). Employee shall devote his full time and attention and
his best efforts to the performance of the services customarily incident to such
office and to such other services as may be reasonably requested by the Board.
The Company shall retain full direction and control of the means and methods by
which Employee performs the above services and of the place(s) at which such
services are to be rendered.
(c) Other Activities. Except upon the prior written consent of the
----------------
Board, Employee, during the Period of Employment, will not (i) accept any other
employment; (ii) engage, directly or indirectly, in any other business activity
(whether or not pursued for pecuniary advantage) that is or may be competitive
with, or that might place him in a competing position to that of the Company or
any Affiliated Company, as determined in the discretion of
1
<PAGE>
the Board; or (iii) engage in any work or business activity of any kind outside
those of the Company.
2. Compensation, Benefits, Expenses.
--------------------------------
(a) Compensation. In consideration of the services to be rendered
------------
hereunder, including, without limitation, services to any Affiliated Company,
Employee shall be paid an annual salary of Three Hundred Thousand Dollars
($300,000.00), payable at the times and pursuant to the procedures regularly
established, and as they may be amended, by the Company during the Period of
Employment. This rate shall be reviewed annually on a calendar year basis, in
accordance with the Company's salary review practices, and adjusted in the sole
discretion of the Board of the Company to reflect increases in the cost of
living and such other increases as are awarded in accordance with the Company's
regular salary review practices for giving salary increases to similarly
situated employees.
(b) Stock Options. Employee is eligible to receive options under
-------------
the Company's 1997 Flexible Stock Incentive Plan (the "Option Plan") and such
other option plans as the Company may from time to time adopt, as approved by
the Board or a Committee (as defined in the Option Plan) thereof. Twenty-five
percent (25%) of the Shares subject to the Option Plan shall vest twelve months
after the date of an Award (as defined in the Option Plan) (the "Vesting
Commencement Date"), and 1/48th of the Shares subject to the Option Plan shall
vest on each monthly anniversary of the Vesting Commencement Date thereafter.
All such options are transferable to the extent provided in the agreement
evidencing a grant of an Award and such agreement is amended as described in
Exhibit E.
(c) Bonus. Employee shall be eligible to participate in such bonus
-----
plans as the Company may from time to time adopt for the benefit of similarly
situated employees of the Company. Employee's right to receive any such bonus
shall be subject to the terms of any Company bonus plan for which he may become
a participant and the terms determined by the Board or a Committee thereof
designating him as a participant or granting him an Award thereunder.
(d) Vacation. Employee shall be entitled to vacation in accordance
--------
with the Company's vacation policies for similarly situated employees, as such
policies may be amended from time to time.
(e) Benefits. As he becomes eligible therefor, the Company shall
--------
provide Employee with the right to participate in and to receive benefits from
all present and future life, accident, disability, medical, pension, and savings
plans and all similar benefits made available generally to similarly situated
employees of the Company. The amount and extent of benefits to which Employee is
entitled shall be governed by the specific benefit plan, as it may be amended
from time to time.
(f) Expenses. The Company shall reimburse Employee for reasonable
--------
travel and other business expenses incurred by Employee in the performance of
his duties hereunder in accordance with the Company's general policies, as they
may be amended from time to time during the course of this Agreement.
2
<PAGE>
3. Termination of Employment.
-------------------------
(a) By Death. The Period of Employment shall terminate automatically
--------
upon the death of the Employee; provided however that the Company shall pay to
the Employee's beneficiaries or estate, as appropriate, the compensation to
which he is entitled pursuant to Sections 2(a) and 2(c) and the benefits to
which he is entitled pursuant to Section 2(e) shall continue through the end of
the Period of Employment, on the same time schedule as if Employee were living.
The level of bonus compensation payable pursuant to said Section 2(c) shall be
80% of the target bonus for Employee for the year of termination as reasonably
determined by the Board. Thereafter, the Company's obligations hereunder shall
terminate. Nothing in this Section shall affect any entitlement of the
Employee's heirs to the benefits of any life insurance plan.
(b) By Disability. If the Employee shall become "permanently
-------------
disabled" as determined for purposes of the disability insurance policy provided
by the Company for Employee, then, to the extent permitted by law, the Period of
Employment shall terminate as of the date that Employee shall be deemed to have
become "permanently disabled" for purposes of such disability insurance policy,
provided, however that, the compensation to which Employee is entitled pursuant
to Sections 2(a) and 2(c) (net of amounts paid to Employee pursuant to said
disability insurance policy) and the benefits to which he is entitled pursuant
to Section 2(e) shall continue through the end of the Period of Employment, on
the same time schedule as if Employee were not disabled. The amount of bonus
payable to Employee pursuant to this Section 3(b) shall be calculated in the
manner set forth in Section 3(a) above. Thereafter, the Company's obligations
hereunder shall terminate. Employee shall continue to be receive benefits under
any disability plan in which Employee is a participant to the extent permitted
under the applicable plan.
(c) By Company For Cause. The Company may terminate, without
--------------------
liability, the Period of Employment for Cause (as defined below) at any time
upon ten (10) days' advance written notice to Employee. The Company shall pay
Employee the compensation to which he is entitled pursuant to Section 2(a)
through the end of the notice period and thereafter the Company's obligations
hereunder shall terminate. The Company may terminate the employment of the
Employee and all of the Company's obligations under this Agreement at any time
for "cause" by giving the Employee notice of such termination, with reasonable
specificity of the details thereof. For the purposes of this Section 3(c),
"Cause" shall mean: (i) the Employee's material misconduct which could
reasonably be expected to have a material adverse effect on the business and
affairs of the Company, (ii) the Employee's disregard of lawful instructions of
the Company's Board of Directors consistent with the Employee's position
relating to the business of the Company or neglect of duties or failure to act,
which, in each case, could reasonably be expected to have a material adverse
effect on the business and affairs of the Company; (iii) Employee is convicted
of common law fraud, or a felony or criminal act against the Company or any
Affiliated Company thereof or any of the assets of any of them; (iv) the
Employee's abuse of alcohol or other drugs or controlled substances, or
conviction of a crime involving moral turpitude, or (v) the Employee's material
breach of any of the agreements contained herein. A termination pursuant to
Section 3(c) (i), (ii), (iv) (other than as a result of a conviction of a crime
involving moral turpitude), or (v) shall take effect 10 days after the giving of
the notice contemplated hereby unless the Employee shall, during such 10-day
period, remedy
3
<PAGE>
to the satisfaction of the Board of Directors of the Company the misconduct,
disregard, abuse or breach specified of such notice; provided, however,
-------- -------
that such termination shall take effect immediately upon giving of such notice
if the Board of Directors of the Company shall have determined that such
misconduct, disregard, abuse or breach is not remediable which determination
shall be stated in such notice. A determination pursuant to Section 3(c) (iii)
or (iv) (as a result of a conviction of a crime involving moral turpitude) shall
take effect immediately upon giving of the notice contemplated hereby.
(d) At Will by Employee. At any time and subject to Section 3(g)
-------------------
below, Employee may terminate the Period of Employment with or without cause, on
written notice to the Company. In the event Employee elects to terminate the
Period of Employment pursuant to this Section 3(d), Employee shall give the
Company not less than two (2) weeks notice of such termination. If the Employee
terminates his employment pursuant to this Section 3(d), the Company shall pay
Employee the compensation to which he is entitled pursuant to Section 2(a)
through the end of the notice period and thereafter all obligations of the
Company shall terminate.
(e) At Will by the Company. At any time, the Company may terminate
----------------------
the Period of Employment for any reason, without cause, upon 24 hours written
notice to the Employee. In the event the Company elects to terminate the Period
of Employment pursuant to this Section 3(e), the Company shall retain Employee
as a consultant to the Company for a period commencing on the date of such
termination and continuing until the expiration of the Period of Employment (the
"Consultancy Period"), during which time Employee agrees to be available to the
Company (which may include availability via telephone) to consult with officers
and directors regarding the business of the Company, whenever so requested, such
consultancy work not to exceed 40 hours per week. Employee shall continue to
receive payment of his compensation under Sections 2(a), 2(c) and 2(f) during
the Consultancy Period and his benefits described in Section 2(e); provided that
-------- ----
if (i) any of the events listed in paragraph (c) of this Section 3 occur then
the Company's obligations hereunder shall be governed in accordance with the
applicable paragraph or (ii) Employee breaches Sections 3(h), 3(i) and/or 4
hereof, including a violation of his Proprietary Information and Inventions
Agreement (described at Section 4 below), then all of the Company's obligations
hereunder shall cease immediately. The amount of bonus payable to Employee
pursuant to this Section 3(e) shall be calculated in the manner set forth in
Section 3(a) above through the end of the Consultancy Period. Employee hereby
agrees that the Company may dismiss him under this Section 3(e) without regard
(i) to any general or specific policies (whether written or oral) of the Company
relating to the employment or termination of its employees, or (ii) to any
statements made to Employee, whether made orally or contained in any document,
pertaining to Employee's relationship with the Company. During the Consultancy
Period, Employee agrees not to compete with the business of the Company during
such Consultancy Period as set forth in Section 3(i) hereof.
(f) Termination by Employee for Good Reason Following Corporate
------------------------------------------------------------
Transaction. At any time following a Corporate Transaction (For purposes of this
Agreement, a "Corporate Transaction" shall include any of the following
stockholder-approved transactions to which the Company is a party: (i) a merger
or consolidation in which the Company is not the surviving entity and securities
representing more than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to holder different from
those who held such securities immediately prior to such merger; (ii) the sale,
transfer or other disposition of all or substantially all of the assets of the
Company in liquidation or dissolution of the Company; or (iii) any reverse
merger in which the Company is the surviving entity but in which securities
representing more than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to holder different from
those who
4
<PAGE>
held such securities immediately prior to such merger.) In addition, a Corporate
Transaction shall also include a Change of Control as such is defined in the
Option Plan and without limitation of Employee's rights under Section 3(d)
above, Employee may terminate the Period of Employment for Good Reason (as
defined below) on not less than two (2) weeks written notice to the Company. In
the event of a termination by Employee for Good Reason pursuant to this Section
3(f), the Company shall retain Employee as a consultant to the Company for a
period commencing on the date of such termination and continuing for two (2)
years thereafter (in lieu of the Consultancy Period set forth in Section 3(e))
for the compensation and benefits and subject to all of the terms set forth in
Section 3(e) above (other than the term for such consultancy services). The
following shall constitute a termination by Employee for "Good Reason" if: (i)
there is an assignment to the Employee of any duties materially inconsistent
with or which constitute a material change in the Employee's position, duties,
responsibilities, or status with the Company, or a material change in the
Employee's position, duties, responsibilities, or status with the Company, or a
material change in the Employee's reporting responsibilities, title, or offices;
or removal of the Employee from or failure to re-elect the Employee to any of
such positions, except in connection with the termination for the Period of
Employment for Cause, or due to disability or death; (ii) there is a reduction
by the Company in the Employee's annual salary then in effect other than a
reduction similar in percentage to a reduction generally applicable to similarly
situated employees of the Company; or (iii) the Company acts in any way that
would adversely affect the Employee's participation in or materially reduce the
Employee's benefit under any benefit plan of the Company in which the Employee
is participating or deprive the Employee of any material fringe benefit enjoyed
by the Employee except those changes generally affecting similarly situated
employees of the Company.
(g) Company Right to Require Consulting Services. In the event of a
--------------------------------------------
termination of the Period of Employment pursuant to Section 3 (c) and 3(d)
above, the Company shall have the option, exercisable on written notice to
Employee within twenty (20) days following such termination of the Period of
Employment, to require Employee to provide consulting services upon the same
terms provided in Section 3(e) above, including without limitation, Employee's
duties not to compete with the Company as provided in Section 3(i), except that:
(i) the Company may thereafter terminate the Consultancy Period on thirty (30)
days notice to Employee; and (ii) the compensation payable to Employee during
the Consultancy Period shall be equal to Employee's salary payable pursuant to
Section 2(a) hereof as prorated and reduced to be equal to an hourly rate
(assuming forty (40) hours work weeks and forty-eight (48) full weeks of service
during a year), and Employee shall be so paid by the Company at such hourly rate
for such consulting services based on the greater of: (i) the actual number of
hours of consulting services provided by Employee; and (ii) ten (10) hours per
calendar month; provided, that if the Company requires in excess of twenty (20)
hours per week of consulting, then the Company shall compensate Employee and
provide benefits and bonuses as if Employee is working full time during the
Consultancy Period. The Company may require up to a maximum of forty (40) hours
per week of consulting services. In the event that the Company requires less
than forty (40) hours of consulting services per week, then the Company may not
prevent
5
<PAGE>
Employee from accepting other employment or engaging in any work or other
activity of any kind during the Consultancy Period provided that such
employment, work or activity is not competitive with the business of the Company
(as defined in Section 3(i) hereof) and Employee may accept such other
noncompetitive employment or engage in other noncompetitive work or business
activities during the Consultancy Period. The Company acknowledges that once it
chooses to require less than forty (40) hours per week of consulting services
from Employee that the Company may not later unilaterally increase the
consulting services required of Employee to forty (40) hours per week or
restrict Employee's ability to accept other noncompetitive employment or engage
in other noncompetitive work or activities without Employee's consent, which may
be withheld in Employee's discretion.
(h) Other Termination Obligations.
-----------------------------
(1) Employee hereby acknowledges and agrees that all personal
property, including, without limitation, all books, manuals, records, reports,
notes, contracts, computer files, lists, blueprints, and other documents, or
materials, or copies thereof, proprietary information, and equipment furnished
to or prepared by Employee in the course of or incident to his employment,
including, without limitation, records and any other materials pertaining to the
Company's proprietary information, belong to the Company and shall be promptly
returned to the Company upon termination of the Period of Employment. Following
termination, the Employee will not retain any written or other tangible material
containing any Proprietary Information or information pertaining to the
Company's proprietary information.
(2) Upon termination of the Period of Employment, the Employee
shall be deemed to have resigned from all offices and directorships then held
with the Company or any Affiliated Company.
(3) Employee agrees that he will not, either directly or
indirectly, for a period of two (2) years following the termination of the later
of the Period of Employment or the Consultancy Period: (i) contact, for purposes
of soliciting employment, any employee of the Company; or, (ii) contact for the
purpose of inducing any termination or breach of any contractual relationship
with the Company, any individual or entity that has a contractual relationship
with the Company.
(4) Employee agrees to comply with the covenant not to compete as
set forth in such Section 3(i).
(i) Covenant not to Compete. During the Consultancy Period, Employee
-----------------------
agrees not to compete with the business of the Company during such Consultancy
Period, anywhere within, from or into the countries listed in Exhibit A and
---------
from or into any additional countries where the Company does business at the
time of termination of Employee's employment. For purposes of this Section 3(i),
Employee shall be deemed to compete if he either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director
or in any other individual or representative capacity engages or participates,
or makes preparations to establish, any business that conducts the same or
substantially the same business as or is competitive with the business which is
conducted by the Company on the date of Employee's termination, including,
without limitation, work relating to Encina, Unikix,
6
<PAGE>
CICS/9000 and any activity engaged in by the Company during the twelve months
immediately preceding the date of termination of the Period of Employment or any
activity contemplated by the Company on the date of such termination. Nothing
contained in this Section 3(i) shall be construed to prohibit Employee from
purchasing and owning (directly or indirectly) up to one percent (1%) of the
capital stock or other securities of any corporation or other entity whose stock
or securities are traded on any national or regional securities exchange or the
national over-the-counter market and such ownership shall not constitute a
violation of this Section 3(i). In the event of a termination of the Period of
Employment pursuant to Section 3(c) or 3(d) above, the Company shall have the
option, exercisable on written notice to Employee within twenty (20) days
following such termination of the Period of Employment, to require Employee to
provide consulting services upon the same terms provided in Section 3(e) above,
including without limitation, Employee's duties not to compete with the Company
as provided herein.
4. Proprietary Information Agreement. As a condition to his employment
---------------------------------
with the Company, Employee shall execute and deliver a copy of the Company's
standard form Employee Proprietary Information and Inventions Agreement in
substantially the form of Exhibit B attached hereto and incorporated herein. Any
---------
breach by Employee of such agreement shall be deemed a breach of this Agreement
for purposes of Section 3(c) hereof. Employee's obligations under such Employee
Proprietary Information and Inventions Agreement shall survive any termination
of the Period of Employment.
5. Loan to Employee. The Company agrees to lend certain amounts to
-----------------
Employee as provided below, which loan need not be secured by assets of
Employee. Each loan will be evidenced by a full recourse promissory note in
substantially the form attached hereto as Exhibit C.
---------
(a) Line of Credit. Employee shall be extended a line of credit for
--------------
a maximum of Five Million Dollars ($5,000,000.00) (the "Line of Credit"). All
advances are subject to the review of and approval by the Company's Chief
Financial Officer. Funds shall be advanced upon written notice for funds by
Employee to Company (the "Advance"). All funds together with interest from the
date of the Advance shall accrue at the applicable federal rate on the date of
the Advance, compounded semiannually and shall be due and payable within ninety
(90) days upon the earlier of (i) the date the prior 30 day average fair market
value of a share of the Common Stock of the Company increases by at least 50%
over the fair market value of a share of the Company's Common Stock on the date
of the Advance and (ii) the date of termination of employment pursuant to
Section 3. For purposes of this Section 5, the fair market value of a share of
the Common Stock of the Company shall mean the closing price for a share for the
last market trading day prior to the time of the determination (or, if no
closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by the Company to
be the primary market for the Common Stock as reported in The Wall Street
Journal or such other source as the Company deems reliable.
6. Additional Bonus. Provided that the employee continues to be employed
-----------------
by the Company, an additional bonus amount will be paid at the end of each
calendar quarter in the amount of $9,053.83 for the duration of this agreement.
7
<PAGE>
7. Assignment; Successors and Assigns. Employee agrees that he will not
----------------------------------
assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or
involuntarily, or by operation of law, any rights or obligations under this
Agreement, nor shall Employee's rights be subject to encumbrance or the claims
of creditors. Any purported assignment, transfer, or delegation shall be null
and void. Nothing in this Agreement shall prevent the consolidation of the
Company with, or its merger into, any other corporation, or the sale by the
Company of all or substantially all of its properties or assets, or the
assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest or any Affiliated Company.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors, and permitted assigns, and shall not benefit any person or entity
other than those enumerated above. Without limitation of the foregoing, any
such successor in interest (including an entity which acquires substantially all
the assets and the business of the Company) in such acquisition transaction or
any Affiliated Company shall be bound by all of the terms and conditions of this
Agreement.
8. Notices. All notices or other communications required or permitted
-------
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
BEA Systems, Inc.
2315 North First Street
San Jose, CA 95151
Attn: Chief Financial Officer
or to the Employee at: William T. Coleman III
c/o Morrison & Foerster
755 Page Mill Rd.
Palo Alto, CA. 94304
Notice of change of address shall be effective only when done in accordance with
this Section.
9. Entire Agreement. The terms of this Agreement are intended by the
----------------
parties to be the final expression of their agreement with respect to the
employment of Employee by the Company and may not be contradicted by evidence of
any prior or contemporaneous agreement. The parties further intend that this
Agreement shall constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial,
administrative, or other legal proceeding involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified, amended, or
-------------------
terminated except by an instrument in writing, signed by the Employee and by a
duly authorized representative of the Company other than Employee. By an
instrument in writing similarly
8
<PAGE>
executed, either party may waive compliance by the other party with any
provision of this Agreement that such other party was or is obligated to comply
with or perform, provided, however, that such waiver shall not operate as a
waiver of, or estoppel with respect to, any other or subsequent failure. No
failure to exercise and no delay in exercising any right, remedy, or power
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, or power hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
11. Severability; Enforcement. If any provision of this Agreement, or the
-------------------------
application thereof to any person, place, or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable, or void, the
remainder of this Agreement and such provisions as applied to other persons,
places, and circumstances shall remain in full force and effect. It is the
intention of the parties that the covenants contained in Section 3(i) shall be
enforced to the greatest extent in time, area, and degree of participation as is
permitted by the law of that jurisdiction whose law is found to be applicable to
any acts allegedly in breach of these covenants.
12. Governing Law. The validity, interpretation, enforceability, and
-------------
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
13. Employee Acknowledgment. Employee acknowledges (i) that he has
-----------------------
consulted with or has had the opportunity to consult with independent counsel of
his own choice concerning this Agreement and has been advised to do so by the
Company, and (ii) that he has read and understands the Agreement, is fully aware
of its legal effect, and has entered into it freely based on his own judgment.
14. Exclusive. Both parties agree that this Agreement shall provide the
---------
exclusive remedies for any breach by the Company of its terms.
The parties have duly executed this Agreement as of the date first
written above.
COMPANY: EMPLOYEE:
BEA SYSTEMS, INC.
By: /s/ Robert F. Donohue /s/ William T. Coleman III
_________________________________ _______________________________
Title: VP Legal & Secretary
________________________________ William T. Coleman III
9
<PAGE>
EXHIBIT A
to
EMPLOYMENT AGREEMENT
--------------------
England
France
Germany
Japan
United States
10
<PAGE>
EXHIBIT B
September, 1999
EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
---------------------------------------------------------
(Rev. 9/23/98)
In consideration of my employment by BEA Systems, Inc., a Delaware
corporation (the "Company"), I hereby agree to certain restrictions placed by
the Company on my use and development of information and technology of the
Company, as more fully set out below.
1. Proprietary Information.
-----------------------
(a) Confidential Restrictions. I understand that, in the course of my
-------------------------
work as an employee of the Company, I may have access to Proprietary
Information (as defined below) concerning the Company. I acknowledge
that the Company has developed, compiled, and otherwise obtained,
often at great expense, this information, which has great value to the
Company's business. I agree to hold in strict confidence and in trust
for the sole benefit of the Company all Proprietary Information and
will not disclose any Proprietary Information, directly or indirectly,
to anyone outside of the Company, or use, copy, publish, summarize, or
remove from Company premises such information (or remove from the
premises any other property of the Company) except (i) during my
employment to the extent necessary to carry out my responsibilities as
an employee of the Company or (ii) after termination of my employment,
as specifically authorized in writing by a duly authorized officer of
the Company. I further understand that the publication of any
Proprietary Information through literature or speeches must be
approved in advance in writing by a duly authorized officer of the
Company.
(b) Proprietary Information Defined. I understand that the term
-------------------------------
"Proprietary Information" in this Agreement means all information and
any idea whether disclosed to, learned by or developed by me,
pertaining in any manner to the business of the Company or to the
Company's affiliates, consultants, or business associates, unless (i)
the information is or becomes publicly known through lawful means;
(ii) the information was rightfully in my possession or part of my
general knowledge prior to my employment by the Company; or (iii) the
information is disclosed to me without confidential or proprietary
restriction by a third party who rightfully possesses the information
(without confidential or proprietary restriction) and did not learn of
it, directly or indirectly, from the Company. I understand that this
definition includes information or ideas in any form, tangible or
intangible, including without limitation, all documents, books,
papers, drawings, models, sketches, and other data of any kind and
description, including electronic data recorded or retrieved by any
means, that have been or will be given to me by the Company (or any
affiliate of it), as well as written or verbal instructions or
comments. I further understand that the Company considers the
following information to be included, without limitation, in the
definition of
11
<PAGE>
Proprietary Information: (A) schematics, techniques, employee
suggestions, development tools and processes, computer printouts,
computer programs, design drawings and manuals, electronic codes,
formulas and improvements; (B) information about costs, profits,
markets, sales, customers, potential customers targeted by the Company
and bids; (C) plans for future development and new product concepts,
business marketing plans; and (D) corporate organization, personnel
files, salary ranges and information about the compensation, equity
and benefits provided to other employees.
(c) Information Use. I agree that I will maintain at my work area or in
---------------
other places under my control only such Proprietary Information that I
have a current "need to know," and that I will return to the
appropriate person or location or otherwise properly dispose of
Proprietary Information once my need to know no longer exists. I agree
that I will not make copies of information unless I have a legitimate
need for such copies in connection with my work.
(d) Prior Actions and Knowledge. I hereby represent and warrant that
---------------------------
from the time of my first contact or communication with the Company I
have held in strict confidence and in trust for the sole benefit of
the Company all Proprietary Information and have not disclosed any
Proprietary Information, directly or indirectly, to anyone outside of
the Company, or used, copied, published, or summarized any Proprietary
Information except to the extent permitted by Section 1(a) above.
Except as disclosed on Schedule A to this Agreement, I do not know
----------
anything about the Company's business or Proprietary Information,
other than information I have learned from the Company in the course
of being hired.
(e) Third Party Information. I recognize that the Company has received
-----------------------
and in the future will receive from third parties their confidential
or proprietary information subject to a duty on the Company's part to
maintain the confidentiality of such information and to use it only
for certain limited purposes. I agree that I owe the Company and such
third parties, during the term of my employment and thereafter, a duty
to hold all such confidential or proprietary information in the
strictest confidence and not to disclose it to any person, firm, or
corporation (except as necessary in carrying out my work for the
Company consistent with the Company's agreement with such third party)
or to use it for the benefit of anyone other than for the Company or
such third party (consistent with the Company's agreement with such
third party) without the express written authorization of a duly
authorized officer of the Company.
(f) Interference with Business. I hereby acknowledge that pursuit of the
--------------------------
activities forbidden by this paragraph 1(f) would necessarily involve
the use or disclosure of Proprietary Information in breach of
paragraph 1(a), but that proof of such breach would be extremely
difficult. To forestall such disclosure, use, and breach, I agree that
for the term of this Agreement and for a period of one (1) year after
termination of my employment with the Company, I shall not, for myself
or any third party, directly or indirectly (i) divert or attempt to
divert from the Company (or any affiliate of it that might be formed)
any business of any kind in which it is
12
<PAGE>
engaged, including, without limitation, the solicitation of or
interference with any of its suppliers or customers or (ii) solicit,
recruit or encourage to leave their employment or recommend for
employment any person employed by the Company. Furthermore, I agree
that during the period of my employment with the Company I shall not
engage in any business activity that is or may be competitive with the
Company, except where I can prove that the action was taken without
the use in any way of Proprietary Information. I understand that this
paragraph 1(f) does not prevent me from working for a competitor
following termination of my employment with the Company as long as I
am able to and do comply with the provisions of this Agreement.
2. Inventions.
----------
(a) Defined; Statutory Notice. I understand that during the term of my
-------------------------
employment, there are certain restrictions on my development of
technology, ideas, and inventions, referred to in this Agreement as
"Invention Ideas." The term Invention Ideas means all ideas,
processes, inventions, technology, designs, formulas, discoveries,
patents, copyrights, and trademarks, and all improvements, rights, and
claims related to the foregoing, that are conceived, developed, or
reduced to practice by me alone or with others except to the extent
that California Labor Code Section 2870 lawfully prohibits the
assignment. I understand that Section 2870(a) provides:
Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in
an invention to his or her employer shall not apply to an invention
that the employee developed entirely on his or her own time without
using the employer's equipment, supplies, facilities, or trade secret
information except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or
demonstrably anticipated research or development of the
employer.
(2) Result from any work performed by the employee for the
employer.
(b) Disclosure. I agree to maintain adequate and current written records
----------
on the development of all Invention Ideas and to disclose promptly to
the Company all Invention Ideas and relevant records, which records
will remain the sole property of the Company. I further agree that all
information and records pertaining to any idea, process, invention,
technology, design, formula, discovery, patent, copyright or
trademark, that I do not believe to be an Invention Idea, but is
conceived, developed, or reduced to practice by me (alone or with
others) during my period of employment or during the one-year period
following termination of my employment, shall be promptly disclosed to
the Company (such disclosure to be received in confidence). The
Company shall examine such information to determine if in fact it is
an Invention Idea subject to this Agreement.
13
<PAGE>
(c) Assignment. I agree to assign to the Company, without further
----------
consideration, my entire right, title, and interest (throughout the
United States and in all foreign countries), free and clear of all
liens and encumbrances, in and to each Invention Idea, which shall be
the sole property of the Company, whether or not copyrightable or
patentable. In the event any Invention Idea shall be deemed by the
Company to be copyrightable or patentable or otherwise registrable, I
will assist the Company (at its expense) in obtaining letters patent
or other applicable registrations thereon and I will execute all
documents and do all other things (including testifying at the
Company's expense) necessary or proper to accomplish such
registrations thereon and to vest the Company with full title thereto.
Should the Company be unable to secure my signature on any document
necessary to apply for, prosecute, obtain, or enforce any patent,
copyright, or other right or protection relating to any Invention
Idea, whether due to my mental or physical incapacity or any other
cause, I hereby irrevocably designate and appoint the Company and each
of its duly authorized officers and agents as my agent and attorney-
in-fact, to act for and in my behalf and stead, to execute and file
any such document, and to do all other lawfully permitted acts to
further the prosecution, issuance, and enforcement of patents,
copyrights, or other rights or protection with the same force and
effect as if executed and delivered by me.
(d) Exclusions. Except as disclosed in Schedule A attached hereto and
---------- ----------
incorporated herein, there are no ideas, processes, inventions,
technology, writings, programs, designs, formulas, discoveries,
patents, copyrights, or trademarks, or improvements to the foregoing,
that I wish to exclude from the operation of this Agreement. To the
best of my knowledge, there is no existing contract in conflict with
this Agreement or any other contract to assign ideas, processes,
inventions, technology, writings, programs, designs, formulas,
discoveries, patents, copyrights, or trademarks, or improvements
thereon, that is now in existence between me and any other person or
entity.
(a) License for Other Inventions. If, in the course of my employment,
-----------------------------
with the Company, I incorporate into Company property an invention
owned by me or in which I have an interest, the Company is granted a
nonexclusive, royalty-free, irrevocable, perpetual, worldwide license
to make, modify, use and sell my invention as part of and in
connection with the Company property.
(e) Post-Termination Period. I acknowledge that because of the
-----------------------
difficulty of establishing when something is first conceived or
developed by me, or whether it results from access to Proprietary
Information or the Company's equipment, facilities, and data, I agree
that any idea, process, invention, technology, writing, program,
design, formula, discovery, patent, copyright, or trademark, or any
improvement, rights, or claims related to the foregoing, shall be
presumed to be an Invention Idea if it is conceived, developed, used,
sold, exploited, or reduced to practice by me or with my aid within
one (1) year after my termination of employment with the Company. I
can rebut the above presumption if I prove that the idea, process,
invention, technology, writing, program, design, formula,
14
<PAGE>
discovery, patent, copyright, or trademark, or improvement, right or
claim, is not an Invention Idea as defined in paragraph 2(a).
(f) California Labor Code. I understand that nothing in this Agreement is
---------------------
intended to expand the scope of protection provided me by Sections
2870 through 2872 of the California Labor Code.
3. Former or Conflicting Agreements. During my employment with the
--------------------------------
Company, I will not disclose to the Company, or use, or induce the Company to
use, any proprietary information or trade secrets of others. I represent and
warrant that I have returned all property and confidential information belonging
to all prior employers, if any. I further represent and warrant that my
employment by the Company and my performance of the terms of this Agreement will
not breach any agreement to keep in confidence proprietary information acquired
by me in confidence or in trust prior to my employment by the Company. I have
not entered into, and I agree I will not enter into, any oral or written
agreement in conflict with my obligations under this Agreement.
4. Government Contracts. I understand that the Company has or may enter
--------------------
into contracts with the government under which certain intellectual property
rights will be required to be protected, assigned, licensed, or otherwise
transferred and I hereby agree to execute such other documents and agreements as
are necessary to enable the Company to meet its obligations under any such
government contracts.
5. Termination. I hereby acknowledge and agree that all personal property,
-----------
including, without limitation, all source code listings, books, manuals,
records, models, drawings, reports, notes, contracts, lists, blueprints, and
other documents or materials or copies thereof, all equipment furnished to or
prepared by me in the course of or incident to my employment, and all
Proprietary Information belong to the Company and will be promptly returned to
the Company upon termination of my employment with the Company. Following my
termination, I will not retain any written or other tangible material containing
any Proprietary Information or information pertaining to any Invention Idea. I
understand that my obligations contained herein will survive the termination of
my employment and that I will continue to make all disclosures required of me by
paragraph 2(b). In the event of the termination of my employment, I agree, if
requested by the Company, to sign and deliver the Termination Certificate
attached as Schedule B hereto and incorporated herein. I agree that after the
----------
termination of my employment with the Company, I will not enter into any
agreement that conflicts with my obligations under this Agreement and will
inform any subsequent employers of my obligations under this Agreement.
2. NO IMPLIED EMPLOYMENT RIGHTS. I RECOGNIZE THAT NOTHING IN THIS
-----------------------------
AGREEMENT SHALL BE CONSTRUED TO IMPLY THAT MY EMPLOYMENT IS GUARANTEED FOR ANY
PERIOD OF TIME. EXCEPT AS OTHERWISE AGREED IN A WRITTEN AGREEMENT SIGNED BY A
DULY AUTHORIZED OFFICER OF THE COMPANY, MY EMPLOYMENT IS FOR AN INDEFINITE
DURATION, AND EITHER THE COMPANY OR I CAN TERMINATE OUR EMPLOYMENT
15
<PAGE>
RELATIONSHIP AT ANY TIME, WITHOUT NOTICE, AND FOR ANY REASON, WITH OR
WITHOUT CAUSE.
6. Remedies. I recognize that nothing in this Agreement is intended to
--------
limit any remedy of the Company under the California Uniform Trade Secrets
Act and that I could face possible criminal and civil actions, resulting in
imprisonment and substantial monetary liability, if I misappropriate the
Company's trade secrets. In addition, I recognize that my violation of this
Agreement could cause the Company irreparable harm, the amount of which may
be extremely difficult to estimate, thus, making any remedy at law or in
damages inadequate. Therefore, I agree that the Company shall have the
right to apply to any court of competent jurisdiction for an order
restraining any breach or threatened breach of this Agreement and for any
other relief the Company deems appropriate. This right shall be in addition
to any other remedy available to the Company in law or equity.
7. Miscellaneous Provisions.
------------------------
(a) Assignment. I agree that the Company may assign to another
----------
person or entity any of its rights under this Agreement.
(b) Governing Law; Severability. The validity, interpretation,
---------------------------
enforceability, and performance of this Agreement shall be
governed by and construed in accordance with the laws of the State
of California. If any provision of this Agreement, or application
thereof to any person, place, or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable, void
or unconscionable, such provision shall be enforced to the
greatest extent permitted by law and the remainder of this
Agreement and such provision as applied to other persons, places,
and circumstances shall remain in full force and effect.
(c) Entire Agreement. The terms of this Agreement are the final
----------------
expression of my agreement with respect to the subject matter hereof
and may not be contradicted by evidence of any prior or
contemporaneous agreement. This Agreement shall constitute the
complete and exclusive statement of its terms and no extrinsic
evidence whatsoever may be introduced in any judicial, administrative,
or other legal proceeding involving this Agreement.
(a) Amendment; Waivers. This Agreement can be amended or terminated
-------------------
only by a written agreement signed by a duly authorized officer of the
Company and me. No failure to exercise or delay in exercising any
right under this Agreement shall operate as a waiver thereof.
(d) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of me, my heirs, executors, administrators,
and successors, as well as the Company's successors and assigns.
(e) Application of this Agreement. I hereby agree that my
-----------------------------
obligations set forth in Sections 1 and 2 hereof and the definitions
of Proprietary Information and Invention Ideas contained therein shall
be equally applicable to Proprietary
16
<PAGE>
Information and Invention Ideas relating to any work performed by
me for the Company prior to the execution of this Agreement.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE
COMPLETELY NOTED ON SCHEDULE A TO THIS AGREEMENT ANY PROPRIETARY INFORMATION,
IDEAS, PROCESSES, INVENTIONS, TECHNOLOGY, WRITINGS, PROGRAMS, DESIGNS, FORMULAS,
DISCOVERIES, PATENTS, COPYRIGHTS, OR TRADEMARKS, OR IMPROVEMENTS, RIGHTS, OR
CLAIMS RELATING TO THE FOREGOING, THAT I DESIRE TO EXCLUDE FROM THIS AGREEMENT.
Date:_____________________________ _______________________________________
Employee Name
/s/ William T. Coleman III
_______________________________________
Employee Signature
17
<PAGE>
SCHEDULE A
----------
EMPLOYEE'S DISCLOSURE
---------------------
1. Proprietary Information. Except as set forth below, I acknowledge that at
-----------------------
this time I know nothing about the business or Proprietary Information of
BEA Systems, Inc., a Delaware corporation (the "Company"), other than
information I have learned from the Company in the course of being hired:
2. Prior Inventions. Except as set forth below, there are no ideas, processes,
----------------
inventions, technology, writings, programs, designs, formulas, discoveries,
patents, copyrights, or trademarks, or any claims, rights, or improvements
to the foregoing, that I wish to exclude from the operation of this
Agreement:________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Date:_____________________________ ______________________________________
Employee Name
/s/ William T. Coleman III
______________________________________
Employee Signature
18
<PAGE>
SCHEDULE B
----------
TERMINATION CERTIFICATE CONCERNING
BEA SYSTEMS, INC.
PROPRIETARY INFORMATION AND INVENTIONS
--------------------------------------
This is to certify that I have returned all personal property of BEA
Systems, Inc., a Delaware corporation (the "Company"), including, without
limitation, all source code listings, books, manuals, records, models, drawings,
reports, notes, contracts, lists, blueprints, and other documents and materials,
Proprietary Information, and equipment furnished to or prepared by me in the
course of or incident to my employment with the Company, and that I did not make
or distribute any copies of the foregoing.
I further certify that I have reviewed the Employee Proprietary Information
and Inventions Agreement signed by me and that I have complied with and will
continue to comply with all of its terms, including, without limitation, (i) the
reporting of any idea, process, invention, technology, writing, program, design,
formula, discovery, patent, copyright, or trademark, or any improvement, rights,
or claims related to the foregoing, conceived or developed by me and covered by
the Agreement and (ii) the preservation as confidential of all Proprietary
Information pertaining to the Company. This certificate in no way limits my
responsibilities or the Company's rights under the Agreement.
On termination of my employment with the Company, I will be employed by
_____________________ [Name of New Employer] [in the ______________ division]
and I will be working in connection with the following projects:
[generally describe the projects]
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Date:___________________________ _________________________________________
Employee Name
_________________________________________
Employee Signature
19
<PAGE>
Exhibit C - PROMISSORY NOTE
(Advance)
$5,000,000 September 1, 1999
San Jose, California
Pursuant to the terms of that certain Employment Agreement dated September
1, 1999 (the "Employment Agreement") between the undersigned William T. Coleman
III ("Maker") and BEA Systems, Inc., a Delaware corporation (the "Company") at
its address 2315 North First Street San Jose, CA 95151, Maker, for value
received, promises to pay to the Company the principal sum of $5,000,000 with
interest from the date hereof at a rate of 7% per annum, compounded semiannually
on the unpaid balance of such principal sum.
Such principal and interest shall be due and payable within ninety (90)
days upon the earlier of (i) the date on which the prior 30 day average fair
market value of a share of the Common Stock of the Company increases by at least
50% over the fair market value of a share of the Company's Common Stock on the
date of hereof, and (ii) the date of termination of employment of Maker pursuant
to Section 3 of the Employment Agreement. The fair market value of a share of
the Common Stock of the Company shall be calculated as set forth in the
Employment Agreement. In the event of a Corporate Transaction as defined in the
Employment Agreement, all outstanding amounts due hereunder shall be forgiven
immediately prior to the consummation of such Corporate Transaction and this
Note shall be cancelled.
This Note evidences the Company's loan to the undersigned pursuant to the
terms of Section 5(a) of the Employment Agreement.
Interest shall be computed on the basis of a year of 360 days. All amounts
payable under this Note are payable in lawful money of the United States,
without notice, demand, offset or deduction. For purposes of interest accrual,
checks will constitute payment upon receipt.
The following occurrence shall constitute an "Event of Default" under this
Note: Maker shall fail to pay any payment of principal or interest, within ten
(10) days of receipt of notice of failure to pay amounts when due in accordance
with the terms hereof.
Upon the occurrence of any Event of Default hereunder, the entire unpaid
principal balance of this Note (including accrued interest) shall, at the option
of the Company and without notice or demand of any kind to Maker or any other
person, immediately become due and payable, and the Company shall have and may
exercise any and all rights and remedies available to it at law or in equity.
Maker promises to pay on demand all reasonable out-of-pocket costs of and
expenses of the Company in connection with the collection of amounts due
hereunder,
1
<PAGE>
including, without limitation, attorneys' fees incurred in connection therewith,
whether or not any lawsuit is ever filed with respect thereto.
Maker and any endorsers or guarantors of this Note for themselves, their
heirs, legal representatives, successors and assigns, respectively, severally
waive diligence, presentment, protest and demand and also notice of protest,
demand, dishonor and nonpayment of this Note.
This Note shall inure to the benefit of the Company and its successors and
assigns. The obligations of Maker hereunder shall not be assignable without the
consent of the Company.
This Note shall be governed by and construed in accordance with the laws of
the State of California. If there is a lawsuit on this Note, the parties agree
to submit to the jurisdiction of the courts of Santa Clara County, California.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as
of the date first above written.
MAKER
-------------------------
2
<PAGE>
Exhibit E
AMENDMENT
TO
BEA SYSTEMS, INC.
1997 STOCK INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
This Amendment is made and dated as of September 1, 1999 by and between BEA
Systems, Inc., a Delaware corporation (the "Company") and William T. Coleman
("Optionee") with respect to unvested stock options that have been previously
granted, between the Company and Optionee (the "Agreement") granted under the
Company's 1997 Stock Incentive Plan (the "Plan"):
RECITALS
WHEREAS, the Company and Optionee now desire to amend Stock Option
Agreements to provide for the full vesting of the Options upon a Change in
Control (as defined in the Plan) of the Company provided that both of the
conditions, as specified below, are met:
1. That the initiation (Memo of Understanding or other document that
binds both parties) of a business combination resulting in a Change in
Control occurs 6 months from the effective date of this Agreement.
2. That there is a substantive change of responsibilities after or as a
result of a Change in Control, regardless of when the Change in
Control occurs.
NOW THEREFORE, the parties hereto agree as follows:
AGREEMENT
1. Vesting of Right to Exercise Option. The Vesting Schedule of the
-----------------------------------
Agreement, as set forth in the Notice of Stock Option Grant related thereto, is
hereby amended in its entirety to read as follows:
"Vesting Schedule:
Twenty-five percent (25%) of the Number of Shares shall vest and may
be exercised upon the first anniversary of the Date of Grant and an
additional 1/48th of the Number of Shares shall vest and may be exercised
upon the monthly anniversary of the Date of Grant thereafter; provided,
however, that all of the Number of Shares shall vest immediately if, as a
result of a Change in Control or Corporate Transaction (as defined in
<PAGE>
the Plan) which takes place after March 1, 2000, Optionee's employment is
terminated by the Company or a successor company without "Cause" or
voluntarily by the Optionee with "Good Reason" following the Corporate
Transaction or Change in Control.
For the purposes of this Agreement "Cause" and "Good Reason" has the
meanings set forth in Optionee's Employment Agreement dated September 1,
1999.
2. Agreement Continues. Except as specifically modified herein, the terms
-------------------
and conditions of the Agreement shall remain in full force and effect.
3. Definitions. Capitalized terms used herein shall have the meanings set
-----------
forth in the Agreement, unless otherwise specifically defined herein.
4. Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed on
its behalf, and Optionee has hereunto set Optionee's hand as of the day and year
first above written.
BEA SYSTEMS, INC.,
a Delaware corporation
By: Robert F. Donohue
--------------------------------
Title: V.P., Legal and Secretary
-----------------------------
Optionee:
/s/ William T. Coleman III
-----------------------------------
William T. Coleman III
Address:
---------------------------
<PAGE>
EXHIBIT 10.17
PROMISSORY NOTE SECURED BY DEED OF TRUST
$400,000.00 December 15, 1999
Santa Clara County, California
FOR VALUE RECEIVED, the undersigned JOE MENARD (sometimes hereinafter referred
to as "Employee") and LAURA MENARD, husband and wife (together "Maker"), hereby
promises to pay to BEA SYSTEMS, INC., a California corporation ("Payee") at 2315
N. First Street, San Jose, CA 95131, Attn.: Jeanne Wu, or at such other place
or to such other party as Payee may from time to time designate, on the earlier
of: (i) five (5) years after the date hereof; (ii) ninety (90) days after Maker
voluntarily leaves his employment with Payee; or (iii) six (6) months after the
date that Maker involuntarily leaves his employment with Payee, the principal
sum of FOUR HUNDRED THOUSAND DOLLARS AND 00/100 ($400,000.00), together with
interest on so much thereof as is from time to time outstanding and unpaid, from
the date of the advance of the principal evidenced hereby, at the interest rate
provided herein, in lawful money of the United States of America and in
immediately available funds. Maker shall not be obligated to pay interest
hereunder except as provided below.
This Note is secured by that certain Deed of Trust and Assignment of Rents
(Modified Long Form Acceleration Clause) of even date herewith (the "Deed of
Trust"), encumbering the property commonly known as 18873 Belgrove Circle,
Saratoga, California 95070, and more particularly described in the Deed of
Trust (the "Property").
(i) Prepayments. Maker reserves the right to prepay the outstanding
-----------
principal amount of this Note, and all interest accrued thereon, in full or in
part at any time during the term of this Note without notice and without premium
or penalty.
(ii) Interest. Interest shall accrue on the then outstanding unpaid
--------
principal amount of this secured promissory note (the "Note") from the date
hereof until the date of payment in full, at the rate of seven percent (7%) per
annum, compounded annually, computed on the basis of a 360-day year and twelve
(12) 30-day months for each full calendar month and on the actual number of days
elapsed for any partial month in which interest is being calculated.
(iii) Due on Sale. In the event that the Property or any portion
-----------
thereof, or any interest therein is sold, agreed to be sold, conveyed or
alienated by Maker, by operation of law or otherwise, the outstanding principal
amount of this Note, including all accrued interest, irrespective of the
maturity date set forth herein shall, at the option of Holder and without demand
or notice, immediately become due and payable.
(iv) Purpose of Loan, Non-transferability, Use of Loan Proceeds,
-----------------------------------------------------------
Certification of Borrower. The Property is being acquired in connection with
- -------------------------
the transfer of Employee
1
<PAGE>
to a "new principal place of work" as defined in Internal Revenue Code Section
217(c). This Note and the benefits of the interest arrangements hereunder are
not transferable by Maker and are conditioned on the future performance of
substantial services by Employee. The proceeds of this Note shall be used only
to purchase the Property which is the new "principal residence" of Maker within
the location of Employee's new principal place of work as such term is described
in Treasury Regulation 1.217-2(b)(8). Maker certifies to Payee that Maker
reasonably expects to be entitled to, and will itemize, deductions for each year
the loan is outstanding.
(v) Events of Default and Remedies. Any one of the following occurrences
------------------------------
shall constitute an "Event of Default" under this Note:
(a) Maker fails to make payment of the full principal amount of this
Note, together with accrued interest, as and when the same becomes due and
payable in accordance with the terms hereof.
(b) Maker becomes insolvent or bankrupt, commits any act of
bankruptcy, generally fails to pay its debts as they become due, becomes the
subject of any proceedings or action of any regulatory agency or any court
relating to insolvency, or makes an assignment for the benefit of her creditors,
or enters into any agreement for the composition, extension, or readjustment of
all or substantially all of her obligations.
(c) An event of default occurs under the Deed of Trust.
Upon the occurrence of any Event of Default hereunder, the entire
unpaid principal balance of this Note, together with accrued interest, shall, at
the option of the Payee and without notice or demand of any kind to Maker or any
other person, immediately become due and payable, and such principal amount
shall, at the option of Holder, bear interest at the rate of ten percent (10%)
or the highest rate of interest then allowed by law, whichever is greater (the
"Default Rate"), until paid, such interest to be compounded annually and Payee
shall have and may exercise any and all rights and remedies available to it at
law or in equity.
(vi) Attorneys' Fees and Costs. Maker promises to pay on demand all
-------------------------
out-of-pocket costs of and expenses of Payee in connection with the collection
of amounts due hereunder, including, without limitation, attorneys' fees and
expenses incurred in connection therewith, whether or not any lawsuit is ever
filed with respect thereto.
(vii) Miscellaneous.
-------------
(a) Waiver. Maker waives diligence, presentment, protest and
------
demand and also notice of protest, demand, dishonor and nonpayment of this Note.
No extension of time for the payment of this Note shall affect the original
liability under this Note of Maker. The pleading of any statute of limitations
as a defense to any demand against Maker is expressly waived by Maker to the
full extent permitted by law.
2
<PAGE>
(b) Setoff. Maker's obligation to pay Payee shall be absolute and
------
unconditional and the rights of Payee shall not be subject to any defense,
setoff, counterclaim or recoupment or by reason of any indebtedness or liability
at any time owing by Payee to Maker.
(c) Payment Notice. This Note is subject to Section 2966 of the
--------------
California Civil Code, which provides that the Payee of this Note shall give
written notice to Maker, or her successor in interest, of prescribed information
at least ninety (90) days and not more than one hundred fifty (150) days before
any balloon payment is due.
(d) Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California. This Note has been
delivered to Payee and accepted by Payee in the State of California. If there is
a lawsuit on this Note, Maker shall submit, at Payee's request, to the
jurisdiction of the courts of Santa Clara County, California.
(e) Successors and Assigns. This Note shall inure to the benefit of
----------------------
Payee and its successors and assigns. The obligations of Maker hereunder shall
not be assignable.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note
as of the date first above written.
MAKER
/s/ Joe Menard
_________________________
Joe Menard
/s/ Laura Menard
_________________________
Laura Menard
3
<PAGE>
EXHIBIT 10.18
OFFICE LEASE
RUSS BUILDING,
Landlord
and
BEA SYSTEMS, INC.,
Tenant
DATED AS OF: September 24th, 1999
----
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Page
- --------- ----
<C> <S> <C>
1. Premises..................................................... 1
2. Certain Basic Lease Terms.................................... 1
3. Term; Delivery of Possession of Premises..................... 2
4. Tenant Improvements; Landlord's Allowance; Landlord's Work... 2
5. Monthly Rent................................................. 7
6. Letter of Credit............................................. 8
7. Additional Rent: Increases in Operating Expenses and Tax
Expenses..................................................... 9
8. Use of Premises; Compliance with Law......................... 14
9. Alterations and Restoration.................................. 16
10. Repair....................................................... 18
11. Abandonment.................................................. 19
12. Liens........................................................ 19
13. Assignment and Subletting.................................... 19
14. Indemnification of Landlord.................................. 24
15. Insurance.................................................... 25
16. Mutual Waiver of Subrogation Rights.......................... 26
17. Utilities.................................................... 26
18. Personal Property and Other Taxes............................ 29
19. Rules and Regulations........................................ 29
20. Surrender; Holding Over...................................... 29
21. Subordination and Attornment................................. 30
22. Financing Condition.......................................... 31
23. Entry by Landlord............................................ 31
24. Insolvency or Bankruptcy..................................... 31
25. Default and Remedies......................................... 32
26. Damage or Destruction........................................ 34
27. Eminent Domain............................................... 36
28. Landlord's Liability; Sale of Building....................... 37
29. Estoppel Certificates........................................ 37
30. Right of Landlord to Perform................................. 37
31. Late Charge.................................................. 38
32. Attorneys' Fees; Waiver of Jury Trial........................ 38
33. Waiver....................................................... 39
34. Notices...................................................... 39
35. Deleted...................................................... 39
36. Defined Terms and Marginal Headings.......................... 39
37. Time and Applicable Law...................................... 39
38. Successors................................................... 39
39. Entire Agreement; Modifications.............................. 40
40. Light and Air................................................ 40
41. Name of Building............................................. 40
42. Severability................................................. 40
43. Authority.................................................... 40
44. No Offer..................................................... 40
45. Real Estate Brokers.......................................... 40
46. Consents and Approvals....................................... 40
47. Reserved Rights.............................................. 40
48. Financial Statements......................................... 41
49. Deleted...................................................... 41
50. Nondisclosure of Lease Terms................................. 41
51. Hazardous Substance Disclosure............................... 42
52. Option to Renew.............................................. 42
53. Right of First Offer......................................... 44
54. Ancillary Sites, Lines and Equipment......................... 45
55. Parking...................................................... 51
</TABLE>
<PAGE>
EXHIBITS:
- ---------
A - Outline of Premises
B - Rules and Regulations
C - Landlord's Work
<PAGE>
LEASE
-----
THIS LEASE is made as of the 24th day of September, 1999, between RUSS
----
BUILDING ("Landlord"), and BEA SYSTEMS, INC., a Delaware corporation ("Tenant").
1. Premises. Landlord hereby leases to Tenant, and Tenant hereby leases
--------
from Landlord, on the terms and conditions set forth herein, the space outlined
on the attached Exhibit A (the "Premises"). The Premises are located on the
---------
floor(s) specified in Paragraph 2 below of the building (the "Building")
presently known as the Russ Building, located at 235 Montgomery Street, San
Francisco, California. The Building, its garage, the parcel(s) of land (the
"Land) on which the Building and garage are located and the other improvements
on the Land are referred to herein as the "Real Property".
Tenant's lease of the Premises shall include the right to use, in common
with others and subject to the other provisions of this Lease, the public
lobbies, entrances, stairs, elevators and other public portions of the Building.
All of the windows and outside walls of the Premises and any space in the
Premises used for shafts, stacks, pipes, conduits, ducts, electrical equipment
or other utilities or Building facilities are reserved solely to Landlord and
Landlord shall have rights of access through the Premises for the purpose of
operating, maintaining and repairing the same. Notwithstanding the preceding
sentence, Tenant shall have the License as set forth in Paragraph 54 below.
2. Certain Basic Lease Terms. As used herein, the following terms shall
-------------------------
have the meaning specified below:
a. Floors on which the Premises are located: A portion of the
fourteenth (14) floor and the entire fifteenth (15th) and
sixteenth (16) floors.
b. Lease term: Approximately seven (7) years. The term of this Lease
shall commence as to each Increment (as defined below) on the
earlier of (i) the date of Substantial Completion (as defined in
Paragraph 4.b. hereof) of the Tenant Improvements in such
Increment, or (ii) the date on which Tenant shall commence the
conduct of business from such Increment or any portion thereof.
The date the Lease term so commences as to each Increment is
referred to herein as the "Commencement Date" for such Increment.
The term of the Lease shall end on the last day of the eighty-
fourth (84th) full calendar month following the first Commencement
Date to occur hereunder (the "Expiration Date). As used in this
Lease, an "Increment" means each of (x) the entirety of the
portion of the Premises located on the 15th and 16th floors of the
Building (the "First Increment"), and (y) the entirety of the
portion of the portion of the Premises located on the 14th floor
of the Building (the "Second Increment"). In no event shall the
Commencement Date of the Second Increment occur prior to the
Commencement Date of the First Increment, unless the Commencement
Date of the Second Increment shall have occurred by reason of
clause (ii) above of this Paragraph 2.b.; provided, however, that
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this sentence shall not impair any deemed acceleration of the
Commencement Date of either or both Increments by reason of Tenant
Delays for purposes of determining the commencement of Tenant's
obligation to pay Monthly Rent as provided in Paragraph 5.a.
below. As an additional requirement of Substantial Completion of
the First Increment prior to the Second Increment, Landlord shall
close-off or otherwise secure the internal stairway between such
two Increments.
c. Monthly Rent: $181,393.00 (which equals $35.00 per rentable square
foot per year).
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d. Security Deposit: $181,393.00.
e. Tenant's Share: 13.09%, which percentage has been calculated by
dividing (A) the rentable square footage of the Premises, which
the parties stipulate as totaling 62,192 rentable square feet for
purposes of this Lease (of which 9,636 rentable square feet is
attributable to the portion of the Premises located on the 14th
floor, 26,032 rentable square feet is attributable to the 15th
floor, and 26,524 rentable square feet is attributable to the 16th
floor), by (B) the total rentable square footage of the Building,
which the parties stipulate as totaling 475,000 rentable square
feet for purposes of this Lease.
f. Base Year: The calendar year 2000.
Base Tax Year: The fiscal tax year ending June 30, 2001.
g. Business of Tenant: Software development and sales.
h. Real estate brokers: Shorenstein Management, Inc., and CB Richard
Ellis, Inc.
3. Term: Delivery of Possession of Premises.
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a. The term of this Lease shall commence as provided in Paragraph
2.b. and, unless sooner terminated pursuant to the terms hereof or at law, shall
expire on the Expiration Date (defined in Paragraph 2.b.).
b. Landlord shall act diligently and in good faith to deliver the
Premises to Tenant with the Tenant Improvements Substantially Completed therein
on or prior to May 1, 2000. In the event of a delay in the delivery of any
Increment of the Premises to Tenant, this Lease shall not be void or voidable,
nor shall Landlord be liable to Tenant for any loss or damage resulting
therefrom; provided, however, that in the event that Landlord does not deliver
an Increment to Tenant on or prior to June 1, 2000, as such date shall be
extended for delays caused by Force Majeure or Tenant Delays (as defined in
Paragraph 4.f.) (such date, as so extended, the "Trigger Date"), then for each
day after the Trigger Date that passes before the delivery date of such
Increment, Monthly Rent first payable by Tenant under Paragraph 5 below for such
Increment only shall be abated one-half (1/2) day. In addition, in the event
that Landlord does not deliver either Increment to Tenant on or prior to
September 1, 2000, as such date shall be extended for delays caused by Force
Majeure or Tenant Delays (such date, as so extended, the "Second Trigger Date"),
Tenant shall have the right to terminate this Lease, as to such Increment only,
by notice to Landlord given, if at all, within ten (10) days after the Second
Trigger Date. For purposes of this Lease, "Force Majeure" shall mean strikes,
lock-outs, labor disputes, shortages of material or labor, fire, earthquake,
flood or other casualty, acts of God or any other cause (other than financial
inability) beyond the reasonable control of Landlord, except that for purposes
of determining the Second Trigger Date only, a holdover of the Premises by any
tenant or other occupant shall not be considered Force Majeure.
4. Tenant Improvements: Landlord's Allowance: Landlord's Work.
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a. Plans. Improvements shall be constructed in the Premises in
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accordance with this Paragraph 4. On or before September 22, 1999, Tenant shall
furnish to Landlord for Landlords review and approval (which approval shall not
be unreasonably withheld) detailed layout plans and finish specifications (the
"Space Plans") prepared by Interior Architects or another architect reasonably
acceptable to Landlord. The Space Plans shall show all of the improvements which
Tenant desires to be constructed in the Premises, and all such improvements
shall comply with all applicable building codes and other legal requirements.
The Space Plans and improvements shown thereon shall also comply with the
"Tenant Construction Standards and Conditions for Construction" applicable to
the Building (the "Building Construction Standards"), receipt of which is hereby
acknowledged by Tenant. The Space Plans shall separately note any proposed
structural work or extraordinary or supplemental electrical, plumbing or HVAC
requirements, and shall contain such detail and specifications as would permit
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a general contractor to obtain preliminary estimates of the cost of performing
all work shown thereon. The Space Plans shall identify any "long-lead" materials
(as described in Paragraph 4.f. below) then known by Tenant or Tenant's
architect. Landlord shall respond to the Space Plans within five (5) Business
Days of its receipt thereof. Tenant shall respond promptly to any reasonable
objections of Landlord to the Space Plans and shall resubmit appropriately
revised Space Plans prepared by Tenant's architect within five (5) Business Days
of Tenant's receipt of Landlord's objections. The Space Plans, as finally
approved in writing by Landlord, shall be referred to herein as the "Final Space
Plans." On or prior to the later of eighteen (18) Business Days of the date
Landlord approves in writing the Space Plans or October 22, 1999, Tenant shall
furnish to Landlord for Landlord's written approval (which shall not be
unreasonably withheld) working plans and specifications (the "Working Drawings)
prepared by Tenant's architect for all of the improvements which Tenant desires
to be constructed in the Premises; provided, however, that if Tenant shall not
submit the Space Plans to Landlord by September 22, 1999 as required above, then
for each calendar day after such date until (and including) the date on which
Tenant shall submit the Space Plans to Landlord, the aforesaid eighteen (18)
Business Day period shall be decreased one(l) Business Day. The Working Drawings
shall show improvements that conform to the Final Space Plans (except to the
extent specifically noted therein or in accompanying specifications) and the
Building Construction Standards and shall be in sufficient detail as to enable
the general contractor for the work to obtain all necessary governmental permits
for construction of all of the improvements and to secure complete bids from
qualified contractors to perform the work for all of the improvements to be
constructed in the Premises. Landlord shall respond to the Working Drawings
within ten (10) Business Days of its receipt thereof. Tenant shall respond
promptly to any reasonable objections of Landlord to the Working Drawings and
shall resubmit appropriately revised Working Drawings prepared by Tenant's
architect within five (5) Business Days of Tenant's receipt of Landlord's
objections. (The Working Drawings, as approved in writing by Landlord, as
revised by Tenant from time to time with Landlord's written approval in
accordance with the following provisions of this Paragraph 4, are hereinafter
called the "Final Plans", and the improvements to be performed in accordance
with the Final Plans are hereinafter called the "Tenant Improvements").
b. Construction. Landlord and Tenant acknowledge that Turner-
------------
Shorenstein, L.P. or an affiliate thereof ("Landlord's Contractor") has been
selected as general contractor for the construction of the Tenant Improvements.
No later than fifteen (15) Business Days after approval of the Final Plans,
Landlord shall cause Landlord's Contractor to receive bids from not less than
three (3) qualified subcontractors for each major trade working on the Tenant
Improvements. At Tenant's election, Tenant or Tenant's architect may suggest
subcontractors to be included on Landlord's Contractor's bid invitation list
and, subject to Landlord's prior approval (which shall not be unreasonably
withheld), such subcontractors shall be so included. Within five (5) Business
Days after the earlier of the expiration of the aforesaid fifteen (15) Business
Day period or the date Landlord's Contractor has received all responses to its
bid requests, Landlord's Contractor will analyze the same and provide Tenant
with a copy of Landlord's Contractor's bid analysis, recommended winning bidders
and estimated budget for the Tenant Improvements, based upon the selected
subcontractors' bids and including Landlord's Contractor's Charge (as defined in
Paragraph 4.g. below). Upon Tenant's request, such bid analysis shall include a
schedule of values and a copy of any or all of the bids received by Landlord.
Tenant shall have six (6) Business Days after the receipt of Landlord's
Contractor's bid analysis to approve or reasonably disapprove Landlord's
Contractor's selection of bids and Landlord's Contractor's estimated budget.
During such six (6) Business Day period Tenant shall have the right to
participate with Landlord in negotiations with the bidders. In the event Tenant
shall disapprove of any bid selected by Landlord's Contractor, Tenant shall
notify Landlord in writing of Tenant's objection to such bid. In no event shall
Tenant be required to approve a bid solely by reason of the fact that it is the
lowest bid. Further, if Tenant disapproves of the budget within such six (6)
Business Day period and the budget will not be revised to Tenant's satisfaction
by virtue of selection of alternative bids by Tenant, the Final Plans shall
promptly be modified by Tenant's architect, in order to satisfactorily reduce
the amount of the estimated budget. Any and all revisions to the Final Plans
shall be subject to Landlord's reasonable approval. Upon Tenant's disapproval of
any bid (without substitution of another received bid previously received and
approved by Landlord and Tenant)
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or the revision of the Final Plans, Landlord shall cause Landlord's Contractor
to promptly issue new bid requests and upon receipt of new bids to prepare and
submit to Tenant a revised estimated budget. Tenant shall respond to the revised
estimated budget in the manner described above. Any delay in commencement of the
Tenant Improvements or Substantial Completion of the Tenant Improvements or
increased cost of the Tenant Improvements caused directly or indirectly by any
such new bid requests or revision to the Final Plans or the budget shall
constitute a Tenant Delay as defined in Paragraph 4.f. below. If Tenant fails to
raise any objections to the analysis and/or budget within the six (6) Business
Day period(s) described above, Tenant shall be deemed to have approved
Landlord's Contractor's recommended bid acceptance and proposed budget. Upon
Tenant's approval or deemed approval of the bids and budget Landlord shall
commence and diligently pursue to completion construction of the Tenant
Improvements; provided, however, that Landlord shall have no obligation to
commence such construction prior to January 2, 2000 or, if later, the date the
Premises shall be surrendered by the current tenant thereof (or if either such
date is not a Business Day, the first Business Day thereafter). The budget so
approved or deemed approved by Tenant in accordance with the foregoing shall
constitute a fixed budget for the Tenant Improvements (subject to use of any
contingencies and reconciliation of any allowances with actual amounts, all as
set forth in such approved budget), and Tenant shall have no liability for any
costs in excess of such budget, other than by reason of Tenant Delays and
Changes as more particularly set forth below. "Substantial Completion" of the
Tenant Improvements shall be deemed to have occurred when they have, in
Landlord's reasonable judgment, been completed in accordance with Final Plans,
subject only to the completion or correction of Punch List Items, and the
portion of the Premises in which such Tenant Improvements are located may be
legally occupied for general office purposes. Punch List Items shall mean
incomplete or defective work or materials in the Tenant Improvements which do
not materially impair Tenant's use of the Premises for the conduct of Tenant's
business therein. Landlord shall complete or correct all Punch List Items as
soon as practicable, provided that Tenant shall have identified the same by
written notice to Landlord within fifteen (15) days after Landlord's delivery of
the Premises to Tenant. Tenant shall accept the Premises upon Substantial
Completion of the Tenant Improvements and notice thereof from Landlord. Tenant's
acceptance of the Premises shall not be deemed a waiver of (i) any latent
defects in the Tenant Improvements, provided that such defects shall be
identified in writing to Landlord within a reasonable period after discovery
thereof by Tenant, but in any event within one (1) year after the Commencement
Date applicable to such portion of the Premises, or (ii) Landlord's repair and
maintenance obligations under Paragraph 10.b. below.
c. Changes. In the event that Tenant shall desire any change in or
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to the Final Plans (a "Change"), Tenant shall submit to Landlord for Landlord's
review and written approval a copy of the change order prepared by Tenant's
architect or Tenant's Contractor with respect to such Change (the "Change
Order"), together with revised Working Drawings prepared by Tenant's architect
incorporating the requested Change and clearly identifying the same as such on
the revised Working Drawings. Landlord shall not unreasonably withhold or delay
its approval of the Change Order or revised Working Drawings, provided, however,
that Landlord shall have at least three (3) Business Days after receipt thereof
to review any proposed Change, or, in the case of any proposed Change affecting
the Base Building (as defined in Paragraph 8.b), such longer period as shall be
reasonable. In the event that Landlord shall approve any proposed Change,
together with such approval, if practicable, and if not practicable as soon
thereafter as is practicable, Landlord shall give Tenant Landlord's estimated
increase or decrease in the cost of the Tenant Improvements which would result
from incorporating such Change and Landlord's estimate of the delay, if any, in
the commencement or completion of the Tenant Improvements which would result
from incorporating such Change. Landlord will use reasonable care in preparing
the estimates, but they shall be good faith estimates only and will not limit
Tenant's obligation to pay for the actual increase in the cost of the Tenant
Improvements or Tenant's responsibility for the actual construction delay
resulting from the Change. Notwithstanding the foregoing, upon Tenant's request
the cost of such Change shall be established and fixed by firm bid, with the
parties hereby acknowledging that any delay in commencement of the Tenant
Improvements or Substantial Completion of the Tenant Improvements or increased
cost of the Tenant Improvements caused directly or indirectly by any such bid
procedure shall constitute a Tenant Delay as defined in Paragraph 4.f. below.
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<PAGE>
Within five (5) Business Days after receipt of such cost and delay estimates (or
bids, as applicable), Tenant shall notify Landlord in writing whether Tenant
approves the Change. If Tenant fails to approve the change within such five (5)
Business Day period, construction of the Tenant Improvements shall proceed as
provided in accordance with the Final Plans as they existed prior to the
requested Change. If, following Tenant's review of the estimated costs and
delays (or bids, as applicable), Tenant desires Landlord to incorporate the
Change into the Tenant Improvements, then Tenant and Landlord shall execute a
change order for such Change on Landlord's standard form therefor, and the term
"Final Plans" shall thereafter be deemed to refer to the Working Drawings as so
revised and approved, and the budget for the Tenant Improvements shall
thereafter be deemed to refer to the budget, as revised to take into account
such estimated (or bid, as applicable) costs.
d. Landlord's Work. In addition to the Tenant Improvements, Landlord
---------------
shall, at Landlord's sole cost and expense, perform the work set forth on
Exhibit C attached hereto ("Landlord's Work"). Where reference is made in this
- ---------
Lease to construction by Landlord, Tenant acknowledges that such construction
shall be performed by Landlord through Landlord's Contractor, as general
contractor.
e. Early Entry. In the event that Landlord shall allow Tenant to
-----------
enter of any portion of the Premises prior to the commencement of the term of
this Lease as to such portion, for purposes of Tenant's installation of
furniture, fixtures, electronic communication equipment, telephones or other
equipment or for any other purposes, the provisions of Paragraphs 14 and 15 of
this Lease, entitled Indemnification and Insurance, respectively, shall apply in
full to such space, and Tenant shall be solely responsible for all such
furniture, fixtures and equipment and for any loss or damage thereto from any
cause whatsoever. Such early access shall be granted in Landlord's reasonable
discretion. Without limitation, in no event will Landlord grant such early
access or installation if Landlord shall determine in good faith that the same
might delay or interfere with Landlord's Work or Landlord's construction of the
Tenant Improvements, or increase the cost of Landlord's Work or the Tenant
improvements. In the event any early entry is granted to Tenant, the parties
shall cause their respective contractors to cooperate so as to promote the
orderly and efficient progress of their respective work.
f. Tenant Delays. Tenant shall be responsible for, and shall pay to
-------------
Landlord, any and all costs and expenses incurred by Landlord in connection with
the following, or by reason of any delay in the commencement or completion of
the Tenant Improvements or Landlord's Work caused by the following: (i) the
failure of Tenant to submit the Space Plans, Final Space Plans, Working Drawings
or Final Plans to Landlord by the dates or within the time periods set forth in
Paragraph 4.a. above, (ii) the failure of the Space Plans, Final Space Plans,
Working Drawings or Final Plans to meet the applicable requirements of Paragraph
4.a. above, (iii) any changes in the Space Plans, Working Drawings or Final
Plans, after submission thereof to Landlord (including any costs or delays
resulting from proposed changes that are not ultimately made), (iv) any delay by
Tenant in promptly responding to inquiries regarding the construction of the
Tenant Improvements or Landlord's Work or in granting Tenant's prompt approval
of materials or finishes for the Tenant Improvements or Landlord's Work, (v) any
failure by Tenant to timely pay any amounts due from Tenant hereunder (it being
acknowledged that if Tenant fails to make or otherwise delays making such
payments, Landlord may stop work on the Tenant Improvements and/or Landlord's
Work rather than incur costs which Tenant is obligated to fund but has not yet
done so and any delay from such a work stoppage will be a Tenant Delay), (vi)
the inclusion in the Tenant Improvements of any so-called "long-lead" materials
(such as fabrics, panelling, tiling, carpeting, light fixtures, supplemental
HVAC equipment or other items that must be imported or are of unusual character
or limited availability), (viii) any interference by Tenant with the
construction of the Tenant Improvements or Landlord's Work, or (viii) any other
delay requested or caused by Tenant. Each of the foregoing is referred to herein
and in the Lease as a "Tenant Delay". Notwithstanding the foregoing, Tenant
shall not be charged with any delay by reason of clause (i) above if, in any
event, on or prior to January 1, 2000 the Final Plans and budget have been
approved by Landlord and Tenant, the bids for the Tenant Improvements have been
awarded and all contracts in connection therewith executed, all required permits
to commence and construct the Tenant Improvements have been obtained, and
Landlord is
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otherwise in a position to commence construction of the Tenant Improvements and
continue the same without any interruption resulting from the matters described
in such clause (i).
Landlord will use its good faith efforts to notify Tenant of any
Tenant Delay as soon as reasonably practicable after Landlord becomes actually
aware of such Tenant Delay, together with Landlord's then good faith estimate of
the probable duration and/or cost, as applicable, of such Tenant Delay. Without
limitation, Landlord will use its good faith efforts to notify Tenant of "long
lead items" as soon as reasonably practicable after actually being advised of
the delay by the suppliers involved, or otherwise actually becoming aware of the
delay, including any awareness gained from Landlord's review of the relevant
plans or drawings. Landlord will suggest alternative products to alleviate the
delay, if possible, and may substitute reasonably equivalent products with
Tenant's approval, which approval shall not be unreasonably withheld.
g. Cost of Improvements. Landlord shall cause Landlord's Contractor
--------------------
to construct the Tenant Improvements on a cost basis plus a charge of thirteen
and one-half percent (13 1/2%) ("Landlord's Contractor's Charge") of the total
cost of the Tenant Improvements (exclusive of architectural, engineering and
permit fees) for overhead and profit, and supervision (for only 25 hours per
week) and general conditions during the period from commencement of construction
until Substantial Completion of the Tenant Improvements. The general conditions
included within Landlord's Contractor Charge include project executive, general
superintendent, home office expenses, general overhead, office supplies,
accounting services, computer charges, telephone expenses, fax office/job site,
data processing, secretarial services, mail, express mail, city licenses
(excluding building and other permits), project manager, estimator scheduling,
superintendent, general labor, daily clean-up and final clean-up, protection of
work, petty cash, safety enforcement and safety signage, small tools, first aid
facilities, general field coordination, project field office, tenant vendor
coordination, job trailer (if applicable), costs of power, and temporary
structures. Expressly excluded from general conditions are all insurance costs,
blue printing costs and San Francisco Business Taxes. The cost of the
construction and installation of the Tenant Improvements shall be borne as
follows:
i. Landlord shall pay the entire cost of Landlord's Work (as
described in Paragraph 4.d. above).
ii. In addition to the sums referenced in clause i. above,
Landlord shall contribute toward the cost of the construction and
installation of the Tenant Improvements an amount not to exceed One
Million Eight Hundred Sixty-Five Thousand Seven Hundred Sixty Dollars
($1,865,760.00) (which is $30.00 per agreed rentable square foot of the
Premises) ("Landlord's Contribution"). The following provisions shall
govern the payment of Landlord's Contribution:
A. Excess Cost: Share of Costs. If the cost of construction of
---------------------------
the Tenant Improvements (including Landlord's Contractor's Charge)
exceeds the funds available therefor from Landlord's Contribution, then
Tenant shall pay all such excess (the "Excess Cost"). Based on the
estimated cost (the "Estimated Costs") of the construction of the Tenant
Improvements, the prorata share of the Estimated Costs payable by
Landlord and Tenant shall be determined and an appropriate percentage
share established for each (a "Share of Costs"). Tenant and Landlord
shall fund the cost of such work as the same is performed, in accordance
with their respective Share of Costs for such work. Each installment of
Tenant's Share of Costs shall be payable within thirty (30) days after
invoicing by Landlord or Landlord's Contractor, but in no event shall
Tenant be required to fund such installments more frequently than once
every thirty (30) days. At such time as Landlord's Contribution has been
entirely disbursed, Tenant shall pay the remaining Excess Cost, if any,
which payments shall be made in installments as construction progresses
in the same manner as Tenant's payments of Tenant's Share of Costs were
paid.
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B. Certain Costs. Portions of Landlord's Contribution may, at
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Tenant's election, be applied toward Tenant's reasonable architectural
and engineering fees in connection with the design and construction of
the Tenant Improvements, including the costs of producing the Space
Plans, Working Drawings and Final Plan; provided, however, that the
portion of Landlord's Contribution applied to such fees and costs may not
exceed Two Dollars and Fifty Cents ($2.50) per rentable square foot of
the Premises. Landlord shall reimburse Tenant for such fees and costs
(or, if Tenant so notifies Landlord in writing, will make payments
directly to Tenant's architect, engineer or vendor) upon Landlord's
receipt of copies of receipted invoices and such other evidence as
Landlord shall reasonably require covering the same. In no event may any
portions of Landlord's Contribution be applied towards the costs of
personal property, equipment, trade fixtures, moving expenses, voice,
data and other cabling costs (which shall not be deemed to include costs
of bringing electrical power to the Premises or distributing electrical
power within the Premises), furniture (including work stations and
modular office furniture, regardless of the method of attachment to walls
and/or floors), signage or free rent.
C. Entire Premises to be Improved. Tenant acknowledges that
------------------------------
Landlord's Contribution is to be applied to the Tenant Improvements (and
the associated costs described above) covering the entire Premises. If
Tenant does not improve the entire Premises, then, without limitation of
any other rights or remedies of Landlord hereunder, Landlord's
Contribution shall be adjusted on a prorata per rentable square foot
basis to reflect the number of rentable square feet actually being
improved. In addition, in no event shall Landlord be obligated to
disburse, as to any floor of the Premises, a portion of Landlord's
Contribution which exceeds Thirty-Five Dollars ($35.00) per rentable
square foot of the portion of the Premises on such floor. The invoices or
other documentation supplied by Tenant to Landlord pursuant to Paragraph
4.g.ii.B. above shall contain such information as shall be reasonably
required by Landlord to determine the portion of the Premises as to which
the disbursements of Landlord's Contribution are applicable.
D. Building Services During Early Entry. Tenant may use the
------------------------------------
Building's freight elevator and loading dock, on a non-exclusive basis
during Business Hours, and in accordance with the Building's rules and
procedures (including scheduling and sharing requirements), free of
charge during the period of early entry, if any, granted pursuant to
Paragraph 4.e. above. If Tenant desires use of the freight elevator or
loading dock during other than Business Hours, then Tenant may reserve
such use in compliance with the Building's rules and procedures and shall
pay Landlord a reasonable amount for providing any elevator personnel or
security services in connection with such use. Any such security services
shall be solely for the benefit of Landlord's property, and in no event
shall Landlord be liable to Tenant for, and Tenant hereby releases
Landlord and its agents and contractors from, liability for, any theft,
loss or damage of or to Tenant's property.
5. Monthly Rent.
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a. On or before the first day of each calendar month during the term
hereof, Tenant shall pay to Landlord, as monthly rent for the Premises, the
Monthly Rent specified in Paragraph 2 above; provided, however, that Tenant
shall have no obligation to pay Monthly Rent applicable to any floor of the
Premises until the Commencement Date applicable to such floor shall have
occurred. If any Commencement Date is a day other than the first day of a
calendar month, or if the term terminates on a day other than the last day of a
calendar month, then the Monthly Rent payable for such partial month shall be
appropriately prorated on the basis of a thirty (30)- day month. Monthly Rent
and the Additional Rent specified in Paragraph 7 shall be paid by Tenant to
Landlord, in advance, without deduction, offset, prior notice or demand, in
immediately available funds of lawful money of the United States of America, or
by good check as described
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below, at the office of Shorenstein Company, L.P., at 555 California Street,
14th floor, San Francisco, California 94104, or to such other person or at such
other place as Landlord may from time to time designate in writing. Payments
made by check must be drawn either on a California financial institution or on a
financial institution that is a member of the federal reserve system.
Notwithstanding the foregoing, if the Commencement Date shall be delayed by
reason of Tenant Delays, then for purposes of the commencement of Tenant's
obligation to pay Monthly Rent, the Commencement Date shall be deemed to have
occurred on the date it would have occurred but for the Tenant Delays.
b. All amounts payable by Tenant to Landlord under this Lease, or
otherwise payable in connection with Tenant's occupancy of the Premises, in
addition to the Monthly Rent hereunder and Additional Rent under Paragraph 7,
shall constitute rent owed by Tenant to Landlord hereunder.
c. Any rent not paid by Tenant to Landlord within five (5) days
after the date due shall bear interest from the date due to the date of payment
by Tenant at an annual rate of interest (the "Interest Rate") equal to the
lesser of (i) the maximum annual interest rate allowed by law on such due date
for business loans (not primarily for personal, family or household purposes)
not exempt from the usury law, or (ii) a rate equal to the sum of four (4)
percentage points over the six-month United States Treasury bill rate (the
"Treasury Rate") in effect from time to time during such delinquency (or if
there is no such publicly announced rate, the rate quoted by the San Francisco
Main Office of Bank of America, NT&SA, or any successor bank thereto, in pricing
ninety (90)-day commercial loans to substantial commercial borrowers).
Notwithstanding the foregoing, Landlord shall give Tenant notice of non-payment
of rent when due and five (5) days after delivery of such notice to cure such
non-payment once in each calendar year before assessing interest in such
calendar year pursuant to this Paragraph 5.c. Failure by Tenant to pay rent when
due, including any interest accrued under this subparagraph, after the
expiration of any applicable notice and cure period provided in Paragraph 25.a.
below, shall constitute an Event of Default (as defined in Paragraph 25 below)
giving rise to all the remedies afforded Landlord under this Lease and at law
for nonpayment of rent.
d. No security or guaranty which may now or hereafter be furnished to
Landlord for the payment of rent due hereunder or for the performance by Tenant
of the other terms of this Lease shall in any way be a bar or defense to any of
Landlord's remedies under this Lease or at law.
6. Letter of Credit. On or prior to November, 1, 1999, Tenant shall
----------------
deliver to Landlord the Letter of Credit described below as security for
Tenant's performance of all of Tenant's covenants and obligations under this
Lease; provided, however, that neither the Letter of Credit nor any proceeds
therefrom (the "Letter of Credit Proceeds") shall be deemed an advance rent
deposit or an advance payment of any other kind, or a measure or limitation of
Landlord's damages or constitute a bar or defense to any of the Landlords other
remedies under this Lease or at law upon Tenant's default. The Letter of Credit
shall be maintained in effect from the date of this Lease through sixty (60)
days after the expiration or earlier termination of the Term and Tenant's
vacation of the Premises, and on or prior to the expiration of such sixty (60)
day period, Landlord shall return to Tenant the Letter of Credit (unless
presented for payment as provided herein) and any Letter of Credit Proceeds then
held by Landlord (other than those held for application by Landlord as provided
below, including application to cure any failure by Tenant to restore the
Premises as required by this Lease upon the surrender thereof); provided,
however, that in no event shall any such return be construed as an admission by
Landlord that Tenant has performed all of its obligations hereunder. Landlord
shall not be required to segregate the Letter of Credit Proceeds from its other
funds and no interest shall accrue or be payable to Tenant with respect thereto.
Upon the occurrence and continuance of an Event of Default, Landlord may (but
shall not be required to) draw upon the Letter of Credit in such amount as will
enable Landlord to cure the Event of Default or to compensate Landlord for any
damage Landlord incurs as a result of the Event of Default, it being understood
that any use of the Letter of Credit Proceeds shall not constitute a bar or
defense to any of Landlord's other remedies under this Lease. In such event and
upon written notice from Landlord to Tenant specifying the amount of the Letter
of Credit Proceeds so utilized by Landlord and the particular purpose for which
such amount was applied, Tenant shall, within ten (10) Business Days after
Landlord's notice,
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deliver to Landlord an amendment to the Letter of Credit or a replacement
thereof in an amount equal to one hundred percent (100%) of the amount specified
below. Tenant's failure to deliver such amendment or replacement to Landlord
within such ten (10) Business Day period shall constitute an Event of Default
hereunder. No lessor under any ground or underlying lease or holder of or
beneficiary under a mortgage or deed of trust, nor any purchaser at any judicial
or private foreclosure sale of the Property or any portion thereof, shall be
responsible to Tenant for such Letter of Credit or any Letter of Credit Proceeds
unless such lessor, holder or purchaser shall have actually received the same.
As used herein, Letter of Credit shall mean an unconditional, irrevocable
letter of credit (hereinafter referred to as the "Letter of Credit") issued at
Tenant's sole expense by a Northern California office of Bank of America NT&SA
or another bank reasonably satisfactory to Landlord (the "Bank"), naming
Landlord as beneficiary, and in form and substance reasonably satisfactory to
Landlord, in the amount of One Hundred Eighty-One Thousand Three Hundred Ninety-
Three Dollars ($181,393.00). The Letter of Credit shall be for a one-year or, at
Tenant's election, longer, term and shall provide: (i) that Landlord may make
partial and multiple draws thereunder, up to the face amount thereof, (ii) that
Landlord may draw upon the Letter of Credit up to the full amount thereof, as
determined by Landlord, and the Bank will pay to Landlord the amount of such
draw upon receipt by the Bank of a sight draft signed by Landlord and
accompanied by a written certification from Landlord to the Bank stating either:
(a) that an Event of Default has occurred and is continuing under this Lease,
and the amount drawn by Landlord under the Letter of Credit is an amount
Landlord is entitled to draw pursuant to the provisions of this Lease or (b)
that an uncured failure by the Tenant to perform one or more of its obligations
has occurred under this Lease and there exist circumstances under which Landlord
is enjoined or otherwise prevented by operation of law from giving to Tenant a
written notice which would be necessary for such failure of performance to
constitute an Event of Default under this Lease, or (c) that Landlord has not
received notice from the Bank that the Letter of Credit will be renewed by the
Bank for at least one (1) year beyond the then relevant expiration date and
Tenant has not furnished Landlord with a replacement Letter of Credit as
hereinafter provided, or (d) that Bank no longer meets the requirements set
forth above and Tenant has not furnished Landlord with a replacement Letter of
Credit as required hereunder from a Bank meeting such requirements; and (iii)
that, in the event of Landlord's assignment or other transfer of its interest in
this Lease, the Letter of Credit shall be freely transferable by Landlord,
without charge and without recourse, to the assignee or transferee of such
interest and the Bank shall confirm the same to Landlord and such assignee or
transferee. The Letter of Credit shall further provide that a draw thereon
pursuant to clause (ii)(c) above may only be made during the thirty (30) day
period preceding the then applicable expiration date of the Letter of Credit. In
the event that the Bank shall fail to notify Landlord that the Letter of Credit
will be renewed for at least one (1) year beyond the then applicable expiration
date, and Tenant shall not have delivered to Landlord, at least thirty (30) days
prior to the relevant annual expiration date, a replacement Letter of Credit in
the amount required hereunder and otherwise meeting the requirements set forth
above, then Landlord shall be entitled to draw on the Letter of Credit as
provided above, and shall hold and apply the proceeds of such draw as Letter of
Credit Proceeds pursuant to this Section 6.01.
In the event that Tenant shall not timely deliver the Letter of Credit to
Landlord, in lieu thereof Tenant shall deliver One Hundred Eighty-One Thousand
Three Hundred Ninety-Three Dollars ($181,393.00) in cash to Landlord no later
than December 1, 1999, failing which an Event of Default shall be deemed to have
occurred hereunder. Such cash amount shall be held as Letter of Credit Proceeds
pursuant to this Paragraph 6.
7. Additional Rent: Increases in Operating Expenses and Tax Expenses.
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a. Operating Expenses. Tenant shall pay to Landlord, at the times
------------------
hereinafter set forth, Tenant's Share, as specified in Paragraph 2.e. above, of
any increase in the Operating Expenses (as defined below) incurred by Landlord
in each calendar year subsequent to the Base Year specified in Paragraph 2.f.
above, over the Operating Expenses incurred by Landlord during the Base Year.
The amounts payable under this Paragraph 7.a. and Paragraph 7.b. below are
termed "Additional Rent" herein.
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The term "Operating Expenses" shall mean the total costs and expenses
incurred by Landlord in connection with the management, operation, maintenance,
repair and ownership of the Real Property, including, without limitation, the
following costs: (1) salaries, wages, bonuses and other compensation (including
hospitalization, medical, surgical, retirement plan, pension plan, union dues,
life insurance, including group life insurance, welfare and other fringe
benefits, and vacation, holidays and other paid absence benefits) relating to
employees of Landlord or its agents engaged in the operation, repair, or
maintenance of the Real Property; (2) payroll, social security, workers'
compensation, unemployment and similar taxes with respect to such employees of
Landlord or its agents, and the cost of providing disability or other benefits
imposed by law or otherwise, with respect to such employees; (3) the cost of
uniforms (including the cleaning, replacement and pressing thereof) provided to
such employees; (4) premiums and other charges incurred by Landlord with respect
to fire, other casualty, rent and liability insurance, any other insurance as is
deemed necessary or advisable in the reasonable judgment of Landlord, or any
insurance required by the holder of any Superior Interest (as defined in
Paragraph 21 below), and, after the Base Year, costs of repairing an insured
casualty to the extent of the deductible amount under the applicable insurance
policy; provided that, if Landlord does not carry earthquake insurance during
the Base Year, but obtains earthquake insurance subsequent to the Base Year,
then the initial annual premium for the earthquake insurance shall not be
included in Operating Expenses, and Operating Expenses in any given year
subsequent to the first calendar year in which Landlord obtains earthquake
insurance shall include only the increases in the annual premium over the annual
premium paid for the earthquake insurance for the first calendar year after the
Base Year in which Landlord carries the same; (5) water charges and sewer rents
or fees; (6) license, permit and inspection fees; (7) sales, use and excise
taxes on goods and services purchased by Landlord in connection with the
operation, maintenance or repair of the Real Property and Building systems and
equipment; (8) telephone, telegraph, postage, stationery supplies and other
expenses incurred in connection with the operation, maintenance, or repair of
the Real Property; (9) management fees and expenses; (10) costs of repairs to
and maintenance of the Real Property, including building systems and
appurtenances thereto and normal repair and replacement of worn-out equipment,
facilities and installations, but excluding the replacement of major building
systems (except to the extent provided in (16) and (17) below); (11) fees and
expenses for janitorial, window cleaning, guard, extermination, water treatment,
rubbish removal, plumbing and other services and inspection or service contracts
for elevator, electrical, mechanical and other building equipment and systems or
as may otherwise be necessary or proper for the operation, repair or maintenance
of the Real Property; (12) costs of supplies, tools, materials, and equipment
used in connection with the operation, maintenance or repair of the Real
Property; (13) accounting, legal and other professional fees and expenses; (14)
fees and expenses for painting the exterior or the public or common areas of the
Building and the cost of maintaining the sidewalks, landscaping and other common
areas of the Real Property; (15) costs and expenses for electricity, chilled
water, air conditioning, water for heating, gas, fuel, steam, heat, lights,
power and other energy related utilities required in connection with the
operation, maintenance and repair of the Real Property; (16) the cost of any
capital improvements made by Landlord to the Real Property or capital assets
acquired by Landlord after the Base Year in order to comply with any local,
state or federal law, ordinance, rule, regulation, code or order of any
governmental entity or insurance requirement (collectively, "Legal Requirement")
with which the Real Property was not required to comply during the Base Year, or
to comply with any amendment or other change to the enactment or interpretation
of any Legal Requirement from its enactment or interpretation during the Base
Year; (17) the cost of any capital improvements made by Landlord to the Building
or capital assets acquired by Landlord after the Base Year for the protection of
the health and safety of the occupants of the Real Property or that are designed
to reduce other Operating Expenses; (18) the cost of furniture, draperies,
carpeting, landscaping and other customary and ordinary items of personal
property (excluding paintings, sculptures and other works of art) provided by
Landlord for use in common areas of the Building or in the Building office (to
the extent that such Building office is dedicated to the operation and
management of the Real Property); (19) any expenses and costs resulting from
substitution of work, labor, material or services in lieu of any of the above
itemizations, or for any additional work, labor, services or material resulting
from compliance with any Legal Requirement applicable to the Real Property or
any parts thereof (excluding costs of capital improvements made in order to
comply
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with Legal Requirements with Which the Real Property was required to comply
during the Base Year); and (20) Building office rent or rental value, to the
extent that such Building office is dedicated to the operation and management of
the Real Property. With respect to the costs of items included in Operating
Expenses under (16) and (17), such costs shall be amortized over a reasonable
period, as determined by Landlord, together with interest on the unamortized
balance at a rate per annum equal to three (3) percentage points over the
Treasury Rate charged at the time such item is constructed or acquired, or at
such higher rate as may have been paid by Landlord on funds borrowed for the
purpose of constructing or acquiring such item, but in either case not more than
the maximum rate permitted by law at the time such item is constructed or
acquired.
Operating Expenses shall not include the following: (i) depreciation on
the Building or equipment or systems therein; (ii) debt service; (iii) rental
under any ground or underlying lease; (iv) interest (except as expressly
provided in this Paragraph 7.a.); (v) Tax Expenses (as defined in Paragraph 7.b.
below); (vi) attorneys' and other professional fees and expenses incurred in
connection with lease negotiations with prospective Building tenants or the
enforcement of leases affecting the Real Property; (vii) the cost (including any
amortization thereof) of any improvements or alterations which would be properly
classified as capital expenditures according to generally accepted property
management practices (except to the extent expressly included in Operating
Expenses pursuant to this Paragraph 7.a.); (viii) the cost of decorating,
improving for tenant occupancy, painting or redecorating portions of the
Building to be demised to tenants; (ix) wages, salaries, benefits or other
similar compensation paid to executive employees of Landlord or Landlord's
agents above the rank of Building manager; (x) advertising and promotional
expenditures, and costs of signage identifying any tenant of the Building (other
than Building directory or floor directory signage); (xi) real estate broker's
or other leasing commissions; (xii) penalties or other costs incurred due to a
violation by Landlord, as determined by written admission, stipulation, final
judgment or arbitration award, of any of the terms and conditions of this Lease
or any other lease relating to the Building except to the extent such costs
reflect costs that would have been incurred by Landlord absent such violation;
(xiii) subject to the provisions of item (4) above, repairs and other work
occasioned by fire, windstorm or other casualty, to the extent Landlord is
reimbursed by insurance proceeds, and other work paid from insurance or
condemnation proceeds; (xiv) costs, penalties or fines arising from Landlord's
violation of any applicable governmental rule or authority except to the extent
such costs reflect costs that would have been incurred by Landlord absent such
violation; (xv) overhead and profit increments paid to subsidiaries or
affiliates of Landlord for management or other services on or to the Building or
for supplies or other materials to the extent that the cost of the services,
supplies or materials materially exceed the amounts normally payable for similar
goods and services under similar circumstances (taking into account the market
factors in effect on the date any relevant contracts were negotiated) in
comparable buildings in the San Francisco financial district; (xvi) charitable
and political contributions; (xviii) rentals and other related expenses incurred
in leasing air conditioning systems, elevators or other equipment ordinarily
considered to be of a capital nature (except equipment that is not affixed to
the Building and is used in providing Janitorial services, and except to the
extent such costs would otherwise be includable pursuant to items (16) and (17)
as set forth in the immediately preceding paragraph); (xix) the cost of any
large-scale asbestos abatement or removal activities, provided, however,
Operating Expenses may include the costs attributable to those actions taken by
Landlord to comply with any Legal Requirements in connection with the ordinary
operation and maintenance of the Building, including costs incurred in removing
limited amounts of asbestos containing materials from the Building when such
removal is directly related to such ordinary maintenance and operation; (xx) any
expense for which Landlord is actually directly reimbursed by a tenant or other
party (other than through a provision similar to the first paragraph of this
Paragraph 7.a.), including, without limitation, payments for Excess Services;
(xxii) the cost of services made available at no additional charge to any tenant
in the Building but not to Tenant; or (xxiii) costs of supplying air
conditioning to leasable space in the Building on other than the twelfth through
sixteenth floors of the Building.
b. Tax Expenses. Tenant shall pay to Landlord as Additional Rent under
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this Lease, at the times hereinafter set forth, Tenant' s Share, as
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specified in Paragraph 2.e. above, of any increase in Tax Expenses (as defined
below) incurred by Landlord in each calendar year over Tax Expenses incurred by
Landlord during the Base Tax Year. Notwithstanding the foregoing, if any
reassessment, reduction or recalculation of any item included in Tax Expenses
during the term results in a reduction of Tax Expenses, then for purposes of
calculating Tenant's Share of increases in Tax Expenses from and after the
calendar year in which such adjustment occurs, Tax Expenses for the Base Tax
Year shall be adjusted to reflect such reduction.
The term "Tax Expenses" shall mean all taxes, assessments (whether
general or special), excises, transit charges, housing fund assessments or other
housing charges, improvement districts, levies or fees, ordinary or
extraordinary, unforeseen as well as foreseen, of any kind, which are assessed,
levied, charged, confirmed or imposed on the Real Property, on Landlord with
respect to the Real Property, on the act of entering into leases of space in the
Real Property, on the use or occupancy of the Real Property or any part thereof,
with respect to services or utilities consumed in the use, occupancy or
operation of the Real Property, on any improvements, fixtures and equipment and
other personal property of Landlord located in the Real Property and used in
connection with the operation of the Real Property, or on or measured by the
rent payable under this Lease or in connection with the business of renting
space in the Real Property, including, without limitation, any gross income tax
or excise tax levied with respect to the receipt of such rent, by the United
States of America, the State of California, the City and County of San
Francisco, any political subdivision, public corporation, district or other
political or public entity or public authority, and shall also include any other
tax, fee or other excise, however described, which may be levied or assessed in
lieu of, as a substitute (in whole or in part) for, or as an addition to, any
other Tax Expense. Tax Expenses shall include reasonable attorneys' fees, costs
and disbursements incurred in connection with proceedings to contest, determine
or reduce Tax Expenses. If it shall not be lawful for Tenant to reimburse
Landlord for any increase in Tax Expenses as defined herein, the Monthly Rent
payable to Landlord prior to the imposition of such increases in Tax Expenses
shall be increased to net Landlord the same net Monthly Rent after imposition of
such increases in Tax Expenses as would have been received by Landlord prior to
the imposition of such increases in Tax Expenses.
Tax Expenses shall not include income, franchise, transfer, inheritance
or capital stock taxes, unless, due to a change in the method of taxation, any
of such taxes is levied or assessed against Landlord in lieu of, as a substitute
(in whole or in part) for, or as an addition to, any other charge which would
otherwise constitute a Tax Expense.
c. Adjustment for Occupancy Factor. Notwithstanding any other
-------------------------------
provision herein to the contrary, in the event the Building is not fully
occupied during the Base Year or any calendar year during the term after the
Base Year, an adjustment shall be made by Landlord in computing Operating
Expenses for the Base Year and such calendar year so that those Operating
Expenses which vary based on levels of occupancy shall be computed for such year
as though the Building had been fully occupied during such year. If any
particular work or service includable in Operating Expenses is not furnished to
a tenant who has undertaken to perform such work or service itself, Operating
Expenses shall be deemed to be increased by an amount equal to the additional
Operating Expenses which would have been incurred if Landlord had furnished such
work or service to such tenant. In addition, for purposes of calculating the
amounts due from Tenant pursuant to this Paragraph 7 for air conditioning costs
and other Operating Expenses in connection with supplying air conditioning
service, Tenant's Share shall be deemed to be 47.34%, which equals a fraction
(expressed as a percentage), the numerator of which is the rentable square
footage of the Premises, and the denominator of which is the total rentable
square footage on the twelfth through sixteenth floors of the Building (agreed
by the parties to be 131,368 rentable square feet). The parties agree that
statements in this Lease to the effect that Landlord is to perform certain of
its obligations hereunder at its own or sole cost and expense shall not be
interpreted as excluding any cost from Operating Expenses or Tax Expenses if
such cost is an Operating Expense or Tax Expense pursuant to the terms of this
Lease.
d. Intention Regarding Expense Pass-Through. It is the intention of
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Landlord and Tenant that the Monthly Rent paid to Landlord throughout the term
of this Lease shall be absolutely net of all increases, respectively, in Tax
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Expenses and Operating Expenses over, respectively, Tax Expenses for the Base
Tax Year and Operating Expenses for the Base Year, and the foregoing provisions
of this Paragraph 7 are intended to so provide.
e. Notice and Payment. On or before the first day of each calendar
------------------
year during the term hereof subsequent to the Base Year, or as soon as
practicable thereafter, Landlord shall give to Tenant notice of Landlord's
estimate of the Additional Rent, if any, payable by Tenant pursuant to
Paragraphs 7.a. and 7.b. for such calendar year subsequent to the Base Year. On
or before the first day of each month during each such subsequent calendar year,
Tenant shall pay to Landlord one-twelfth (1/12th) of the estimated Additional
Rent: provided, however, that if Landlord's notice is not given prior to the
first day of any calendar year Tenant shall continue to pay Additional Rent on
the basis of the prior year's estimate until the month after Landlord's notice
is given. If at any time it appears to Landlord that the Additional Rent payable
under Paragraphs 7.a. and/or 7.b. will vary from Landlord's estimate by more
than five percent (5%), Landlord may, by written notice to Tenant, revise its
estimate for such year, and subsequent payments by Tenant for such year shall be
based upon the revised estimate. On the first monthly payment date after any new
estimate is delivered to Tenant, Tenant shall also pay any accrued cost
increases, based on such new estimate.
f. Annual Accounting. Landlord shall maintain true, correct and
-----------------
complete records of the Operating Expenses and Tax Expenses in accordance with
generally accepted accounting principles, consistently applied. Within ninety
(90) days after the close of each calendar year, or as soon after such ninety
(90) day period as practicable, but in any event within one hundred eighty (180)
days after the close of each calendar year, Landlord shall deliver to Tenant a
statement of the Additional Rent payable under Paragraphs 7.a. and 7.b. for such
year. The statement shall be based on the results of an audit of the operations
of the Building prepared for the applicable year by a nationally recognized
certified public accounting firm selected by Landlord. Upon Tenant's request
made no later than ninety (90) days after receipt of Landlord's annual
statement, Landlord shall promptly deliver to Tenant a copy of the auditor's
statement on which Landlord's annual statement is based, and such other
information regarding the annual statement as may be reasonably requested by
Tenant to ascertain Landlord's compliance with this Paragraph 7. At Landlords
option, Landlord may deliver such auditor's statement to Tenant together with
Landlord's annual statement, or otherwise deliver such auditor's statement to
Tenant prior to Tenant's request therefor. Landlord's annual statement shall be
final and binding upon Landlord and Tenant (except for revisions to take into
account any subsequent reassessment affecting the calculation of Tax Expenses
included in such statement, which revisions shall be made if at all, within one
hundred eighty (180) days after the close of the calendar year in which Landlord
receives the revised tax bill) unless, within thirty (30) days after Tenant's
receipt thereof or Tenant's receipt of any such revisions due to a reassessment
or Tenant's receipt of any correction thereof by Landlord pursuant to the
following provisions, as applicable), Tenant shall contest or Landlord shall
correct any item therein by giving written notice to the other, specifying each
item contested or corrected, respectively, and the reason therefor. If the
annual statement shows that Tenant's payments of Additional Rent for such
calendar year pursuant to Paragraph 7.e. hereof exceeded Tenant's obligations
for the calendar year, Landlord shall at its option either (1) credit the excess
to the next succeeding installments of rent or (2) pay the excess to Tenant
within thirty (30) days after delivery of such statement. If the annual
statement shows that Tenant's payments of Additional Rent for such calendar year
pursuant to Paragraph 7.e. hereof were less than Tenant's obligation for the
calendar year, Tenant shall pay the deficiency to Landlord within thirty (30)
days after delivery of such statement.
g. Proration for Partial Lease Year. If this Lease terminates on a day
--------------------------------
other than the last day of a calendar year, the Additional Rent payable by
Tenant pursuant to this Paragraph 7 applicable to the calendar year in which
this Lease terminates shall be prorated on the basis that the number of days
from the commencement of such calendar year to and including such termination
date bears to three hundred sixty-five (365).
h. Tenant's Audit Rights. Tenant shall have the right to cause a
---------------------
reputable nationally recognized accounting firm to audit Landlord's books and
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records pertaining to Operating Expenses for the immediately prior calendar
year, provided that Tenant notifies Landlord in writing of Tenant's intention to
exercise such audit right within ninety (90) days after receipt of the relevant
annual statement, or ninety (90) days after receipt of the auditor's statement
with respect thereto (if Tenant shall have timely requested the same or if
Landlord shall have otherwise elected to deliver the same), whichever is later,
actually begins such audit within forty-five (45) days after such notice from
Tenant (but in no event earlier than ten (10) Business Days after such notice)
and diligently pursues such audit to completion as quickly as reasonably
possible. Landlord agrees to make available to Tenant's auditors, at Landlord's
office in San Francisco, the books and records relevant to the audit for review
and copying, but such books and records may not be removed from Landlord's
offices. Tenant shall bear all costs of such audit, including Landlord's
incidental costs (e.g., for overtime or additional or temporary personnel
charges, copying, making space available to Tenant's auditors) incurred in
connection with such audit, except that, if the audit (as conducted and
certified by Tenant's nationally recognized accounting firm) shows an aggregate
overstatement of Operating Expenses of five percent (5%) or more, and Landlord's
auditors concur in such findings (or, in the absence of such concurrence, such
overstatement is confirmed by a court of competent jurisdiction or such other
dispute resolution mechanism as the parties shall mutually agree), then Landlord
shall bear all costs of the audit, including, but without limitation, the costs
of Tenant's auditor, such payment to be made by Landlord within thirty (30) days
of Landlord's receipt of the invoice (with reasonably satisfactory supporting
documentation) for such costs. If the agreed or confirmed audit shows an
underpayment of Operating Expenses by Tenant, Tenant shall pay to Landlord,
within thirty (30) days after the audit is agreed to or confirmed, the amount
owed to Landlord, and, if the agreed or confirmed audit shows an overpayment of
Operating Expenses by Tenant, Landlord shall at its option either (1) credit the
excess to the next succeeding installments of Monthly Rent and estimated
Additional Rent due under this Lease or (2) reimburse Tenant for such
overpayment within thirty (30) days after the audit is agreed to or confirmed.
The provisions of this Paragraph 7.h. shall survive the expiration or
termination of the Lease term.
8. Use of Premises: Compliance with Law.
------------------------------------
a. Use of Premises. The Premises shall be used solely for general
---------------
office purposes for the business of Tenant as described in Paragraph 2.g. above,
for customer training and support incidental thereto (provided that in no event
shall more than 25% of the rentable square footage of the Premises be used for
dedicated classroom facilities), or for any other general office use consistent
with the operation of the Building as a first-class high-rise office building in
the San Francisco financial district, and for no other use or purpose.
Tenant shall not do or suffer or permit anything to be done in or about
the Premises or the Real Property, nor bring or keep anything therein, which
would in any way subject Landlord, Landlord's agents or the holder of any
Superior Interest (as defined in Paragraph 21) to any liability, increase the
premium rate of or affect any fire, casualty, liability, rent or other insurance
relating to the Real Property or any of the contents of the Building, or cause a
cancellation of, or give rise to any defense by the insurer to any claim under,
or conflict with, any policies for such insurance. If any act or omission of
Tenant results in any such increase in premium rates, Tenant shall pay to
Landlord upon demand the amount of such increase. Tenant shall not do or suffer
or permit anything to be done in or about the Premises or the Real Property
which will in any way unreasonably obstruct or interfere with the rights of
other tenants or occupants of the Building or injure or annoy them, or use or
suffer or permit the Premises to be used for any immoral or unlawful purpose,
nor shall Tenant cause, maintain, suffer or permit any nuisance in, on or about
the Premises or the Real Property. Without limiting the foregoing, no
loudspeakers or other similar device which can be heard outside the Premises
shall, without the prior written approval of Landlord, be used in or about the
Premises. Tenant shall not commit or suffer to be committed any waste in, to or
about the Premises.
Tenant agrees not to employ any person, entity or contractor for any work
in the Premises (including moving Tenant's equipment and furnishings in, out or
around the Premises) whose presence is likely to give rise to a labor or other
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disturbance in the Building and, if necessary to prevent such a disturbance in a
particular situation, Landlord may require Tenant to employ union labor for the
work. Landlord will advise Tenant, upon request, as to whether a given person,
entity or contractor, in Landlord's reasonable judgment, is likely to cause a
labor or other disturbance.
b. Compliance with Law. Tenant shall not do or permit anything to be
-------------------
done in or about the Premises which will in any way conflict with any Legal
Requirement (as defined in Paragraph 7.a.(16) above) now in force or which may
hereafter be enacted. Tenant, at its sole cost and expense, shall promptly
comply with all such present and future Legal Requirements relating to the
condition, use or occupancy of the Premises, and shall perform all work to the
Premises or other portions of the Real Property required to effect such
compliance (or, as to work to the Base Building or outside of the Premises,
Landlord, at Landlord's election, may perform such work at Tenant's cost).
Notwithstanding the foregoing, however, (I) Tenant shall not be required to
perform any changes to the Base Building (as defined below) unless such changes
are caused or triggered by (i) Tenant's Alterations (as defined in Paragraph 9
below), (ii) Tenant's particular use of the Premises (as opposed to Tenant's use
of the Premises for general office purposes in a normal and customary manner),
including use of the Premises for customer training and support or classroom
facilities, unless such training, support or facilities take place in and
constitute normal and customary conference rooms of size, configuration and
permitted density typical for general office use in a high rise Class A office
building in the San Francisco financial district, or (iii) Tenant's particular
employees or employment practices, (II) Tenant shall not be required to perform
any changes to portions of the Building systems located outside of the Premises,
or to other components of the Base Building located outside of the Premises, by
reason of the Tenant Improvements unless such changes are caused or triggered by
(i) the failure of Tenant's architect to design the Tenant Improvements in
compliance with applicable building codes and other Legal Requirements, or (ii)
inclusion in the Tenant Improvements of improvements which are not normal and
customary general office improvements (such as, without limitation library,
file, computer or meeting rooms, classroom facilities (other than normal and
customary conference rooms as described above) or kitchens or cafeterias or
other areas requiring floor reinforcement or enhanced systems requirements), and
(III) provided that Tenant's architect shall have prepared the Final Plans in
compliance with applicable building codes and other Legal Requirements, Tenant
shall not be required to perform any work to the Premises caused or triggered
solely by reason of Landlord's failure to construct the Tenant Improvements in
accordance with the Final Plans. Upon Tenant's request with its submission to
Landlord of the plans and specifications for the Tenant Improvements, Landlord
will advise Tenant if any of the Tenant Improvements are within the preceding
clause (ii), and Landlord's failure to so advise Tenant shall be deemed
Landlord's agreement that none of the Tenant Improvements are within the
preceding clause (ii). The judgment of any court of competent jurisdiction or
the admission of Tenant in an action against Tenant, whether or not Landlord is
a party thereto, that Tenant has violated any Legal Requirement shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall immediately
furnish Landlord with any notices received from any insurance company or
governmental agency or inspection bureau regarding any unsafe or unlawful
conditions within the Premises or the violation of any Legal Requirement.
"Base Building" means the structural portions of the Building
(including exterior walls, roof, foundation, floor slabs and core of the
Building), all Building systems, including, without limitation, elevator,
plumbing, heating, electrical, security, life safety and power, except (i) those
special or supplemental systems (including air-conditioning systems), and
equipment used in connection therewith , and non-Building standard lighting and
electrical wiring installed specifically for Tenant or any other tenants and
(ii) the portion of any Building system within the Premises or any other
specific tenant space, the maintenance, repair or compliance of which is the
responsibility of Tenant or such other tenant, respectively.
c. Hazardous Materials. Tenant shall not cause or permit the storage,
-------------------
use, generation, release, handling or disposal (collectively, "Handling") of any
Hazardous Materials (as defined below), in, on, or about the Premises or the
Real Property by Tenant or any agents, employees, contractors, licensees,
subtenants, customers, guests or invitees of Tenant (collectively with
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Tenant, "Tenant Parties"), except that Tenant shall be permitted to use normal
quantities of office supplies or products (such as copier fluids or cleaning
supplies) customarily used in the conduct of general business office activities
("Common Office Chemicals"), provided that the Handling of such Common Office
Chemicals shall comply at all times with all Legal Requirements, including
Hazardous Materials Laws (as defined below). Notwithstanding anything to the
contrary contained herein, however, in no event shall Tenant permit any usage of
Common Office Chemicals in a manner that may cause the Premises or the Real
Property to be contaminated by any Hazardous Materials or in violation of any
Hazardous Materials Laws. Tenant shall immediately advise Landlord in writing of
(a) any and all enforcement, cleanup, remedial, removal, or other governmental
or regulatory actions instituted, complete\\d, or threatened pursuant to any
Hazardous Materials Laws relating to any Hazardous Materials affecting the
Premises; and (b) all claims made or threatened by any third party against
Tenant, Landlord, the Premises or the Real Property relating to damage,
contribution, cost recovery, compensation, loss, or injury resulting from any
Hazardous Materials on or about the Premises. Without Landlord's prior written
consent, Tenant shall not take any remedial action or enter into any agreements
or settlements in response to the presence of any Hazardous Materials in, on, or
about the Premises. Tenant shall be solely responsible for and shall indemnify,
defend and hold Landlord and all other Indemnitees (as defined in Paragraph
14.b. below), harmless from and against all Claims (as defined in Paragraph
14.b. below), arising out of or in connection with, or otherwise relating to (i)
any Handling of Hazardous Materials by any Tenant Party or Tenant's breach of
its obligations hereunder, or (ii) any removal, cleanup, or restoration work and
materials necessary to return the Real Property or any other property of
whatever nature located on the Real Property to their condition existing prior
to the Handling of Hazardous Materials in, on or about the Premises by Tenant or
any Tenant Party. Tenant's obligations under this paragraph shall survive the
expiration or other termination of this Lease. For purposes of this Lease,
"Hazardous Materials" means any explosive, radioactive materials, hazardous
wastes, or hazardous substances, including without limitation asbestos
containing materials, PCB's, CFC's, or substances defined as "hazardous
substances" in the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. Section 9601-9657; the Hazardous
Materials Transportation Act of 1975, 49 U.S.C. Section 1801-1812; the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901-6987; or any other
Legal Requirement regulating, relating to, or imposing liability or standards of
conduct concerning any such materials or substances now or at any time hereafter
in effect (collectively, "Hazardous Materials Laws").\\
d. Applicability of Paragraph. The provisions of this Paragraph 8 are
--------------------------
for the benefit of Landlord, the holder of any Superior Interest (as defined in
Paragraph 21 below), and the other Indemnitees only and are not nor shall they
be construed to be for the benefit of any tenant or occupant of the Building.
9. Alterations and Restoration.
---------------------------
a. Tenant shall not make or permit to be made any alterations,
modifications, additions, decorations or improvements to the Premises, or any
other work whatsoever that would directly or indirectly involve the penetration
or removal (whether permanent or temporary) of, or require access through, in,
under, or above any floor, wall or ceiling, or surface or covering thereof in
the Premises (collectively, "Alterations"), except as expressly provided in this
Paragraph 9. If Tenant desires any Alteration, except for Cosmetic Alterations
as described in the next paragraph, Tenant must obtain Landlord's prior written
approval of such Alteration. The term "Alterations" shall not include the Tenant
Improvements or Landlord's Work.
Notwithstanding the foregoing or anything to the contrary contained
elsewhere in this Paragraph 9, Tenant shall have the right, without Landlord's
consent, to make any Alteration that meets all of the following criteria (a
"Cosmetic Alteration"): (a) the Alteration is decorative in nature (such as
paint, carpet or other wall or floor finishes, movable partitions or other such
work), (b) Tenant provides Landlord with ten (10) days' advance written notice
of the commencement of such Alteration, (c) such Alteration does not affect the
Building's electrical, mechanical, life safety, plumbing, security, or HVAC
systems or any other portion of the Base Building or any part of the Building
other than the Premises, (d) the work will not decrease the value
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of the Premises, does not require a building permit or other governmental
permit, uses only new materials comparable in quality to those being replaced
and is performed in a workman-like manner and in accordance with all Legal
Requirements, (e) the work does not involve the Building's asbestos procedures,
and (f) the cost of such Alteration, when aggregated with the cost of all other
Cosmetic Alterations performed during the previous twelve (12) month period,
does not exceed Fifty Thousand Dollars ($50,000.00) as to any one (1) floor of
the Premises or One Hundred Thousand Dollars ($100,000.00) in the aggregate as
to all of the Premises. At the time Tenant notifies Landlord of any Cosmetic
Alteration, Tenant shall give Landlord a copy of Tenant's plans for the work. If
the Cosmetic Alteration is of such a nature that formal plans will not be
prepared for the work, Tenant shall provide Landlord with a reasonably specific
description of the work.
All Alterations shall be made at Tenant's sole cost and expense, including
the expense of complying with all present and future Legal Requirements,
including those regarding asbestos, if applicable, and the expense of any other
work required to be performed in other areas within or outside the Premises by
reason of the Alterations. Alterations shall be made, at Tenant's election, by
Landlord's contractor or by a contractor reasonably approved by Landlord. If
Tenant hires Landlord's contractor to perform the Alterations, Landlord's
contractor shall be entitled to receive a fee for such work of fifteen percent
(15%) of the first $100,000 of the construction costs of such work, and the fee
for any construction costs over such amount shall be as negotiated by Tenant and
Landlord. If Landlord's contractor does not perform the Alterations pursuant to
the above, Tenant shall pay Landlord on demand prior to or during the course of
such construction an amount (the "Alteration Operations Fee") equal to three
percent (3%) of the total cost of the Alterations (and for purposes of
calculating the Alteration Operations Fee, such cost shall include architectural
and engineering fees, but shall not include permit fees) as compensation to
Landlord for electrical energy consumed in connection with the work, freight
elevator operation, additional cleaning expenses, additional security services,
and for other miscellaneous costs incurred by Landlord as result of the work.
Notwithstanding the foregoing, (i) the Alteration Operations Fee shall not be
due with respect to Cosmetic Alterations, and in lieu thereof Tenant shall
reimburse Landlord within thirty (30) days after Landlord's demand for the
actual and reasonable fees paid by Landlord to third party architects, engineers
or other consultants retained by Landlord to review the Cosmetic Alterations and
confirm that they qualify as such, and (ii) the Alteration Operations Fee shall
not be due with respect to the Tenant Improvements, it being the parties
agreement that Landlord's Contractor's Charge specified in Paragraph 4 shall be
payable in lieu thereof.
All such work shall be performed diligently and in a first-class
workmanlike manner and in accordance with plans and specifications approved by
Landlord, and shall comply with all Legal Requirements and Landlord's reasonable
construction procedures and requirements for the Building (including Landlord's
requirements relating to insurance and contractor qualifications). In no event
shall Tenant employ any person, entity or contractor to perform work in the
Premises whose presence may give rise to a labor or other disturbance in the
Building. Default by Tenant in the payment of any sums agreed to be paid by
Tenant for or in connection with an Alteration (regardless of whether such
agreement is pursuant to this Paragraph 9 or separate instrument) shall entitle
Landlord to all the same remedies as for non-payment of rent hereunder, subject
to the expiration of any applicable notice and cure period under Paragraph 25.a.
below. Any Alterations, including, without limitation, moveable partitions that
are affixed to the Premises (but excluding moveable, free standing partitions)
and all carpeting, shall at once become part of the Building and the property of
Landlord. Tenant shall give Landlord not less than five (5) days prior written
notice of the date the construction of the Alteration is to commence. Landlord
may post and record an appropriate notice of nonresponsibility with respect to
any Alteration and Tenant shall maintain any such notices posted by Landlord in
or on the Premises.
b. Upon Tenant's written request expressly referring to this Paragraph
9.b., Landlord shall advise Tenant at the time of Landlord's approval of any
Alteration requested by Tenant or, if pursuant to Paragraph 9.a. Landlord's
approval is not required, within five (5) Business Days after such written
request by Tenant, whether Landlord will require the removal of the
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Alteration and restoration of the Premises to its previous condition at the
expiration or sooner termination of this Lease. Those Alterations so required by
Landlord to be removed from the Premises at the expiration or sooner termination
of this Lease shall be so removed by Tenant and the Premises shall be restored
to their condition prior to the making of the Alterations, ordinary wear and
tear excepted. If Tenant fails to request such determination by Landlord as set
forth above, then at Landlord's sole election exercised at the expiration or
sooner termination of this Lease any or all such Alterations shall be removed
and the Premises so restored. If Tenant requests such determination by Landlord
as set forth above, and Landlord fails to timely respond thereto, Landlord shall
be deemed to have waived its right to require that Tenant remove such
Alterations at the expiration or sooner termination of this Lease and restore
the Premises as set forth above. Tenant shall not be required to remove any of
the Tenant Improvements from the Premises upon the expiration or sooner
termination of this Lease except as stated by Landlord in writing on or prior to
its approval of the Final Plans. Notwithstanding the foregoing, Tenant shall be
obligated to remove from the Premises at the expiration or sooner termination of
this Lease only such Tenant Improvements and Alterations as are not normal and
customary general office improvements (but such requirement may be waived by
Landlord at Landlord's election). Except to the extent Landlord shall elect
otherwise at the expiration or sooner termination of this Lease, Tenant shall in
any event remove any internal stairways installed in the Premises as part of the
Tenant Improvements or any Alterations and close-up and otherwise restore to
their pre-existing condition areas of the Premises in which internal stairways
have been installed. The removal of the Tenant Improvements and Alterations and
the restoration of the Premises shall be performed by a general contractor
selected by Tenant and approved by Landlord, in which event Tenant shall pay the
general contractor's fees and costs in connection with such work. Any separate
work letter or other agreement which is hereafter entered into between Landlord
and Tenant pertaining to Alterations shall be deemed to automatically
incorporate the terms of this Lease without the necessity for further reference
thereto.
10. Repair.
------
a. By taking possession of the Premises, Tenant agrees that the Premises
are in good condition and repair. Tenant, at Tenant's sole cost and expense,
shall keep the Premises and every part thereof (including the interior walls and
ceilings of the Premises, those portions of the Building systems located within
and exclusively serving the Premises, and improvements and Alterations) in good
condition and repair. Tenant waives all rights to make repairs at the expense of
Landlord as provided by any Legal Requirement now or hereafter in effect. It is
specifically understood and agreed that, except as specifically set forth in
this Lease, Landlord has no obligation and has made no promises to alter,
remodel, improve, repair, decorate or paint the Premises or any part thereof,
and that no representations respecting the condition of the Premises or the
Building have been made by Landlord to Tenant. Tenant hereby waives the
provisions of California Civil Code Sections 1932(1), 1941 and 1942 and of any
similar Legal Requirement now or hereafter in effect.
b. Landlord shall repair and maintain in good condition and repair the Base
Building (other than the portions of Building systems that are Tenant's
responsibility to maintain and repair pursuant to Paragraph 10.a. above) and
common areas of the Real Property; provided, however, that to the extent repairs
which Landlord is required to make pursuant to this Paragraph 10.b. are
necessitated by the negligence or willful misconduct of Tenant or Tenant's
agents, employees or contractors, then Tenant shall reimburse Landlord for the
cost of such repair within thirty (30) days after Landlord's demand to the
extent Landlord is not reimbursed therefor by insurance. Landlord shall in no
event be obligated to repair any ordinary wear and tear to the Premises.
Landlord shall repair and maintain the Real Property in accordance with the
foregoing provisions to the standards of other first-class high-rise office
buildings in the San Francisco financial district.
c. Landlord represents and warrants to Tenant that those portions of the
Building systems located within and exclusively serving the Premises are, and as
of the applicable Commencement Date will be, in good working order and
condition; provided, however, that the foregoing shall not imply any
representation or warranty as to the useful life of such systems, nor shall the
foregoing diminish Tenant's responsibility to perform any repairs, modifications
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or improvements to the same necessitated after the Commencement Date by reason
of Tenant's use of the same, Tenant's Alterations, or otherwise.
11. Abandonment. Tenant shall not abandon the Premises or any part
-----------
thereof at any time during the term hereof. Upon the expiration or earlier
termination of this Lease, or if Tenant abandons or surrenders all or any part
of the Premises or is dispossessed of the Premises by process of law, or
otherwise, any movable furniture, equipment, trade fixtures, or other personal
property belonging to Tenant and left on the Premises shall at the option of
Landlord be deemed to be abandoned and, whether or not the property is deemed
abandoned, Landlord shall have the right to remove such property from the
Premises and charge Tenant for the removal and any restoration of the Premises
as provided in Paragraph 9. Landlord may charge Tenant for the storage of
Tenant's property left on the Premises at such rates as Landlord may from time
to time reasonably determine, or, Landlord may, at its option, store Tenant's
property in a public warehouse at Tenant's expense. Notwithstanding the
foregoing, neither the provisions of this Paragraph 11 nor any other provision
of this Lease shall impose upon Landlord any obligation to care for or preserve
any of Tenant's property left upon the Premises, and Tenant hereby waives and
releases Landlord from any claim or liability in connection with the removal of
such property from the Premises and the storage thereof and specifically waives
the provisions of California Civil Code Section 1542 with respect to such
release. Landlord's action or inaction with regard to the provisions of this
Paragraph 11 shall not be construed as a waiver of Landlord's right to require
Tenant to remove its property, restore any damage to the Premises and the
Building caused by such removal, and make any restoration required pursuant to
Paragraph 9 above.
12. Liens. Tenant shall not permit any mechanic's, materialman's or other
-----
liens arising out of work performed at the Premises by or on behalf of Tenant to
be filed against the fee of the Real Property nor against Tenant's interest in
the Premises. Landlord shall have the right to post and keep posted on the
Premises any notices which it deems necessary for protection from such liens. If
any such liens are filed, Landlord may, upon twenty (20) days' written notice to
Tenant, without waiving its rights based on such breach by Tenant and without
releasing Tenant from any obligations hereunder, pay and satisfy the same and in
such event the sums so paid by Landlord shall be due and payable by Tenant
immediately without notice or demand, with interest from the date paid by
Landlord through the date Tenant pays Landlord, at the Interest Rate. Tenant
agrees to indemnify, defend and hold Landlord and the other Indemnitees (as
defined in Paragraph 14.b. below) harmless from and against any Claims (as
defined in Paragraph 14.b. below) for mechanics', materialmen's or other liens
in connection with any Alterations, repairs or any work performed, materials
furnished or obligations incurred by or for Tenant, provided, however, that this
indemnity shall not apply to, and Tenant shall have no liability or
responsibility for, any mechanics', materialmen's or other liens arising out of
the Tenant Improvements, except to the extent the same arise by reason of
Tenant's failure to pay the Excess Cost (as defined in Paragraph 4.g.ii.A.
above).
13. Assignment and Subletting.
-------------------------
a. Landlord's Consent. Landlord's and Tenant's agreement with regard
------------------
to Tenant's right to transfer all or part of its interest in the Premises is as
expressly set forth in this Paragraph 13. Tenant agrees that, except upon
Landlord's prior written consent, which consent shall not (subject to Landlord's
rights under Paragraph 13.d. below) be unreasonably withheld, neither this Lease
nor all or any part of the leasehold interest created hereby shall, directly or
indirectly, voluntarily or involuntarily, by operation of law or otherwise, be
assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant or
Tenant's legal representatives or successors in interest (collectively an
"assignment") and neither the Premises nor any part thereof shall be sublet or
be used or occupied for any purpose by anyone other than Tenant (collectively, a
"sublease"). Except where Landlord's consent is expressly not required
hereunder, any assignment or subletting without Landlord's prior written consent
shall, at Landlord's option, be void and shall constitute an Event of Default
entitling Landlord to exercise all remedies available to Landlord under this
Lease and at law.
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The parties hereto agree and acknowledge that, among other circumstances
for which Landlord may reasonably withhold its consent to an assignment or
sublease, it shall be reasonable for Landlord to withhold its consent where: (i)
the assignment or subletting would increase the operating costs for the Building
or the burden on the Building services, or generate additional foot traffic,
elevator usage or security concerns in the Building, or create an increased
probability of the comfort and/or safety of Landlord and other tenants in the
Building being compromised or reduced, (ii) the space will be used for a school
or training facility, an entertainment, sports or recreation facility, retail
sales to the public (unless Tenant's permitted use is retail sales), a personnel
or employment agency (other than executive offices of the same not having
substantial dealings with the public), an office or facility of any governmental
or quasi-governmental agency or authority having any on-premises dealings with
the general public, a place of public assembly (including without limitation a
meeting center, theater or public forum), any use by or affiliation with a
foreign government (including without limitation an embassy or consulate or
similar office), or a facility for the provision of social, welfare or clinical
health services or sleeping accommodations (whether temporary, daytime or
overnight); (iii) the proposed assignee or subtenant is a current tenant of the
Building, or is a prospective tenant of the Building with whom Landlord has
entered into a letter of intent (or similar document) or exchanged an offer and
counteroffer, and Landlord has or will have available space in the Building that
is comparable to the Premises or the portion thereof subject to such subletting,
as applicable, or that otherwise meets such tenant's or prospective tenant's
needs; (iv) Landlord reasonably disapproves of the proposed assignee or
subtenant's reputation or creditworthiness; (v) Landlord reasonably determines
that the character of the business that would be conducted by the proposed
assignee or subtenant at the Premises, or the manner of conducting such
business, would be inconsistent with the character of the Building as a first-
class office building; (vi) the assignment or subletting may conflict with any
exclusive uses granted to other tenants of the Real Property, or with the terms
of any easement, covenant, condition or restriction, or other agreement
affecting the Real Property; (vii) the assignment or subletting would involve a
change in use from that expressly permitted under this Lease; or (viii) Landlord
reasonably determines that there is a material risk that the proposed assignee
may be unable to perform all of Tenant's obligations under this Lease or the
proposed subtenant may be unable to perform all of its obligations under the
proposed sublease. Landlord's foregoing rights and options shall continue
throughout the entire term of this Lease.
For purposes of this Paragraph 13, the following events shall be deemed
an assignment or sublease, as appropriate: (i) the issuance of equity interests
(whether stock, partnership interests or otherwise) in Tenant or any subtenant
or assignee, or any entity controlling any of them, to any person or group of
related persons, in a single transaction or a series of related or unrelated
transactions, such that, following such issuance, such person or group shall
have Control (as defined below) of Tenant or any subtenant or assignee; (ii) a
transfer of Control of Tenant or any subtenant or assignee, or any entity
controlling any of them, in a single transaction or a series of related or
unrelated transactions (including, without limitation, by consolidation, merger,
acquisition or reorganization), except that the transfer of outstanding capital
stock or other listed equity interests by persons or parties other than
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, through the "over-the-counter" market or any recognized national or
international securities exchange, shall not be included in determining whether
Control has been transferred; (iii) a reduction of Tenant's assets to the point
that this Lease is substantially Tenant's only asset; or (iv) a change or
conversion in the form of entity of Tenant, any subtenant or assignee, or any
entity controlling any of them, which has the effect of limiting the liability
of any of the partners, members or other owners of such entity. "Control" shall
mean direct or indirect ownership of 50%-or more of all of the voting stock of a
corporation or 50% or more of the legal or equitable interest in any other
business entity, or the power to direct the operations of any entity (by equity
ownership, contract or otherwise).
If this Lease is assigned, whether or not in violation of the terms of
this Lease, Landlord may collect rent from the assignee. If the Premises or any
part thereof is sublet, Landlord may, upon an Event of Default by Tenant
hereunder, collect rent from the subtenant. In either event, Landlord may apply
20
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the amount collected from the assignee or subtenant to Tenant's monetary
obligations hereunder.
The consent by Landlord to an assignment or subletting hereunder shall
not relieve Tenant or any assignee or subtenant from obtaining Landlord's
express prior written consent to any other or further assignment or subletting.
Neither an assignment or subletting nor the collection of rent by Landlord from
any person other than Tenant, nor the application of any such rent as provided
in this Paragraph 13.a. shall be deemed a waiver of any of the provisions of
this Paragraph 13.a. or release Tenant from its obligation to comply with the
provisions of this Lease and Tenant shall remain fully and primarily liable for
all of Tenant's obligations under this Lease. If Landlord approves of an
assignment or subletting hereunder and this Lease contains any renewal options,
expansion options, rights of first refusal, rights of first negotiation or any
other rights or options pertaining to additional space in the Building, such
rights and/or options shall not run to the subtenant or assignee, it being
agreed by the parties hereto that any such rights and options are personal to
the Tenant originally named herein and may not be transferred.
b. Processing Expenses. Tenant shall pay to Landlord, as Landlord's
-------------------
cost of processing each proposed assignment or subletting for which Landlord's
consent is required hereunder, an amount equal to the sum of (i) Landlord's
reasonable attorneys' and other professional fees, plus (ii) the sum of $750.00
for the cost of Landlord's administrative, accounting and clerical time
(collectively, "Processing Costs"), and the amount of all direct and indirect
costs and expenses incurred by Landlord arising from the assignee or sublessee
moving into the subject space (including, without limitation, costs of freight
elevator operation for moving of furnishings and trade fixtures, security
service, janitorial and cleaning service, and rubbish removal service).
Notwithstanding anything to the contrary herein, Landlord shall not be required
to process any request for Landlord's consent to an assignment or subletting
until Tenant has paid to Landlord the amount of Landlord's estimate of the
Processing Costs and all other direct and indirect costs and expenses of
Landlord and its agents arising from the assignee or subtenant taking occupancy.
c. Consideration to Landlord. In the event of any assignment or
-------------------------
sublease, except with respect to an assignment or sublease pursuant to Paragraph
13.g., Landlord shall be entitled to receive, as additional rent hereunder,
fifty percent (50%) of any consideration (including, without limitation, payment
for leasehold improvements and any "Leasehold Profit" as defined below) paid by
the assignee or subtenant for the assignment or sublease and, in the case of a
sublease, fifty percent (50%) of the excess of the amount of rent paid for the
sublet space by the subtenant over the amount of Monthly Rent under Paragraph 5
above and Additional Rent under Paragraph 7 above attributable to the sublet
space for the corresponding month; except that Tenant may recapture, on an
amortized basis over the term of the sublease or assignment, together with
interest on the unamortized balance at a rate per annum equal to three (3)
percentage points over the Treasury Rate charged as of the commencement date of
such assignment or sublease (i) any brokerage commissions paid by Tenant in
connection with the subletting or assignment (not to exceed commissions
typically paid in the market at the time of such subletting or assignment), (ii)
reasonable legal fees paid by Tenant in connection with such assignment or
subletting (provided that such legal fees shall not exceed One Thousand Five
Hundred Dollars ($1,500.00) for an assignment of the Lease and shall not exceed
Seven Hundred Fifty Dollars ($750.00) for any single sublease) and (iii) any
improvement allowance or construction costs incurred by Tenant in connection
with the assignment or sublease (collectively the "Assignment or Subletting
Costs"), provided that, as a condition to Tenant recapturing the Assignment or
Subletting Costs, Tenant shall provide to Landlord, within ninety (90) days of
Landlord's execution of Landlord's consent to the assignment or subletting, a
detailed accounting of the Assignment or Subletting Costs theretofore incurred
by Tenant and supporting documents, such as receipts and construction invoices,
and within one-hundred eighty (180) days of Landlord's execution of Landlord's
consent to the assignment or subletting, a detailed accounting of all Assignment
or Subletting Costs to be taken into account hereunder and supporting documents,
such as receipts and construction invoices. To effect the foregoing, Tenant
shall deduct from the monthly amounts received by Tenant from the subtenant or
assignee as rent or consideration (i) the Monthly Rent and Additional Rent
payable by Tenant to Landlord for the subject space and (ii) the incremental
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amount, on an amortized basis, of the Assignment or Subletting Costs, and fifty
percent (50%) of the then remaining sum shall be paid promptly to Landlord.
"Leasehold Profit" shall be the value allocated to the leasehold between the
parties to the assignment or sublease, but in no event less than the excess of
the present value of the fair market rent of the Premises for the remaining term
of this Lease after such assignment or sublease, over the Monthly Rent payable
hereunder for such remaining term, as reasonably determined by Landlord. Upon
Landlord's request, Tenant shall assign to Landlord all amounts to be paid to
Tenant by any such subtenant or assignee and that belong to Landlord, and shall
direct such subtenant or assignee to pay the same directly to Landlord. If there
is more than one sublease under this Lease, the amounts (if any) to be paid by
Tenant to Landlord pursuant to the preceding sentence shall be separately
calculated for each sublease and amounts due Landlord with regard to any one
sublease may not be offset against rental and other consideration pertaining to
or due under any other sublease.
d. Procedures. If Tenant desires to assign this Lease or any interest
----------
therein or sublet all or part of the Premises, Tenant shall give Landlord
written notice thereof and the terms proposed (the "Sublease Notice"), which
Sublease Notice, in the case of a proposed sublease, shall designate the space
proposed to be sublet. Landlord shall have the prior right and option (to be
exercised by written notice to Tenant given within thirty (30) days after
receipt of Tenant's notice) (i) to sublet from Tenant the portion of the
Premises proposed by Tenant to be sublet, for the term for which such portion is
proposed to be sublet, but at the lesser of the proposed sublease rent or the
same rent (including Additional Rent as provided for in Paragraph 7 above) as
Tenant is required to pay to Landlord under this Lease for the same space,
computed on a pro rata square footage basis, and during the term of such
sublease Tenant shall be released of its obligations under this Lease with
regard to the subject space, (ii) in the case of any proposed assignment of this
Lease or any proposed sublet of all or any portion of the Premises the term of
which expires during the last twelve (12) months of the term of this Lease, to
terminate this Lease in its entirety (in the case of any proposed assignment) or
as it pertains to the portion of the Premises so proposed by Tenant to be sublet
(in the case of any such proposed sublet), or (iii) to approve Tenant's proposal
to assign or sublet conditional upon Landlord's subsequent written approval of
the specific assignment or sublease obtained by Tenant and the specific assignee
or subtenant named therein. If Landlord exercises its option in (i) above, then
Landlord may, at Landlord's sole cost, construct improvements in the subject
space and, so long as the improvements are suitable for general office purposes,
Landlord shall have no obligation to restore the subject space to its original
condition following the termination of the sublease. If Landlord exercises its
option described in (iii) above, then Tenant shall have six (6) months
thereafter to submit to Landlord, for Landlord's written approval, Tenant's
proposed assignment or sublease agreement (in which the proposed assignee or
subtenant shall be named, and which agreement shall otherwise meet the
requirements of Paragraph 13.e. below), together with a current financial
statement of such proposed assignee or subtenant and any other information
reasonably requested by Landlord. If Tenant fails to submit the specific
assignment or sublease and other required information within such time, or if
the terms of the specific assignment or sublease submitted by Tenant vary from
the terms set forth in the Sublease Notice approved by Landlord pursuant to
(iii) above, then Tenant shall be required to submit a new Sublease Notice for
Landlord's evaluation pursuant to the procedures set forth in this paragraph. If
Landlord fails to exercise any such option to sublet or to terminate, this shall
not be construed as or constitute a waiver of any of the provisions of
Paragraphs 13.a., b., c. or d. herein. If Landlord exercises any option to
sublet or to terminate, any costs of demising the portion of the Premises
affected by such subleasing or termination shall be borne by Tenant. In
addition, Landlord shall have no liability for any real estate brokerage
commission(s) or with respect to any of the costs and expenses that Tenant may
have incurred in connection with its proposed subletting, and Tenant agrees to
indemnify, defend and hold Landlord and all other Indemnitees harmless from and
against any and all Claims (as defined in Paragraph 14.b. below), including,
without limitation, claims for commissions arising from such proposed
subletting. Landlord's foregoing rights and options shall continue throughout
the entire term of this Lease.
e. Documentation. No permitted assignment or subletting by Tenant
-------------
shall be effective until there has been delivered to Landlord a fully executed
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counterpart of the assignment or sublease which expressly provides that (i) the
assignee or subtenant may not further assign or sublet the assigned or sublet
space without Landlord's prior written consent (which, in the case of a further
assignment proposed by an assignee, shall not be unreasonably withheld, subject
to Landlord's rights under the provisions of this Paragraph 13), subject,
however, to an assignee's right to further assign this Lease without Landlord's
consent pursuant to Paragraph 13.g. below, (ii) the assignee or subtenant will
comply with all of the provisions of this Lease, and Landlord may enforce the
Lease provisions directly against such assignee or subtenant, (iii) in the case
of an assignment, the assignee assumes all of Tenant's obligations under this
Lease arising on or after the date of the assignment, and (iv) in the case of a
sublease, the subtenant agrees to be and remain jointly and severally liable
with Tenant for the payment of rent pertaining to the sublet space in the amount
set forth in the sublease, and for the performance of all of the terms and
provisions of this Lease which are applicable to the sublet space. In addition
to the foregoing, no sublease by Tenant shall be effective until there has been
delivered to Landlord a fully executed counterpart of Landlord's consent to
sublease form. The failure or refusal of a subtenant or assignee to execute any
such instrument shall not release or discharge the subtenant or assignee from
its liability as set forth above. Notwithstanding the foregoing, however, no
subtenant or assignee shall be permitted to occupy the Premises unless and until
such subtenant or assignee provides Landlord with certificates evidencing that
such subtenant or assignee is carrying all insurance coverage required of such
subtenant or assignee under this Lease.
f. No Merger. Without limiting any of the provisions of this Paragraph
---------
13, if Tenant has entered into any subleases of any portion of the Premises, the
voluntary or other surrender of this Lease by Tenant, or a mutual cancellation
by Landlord and Tenant, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies or, at the
option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies. If Landlord does elect that such surrender or
cancellation operate as an assignment of such subleases or subtenancies,
Landlord shall in no way be liable for any previous act or omission by Tenant
under the subleases or for the return of any deposit(s) under the subleases that
have not been actually delivered to Landlord, nor shall Landlord be bound by any
sublease modification(s) executed without Landlord's consent or for any advance
rental payment by the subtenant in excess of one month's rent.
g. Affiliates. Notwithstanding anything to the contrary in Paragraphs
----------
13.a. and 13.d., but subject to Paragraphs 13.e. and 13.f., Tenant may assign
this Lease or sublet the Premises or any portion thereof, without Landlord's
consent, to any partnership, corporation or other entity which controls, is
controlled by, or is under common control with Tenant or Tenant's parent
(control being defined for such purposes as ownership of at least 50% of the
equity interests in, or the power to direct the management of, the relevant
entity) or to any partnership, corporation or other entity resulting from a
merger or consolidation with Tenant or Tenant's parent, or to any person or
entity which acquires substantially all the assets of Tenant as a going concern
(collectively, an "Affiliate"), provided that (i) Landlord receives prior
written notice of an assignment or subletting, (ii) in the case of an
assignment, the Affiliate's net worth is not less than Tenant's net worth
immediately prior to the assignment (or series of transactions of which the same
is a part), (iii) the Affiliate has proven experience in the operation of a
first-class business of a type consistent with the use of the Building as a
first-class office Building in the San Francisco financial district, (iv) the
Affiliate remains an Affiliate for the duration of the subletting or the balance
of the term in the event of an assignment, (v) the Affiliate assumes (in the
event of an assignment) in writing all of Tenant's obligations under this Lease
and (vi) Landlord receives a fully executed copy of an assignment or sublease
agreement between Tenant and the Affiliate.
h. Shared Space Arrangement. Notwithstanding anything to the contrary
------------------------
in this Paragraph 13, Tenant may from time to time permit third parties with
whom Tenant is working on particular projects and with whom Tenant will share
office services to use a portion of the Premises and such use shall not be
deemed to be a sublease so long as (i) no more than fifteen percent (15%) of the
rentable square footage of the Premises is so used at any one time and (ii) the
space occupied by such parties is not separately demised from the balance of the
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Premises (i.e. separated from the balance of the space by a wall or other
constructed device and having separate entrances to the common areas), (iii) the
use of the space is not a use which is described in clause (ii) of the second
paragraph of Paragraph 13.a., and (iv) Tenant does not realize a profit with
respect to the space so used. The rights set forth in this paragraph are
personal to the then Tenant under this Lease and its Affiliates, and shall not
inure to the benefit of any subtenant which is not an Affiliate of the then
Tenant hereunder. Tenant shall be fully responsible for the conduct of such
parties within the Premises and the Real Property, and Tenant's indemnification
obligations set forth in Paragraph 14 of this Lease shall apply with respect to
the conduct of such parties. Prior to the effective date thereof, Tenant shall
supply Landlord with the terms of any such space sharing arrangement, including
the identity of the parties to such arrangement. If such arrangement indicates
that the sums payable thereunder for the value of the use of the space exceed
the Monthly Rent and Additional Rent payable under Paragraphs 5 and 7 hereof for
such space, that particular space sharing arrangement will be deemed to be a
sublease for all purposes of this Lease, including for the purpose of requiring
Landlord's consent thereto and applying the provisions of Paragraph 13.c. above.
14. Indemnification of Landlord.
---------------------------
a. Landlord and the holders of any Superior Interests (as defined in
Paragraph 21 below) shall not be liable to Tenant and Tenant hereby waives all
claims against such parties for any loss, injury or other damage to person or
property in or about the Premises or the Real Property from any cause
whatsoever, including without limitation, water leakage of any character from
the roof, walls, basement, fire sprinklers, appliances, air conditioning,
plumbing or other portion of the Premises or the Real Property, or gas, fire,
explosion, falling plaster, steam, electricity, or any malfunction within the
Premises or the Real Property, or acts of other tenants of the Building;
provided, however, that, subject to Paragraph 16 below, the foregoing waiver
shall be inapplicable to any loss, injury or damage resulting directly from
Landlord's gross negligence or willful misconduct. Tenant acknowledges that from
time to time throughout the term of this Lease, construction work may be
performed in and about the Building and the Real Property by Landlord,
contractors of Landlord, or other tenants or their contractors, and that such
construction work may result in noise and disruption to Tenant' s business. In
addition to and without limiting the foregoing waiver or any other provision of
this Lease, Tenant agrees that Landlord shall not be liable for, and Tenant
expressly waives and releases Landlord and the other Indemnitees (as defined in
Paragraph 14.b. below) from any Claims (as defined in Paragraph 14.b. below),
including without limitation, any and all consequential damages or interruption
or loss of business, income or profits, or claims of constructive eviction,
arising or alleged to be arising as a result of any such construction activity.
Landlord shall use its good faith efforts to minimize such noise and disruption
to Tenant's business, and, without limitation, Landlord shall perform any
extraordinarily noisy or disruptive work after Business Hours or on weekends to
the extent such procedures would be generally followed by managers of other
first class high rise office buildings in the San Francisco financial district
(except to the extent an emergency and/or Legal Requirements require otherwise,
as reasonably determined by Landlord).
b. Tenant shall hold Landlord and the holders of any Superior
Interest, and the constituent shareholders, partners or other owners thereof,
and all of their agents, contractors, servants, officers, directors, employees
and licensees (collectively with Landlord, the "Indemnitees") harmless from and
indemnify the Indemnitees against any and all claims, liabilities, damages,
costs and expenses, including reasonable attorneys' fees and costs incurred in
defending against the same (collectively, "Claims"), to the extent arising from
(a) the acts or omissions of Tenant or any other Tenant Parties (as defined in
Paragraph 8.c. above) in, on or about the Real Property, or (b) any construction
or other work undertaken by or on behalf of Tenant in, on or about the Premises,
whether prior to or during the term of this Lease (but excluding any
construction work undertaken by or on behalf of Landlord), or (c) any breach or
Event of Default under this Lease by Tenant, or (d) any accident, injury or
damage, howsoever and by whomsoever caused, to any person or property, occurring
in, on or about the Premises; except to the extent such Claims are caused
directly by the gross negligence or willful misconduct of Landlord or its
authorized representatives. In case any action or proceeding be brought against
any of the
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Indemnitees by reason of any such Claim, Tenant, upon notice from Landlord,
covenants to resist and defend at Tenant's sole expense such action or
proceeding by counsel reasonably satisfactory to Landlord. The provisions of
this Paragraph 14.b. shall survive the expiration or earlier termination of this
Lease with respect to any injury, illness, death or damage occurring prior to
such expiration or termination.
15. Insurance.
---------
a. Tenant's Insurance. Tenant shall, at Tenant's expense, maintain
------------------
during the term of this Lease (and, if Tenant occupies or conducts activities in
or about the Premises prior to or after the term hereof, then also during such
pre-term or post-term period): (i) commercial general liability insurance
including contractual liability coverage, with minimum coverages of $1,000,000
per occurrence combined single limit for bodily injury and property damage,
$1,000,000 for products-completed operations coverage, $100,000 fire legal
liability, $1,000,000 for personal and advertising injury (which coverage shall
not be subject to the contractual liability exclusion), with a $2,000,000
general aggregate limit, for injuries to, or illness or death of, persons and
damage to property occurring in or about the Premises or otherwise resulting
from Tenant's operations in the Building, (ii) property insurance protecting
Tenant against loss or damage by fire and such other risks as are insurable
under then-available standard forms of "all risk" insurance policies (excluding
earthquake and flood but including water damage), covering Tenant's personal
property and trade fixtures in or about the Premises or the Real Property, and
any improvements and/or Alterations in the Premises, for the full replacement
value thereof without deduction for depreciation, except that Tenant shall not
be obligated to insure any of the Tenant Improvements which are normal and
customary general office improvements; (iii) workers' compensation insurance in
statutory limits; and (iv) if Tenant operates owned, leased or non-owned
vehicles on the Real Property, comprehensive automobile liability insurance with
a minimum coverage of $1,000,000 per occurrence, combined single limit. The
above described policies shall protect Tenant, as named insured, and Landlord
and all the other Indemnitees and any other parties designated by Landlord, as
additional insureds; shall insure Landlord's and such other parties' contingent
liability with regard to acts or omissions of Tenant; shall specifically include
all liability assumed by Tenant under this Lease (provided, however, that such
contractual liability coverage shall not limit or be deemed to satisfy Tenant's
indemnity obligations under this Lease); and, if subject to deductibles, shall
provide for deductible amounts not in excess of those approved in advance in
writing by Landlord in its reasonable discretion. Landlord reserves the right to
increase the foregoing amount of liability coverage from time to time as
Landlord reasonably determines is required to adequately protect Landlord and
the other parties designated by Landlord from the matters insured thereby
(provided, however, that Landlord makes no representation that the limits of
liability required hereunder from time to time shall be adequate to protect
Tenant), and to require that Tenant cause any of its contractors, vendors,
movers or other parties conducting activities in or about or occupying the
Premises to obtain and maintain insurance as reasonably determined by Landlord
and as to which Landlord and such other parties designated by Landlord shall be
additional insureds.
b. Policy Form. Each insurance policy required pursuant to Paragraph
-----------
15.a. above shall be issued by an insurance company licensed in the State of
California and with a general policyholders' rating of "A+" or better and a
financial size ranking of "Class VIII" or higher in the most recent edition of
Best's Insurance Guide. Each insurance policy, other than Tenant's workers'
compensation insurance, shall (i) provide that it may not be materially changed,
cancelled or allowed to lapse unless thirty (30) days' prior written notice to
Landlord and any other insureds designated by Landlord is first given, (ii)
provide that no act or omission of Tenant shall affect or limit the obligations
of the insurer with respect to any other insured, (iii) include all waiver of
subrogation rights endorsements necessary to effect the provisions of Paragraph
16 below, and (iv) provide that the policy and the coverage provided shall be
primary, that Landlord, although an additional insured, shall nevertheless be
entitled to recovery under such policy for any damage to Landlord or the other
Indemnitees by reason of acts or omissions of Tenant, and that any coverage
carried by Landlord shall be noncontributory with respect to policies carried by
Tenant. Each such insurance policy or a certificate thereof shall be delivered
to Landlord by Tenant on or before the effective date of such policy
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and thereafter Tenant shall deliver to Landlord renewal policies or certificates
at least thirty (30) days prior to the expiration dates of expiring policies. If
Tenant fails to procure such insurance or to deliver such policies or
certificates, Landlord may, at its option, procure the same for Tenant's
account, and the cost thereof shall be paid to Landlord by Tenant upon demand.
Landlord may at any time, and from time to time, inspect and/or copy any and all
insurance policies required by this Lease.
Nothing in this Paragraph 15 shall be construed as creating or
implying the existence of (i) any ownership by Tenant of any fixtures,
additions, Alterations, or improvements in or to the Premises or (ii) any right
on Tenant's part to make any addition, Alteration or improvement in or to the
Premises.
c. Landlord's Insurance. During the term hereof, Landlord shall keep
--------------------
the Building and all Tenant Improvements made pursuant to Paragraph 4 hereof
(but excluding any Initial Alterations which are not normal and customary
general office improvements, and any personal property, trade fixtures or other
fixtures, office equipment, furniture, artwork and other decorations not affixed
to and a part of the Building) insured through reputable insurance underwriters
against perils covered by a standard "all risk" insurance policy or policies as
such policies are in use from time to time for comparable first-class high-rise
office buildings in the San Francisco financial district (excluding, at
Landlord's option, perils such as earthquake, flood and other standard "all
risk" policy form exclusions), with a deductible provision, if any, that does
not materially exceed that which prudent, efficient operators of first-class
high-rise office buildings in the San Francisco financial district would carry
from time-to-time in the exercise of reasonable business judgment, in an amount
or amounts equal to not less than eighty percent (80%) of the full replacement
value of the Building (excluding the land and the footings, foundations and
installations below the basement level) and such Tenant Improvements, without
deduction for depreciation, including the costs of demolition and debris
removal, or such other fire and property damage insurance as Landlord shall
reasonably determine to give substantially equal or greater protection. During
the term hereof, Landlord shall keep in force general liability insurance in the
amount and coverage as Landlord deems commercially reasonable.
16. Mutual Waiver of Subrogation Rights. Each party hereto hereby
-----------------------------------
releases the other respective party and, in the case of Tenant as the releasing
party, the other Indemnitees, and the respective partners, shareholders, agents,
employees, officers, directors and authorized representatives of such released
party, from any claims such releasing party may have for damage to the Building,
the Premises or any of such releasing party's fixtures, personal property,
improvements and alterations in or about the Premises, the Building or the Real
Property that is caused by or results from risks insured against under any fire
and extended coverage insurance policies actually carried by such releasing
party or deemed to be carried by such releasing party; provided, however, that
such waiver shall be limited to the extent of the net insurance proceeds payable
by the relevant insurance company with respect to such loss or damage (or in the
case of deemed coverage, the net proceeds that would have been payable). For
purposes of this Paragraph 16, Landlord and Tenant shall be deemed to be
carrying the insurance policies that they are required to carry pursuant to
Paragraph 15 but do not actually carry. Each party hereto shall cause each such
fire and extended coverage insurance policy obtained by it to provide that the
insurance company waives all rights of recovery by way of subrogation against
the other respective party and the other released parties in connection with any
matter covered by such policy.
17. Utilities.
---------
a. Basic Services. Landlord shall furnish the following utilities and
--------------
services ("Basic Services") for the Premises: (i) during the hours of 7 A.M. to
6 P.M. ("Business Hours") Monday through Friday (except public holidays)
("Business Days"), electricity for Building standard lighting and power suitable
for the use of the Premises for ordinary general office purposes, (ii) during
Business Hours on Business Days, heat and air-conditioning required in Landlords
judgment for the comfortable use and occupancy of the Premises for ordinary
general office purposes, (iii) unheated water for the restroom(s) servicing the
Premises, (iv) elevator service to the floor(s) of the Premises by nonattended
automatic elevators for general office pedestrian usage, and (v) on Business
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Days, janitorial services limited to emptying and removal of general office
refuse, light vacuuming as needed and window washing as determined by Landlord.
Notwithstanding the above, but subject to any temporary shutdown for repairs,
for security purposes, for compliance with any Legal Requirements, or due to
Force Majeure, (A) Tenant shall have access to the Premises 24 hours a day, each
day of the Lease term, and (B) the services described in (iii) and (iv) above
shall be provided to the Premises 24 hours a day, each day of the Lease term,
without additional charge to Tenant. In addition, Tenant may use and Landlord
shall make available to Tenant water, heat, air conditioning, electric current
and janitorial service in excess of that provided in Basic Services ("Excess
Services," which shall include without limitation any power usage other than
through standard 110-volt AC outlets; electricity and/or water consumed by
Tenant in connection with any dedicated or supplemental heating, ventilating
and/or air conditioning, computer power, telecommunications and/or other special
units or systems of Tenant; chilled, heated or condenser water; or water used
for any purpose other than ordinary drinking and lavatory purposes) provided
that the Excess Services desired by Tenant are reasonably available to Landlord
and to the Premises (it being understood that in no event shall Landlord be
obligated to make available to the Premises more than the pro rata share of the
capacity of any Excess Service available to the Building or the applicable floor
of the Building, as the case may be), and provided further that Tenant complies
with the non-discriminatory procedures established by Landlord from time to time
for requesting and paying for such Excess Services and with all other provisions
of this Paragraph 17. Landlord reserves the right to install in the Premises or
the Real Property electric current and/or water meters (including, without
limitation, any additional wiring, conduit or panel required therefor) to
measure the electric current or water consumed by Tenant or to cause the usage
to be measured by other reasonable methods (e.g. by temporary "check" meters or
by survey).
b. Payment for Utilities and Services. The cost of Basic Services
----------------------------------
shall be included in Operating Expenses. In addition, Tenant shall pay to
Landlord upon demand (i) the cost, at Landlord's prevailing rate in the
Building, of any Excess Services used by Tenant, (ii) the cost of installing,
operating, maintaining or repairing any meter or other device used to measure
Tenant's consumption of utilities, but only if such meter or other device
establishes Tenant's use of Excess Services, (iii) the cost of installing,
operating, maintaining or repairing any Temperature Balance Equipment (as
defined in Paragraph 17.c. below) for the Premises and/or any equipment required
in connection with any Excess Services requested by Tenant, and (iv) any cost
otherwise incurred by Landlord in keeping account of or determining any Excess
Services used by Tenant. Landlord's failure to bill Tenant for any of the
foregoing shall not waive Landlord's right to bill Tenant for the same at a
later time, provided that such bill is delivered to Tenant no later than hundred
eighty (180) days from the end of the calendar year in which such utilities or
services were performed or such costs incurred by Landlord, as applicable.
c. Temperature Balance. If the temperature otherwise maintained in any
-------------------
portion of the Premises by the heating, air conditioning (if applicable) or
ventilation (if applicable) system is affected as a result of (i) the type or
quantity of any lights, machines or equipment (excluding typical office
equipment in typical densities for office use, which typical equipment and
densities shall in no event include dedicated computer rooms) used by Tenant in
the Premises, (ii) the occupancy of such portion of the Premises by more than
one person per one hundred seventy-five (175) square feet of rentable area
therein, (iii) an electrical demand load in excess of 1.0 watt per rentable
square foot for overhead lighting or 2.0 watts per rentable square foot for
convenience outlets, (iv) any rearrangement of partitioning or other
improvements (other than those included in the Tenant Improvements), or (v)
Tenant' s failure to observe Landlord's requirements with respect to closure of
any operable windows in the Premises, then at Tenant's sole cost, Landlord may
install any equipment, or modify any existing equipment Landlord reasonably
determines to be necessary to restore the temperature balance (such new
equipment or modifications to existing equipment termed herein "Temperature
Balance Equipment"). Tenant agrees to keep closed, when necessary, (i) draperies
which, because of the sun's position, must be closed to provide for the
efficient operation of the air conditioning system, and (ii) windows which,
because of outside temperatures, winds or other conditions, must be closed to
provide for the efficient operation of the air conditioning system, and Tenant
agrees to cooperate with Landlord and to abide
27
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by the regulations and requirements which Landlord may prescribe for the proper
functioning and protection of the heating, ventilating, if applicable, and air
conditioning, if applicable, system. Landlord makes no representation to Tenant
regarding the adequacy or fitness of the equipment in the Building to maintain
temperatures that may be required for, or because of, any computer or
communications rooms, machine rooms, conference rooms or other areas of high
concentration of personnel or electrical usage, or any other uses other than or
in excess of the fractional horsepower normally required for office equipment,
and Landlord shall have no liability for loss or damage suffered by Tenant or
others in connection therewith.
d. Utility Connections. Tenant shall not connect or use any apparatus
-------------------
or device in the Premises (i) using current in excess of 110 volts, or (ii)
which would cause Tenant's electrical demand load to exceed 1.0 watt per
rentable square foot for overhead lighting or (iii) which would exceed the
capacity of the existing panel or transformer serving the Premises (unless
Tenant pays the cost of modifying any such panel or transformer to increase its
capacity so as to be sufficient for Tenant's requirements); provided, however,
that in no event shall Tenant's electrical demand load exceed 2.0 watts per
rentable square foot for convenience outlets without Landlord's prior written
consent, which consent shall not be unreasonably withheld. The electricity
available to Tenant pursuant to the foregoing shall not affect Tenant's
obligation pursuant to Paragraph 17.b above to pay for any such electricity
which constitutes Excess Services pursuant to Paragraph 17.a. above. Tenant
shall not connect with electric current (except through existing outlets in the
Premises or such additional outlets as may be installed in the Premises as part
of the Tenant Improvements or Alterations approved by Landlord), or water pipes,
any apparatus or device for the purpose of using electrical current or water.
Landlord will not permit additional coring of the floor of the Premises in
order to install new electric outlets in the Premises unless Landlord is
satisfied, on the basis of such information to be supplied by Tenant at Tenant's
expense, that coring of the floor in order to install such additional outlets
will not weaken the structure of the floor.
e. Interruption of Services. Landlord's obligation to provide access
------------------------
to and utilities and services for the Premises are subject to the Rules and
Regulations of the Building, applicable Legal Requirements (including the rules
or actions of the public utility company furnishing the utility or service), and
shutdowns for maintenance and repairs, for security purposes, or due to strikes,
lockouts, labor disputes, fire or other casualty, acts of God, or other causes
beyond the control of Landlord. In the event of an interruption in, or failure
or inability to provide access to or any service or utility for the Premises for
any reason, such interruption, failure or inability shall not constitute an
eviction of Tenant, constructive or otherwise, or impose upon Landlord any
liability whatsoever, including, but not limited to, liability for consequential
damages or loss of business by Tenant. Tenant hereby waives the provisions of
California Civil Code Section 1932(1) or any other applicable existing or future
Legal Requirement permitting the termination of this Lease due to such
interruption, failure or inability. Notwithstanding the foregoing, if any
interruption in, or failure or inability to provide access to the Premises or
any of the Basic Services described in Paragraph 17.a. is within Landlord's
reasonable control and continues for ten (10) or more consecutive days after
Tenant's written notice thereof to Landlord, and Tenant is unable to conduct and
does not conduct any business in a material portion of the Premises as a result
thereof, then Tenant shall be entitled to an abatement of Monthly Rent under
Paragraph 5 hereof and Additional Rent under Paragraph 7 hereof, which abatement
shall commence as of the first day after the expiration of such ten (10) day
period and terminate upon the cessation of such interruption, failure or
inability, and which abatement shall be based on the portion of the Premises
rendered inaccessible or-unusable for Tenant's business by such interruption,
failure or inability. The abatement provision set forth above shall be
inapplicable to any interruption, failure or inability described in this
Paragraph 17.e. that is caused by (x) damage from fire or other casualty (it
being acknowledged that such situation shall be governed by Paragraph 26, or (y)
the gross negligence or willful misconduct of Tenant or its agents, employees or
contractors, except where Tenant reimburses Landlord for the deductible required
under Landlord's property damage/rental loss insurance.
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f. Governmental Controls. In the event any governmental authority
---------------------
having jurisdiction over the Real Property or the Building promulgates or
revises any Legal Requirement or building, fire or other code or imposes
mandatory or voluntary controls or guidelines on Landlord or the Real Property
or the Building relating to the use or conservation of energy or utilities or
the reduction of automobile or other emissions (collectively "Controls") or in
the event Landlord is required or elects to make alterations to the Real
Property or the Building in order to comply with such mandatory or voluntary
Controls, Landlord may, in its sole discretion, comply with such Controls or
make such alterations to the Real Property or the Building related thereto. Such
compliance and the making of such alterations shall not constitute an eviction
of Tenant, constructive or otherwise, or impose upon Landlord any liability
whatsoever, including, but not limited to, liability for consequential damages
or loss of business by Tenant. Landlord shall use its good faith efforts to
minimize disruption to Tenant's business caused by any such alterations, and,
without limitation, Landlord shall perform any extraordinarily noisy or
disruptive work after Business Hours or on weekends to the extent such
procedures would be generally followed by managers of other first class high
rise office buildings in the San Francisco financial district (except to the
extent an emergency and/or Legal Requirements require otherwise, as reasonably
determined by Landlord).
18. Personal Property and Other Taxes. Tenant shall pay, at least ten
---------------------------------
(10) days before delinquency, any and all taxes, fees, charges or other
governmental impositions levied or assessed against Landlord or Tenant (a) upon
Tenant's equipment, furniture, fixtures, improvements and other personal
property (including carpeting installed by Tenant) located in the Premises, (b)
by virtue of any Alterations made by Tenant to the Premises, and (c) upon this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises. If any such fee, charge or other
governmental imposition is paid by Landlord, Tenant shall reimburse Landlord for
Landlord's payment upon demand.
19. Rules and Regulations. Tenant shall comply with the rules and
---------------------
regulations set forth on Exhibit B attached hereto, as such rules and
---------
regulations may be modified or amended by Landlord from time to time (the "Rules
and Regulations"), provided such amendments or modifications shall be reasonable
and non-discriminatory and shall not materially increase the burdens or
obligations imposed by this Lease upon Tenant and shall not prohibit the conduct
of any business in the Premises which Tenant is permitted to conduct pursuant to
Paragraphs 2.g. and 8 hereof. Landlord shall not be responsible to Tenant for
the nonperformance or noncompliance by any other tenant or occupant of the
Building of or with any of the Rules and Regulations, but Landlord shall not
enforce the Rules and Regulations in a discriminatory manner. In the event of
any conflict between the Rules and Regulations and the balance of this Lease,
the balance of this Lease shall control.
20. Surrender: Holding Over.
-----------------------
a. Surrender. Upon the expiration or other termination of this
---------
Lease, Tenant shall surrender the Premises to Landlord vacant and broom-clean,
with all improvements and Alterations (except as provided in Paragraph 9 above)
in their original condition, except for reasonable wear and tear and damage from
casualty or condemnation; provided, however, that prior to the expiration or
termination of this Lease Tenant shall remove from the Premises any Alterations
that Tenant is required by Landlord to remove under the provisions of Paragraph
9, and all of Tenant's equipment and other personal property, trade fixtures,
and furniture. If such removal is not completed at the expiration or other
termination of this Lease, Landlord may remove the same at Tenant's expense. Any
damage to the Premises or the Building caused by such removal shall be repaired
promptly by Tenant (including the patching or repairing of ceilings and walls)
or, if Tenant fails to do To, Landlord may do so at Tenant's expense. The
removal of the Tenant Improvements and other Alterations from the Premises shall
be governed by Paragraph 9 above. Tenant's obligations under this paragraph
shall survive the expiration or other termination of this Lease. Upon expiration
or termination of this Lease or of Tenant's possession, Tenant shall surrender
all keys to the Premises or any other part of the Building and shall make known
to Landlord the combination of locks on all safes, cabinets and vaults that may
be located in the Premises.
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b. Holding Over. If Tenant remains in possession of the Premises after
------------
the expiration or earlier termination of this Lease with the express written
consent of Landlord, Tenant's occupancy shall be a month-to-month tenancy at a
rent agreed upon by Landlord and Tenant, but in no event less than the greater
of (i) one hundred fifty percent (150%) of the Monthly Rent and Additional Rent
payable under this Lease during the last full month prior to the date of the
expiration of this Lease or (ii) the then fair market rental (as reasonably
determined by Landlord) for the Premises. Except as provided in the preceding
sentence, the month-to-month tenancy shall be on the terms and conditions of
this Lease, except that any renewal options, expansion options, rights of first
refusal, rights of first negotiation or any other rights or options pertaining
to additional space in the Building contained in this Lease shall be deemed to
have terminated and shall be inapplicable thereto. Landlord's acceptance of rent
after such holding over with Landlord's written consent shall not result in any
other tenancy or in a renewal of the original term of this Lease. If Tenant
remains in possession of the Premises after the expiration or earlier
termination of this Lease without Landlord's consent, Tenant's continued
possession shall be on the basis of a tenancy at sufferance and Tenant shall pay
as Monthly Rent during the holdover period an amount equal to the greater of (i)
one hundred fifty percent (150%) of the fair market rental (as reasonably
determined by Landlord) for the Premises or (ii) two hundred percent (200%) of
the Monthly Rent and Additional Rent payable under this Lease for the last full
month prior to the date of such expiration or termination.
c. Indemnification. If Tenant remains in possession of the Premises
---------------
after the expiration or earlier termination of this Lease without the express
written consent of Landlord, and such occupancy shall continue for more than ten
(10) days Landlord's written demand to Tenant that Tenant surrender possession
of the Premises to Landlord, Tenant shall indemnify, defend and hold Landlord
harmless from and against all Claims incurred by or asserted against Landlord
and arising directly or indirectly from Tenant's failure to timely surrender the
Premises, including but not limited to (i) any rent payable by or any loss,
cost, or damages, including lost profits, claimed by any prospective tenant of
the Premises or any portion thereof, and (ii) Landlord's damages as a result of
such prospective tenant rescinding or refusing to enter into the prospective
lease of the Premises or any portion thereof by reason of such failure to timely
surrender the Premises.
21. Subordination and Attornment.
----------------------------
a. This Lease is expressly made subject and subordinate to any
mortgage, deed of trust, ground lease, underlying lease or like encumbrance
affecting any part of the Real Property or any interest of Landlord therein
which is now existing or hereafter executed or recorded, any present or future
modification, amendment or supplement to any of the foregoing, and to any
advances made thereunder (any of the foregoing being a "Superior Interest")
without the necessity of any further documentation evidencing such
subordination. Notwithstanding the foregoing, Tenant shall, within ten (10) days
after Landlord's request, execute and deliver to Landlord a document evidencing
the subordination of this Lease to a particular Superior Interest. Tenant hereby
irrevocably appoints Landlord as Tenant's attorney-in-fact to execute and
deliver any such instrument in the name of Tenant if Tenant fails to do so
within such time. If the interest of Landlord in the Real Property or the
Building is transferred to any person ("Purchaser") pursuant to or in lieu of
proceedings for enforcement of any Superior Interest, Tenant shall immediately
and automatically attorn to the Purchaser, and this Lease shall continue in full
force and effect as a direct lease between the Purchaser and Tenant on the terms
and conditions set forth herein. Notwithstanding the foregoing, if a Superior
Interest is created following the execution of this Lease, Landlord's delivery
to Tenant of a non-disturbance agreement with respect thereto as described in
Paragraph 21.b. below and otherwise in such holder's standard institutional form
shall be a condition to the subordination of this Lease thereto, except that in
no event shall Tenant be required to pay Landlord or the holder of such Superior
Interest any fees or charges in order to obtain such non-disturbance agreement.
b. Upon Tenant's written request, Landlord will request that the
holders of any Superior Interests in place as of the date of this Lease execute
a written "non-disturbance agreement" on Tenant's behalf providing that, if
Tenant is not in default under this Lease beyond any applicable grace period,
30
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that such party will recognize this Lease and Tenant's rights hereunder and will
not disturb Tenant's possession hereunder, and if this Lease is by operation of
law terminated in a foreclosure, that a new lease will be entered into on the
same terms as this Lease for the remaining term hereof. The failure of any such
holder of a Superior Interest to execute and deliver such a non-disturbance
agreement upon Landlord's request shall not constitute a default hereunder by
Landlord, it being understood that Landlord's sole obligation is to request in
good faith the execution and delivery of such agreement. Further, if in order to
obtain such non-disturbance agreement from any such holder of a Superior
Interest Landlord is required to expend any sum, Landlord shall so notify Tenant
and Tenant may elect to pay such sum. In no event shall Landlord be required to
expend any sums in connection therewith.
22. Financing Condition. If any lender or ground lessor that intends to
-------------------
acquire an interest in, or holds a mortgage, ground lease or deed of trust
encumbering any portion of the Real Property should require, either the
execution by Tenant of an agreement requiring Tenant to send such lender written
notice of any default by Landlord under this Lease, giving such lender the right
to cure such default until such lender has completed foreclosure, and preventing
Tenant from terminating this Lease unless such default remains uncured after
foreclosure has been completed, and/or any modification of the agreements,
covenants, conditions or provisions of this Lease, then Tenant agrees that it
shall, within fifteen (15) days after Landlord's request, execute and deliver
such agreement and modify this Lease as required by such lender or ground
lessor; provided, however, that no such modification shall affect the length of
the term or increase the rent payable by Tenant under Paragraphs 5 and 7 or
otherwise increase Tenant's obligations (other than notice requirements and
other similar ministerial obligations). Tenant acknowledges and agrees that its
failure to timely execute any such agreement or modification required by such
lender or ground lessor may cause Landlord serious financial damage by causing
the failure of a financing transaction and giving Landlord all of its rights and
remedies under Paragraph 25 below, including its right to damages caused by the
loss of such financing.
23. Entry by Landlord. Landlord may, at any and all reasonable times, and
-----------------
upon reasonable advance notice (provided that no advance notice need be given if
an emergency (as determined by Landlord in its reasonable judgment) necessitates
an immediate entry or prior to entry to provide routine janitorial services),
enter the Premises to (a) inspect the same and to determine whether Tenant is in
compliance with its obligations hereunder, (b) supply janitorial and any other
service Landlord is required to provide hereunder, (c) show the Premises to
prospective lenders, purchasers or tenants, (d) post notices of
nonresponsibility, and (e) alter, improve or repair the Premises or any other
portion of the Real Property. In connection with any such alteration,
improvement or repair, Landlord may erect in the Premises or elsewhere in the
Real Property scaffolding and other structures reasonably required for the work
to be performed. Except as otherwise expressly provided in this Lease, in no
event shall such entry or work entitle Tenant to an abatement of rent,
constitute an eviction of Tenant, constructive or otherwise, or impose upon
Landlord any liability whatsoever, including but not limited to liability for
consequential damages or loss of business or profits by Tenant; provided,
however, that Landlord shall use good faith efforts to cause all such work to be
done in such a manner as to cause as little interference to Tenant as reasonably
possible without incurring additional expense. Landlord shall at all times
retain a key with which to unlock all of the doors in the Premises, except
Tenant's vaults and safes. If an emergency necessitates immediate access to the
Premises, Landlord may use whatever force is necessary to enter the Premises and
any such entry to the Premises shall not constitute a forcible or unlawful entry
into the Premises, a detainer of the Premises, or an eviction of Tenant from the
Premises, or any portion thereof.
24. Insolvency or Bankruptcy. The occurrence of any of the following
------------------------
shall constitute an Event of Default under Paragraph 25 below:
1. Tenant ceases doing business as a going concern, makes an
assignment for the benefit of creditors, is adjudicated an insolvent, files a
petition (or files an answer admitting the material allegations of such
petition) seeking for Tenant any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any state or
federal
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bankruptcy or other law, or Tenant consents to or acquiesces in the appointment,
pursuant to any state or federal bankruptcy or other law, of a trustee, receiver
or liquidator for the Premises, for Tenant or for all or any substantial part of
Tenant's assets; or
2. Tenant fails within sixty (60) days after the commencement of any
proceedings against Tenant seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any state or
federal bankruptcy or other Legal Requirement, to have such proceedings
dismissed, or Tenant fails, within sixty (60) days after an appointment pursuant
to any state or federal bankruptcy or other Legal Requirement without Tenant's
consent or acquiescence, of any trustee, receiver or liquidator for the
Premises, for Tenant or for all or any substantial part of Tenant's assets, to
have such appointment vacated; or
3. Tenant is unable, or admits in writing its inability, to pay its
debts as they mature; or
4. Tenant gives notice to any governmental body of its insolvency or
pending insolvency, or of its suspension or pending suspension of operations.
In no event shall this Lease be assigned or assignable by reason of any
voluntary or involuntary bankruptcy, insolvency or reorganization proceedings,
nor shall any rights or privileges hereunder be an asset of Tenant, the trustee,
debtor-in-possession, or the debtor's estate in any bankruptcy, insolvency or
reorganization proceedings.
25. Default and Remedies.
--------------------
a. Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" by Tenant:
1. Tenant fails to pay when due Monthly Rent, Additional Rent
or any other rent due hereunder within five (5) days after written notice from
Landlord that such sum is due, except that Landlord shall only be required to
give one such notice in any calendar year, and after any such notice is given
any failure by Tenant in such calendar year to pay Monthly Rent, Additional Rent
or any other rent due hereunder within five (5) days after due shall itself
constitute an Event of Default, without the requirement of notice from Landlord
of such failure; or
2. Tenant abandons the Premises or any portion thereof; or
3. Tenant fails to deliver any estoppel certificate pursuant to
Paragraph 29 below, subordination agreement pursuant to Paragraph 21 above, or
document required pursuant to Paragraph 22 above, within the applicable period
set forth therein; or
4. Tenant violates the bankruptcy and insolvency provisions of
Paragraph 24 above; or
5. Tenant makes or has made or furnishes or has furnished any
warranty, representation or statement to Landlord in connection with this Lease,
or any other agreement made by Tenant for the benefit of Landlord, which is or
was false or misleading in any material respect when made or furnished; or
6. Tenant assigns this Lease or subleases any portion of the
Premises in violation of Paragraph 13 above; or
7. Tenant fails to comply with any other provision of this
Lease in the manner required pursuant to this Lease within thirty (30)
days after written notice from Landlord of such failure (or if the noncompliance
cannot by its nature be cured within the 30-day period, if Tenant fails to
commence to cure such noncompliance within the 30-day period and thereafter
diligently prosecute such cure to completion).
b. Remedies. Upon the occurrence of an Event of Default Landlord
--------
shall have the following remedies, which shall not be exclusive but shall be
32
<PAGE>
cumulative and shall be in addition to any other remedies now or hereafter
allowed by law:
1. Landlord may terminate Tenant's right to possession of the Premises
at any time by written notice to Tenant. Tenant expressly acknowledges that in
the absence of such written notice from Landlord, no other act of Landlord,
including, but not limited to, its re-entry into the Premises, its efforts to
relet the Premises, its reletting of the Premises for Tenant's account, its
storage of Tenant's personal property and trade fixtures, its acceptance of keys
to the Premises from Tenant, its appointment of a receiver, or its exercise of
any other rights and remedies under this Paragraph 25 or otherwise at law, shall
constitute an acceptance of Tenant's surrender of the Premises or constitute a
termination of this Lease or of Tenant's right to possession of the Premises.
Upon such termination in writing of Tenant's right to possession of the
Premises, this Lease shall terminate and Landlord shall be entitled to recover
damages from Tenant as provided in California Civil Code Section 1951.2 or any
other applicable existing or future Legal Requirement providing for recovery of
damages for such breach, including but not limited to the following:
(i) The reasonable cost of recovering the Premises; plus
(ii) The reasonable cost of removing Tenant's Alterations, trade
fixtures and improvements; plus
(iii) All unpaid rent due or earned hereunder prior to the date
of termination, less the proceeds of any reletting or any rental received from
subtenants prior to the date of termination applied as provided in Paragraph
25.b.2. below, together with interest at the Interest Rate, on such sums from
the date such rent is due and payable until the date of the award of damages;
plus
(iv) The amount by which the rent which would be payable by
Tenant hereunder, including Additional Rent under Paragraph 7 above, as
reasonably estimated by Landlord, from the date of termination until the date of
the award of damages, exceeds the amount of such rental loss as Tenant proves
could have been reasonably avoided, together with interest at the Interest Rate
on such sums from the date such rent is due and payable until the date of the
award of damages; plus
(v) The amount by which the rent which would be payable by Tenant
hereunder, including Additional Rent under Paragraph 7 above, as reasonably
estimated by Landlord, for the remainder of the then term, after the date of the
award of damages exceeds the amount such rental loss as Tenant proves could have
been reasonably avoided, discounted at the discount rate published by the
Federal Reserve Bank of San Francisco for member banks at the time of the award
plus one percent (1%); plus
(vi) Such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law, including
without limitation any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.
2. Landlord has the remedy described in California Civil Code
Section 1951.4 (a landlord may continue the lease in effect after the tenant's
breach and abandonment and recover rent as it becomes due, if the tenant has the
right to sublet and assign subject only to reasonable limitations), and may
continue this Lease in full force and effect and may enforce all of its rights
and remedies under this Lease, including, but not limited to, the right to
recover rent as it becomes due. After the occurrence of an Event of Default,
Landlord may enter the Premises without terminating this Lease and sublet all or
any part of the Premises for Tenant's account to any person, for such term
(which may be a period beyond the remaining term of this Lease), at such rents
and on such other terms and conditions as Landlord deems advisable. In the event
of any such subletting, rents received by Landlord from such subletting shall be
applied (i) first, to the payment of the costs of maintaining, preserving,
altering and
33
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preparing the Premises for subletting, the other costs of subletting, including
but not limited to brokers' commissions, attorneys' fees and expenses of removal
of Tenant's personal property, trade fixtures and Alterations; (ii) second, co
the payment of rent then due and payable hereunder; (iii) third, co the payment
of future rent as the same may become due and payable hereunder; (iv) fourth,
the balance, if any, shall be paid to Tenant upon (but not before) expiration of
the term of this Lease. If the rents received by Landlord from such subletting,
after application as provided above, are insufficient in any month co pay the
rent due and payable hereunder for such month, Tenant shall pay such deficiency
co Landlord monthly upon demand. Notwithstanding any such subletting for
Tenant's account without termination, Landlord may at any time thereafter, by
written notice to Tenant, elect to terminate this Lease by virtue of a previous
Event of Default.
During the continuance of an Event of Default, for so long as Landlord
does not terminate Tenant's right to possession of the Premises and subject to
Paragraph 13, entitled Assignment and Subletting, and the options granted to
Landlord thereunder, Landlord shall not unreasonably withhold its consent to an
assignment or sublease of Tenant's interest in the Premises or in this Lease.
3. During the continuance of an Event of Default, and after Tenant's
abandonment of the Premises (within the meaning of California Civil Code Section
1951.2) or Landlord's eviction of Tenant from the Premises by appropriate legal
proceedings, Landlord may enter the Premises without terminating this Lease and
remove all Tenant's equipment, furniture and other personal property,
Alterations and trade fixtures from the Premises and store them at Tenant's risk
and expense. If Landlord removes such property from the Premises and stores it
at Tenant's risk and expense, and if Tenant fails to pay the cost of such
removal and storage after written demand therefor and/or co pay any rent then
due, then after the property has been stored for a period of thirty (30) days or
more Landlord may sell such property at public or private sale, in the manner
and at such times and places as Landlord deems commercially reasonable following
reasonable notice to Tenant of the time and place of such sale. The proceeds of
any such sale shall be applied first to the payment of the expenses for removal
and storage of the property, the preparation for and the conducting of such
sale, and for attorneys' fees and other legal expenses incurred by Landlord in
connection therewith, and the balance shall be applied as provided in Paragraph
25.b.2. above.
Tenant hereby waives all claims for damages that may be caused by
Landlord's reentering and taking possession of the Premises or removing and
storing Tenant's personal property pursuant to this Paragraph 25, and Tenant
shall indemnify, defend and hold Landlord harmless from and against any and all
Claims resulting from any such act. No reentry by Landlord shall constitute or
be construed as a forcible entry by Landlord.
4. Landlord may require Tenant to remove any and all Alterations from
the Premises or, if Tenant fails to do so within ten (10) days after Landlord's
request, Landlord may do so at Tenant's expense.
5. Landlord may cure the Event of Default at Tenant's expense, it
being understood that such performance shall not waive or cure the subject Event
of Default. If Landlord pays any sum or incurs any expense in curing the Event
of Default, Tenant shall reimburse Landlord upon demand for the amount of such
payment or expense with interest at the Interest Rate from the date the sum is
paid or the expense is incurred until Landlord is reimbursed by Tenant. Any
amount due Landlord under this subsection shall constitute additional rent
hereunder.
c. Waiver of Redemption. Tenant hereby waives, for itself and all
--------------------
persons claiming by and under Tenant, all rights and privileges which it might
have under any present or future Legal Requirement to redeem the Premises or to
continue this Lease after being dispossessed or ejected from the Premises.
26. Damage or Destruction. If all or a part of the Premises are damaged
---------------------
by fire or other casualty, or if the Building is so damaged Chat access to or
use and occupancy of the Premises is materially impaired, within thirty (30)
days of the date of the damage Landlord shall give Tenant notice of Landlord's
reasonable estimate of the time required from the date of the damage
34
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to repair the damage (the "Damage Estimate"). If the Damage Estimate is one
hundred twenty (120) days or less, then Landlord shall repair the damage and
this Lease shall remain in full force and effect. If the Damage Estimate is more
than one hundred twenty (120) days, Landlord, at its option exercised by written
notice to Tenant within sixty (60) days of the date of the damage, shall either
(a) repair the damage, in which event this Lease shall continue in full force
and effect, or (b) terminate this Lease as of the date specified by Landlord in
the notice, which date shall be not less than thirty (30) days nor more than
sixty (60) days after the date such notice is given, and this Lease shall
terminate on the date specified in the notice. If the Damage Estimate is more
than one (1) year, and Landlord does not give notice terminating this Lease,
then Tenant may give notice to Landlord, within thirty (30) calendar days after
Tenant receives the Damage Estimate, terminating this Lease as of the date
specified in Tenant's termination notice, which date shall not be before the
date of such notice or more than thirty (30) days after the date of Tenant's
termination notice.
Notwithstanding anything to contrary contained in this Paragraph 26, if
the initial Damage Estimate is more than ninety (90) days, and the date on which
Landlord reasonably anticipates the repairs of such damage will be completed is
during the last twelve (12) months of the Lease term, Landlord and Tenant shall
each have the option to terminate this Lease by giving written notice to the
other, in the case of Landlord together with the Damage Estimate, or, in the
case of Tenant, within thirty (30) days of Tenant's receipt of the Damage
Estimate, and this Lease shall terminate as of the date specified by the party
in its termination notice, which date shall not be before the date of such
notice or more than thirty (30) days after the date of such notice.
Notwithstanding the foregoing, if Landlord shall purport to exercise its
termination right pursuant to this paragraph, and within fifteen (15) days
thereafter Tenant shall validly exercise any theretofore unexercised renewal
option under Paragraph 52 below, Landlord's exercise of such termination right
shall be deemed void and of no force and effect, but the remaining provisions of
this Paragraph 26 shall fully apply with respect to such fire or ether casualty,
and any rights of Landlord (but not Tenant) to terminate this Lease pursuant to
the first paragraph of this Paragraph 26 shall survive and remain exercisable in
accordance with the terms of such first paragraph.
Notwithstanding anything to the contrary in the Paragraph 26, if damage
which would otherwise lead to a right to terminate this Lease results from the
willful misconduct of Landlord or Tenant, the party from whose misconduct such
damage results shall have no right to terminate this Lease.
If the fire or other casualty damages the Premises or the common areas of
the Real Property necessary for Tenant's use and occupancy of the Premises, and
Tenant ceases to use any portion of the Premises as a result of such damage,
then during the period the Premises or portion thereof are rendered unusable by
such damage and repair, Tenant's Monthly Rent and Additional Rent under
Paragraphs 5 and 7 above shall be proportionately reduced based upon the extent
to which the damage and repair prevents Tenant from conducting, and Tenant does
not conduct, its business at the Premises; provided, however, if the damage
results from the negligence or willful misconduct of Tenant or Tenant's agents,
employees, contractors, licensees or invitees, then Tenant's Monthly Rent and
Additional Rent will not abate unless Tenant reimburses Landlord for the
deductible required under Landlord's property damage/rental loss insurance.
Landlord shall not be obligated to repair or replace any of Tenant's movable
furniture, equipment, trade fixtures, and other personal property, nor any
Alterations installed in the Premises by Tenant (other than those of the Initial
Alterations which are normal and customary general office improvements), and no
damage to any of the foregoing shall entitle Tenant to any abatement, and Tenant
shall, at Tenant's sole cost and expense, repair and replace such items. All
such repair and replacement of Alterations shall be constructed in accordance
with Paragraph 9 above regarding Alterations.
A total destruction of the Building shall automatically terminate this
Lease. In no event shall Tenant be entitled to any compensation or damages from
Landlord for loss of use of the whole or any part of the Premises or for any
inconvenience occasioned by any such destruction, rebuilding or restoration of
the Premises, the Building or access thereto, except for the rent abatement
expressly provided above. Tenant hereby waives California Civil Code Sections
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1932(2) and 1933(4), providing for termination of hiring upon destruction of the
thing hired and Sections 1941 and 1942, providing for repairs to and of
premises.
27. Eminent Domain.
--------------
a. If all or any part of the Premises are taken by any public or
quasi-public authority under the power of eminent domain, or any agreement in
lieu thereof (a "taking"), this Lease shall terminate as to the portion of the
Premises taken effective as of the date of taking. If only a portion of the
Premises is taken, Landlord or Tenant may terminate this Lease as to the
remainder of the Premises upon written notice to the other party within ninety
(90) days after the taking; provided, however, that Tenant's right to terminate
this Lease is conditioned upon the remaining portion of the Premises being of
such size or configuration that such remaining portion of the Premises is
unusable or uneconomical for Tenant's business. Landlord shall be entitled to
all compensation, damages, income, rent awards and interest thereon whatsoever
which may be paid or made in connection with any taking and Tenant shall have no
claim against Landlord or any governmental authority for the value of any
unexpired term of this Lease or of any of the improvements or Alterations in the
Premises; provided, however, that the foregoing shall not prohibit Tenant from
prosecuting a separate claim against the taking authority for an amount
separately designated for Tenant's relocation expenses or the interruption of or
damage to Tenant's business or as compensation for Tenant's personal property,
trade fixtures, Alterations or other improvements paid for by Tenant so long as
any award to Tenant will not reduce the award to Landlord.
In the event of a partial taking of the Premises which does not result in
a termination of this Lease, the Monthly Rent and Additional Rent under
Paragraphs 5 and 7 hereunder shall be equitably reduced. If all or any part of
the Real Property other than the Premises is taken, Landlord may terminate this
Lease upon written notice to Tenant given within ninety (90) days after the date
of taking. If a portion of the Real Property other than the Premises is taken,
and such taking renders Tenant without reasonable access to the Premises, Tenant
may terminate this Lease upon written notice to Landlord given within thirty
(30) days after the date of taking. Any termination pursuant to this paragraph
shall be effective as of the date specified by the party in its termination
notice, which date shall not be before the date of such notice or more than
thirty (30) days after the date of such notice.
b. Notwithstanding the foregoing, if all or any portion of the
Premises is taken for a period of time not exceeding one (1) year and ending
prior to the end of the term of this Lease, this Lease shall remain in full
force and effect and Tenant shall continue to pay all rent and to perform all of
its obligations under this Lease; provided, however, that Tenant shall be
entitled to all compensation, damages, income, rent awards and interest thereon
that is paid or made in connection with such temporary taking of the Premises
(or portion thereof), except that any such compensation in excess of the rent or
other amounts payable to Landlord hereunder shall be promptly paid over to
Landlord as received. Landlord and Tenant each hereby waive the provisions of
California Code of Civil Procedure Section 1265.130 and any other applicable
existing or future Legal Requirement providing for, or allowing either party to
petition the courts of the state in which the Real Property is located for, a
termination of this Lease upon a partial taking of the Premises and/or the
Building.
28. Landlord's Liability: Sale of Building. The term "Landlord," as used
--------------------------------------
in this Lease, shall mean only the owner or owners of the Real Property at the
time in question. Notwithstanding any other provision of this Lease, the
liability of Landlord for its obligations under this Lease is limited solely to
Landlord's interest in the Real Property as the same may from time to time be
encumbered, and no personal liability shall at any time be asserted or
enforceable against any other assets of Landlord or against the constituent
shareholders, partners or other owners of Landlord, or the directors, officers,
employees and agents of Landlord or such constituent shareholder, partner or
other owner, on account of any of Landlord's obligations or actions under this
Lease. In addition, in the event of any conveyance of title to the Real
Property, then the grantor or transferor shall be relieved of all liability with
respect to Landlord's obligations to be performed under this Lease after the
date of such conveyance. In no event shall Landlord be deemed to be in default
under this Lease unless Landlord fails to perform its obligations under this
Lease, Tenant
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delivers to Landlord written notice specifying the nature of Landlord's alleged
default, and Landlord fails to cure such default within thirty (30) days
following receipt of such notice (or, if the default cannot reasonably be cured
within such period, to commence action within such thirty (30)-day period and
proceed diligently thereafter to cure such default). Upon any conveyance of
title to the Real Property, the grantee or transferee shall be deemed to have
assumed Landlord's obligations to be performed under this Lease from and after
the date of such conveyance, subject to the limitations on liability set forth
above in this Paragraph 28. If Tenant provides Landlord with any security for
Tenant's performance of its obligations hereunder, and Landlord transfers such
security to the grantee or transferee of Landlord's interest in the Real
Property, Landlord shall be released from any further responsibility or
liability for such security. Notwithstanding any other provision of this Lease,
but not in limitation of the provisions of Paragraph 14.a. above, Landlord shall
not be liable for any consequential damages, or interruption or loss of
business, income or profits, or claims of constructive eviction, nor shall
Landlord be liable for loss of or damage to artwork, currency, jewelry, bullion,
unique or valuable documents, securities or other valuables, or for other
property not in the nature of ordinary fixtures, furnishings and equipment used
in general administrative and executive office activities and functions.
Wherever in this Lease Tenant (a) releases Landlord from any claim or liability,
(b) waives or limits any right of Tenant to assert any claim against Landlord or
to seek recourse against any property of Landlord or (c) agrees to indemnify
Landlord against any matters, the relevant release, waiver, limitation or
indemnity shall run in favor of and apply to Landlord, the constituent
shareholders, partners or other owners of Landlord, and the directors, officers,
employees and agents of Landlord and each such constituent shareholder, partner
or other owner.
Notwithstanding anything to the contrary contained above in this
Paragraph 28 or elsewhere in this Lease, in the event that Landlord's interest
in the Real Property, as the same may from time to time be encumbered, shall be
in excess of Ten Million Dollars ($10,000,000.00), then such excess shall not be
subject to any claims by Tenant or liability to Tenant arising out of or in
connection with this Lease.
29. Estoppel Certificates. At any time and from time to time, upon not
---------------------
less than ten (10) Business Days' prior notice from Landlord, Tenant shall
execute, acknowledge and deliver to Landlord a statement certifying the
commencement date of this Lease, stating that this Lease is unmodified and in
full force and effect (or if there have been modifications, that this Lease is
in full force and effect as modified and the date and nature of each such
modification), that to the best of Tenant's knowledge Landlord is not in default
under this Lease (or, if Landlord is in default, specifying the nature of such
default), that Tenant is not in default under this Lease (or if Tenant is in
default, specifying the nature of such default), the current amounts of and the
dates to which the Monthly Rent and Additional Rent has been paid, and setting
forth such other matters as may be reasonably requested by Landlord. Any such
statement may be conclusively relied upon by a prospective purchaser of the Real
Property or by a lender obtaining a lien on the Real Property as security. If
Tenant fails to deliver such statement within the time required hereunder, such
failure shall be conclusive upon Tenant that (i) this Lease is in full force and
effect, without modification except as may be represented by Landlord, (ii)
there are no uncured defaults in Landlord's performance of its obligations
hereunder, (iii) not more than one month's installment of Monthly Rent has been
paid in advance, and (iv) any other statements of fact included by Landlord in
such statement are correct. Tenant acknowledges and agrees that its failure to
execute such certificate may cause Landlord serious financial damage by causing
the failure of a sale or financing transaction and giving Landlord all of its
rights and remedies under Paragraph 25 above, including its right to damages
caused by the loss of such sale or financing.
30. Right of Landlord to Perform. If Tenant fails to make any payment
----------------------------
required hereunder (other than Monthly Rent and Additional Rent) or fails to
perform any other of its obligations hereunder, after the expiration of any
applicable grace or cure period (unless waiting for such period to expire would
jeopardize the health, safety or quiet enjoyment of the Building by its tenants
and occupants or cause further damage or loss to Landlord or the Real Property,
as reasonably determined by Landlord, or result in any violation (or continuance
of any violation) of any Legal Requirement), Landlord may, but shall not be
37
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obliged to, and without waiving any default of Tenant or releasing Tenant from
any obligations to Landlord hereunder, make any such payment or perform any
other such obligation on Tenant's behalf. All sums so paid by Landlord and all
necessary incidental costs in connection with the performance by Landlord of an
obligation of Tenant (together with interest thereon from the date of such
payment by Landlord until paid at the Interest Rate) shall be payable by Tenant
to Landlord upon demand, and Tenant's failure to make such payment upon demand
shall entitle Landlord to the same rights and remedies provided Landlord in the
event of non-payment of rent.
31. Late Charge. Tenant acknowledges that late payment of any installment
-----------
of Monthly Rent or Additional Rent or any other amount required under this Lease
will cause Landlord to incur costs not contemplated by this Lease and that the
exact amount of such costs would be extremely difficult and impracticable to
fix. Such costs include, without limitation, processing and accounting charges,
late charges that may be imposed on Landlord by the terms of any encumbrance or
note secured by the Real Property and the loss of the use of the delinquent
funds. Therefore, if any installment of Monthly Rent or Additional Rent or any
other amount due from Tenant is not received within five (5) days after due,
Tenant shall pay to Landlord on demand, on account of the delinquent payment, an
additional sum equal to the greater of (i) five percent (5%) of the overdue
amount, or (ii) $100.00, which additional sum represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant. Notwithstanding the foregoing, Landlord shall give Tenant notice of non-
payment of any amounts required of Tenant under this Lease and five (5) days
after delivery of such notice to cure such non-payment once in each calendar
year before assessing the late charge in such calendar year pursuant to this
Paragraph 31. Acceptance of any late charge shall not constitute a waiver of
Tenant's default with respect to the overdue amount, nor prevent Landlord from
exercising its right to collect interest as provided above, rent, or any other
damages, or from exercising any of the other rights and remedies available to
Landlord.
32. Attorneys' Fees: Waiver of Jury Trial. In the event of any action or
-------------------------------------
proceeding between Landlord and Tenant (including an action or proceeding
between Landlord and the trustee or debtor in possession while Tenant is a
debtor in a proceeding under any bankruptcy law) to enforce any provision of
this Lease, the losing party shall pay to the prevailing party all costs and
expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred in such action and in any appeal in connection therewith by
such prevailing party. The "prevailing party" will be determined by the court
before whom the action was brought based upon an assessment of which party's
major arguments or positions taken in the suit or proceeding could fairly be
said to have prevailed over the other party's major arguments or positions on
major disputed issues in the court's decision. Notwithstanding the foregoing,
however, Landlord shall be deemed the prevailing party in any unlawful detainer
or other action or proceeding instituted by Landlord based upon any default or
alleged default of Tenant hereunder if (i) judgment is entered in favor of
Landlord, or (ii) prior to trial or judgment Tenant pays all or any portion of
the rent claimed by Landlord, vacates the Premises, or otherwise cures the
default claimed by Landlord.
If Landlord becomes involved in any litigation or dispute, threatened or
actual, by or against anyone not a party to this Lease, but arising by reason of
or related to any act or omission of Tenant or any Tenant Party, Tenant agrees
to pay Landlord's reasonable attorneys' fees and other costs incurred in
connection with the litigation or dispute, regardless of whether a lawsuit is
actually filed.
IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE
PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND
THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING
UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, LANDLORD AND TENANT HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Tenant agree that
this paragraph constitutes a written consent to waiver of trial by jury within
the meaning of California Code of Civil Procedure Section 631(a)(2), and Tenant
does hereby authorize and empower Landlord to file this paragraph and/or this
Lease, as required, with the clerk or judge of any court of competent
jurisdiction as a written consent to waiver of jury trial.
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33. Waiver. No provisions of this Lease shall be deemed waived by
------
Landlord or Tenant unless such waiver is in a writing signed by the party giving
such waiver. The waiver by either party of any breach of any provision of this
Lease by the other party shall not be deemed a waiver of any subsequent breach
of the same or any other provision of this Lease. No delay or omission in the
exercise of any right or remedy of Landlord upon any default by Tenant, or of
Tenant upon any default of Landlord, shall impair such right or remedy or be
construed as a waiver. Landlord's acceptance of any payments of rent due under
this Lease shall not be deemed a waiver of any default by Tenant under this
Lease (including Tenant's recurrent failure to timely pay rent) other than
Tenant's nonpayment of the accepted sums, and no endorsement or statement on any
check or accompanying any check or payment shall be deemed an accord and
satisfaction. Tenant's payment of rent due and Tenant's continuance in
possession shall not constitute a waiver by Tenant of any default of Landlord.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.
34. Notices. All notices and demands which may or are required to be
-------
given by either party to the other hereunder shall be in writing. All notices
and demands by Landlord to Tenant shall be delivered personally or sent by
United States mail, postage prepaid, or by any reputable overnight or same-day
courier, addressed to Tenant at BEA Systems, Inc., 2315 North First Street, San
Jose, California 95131, Attention: Director of Real Estate and Facilities, with
a copy to Tenant at the foregoing address, Attention: General Counsel, or to
such other place as Tenant may from time to time designate by notice to Landlord
hereunder. All notices and demands by Tenant to Landlord shall be sent by United
States mail, postage prepaid, or by any reputable overnight or same-day courier,
addressed to Landlord in care of Shorenstein Company, L.P., 555 California
Street, 49th floor, San Francisco, California 94104, or to such other place as
Landlord may from time to time designate by notice to Tenant hereunder. Notices
delivered personally or sent same-day courier will be effective immediately upon
delivery to the addressee at the designated address; notices sent by overnight
courier will be effective one (1) Business Day after acceptance by the service
for delivery; notices sent by mail will be effective two (2) Business Days after
mailing. In the event Tenant requests multiple notices hereunder, Tenant will be
bound by such notice from the earlier of the effective times of the multiple
notices.
35. Deleted.
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36. Defined Terms and Marginal Headings. When required by the context of
-----------------------------------
this Lease, the singular includes the plural. If more than one person or entity
signs this Lease as Tenant, the obligations hereunder imposed upon Tenant shall
be joint and several, and the act of, written notice to or from, refund to, or
signature of, any Tenant signatory to this Lease (including without limitation
modifications of this Lease made by fewer than all such Tenant signatories)
shall bind every other Tenant signatory as though every other Tenant signatory
had so acted, or received or given the written notice or refund, or signed. The
headings and titles to the paragraphs of this Lease are for convenience only and
are not to be used to interpret or construe this Lease. Wherever the term
"including" or "includes" is used in this Lease it shall be construed as if
followed by the phrase "without limitation." The language in all parts of this
Lease shall in all cases be construed as a whole and in accordance with its fair
meaning and not construed for or against any party simply because one party was
the drafter thereof."
37. Time and Applicable Law. Time is of the essence of this Lease and of
-----------------------
each and all of its provisions. This Lease shall be governed by and construed in
accordance with the laws of the State of California, and the venue of any action
or proceeding under this Lease shall be the City and County of San Francisco,
California.
38. Successors. Subject to the provisions of Paragraphs 13 and 28 above,
----------
the covenants and conditions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors, executors, administrators and assigns.
39
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39. Entire Agreement: Modifications. This Lease (including any exhibit,
-------------------------------
rider or attachment hereto) constitutes the entire agreement between Landlord
and Tenant with respect to Tenant's lease of the Premises. No provision of this
Lease may be amended or otherwise modified except by an agreement in writing
signed by the parties hereto. Neither Landlord nor Landlord's agents have made
any representations or warranties with respect to the Premises, the Building,
the Real Property or this Lease except as expressly set forth herein, including
without limitation any representations or warranties as to the suitability or
fitness of the Premises for the conduct of Tenant's business or for any other
purpose, nor has Landlord or its agents agreed to undertake any alterations or
construct any improvements to the Premises except those, if any, expressly
provided in this Lease, and no rights, easements or licenses shall be acquired
by Tenant by implication or otherwise unless expressly set forth herein. Neither
this Lease nor any memorandum hereof shall be recorded by Tenant.
40. Light and Air. Tenant agrees that no diminution of light air or view
-------------
by any structure which may hereafter be erected (whether or not by Landlord)
shall entitle Tenant to any reduction of rent hereunder, result in any liability
of Landlord to Tenant, or in any other way affect this Lease.
41. Name of Building. Tenant shall not use the name of the Building for
----------------
any purpose other than as the address of the business conducted by Tenant in the
Premises without the written consent of Landlord. Landlord reserves the right to
change the name of the Building at any time in its sole discretion by written
notice to Tenant and Landlord shall not be liable to Tenant for any loss, cost
or expense on account of any such change of name.
42. Severability. If any provision of this Lease or the application
------------
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
43. Authority. If Tenant is a corporation, partnership, trust,
---------
association or other entity, Tenant and each person executing this Lease on
behalf of Tenant, hereby covenants and warrants that (a) Tenant is duly
incorporated or otherwise established or formed and validly existing under the
laws of its state of incorporation, establishment or formation, (b) Tenant has
and is duly qualified to do business in the state in which the Real Property is
located, (c) Tenant has full corporate, partnership, trust, association or other
appropriate power and authority to enter into this Lease and to perform all
Tenant's obligations hereunder, and (d) each person (and all of the persons if
more than one signs) signing this Lease on behalf of Tenant is duly and validly
authorized to do so.
44. No Offer. Submission of this instrument for examination and signature
--------
by Tenant does not constitute an offer to lease or a reservation of or option
for lease, and is not effective as a lease or otherwise until execution and
delivery by both Landlord and Tenant.
45. Real Estate Brokers. Tenant represents and warrants that it has
-------------------
negotiated this Lease directly with the real estate broker(s) identified in
Paragraph 2 and has not authorized or employed, or acted by implication to
authorize or to employ, any other real estate broker or salesman to act for
Tenant in connection with this Lease. Tenant shall indemnify, defend and hold
Landlord harmless from and against any and all Claims by any real estate broker
or salesman other than the real estate broker(s) identified in Paragraph 2 for a
commission, finder's fee or other compensation as a result of Tenant's entering
into this Lease. Landlord shall pay any commission owing to the Real Estate
Brokers identified in Paragraph 2 above pursuant to a separate agreement,, and
shall indemnify, defend and hold Tenant harmless from and against any and all
Claims by such real estate brokers.
46. Consents and Approvals. Wherever the consent, approval, judgment or
----------------------
determination of Landlord is required or permitted under this Lease, Landlord
may exercise its sole discretion in granting or withholding such consent or
approval or in making such judgment or determination without reference to any
extrinsic standard of reasonableness, unless the provision providing for such
consent, approval, judgment or determination specifies that Landlord's consent
40
<PAGE>
or approval is not to be unreasonably withheld, or that the standard for such
consent, approval, judgment or determination is to be reasonable, or otherwise
specifies the standards under which Landlord may withhold its consent. Whenever
Tenant requests Landlord to take any action or give any consent or approval,
Tenant shall reimburse Landlord for all of Landlord's reasonable costs incurred
in reviewing the proposed action or consent (whether or not Landlord consents to
any such proposed action), including without limitation reasonable attorneys' or
consultants' fees and expenses, within thirty (30) days after Landlord's
delivery to Tenant of a statement of such costs. The review and/or approval by
Landlord of any item shall not impose upon Landlord any liability for accuracy
or sufficiency of any such item or the quality or suitability of such item for
its intended use. Any such review or approval is for the sole purpose of
protecting Landlord's interest in the Real Property, and neither Tenant nor any
Tenant Party nor any person or entity claiming by, through or under Tenant, nor
any other third party shall have any rights hereunder by virtue of such review
and/or approval by Landlord.
47. Reserved Rights. Landlord retains and shall have the rights set forth
---------------
below, exercisable without notice and without liability to Tenant for damage or
injury to property, person or business and without effecting an eviction,
constructive or actual, or disturbance of Tenant's use or possession of the
Premises or giving rise to any claim for rent abatement:
(a) To grant to anyone the exclusive right to conduct any business or render
any service in or to the Building and its tenants, provided that such
exclusive right shall not operate to require Tenant to use or patronize
such business or service or to exclude Tenant from its use of the
Premises expressly permitted herein.
(b) To perform, or cause or permit to be performed, at any time and from time
to time, including during Business Hours, construction in the common
areas and facilities or other leased areas in the Real Property. Landlord
shall use its good faith efforts to minimize disruption to Tenant's
business caused by any such work, and, without limitation, Landlord shall
perform any extraordinarily noisy or disruptive work after Business Hours
or on weekends to the extent such procedures would be generally followed
by managers of other first class high rise office buildings in the San
Francisco financial district (except to the extent an emergency and/or
Legal Requirements require otherwise, as reasonably determined by
Landlord).
(c) To reduce, increase, enclose or otherwise change at any time and from
time to time the size, number, location, lay-out and nature of the common
areas and facilities and other tenancies and premises in the Real
Property and to create additional rentable areas through use or enclosure
of common areas.
48. Financial Statements. Within thirty (30) days after Landlord's
--------------------
request therefor, Tenant shall furnish to Landlord, and to any lender,
prospective lender, purchaser or prospective purchaser designated by Landlord,
copies of true and accurate financial statements reflecting Tenant's then
current financial situation (including without limitation balance sheets,
statements of profit and loss, and changes in financial condition), Tenant's
most recent audited or certified annual financial statements, and in addition
shall cause to be furnished to Landlord similar financial statements for any
guarantor(s) of this Lease. So long as Tenant or such guarantor shall be a
publicly traded entity, it may satisfy the requirements of this Paragraph 48 by
delivery of its most recent publicly available financial statements.
49. Deleted.
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50. Nondisclosure of Lease Terms. Tenant agrees that the terms of this
----------------------------
Lease are confidential and constitute proprietary information of Landlord, and
that disclosure of the terms hereof could adversely affect the ability of
Landlord to negotiate with other tenants. Tenant hereby agrees that Tenant shall
use its best efforts to ensure that Tenant and its partners, officers,
directors, employees, agents, real estate brokers and sales persons and
attorneys shall not disclose the terms of this Lease to any other person without
Landlord's prior written consent, except to any accountants of Tenant in
connection with the
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preparation of Tenant's financial statements or tax returns, to an assignee of
this Lease or sublessee of the Premises, or to an entity or person to whom
disclosure is required by applicable law or in connection with any action
brought to enforce this Lease.
51. Hazardous Substance Disclosure. California law requires landlords to
------------------------------
disclose to tenants the existence of certain hazardous substances. Accordingly,
the existence of gasoline and other automotive fluids, maintenance fluids,
copying fluids and other office supplies and equipment, certain construction and
finish materials, tobacco smoke, cosmetics and other personal items, and
asbestos-containing materials ("ACM") must be disclosed. Gasoline and other
automotive fluids are found in the garage area of the Building. Cleaning,
lubricating and hydraulic fluids used in the operation and maintenance of the
Building are found in the utility areas of the Building not generally accessible
to Building occupants or the public. Many Building occupants use copy machines
and printers with associated fluids and toners, and pens, markers, inks, and
office equipment that may contain hazardous substances. Certain adhesives,
paints and other construction materials and finishes used in portions of the
Building may contain hazardous substances. Although smoking is prohibited in the
public areas of the Building, these areas may, from time to time, be exposed to
tobacco smoke. Building occupants and other persons entering the Building from
time-to-time may use or carry prescription and non-prescription drugs, perfumes,
cosmetics and other toiletries, and foods and beverages, some of which may
contain hazardous substances. Further, certain portions of the Building contain
ACM in the form of pipe insulation located in areas generally inaccessible to
Building occupants and visitors, such as machinery and utility rooms, the inside
of sealed walls and above suspended ceilings. Landlord has made no special
investigation of the Premises with respect to any hazardous substances. Tenant
agrees not to expose or disturb any ACM unless Landlord has given Tenant prior
written consent thereto and Tenant complies with all applicable Legal
Requirements and Landlord's written procedures for handling ACM. Tenant's
failure to comply with the immediately preceding sentence shall constitute an
Event of Default under Paragraph 25 of this Lease. Tenant may obtain a copy of
Landlord's written procedures for handling ACM from the Building office.
52. Option to Renew.
---------------
a. Option to Renew. Tenant shall have the option to renew this Lease
---------------
for one (1) additional term of five (5) years, commencing upon the expiration of
the initial term of this Lease. Such renewal option must be exercised, if at
all, by written notice given by Tenant to Landlord not later than twelve (12)
months prior to the expiration of the initial term of this Lease.
Notwithstanding the foregoing, this renewal option shall be null and void and
Tenant shall have no right to renew this Lease if (i) as of the date immediately
preceding the commencement of the renewal period Tenant and/or any Affiliate of
Tenant is not in occupancy of at least 47,000 rentable square feet of space in
the Building pursuant to this Lease or Tenant and/or any Affiliate of Tenant
does not intend to continue to occupy at least 47,000 rentable square feet of
space in the Building pursuant to this Lease (but intends to assign this Lease
or sublet the space in whole or in part such that such occupancy requirement
will not be met), or (ii) on the date Tenant exercises the option or on the date
immediately preceding the commencement date of the renewal period an Event of
Default shall have occurred and be continuing under this Lease.
b. Terms and Conditions. If Tenant exercises a renewal option, then
--------------------
during the applicable renewal period all of the terms and conditions set forth
in this Lease as applicable to the Premises during the initial term shall apply
during the renewal term, except that (i) Tenant shall have no further right to
renew this Lease, (ii) Tenant shall take the Premises in their then "as-is"
state and condition for the applicable renewal period (but the foregoing shall
not diminish Landlord's duties to repair and maintain the Real Property as
required by this Lease), (iii) the Base Year for the Premises shall be the
calendar year in which the renewal term commences and the Base Tax Year for the
Premises shall be the fiscal tax year in which the renewal term commences, and
(iv) the Monthly Rent payable by Tenant for the Premises shall be the then-fair
market rent for the Premises based upon the terms of this Lease, as renewed.
Fair market rent shall include the periodic rental increases, if any, that would
be included for space leased for the period the space will be covered by the
Lease. For purposes of this Paragraph 52, the term "fair market rent" shall mean
42
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the rental rate that would be applicable for a lease term commencing on the
commencement date of the renewal term and that would be payable in any arms
length negotiations for the Premises in their then as-is condition, for the
renewal term, which rental rate may be established by reference to rental terms
actually negotiated for comparable space under primary lease (and not sublease),
taking into consideration the location of the Building and such amenities as
existing improvements, view, floor on which the Premises are situated and the
like, situated in first class, reputable, established high-rise office buildings
in the San Francisco Financial District, in sound physical and economic
condition, engaged in then-prevailing ordinary rental market practices with
respect to tenant concessions (if any) (e.g. not offering extraordinary rental,
promotional deals and other concessions to tenants in an effort to alleviate
cash flow problems, difficulties in meeting loan obligations or other financial
distress, or in response to a greater than average vacancy rate or to entice an
anchor tenant into a newly constructed building). The fair market rent shall be
mutually agreed upon by Landlord and Tenant in writing within the thirty (30)
calendar day period commencing three (3) months prior to commencement of the
renewal period. If Landlord and Tenant are unable to agree upon the fair market
monthly rent within such thirty (30)-day period, then the fair market rent shall
be established by the appraisal procedures set forth in Paragraph 52.c. below.
c. Appraisal. Within thirty (30) days after the expiration of the
---------
thirty (30)-day period provided in Paragraph 52.b.-above for the mutual
agreement of Landlord and Tenant as to the fair market rent, each party hereto,
at its cost, shall engage a California licensed real estate broker to act on its
behalf in determining the fair market monthly rent. The brokers each shall have
at least ten (10) years' experience with leases in first-class high-rise office
buildings in the San Francisco Financial District. If a party does not appoint
an broker within such thirty (30)-day period but an broker is appointed by the
other respective party, the single broker appointed shall be the sole broker and
shall set the fair market rent. If the two brokers are appointed by the parties
as stated in this paragraph, such brokers shall meet promptly and attempt to set
the fair market rent taking into account all of the parameters set forth in
Paragraph 52.b. above. If such brokers are unable to agree within thirty (30)
days after appointment of the second broker, the brokers shall inform Landlord
and Tenant in writing of their respective determinations of the fair market rent
(each an "Initial Fair Market Rent Determination"), and shall elect a third
broker meeting the qualifications stated in this paragraph within ten (10) days
after the last date the two brokers are given to set the fair market rent. Each
of the parties hereto shall bear one-half (1/2) the cost of appointing the third
broker and of the third broker's fee. The third broker shall be a person who has
not previously acted in any capacity for either party.
Neither Landlord nor Tenant shall advise the third broker of the fair
market rent determinations delivered by the first two brokers, and Landlord and
Tenant shall instruct the first two brokers not to advise the third broker of
such determinations. The third broker shall make his own determination of the
fair market rent within thirty (30) days of his appointment, and shall be
instructed not to advise either party or the other two brokers of his
determination except as follows: When the third broker has made his
determination, he shall so advise Landlord and Tenant and shall establish a
date, at least five (5) days after the giving of notice by the third broker to
Landlord and Tenant, on which he shall meet with the parties to disclose his
determination of the fair market rent. Such meeting shall take place in the
third broker's office unless otherwise agreed by the parties.
If the fair market rent determined by the third broker is the average
of the determinations of the fair market rent delivered by Landlord's broker and
Tenant's broker, the third broker's determination of fair market rent shall be
the fair market rent. If such is not the case, fair market rent shall be
whichever of the Initial Fair Market Rent Determinations is closest to the
determination of fair market rent by the third broker.
d. Minimum Rental. Notwithstanding the foregoing, in no event
--------------
shall the Monthly Rent during the renewal period be less than the aggregate of
the amounts of Monthly Rent and Additional Rent payable by Tenant (for all of
the Premises leased hereunder) under Paragraphs 2.b., 5 and 7 hereof for the
calendar month immediately preceding the commencement of the renewal period.
43
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53. Right of First Offer.
--------------------
a. First Offer Right. Commencing June 1, 2000 and terminating May
-----------------
31, 2003, Tenant shall have a one-time right of first offer to lease each
increment of space comprising two thousand (2,000) rentable square feet or more
and located on the twelfth (12th) through seventeenth (17th) floors of the
Building (each of which is a "First Offer Increment") which becomes "available
for lease" after June 1, 2000 and prior to May 31, 2003. Without limitation, an
increment of space shall not be deemed "available for lease" within the meaning
of this Paragraph 53 if (i) the then tenant under an expiring lease of such
space desires to renew or extend its lease (regardless of whether such tenant
shall now or at such time have a right or option to so renew or extend) or (ii)
any tenant of the Building exercises an expansion option or right of first offer
or refusal to lease such space, which expansion option or right of first offer
or refusal has been granted prior to June 1, 2000. Upon Landlord obtaining
knowledge of any such increment of space becoming available, Landlord shall so
notify Tenant in writing, identifying the space and specifying the availability
date (or estimated availability date); provided, however, that Landlord shall
have no obligation to deliver any such availability notice (i) prior to June 1,
2000 (and Tenant shall have no rights under this Paragraph 53 prior to such
date), (ii) prior to six (6) months prior to the estimated availability date, or
(iii) in any given calendar year (and Tenant shall not have any right of first
offer pursuant to this Lease during such calendar year) unless on or prior to
December 1st of the preceding calendar year Tenant shall deliver written notice
to Landlord requesting that Landlord deliver to Tenant availability notices
pursuant to this Paragraph 53 during such given calendar year.
b. Terms and Conditions. If Tenant elects to lease a First Offer
--------------------
Increment, Tenant shall so notify Landlord in writing within ten (10) Business
Days after the date of Landlord's notice. If Tenant does not exercise its right
to lease a First Offer Increment within such ten (10) Business Day period, then
Landlord shall be forever released of its obligation to offer or lease such
First Offer Increment to Tenant, Tenant shall have no rights with respect
thereto, and the provisions of this Paragraph 53 shall not again apply to that
particular First Offer Increment.
Upon Tenant's election to lease a First Offer Increment, Landlord and
Tenant shall promptly enter into an amendment of this Lease, adding such First
Offer Increment to the Premises on all the terms and conditions set forth in
this Lease as to the Premises originally demised hereunder, except that (i) the
term of the lease to Tenant of such First Offer Increment shall commence upon
Landlord's delivery of the same to Tenant (but in no event sooner than thirty
(30) days after the date of Landlord's notice to Tenant) and shall continue
coextensively with the remaining term of this Lease and any extension thereof,
(ii) Tenant shall take the First Offer Increment in its then "as-is" condition,
(iii) the Monthly Rent payable by Tenant under Paragraph 5 of the Lease for the
First Offer Increment shall be as provided in Paragraph 53.d. below, (iv)
Tenant's Share payable under Paragraph 7 hereof with respect to such First Offer
Increment shall be determined by dividing the rentable square footage of such
First Offer Increment (using Landlord's then applicable space measurement method
in the Building) by the rentable square footage of the Building (using
Landlord's then applicable space measurement method in the Building) and
Tenant's Share for the Premises set forth in Paragraph 2.e. shall be increased
by such amount, (v) the "Base Year" with respect to such First Offer Increment
shall be the calendar year in which such First Offer Increment is added to this
Lease, and (vi) the "Base Tax Year" with respect to the First Offer Increment
shall be the fiscal tax year in which the First Offer Increment is added to this
Lease.
d. Monthly Rent. The Monthly Rent for each First Offer Increment shall
------------
be the then-fair market rent for the First Offer Increment. For purposes of this
Paragraph 53, the term "fair market rent" shall have the meaning set forth in
Paragraph 52 above, all references to the "Premises" therein being deemed
references to the "First Offer Increment", and disregarding any provisions which
by their nature pertain only to the renewal term. The fair market rent shall be
mutually agreed upon by Landlord and Tenant in writing within the thirty (30)
day period following Landlord's notice to Tenant regarding the availability of
the First Offer Increment, but in no shall such thirty (30) day period commence
prior to three (3) months prior to the estimated availability date of the First
Offer Increment. If Landlord and Tenant are unable to agree
44
<PAGE>
upon the fair market rent within such thirty (30)-day period, then the fair
market rent shall be established by appraisal in accordance with the procedures
set forth in Paragraph 52.c. If the fair market rent for a First Offer Increment
has not been established prior to the date the First Offer Increment is to be
added to this Lease, then Tenant shall pay as minimum Monthly Rent for the First
Offer Increment the amount produced by multiplying the rentable square footage
of the First Offer Increment by the Monthly Rent and Additional Rent payable by
Tenant for all the Premises then leased under this Lease under Paragraphs 2.c.,
5 and 7 hereof (as calculated on a per rentable square foot basis) for the month
immediately preceding the date the First Offer Increment is added to the
Premises. If the fair market rent, as subsequently determined, exceeds the rent
paid by Tenant for the First Offer Increment during the period prior to the date
the fair market rent was determined, Tenant shall pay the deficiency to Landlord
within ten (10) days after such determination, and if the fair market rent, as
subsequently determined, is less than the rent so paid by Tenant, Landlord shall
credit Tenant's overpayment against Tenant's next accruing Monthly Rent
obligations with respect to the Premises.
Notwithstanding the foregoing, in no event shall the Monthly Rent for
the First Offer Increment, as finally determined and as calculated on a per
rentable square foot basis, be less than the aggregate of the amounts of Monthly
Rent and Additional Rent payable by Tenant (for all of the Premises leased
hereunder) under Paragraphs 2.b., 5 and 7 hereof, as calculated on a per
rentable square foot basis.
e. Delayed Delivery. If Tenant exercises the right of first offer,
----------------
Landlord shall use its reasonable efforts to deliver the First Offer Increment
to Tenant on the availability date stated in Landlord's availability notice, but
Landlord does not guarantee that the First Offer Increment will be available on
the availability date stated in Landlord's availability notice if the then
existing occupants of the First Offer Increment shall hold-over, or for any
other reason beyond Landlord's reasonable control. In such event, as Tenant's
sole recourse, the term of this Lease as to the First Offer Increment shall be
delayed until Landlord legally delivers the same to Tenant. In no event shall
Landlord be required to institute holdover or eviction proceedings against any
tenant in order to make any First Offer Increment available to Tenant.
f. Prerequisite to Exercise of Right. Notwithstanding anything in this
---------------------------------
Paragraph 53 to the contrary, if at the time of Tenant's exercise of its right
of first offer or at the time the Lease term for the First Offer Increment is to
commence, (i) an Event of Default has occurred and is continuing hereunder, (ii)
the Tenant originally named under this Lease and/or any Affiliate of such Tenant
is not in occupancy of at least seventy-five percent (75%) of the space then
demised under this Lease (i.e. at least seventy-five percent (75%) of the space
as to which the Commencement Date shall have occurred) or does not at the time
of the exercise of the right of first offer or the date immediately preceding
the date the Lease term for the First Offer Increment is to commence intend to
remain in occupancy of at least seventy-five percent (75%) of such space or to
occupy the entire area of the First Offer Increment throughout the balance of
the term of this Lease (i.e. such Tenant has assigned or intends to assign this
Lease to other than an Affiliate, or intends to sublet the First Offer Increment
in whole or in part, or has sublet or intends to sublet any portion of the
Premises to other than an Affiliate such that the aforesaid seventy-five percent
(75%) occupancy requirement will not be met), then at Landlord's option Tenant
shall have no right to lease the First Offer Increment and Tenant's attempt to
exercise the right of first offer shall be null and void. If Tenant is not in
occupancy of any portion of the Premises due to construction of the Tenant
Improvement therein, Tenant shall nevertheless be deemed in "occupancy" of such
portion of the Premises for purposes of this Paragraph 53.
54. Ancillary Sites, Lines and Equipment.
------------------------------------
a. Ancillary Sites, Lines and Equipment. In addition to the Premises,
------------------------------------
Landlord hereby grants to Tenant and Tenant hereby accepts from Landlord, a
license (the "License") to use the following portions of the Building during the
term of this Lease (subject to earlier termination of the License as provided
below):
45
<PAGE>
(i) a certain portion of the roof area above the 16th floor of the
Building acceptable to Landlord and Tenant and set forth as the HVAC Site (the
"HVAC Site") in an amendment to this Lease, for purposes of installation,
operation, maintenance and replacement by Tenant at Tenant's sole expense, of
HVAC condenser units, none of which shall have a height in excess of four (4)
feet;
(ii) on a non-exclusive basis, in common with one or more other tenants
of the Building and Landlord, the vertical shafts and horizontal raceways of the
Building for purposes (and only for the purposes) of installation therein of
such electrical and communication wires and cables, pipes, duct-work, and
conduit (the "Non-Exclusive Lines") as may be reasonably needed to interconnect
Tenant's equipment on the HVAC Site with the Premises, as shown on plans and
specifications approved by Landlord, such approval not to be unreasonably
withheld; and
(iii) on an exclusive basis, from a point of entry into the Building to a
point within the portion of the Premises located on the 16th floor of the
Building, two (2) four inch (4") risers ("Tenant's Risers") installed in the
Building as part of the Tenant Improvements and approved by Landlord in
accordance with the provisions of Paragraph 4 above, for purposes (and only for
the purposes) of installation therein of such electrical wires, cables and
conduit as Tenant shall reasonably require in connection with Tenant's permitted
use of the Premises (collectively, the "Exclusive Lines"; and together with the
Non-Exclusive Lines, the "Lines").
The above described HVAC condenser units and Lines are collectively
referred to herein as the "Equipment". The HVAC Site and the areas of the
Building in which the Lines shall be located are collectively referred to herein
as the "Ancillary Sites".
b. Lease Provisions Applicable. The provisions of the Lease shall apply
---------------------------
to Tenant's license the Ancillary Sites, and any default by Tenant under this
Paragraph 54 shall constitute a breach and default under this Lease for purposes
of Paragraph 25 above. Without limiting the generality of the foregoing, the
provisions of Paragraphs 14 and 15, entitled "Indemnification of Landlord" and
"Insurance", respectively, shall apply in full to Tenant's lease of the
Ancillary Sites and Tenant's installation, operation and maintenance of the
Equipment. Notwithstanding the foregoing, Landlord shall not be obligated to
provide any water, gas or other utilities to the Ancillary Sites, but Landlord
shall permit Tenant to tap into the Building's water supply for purposes of
supplying necessary water to the HVAC condenser units. The water utilized in
connection with the use of the HVAC condenser units shall be recorded by (and
paid for by Tenant directly to Landlord or the public utility company (as
Landlord shall direct) on the basis of) the separate water meter installed by
Tenant in the Premises as part of the Tenant Improvements. The electricity
utilized in connection with the use of the Equipment related to the Ancillary
Sites shall be drawn from an electrical sub-panel installed by Tenant as part of
the Tenant Improvements to serve the Premises and shall be recorded by (and paid
for by Tenant directly to Landlord or the public utility company (as Landlord
shall direct) on the basis of) the separate electrical meter installed by Tenant
in the Premises as part of the Tenant Improvements. Landlord shall not be liable
for any loss or damage suffered by Tenant or others because of Landlord's
failure to furnish electrical power for any reason, including, without
limitation, loss of business or injury to persons or property. Tenant expressly
agrees to indemnify, defend and save harmless Landlord and the Indemnitees from
and against all loss, costs, penalties, liability, damage and claims of whatever
nature arising (or claimed to have arisen) from the installation, maintenance
and operation of the Lines or the Equipment, except to the extent arising from
the negligence or willful misconduct of Landlord or its employees. In addition
to the provisions of Paragraph 28, Landlord shall in no event be liable for any
loss or damage to the Equipment, or for any losses Or damages (direct,
consequential or otherwise) arising out of or in connection with any loss or
damage to the Equipment, in each case regardless of whether caused by Landlord's
or its employees' or agents' negligence, and Tenant shall install and maintain
the Equipment in such manner as to protect it against damage and disruption.
c. (i) Landlord's Approvals or Requirements. Landlord's approval of, or
------------------------------------
requirements concerning, the Lines, the Equipment or any plans and
46
<PAGE>
specifications, contractors and subcontractors for the design or installation
thereof, shall not be deemed a waiver of any of the provisions of this Lease,
nor a warranty as to the adequacy of the design, workmanship or quality of
materials or installation, and Landlord shall have no responsibility or
liability for the same. Landlord shall have no responsibility for any
deficiencies in drawings submitted by Tenant for approval by Landlord or any
failure of such drawings to reflect actual conditions (concealed or apparent) at
the Building, including without limitation any failure of the drawings to
reflect existing equipment, walls or other facilities. In the case any such
drawings are deficient, Landlord may require that Tenant stop the installation
work and revise the drawings. Any matters not specifically reflected in the
drawings (including for example, but not limited to, the height of any proposed
wall penetration or the height at which the Lines will be run) shall be subject
to Landlord's prior written approval, which may be withheld in Landlord's
reasonable discretion.
ii. Identification. Tenant shall cause Tenant's personnel or
--------------
contractor(s) to clearly mark (including any color coding required by the
Building) each conduit, cable, wire and piece of equipment comprising the Lines
with the License number assigned by the Building management and the starting
point and the destination of such conduit, cable or wire (e.g. "No.
----------,
Basement to Floor "), and shall place such identification tags in each closet,
--
if any, that the Lines pass through, on each horizontal run of the Lines, and on
each item of equipment that is part of the Lines.
iii. Line Specifications. All Lines shall comply with the specifications
-------------------
and requirements established by Landlord from time to time, including without
limitation the following: (a) Tenant's vertical riser Lines shall be fiber optic
or, subject to the requirements of clause (c) below, copper, (b) if Tenant at
any time uses any equipment that may create an electromagnetic field exceeding
the normal insulation ratings of ordinary twisted pair riser cable or cause
radiation higher than normal background radiation, the Lines therefor (including
riser lines) shall be appropriately insulated to prevent such excessive
electromagnetic fields or radiation (and such insulation shall not be provided
by the use of additional unused twisted pair lines), (c) no copper
communications wire shall be installed in the same riser sleeve, chaseway or
other enclosure in close proximity with electrical wire, no PVC-coated lines
shall be installed under any circumstances, and all Lines not in conduit shall
be plenum rated, (d) all Lines shall be installed appropriately underground,
within walls, above suspended ceilings, within sleeves (which, in the case of
vertical or horizontal fiber Lines, shall be through plenum-rated innerduct),
pipes, conduits or horizontal chaseways or otherwise as Landlord shall require,
and in no event shall be visible to tenants or occupants of the Building, (e)
each riser Line installed by or for Tenant shall be tied off and securely
anchored at each floor of the building, and any metal clamps or other metal
equipment shall be properly grounded, (f) no multiplexers, PBX mainframes, file
servers, key system units or any other equipment or items of any kind shall be
installed in any wire closet except 25 pair 66 Block connectors, and then only
if expressly approved or required by Landlord in writing (in the exercise of
Landlord's reasonable judgment), (g) appropriate ground protectors shall be used
to protect against over-voltage or overcurrent of 600 volts or greater at the
Building's main telephone equipment room, and (h) all installation,
modification, maintenance, replacements, and removal of the Lines shall comply
with such inside wire standards as Landlord shall adopt from time to time.
d. Impositions. Tenant shall be responsible for and promptly pay all
-----------
additional real and personal property taxes, assessments, charges, fees or other
governmental impositions levied or assessed on the Building or the Real Property
due to the Equipment or the construction of operation thereof.
e. Installation Plans. Tenant shall submit to Landlord detailed plans and
------------------
specifications for the Equipment' (and any subsequent modification or
replacement of the Equipment if the same would result in a greater burden on the
Building's roof, the Building Systems or Base Building Components, require an
expansion of the Ancillary Sites or require additional Lines be placed therein),
and Landlord shall not unreasonably withhold its approval of such plans and
specifications. Tenant shall not commence any installation of the Equipment or
any such modification or replacement until any plans and specifications so
requiring Landlord's approval have been so approved in writing by Landlord, and
Tenant shall have submitted such evidence as Landlord shall reasonably require
47
<PAGE>
evidencing that Tenant has obtained all necessary governmental approvals and
permits for installation and operation of the Equipment. Landlord shall have no
responsibility for, and Tenant holds Landlord harmless from, any failure of
Tenant's Equipment to function properly notwithstanding the fact that Landlord
may have approved plans and specifications therefor. Tenant shall keep the
Ancillary Sites and the Real Property free from any liens arising out of any
work performed, materials furnished or obligations incurred with respect to the
Equipment. Tenant shall install, maintain and operate the Equipment in a safe
manner that shall not overburden or otherwise adversely affect any walls,
floors, ceilings or any other structural or nonstructural elements in the
Building or the electrical system therein. Tenant shall give Landlord not less
than ten (10) days prior written notice of the commencement of any construction
or installation under this Article 54, including any construction which is part
of the initial Improvements. If required by Landlord, Tenant shall obtain
opinions from engineers reasonably acceptable to Landlord (or at Landlord's sole
discretion, shall reimburse Landlord's costs for obtaining such opinions
directly) stating that the Lines and Work to be done with respect thereto will
not adversely affect other lines or equipment at the Building, the Building
systems and equipment (including without limitation, electrical, heating,
ventilating, air-conditioning, plumbing, alarm and fire protection), or the
Building structure. At all times during the term of this Lease, Tenant shall
maintain with Landlord a current and complete record of all Tenant's Lines in
the Building.
f. Use: Compliance With Law. Tenant agrees that Tenant shall not sell the
------------------------
HVAC or energy services of the Equipment, or otherwise use the Equipment to
provide services to any other party (other than to permitted subtenants in the
Premises) or to any other location other than the Premises. Tenant shall have
the right to operate the generator and related Equipment only when (and for so
long as) the supply of electrical service to the Premises in the ordinary manner
has been interrupted. Landlord makes no representation that Tenant's
contemplated use of the Lines or the Ancillary Sites will comply with applicable
Legal Requirements. Tenant, at Tenant's sole expense, shall comply with all
Legal Requirements regarding the installation, construction, operation and
maintenance of the Equipment, and shall be solely responsible for obtaining and
shall obtain and keep in force all permits, licenses and approvals necessary for
operation of the Equipment (provided that in doing so Tenant shall not adversely
affect Landlord or impair in any way Landlord's current and permitted use of the
Building). If at any time during the term of this Lease such permits or
approvals shall expire and are not renewed within thirty (30) days after the
expiration thereof, or if applicable Legal Requirements shall otherwise not
permit the Equipment to remain or be operated on the Ancillary Sites, or if
there shall be any release of Hazardous Materials upon the Ancillary Sites or
any other portion of the Property (or upon adjacent lands) arising out of or in
connection with the Equipment, Tenant shall promptly remove the Equipment in
accordance with the provisions set forth below applicable to Tenant's removal of
the Equipment upon the expiration or earlier termination of the Lease.
Tenant shall not use any portion of the Ancillary Sites for the storage,
generation or handling of Hazardous Materials without the express written prior
consent of Landlord, and then only to the extent that the presence of the
Hazardous Materials is (i) properly licensed and approved by all appropriate
governmental officials and in accordance with all applicable Legal Requirements
and (ii) in compliance with any terms and conditions stated in said prior
written approval by Landlord. Tenant shall promptly provide Landlord with copies
of all notices received by it, including, without limitation, any notice of
violations, notice of responsibility or demand for action from any federal,
state or local authority or official in connection with the presence of
Hazardous Materials in or about the Ancillary Sites or any other portion of the
Property. In the event of any release of Hazardous Materials upon the Ancillary
Sites or any other portion of the Property, or upon adjacent lands, if caused by
Tenant or any other Tenant Party, Tenant shall promptly remedy the problem in
accordance with all applicable Legal Requirements. The provisions of Paragraphs
8.b. and 8.c. of this Lease shall fully apply to Tenants use of the Ancillary
Sites and the installation, maintenance and operation of the Equipment.
g. Interference by Equipment. Tenant shall not use the Ancillary Sites or
-------------------------
the Lines so as to interfere in any way with the ability of tenants or other
occupants of the Building or occupants of other properties to receive or
transmit radio, television, telephone, computer, data processing, fiber optic,
48
<PAGE>
microwave, short-wave, long-wave or other signals of any sort, nor so as to
interfere with the use by Landlord or such other tenants or occupants of
electric, computer, electronic, fiber optic or other facilities, equipment,
appliances, personal property or fixtures, nor so as to interfere in any way
with the use of any antennas, satellite dishes or other equipment or facilities
currently or hereafter located on the roof or any other floor or area of the
Building or other properties. If the operation of the Equipment, interferes with
such items, then immediately following written notice from Landlord to Tenant
any of such interference, Tenant shall eliminate such interference. If Tenant is
unable to promptly eliminate such interference, Tenant shall immediately cease
operation of the interfering Equipment and remove the interfering Equipment from
the Ancillary Sites pursuant to Paragraph 54.h. below. Landlord shall reasonably
cooperate in relocating the Equipment on the Ancillary Sites to a new location
in or on the Building, if available, where such interference is not likely to be
experienced, which relocation shall be at Tenant's sole expense. Landlord and
Tenant shall cooperate with each other at all times during the term of this
Lease so as to minimize interference between the Equipment and other
communications equipment in the Building or on the Building's roof.
h. Removal of Equipment. The Equipment shall be and remain Tenant's
--------------------
property throughout the term of this Lease. Upon the expiration or any sooner
termination of this Lease, or if Tenant fails to perform any of its obligations
under this Paragraph 54 and such failure continues for ten (10) days after
written notice thereof from Landlord (or if the failure cannot by its nature be
cured within the 10-day period, if Tenant fails to commence to cure such failure
within the 10-day period and thereafter diligently prosecute such cure to
completion), or if Tenant is required to remove the Equipment pursuant to
Paragraph 54.g. or by any governmental agency having jurisdiction over the
Equipment, Tenant shall at its expense remove all of the Equipment from the
Ancillary Sites, raceways and Building areas and restore any damage caused by
the installation or removal.
i. Access to Ancillary Sites. Subject to the notice requirements
-------------------------
hereinafter set forth, Tenant shall have the right, at Tenant's sole cost and
expense, to enter upon the Ancillary Sites to construct, install, operate and
maintain the Equipment on the Ancillary Sites until this Lease terminates.
Tenant may access the Ancillary Sites and perform construction work therein in
accordance with the plans and specifications approved by Landlord pursuant to
Paragraph 54.e. above. Tenant may have access to the Ancillary Sites for normal
repairs during Business Hours upon not less than twenty-four (24) hours' prior
telephone notice to the Building Manager (as designated by Landlord from time to
time by notice to Tenant) during Business Hours, except in the case of
emergencies, when prior notice shall not be required (but Tenant shall give
Landlord subsequent notice of such access as soon as practicable after such
emergency). A representative of Landlord shall be entitled to be present any
time Tenant wishes to access the Ancillary Sites. Landlord may allow access to
the Ancillary Sites to any persons who show evidence which in the sole good
faith judgment and discretion of Landlord, appears to constitute authorization
by Tenant or by any other tenant granted rights by Landlord to install, operate
and/or maintain facilities or equipment of any kind in such areas of the
Building, or by any representative or agent of Landlord for such access. Tenant
shall pay Landlord's charges for monitoring or supervising Tenant's activities
in connection with the License granted hereunder by any of Landlord's
administrative, engineering, security or other personnel, which shall be billed
to Tenant at the hourly standard rates for such services, as established from
time to time by Landlord, and shall be payable by Tenant within thirty (30) days
of such billing.
j. Landlord's Liability. Landlord shall have no obligation to design,
--------------------
install, construct, use, operate, maintain, repair, replace or remove Tenant's
Equipment or to have any other responsibility or liability in connection
therewith or the operations thereof.
k. Repair. Tenant acknowledges and agrees that Tenant accepts the
------
Ancillary Sites in their "as-is" condition, and that Tenant own expense shall
make any alterations necessary to make such sites suitable for Tenant's purposes
thereon, subject to Landlord's approval rights set forth above. Tenant, at
Tenant's sole cost and expense, shall keep the Ancillary Sites in good condition
and repair. Landlord makes no representations respecting the condition
49
<PAGE>
of the Ancillary Sites or their suitability for operation of the Equipment.
Landlord shall use its good faith efforts to perform any repairs to or about the
Ancillary Sites to be performed in such manner as shall not require Tenant to
remove Tenant's Equipment from the Ancillary Sites, but Landlord, on reasonable
advance notice to Tenant, may require Tenant to temporarily remove Tenant's
Equipment from the Ancillary Sites if the same is reasonably required in order
to allow Landlord to perform the repairs. Such removal and the reinstallation of
the Equipment shall be at Tenant's sole cost and expense.
1. Relocation of Ancillary Sites. Upon no less than thirty (30) days'
-----------------------------
prior written notice to Tenant, Landlord may require Tenant to relocate the
Ancillary Sites (or any of them) to another location in or on the Building which
does not have a material adverse affect on the reception or other functioning of
the Equipment. Except as otherwise provided in this Paragraph 54, all work
necessary to move the Equipment applicable to the Ancillary Sites shall be
performed by Landlord at Landlord's expense, including the expense of complying
with all Legal Requirements regarding the installation of the Equipment in the
new locations. Tenant acknowledges that during any such relocation the Equipment
will be unavailable for Tenant's use.
m. Damage or Destruction: Eminent Domain. A fire or other casualty or a
-------------------------------------
taking affecting the Ancillary Sites or the Equipment shall not affect the
rights and obligations of Tenant under this Lease, and this Lease shall remain
in full force and effect, without any abatement of any amounts payable to
Landlord thereunder. Landlord shall be entitled to all compensation, damages,
income, rent awards and interest thereon whatsoever which maybe paid or made in
connection with any taking of the Ancillary Sites, and Tenant shall have no
claim against Landlord or any governmental authority for the value of any
unexpired term of its rights under this Paragraph 54; provided, however, that
the foregoing shall not prohibit Tenant from prosecuting a separate claim
against the taking authority for an amount separately designated for the
Equipment, so long as any award to Tenant will not reduce the award to Landlord.
n. Evacuation. If Landlord closes the Building and calls for its
----------
evacuation, or suggests that the Building be evacuated for any reason, including
because of an electrical failure, and if one or more employee, agent,
contractor, or other person acting on behalf of or at the request of Tenant or
Tenant's affiliate(s) ("Tenant's Personnel") remains in or later enters the
Building or the Premises during the evacuation period, then Tenant hereby waives
all claims against Landlord and the other Indemnitiees for any injury incurred
by any of Tenant's Personnel, or injury to property, due in whole or in part to
Tenant's failure to evacuate all of Tenant's Personnel from the Premises and the
Building. Further, Tenant will hold the Landlord and the other Indemnitees
harmless from and defend and indemnify them against any and all claims,
liabilities, damages or costs, including reasonable attorney's fees, incurred by
them due to injury to person or property as a direct or indirect result of
Tenant's Personnel remaining in the Premises or the Building during such
evacuation period.
o. Security. The parties acknowledge that safety and security devices,
--------
services and programs provided by Landlord at the Building (including without
limitation, such devices and programs affecting the room in which the main
distribution frame for the Building is located, the Ancillary Sites and the
Building), if any, may not prevent theft or other criminal acts, or ensure
safety of persons or property or limit access. The risk that any safety or
security device, service or program may not be effective, or may malfunction, or
be circumvented by any party, is assumed by Tenant with respect to Tenant's
property and interests (including without limitation the Lines), Tenant shall
obtain insurance coverage to the extent Tenant desires protection against such
criminal acts and other losses, and Tenant releases Landlord and the other
Indemnitees from any liability for or in connection with such acts and losses.
Tenant agrees to cooperate in any reasonable safety or security program
developed by Landlord or required by Legal Requirement.
p. UPS Site. Landlord recognizes that Tenant may, at some time during the
--------
term of this Lease, desire to install, at Tenant's sole cost and expense, a
battery powered UPS system in the basement or garage areas of the Building. Upon
Tenant's request, Landlord will endeavor in good faith to provide suitable space
to Tenant for such purposes, provided that such space is available to Landlord,
and provided further that Landlord and Tenant agree, after good faith
50
<PAGE>
negotiations, as to the terms, covenants and conditions applicable to Tenant's
license of any such space. In the event any such space is licensed by Tenant,
the terms, covenants and conditions applicable thereto shall be set forth in an
amendment to this Lease approved and executed by Landlord and Tenant. Tenant
shall have the right to operate any Such UPS system and related equipment only
when (and for so long as) the supply of electrical service to the Premises in
the ordinary manner has been interrupted.
q. Survival. The indemnities granted by Tenant in this Paragraph 54 shall
--------
survive the expiration or earlier termination of the Lease.
55. Parking. Landlord shall provide Tenant with valet-type parking for
-------
twenty (20) automobiles in the garage of the Building, and Tenant shall pay for
such parking at Landlord's regular rate or charge from time to time in effect
for parking in the Building. Tenant shall provide Landlord with written notice
of the names of each party to whom Tenant from time to time distributes Tenant's
parking rights hereunder (all of whom must be employees, partners, members
and/or shareholders, as applicable, of Tenant), and shall cause each such party
to execute Landlord's standard contract and waiver form for garage users. If the
parking charge is not paid when due, and such failure continues for five (5)
days after notice thereof to Tenant, then Landlord may terminate Tenant's rights
under this Paragraph 55 as to the number of spaces as to which the parking
charge has not been paid in full. The parking rights set forth in this Paragraph
55 are personal to the Tenant originally named in this Lease and its Affiliates
and shall not inure to the benefit of any other successor, assignee or subtenant
of Tenant. Further, if at any time during the term hereof, Tenant releases to
Landlord any parking space provided for in this paragraph, then Tenant's right
under this paragraph to use such released parking space shall forever terminate.
THIS LEASE IS EXECUTED by Landlord and Tenant as of the date set forth at
----------------------
the top of page 1 hereof.
RUSS BUILDING, BEA SYSTEMS, INC.,
a California general partnership a Delaware corporation
By Shorenstein Company, L.P., a By /s/ William T. Coleman III
California limited partnership, -----------------------------
General Partner Name William T. Coleman III
---------------------------
By Shorenstein Management, Inc., a Title CEO
California corporation, --------------------------
General Partner Tenant
By /s/ Douglas W. Shorenstein
----------------------------
Douglas W. Shorenstein
President
Landlord
51
<PAGE>
EXHIBIT 10.19
FIRST AMENDMENT TO LEASE
------------------------
(Adding Additional Premises)
THIS FIRST AMENDMENT TO LEASE (this "Amendment") is executed as of the
15th of March, 2000, between RUSS BUILDING ("Landlord") and BEA SYSTEMS, INC.,
- ----
a Delaware corporation ("Tenant").
RECITALS
--------
A. Landlord, as landlord, and Tenant, as tenant, entered into a
lease, dated as of September 24, 1999 (the "Lease"), pursuant to which Tenant
leased certain premises in the building commonly known as the Russ Building,
located at 235 Montgomery Street, San Francisco, California (the "Building").
The premises presently demised under the Lease are referred to herein as the
"Existing Premises", and include a portion of the 14th floor of the Building
(the "Existing 14th Floor Premises").
B. Landlord and Tenant presently desire to amend the Lease to (i) add
the remaining rentable area of the 14th floor of the Building to the Lease, (ii)
set forth the monthly base rent and other amounts payable by Tenant with respect
to such additional space, (iii) acknowledge certain matters pertaining to the
construction of the Tenant Improvements in the Existing Premises and the impact
on the commencement of Tenant's obligation to pay Monthly Rent with respect to
the Existing Premises, and (iv) modify the Lease in certain other respects.
Capitalized terms not otherwise defined herein shall have the meanings given
them in the Lease.
NOW, THEREFORE, in consideration of the foregoing, the parties hereto
agree as follows:
1. 14th Floor Additional Premises. Effective as of the date hereof,
------------------------------
the space located on the fourteenth (14th) floor of the Building and shown
outlined on the attached Exhibit A (the "14th Floor Additional Premises") shall
---------
be added to the premises covered by the Lease. Commencing on the date hereof,
all references in the Lease to the "Premises" shall be deemed to refer to the
Existing Premises (as defined in Recital A above) plus the 14th Floor Additional
Premises. Except as expressly hereinafter provided in this Amendment, all
provisions of the Lease applicable to the Existing Premises shall apply with
equal force and effect to the 14th Floor Additional Premises, as if the 14th
Floor Premises were originally demised under the Lease together with the
Existing Premises. Landlord and Tenant acknowledge that the 14th Floor
Additional Premises comprise all rentable space on the fourteenth (14th) floor
of the Building not presently leased by Tenant as part of the Existing Premises.
2. Term; Delivery of Possession; Tenant Improvements.
--------------------------------------------------
a. Term. The term of the Lease shall commence as to the 14th Floor
----
Additional Premises as provided in Paragraph 2.b. of the Lease, and for such
purposes the 14th Floor Premises shall be deemed a separate "Increment" and is
referred to herein for purposes of said Paragraph 2.b. as the "Third Increment".
In no event shall the Commencement Date of the First Increment or the Second
Increment have any bearing on the Commencement Date on the Third Increment.
b. Delivery of Possession. Paragraph 3.b. of the Lease shall not be
----------------------
applicable to the 14th Floor Additional Premises, and in lieu thereof the
provisions of this Paragraph 2.b. shall apply. Landlord shall act diligently and
in good faith to deliver the 14th Floor Additional Premises to Tenant with the
applicable Tenant Improvements Substantially Completed therein as soon as
reasonably practicable. Notwithstanding the foregoing, or anything to the
contrary contained in the Lease, in the event of a delay in delivery of the 14th
Floor Additional Premises to Tenant, for any reason whatsoever, including,
without limitation, by reason of a delay in Substantial Completion of the Tenant
Improvements (including a delay which does not result from Tenant Delay),
neither the Lease nor this Amendment shall be void or voidable, nor shall
Landlord be liable to Tenant for any loss or damage resulting therefrom, nor
shall Tenant's obligation to pay monthly rent applicable to the 14th Floor
Additional Premises be postponed.
c. Improvements. For purposes of applying Paragraph 4 of the Lease to
------------
the construction of improvements in the 14th Floor Additional Premises,
Paragraph 4 shall applied to the 14th Floor Additional Premises separately from
the Existing Premises, and shall be modified as follows:
(i) The dates in Paragraph 4.a. of the Lease applicable to Tenant's
submission to
1
<PAGE>
Landlord of the Space Plans, Final Space Plans and Working Drawings shall not be
applicable to the 14th Floor Additional Premises, and in lieu thereof Tenant
shall make such submissions to Landlord at such times as Tenant shall elect.
Landlord shall respond to such submissions within the time periods set forth in
said Paragraph 4.a.
(ii) Landlord's Contribution pursuant to Paragraph 4.g.ii. of the
Lease shall be Three Hundred Eighty-Nine Thousand Eight Hundred Twenty-Five
Dollars ($389,825.00) as respects the 14th Floor Additional Premises (which is
$25.00 per agreed rentable square foot of the 14th Floor Additional Premises).
(iii) The portion of Landlord's Contribution for the 14th Floor
Additional Premises that may be applied to the fees and costs described in
Paragraph 4.g.ii.B. of the Lease, as allocable to the 14th Floor Additional
Premises, may not exceed Two Dollars ($2.00) per rentable square foot of the
14th Floor Additional Premises.
3. Monthly Rent; Tenant's Share.
----------------------- -
a. Monthly Rent. Commencing on the date (the "14th Floor Additional
------------
Premises Rent Commencement Date") which is the earlier of (i) May 1, 2000, or
(ii) the date Tenant commences occupancy of the 14th Floor Additional Premises
or any portion thereof for the conduct of business, and continuing through the
balance of the Lease term, Tenant shall pay Landlord, as monthly rent for the
14th Floor Additional Premises, the sum of Sixty-Two Thousand Three Hundred
Seventy-Two Dollars ($62,372.00) in accordance with the terms of Paragraph 5 of
the Lease. The foregoing monthly rent payable by Tenant for the 14th Floor
Additional Premises shall be in addition to the Monthly Rent payable by Tenant
under the Lease for the Existing Premises, and from and after the 14th Floor
Additional Premises Rent Commencement Date, the term "Monthly Rent" as used in
the Lease shall mean the aggregate monthly rent payable by Tenant for the
Existing Premises and the 14th Floor Additional Premises. Tenant acknowledges
that its obligation to pay monthly rent for the 14th Floor Additional Premises
may commence, pursuant to the foregoing, prior to delivery of the 14th Floor
Additional Premises to Tenant and prior to the commencement of the term of the
Lease as to the 14th Floor Additional Premises.
b. Tenant's Share. Commencing on the 14th Floor Additional Premises
--------------
Rent Commencement Date, and continuing through the balance of the Lease term,
"Tenant's Share", as set forth in Paragraph 2.e. of the Lease, shall be
increased to 16.38%, to take into account the rentable square footage of the
14th Floor Additional Premises, which the parties hereby stipulate as 15,593
rentable square feet.
4. Security Deposit.; Letter of Credit. Effective as of the date that
-----------------------------------
is thirty (30) days after the date of this Amendment, the amount "$181,393.00",
as set forth in Paragraphs 2.d. and 6 of the Lease, shall be deleted and the
amount "$243,765.00" substituted therefor. On or prior to the date that is
thirty (30) days after the date of this Amendment, Tenant shall deliver to
Landlord either (i) an amendment to the Letter of Credit previously delivered to
Landlord, whereby the amount of such Letter of Credit is increased to
$243,765.00, or (ii) a replacement Letter of Credit, in the amount of
$243,765.00, and otherwise meeting the requirements of Paragraph 6 of the Lease,
whereupon Landlord shall return to Tenant the Letter of Credit previously
delivered to Landlord. If Tenant shall not timely deliver such amendment or
replacement Letter of Credit, in lieu thereof Tenant shall deliver Sixty-Two
Thousand Three Hundred Seventy-Two Dollars ($62,372.00) in cash to Landlord no
later than the date that is thirty (30) days after the date of this Amendment,
failing which an Event of Default shall be deemed to have occurred under the
Lease. Such cash amount shall be held as Letter of Credit Proceeds pursuant to
Paragraph 6 of the Lease.
5. Option to Renew. Effective as of the date hereof, Paragraph 52.a.
---------------
of the Lease is amended by deleting the phrase "47,000 rentable square feet of
space" in both places it appears in such Paragraph and substituting in place
thereof in each such place the phrase "two (2) full floors".
6. Parking. Effective as of the 14th Floor Additional Premises Rent
-------
Commencement Date, the number "twenty (20)" contained in Paragraph 55 of the
Lease shall be deleted, and the number "twenty-five (25) shall be substituted
therefor.
7. 15th Floor Exhibit A. Retroactive to the date of the Lease, page 2
--------------------
of Exhibit A of the Lease, which delineates the portion of the Existing Premises
on the 15th floor of the Building, shall be deleted, and page 2 of Exhibit A, as
attached hereto, shall be substituted therefor.
8. Interim Sublease of 14th Floor Additional Premises. In the event
--------------------------------------------------
that Tenant shall desire to sublease all or any portion of the 14th Floor
Additional Premises for a term of no more than three (3) years commencing on or
prior to January I, 2001, Landlord agrees that it shall not have the option
described in Paragraph 13.d.(i) of the Lease with respect thereto.
2
<PAGE>
9. Existing Premises.
------------------
a. Tenant Improvements; Landlord's Work. The parties acknowledge that
------------------------------------
certain disputes have arisen between them with respect to the construction of
the Tenant Improvements in the Existing Premises, Change Orders with respect
thereto, Landlord's Work, the allocation of the costs of the foregoing between
Landlord and Tenant, and certain conditions with respect to the Base Building.
The parties have resolved such disputes to their mutual satisfaction and set
forth below their full, complete and final settlement with respect thereto.
b. Tenant Delays. By reason of Tenant's failure to deliver the Working
-------------
Drawings within the time period required under the Lease, Tenant's failure to
respond to Landlord's requests for information within the time periods required
under the Lease, and the Change Orders requested by Tenant through the date
hereof as set forth on Schedule I attached hereto (the "Agreed Change Orders"),
----------
the parties agree that Tenant shall be charged with a net period of Tenant Delay
of twenty-eight (28) days. Accordingly, for purposes of determining the
commencement of Tenant's obligation to pay Monthly Rent with respect to each
Increment of the Existing Premises, the Commencement Date shall be deemed to
have occurred twenty-eight (28) days prior to the actual Commencement Date with
respect to each Increment of the Existing Premises. Tenant acknowledges that the
foregoing only takes into account Tenant Delay of which Landlord has knowledge
as of the date hereof. Landlord reserves its right to charge Tenant with further
Tenant Delay resulting from matters of which Landlord does not have knowledge as
of the date hereof or from any matters which arise after the date hereof.
c. Budget. The parties acknowledge that the original budget for the
-------
construction of the Tenant Improvements with respect to the Existing Premises
was in the total amount of $4,582,781.00. By reason of the Agreed Change Orders,
the parties acknowledge that the current budget for the construction of the
Tenant Improvements is $5,213,222.00. Tenant acknowledges that Landlord's sole
obligation with respect to such currently budgeted costs shall be in the amount
of Landlord's Contribution as set forth in Paragraph 4.g.ii. of the Lease, and
that the balance of such costs shall be paid by Tenant as Excess Cost pursuant
to Paragraph 4.g.ii.A of the Lease, without any claim by Tenant against Landlord
for payment or reimbursement for any such Excess Costs.
d. Landlord's Work. Tenant acknowledges that Landlord has fully
---------------
performed, to Tenant's complete satisfaction, the items of Landlord's Work
described in paragraphs 2, 5 and 6 of Exhibit C to the Lease. Tenant has
---------
released Landlord from its obligation to perform the portion of Landlord's Work
described in paragraph 3 of Exhibit C in exchange for the credit issued by
---------
Landlord pursuant to Agreed Change Order number CO 13r. Tenant further
acknowledges that the portion of Landlord's Work described in paragraph 1 of
Exhibit C has been fully performed to Tenant's complete satisfaction except for
- ---------
the final work to close off the stairway, which final work is currently
underway. Landlord acknowledges that the portion of Landlord's Work described in
paragraphs 4 and 7 of Exhibit C has not yet been fully performed.
---------
10. Release.
--------
a. Tenant, for itself, its legal successors and assigns, its agents,
servants and employees, and each of them, does hereby release and forever
discharge Landlord, Shorenstein Company, L.P., a California limited partnership,
Turner-Shorenstein L.P., a California limited partnership, their legal
successors and assigns, their shareholders, partners, agents, servants and
employees, and each of them, together with the Indemnitees (as defined in
Paragraph 14.b. of the Lease) (all of the foregoing, collectively, the "Landlord
Parties"), of and from any and all claims, demands, damages, debts, liabilities,
actions, and causes of action of every kind and nature whatsoever, whether now
known or unknown, which Tenant ever had, now has or may hereafter have against
the Landlord Parties or any of them, arising out of, based in whole or part
upon, or relating to the Lease, the construction of the Tenant Improvements or
any act, omission, event, matter or thing occurring at any time up to the date
of this Amendment in connection therewith; provided, however, that nothing in
-------- -------
this Amendment is intended to release Landlord from its obligations to be
performed under the Lease from and after the date of this Amendment.
b. Tenant acknowledges that it has been informed of the provisions of
Section 1542 of the Civil Code of the State of California and does hereby
expressly waive and relinquish all rights and benefits which it has or may have
had under said Section, which reads as follows:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
3
<PAGE>
c. Tenant acknowledges that it is aware that it may hereafter discover
facts or law different from or in addition to those now known or believed to be
flue in respect to the claims, demands, damages, debts, liabilities, actions or
causes of action herein released, and hereby agrees that this release shall be
and remain in effect in all respects as complete and general release as to the
matters to be released, notwithstanding any such different and additional facts
or law.
d. Tenant represents and warrants that it has not heretofore assigned
or transferred or purported to transfer or assign to any person, firm or
corporation any claim, demand, damages, debt, liability, action or cause of
action herein released. Tenant shall indemnify and hold harmless the Landlord
Parties against any claim, demand, damages, debt, liability, action, cause of
action, cost or expense including attorneys' fees actually paid or incurred,
arising out of or in connection with any such transfer or assignment or
purported or claimed transfer or assignment.
e. Tenant represents and warrants that it has consulted with competent
counsel in connection with the provisions of this Paragraph 10, it fully
understands the scope and implications of the foregoing release, and does hereby
grant the same knowingly, voluntarily and with the advice of said counsel.
11. Real Estate Brokers. Tenant represents and warrants that it has
--------------------
negotiated this Amendment directly with the real estate brokers identified in
Paragraph 2 of the Lease, and has not authorized or employed, or acted by
implication to authorize or to employ, any other real estate broker or salesman
to act for Tenant in connection with this Amendment. Tenant shall indemnify,
defend and hold Landlord harmless from and against any and all Claims by any
real estate broker or salesman other than the real estate brokers identified in
Paragraph 2 of the Lease for a commission, finder's fee or other compensation as
a result of Tenant's entering into this Lease. Landlord shall pay any commission
owing to the Real Estate Brokers identified in Paragraph 2 of the Lease pursuant
to a separate agreement, and shall indemnify, defend and hold Tenant harmless
from and against any and all Claims by such real estate brokers.
12. Lease in Full Force and Effect. Except as provided above, the
------------------------------
Lease is unmodified hereby and remains in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this document as of
the date and year first above written.
Landlord: Tenant:
RUSS BUILDING BEA SYSTEMS, INC.,
a Delaware corporation
By: Shorenstein Company, L.P., a By /s/ William Klein
-----------------------
California limited partnership,
General Partner
Name William Klein
---------------------
By: Shorenstein Management, Inc., a Title CFO
--------------------
California corporation,
General Partner
Tenant
By /s/ Douglas Shorenstein
-----------------------
Douglas W. Shorenstein
President
Landlord
4
<PAGE>
THE RUSS BUILDING
FLOOR 14
EXHIBIT A
---------
[MAP APPEARS HERE]
(Page 1 of 2 Pages)
5
<PAGE>
THE RUSS BUILDING
FLOOR 15
EXHIBIT A
---------
[MAP APPEARS HERE]
(Page 2 of 2 Pages)
6
<PAGE>
Schedule 1
----------
Project: BEA Systems, 235 Montgomery, Floors 14 & 16
============================================================================
Following are listed Tenant Change Orders for referenced project:
<TABLE>
<CAPTION>
TCO Date
- ------- -------
<S> <C>
#1 1/18/00
#2 1/18/00
#3 1/18/00
#4r2 3/2/00
#5r2 3/2/00
#6r2 3/2/00
#7r2 3/2/00
#8r 3/2/00
#9r 3/2/00
#10r 3/2/00
#11r 3/2/00
#12r 3/2/00
#13r 3/2/00
</TABLE>
Schedule 1
----------
7
<PAGE>
EXHIBIT 10.20
BEA SYSTEMS, INC.
2000 NON-QUALIFIED STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Non-Qualified Stock
--------------------
Incentive Plan are to attract and retain the best available personnel, to
provide additional incentive to Employees (who are not Officers) and Consultants
and to promote the success of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of the Committees appointed
-------------
to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
--------- ---------
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
(d) "Award" means the grant of an Option, SAR, Dividend Equivalent
-----
Right, Restricted Stock, Performance Unit, Performance Share, or other right or
benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing the grant
---------------
of an Award executed by the Company and the Grantee, including any amendments
thereto.
(f) "Board" means the Board of Directors of the Company.
-----
(g) "Cause" means, with respect to the termination by the Company or a
-----
Related Entity of the Grantee's Continuous Service, that such termination is for
"Cause" as such term is expressly defined in a then-effective written agreement
between the Grantee and the Company or such Related Entity, or in the absence of
such then-effective written agreement and definition, is based on, in the
determination of the Administrator, the Grantee's: (i) refusal or failure to act
in accordance with any specific, lawful direction or order of the Company or a
Related Entity; (ii) unfitness or unavailability for service or unsatisfactory
performance (other than as a result of Disability); (iii) performance of any act
or failure to perform any act in bad faith and to the detriment of the Company
or a Related Entity; (iv) dishonesty, intentional misconduct or material breach
of any agreement with the Company or a Related Entity; or (v) commission of a
crime involving dishonesty, breach of trust, or physical or emotional harm to
any person. At least 30 days prior to the termination of the Grantee's
Continuous Service pursuant to (i) or (ii) above, the Administrator shall
provide the Grantee with notice of the Company's or such Related Entity's intent
to terminate, the reason therefor, and an opportunity for the Grantee to cure
such defects in his or her service to the Company's or such Related
1
<PAGE>
Entity's satisfaction. During this 30 day (or longer) period, no Award issued to
the Grantee under the Plan may be exercised or purchased.
(h) "Change in Control" means a change in ownership or control of the
-----------------
Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities pursuant to
a tender or exchange offer made directly to the Company's stockholders which a
majority of the Continuing Directors who are not Affiliates or Associates of the
offeror do not recommend such stockholders accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(i) "Code" means the Internal Revenue Code of 1986, as amended.
----
(j) "Committee" means any committee appointed by the Board to
---------
administer the Plan.
(k) "Common Stock" means the common stock of the Company.
------------
(l) "Company" means BEA Systems, Inc., a Delaware corporation.
-------
(m) "Consultant" means any person (other than an Employee or a
----------
Director, solely with respect to rendering services in such person's capacity as
a Director) who is engaged by the Company or any Related Entity to render
consulting or advisory services to the Company or such Related Entity.
(n) "Continuing Directors" means members of the Board who either (i)
--------------------
have been Board members continuously for a period of at least thirty-six (36)
months or (ii) have been Board members for less than thirty-six (36) months and
were elected or nominated for election as Board members by at least a majority
of the Board members described in clause (i) who were still in office at the
time such election or nomination was approved by the Board.
(o) "Continuous Service" means that the provision of services to the
------------------
Company or a Related Entity in any capacity of Employee or Consultant, is not
interrupted or terminated. Continuous Service shall not be considered
interrupted in the case of (i) any approved leave of absence, (ii) transfers
among the Company, any Related Entity, or any successor, in any capacity of
Employee or Consultant, or (iii) any change in status as long as the individual
remains in the service of the Company or a Related Entity in any capacity of
Employee or Consultant (except as
2
<PAGE>
otherwise provided in the Award Agreement). An approved leave of absence shall
include sick leave, military leave, or any other authorized personal leave.
(p) "Corporate Transaction" means any of the following transactions:
---------------------
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company;
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger; or
(iv) acquisition by any person or related group of persons
(other than the Company or by a Company-sponsored employee benefit plan) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities (whether or not in a transaction
also constituting a Change in Control), but excluding any such transaction that
the Administrator determines shall not be a Corporate Transaction.
(q) "Director" means a member of the Board or the board of directors
--------
of any Related Entity.
(r) "Disability" means that a Grantee is permanently unable to carry
----------
out the responsibilities and functions of the position held by the Grantee by
reason of any medically determinable physical or mental impairment. A Grantee
will not be considered to have incurred a Disability unless he or she furnishes
proof of such impairment sufficient to satisfy the Administrator in its
discretion.
(s) "Dividend Equivalent Right" means a right entitling the Grantee to
-------------------------
compensation measured by dividends paid with respect to Common Stock.
(t) "Employee" means any person who is an employee of the Company or
--------
any Related Entity. The payment of a director's fee by the Company or a Related
Entity shall not be sufficient to constitute "employment" by the Company.
(u) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(v) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
3
<PAGE>
(i) Where there exists a public market for the Common Stock,
the Fair Market Value shall be (A) the closing price for a Share for the last
market trading day prior to the time of the determination (or, if no closing
price was reported on that date, on the last trading date on which a closing
price was reported) on the stock exchange determined by the Administrator to be
the primary market for the Common Stock or the Nasdaq National Market, whichever
is applicable or (B) if the Common Stock is not traded on any such exchange or
national market system, the average of the closing bid and asked prices of a
Share on the Nasdaq Small Cap Market for the day prior to the time of the
determination (or, if no such prices were reported on that date, on the last
date on which such prices were reported), in each case, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(ii) In the absence of an established market for the Common
Stock of the type described in (i), above, the Fair Market Value thereof shall
be determined by the Administrator in good faith.
(w) "Grantee" means an Employee or Consultant who receives an Award
-------
pursuant to an Award Agreement under the Plan.
(x) "Immediate Family" means any child, stepchild, grandchild, parent,
----------------
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-
in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or sister-
in-law, including adoptive relationships, any person sharing the Grantee's
household (other than a tenant or employee), a trust in which these persons have
more than fifty percent (50%) of the beneficial interest, a foundation in which
these persons (or the Grantee) control the management of assets, and any other
entity in which these persons (or the Grantee) own more than fifty percent (50%)
of the voting interests.
(y) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(z) "Non-Qualified Stock Option" means an Option not intended to
--------------------------
qualify as an Incentive Stock Option.
(aa) "Officer" means a person who is an officer of the Company or a
-------
Related Entity within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
(bb) "Option" means an option to purchase Shares pursuant to an Award
------
Agreement granted under the Plan.
(cc) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(dd) "Performance Shares" means Shares or an Award denominated in
------------------
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
4
<PAGE>
(ee) "Performance Units" means an Award which may be earned in whole
-----------------
or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities or a
combination of cash, Shares or other securities as established by the
Administrator.
(ff) "Plan" means this 2000 Non-Qualified Stock Incentive Plan.
----
(gg) "Related Entity" means any Parent, Subsidiary and any business,
--------------
corporation, partnership, limited liability company or other entity in which the
Company, a Parent or a Subsidiary holds a substantial ownership interest,
directly or indirectly.
(hh) "Related Entity Disposition" means the sale, distribution or
--------------------------
other disposition by the Company, a Parent or a Subsidiary of all or
substantially all of the interests of the Company, a Parent or a Subsidiary in
any Related Entity effected by a sale, merger or consolidation or other
transaction involving that Related Entity or the sale of all or substantially
all of the assets of that Related Entity, other than any Related Entity
Disposition to the Company, a Parent or a Subsidiary.
(ii) "Restricted Stock" means Shares issued under the Plan to the
----------------
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(jj) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
----------
or any successor thereto.
(kk) "SAR" means a stock appreciation right entitling the Grantee to
---
Shares or cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.
(ll) "Share" means a share of the Common Stock.
-----
(mm) "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.
-------------------------
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards is
2,000,000 Shares. The Shares to be issued pursuant to Awards may be authorized,
but unissued, or reacquired Common Stock.
(b) Any Shares covered by an Award (or portion of an Award) which is
forfeited or canceled, expires or is settled in cash, shall be deemed not to
have been issued for purposes of determining the maximum aggregate number of
Shares which may be issued under the Plan. Shares that actually have been issued
under the Plan pursuant to an Award shall not be returned to the Plan and shall
not become available for future issuance under the Plan, except that
5
<PAGE>
if unvested Shares are forfeited, or repurchased by the Company at their
original purchase price, such Shares shall become available for future grant
under the Plan.
4. Administration of the Plan.
--------------------------
(a) Plan Administrator.
------------------
(i) Administration With Respect to Consultants and Employees.
--------------------------------------------------------
With respect to grants of Awards to Consultants and Employees who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws. Once appointed,
such Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. The Board may authorize one or more Officers to
grant such Awards and may limit such authority as the Board determines from time
to time consistent with Applicable Laws.
(ii) Administration Errors. In the event an Award is granted in a
---------------------
manner inconsistent with the provisions of this subsection (a), such Award shall
be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and the
---------------------------
provisions of the Plan (including any other powers given to the Administrator
hereunder), and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(i) to select the Employees and Consultants to whom Awards may
be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are granted
hereunder;
(iii) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the
Plan;
(v) to determine the terms and conditions of any Award granted
hereunder;
(vi) to amend the terms of any outstanding Award granted under
the Plan, provided that any amendment that would adversely affect the Grantee's
rights under an outstanding Award shall not be made without the Grantee's
written consent;
(vii) to construe and interpret the terms of the Plan and Awards
granted pursuant to the Plan, including without limitation, any notice of Award
or Award Agreement, granted pursuant to the Plan;
6
<PAGE>
(viii) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign jurisdictions
and to afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with the
provisions of the Plan; and
(ix) to take such other action, not inconsistent with the terms
of the Plan, as the Administrator deems appropriate.
5. Eligibility. Awards may be granted to Employees and Consultants.
-----------
Officers and Directors are not eligible to receive Awards under the Plan. An
Employee or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees or
Consultants who are residing in foreign jurisdictions as the Administrator may
determine from time to time.
6. Terms and Conditions of Awards.
------------------------------
(a) Type of Awards. The Administrator is authorized under the Plan to
--------------
award any type of arrangement to an Employee or Consultant that is not
inconsistent with the provisions of the Plan and that by its terms involves or
might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar right
with a fixed or variable price related to the Fair Market Value of the Shares
and with an exercise or conversion privilege related to the passage of time, the
occurrence of one or more events, or the satisfaction of performance criteria or
other conditions, or (iii) any other security with the value derived from the
value of the Shares. Such awards include, without limitation, Options, SARs,
sales or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance
Units or Performance Shares, and an Award may consist of one such security or
benefit, or two (2) or more of them in any combination or alternative.
(b) Designation of Award. Each Award shall be designated in the Award
--------------------
Agreement. In the case of an Option, the Option shall be designated as a Non-
Qualified Stock Option.
(c) Conditions of Award. Subject to the terms of the Plan, the
-------------------
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d) Acquisitions and Other Transactions. The Administrator may issue
-----------------------------------
Awards under the Plan in settlement, assumption or substitution for, outstanding
awards or
7
<PAGE>
obligations to grant future awards in connection with the Company or a Related
Entity acquiring another entity, an interest in another entity or an additional
interest in a Related Entity whether by merger, stock purchase, asset purchase
or other form of transaction.
(e) Deferral of Award Payment. The Administrator may establish one or
-------------------------
more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award, satisfaction
of performance criteria, or other event that absent the election would entitle
the Grantee to payment or receipt of Shares or other consideration under an
Award. The Administrator may establish the election procedures, the timing of
such elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts, Shares or other consideration so deferred, and
such other terms, conditions, rules and procedures that the Administrator deems
advisable for the administration of any such deferral program.
(f) Award Exchange Programs. The Administrator may establish one or
-----------------------
more programs under the Plan to permit selected Grantees to exchange an Award
under the Plan for one or more other types of Awards under the Plan on such
terms and conditions as determined by the Administrator from time to time.
(g) Separate Programs. The Administrator may establish one or more
-----------------
separate programs under the Plan for the purpose of issuing particular forms of
Awards to one or more classes of Grantees on such terms and conditions as
determined by the Administrator from time to time.
(h) Early Exercise. The Award Agreement may, but need not, include a
--------------
provision whereby the Grantee may elect at any time while an Employee or
Consultant to exercise any part or all of the Award prior to full vesting of the
Award. Any unvested Shares received pursuant to such exercise may be subject to
a repurchase right in favor of the Company or a Related Entity or to any other
restriction the Administrator determines to be appropriate.
(i) Term of Award. The term of each Award shall be the term stated in
-------------
the Award Agreement.
(j) Transferability of Awards. Awards may be transferred by gift or
-------------------------
through a domestic relations order to members of the Grantee's Immediate Family
to the extent provided in the Award Agreement or in the manner and to the extent
determined by the Administrator.
(k) Time of Granting Awards. The date of grant of an Award shall for
-----------------------
all purposes be the date on which the Administrator makes the determination to
grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee or Consultant
to whom an Award is so granted within a reasonable time after the date of such
grant.
8
<PAGE>
7. Award Exercise or Purchase Price, Consideration and Taxes.
---------------------------------------------------------
(a) Exercise or Purchase Price. The exercise or purchase price, if
--------------------------
any, for an Award shall be as follows:
(i) In the case of a Non-Qualified Stock Option, the per Share
exercise price shall be not less than eighty-five percent (85%) of the Fair
Market Value per Share on the date of grant unless otherwise determined by the
Administrator.
(ii) In the case of other Awards, such price as is determined by
the
Administrator.
(iii) Notwithstanding the foregoing provisions of this Section 7
(a), in the case of an Award issued pursuant to Section 6(d), above, the
exercise or purchase price for the Award shall be determined in accordance with
the principles of Section 424 (a) of the Code.
(b) Consideration. Subject to Applicable Laws, the consideration to be
-------------
paid for the Shares to be issued upon exercise or purchase of an Award including
the method of payment, shall be determined by the Administrator. In addition to
any other types of consideration the Administrator may determine, the
Administrator is authorized to accept as consideration for Shares issued under
the Plan the following, provided that the portion of the consideration equal to
the par value of the Shares must be paid in cash or other legal consideration
permitted by the Delaware General Corporation Law:
(i) cash:
(ii) check;
(iii) delivery of Grantee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator determines as
appropriate;
(iv) surrender of Shares or delivery of a properly executed form
of attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of the
Award) which have a Fair Market Value on the date of surrender or attestation
equal to the aggregate exercise price of the Shares as to which said Award shall
be exercised (but only to the extent that such exercise of the Award would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price unless otherwise determined by the Administrator);
(v) with respect to Options, payment through a broker-dealer
sale and remittance procedure pursuant to which the Grantee (A) shall provide
written instructions to a Company designated brokerage firm to effect the
immediate sale of some or all of the purchased Shares and remit to the Company,
out of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased Shares and (B)
shall provide written directives to the Company to deliver the certificates for
the purchased Shares directly to such brokerage firm in order to complete the
sale transaction; or
9
<PAGE>
(vi) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any Grantee
-----
or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares. Upon exercise
of an Award, the Company shall withhold or collect from Grantee an amount
sufficient to satisfy such tax obligations.
8. Exercise of Award.
-----------------
(a) Procedure for Exercise; Rights as a Stockholder.
-----------------------------------------------
(i) Any Award granted hereunder shall be exercisable at such
times and under such conditions as determined by the Administrator under the
terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Award by the person entitled to exercise the Award and full payment
for the Shares with respect to which the Award is exercised, including, to the
extent selected, use of the broker-dealer sale and remittance procedure to pay
the purchase price as provided in Section 7 (b) (v). 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 stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to Shares subject to an Award,
notwithstanding the exercise of an Option or other Award. The Company shall
issue (or cause to be issued) such stock certificate promptly upon exercise of
the Award. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in the Award Agreement or Section 10, below.
(b) Exercise of Award Following Termination of Continuous Service.
-------------------------------------------------------------
(i) An Award may not be exercised after the termination date of
such Award set forth in the Award Agreement and may be exercised following the
termination of a Grantee's Continuous Service only to the extent provided in the
Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise an
Award following the termination of the Grantee's Continuous Service for a
specified period, the Award shall terminate to the extent not exercised on the
last day of the specified period or the last day of the original term of the
Award, whichever occurs first.
9. Conditions Upon Issuance of Shares.
----------------------------------
(a) Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
10
<PAGE>
(b) As a condition to the exercise of an Award, the Company may
require the person exercising such Award 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
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
------------------------------------------
action by the stockholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, the exercise or purchase price of each such
outstanding Award, as well as any other terms that the Administrator determines
require adjustment shall be proportionately adjusted for (i) any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Shares, or
similar event affecting the Shares, (ii) any other increase or decrease in the
number of issued Shares effected without receipt of consideration by the
Company, or (iii) as the Administrator may determine in its discretion, any
other transaction with respect to Common Stock to which Section 424(a) of the
Code applies or any similar transaction; provided, however that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator and its determination shall be final, binding and conclusive.
Except as the Administrator determines, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason hereof shall be made with respect to,
the number or price of Shares subject to an Award.
11. Corporate Transactions Related Entity Dispositions. Except as may be
--------------------------------------------------
provided in an Award Agreement:
(a) Effective upon the consummation of a Corporate Transaction, all
outstanding Awards under the Plan shall terminate. However, all such Awards
shall not terminate if they are, in connection with the Corporate Transaction,
assumed by the successor corporation or Parent thereof.
(b) Effective upon the consummation of a Related Entity Disposition,
for purposes of the Plan and all Awards, the Continuous Service of each Grantee
who is at the time engaged primarily in service to the Related Entity involved
in such Related Entity Disposition shall be deemed to terminate and each Award
of such Grantee which is at the time outstanding under the Plan shall be
exercisable in accordance with the terms of the Award Agreement evidencing such
Award. However, such Continuous Service shall be not to deemed to terminate if
such Award is, in connection with the Related Entity Disposition, assumed by the
successor entity or its parent.
12. Effective Date and Term of 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 sooner terminated. Subject to Applicable Laws, Awards may be
granted under the Plan upon its becoming effective.
11
<PAGE>
Exhibit 10.21
PROMISSORY NOTE SECURED BY DEED OF TRUST
$350,000.00 December 7, 1999
Santa Clara County, California
FOR VALUE RECEIVED, the undersigned IVAN KOON (sometimes hereinafter
referred to as "Employee") and IRENE LI-PING CHEUNG, husband and wife (together
"Maker"), hereby promises to pay to BEA SYSTEMS, INC., a Delaware corporation
("Payee") at 2315 N. First Street, San Jose, CA 95131, Attn.: Jeanne Wu, or at
such other place or to such other party as Payee may from time to time
designate, on the earlier of: (i) five (5) years after the date hereof; (ii)
ninety (90) days after Maker voluntarily leaves his employment with Payee; or
(iii) six (6) months after the date that Maker involuntarily leaves his
employment with Payee, the principal sum of THREE HUNDRED FIFTY THOUSAND DOLLARS
AND 00/100 ($350,000.00) together with interest on so much thereof as is from
time to time outstanding and unpaid, from the date of the advance of the
principal evidenced hereby, at the interest rate provided herein, in lawful
money of the United States of America and in immediately available funds. Maker
shall not be obligated to pay interest hereunder except as provided below.
This Note is secured by that certain Deed of Trust and Assignment of Rents
(Modified Long Form Acceleration Clause) of even date herewith (the "Deed of
Trust"), encumbering the property commonly known as 400 Esther Avenue, Campbell,
California 95008, and more particularly described in the Deed of Trust (the
"Property").
(i) Prepayments. Maker reserves the right to prepay the outstanding
-----------
principal amount of this Note, and all interest accrued thereon, in full or in
part at any time during the term of this Note without notice and without premium
or penalty.
(ii) Interest. Interest shall accrue on the then outstanding unpaid
--------
principal amount of this secured promissory note (the "Note") from the date
hereof until the date of payment in full, at the rate of seven percent (7%) per
annum, compounded annually, computed on the basis of a 360-day year and twelve
(12) 30-day months for each full calendar month and on the actual number of days
elapsed for any partial month in which interest is being calculated.
(iii) Due on Sale. In the event that the Property or any portion thereof, or
-----------
any interest therein is sold, agreed to be sold, conveyed or alienated by Maker,
by operation of law or otherwise, the outstanding principal amount of this Note,
including all accrued interest, irrespective of the maturity date set forth
herein shall, at the option of Holder and without demand or notice, immediately
become due and payable.
(iv) Purpose of Loan, Non-transferability, Use of Loan Proceeds,
-----------------------------------------------------------
Certification of Borrower. The Property is being acquired in connection with the
- -------------------------
transfer of Employee
1
<PAGE>
to a "new principal place of work" as defined in Internal Revenue Code Section
217(c). This Note and the benefits of the interest arrangements hereunder are
not transferable by Maker and are conditioned on the future performance of
substantial services by Employee. The proceeds of this Note shall be used only
to purchase the Property which is the new "principal residence" of Maker within
the location of Employee's new principal place of work as such term is described
in Treasury Regulation 1.217-2(b)(8). Maker certifies to Payee that Maker
reasonably expects to be entitled to, and will itemize, deductions for each year
the loan is outstanding.
(v) Events of Default and Remedies. Any one of the following occurrences
------------------------------
shall constitute an "Event of Default" under this Note:
(a) Maker fails to make payment of the full principal amount of this
Note, together with accrued interest, as and when the same becomes due and
payable in accordance with the terms hereof.
(b) Maker becomes insolvent or bankrupt, commits any act of bankruptcy,
generally fails to pay its debts as they become due, becomes the subject of any
proceedings or action of any regulatory agency or any court relating to
insolvency, or makes an assignment for the benefit of her creditors, or enters
into any agreement for the composition, extension, or readjustment of all or
substantially all of her obligations.
(c) An event of default occurs under the Deed of Trust.
Upon the occurrence of any Event of Default hereunder, the entire unpaid
principal balance of this Note, together with accrued interest, shall, at the
option of the Payee and without notice or demand of any kind to Maker or any
other person, immediately become due and payable, and such principal amount
shall, at the option of Holder, bear interest at the rate of ten percent (10%)
or the highest rate of interest then allowed by law, whichever is greater (the
"Default Rate"), until paid, such interest to be compounded annually and Payee
shall have and may exercise any and all rights and remedies available to it at
law or in equity.
(vi) Attorneys' Fees and Costs. Maker promises to pay on demand all out-of-
-------------------------
pocket costs of and expenses of Payee in connection with the collection of
amounts due hereunder, including, without limitation, attorneys' fees and
expenses incurred in connection therewith, whether or not any lawsuit is ever
filed with respect thereto.
(vii) Miscellaneous.
-------------
(a) Waiver. Maker waives diligence, presentment, protest and demand
------
and also notice of protest, demand, dishonor and nonpayment of this Note. No
extension of time for the payment of this Note shall affect the original
liability of Maker under this Note. The pleading of any statute of limitations
as a defense to any demand against Maker is expressly waived by Maker to the
full extent permitted by law.
2
<PAGE>
(b) Setoff. Maker's obligation to pay Payee shall be absolute and
------
unconditional and the rights of Payee shall not be subject to any defense,
setoff, counterclaim or recoupment or by reason of any indebtedness or
liability at any time owing by Payee to Maker.
(c) Payment Notice. This Note is subject to Section 2966 of the
--------------
California Civil Code, which provides that the Payee of this Note shall give
written notice to Maker, or her successor in interest, of prescribed information
at least ninety (90) days and not more than one hundred fifty (150) days before
any balloon payment is due.
(d) Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California. This Note has been
delivered to Payee and accepted by Payee in the State of California. If there is
a lawsuit on this Note, Maker shall submit, at Payee's request, to the
jurisdiction of the courts of Santa Clara County, California.
(e) Successors and Assigns. This Note shall inure to the benefit of
----------------------
Payee and its successors and assigns. The obligations of Maker hereunder shall
not be assignable.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as
of the date first above written.
MAKER
__/s/ Ivan Koon____________
IVAN KOON
__/s/ Irene Li-Ping Cheung___
IRENE LI-PING CHEUNG
3
<PAGE>
EXHIBIT 12.1
BEA Systems, Inc.
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Fiscal years ended January 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes $(5,657) $(46,726) $(20,068) $(87,034) $(17,680)
Add fixed charges 29,385 16,615 8,531 3,238 193
------- -------- -------- -------- --------
Earnings (as defined) $23,728 $(30,111) $(11,537) $(78,796) $(17,487)
======= ======== ======== ======== ========
Fixed charges:
Interest expense 20,417 10,426 6,054 $ 6,727 $ 89
Portion of rent expense 7,779 5,528 2,477 1,511 104
representative of interest
Amortization of debt issuance costs 1,189 661 _ _ _
------- -------- -------- -------- --------
Total fixed charges $29,385 $ 16,615 $ 8,531 $ 8,238 $ 193
======= ======== ======== ======== ========
Ratio of earnings to fixed charges 0.81 * * * *
======= ======== ======== ======== ========
</TABLE>
- --------------------
* Earnings (as defined) were insufficient to cover fixed charges by $46,726,
$20,068, $87,034 and $17,680 for the fiscal years ended January 31, 1999,
1998, 1997, and 1996, respectively.
<PAGE>
EXHIBIT 21.1
BEA SYSTEMS, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<S> <C>
1. BEA Systems (FSC), Inc., Barbados
2. BEA International, Cayman Islands
3. BEA Systems, Ltd., Canada
4. BEA Systems Limitada, Brazil
5. BEA Systems SA de CV, Mexico
6. BEA Systems Europe GmbH, Germany
7. BEA Systems Europe Ltd., United Kingdom
8. BEA Systems Italia S.P.A.
9. BEA Systems Spain S.A.
10. BEA Systems Europe N.V., Belgium
11. BEA Systems Pty Ltd., South Africa
12. BEA Systems AB, Sweden
13. BEA Systems, Ltd., United Kingdom
14. BEA Systems OY, Finland
15. BEA Systems S.A., France
16. BEA Systems (Switzerland) Ltd., Switzerland
17. BEA Systems Japan Ltd., Japan
18. BEA Systems Korea, Korea
19. BEA Systems Pty Ltd., Australia
20. BEA Systems HK Ltd., Hong Kong
21. BEA Systems Holland B.V., Netherlands
22. BEA WebXpress, LLC
23. Avitek Inc.
24. The Theory Center, Inc.
25. Technology Resource Group
26. BEA Systems Holding A, Inc.
27. BEA Systems Holding B, Inc.
28. BEA Systems Distribution B.V., Netherlands
29. BEA Systems Netherlands B.V.
30. BEA Cayman Holding I
31. BEA Cayman Holding II
32. BEA Cayman Holding III
33. BEA Systems (Ontario), Inc.
34. BEA Systems (Nova Scotia) Company
35. The Object People Limited
36. The Object People GmbH
37. 1395135 Ontario Inc.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-37385, 333-24941, 333-66445, 333-69241, 333-77725, 333-
77723, 333-87301 and 333-92257) pertaining to the 1995 Flexible Stock
Incentive Plan, the 1997 Stock Incentive Plan, the 1997 Employee Stock
Purchase Plan, the WebLogic, Inc. 1996 Stock Plan and The Theory Center, Inc.
Amended and Restated 1999 Stock Option/Stock Issuance Plan and the
Registration Statements (Form S-3 Nos. 333-58439, 333-63117, 333-66443, 333-
34956, 333-92085 and 333-32348) of BEA Systems, Inc. of our report dated
February 21, 2000, with respect to the consolidated financial statements and
schedule of BEA Systems, Inc. included in this Annual Report (Form 10-K) for
the year ended January 31, 2000.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 764,925
<SECURITIES> 38,135
<RECEIVABLES> 138,581
<ALLOWANCES> 5,512
<INVENTORY> 0
<CURRENT-ASSETS> 971,377
<PP&E> 43,971
<DEPRECIATION> 15,813
<TOTAL-ASSETS> 1,258,841
<CURRENT-LIABILITIES> 235,533
<BONDS> 572,484
0
0
<COMMON> 361
<OTHER-SE> 444,458
<TOTAL-LIABILITY-AND-EQUITY> 1,258,841
<SALES> 292,855
<TOTAL-REVENUES> 464,410
<CGS> 6,445
<TOTAL-COSTS> 464,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,312
<INTEREST-EXPENSE> 21,607
<INCOME-PRETAX> 323
<INCOME-TAX> 13,917
<INCOME-CONTINUING> (19,574)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,574)
<EPS-BASIC> (0.06)<F1>
<EPS-DILUTED> (0.06)
<FN>
<F1>For purposes of this exhibit, primary means basic.
</FN>
</TABLE>
