<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MICROMUSE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3288385
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
139 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 538-9090
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHRISTOPHER J. DAWES
CHIEF EXECUTIVE OFFICER AND PRESIDENT
MICROMUSE INC.
139 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94107
(415) 538-9090
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
STEVEN M. SPURLOCK, ESQ. MARK A. BERTELSEN, ESQ.
MARK P. LONG, ESQ. JAMES N. STRAWBRIDGE, ESQ.
RICHARD R. HESP, ESQ. JON C. GONZALES, ESQ.
GUNDERSON DETTMER STOUGH WILSON SONSINI GOODRICH & ROSATI
VILLENEUVE FRANKLIN & HACHIGIAN, LLP PROFESSIONAL CORPORATION
155 CONSTITUTION DRIVE 650 PAGE MILL ROAD
MENLO PARK, CALIFORNIA 94025 PALO ALTO, CALIFORNIA 94304
(650) 321-2400 (650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
==================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value................................. $31,050,000 $9,160
==================================================================================================================
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED , 1998
LOGO
- --------------------------------------------------------------------------------
COMMON STOCK SHARES
- --------------------------------------------------------------------------------
Of the shares (the "Shares") of Common Stock, par value $0.01 per
share ("Common Stock"), of Micromuse Inc. (the "Company") offered hereby (the
"Offering"), shares are being offered by the Company and
shares are being offered by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders" and "Underwriting." Prior to this Offering, there has been no
public market for the Common Stock. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Company has applied to have the Common Stock approved for listing on the Nasdaq
National Market under the symbol "MUSE."
FOR INFORMATION CONCERNING CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER(2)
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total(3) $ $ $ $
</TABLE>
(1) See "Underwriting" for information relating to indemnification and
compensation of the Underwriters and other matters.
(2) Before deducting expenses of the Offering of approximately $ , all of
which are payable by the Company.
(3) The Company and certain of the Selling Stockholders have granted to the
Underwriters an option, exercisable within 30 days of the date hereof, to
purchase up to additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholders will be increased to $ , $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock offered hereby are offered, subject to prior sale, by
the Underwriters on a firm commitment basis when, and as if delivered and
accepted by them, and subject to approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. Delivery of shares of Common Stock offered hereby to the Underwriters
is expected to be made in New York, New York, on or about , 1998.
DEUTSCHE MORGAN GRENFELL
NATIONSBANC MONTGOMERY SECURITIES
SALOMON SMITH BARNEY
The date of this Prospectus is , 1998.
<PAGE> 3
[PHOTOGRAPH FOR INSIDE COVER TO BE INSERTED HERE]
Except as otherwise noted, all information in this Prospectus, including
share and per share information, (i) assumes no exercise of the Underwriters'
over-allotment option, (ii) assumes the exercise of a warrant to purchase
1,500,000 shares of Series A Convertible Preferred Stock at an exercise price of
$2.00 per share and (iii) except in the Consolidated Financial Statements and
Notes thereto, excludes 120,000 shares of Common Stock held as treasury stock
and reflects the conversion of all outstanding shares of Preferred Stock of the
Company into an aggregate of 5,988,336 shares of Common Stock and the filing of
a Restated Certificate of Incorporation upon the closing of the Offering. See
"Description of Capital Stock" and "Underwriting."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS OR OTHERWISE. SUCH ACTIVITIES, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management -- the effective monitoring and management of multiple elements
underlying an Information Technology infrastructure, including network devices,
computing systems and applications, and the mapping of these elements to the
business services they impact. The Company's Netcool product suite collects,
normalizes and consolidates high volumes of event information from heterogeneous
network management environments into an active database which de-duplicates and
correlates the resulting data in real time, and then rapidly distributes
graphical views of the information to operators and administrators responsible
for monitoring service levels. Netcool's unique architecture allows for the
rapid, programmerless association of devices and specific attributes of those
devices to the business services they impact. This readily enables
administrators to create and modify their service views during systems
operations to monitor particular business services, rapidly identify which users
are affected by which network faults, pinpoint sources of network problems,
automate operator responses, facilitate problem resolution and report on the
results. The Company markets and distributes to customers through its own sales
force, OEMs, value added resellers and systems integrators. The Company has
distribution agreements with Bay Networks, Cisco Systems, Ericsson, N.E.T., and
Vanstar. As of September 30, 1997, the Company had over 90 customers operating
in and serving a variety of industries. Customers include America Online,
British Telecommunications, Cable and Wireless, Cellular One, First Data
Resources, Genuity, GE Information Services, GTE Internetworking, Merrill Lynch,
MindSpring, Morgan Stanley, Netcom, Pacific Bell, PSINet, Siemens, and
WorldCom/MFS/UUNet.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered................................ shares (including shares by the Company and
shares by the Selling Stockholders)
Common Stock to be outstanding after the Offering... shares(1)
Use of proceeds..................................... For working capital and other general corporate purposes.
Proposed Nasdaq National Market symbol.............. MUSE
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.......................................................................... $1,446 $4,515 $ 9,292
Loss from continuing operations................................................... (945) (805) (8,933)
Income (loss) from discontinued operations, net of taxes.......................... 711 569 (104)
Gain on disposal of discontinued operations, net of taxes......................... -- -- 1,161
Net loss.......................................................................... (234) (236) (7,876)
Accretion on redeemable convertible preferred stock............................... -- -- (755)
Net loss applicable to holders of common stock.................................... (234) (236) (8,631)
Pro forma net loss from continuing operations per share........................... $ (0.83)
Pro forma loss from discontinued operations per share............................. $ (0.01)
Pro forma gain on disposal of discontinued operations per share................... $ 0.11
Pro forma loss per share.......................................................... $ (0.80)
Shares used in per share calculation(1)........................................... 10,817
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................................................... $13,741 $
Working capital.................................................................... 13,181
Total assets....................................................................... 22,740
Redeemable convertible preferred stock............................................. 22,865
Total stockholders' equity (deficit)............................................... (7,234)
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of September 30, 1997. Excludes
1,312,086 shares of Common Stock issuable upon exercise of outstanding
options as of September 30, 1997 with a weighted average exercise price of
$2.38 and as of September 30, 1997, 100,000 shares of Common Stock reserved
for issuance under the Company's stock plans. See "Management -- 1997 Stock
Option/Stock Issuance Plan," "-- 1997 Employee Stock Purchase Plan" and Note
6 of Notes to Consolidated Financial Statements.
(2) Adjusted to reflect the sale of shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $ per
share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of
the net proceeds therefrom. See "Capitalization" and "Use of Proceeds."
3
<PAGE> 5
THE COMPANY
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management ("SLM") -- the effective monitoring and management of multiple
elements underlying an Information Technology ("IT") infrastructure, including
network devices, computing systems and applications, and the mapping of these
elements to the business services they impact. The Company's Netcool product
suite collects, normalizes and consolidates high volumes of event information
from heterogeneous network management environments into an active database which
de-duplicates and correlates the resulting data in real time, and then rapidly
distributes graphical views of the information to operators and administrators
responsible for monitoring service levels. Netcool's unique architecture allows
for the rapid, programmerless association of devices and specific attributes of
those devices to the business services they impact. This readily enables
administrators to create and modify their service views during systems
operations to monitor particular business services, rapidly identify which users
are affected by which network faults, pinpoint sources of network problems,
automate operator responses, facilitate problem resolution and report on the
results.
IT has become increasingly mission critical for businesses as vital
communications, control and information services depend on reliable IT
performance. Effective, adaptable management of IT infrastructure is
particularly important for organizations in the business of providing network
services, such as telecommunications carriers and Internet Service Providers
("ISPs"). With SLM, network service providers can both manage their large
internal networks and offer additional network services to corporations that
require ongoing service guarantees, as set forth in their Service Level
Agreements ("SLAs"). The market for these services, known as Managed Network
Services or Network Operations Outsourcing, has grown rapidly as corporations
outsource the management and operation of their LANs and WANs to service
providers, and was estimated to be approximately $5 billion in 1996, and
projected to grow to approximately $11 billion in 2001, according to
International Data Corp ("IDC"). In the enterprise, SLM permits IT staffs to
guarantee network availability and performance, predict problems and maintain
SLA-defined service levels for mission critical services such as credit card
verification and electronic commerce.
Traditional solutions typically have been unable to deliver SLM cost
effectively. To capitalize on this opportunity, the Company's products have been
specifically designed to deliver SLM through ease of use and the efficient
management of complex, evolving and mission critical networks. The Company
believes that Netcool products provide customers a rapid return on investment by
offering: (i) cost-effective solutions with shorter implementation times and a
high level of configurability; (ii) efficient solutions that leverage customers'
existing network management products and services; and (iii) scalable solutions
that enable both the expansion and enhancement of current services as well as
the rapid deployment of new services to end-users.
The Company's initial target market has been organizations with large,
technically complex and heterogeneous networks, the majority of whom have been
in the telecommunications, ISP and investment banking markets. The Company
markets and distributes to customers through its own sales force, OEMs, value
added resellers and systems integrators. The Company has distribution agreements
with Bay Networks, Cisco Systems, Ericsson, N.E.T., and Vanstar. As of September
30, 1997, the Company had over 90 customers operating in and serving a variety
of industries. Customers include America Online, British Telecommunications,
Cable and Wireless, Cellular One, First Data Resources, Genuity, GE Information
Services, GTE Internetworking, Merrill Lynch, MindSpring, Morgan Stanley,
Netcom, Pacific Bell, PSINet, Siemens, and WorldCom/MFS/UUNet.
Micromuse plc was incorporated in England in 1989 and in March 1997 became
a subsidiary of Micromuse Inc., a Delaware corporation formed in connection with
a corporate reorganization and relocation of the corporate headquarters to San
Francisco, California (the "Reorganization"). As used herein, the term
"Micromuse" or the "Company" refers to Micromuse Inc., Micromuse plc, and their
other subsidiaries, unless the context otherwise requires or unless otherwise
expressly stated. The Company's principal executive offices are located at 139
Townsend Street, San Francisco, California 94107, and its telephone number at
that address is (415) 538-9090.
4
<PAGE> 6
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be considered carefully in evaluating the
Company and its business before purchasing shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as those discussed elsewhere in this
Prospectus.
LIMITED OPERATING HISTORY AS A SOFTWARE COMPANY; ANTICIPATED CONTINUING
LOSSES; UNCERTAINTY OF FUTURE OPERATING RESULTS. Although the Company began
offering services for the network and systems integration market in 1989, the
Company first shipped its internally developed software product,
Netcool/OMNIbus, for the Service Level Management ("SLM") market in January
1995. Accordingly, the Company has only a limited operating history as a
developer and provider of SLM software upon which an evaluation of its business
and prospects can be based. Since inception, the Company's software business has
incurred significant losses that were partially offset by profits from the
Company's systems integration business, which was divested in the fourth quarter
of fiscal 1997. The Company does not expect to achieve profitability for the
next several quarters, and there can be no assurance that it will be profitable
thereafter, or that the Company will sustain any such profitability if achieved.
The limited operating history of the Company makes the prediction of future
results of operations difficult if not impossible, and the Company and its
prospects must be considered in light of the risks, costs and difficulties
frequently encountered by emerging companies, particularly companies in the
competitive software industry. Although the Company has achieved recent revenue
growth, there can be no assurance that the Company can generate the substantial
additional revenue growth on a quarterly or annual basis necessary for the
Company to become profitable, or that any revenue growth that is achieved can be
sustained. In addition, the Company has increased, and plans to increase
further, its operating expenses in order to develop new distribution channels,
increase its sales and marketing efforts, implement and improve its operational,
financial and management information systems, broaden its technical services and
customer support capabilities, fund higher levels of research and development
and expand its administrative resources in anticipation of future growth. To the
extent that increases in such expenses are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition would be materially adversely affected. In addition, in view of recent
revenue growth, the rapidly evolving nature of its business and markets and its
limited operating history in its current market, the Company believes that
period-to-period comparisons of financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance. As of
September 30, 1997, the Company had accumulated net losses of $9.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY. The Company's
quarterly operating results have fluctuated significantly in the past, and will
likely continue to fluctuate in the future, as a result of a number of factors,
many of which are outside the Company's control. These factors include changes
in the demand for the Company's software products and services; the size and
timing of specific sales; the timing of new hires; the level of product and
price competition that the Company encounters; changes in the mix of, and lack
of demand from, distribution channels through which products are sold; the
length of sales cycles; spending patterns and budgetary resources of its
customers on network management software solutions; the success of the Company's
new customer generation activities; introductions or enhancements of products,
or delays in the introductions or enhancements of products, by the Company or
its competitors; market acceptance of new products; the Company's ability to
anticipate and effectively adapt to developing markets and rapidly changing
technologies; the mix of products and services sold;
5
<PAGE> 7
changes in the Company's sales incentives; changes in the renewal rate of
support agreements; the mix of international and domestic revenue; product life
cycles; software defects and other product quality problems; the Company's
ability to attract, retain and motivate qualified personnel; changes in the mix
of sales to new and existing customers; the extent of industry consolidation;
expansion of the Company's international operations; and general domestic and
international economic and political conditions. The timing of large individual
sales has been difficult for the Company to predict, and large individual sales
have, in some cases, occurred in quarters subsequent to those anticipated by the
Company. There can be no assurance that the loss or deferral of one or more
significant sales would not have a material adverse effect on the Company's
quarterly operating results. In addition, the Company's business has experienced
and may continue to experience significant seasonality. Historically, a
disproportionate amount of the Company's annual revenues have been generated by
sales of its products during the Company's fourth fiscal quarter. There can be
no assurance that this trend will not continue.
The Company's software products are typically shipped when orders are
received, and consequently, license backlog at the beginning of any quarter has
typically represented only a small portion of that quarter's expected revenue.
In addition, the Company typically realizes a significant portion of license
revenue in the last month of a quarter, frequently in the last weeks or even
days of a quarter. As a result, license revenue in any quarter is difficult to
forecast because it is substantially dependent on orders booked and shipped in
that quarter. Moreover, the Company's sales cycles, from initial evaluation to
delivery of software, vary substantially from customer to customer. In addition,
the Company's expense levels are based in part on its expectations of future
orders and sales, which, given the Company's limited operating history, are
extremely difficult to predict. A substantial portion of the Company's operating
expenses are related to personnel, facilities, and sales and marketing programs.
The level of spending for such expenses cannot be adjusted quickly and is,
therefore, relatively fixed in the short term. If revenue falls below the
Company's expectations in a particular quarter, the Company's operating results
could be materially adversely affected. See "-- Lengthy Sales Cycle."
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from
quarter-to-quarter. As a result, quarter-to-quarter comparisons of operating
results are not necessarily meaningful or indicative of future performance.
Furthermore, the Company believes it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail, or are perceived to prevail, with respect to the Company's business or
generally, the market price of the Company's Common Stock would likely be
materially adversely affected. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANAGEMENT OF GROWTH; NEED TO IMPROVE FINANCIAL SYSTEMS AND CONTROLS. The
Company has recently experienced a period of rapid revenue and customer growth
and a substantial expansion in the number of its personnel, and in the scope and
the geographic area of its operations. The Company has grown from 57 employees
on March 31, 1997 to 135 employees on September 30, 1997 and currently plans to
continue to recruit more staff. This growth has resulted in new and increased
responsibilities for management personnel and has placed and continues to place
a significant strain upon the Company's management, operating and financial
systems and resources. Moreover, members of the Company's management team,
including, without limitation, the Senior Vice President, Finance and Senior
Vice President, Sales, have been in their current positions with the Company for
a limited period of time. To accommodate recent growth and to compete
effectively and manage future growth, if any, the Company will be required to
continue to implement and improve a variety of operational, financial and
management information systems, procedures and controls on a timely basis and to
expand, train, motivate and manage its work force. In particular, the Company
will be required to improve its accounting and financial reporting systems,
which currently require substantial management effort, and to suc-
6
<PAGE> 8
cessfully manage an increasing number of relationships with customers, suppliers
and employees. These demands will require the addition of new management
personnel, and the Company currently is in the process of recruiting individuals
to fill important management positions such as Chief Financial Officer,
controller for U.S. operations, human resources director and managers for
research and development projects. Further, as a consequence of the
Reorganization, the Company will need to implement a U.S.-based financial and
accounting system. The Company's future success will depend to a significant
extent on the recruitment and retention of these key personnel, particularly a
Chief Financial Officer, controller for U.S. operations, the implementation and
improvement of operational, financial and management systems and the ability of
its current and future executive officers to operate effectively, both
independently and as a group. There can be no assurance that the Company will be
able to execute on a timely and cost-effective basis all that is necessary to
successfully manage any growth, and any failure to do so could have a material
adverse effect on the Company's business, operating results or financial
condition. See "Business -- Employees."
NEED TO EXPAND AND IMPROVE PRODUCTIVITY OF SALES FORCE, TECHNICAL SERVICES
AND CUSTOMER SUPPORT ORGANIZATION. To increase market penetration, the Company
has increased the size of its sales organization from 14 to 31 individuals
during the nine months ended September 30, 1997. Based on the Company's
experience, it takes at least six months, if not longer, for a salesperson to
become fully productive. There can be no assurance that the Company will be
successful in increasing the productivity of its sales personnel, and the
failure to do so could have a material adverse effect on the Company's business,
financial condition or results of operations. As a result of the recent
expansion of the installed base of Netcool/OMNIbus, the demands on the Company's
technical services and customer support resources have grown rapidly. The
Company believes that a high level of technical services, training and customer
support is essential to maintaining its competitive position. The Company will
be required to significantly expand its technical services and customer support
organizations if it is to achieve significant additional revenue growth. In
addition, the Company has recently redeployed personnel from its discontinued
systems integration business and other newly hired personnel and the Company
expects that increased resources will be spent on training and transitioning
such personnel. Competition for additional qualified technical personnel to
perform the required functions is intense. There can be no assurance that the
Company's technical services and customer support resources will be sufficient
to manage any future growth in the Company's business, and any failure of the
Company to expand its technical services and customer support organizations
commensurate with any expansion of the installed base of Netcool/OMNIbus would
have a material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Technical Services" and "-- Customer
Support."
NEED TO EXPAND DISTRIBUTION CHANNELS; DEPENDENCE ON THIRD-PARTY
RELATIONSHIPS. A key element of the Company's business strategy is to develop
relationships with leading network equipment and telecommunications providers
and to expand the third-party channel of distribution. The Company is currently
investing, and plans to continue to invest, significant resources to develop
these relationships and channels of distribution, which could adversely affect
the Company's ability to generate profits. Third-party distributors accounted
for approximately 11% of the Company's total revenues in fiscal 1997. There can
be no assurance that the Company will be able to attract additional distributors
that will be able to market the Company's products effectively. Many of the
Company's agreements with third-party distributors are nonexclusive, and many of
the companies with which the Company has agreements also have similar agreements
with the Company's competitors or potential competitors. The Company's
third-party distributors have significantly greater sales and marketing
resources than the Company, and there can be no assurance that their sales and
marketing efforts will not conflict with the Company's direct sales efforts. In
addition, although sales through third-party distributors result in reduced
sales and marketing expense with respect to such sales, the Company sells its
products to third-party distributors at reduced prices, resulting in lower gross
margins on such third-party sales. The
7
<PAGE> 9
Company believes that its success in penetrating markets for its SLM
applications depends in large part on its ability to maintain its current
distribution relationships, in particular, those with Cisco Systems ("Cisco")
and Bay Networks ("Bay"), to cultivate additional distribution relationships and
to cultivate alternative distribution relationships if distribution channels
change. There can be no assurance that network equipment and telecommunications
providers and distributors will not discontinue their relationships with the
Company, compete directly with the Company or form additional competing
arrangements with the Company's competitors or that the Company will be able to
expand its distribution relationships beyond what currently exists. See
"Business -- Sales and Marketing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
EMERGING SERVICE LEVEL MANAGEMENT MARKET; DEPENDENCE ON TELECOMMUNICATIONS
CARRIERS AND OTHER SERVICE PROVIDERS; DEMAND FOR SLM PRODUCTS. The market for
the Company's products is in an early stage of development. Although the rapid
expansion and increasing complexity of computer networks in recent years and the
resulting emergence of SLAs has increased the demand for SLM software products,
the awareness of and the need for such products is a recent development. Because
the market for these products is only beginning to develop, it is difficult to
assess the size of this market, the appropriate features and prices for products
to address this market, the optimal distribution strategy and the competitive
environment that will develop. Failure of the SLM market to grow at anticipated
rates or failure of the Company to properly assess and address the demands from
such market would have a material adverse effect on the Company's business,
operating results and financial condition. Historically, a significant portion
of the Company's revenues have been derived from sales to investment banks.
However, as a result of the Company's strategy to focus on telecommunications
carriers, ISPs and other providers of managed networks, the Company expects
sales to investment banks to comprise a decreasing portion of total revenues
over the long-term. A majority of the Company's revenues to date have been
derived from the sale of its Netcool family of products to telecommunications
carriers, such as ISPs, that deliver advanced communications services to their
customers. In addition, these providers are the central focus of the Company's
sales strategy. There can be no assurance that telecommunications carriers and
other service providers will be able to market their communications services
successfully, that SLM will gain widespread market acceptance or that
telecommunications carriers and other service providers will use the Company's
products in the deployment of their services. Delays in the introduction of
advanced services, such as network management outsourcing, failure of such
services to gain widespread market acceptance or the decision of
telecommunications carriers and other service providers not to use the Company's
products in the deployment of these services would have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance the Company will be able to penetrate these markets
further. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Customers."
COMPETITION. The Company's products are designed for use in the evolving
SLM and enterprise network management markets. Competition in these markets is
intense and is characterized by rapidly changing technologies, new and evolving
industry standards, frequent new product introductions and rapid changes in
customer requirements. The Company's current and prospective competitors offer a
variety of solutions to address the SLM and enterprise network management
markets and generally fall within the following five categories: (i) customer's
internal design and development organizations that produce SLM and network
management applications for their particular needs, in some cases using multiple
instances of products from hardware and software vendors such as Sun
Microsystems, Inc. ("Sun"), Hewlett-Packard Company ("HP") and Cabletron
Systems, Inc. ("Cabletron"); (ii) vendors of network and systems management
frameworks including Computer Associates International, Inc. ("CA") and
International Business Machines Corporation ("IBM"); (iii) vendors of network
and systems management applications including HP, Sun and IBM; (iv) providers of
specific market applications including Boole & Babbage, Inc. ("Boole & Babbage")
and several smaller software vendors; and (v) systems
8
<PAGE> 10
integrators which primarily provide programming services to develop customer
specific applications including TCSI Corporation (formerly Teknekron
Communications Systems, Inc.) and Objective Systems Integrators, Inc. ("OSI").
In the future, as the Company enters new markets, the Company expects that such
markets will have additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, the Company
expects additional competition from other established and emerging companies.
Increased competition is likely to result in price reductions and may result in
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, operating results or financial
condition.
Many of the Company's existing and potential customers continuously
evaluate whether to design and develop their own network operations support and
management applications or purchase them from outside vendors. Sometimes these
customers internally design and develop their own software solutions for their
particular needs and therefore may be reluctant to purchase products offered by
independent vendors such as the Company. As a result, the Company must
continuously educate existing and prospective customers as to the advantages of
the Company's products versus internally developed network operations support
and management applications.
Many of the Company's current and potential competitors have longer
operating histories and have significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and a larger
customer base, than the Company. As a result, they may be able to devote greater
resources to the development, promotion, sale and support of their products or
to respond more quickly to new or emerging technologies and changes in customer
requirements than the Company. Existing competitors could also increase their
market share by bundling products having management functionality offered by the
Company's products with their current applications. Moreover, the Company's
current and potential competitors may increase their share of the SLM market by
strategic alliances and/or the acquisition of competing companies. In addition,
network operating system vendors could introduce new or upgrade and extend
existing operating systems or environments that include management functionality
offered by the Company's products, which could render the Company's products
obsolete and unmarketable. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results or financial condition. See "Business --
Competition."
LENGTHY SALES CYCLE. The Company's software is generally used for division-
or enterprise-wide, business-critical purposes and involves significant capital
commitments by customers. Potential customers generally commit significant
resources to an evaluation of available enterprise software and require the
Company to expend substantial time, effort and money educating them about the
value of the Company's solutions. Sales of the Company's software products often
require an extensive sales effort throughout a customer's organization because
decisions to license such software generally involve the evaluation of the
software by a significant number of customer personnel in various functional and
geographic areas, each often having specific and conflicting requirements. A
variety of factors, including actions by competitors and other factors over
which the Company has little or no control, may cause potential customers to
favor a particular supplier or to delay or forego a purchase. As a result of
these and other factors, the sales cycle for the Company's products is long,
typically about three to six months. As a result of the length of the sales
cycle for its software products, the Company's ability to forecast the timing
and amount of specific sales is limited, and the delay or failure to complete
one or more large license transactions could have a material adverse effect on
the Company's business, operating results or financial condition and cause the
Company's operating results to vary significantly from quarter to quarter. See
"-- Variability of Quarterly Operating Results; Seasonality," and
"Business -- Sales and Marketing."
9
<PAGE> 11
DEPENDENCE ON KEY PERSONNEL. The Company's success is substantially
dependent upon a limited number of key management, sales, product development,
technical services and customer support personnel. The loss of the services of
one or more of such key employees could have a material adverse effect on the
Company's business, financial condition or results of operations. In particular,
the Company would be materially adversely affected if it were to lose the
services of Christopher J. Dawes, Chief Executive Officer of the Company, who
has provided significant leadership and direction to the Company since its
inception. The Company does not have employment contracts with any of its key
personnel. In addition, the Company's success will be dependent upon its
continuing ability to attract, train and retain additional highly qualified
management, sales, product development, technical services and customer support
personnel. The Company has at times and continues to experience difficulty in
recruiting qualified personnel. Because the Company faces intense competition in
its recruiting activities, there can be no assurance that the Company will be
able to attract and/or retain qualified personnel, including without limitation
a Chief Financial Officer and a controller for U.S. operations. Failure to
attract and retain the necessary qualified personnel on a timely basis could
have a material adverse effect on the Company's business, operating results or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PRODUCT CONCENTRATION. Other than discontinued operations, all of the
Company's revenues have been derived from licenses for its Netcool family of
products and related maintenance, training and consulting services. The Company
currently expects that Netcool/OMNIbus-related revenues will continue to account
for all or substantially all of the Company's revenues for the remainder of
fiscal 1998 and for the foreseeable future thereafter. Therefore, the Company's
future operating results, particularly in the near term, are significantly
dependent upon the continued market acceptance of Netcool/OMNIbus, improvements
to Netcool/OMNIbus and new and enhanced Netcool/OMNIbus applications. There can
be no assurance that Netcool/OMNIbus will continue to achieve market acceptance
or that the Company will be successful in developing, introducing or marketing
improvements to Netcool/OMNIbus or new or enhanced Netcool/OMNIbus applications.
The life cycles of Netcool/OMNIbus, including the Netcool/OMNIbus applications,
are difficult to estimate due in large part to the recent emergence of many of
the Company's markets, the effect of future product enhancements and
competition. A decline in the demand for Netcool/OMNIbus as a result of
competition, technological change or other factors would have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Products and Technology" and "-- Research and
Development."
SALES CONCENTRATION. To date, a significant portion of the Company's
revenues in any particular period has been attributable to a limited number of
customers. In fiscal 1997, entities affiliated with WorldCom and entities
affiliated with British Telecommunications, accounted for 19% and 11%,
respectively, of the Company's total revenues. In addition, entities affiliated
with British Telecommunications accounted for 53% and 14% of the Company's total
revenues for fiscal 1995 and fiscal 1996, respectively. The Company expects that
it will continue to be dependent upon a limited number of customers for a
significant portion of its revenues in future periods. As a result of this
concentration of sales, the Company's business, operating results or financial
condition could be materially adversely affected by the failure of anticipated
orders from significant customers to materialize or by deferrals or
cancellations of orders by significant customers. In addition, there can be no
assurance that revenue from customers that have accounted for significant
revenues in past periods, individually or as a group, will continue, or if
continued will reach or exceed historical levels in any future period. The terms
of the Company's agreements with its customers typically contain a one-time
license fee and a prepayment of one year of maintenance fees. The maintenance
agreement is renewable annually at the option of the customer and there are no
minimum payment obligations or obligations to license additional software.
Therefore, there can be no assurance that any of the Company's current customers
will
10
<PAGE> 12
generate significant revenues in future periods. For example, pre-existing
customers may be part of, or become part of, large organizations which
standardize using a competitive product. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; NEED TO MANAGE PRODUCT
TRANSITIONS; DEPENDENCE ON THIRD-PARTY SOFTWARE PLATFORMS. The market for the
Company's products is characterized by rapidly changing technologies, evolving
industry standards, changing regulatory environments, frequent new product
introductions and rapid changes in customer requirements. The introduction or
announcement of products by the Company or its competitors embodying new
technologies and the emergence of new industry standards and practices can
render existing products obsolete and unmarketable. As a result, the life cycles
of the Company's products are difficult to estimate. The Company's future
success will depend on its ability to enhance its existing products and to
develop and introduce, on a timely and cost-effective basis, new products and
product features that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of its
customers. Historically, the Company has used its close working relationship
with large customers to define its product development direction. There can be
no assurance that the Company will be successful in developing and marketing new
products or product features that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
new products and features, or that its new products or product features will
adequately meet the requirements of the marketplace and achieve market
acceptance. In particular, the widespread adoption of the Telecommunications
Management Network ("TMN") architecture for managing telecommunications networks
would force the Company to adapt its products to such standard, and there can be
no assurance that this could be done on a timely or cost-effective basis, if at
all. In addition, to the extent that any product upgrade or enhancement requires
extensive installation and configuration, current customers may postpone or
forgo the purchase of new versions of the Company's products. If the Company is
unable, for technological or other reasons, to develop and introduce
enhancements of existing products or new products in a timely manner, the
Company's business, operating results and financial condition will be materially
adversely affected. In addition, there can be no assurance that the introduction
or announcement of new product offerings by the Company or one or more of its
competitors will not cause customers to defer licensing of existing Company
products. Any such deferment of purchases could have a material adverse effect
on the Company's business, operating results or financial condition.
The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their networks. The Company must
continually modify and enhance its products to keep pace with changes in
hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by systems vendors, particularly Sun, IBM, HP,
Cabletron and Cisco and by vendors of relational database software, particularly
Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"), could materially
adversely impact the Company's business, operating results or financial
condition. For example, the Company is currently endeavoring to modify certain
of its products to operate with the Microsoft Windows NT operating system. The
failure of the Company's products to operate effectively across the various
existing and evolving versions of hardware and software platforms and database
environments employed by customers could have a material adverse effect on the
Company's business, operating results or financial condition. See
"Business -- Research and Development."
RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY. Software products as internally
complex as Netcool/OMNIbus frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Despite
extensive product testing by the Company, the Company has in the past released
versions of Netcool/OMNIbus with defects and has
11
<PAGE> 13
discovered software errors in certain of its products after their introduction.
For example, version 3.0 of Netcool/OMNIbus, released in 1995, had a number of
material defects. The Company has in the past had to use a significant portion
of its technical personnel's time to address such defects without additional
revenue commensurate with such services. To the extent future product defects
require the allocation of a significant portion of the Company's technical
personnel's time, the Company business, operating results or financial condition
could be materially adversely affected. See " -- Need to Expand and Improve
Productivity of Sales Force, Technical Services and Customer Support
Organization." Additionally, there can be no assurance that, despite testing by
the Company and by current and potential customers, defects and errors will not
be found in new versions or enhancements after commencement of commercial
shipments, resulting in loss of revenues, delay in market acceptance or damage
to the Company's reputation, any of which could have a material adverse effect
upon the Company's business, operating results or financial condition.
Since the Company's products are used by its customers to monitor and
address network problems and avoid failures of the network to support critical
business functions, design defects, software errors, misuse of the Company's
products, incorrect data from network elements or other potential problems
within or out of the Company's control that may arise from the use of the
Company's products could result in financial or other damages to the Company's
customers. Such customers could seek damages from the Company for any such
losses, which, if successful, could have a material adverse effect on the
Company's business, operating results or financial condition. Furthermore, the
Company does not maintain product liability insurance. Although the Company's
license agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect the
Company against such claims and the liability and costs associated therewith.
Accordingly, any such claim could have a material adverse effect upon the
Company's business, results of operations or financial condition. See
"Business -- Products and Technology" and "-- Research and Development."
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF
INFRINGEMENT. The Company's success and ability to compete is dependent in
significant part upon its proprietary software technology. The Company relies on
a combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its proprietary
rights. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that the steps taken by the Company to protect its proprietary
technology will prevent misappropriation of such technology, and such
protections may not preclude competitors from developing products with
functionality or features similar to the Company's products. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. While the Company believes that its products and
trademarks do not infringe upon the proprietary rights of third parties, there
can be no assurance that the Company will not receive future communications from
third parties asserting that the Company's products infringe, or may infringe,
the proprietary rights of third parties. The Company expects that software
product developers will be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require the Company to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all. In the event of a successful claim of product infringement against
the Company and failure or inability of the Company to develop non-infringing
technology or license the infringed or similar technology, the Company's
business, operating results or financial condition could be
12
<PAGE> 14
materially adversely affected. See "Business -- Intellectual Property and Other
Proprietary Rights."
RISKS ASSOCIATED WITH INTERNATIONAL LICENSING AND OPERATIONS. License,
maintenance and service revenue outside of the United States accounted for 76%,
55% and 48% of the Company's total revenue in fiscal 1995, 1996 and 1997,
respectively. The Company expects that international license, maintenance and
consulting revenue will continue to account for a significant portion of its
total revenue in future periods. The Company intends to enter into additional
international markets and to continue to expand its operations outside of the
United States by expanding its direct sale force and pursuing additional
strategic relationships. Such expansion will require significant management
attention and expenditure of significant financial resources and could adversely
affect the Company's ability to generate profits. To the extent that the Company
is unable to establish additional foreign operations in a timely manner, the
Company's growth, if any, in international sales will be limited, and the
Company's business, operating results or financial condition could be materially
adversely affected. The Company maintains a significant portion of its
operations, including the bulk of its software development operations, in the
United Kingdom. The Company's international operations and revenue involve a
number of inherent risks, including longer receivables collection periods and
greater difficulty in accounts receivable collection, difficulty in staffing and
managing foreign operations, an even lengthier sales cycle than with domestic
customers, the impact of possible recessionary environments in economies outside
the United States, unexpected changes in regulatory requirements, including a
slowdown in the rate of privatization of telecommunications service providers,
reduced protection for intellectual property rights in some countries and
tariffs and other trade barriers. There can be no assurance that the Company
will be able to sustain or increase revenue derived from international licensing
and service or that the foregoing factors will not have a material adverse
effect on the Company's future international license, service and other revenue,
and, consequently, on the Company's business, operating results or financial
condition. The Company pays the expenses of its international operations in
local currencies and does not currently engage in hedging transactions with
respect to such obligations. Currency exchange fluctuations in countries in
which the Company licenses its products or conducts operations could have a
material adverse effect on the Company's business, operating results or
financial condition by resulting in pricing levels that are not competitive or
expense levels that adversely impact profitability. In such event, gains and
losses on the conversion to United States dollars of accounts receivable and
accounts payable arising from international operations may contribute to
fluctuations in the Company's operating results. In addition, sales in Europe
and certain other parts of the world typically are adversely affected in the
quarter ending September 30 as many customers reduce their business activities
during the summer months. If the Company's international sales become a greater
component of total revenue, these seasonal factors may have a more pronounced
effect on the Company's operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Customers" and "-- Sales and Marketing."
RISKS ASSOCIATED WITH THIRD-PARTY LICENSES. The Company relies on certain
software that it licenses from third parties, including software that is
integrated with internally developed software and used in the Company's products
to perform key functions. There can be no assurance that these third-party
software licenses will continue to be available to the Company on commercially
reasonable terms or at all. Although the Company believes that alternative
software is available from other third-party suppliers, the loss of or inability
to maintain any of these software licenses or the inability of the third parties
to enhance in a timely and cost-effective manner their products in response to
changing customer needs, industry standards or technological developments could
result in delays or reductions in product shipments by the Company until
equivalent software could be developed internally or identified, licensed and
integrated, which would have a material adverse effect on the Company's
business, operating results and financial condition. See
"Business -- Intellectual Property and Other Proprietary Rights."
13
<PAGE> 15
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. In the Company's standard license agreements,
the Company warrants to licensees that its software routines and programs are
Year 2000 compliant (i.e. that they accurately process date-related data within
any century and between two or more centuries). Although the Company believes
its software products are Year 2000 compliant, there can be no assurance that
the Company's software products contain all necessary software routines and
programs necessary for the accurate calculation, display, storage and
manipulation of data involving dates. If any of the Company's licensees
experience Year 2000 problems, such licensee could assert claims for damages
against the Company. Any such litigation could result in substantial costs and
diversion of the Company's resources even if ultimately decided in favor of the
Company. In addition, many companies are expending significant resources to
correct or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those offered by the Company. The occurrence of any of the foregoing
could have a material adverse effect on the Company's business, operating
results or financial condition.
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK
PRICE. Prior to this Offering, there has been no public market for the Common
Stock of the Company, and there can be no assurance that an active trading
market will develop or be sustained after this Offering. The initial public
offering price will be determined through negotiations among the Company, the
Selling Stockholders and the representatives of the Underwriters based on
several factors and may not be indicative of the market price of the Common
Stock after this Offering. The market price of the shares of Common Stock is
likely to be highly volatile and may be significantly affected by factors such
as actual or anticipated fluctuations in the Company's operating results,
announcements of technological innovations, new products or new contracts by the
Company or its competitors, developments with respect to copyrights or
proprietary rights, adoption of new accounting standards affecting the software
industry, general market conditions and other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market price for the common
stocks of technology companies. These types of broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against such
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources which could have a material adverse effect
upon the Company's business, operating results or financial condition. See
"Underwriting."
GENERAL ECONOMIC AND MARKET CONDITIONS. Segments of the software industry
have experienced significant economic downturns characterized by decreased
product demand, price erosion, work slowdowns and layoffs. The Company's
operations may in the future experience substantial fluctuations from period to
period as a consequence of general economic conditions affecting the timing of
orders from major customers and other factors affecting capital spending.
Although the Company has a diverse client base, it has targeted certain vertical
markets. Therefore, any economic downturns in general or in the targeted
vertical segments in particular would have a material adverse effect on the
Company's business, operating results and financial condition.
CONTROL BY EXISTING STOCKHOLDERS. Immediately after the closing of this
Offering, % of the outstanding Common Stock will be held by the directors
and executive officers of the Company, together with certain entities affiliated
with them, assuming no exercise of outstanding
14
<PAGE> 16
stock options. As a result, these stockholders, if acting together, would be
able to control substantially all matters requiring approval by the stockholders
of the Company, including the election of all directors and approval of
significant corporate transactions. See "Management -- Executive Officers and
Directors," "Certain Transactions" and "Principal and Selling Stockholders."
ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE
LAW. Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws and certain provisions of Delaware law could delay or make difficult
a merger, tender offer or proxy contest involving the Company. The authorized
but unissued capital stock of the Company includes 5,000,000 shares of preferred
stock. The Board of Directors is authorized to provide for the issuance of such
preferred stock in one or more series and to fix the designations, preferences,
powers and relative, participating, optional or other rights and restrictions
thereof. Accordingly, the Company may in the future issue a series of preferred
stock, without further stockholder approval, that will have preference over the
Common Stock with respect to the payment of dividends and upon liquidation,
dissolution or winding-up of the Company. See "Description of Capital
Stock -- Preferred Stock." Further, Section 203 of the General Corporation Law
of the State of Delaware (as amended from time to time, the "DGCL"), which is
applicable to the Company, prohibits certain business combinations with certain
stockholders for a period of three years after they acquire 15% or more of the
outstanding voting stock of a corporation. In addition, the Restated Certificate
of Incorporation provides that, upon the closing of this Offering, the Board of
Directors will be divided into two classes of directors, with each class serving
a staggered two-year term. The classification of the Board of Directors has the
effect of generally requiring at least two annual stockholder meetings, instead
of one, to replace a majority of the Board members. Any of the foregoing could
adversely affect holders of the Common Stock or discourage or make difficult any
attempt to obtain control of the Company. See "Description of Capital Stock --
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock (including shares issued upon the exercise of outstanding options)
in the public market after this Offering could materially adversely affect the
market price of the Common Stock. Such sales also might make it more difficult
for the Company to sell equity securities or equity-related securities in the
future at a time and price that the Company deems appropriate. See
"Management -- Employee Benefit Plans," "Shares Eligible for Future Sale" and
"Underwriting."
DILUTION; POTENTIAL NEED FOR ADDITIONAL FINANCING; DIVIDEND
POLICY. Investors participating in this offering will incur immediate and
substantial dilution of pro forma net tangible book value per share of
$ from the initial public offering price. To the extent outstanding
options to purchase the Company's Common Stock are exercised, there will be
further dilution. There can be no assurance that the Company will not require
additional funds to support its working capital requirements or for other
purposes, in which case the Company may seek to raise such additional funds
through public or private equity financing or from other sources. There can be
no assurance that such additional financing will be available or that, if
available, such financing will be obtained on terms favorable to the Company and
would not result in additional dilution to the Company's stockholders. The
Company did not pay or declare any cash dividends on the Common Stock or other
securities during fiscal 1996 or fiscal 1997 and does not anticipate paying cash
dividends in the foreseeable future. See "Dilution" and "Dividend Policy."
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
to be sold by the Company in this Offering are estimated to be $ million,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company will not receive any of
the proceeds from the sale of shares of Common Stock by the Selling
Stockholders.
The principal purposes of the Offering are to increase the Company's equity
capital, to create a public market for the Common Stock, to facilitate future
access by the Company to public equity markets, to provide liquidity for certain
of the Company's existing stockholders and to provide increased visibility of
the Company in a marketplace where many of its competitors are publicly held
companies.
The Company intends to use the proceeds of the Offering for working capital
and general corporate purposes. The Company may also use a portion of the net
proceeds for possible acquisition of businesses, products and technologies that
are complementary to those of the Company. Although the Company has not
identified any specific businesses, products or technologies that it may
acquire, nor are there any current agreements or negotiations with respect to
any such transactions, the Company from time to time evaluates such
opportunities. Pending such uses, the Company plans to invest the net proceeds
in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company did not declare or pay any cash dividends on its capital stock
during fiscal 1996 or fiscal 1997 and does not expect to do so in the
foreseeable future. The Company anticipates that all future earnings, if any,
generated from operations will be retained by the Company to develop and expand
its business. Any future determination with respect to the payment of dividends
will be at the discretion of the Board of Directors and will depend upon, among
other things, the Company's operating results, financial condition and capital
requirements, the terms of then-existing indebtedness, general business
conditions and such other factors as the Board of Directors deems relevant.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997: (i) on an actual basis; (ii) on a pro forma basis to reflect
(A) the filing of a Restated Certificate of Incorporation upon the closing of
this Offering, (B) the exercise of a certain warrant resulting in the issuance
of 1,500,000 shares of the Company's Series A Preferred Stock at an exercise
price of $2.00 per share, and (C) the conversion of all outstanding shares of
the Company's Preferred Stock into Common Stock; and (iii) on such pro forma
basis as adjusted to reflect the offering of shares of Common Stock
offered by the Company hereby and the receipt of the estimated net proceeds
therefrom at an assumed initial public offering price of $ per share and
after deducting underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997(1)
------------------------------------
ACTUAL PRO FORMA(2)
------- ------------ PRO FORMA
AS ADJUSTED
-----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Redeemable convertible preferred stock $0.01 par value;
5,988,336 shares authorized, actual; 5,000,000 shares
authorized, pro forma and pro forma as adjusted;
4,488,336 shares issued and outstanding, actual; none,
pro forma and pro forma as adjusted, respectively..... $22,865 $ -- $ --
Stockholders' equity (deficit):
Common stock, $0.01 par value, 18,500,000 shares
authorized, 6,705,853 shares issued and outstanding,
actual; 60,000,000 shares authorized, pro forma and
pro forma as adjusted; 12,694,189 shares issued and
outstanding, pro forma; 60,000,000 shares authorized,
shares issued and outstanding, pro forma as
adjusted.............................................. 366 426
Additional paid-in capital.............................. 2,091 27,896
Treasury stock, at cost: 120,000 shares................. (300) (300) (300)
Deferred compensation................................... (215) (215) (215)
Currency translation adjustment......................... 52 52 52
Accumulated deficit..................................... (9,228) (9,228) (9,228)
------- ------- -------
Total stockholders' equity (deficit).................. (7,234) 18,631
------- ------- -------
Total capitalization............................... $15,631 $ 18,631 $
======= ======= =======
</TABLE>
- ---------------
(1) Based on the number of shares outstanding as of September 30, 1997. Excludes
1,312,086 shares of Common Stock issuable upon exercise of outstanding
options as of September 30, 1997 with a weighted average exercise price of
$2.38 per share; and as of September 30, 1997, 100,000 shares reserved for
issuance under the Company's stock plans. See "Management -- 1997 Stock
Option/Stock Issuance Plan," "-- 1997 Employee Stock Purchase Plan" and Note
6 of Notes to Consolidated Financial Statements.
(2) Reflects the issuance of 1,500,000 shares of Series A Preferred Stock
issuable upon exercise of a warrant issued to Sierra Ventures V, L.P. at an
exercise price of $2.00 per share (the "Series A Warrant"). See Note 6 of
Notes to Consolidated Financial Statements.
17
<PAGE> 19
DILUTION
As of September 30, 1997, the Company had a net pro forma net tangible book
value of $18,631,000, or approximately $1.47 per share of Common Stock after
giving pro forma effect to the exercise of a certain warrant for 1,500,000
shares of Series A Preferred Stock and the conversion of all outstanding
preferred stock to common stock. "Net tangible book value" represents the amount
of tangible assets less total liabilities. Without taking into account any other
changes in the net tangible book value after September 30, 1997, other than to
give effect to the receipt by the Company of the net proceeds from the sale of
the shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $ per share and after deducting underwriting
discounts and estimated offering expenses, the pro forma net tangible book value
of the Company as of September 30, 1997 would have been $ , or
$ per share. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate dilution
in net tangible book value of $ per share to purchasers of Common Stock
in the Offering. Investors participating in this Offering will incur immediate,
substantial dilution. This is illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Pro forma net tangible book value per share as of September 30,
1997......................................................... $ 1.47
Increase per share attributable to new investors................
Adjusted pro forma net tangible book value per share as of
September 30, 1997..............................................
------ ------
Dilution per share to new investors............................... $
======
</TABLE>
The following table summarizes on the pro forma basis described above as of
September 30, 1997, the difference between the existing stockholders and the
purchasers of shares in the Offering (at an assumed initial public offering
price of $ per share) with respect to the number of shares of Common
Stock purchased from the Company, the total cash consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... % $ % $2.22
New investors.................
---------- ----- ----------- ----- -----
Total............... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations are based on the number of shares outstanding as
of September 30, 1997 and exclude 1,312,086 shares of Common Stock issuable upon
exercise of outstanding options as of September 30, 1997 with a weighted average
exercise price of $2.38 per share, and as of September 30, 1997, an additional
100,000 shares reserved for issuance under the Company's stock plans. To the
extent outstanding options are exercised, there will be further dilution to new
investors. See "Management -- 1997 Stock Option/Stock Issuance Plan," "-- 1997
Employee Stock Purchase Plan" and Note 6 of Notes to Consolidated Financial
Statements.
- ---------------
(1) Sales by Selling Stockholders in this Offering will reduce the number of
shares held by existing stockholders to , or approximately %
( shares or approximately % if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares held by
new investors to , or approximately % ( shares or
approximately % if the Underwriters' over-allotment option is exercised
in full) of the total number of shares of Common Stock to be outstanding
after this Offering.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at September 30, 1996
and 1997 and for each of the years in the three-year period ended September 30,
1997 are derived from consolidated financial statements of the Company that have
been audited by KPMG Peat Marwick LLP ("KPMG"), independent certified public
accountants, and are included elsewhere in this Prospectus. The consolidated
balance sheet data at September 30, 1995 is derived from the audited
consolidated financial statements of the Company that are not included herein.
The consolidated statements of operations data for the years ended September 30,
1993 and 1994 and the consolidated balance sheet data at September 30, 1993 and
1994 are derived from unaudited consolidated financial statements and are not
included herein. The historical results are not necessarily indicative of the
operating results to be expected in the future. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ------ ------ -------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................................. $ -- $ 111 $1,077 $3,374 $ 6,968
Maintenance and services................................. -- 3 369 1,141 2,324
----- ----- ------ ------ -------
Total revenues.................................... -- 114 1,446 4,515 9,292
----- ----- ------ ------ -------
Cost of revenues:
License.................................................. -- 61 163 311 523
Maintenance and services................................. -- -- 102 384 1,042
----- ----- ------ ------ -------
Total cost of revenues............................ -- 61 265 695 1,565
----- ----- ------ ------ -------
Gross profit............................................... -- 53 1,181 3,820 7,727
Operating expenses:
Sales and marketing...................................... -- 30 728 1,768 8,970
Research and development ................................ 224 318 708 1,582 2,042
General and administrative............................... 78 236 584 996 4,244
----- ----- ------ ------ -------
Total operating expenses.......................... 302 584 2,020 4,346 15,256
----- ----- ------ ------ -------
Loss from operations....................................... (302) (531) (839) (526) (7,529)
Interest expense........................................... (17) (68) (106) (179) (1,404)
----- ----- ------ ------ -------
Loss before income taxes................................... (319) (599) (945) (705) (8,933)
Income taxes .............................................. -- -- -- 100 --
----- ----- ------ ------ -------
Loss from continuing operations............................ (319) (599) (945) (805) (8,933)
Discontinued Operations:
Income (loss) from discontinued operations, net of
taxes.................................................. 633 335 711 569 (104)
Gain on disposal of discontinued operations, net of
taxes(1)............................................... -- -- -- -- 1,161
----- ----- ------ ------ -------
Net income (loss).......................................... $ 314 $(264) $ (234) $ (236) $(7,876)
Accretion on redeemable convertible preferred stock........ -- -- -- -- (755)
----- ----- ------ ------ -------
Net income (loss) applicable to holders of common stock.... $ 314 $(264) $ (234) $ (236) $(8,631)
===== ===== ====== ====== =======
Per Share of Common Stock:
Pro forma loss from continuing operations................ $ (0.83)
Pro forma loss from discontinued operations.............. $ (0.01)
Pro forma gain on disposal of discontinued operations.... $ 0.11
Pro forma net loss applicable to holders of common
stock........................................... $ (0.80)
Shares used in per share calculation(2).................... 10,817
Cash dividends per share................................... $ -- $ -- $ 0.01 $ -- $ --
===== ===== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1993 1994 1995 1996 1997
------ ----- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ -- $ 18 $ 12 $ 594 $13,741
Working capital (deficiency)............................ (259) (453) (383) (847) 13,181
Total assets............................................ 4,375 4,492 5,767 9,107 22,740
Redeemable convertible preferred stock.................. -- -- -- -- 22,865
Total stockholders' equity (deficit) ................... 351 93 (203) (222) (7,234)
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed below and in
"Risk Factors" and "Business" as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management. The Company was founded in 1989 in London, England and historically
operated a systems integration business, reselling computer hardware and
software products and providing consulting services principally for managing
networks. Leveraging its expertise in network management and using funds
generated from the systems integration business, the Company developed its
Netcool/OMNIbus software, which the Company began shipping in January 1995. In
March 1997, the Company was reorganized in Delaware and relocated its
headquarters from London to San Francisco. In connection with the
Reorganization, the Company raised $4.9 million through the sale of equity
securities and arranged a $3.0 million credit facility. In September 1997, the
Company raised an additional $15.9 million through the sale of equity securities
and sold its systems integration business for approximately $400,000, net of
fees. With the proceeds from the financings and the sale of the systems
integration business, the Company expanded operations and substantially
increased development, sales and administrative headcount for the Netcool
business throughout the second half of fiscal 1997, growing from 57 employees on
March 31, 1997 to 135 employees on September 30, 1997. To accommodate recent
growth and to compete effectively and manage future growth, if any, the Company
will be required to continue to implement and improve operational, financial and
management information systems, procedures and controls on a timely basis and to
expand, train, motivate and manage its work force. See "Risk
Factors -- Management of Growth; Need to Improve Financial Systems and Controls"
and "-- Need to Expand and Improve Productivity of Sales Force, Technical
Services and Customer Support Organization."
The Company's consolidated financial statements have been restated to
reflect the discontinuation of the operations associated with the Company's
systems integration business. In connection with such sale, the Company was
indemnified by the purchaser for work-in-process under existing contracts,
warranty claims under completed contracts and maintenance agreements, but
retained liability for completed contracts. See Note 2 of Notes to Consolidated
Financial Statements for information concerning this restatement.
Other than discontinued operations, all of the Company's revenues have been
derived from licenses for its Netcool family of products and related
maintenance, training and consulting services. The Company currently expects
that Netcool-related revenues will continue to account for all or substantially
all of the Company's revenues for the remainder of fiscal 1998 and for the
foreseeable future thereafter. As a result, the Company's future operating
results are dependent upon continued market acceptance of its Netcool products
and enhancements thereto. See "Risk Factors -- Emerging Service Level Management
Market; Dependence on Telecommunications Carriers and Other Service Providers;
Demand for SLM Products," and "-- Product Concentration."
As of September 30, 1997, Micromuse had licensed its Netcool products to
more than 90 customers worldwide. Micromuse licenses its software through its
direct sales force, OEMs and value added resellers. License revenues from OEMs
and resellers accounted for approximately
20
<PAGE> 22
12%, 8% and 11% of the Company's total license revenues for fiscal 1995, 1996
and 1997 respectively. The Company's ability to achieve significant additional
revenue growth in the future will depend in large part on its success in
recruiting and training sufficient sales and technical services personnel,
maintaining its current distribution relationships and establishing additional
relationships with OEMs, resellers and systems integrators. For a discussion of
the risks associated with expanding distribution, see "Risk Factors -- Need to
Expand Distribution Channels; Dependence on Third-Party Relationships." To date,
the Company has sold its products primarily to telecommunications carriers, ISPs
and investment banks and has generated a significant portion of its revenues
from sources outside the U.S.
Although the Company's revenues have increased in each of the last four
quarters, after giving effect to the restatement of the financial statements due
to the sale of the systems integration business, the Company incurred net losses
in each quarter from inception through the quarter ended September 30, 1997, and
had an accumulated deficit of $9.2 million as of September 30, 1997. In
addition, the Company expects to incur net losses for the next several quarters.
The Company's limited operating history as a software developer, rapid expansion
of operations and headcount and the emerging nature of the market for SLM
software make the prediction of future operating results difficult. Accordingly,
although the Company has recently experienced revenue growth, such growth should
not be considered indicative of future revenue growth, if any, or of future
operating results. There can be no assurance that the Company's business
strategies will be successful or that the Company will be able to achieve
profitability on a quarterly or annual basis. See "Risk Factors -- Limited
Operating History as a Software Company; Anticipated Continuing Losses;
Uncertainty of Future Operating Results" and "-- Variability of Quarterly
Operating Results; Seasonality" and "-- Management of Growth; Need to Improve
Financial Systems and Controls."
21
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statement of operations as a percentage of total revenues, except as indicated,
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------
AS A PERCENTAGE OF TOTAL REVENUES 1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
License..................................................... 74.5% 74.7% 75.0%
Maintenance and services.................................... 25.5 25.3 25.0
----- ----- -----
Total revenues........................................... 100.0 100.0 100.0
Cost of revenues:
License..................................................... 11.3 6.9 5.6
Maintenance and services.................................... 7.0 8.5 11.2
----- ----- -----
Total cost of revenues................................... 18.3 15.4 16.8
----- ----- -----
Gross profit............................................. 81.7 84.6 83.2
----- ----- -----
Operating expenses:
Sales and marketing......................................... 50.3 39.2 96.5
Research and development.................................... 49.0 35.0 22.0
General and administrative.................................. 40.4 22.1 45.7
----- ----- -----
Total operating expenses................................. 139.7 96.3 164.2
----- ----- -----
Loss from operations..................................... (58.0) (11.7) (81.0)
Interest expense.............................................. (7.4) (3.9) (15.1)
Loss before income taxes................................. (65.4) (15.6) (96.1)
Income taxes.................................................. -- 2.2 --
----- ----- -----
Loss from continuing operations.......................... (65.4) (17.8) (96.1)
Income (loss) from discontinued operations, net of taxes...... 49.2 12.6 (1.1)
Gain on disposal of discontinued operations, net of taxes..... -- -- 12.4
Net loss................................................. (16.2) (5.2) (84.8)
===== ===== =====
Accretion on redeemable convertible preferred stock........... -- -- (8.1)
----- ----- -----
Net loss applicable to holders of common stock................ (16.2) (5.2) (92.9)
----- ----- -----
AS A PERCENTAGE OF RELATED REVENUES
Cost of license revenues...................................... 15.1 9.2 7.5
Cost of maintenance and services revenues..................... 27.6 33.7 44.8
</TABLE>
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
Revenues. The Company's total revenues are derived from license revenues
for its Netcool family of products as well as associated maintenance, consulting
and training services revenues. License revenues are recognized upon the
acceptance of a purchase order and shipment of the software if no significant
obligations on the part of the Company remain and collection of the resulting
receivable is probable. Allowances for credit losses and for estimated future
returns are provided for upon shipment. Returns to date have not been material.
Maintenance revenues from ongoing customer support and product upgrades are
deferred and recognized ratably over the term of the maintenance agreement,
typically 12 months. Payments for maintenance fees (on initial order or on
renewal) are generally made in advance and are nonrefundable. Revenues for
consulting and training services are recognized as the services are performed.
See Note 1 of Notes to Consolidated Financial Statements. The Company has
recognized revenue, for all periods presented, in accordance with American
Institute of Certified Public Accountants Statement of Position 91-1 entitled
Software Revenue Recognition.
22
<PAGE> 24
The Company's total revenues increased from $1.4 million in fiscal 1995 to
$4.5 million in fiscal 1996 and to $9.3 million in fiscal 1997. License revenues
increased from $1.1 million in fiscal 1995 to $3.4 million in fiscal 1996 and to
$7.0 million in fiscal 1997, primarily as a result of an increase in the number
of product licenses sold and in average transaction size, reflecting increased
acceptance of Netcool/OMNIbus and expansion of the Company's direct sales
organization. Maintenance and services revenues increased from $369,000 in
fiscal 1995 to $1.1 million in fiscal 1996 and to $2.3 million in fiscal 1997,
as a result of providing maintenance and services to a larger installed base in
each successive year. The percentage of the Company's total revenues
attributable to software licenses has remained relatively constant at 75% in
each of fiscal 1995, 1996 and 1997. Maintenance and services revenues accounted
for 25% of total revenues in each of fiscal 1995, 1996 and 1997.
Revenues from U.S. operations grew from 24% of revenues in fiscal 1995 to
45% of revenues in fiscal 1996 and to 52% of revenues in fiscal 1997, reflecting
the Company's expansion of U.S. operations. International revenues include all
revenues other than from the United States. For a discussion of risks associated
with international sales see "Risk Factors -- Risks Associated with
International Licensing and Operations." See Note 8 of Notes to Consolidated
Financial Statements.
To date, the Company's revenues have resulted primarily from sales to the
telecommunications industry, ISPs, and to investment banks. License revenues
from telecommunications industry customers and ISPs, accounted for 74%, 34% and
58% of the Company's total license revenues in fiscal 1995, 1996 and 1997
respectively. License revenues from investment banks accounted for 14%, 29% and
15% of total license revenues in fiscal 1995, 1996 and 1997, respectively. In
fiscal 1997, entities affiliated with WorldCom and entities affiliated with
British Telecommunications, accounted for 19% and 11%, respectively, of the
Company's total revenue. In addition, entities affiliated with British
Telecommunications accounted for 53% and 14% of the Company's total revenues in
fiscal 1995 and fiscal 1996, respectively. See "Risk Factors -- Sales
Concentration" and Note 9 of Notes to Consolidated Financial Statements.
Cost of Revenues. Cost of license revenues consists primarily of technology
license fees paid to third party software vendors and the costs of software
media, packaging and production. Cost of license revenues decreased as a
percentage of license revenues from 15% in fiscal 1995 to 9% in fiscal 1996, and
to 8% in fiscal 1997, as a result of economies of scale.
Cost of maintenance and services revenues consists primarily of
personnel-related costs incurred in providing maintenance, consulting and
training to customers. Cost of maintenance and services revenues increased as a
percentage of maintenance and services revenues from 28% in fiscal 1995 to 34%
in fiscal 1996, and to 45% in fiscal 1997, principally due to increased
personnel, facilities and travel costs associated with growth in the customer
support and technical services organizations. The Company expects that cost of
maintenance and services will continue to increase in dollar amounts in future
periods as the Company continues to hire additional customer support and
technical services personnel and expands its maintenance consulting and training
activities.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries, commissions and bonuses earned by personnel engaged in
sales, technical presales and marketing activities as well as the costs of trade
shows, public relations, marketing materials and other marketing activities.
Sales and marketing expenses increased from $728,000 in fiscal 1995 to $1.8
million in fiscal 1996 and to $9.0 million in fiscal 1997. The increases in both
fiscal 1996 and fiscal 1997 reflected the hiring of additional personnel in
connection with the building of the Company's sales force. In addition, sales
and marketing expenses increased in fiscal 1997 due to increased technical staff
and marketing personnel, compensation expense related to bonus shares issued,
increased facilities costs and costs associated with expanded marketing
activities. Sales and marketing expenses represented 50%, 39% and 96% of total
revenues in fiscal 1995, 1996
23
<PAGE> 25
and 1997, respectively. The Company expects that sales and marketing expenses
will continue to increase in absolute dollar amounts in future periods as the
Company continues to hire additional sales, technical services and marketing
personnel, to increase marketing activities and to build its indirect sales
channel. See Note 6 of Notes to Consolidated Financial Statements.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and other personnel-related expenses and costs of
computer systems and software development tools. Research and development
expenses increased 123% from $708,000 in fiscal 1995 to $1.6 million in fiscal
1996 and 29% to $2.0 million in fiscal 1997. The increase in research and
development expenses in each year was primarily attributable to increased
personnel, additional facilities and an increase in the computer systems and
software development tools required by the additional personnel. In addition to
expanding its research and development facility in London, the Company
established a research and development team focused on application development
in its New York office in fiscal 1997. Research and development expenses
represented 49%, 35% and 22% of total revenue in fiscal 1995, 1996 and 1997,
respectively. The decrease as a percentage of total revenues was due to growth
in the Company's total revenues. The Company anticipates that it will commit
increasing resources to research and development in future periods to enhance
and extend its core technology and product line and, as a result, expects that
research and development expenses will increase in absolute dollars in future
periods. To date, all research and development costs have been expensed as
incurred. See Note 1 of Notes to Consolidated Financial Statements.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel costs for administration, finance, information
systems and human resources, as well as professional fees. General and
administrative expenses increased from $584,000 in fiscal 1995 to $996,000 in
fiscal 1996 and to $4.2 million in fiscal 1997. These increases in each year
were primarily due to increased staffing, facilities costs and associated
expenses necessary to manage and support the Company's increased scale of
operations and, in fiscal 1997, due to compensation expense related to bonus
shares issued. General and administrative expenses as a percentage of total
revenues were 40% in fiscal 1995, 22% in fiscal 1996 and 46% in fiscal 1997. The
decrease of general and administrative expenses as a percentage of total
revenues from fiscal 1995 to 1996 was primarily attributable to growth in total
revenues. The increase in general and administrative expenses as a percentage of
total revenues from fiscal 1996 to fiscal 1997 was primarily attributable to
personnel-related costs and to the payment of professional fees for various
matters, including the Reorganization associated with the transfer of the
Company's headquarters from London to San Francisco. The Company expects that
its general and administrative expenses will increase in absolute dollar amounts
as the Company expands its administrative staff, adds infrastructure and incurs
additional costs related to the growth of its business and related to being a
public company, such as expenses related to directors' and officers' insurance,
investor relations programs and increased professional fees. See Note 6 of Notes
to Consolidated Financial Statements.
Interest Expense. The increase in interest expense from fiscal 1996 to
fiscal 1997 was primarily attributable to the imputed interest relating to the
issuance of a warrant to purchase shares of Series A Preferred Stock issued in
connection with the provision of a line of credit to the Company. See Note 6 of
Notes to Consolidated Financial Statements.
Provision for Income Taxes. As of September 30, 1997, the Company had
approximately $2.4 million and $1.4 million of net operating loss carryforwards
for federal and state tax purposes. The federal net operating loss carryforwards
expire in 2012, and the state net operating loss carryforwards expire primarily
in 2002. Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change" as defined in Section 382 of the Internal Revenue Code. The Company has
not yet determined whether an ownership change occurred due to significant stock
transactions in each of the reporting years disclosed. If an ownership change
has occurred, utilization of the net operating loss
24
<PAGE> 26
carryforwards could be significantly reduced. Additionally, loss carryforwards
of either Micromuse Inc. or Micromuse USA Inc. cannot be utilized against future
profits generated by the other company. As of September 30, 1997, the Company
also had approximately $1.8 million and $200,000 of loss carryforwards in
England and Australia, respectively. The Company has provided a full valuation
allowance on the deferred tax asset, consisting primarily of net operating loss
carryforwards, because of uncertainty regarding its realizability. See Note 7 of
Notes to Consolidated Financial Statements.
Discontinued Operations. In July 1997, the Company adopted a formal plan to
discontinue its Systems Integration division based in England. In September the
Company sold the division for approximately $400,000 in cash, net of fees. The
disposition of the division in September 1997 has been accounted for as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30 and prior period consolidated financial statements have been restated to
reflect the discontinuation of the Systems Integration business. Revenue from
discontinued operations was $16.6 million, $14.0 million and $15.7 million,
respectively in fiscal 1995, 1996 and 1997. The income (loss) from discontinued
operations of $711,000, $569,000, and ($104,000) in fiscal 1995, 1996, and 1997,
respectively, represents the operation's operating income, net of taxes. The
gain on disposal of discontinued operations of $1.2 million in fiscal 1997
represents the gain on disposal of the operation including net income from
operations of $256,000 from the measurement date to the disposal date. See Note
2 of Notes to Consolidated Financial Statements.
25
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly consolidated
statement of operations data for each quarter of fiscal 1996 and 1997, as well
as such data expressed as a percentage of the Company's total revenues for the
periods indicated. In the opinion of management, this information has been
presented on the same basis as the consolidated financial statements appearing
elsewhere in this Prospectus, and all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with the
consolidated financial statements of the Company and related notes thereto
appearing elsewhere in this Prospectus. The operating results for any quarter
should not be considered indicative of results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............. $ 442 $ 528 $ 684 $ 1,720 $ 802 $ 1,095 $ 2,094 $ 2,977
Maintenance and
services.......... 67 234 322 518 424 616 590 694
----- ----- ------ ------ ------ ------- ------- -------
Total revenues.... 509 762 1,006 2,238 1,226 1,711 2,684 3,671
----- ----- ------ ------ ------ ------- ------- -------
Cost of revenues:
License............. 50 75 54 132 61 108 155 199
Maintenance and
services.......... 28 92 115 149 166 180 303 393
----- ----- ------ ------ ------ ------- ------- -------
Total cost of
revenues........ 78 167 169 281 227 288 458 592
----- ----- ------ ------ ------ ------- ------- -------
Gross profit.......... 431 595 837 1,957 999 1,423 2,226 3,079
Operating expenses:
Sales and
marketing......... 241 294 528 705 1,004 1,951 1,714 4,301
Research and
development....... 267 371 410 534 303 383 596 760
General and
administrative.... 143 142 272 439 467 1,553 714 1,510
----- ----- ------ ------ ------ ------- ------- -------
Total operating
expenses........ 651 807 1,210 1,678 1,774 3,887 3,024 6,571
----- ----- ------ ------ ------ ------- ------- -------
Income (loss) from
operations.......... (220) (212) (373) 279 (775) (2,464) (798) (3,492)
Interest income
(expense)........... (51) (44) (53) (31) 26 (450) (464) (516)
----- ----- ------ ------ ------ ------- ------- -------
Income (loss) before
income taxes........ (271) (256) (426) 248 (749) (2,914) (1,262) (4,008)
Income taxes.......... -- 59 30 11 -- -- -- --
----- ----- ------ ------ ------ ------- ------- -------
Income (loss) from
continuing
operations.......... (271) (315) (456) 237 (749) (2,914) (1,262) (4,008)
Discontinued
operations:
Income (loss) from
discontinued
operations, net of
taxes............. 211 218 197 (57) (120) 18 (2) --
Gain on disposal of
discontinued
operations, net of
taxes............. -- -- -- -- -- -- -- 1,161
----- ----- ------ ------ ------ ------- ------- -------
Net income (loss)..... (60) (97) (259) 180 (869) (2,896) (1,264) (2,847)
Accretion on
redeemable
convertible
preferred stock..... -- -- -- -- -- (89) (264) (402)
----- ----- ------ ------ ------ ------- ------- -------
Net income (loss)
applicable to
holders of common
stock............... $ (60) $ (97) $ (259) $ 180 $ (869) $ (2,985) $ (1,528) $ (3,249)
===== ===== ====== ====== ====== ======= ======= =======
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............... 86.8% 69.3% 68.0% 76.9% 65.4% 64.0% 78.0% 81.1%
Maintenance and
services............ 13.2 30.7 32.0 23.1 34.6 36.0 22.0 18.9
----- ----- ----- ----- ----- ----- ----- -----
Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License............... 9.8 9.8 5.4 5.9 5.0 6.3 5.8 5.4
Maintenance and
services............ 5.5 12.1 11.4 6.7 13.5 10.5 11.3 10.7
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues.. 15.3 21.9 16.8 12.6 18.5 16.8 17.1 16.1
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 84.7 78.1 83.2 87.4 81.5 83.2 82.9 83.9
Operating expenses:
Sales and marketing... 47.3 38.6 52.5 31.5 81.9 114.0 63.8 117.2
Research and
development......... 52.5 48.7 40.8 23.8 24.7 22.4 22.2 20.7
General and
administrative...... 28.1 18.6 27.0 19.6 38.1 90.8 26.6 41.1
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.......... 127.9 105.9 120.3 74.9 144.7 227.2 112.6 179.0
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............ (43.2) (27.8) (37.1) 12.5 (63.2) (144.0) (29.7) (95.1)
Interest income
(expense)............. (10.0) (5.8) (5.2) (1.4) 2.1 (26.3) (17.3) (14.1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes.......... (53.2) (33.6) (42.3) 11.1 (61.1) (170.3) (47.0) (109.2)
----- ----- ----- ----- ----- ----- ----- -----
Income taxes............ -- 7.7 3.0 0.5 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
continuing
operations............ (53.2) (41.3) (45.3) 10.6 (61.1) (170.3) (47.0) (109.2)
Discontinued operations:
Income (loss) from
discontinued
operations, net of
taxes............... 41.4 28.6 19.6 (2.6) (9.8) 1.0 (0.1) --
Gain on sale of
discontinued
operations, net of
taxes............... -- -- -- -- -- -- -- 31.7
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (11.8) (12.7) (25.7) 8.0 (70.9) (169.3) (47.1) (77.5)
Accretion on redeemable
convertible preferred
stock................. -- -- -- -- -- (5.2) (9.8) (11.0)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)
applicable to holders
of common stock....... (11.8) (12.7) (25.7) 8.0 (70.9) (174.5) (56.9) (88.5)
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Revenues. The Company's total revenues have increased in each quarter
presented other than the quarter ended December 31, 1996. The increases have
been generally due to increased acceptance of the Company's Netcool products,
expansion of the Company's direct sales and technical presales organizations,
increased transaction sizes and increased maintenance revenues reflecting the
growth in the installed base. The decrease in total revenues reflected in the
quarter ended December 31, 1996 was primarily attributable to the Company's
sales incentive program then in place, which encouraged fiscal year-end sales in
the preceding quarter. The Company expects such year-end-related fluctuations to
be reduced in future periods due to changes in the Company's sales incentive
program as well as to an anticipated increase in the percentage of revenues
through indirect channels, which are less subject to year-end fluctuations. If
the changes in the sales incentive program do not impact the sales process as
expected or the increased sales through indirect channels do not occur, year-end
fluctuations in the quarterly results may continue.
27
<PAGE> 29
Operating Expenses. Operating expenses have generally increased in absolute
dollar amounts over the quarters shown due to the Company's increased staffing
in sales and marketing, product development and general and administrative
functions. In the quarter ended March 31, 1997, sales and marketing expenses
increased due to compensation expense related to shares bonused and an increase
in the number of sales and marketing personnel. General and administrative
expenses increased during the same quarter due to compensation expense related
to bonus shares issued and professional fees associated with the Reorganization.
In the quarter ended September 30, 1997, sales and marketing expense increased
due to increased commissions on higher bookings and a significant increase in
the number of sales and marketing personnel. General and administrative expenses
increased in the same quarter due to increased professional fees. The Company's
total operating expenses as a percentage of total revenues for the quarter ended
September 30, 1996 were lower than the preceding or following periods presented
as a result of the substantial increase in total revenues during the quarter
primarily attributable to the Company's sales incentive program then in place,
which encouraged fiscal year-end sales in the preceding quarter. The Company's
operating expenses represented a higher percentage of total revenues in the
quarters ended December 31, 1997, March 31, 1997, and September 30, 1997 than in
the quarter ended June 30, 1997 as a result of: (i) greater growth in revenues
during the quarter ended June 30, 1997; (ii) slower growth in personnel-related
expenses during the quarter ended June 30, 1997; and (iii) professional fees
paid related to various matters, including the Company's Reorganization, during
the quarters ended December 31, 1997, March 31, 1997, and September 30, 1997.
Interest Expense. Interest expense in the quarters ended March 31, 1997,
June 30, 1997 and September 30, 1997 increased primarily due to the imputed
interest related to the issuance of the Series A Warrant issued in connection
with the provision of a line of credit to the Company and due to greater
borrowings under a credit facility the Company maintained with National
Westminster Bank.
FACTORS AFFECTING QUARTERLY OPERATING RESULTS.
The Company's quarterly operating results have fluctuated significantly in
the past, and will likely continue to fluctuate in the future, as a result of a
number of factors, many of which are outside the Company's control. These
factors include changes in the demand for the Company's software products and
services; the size and timing of specific sales; the timing of new hires; the
level of product and price competition that the Company encounters; changes in
the mix of, and lack of demand from, distribution channels through which
products are sold; the length of sales cycles; spending patterns and budgetary
resources of its customers on network management software solutions; the success
of the Company's new customer generation activities; introductions or
enhancements of products, or delays in the introductions or enhancements of
products, by the Company or its competitors; market acceptance of new products;
the Company's ability to anticipate and effectively adapt to developing markets
and rapidly changing technologies; the mix of products and services sold;
changes in the Company's sales incentives; changes in the renewal rate of
support agreements; the mix of international and domestic revenue; product life
cycles; software defects and other product quality problems; the Company's
ability to attract, retain and motivate qualified personnel; changes in the mix
of sales to new and existing customers; the extent of industry consolidation;
expansion of the Company's international operations; and general domestic and
international economic and political conditions. The timing of large individual
sales has been difficult for the Company to predict, and large individual sales
have, in some cases, occurred in quarters subsequent to those anticipated by the
Company. There can be no assurance that the loss or deferral of one or more
significant sales would not have a material adverse effect on the Company's
quarterly operating results. In addition, the Company's business has experienced
and may continue to experience significant seasonality. Historically, a
disproportionate amount of the Company's annual revenues have been generated by
sales of its products during the Company's fiscal fourth quarter. There can be
no assurance that this trend will not continue.
28
<PAGE> 30
The Company's software products are typically shipped when orders are
received, and consequently, license backlog at the beginning of any quarter has
typically represented only a small portion of that quarter's expected revenue.
In addition, the Company typically realizes a significant portion of license
revenue in the last month of a quarter, frequently in the last weeks or even
days of a quarter. As a result, license revenue in any quarter is difficult to
forecast because it is substantially dependent on orders booked and shipped in
that quarter. Moreover, the Company's sales cycles, from initial evaluation to
delivery of software, vary substantially from customer to customer. In addition,
the Company's expense levels are based in part on its expectations of future
orders and sales, which, given the Company's limited operating history, are
extremely difficult to predict. A substantial portion of the Company's operating
expenses are related to personnel, facilities, and sales and marketing programs.
This level of spending for such expenses cannot be adjusted quickly and is,
therefore, relatively fixed in the short term. If revenue falls below the
Company's expectations in a particular quarter, the Company's operating results
could be materially adversely affected. See "Risk Factors -- Lengthy Sales
Cycle."
In the Company's standard license agreements, the Company warrants to
licensees that its software routines and programs are Year 2000 compliant (i.e.
that they accurately process date-related data within any century and between
two or more centuries). Although the Company believes its software products are
Year 2000 compliant, there can be no assurance that the Company's software
products contain all necessary software routines and programs necessary for the
accurate calculation, display, storage and manipulation of data involving dates.
If any of the Company's licensees experience Year 2000 problems, such licensee
could assert claims for damages against the Company. Any such litigation could
result in substantial costs and diversion of the Company's resources even if
ultimately decided in favor of the Company. In addition, many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase software products such as those offered by the Company.
The occurrence of any of the foregoing could have a material adverse effect on
the Company's business, operating results or financial condition. See "Risk
Factors -- Year 2000 Compliance."
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is possible that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would likely be materially
adversely affected. See "Risk Factors -- Variability of Quarterly Operating
Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through bank debt,
private sales of preferred equity securities totaling $20.8 million, cash
generated from discontinued operations and capital equipment lease lines. In
March 1997, the Company sold shares of Series B Preferred Stock for an aggregate
of $4.9 million and entered into a credit agreement (the "Credit Agreement")
that provided the Company with a $3.0 million revolving credit line that
terminates upon the earlier of the Offering or after five years. In connection
with the Credit Agreement, the Company issued a warrant to purchase shares of
Series A Preferred Stock for an aggregate exercise price of $3.0 million that
terminates upon the Offering if not exercised prior thereto. During fiscal 1997,
the Company had borrowed and repaid a total of $1.0 million under the Credit
Agreement and there was no balance outstanding thereunder as of September 30,
1997. In September 1997, the Company sold shares of Series C Preferred Stock for
an aggregate of $15.9 million. In November 1997, the Company repurchased shares
of Common Stock for $5.0 million. As of Septem-
29
<PAGE> 31
ber 30, 1997, the Company had $13.7 million in cash and cash equivalents. See
"Certain Transactions" and Notes 4, 6 and 11 of Notes to Consolidated Financial
Statements.
Net cash used in operating activities in fiscal 1995 was primarily
attributable to a net loss and increases in accounts receivable and prepaid
expenses and other current assets. Net cash provided by operating activities in
fiscal 1996 was primarily attributable to growth in accounts payable and
deferred revenue, as well as the non-cash nature of depreciation and
amortization, which more than offset a net loss and growth in accounts
receivable and prepaid expenses and other current assets. Net cash used in
operating activities in fiscal 1997 was primarily attributable to a net loss of
$7.9 million.
Cash flows used in investing activities in each of fiscal 1995, 1996 and
1997 were attributable to capital expenditures. Net cash provided by financing
activities was primarily attributable to proceeds from a bank overdraft and
short-term notes in fiscal 1995, fiscal 1996 and to proceeds from the issuance
of redeemable convertible preferred stock in fiscal 1997.
As of September 30, 1997, the Company's principal commitments consisted of
obligations under operating leases. As of September 30, 1997, the Company had a
$300,000 capital lease line which was not used. See Note 10 of Notes to
Consolidated Financial Statements.
The Company believes that the net proceeds received by the Company from
this Offering, together with it current cash balances, its capital equipment
lease facility and the cash flows generated by operations, if any, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for the next 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to sell additional equity or convertible debt securities or
obtain credit facilities. The sale of additional equity or debt securities could
result in additional dilution to the Company's stockholders. A portion of the
Company's cash may be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. From time to
time, in the ordinary course of business, the Company evaluates potential
acquisitions of such businesses, products or technologies. The Company has no
current plans, agreements or commitments, and is not currently engaged in any
negotiations with respect to any such transaction.
30
<PAGE> 32
BUSINESS
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management ("SLM") -- the effective monitoring and management of multiple
elements underlying an Information Technology ("IT") infrastructure, including
network devices, computing systems and applications, and the mapping of these
elements to the business services they impact. The Company's Netcool product
suite collects, normalizes and consolidates high volumes of event information
from heterogeneous network management environments into an active database which
de-duplicates and correlates the resulting data in real time, and then rapidly
distributes graphical views of the information to operators and administrators
responsible for monitoring service levels. Netcool's unique architecture allows
for the rapid, programmerless association of devices and specific attributes of
those devices to the business services they impact. This readily enables
administrators to create and modify their service views during systems
operations to monitor particular business services, rapidly identify which users
are affected by which network faults, pinpoint sources of network problems,
automate operator responses, facilitate problem resolution and report on the
results.
The Company's initial target market has been organizations with large,
technically complex and heterogeneous networks, the majority of whom have been
in the telecommunications, Internet Service Provider and investment banking
markets. The Company markets and distributes to these potential customers
through its own sales force, OEMs, value added resellers and systems
integrators. The Company has distribution agreements with Bay Networks, Cisco
Systems, Ericsson, N.E.T., and Vanstar. As of September 30, 1997, the Company
had over 90 customers operating in and serving a variety of industries.
Customers include America Online, British Telecommunications, Cable and
Wireless, Cellular One, First Data Resources, Genuity, GE Information Services,
GTE Internetworking, Merrill Lynch, MindSpring, Morgan Stanley, Netcom, Pacific
Bell, PSINet, Siemens, and WorldCom/MFS/UUNet.
INDUSTRY BACKGROUND
IT has become increasingly mission critical for businesses as vital
communications, control and information services depend on reliable IT
performance. As a result, corporate management is increasingly requiring that IT
staffs meet pre-defined availability and performance levels for computing
processes, commonly known as service level agreements ("SLAs"). At the same
time, efficient management of IT infrastructure has become more difficult as
corporations have migrated from mainframe-based to distributed, client/server
computing environments resulting in complex and heterogeneous computing systems,
applications and networks. The advent of the Internet, intranets and extranets
has exacerbated this problem by increasing corporate reliance on IT while
accelerating the adoption of client/server distributed computing and adding
equipment complexities such as remote access technologies. In addition,
corporations must address rapid and unpredictable change in technology, in the
composition of their networks and in the demands of the business environment. As
a result, the ability to manage complex, growing and rapidly changing IT
environments cost-effectively is becoming a key driver of business performance
and, in some cases, a basis of competitive advantage.
The importance of effective, adaptable management of IT infrastructure is
particularly acute for organizations in the business of providing network
services, such as telecommunications carriers and ISPs. The size and complexity
of public networks has grown rapidly in response to the explosion of data
traffic caused by the Internet, intranets and extranets. Service providers now
must manage voice, data and video traffic over wireline or wireless
architectures by integrating numerous proprietary, legacy and emerging
technologies, such as ATM, CDMA, Frame Relay, GSM, IP, ISDN, SNA, SONET/SDH,
TDM, WDM, X.25 and xDSL, across vast geographies. At the same time, deregulation
and privatization have produced an environment of intense competition in these
markets. For example, fierce competition in the Internet access market has
forced ISPs to offer customers low, flat-rate, unlimited usage programs. In this
new environment, service
31
<PAGE> 33
providers are seeking to maximize profits and differentiate themselves based on
the breadth, quality, flexibility and cost of their services. One method of
differentiation used by service providers is the ability to offer customized
SLAs, guaranteeing the customer end-to-end service availability and performance.
Service Level Management ("SLM") is the effective monitoring and management
of multiple elements underlying an IT infrastructure, including network devices,
computing systems and applications, and the mapping of these elements to the
SLAs they impact. Efficient SLM allows service providers to associate these
elements with the services specified in SLAs and to maximize utilization of
their IT infrastructures. With SLM, network service providers can both manage
their large internal networks and offer additional network services to
corporations that require ongoing service guarantees. The market for these
services, known as Managed Network Services or Network Operations Outsourcing,
has grown rapidly as corporations outsource the management and operation of
their LANs and WANs to service providers, and was estimated to be approximately
$5 billion in 1996, and projected to grow to approximately $11 billion in 2001,
according to IDC. In the enterprise, SLM permits IT staffs to guarantee network
availability and performance, perform capacity planning, predict problems and
maintain SLA-defined service levels for mission critical services such as Wall
Street trading, credit card verification and electronic commerce. Cost-
effectively delivering the services specified in SLAs through the management of
IT infrastructure is the goal of SLM.
Effective SLM requires:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------
COLLECTION OF DATA MANAGEMENT OF SERVICES MANAGEMENT OF CHANGE
- --------------------------------------------------------------------------------------------
- Collect data in real time - Map and associate elements - Adapt service profiles to
to services changes in IT or business
priorities during systems
operations
- Collect data from every - Create service profiles - Enable rapid provision of
element and management customized to SLAs new services
platform in an IT
infrastructure
- Process high volume of - Centralized monitoring of - Integrate new IT elements
data elements affecting seamlessly into profiles
services
- Filter redundancies - Remotely diagnose and - Scale operations to meet
resolve service impact network and business
demands
- --------------------------------------------------------------------------------------------
</TABLE>
Software solutions that deliver these benefits can provide customers rapid
return on investment ("ROI") on their SLM software purchases by enabling
reductions in the cost of management and ownership of these systems, as well as
by generating additional financial returns from existing IT infrastructures.
Traditional solutions typically have been unable to deliver SLM cost
effectively. Historically, communications providers have designed internal
network management systems based on proprietary applications. It has proven
difficult to integrate new technologies into these proprietary solutions, and
such systems often require costly development teams to maintain and update. In
addition, some organizations have used multiple third-party domain-based
management systems to monitor and manage all the elements that comprise a
service. However, since these systems only provide component-level views of a
portion of the IT infrastructure, they are unable to provide a comprehensive
view of all of the elements that may affect the services being offered. More
recently, third parties have designed operations support and network management
systems to integrate all the various components of a service. However, these
systems frequently require long development cycles and extensive consulting
projects to implement and therefore hinder an organization's ability to adapt
rapidly to changes in their business environment. As a result, these
32
<PAGE> 34
applications have generally proved either to be incapable of providing the level
of aggregation necessary for end-to-end SLA compliance, incapable of monitoring
the technical complexity and volume of events produced by complex and
heterogeneous networking environments, or too cumbersome to allow service
providers to cope with the increasing rate at which network services must be
deployed. The result has been the inability of such traditional approaches to
deliver SLM cost effectively. Moreover, corporate management, confronted with
environments of rapid change and intense competition, is increasingly demanding
end-to-end SLM solutions that deliver rapid ROI.
THE MICROMUSE SOLUTION
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable SLM. The
Company's Netcool product suite collects, normalizes and consolidates high
volumes of event information from heterogeneous network management environments
into an active database which de-duplicates and correlates the resulting data in
real time, and then rapidly distributes graphical views of the information to
operators and administrators responsible for monitoring service levels.
Netcool's unique architecture allows for the rapid, programmerless association
of devices and specific attributes of those devices to the business services
they impact. This readily enables administrators to create and modify their
service views during systems operations to monitor particular business services,
rapidly identify which users are affected by which network faults, pinpoint
sources of network problems, automate operator responses, facilitate problem
resolutions and report on the results.
The Company's products are specifically designed for ease of use and
configuration and for the efficient management of and rapid deployment in
complex, evolving, large scale mission critical networks. In addition, service
providers can also use Netcool to remotely manage customer IT infrastructures
and provide their customers with views of the status of their IT environments.
The Company believes that Netcool products provide customers a rapid ROI by
offering: (i) cost-effective solutions with shorter implementation times and a
high level of configurability; (ii) efficient solutions that leverage customers'
existing network management products and services; and (iii) scalable solutions
that enable both the expansion and enhancement of current services as well as
the rapid deployment of new services to end users.
The Netcool product suite has the following features designed to enable the
cost-effective delivery of Service Level Management:
Efficient Management of Heterogeneous IT Infrastructure Elements. The
Company's Netcool suite of products utilizes sophisticated software agent
technology to gather event information from network devices and network
management platforms regardless of the transmission technology, management
protocols or media used in the network. After receiving all this data, Netcool's
Probes and object-oriented, memory-resident, active database technology
automatically normalizes and consolidates all events, de-duplicates repeated
events and then correlates the remaining information. Netcool enables the easy
association of events with services, and its sophisticated filtering
capabilities allow operators to focus on mission critical services and elements
of the network. Operators can manage their entire network and related services
though Netcool's common user interface. This approach to network management
helps to protect a customer's investment in their current systems. In addition,
Netcool helps to increase the efficiency of operators by minimizing the volume
and complexity of data generated from a customer's entire network and by
allowing additional underlying technologies to be implemented on the network
without costly operator training.
Rapid Deployment and Adaptability to Evolving IT Infrastructure. Due to its
unique design, the limited amount of programming necessary to install and
configure the product, and the extensive range of pre-existing Probes, Netcool
can be typically implemented in a matter of weeks into complex networking
environments. Netcool allows network administrators to quickly obtain an
enterprise-wide view of their networks and to manage fault data
"out-of-the-box." In addition,
33
<PAGE> 35
new Probes can be developed and deployed quickly during systems operation, which
allows for rapid and easy configuration of Netcool to meet new or changing
network environments. Furthermore, Netcool can easily adapt existing
associations to changes in network elements or business priorities. These
features allow customers to rapidly expand, scale and adapt to their evolving
networks without losing management control.
Programmerless Configuration and Ease of Use. Netcool's object-oriented
design enables programmerless configuration of the product through familiar
"drag-and-drop" principles and graphical user interfaces. As a result, network
administrators are easily able to create, modify and monitor specific views of
the status of any segment of the network during systems operation. Such rapid
configuration allows service providers to quickly introduce network services and
provision customized SLAs. Netcool's rapid installation and ease of
configuration minimizes the need for users to seek outside consultation.
Scalability Across Customer IT Infrastructure. Netcool's advanced
architecture allows customers to scale their networks without impairing their
ability to monitor and manage their networks. Netcool's scalability addresses
network management needs relating to performance, capacity, geography and
corporate structure, and is the reason many of the world's largest
telecommunications carriers and ISPs have selected Netcool as their management
platform. For example, one Netcool customer uses Netcool to manage in excess of
250,000 network devices.
Rapid Return on Investment. Netcool's products, which are designed for
rapid deployment and implementation, can provide a rapid ROI to customers.
Netcool products are generally operational in a matter of weeks. For example, a
leading ISP implemented Netcool throughout its U.S. network operating center in
one week. In addition, Netcool leverages existing infrastructure investment by
providing a common user interface that can be implemented alongside existing
management products such as HP OpenView, IBM NetView, Microsoft Windows NT,
Seagate Nervecenter Pro and Sun SunNet Manager, as well as tightly integrating
helpdesk products from companies like Remedy Corporation into the SLM
environment. Finally, Netcool products reduce the number of network operations
personnel required to effectively manage an enterprise-wide distributed network.
For example, Netcool permitted MindSpring to double the number of subscribers it
serves and the number of network devices it manages without increasing network
operations personnel.
STRATEGY
Micromuse's objective is to maintain its leadership position in the market
for Service Level Management software solutions. To achieve this objective,
Micromuse is pursuing the following strategies:
Maintain Focus on Telecommunications Carriers, ISPs and Other Providers of
Managed Network Services. Telecommunications carriers, ISPs and other network
service providers operate some of the largest, most complex and fastest growing
IT infrastructures in the world. The Company originally developed Netcool to
deliver SLM to these service providers. As a result, these organizations can use
Netcool both to manage their own highly complex networks and to remotely manage
customer LAN and WAN IT infrastructures and provide their customers with views
of the status of their IT environments. With many large organizations
outsourcing network services and requiring more sophisticated SLAs, the Company
believes that continuing to target MNS providers, including telecommunications
carriers, ISPs, systems integrators and outsourcers, can accelerate expansion of
the Company's existing customer base. In addition, the Company believes that the
size, performance requirements and evolving nature of these companies' IT
infrastructures will provide direction for the Company's future products and SLM
solutions.
Expand Global Distribution Channels. The Company believes that Netcool's
ease of operation, design, adaptability and pricing make it well suited for
resale through indirect channels. Accordingly, the Company has complemented its
direct sales effort with a dedicated indirect sales force
34
<PAGE> 36
which focuses on distribution relationships with selected OEMs, value added
resellers, and systems integrators and intends to expand these channels. Current
distributors of the Company's products include Bay Networks, Cisco, Ericsson,
Network Equipment Technologies, Vanstar Corporation, and Wandel and Goltermann.
In addition, the Company intends to expand its direct sales force, currently
located in San Francisco, Boston, Chicago, Dallas, New York, Los Angeles,
Washington, D.C., London and Sydney.
Increase Penetration of Existing Customer Base. The Company has
historically generated a significant amount of revenue from sales to existing
customers. Opportunities to increase sales to existing customers include: (i)
expansion of initial Netcool deployments; (ii) sales of new products to current
Netcool users; and (iii) the adoption of Netcool to manage networks of other
departments or subsidiaries of existing customers. The Company's current
customer base includes organizations with large, fast growing IT infrastructures
that present significant additional opportunity to the Company.
Extend Technical Leadership. Netcool contains a real-time, object-oriented,
memory-resident, active database optimized for the collection and processing of
event information from hundreds of thousands of computing devices. All data
de-duplication, correlation and response automation occur within the Netcool
active database. This design allows customers to collect and process all the
information in their networks rapidly and then view only the necessary subset of
that information needed to manage a particular SLA during systems operation. In
addition, the Netcool architecture attaches descriptive information to network
events which readily enables the association of these events with multiple
services. The Company believes that these technical advantages provide customers
with critical, real-time information about their networks and services and allow
them to implement Netcool faster than competing products. The Company plans to
leverage this key technical advantage into the development of new products
through its internal research and development efforts and partnerships with
leading research institutes such as Cambridge University Centre for
Communication Systems Research.
Leverage and Enhance Core Customer Relationships. The Company has
historically developed, and plans to continue to develop, its products in close
cooperation with its key customers. This is designed to enable the Company to
deliver timely solutions that effectively fulfill market requirements in rapidly
changing technology and business environments. For example, the Company worked
with a service provider to offer a customer network management service by
implementing Netcool to deliver views of the customer's managed network directly
to the customer and to associate customer circuit information with events. In
addition to these types of efforts, the
Company plans to continue its annual user groups and customer support programs
in an effort to continue to further understand market requirements.
Leverage Third-Party Applications. The Company plans to enhance the
functionality of its products by continuing to develop interfaces to
complementary third-party software applications. These applications include
Remedy's helpdesk system, standard relational database management systems, the
performance management systems of Concord Communications and Kaspia Systems, and
the network management application of Seagate Software. In addition, the Company
intends to further integrate the Netcool product suite with other
broadly-deployed management platforms such as HP OpenView, Sun SunNet Manager,
IBM NetView and Seagate NerveCenter Pro.
PRODUCTS AND TECHNOLOGY
Micromuse provides a suite of software products that enable SLM. The
Company's Netcool SLM solution includes Netcool/OMNIbus and its components for
event management, Netcool/ Reporter for service level reporting, and associated
related technical services. Netcool/OMNIbus collects, consolidates,
de-duplicates and correlates information from a wide range of network management
platforms and devices and then presents user-configurable views of subsets of
35
<PAGE> 37
network data. Netcool/Reporter uses this data to provide real-time and
historical reporting. Since customers can quickly associate each network element
(a network device, computing system or application) with a particular service,
Netcool products enable companies to efficiently set up, monitor, manage and
report on SLAs.
An illustration of the architecture of Netcool is set forth below:
LOGO
NETCOOL/OMNIBUS. Netcool/OMNIbus is based on a three-tier, client/server
architecture and is the core application of the product suite. Netcool/OMNIbus
consists of four components: Netcool/OMNIbus Probes, the Netcool/OMNIbus
ObjectServer, Netcool/OMNIbus Desktops, and Netcool/OMNIbus Gateways. Probes
collect event information from existing network management systems, as well as
event messages from network devices, computing systems, applications or legacy
systems. The Probes then normalize and feed this event data into the
ObjectServer, an object-oriented, memory-resident active database. At the
ObjectServer, the event data is de-duplicated, correlated and associated with
other event data. By manipulating the data in the ObjectServer through the
Desktops, users can design customized views of event data to monitor segments of
the network or services that span the entire network. Gateways permit data to be
shared between multiple ObjectServers for load balancing or fail-over
facilities, exported to common relational database management systems (Oracle or
Sybase) for historical service level views, or integrated with other
applications such as Remedy's helpdesk application.
Probes. Probes are the first tier of Netcool's three-tier architecture.
Probes are primarily passive software interfaces that collect network event data
(including messaged network data such as faults, alerts, and traps) from
elements on the network or from domain-based network management systems. These
Probes can collect information presented from either management platforms and
devices (e.g. HP OpenView, Cabletron SPECTRUM, Cisco StrataView Plus, and
Newbridge 46020) and standard protocols such as screen oriented ASCII character
streams, application log files (e.g., syslog) TL1, SMNP, or any other method of
management information provision. They recognize Management Information Base
("MIB") information from switches and routers from leading vendors, including
Bay Networks, Cabletron, Cisco, 3Com and N.E.T. Probes use rules and lookup
tables to categorize and add information to events. As a result, network data
collected by the Probes is normalized into a common alert format and then passed
to the ObjectServer.
36
<PAGE> 38
The Company has developed over 39 pre-built Probes, and a Probe API
development kit is available for customers to build probes for specialized
in-house or legacy systems. The following table lists Micromuse's existing
Probes:
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
NETCOOL PROBES
- ----------------------------------------------------------------------------------------------------------------
Agile ATM Switch HP OpenView KBU Fivemere Ping Probe
Management IT/Operations Microsoft Windows NT Polycentre Watchdog
Ascom TimePlex Center v.4.x Event Log RoboMon Element
TimeView/2000 HP OpenView NNM Modular Probe Manager Probe
Cabletron SPECTRUM v.3.31 NET IDNX SimNet
Cisco StrataView v8.4 HP OpenView NNM NET Open/5000 Solstice Enterprise
Ericsson ACP1000 v.4.x HP Netlabs Manager
Ericsson MD110 OpenView NNM Newbridge 46020 Solstice SNM 2.3
Fibermux LightWatch v.5.x Nortel TN-MS Element Sybase Table
Generic Probe HTTP Command Controller for TN-1X Telematics Switch
GPT EMOS Log Format Netcool Probes Trapd (SNMP) Probe
Heartbeat Probe HTTP Server Error Log Operator Communications Unix Syslog Probe
HP OpenView IBM NetView Facility Probe
IT/Operations Informix Table Oracle Table
Center v.3.x
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
ObjectServer. The ObjectServer, which is the second tier of Netcool's
three-tier architecture, is a real-time, object-oriented, memory-resident,
active database which stores and manages all the collected network events. The
ObjectServer consolidates, associates and de-duplicates normalized data from the
Probes, converting events, such as faults and alarms, into event objects that
can be easily manipulated to create associations and filters. The active
components of the ObjectServer include its de-duplication capability and its
ability to correlate event objects with other event objects, make decisions on
information, automate operator responses and facilitate problem resolution. The
ObjectServer, which has been designed and optimized for handling large volumes
of events messages, can process hundreds of alarms per second and can collect
data from multiple Probes concurrently. The ObjectServer architecture also
permits multiple authenticated users to view all the events throughout the
enterprise. In addition, since one network fault can impact several locations in
a distributed environment and can therefore trigger multiple events, the
ObjectServer is designed to automatically de-duplicate repeated events so that
network operators can easily identify the root cause. The Company believes that
the ObjectServer architecture provides the Company with a competitive advantage
in both the speed with which it collects network events and the ability to
associate event information with the services it manages.
Desktops. A Desktop, the third tier in Netcool's three-tier architecture,
is an integrated suite of software tools designed for use by operators and
administrators to create filters, customize views of network event data, monitor
several services simultaneously, and automatically resolve service problems.
Network operators can quickly build filters by responding to simple onscreen
queries about user preferences. They can also associate events with services
through the use of simple "drag-and-drop" technology that automatically creates
the Boolean logic and SQL required to retrieve the data from the ObjectServer.
In this way, non-programmers can manipulate the data in the ObjectServer to
custom-design views of event data. In addition, each operator can use Desktops
to resolve element problems directly or automate responses to common network
problems when critical thresholds are reached.
Operators can use Desktops to monitor services through either EventLists,
the EventList Console or ObjectiveView. The EventList presents a configurable
spreadsheet-like view of the de-duplicated faults and acts as the primary
interface through which operators access problem resolution tools. The EventList
Console depicts a concise view of the EventLists for several services while the
ObjectiveView provides a graphical view of the network or services which depend
upon it. Administrators can use Desktops to configure the ObjectServer and the
operator's
37
<PAGE> 39
desktop environments. Desktops run on multiple computing platforms, including
UNIX/Motif, Microsoft Windows NT, or Web browsers via Java applications.
Gateways. Gateways are interfaces to other Micromuse products or to
third-party applications that allow sharing of Netcool event data. For example,
multiple Netcool ObjectServers can share data using a Gateway to offer customers
load-balancing and fail-over facilities. In addition, event data can be exported
through Gateways to databases such as Oracle or Sybase for historical analysis
and reporting or to trouble-ticketing packages such as Remedy's help desk
application.
NETCOOL/REPORTER. Netcool/Reporter, which is not yet commercially
available, is a Java-based application that generates reports on the real-time
and historical availability of network services, applications, business
processes or any customer-defined grouping of IT resources (both physical and
logical). Since Netcool/Reporter has been designed to leverage the archived data
from the service profiles created within Netcool/OMNIbus, it allows operators to
report on SLA compliance. Netcool/Reporter can produce availability data in
several graphical formats, including spreadsheets, 2D or 3D charts, and billing
forms. Netcool/Reporter provides both Service Level Reports and generic reports.
Service Level Reports allow operators to define individualized service levels by
designing their own report metrics. They can also be tailored to precisely match
the service level availability criteria described by SLAs. Generic reports are
pre-configured reports that use event time and frequency categories as the
primary variables. Netcool/Reporter is expected to be commercially available in
the second quarter of fiscal 1998.
38
<PAGE> 40
The following table summarizes the Netcool product suite:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
DATE OF
NETCOOL PRODUCT INTRODUCTION DESCRIPTION
- ----------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS OBJECTSERVER
ObjectServer Solaris1 1994 Real-time, object-oriented, memory-
ObjectServer Solaris 2.x 1994 resident, active database system that
ObjectServer HP-UX9.x 1994 stores and manages all collected network
ObjectServer HP-UX10.x 1995 events.
ObjectServer AIX 4.x PowerPC 1997
- ----------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS DESKTOP
X11/Motif Desktop 1994 Integrated suite of software tools that
Java EventList Desktop 1996 creates filters and customized views of
Microsoft Windows NT Desktop 1997 network event data, monitors several
services simultaneously and
automatically resolves service problems.
- ----------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS GATEWAY
Remedy ARS 1994 Interfaces to other Micromuse products
Sybase RDBMS 10.x/11.x 1994 or third party applications that allow
ObjectServer 1994 sharing of Netcool event data.
SNMP Trap Forwarder 1995
Oracle RDBMS 7.x, 8.x 1997
File/Socket 1997
- ----------------------------------------------------------------------------------------------
NETCOOL/OMNIBUS PROBE
Basic Probes 1994-1997 Software that collects network event
Generic Probe 1996 data from network element devices or
Probe Development Kit 1994 from network management systems.
- ----------------------------------------------------------------------------------------------
NETCOOL/REPORTER* 1998 A Java-based application that uses
information stored by Netcool/OMNIbus to
generate reports on the real-time and
historical availability of networks or
other services.
- ----------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Netcool/Reporter is expected to be commercially available in the second
quarter of fiscal 1998.
Product Pricing. At least one Probe, ObjectServer, and Desktop are required
for Netcool/ OMNIbus to operate. Netcool/Reporter will be sold as an add-on
feature to Netcool/OMNIbus. Customers can choose the particular configuration of
Probes, ObjectServers, Desktops, and Gateways required for their existing
network configuration. The list price in the United States for each ObjectServer
is $25,000, each Probe, Gateway and Desktop is $7,500, and the list price for
Netcool/Reporter will be $15,000. Fees for implementations of Netcool/OMNIbus
typically range from $40,000 to $1.0 million.
CUSTOMERS
Micromuse sells its products to organizations with large and medium-size
networks, as well as network service providers which include telecommunications
carriers, ISPs, systems integrators and outsourcers. The Company's products are
used by a diverse set of customers in a variety of industries. As of September
30, 1997, the Company had over 90 customers in the following 6 countries: the
United States, Canada, the United Kingdom, Italy, Mexico, and Netherlands. The
39
<PAGE> 41
following is a list of customers that have purchased in excess of $100,000 of
the Company's Netcool family of products and services:
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Telecommunications Internet Service Providers Investment Banking
British Telecommunications America Online Bear Stearns
British Telecommunications BT Internet Deutsche Morgan Grenfell
MNS Genuity Merrill Lynch
BT Labs GTE Internetworking Morgan Stanley
BT North America Netcom Salomon Smith Barney
BT Syncordia PSInet
CableTel (NTL) Southwestern Bell Internet
Concert UUNet Commercial
GEIS
Ionica Cellular Automobile Association (U.K.)
MFS Communications First Data Resources
Multisys Cellular One J.C. Penney
Pacific Bell Hutchinson Orange PCS Nationwide Building Society
TMI Xypoint Pemex Oil
Vyvx Royal Automobile Club
WorldCom Communications Equipment Shell Oil Services
TRW
Ascom Timeplex
Bay Networks
Cisco
Ericsson
Motorola
N.E.T.
Siemens
- ----------------------------------------------------------------------------------------------
</TABLE>
SELECTED CUSTOMER APPLICATIONS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
CUSTOMER APPLICATION
- ---------------------------------------------------------------------------------------------------
MANAGED NETWORK SERVICE GEIS is a managed network services provider that maintains a
PROVIDER chain of support centers in locations around the world, including
(GEIS) the Netherlands, Hong Kong and Maryland. The worldwide GEIS
network comprises a variety of technologies, including Cisco
router-based IP, Telematics-based X.25, Stratacom-based frame
relay, and GEIS' own proprietary network. By installing Netcool,
GEIS was able to win the business of a large, multinational
conglomerate that required a secure view of the entire virtual
private network ("VPN") being provided by GEIS. Netcool made this
possible via its ability to easily append information to events
and associate them with specific customers, and to support a
firewalled Netcool server at the customer site.
- ---------------------------------------------------------------------------------------------------
INTERNET SERVICE PROVIDER MindSpring, a leading ISP focusing on delivering outstanding
(MINDSPRING) service and support to its customers, offers local Internet
service in more than 250 locations throughout the United States
and has over 240,000 customers. MindSpring uses Netcool to
provide next-generation management of the e-mail, Internet
access, and Web hosting services at its state-of-the-art Network
Operations Center ("NOC"). To manage these services, Netcool is
used in conjunction with Seagate's NerveCenter application to
collect data from over 15,000 modems, 400 terminal servers, 60
CSU/DSUs, 60 UNIX servers of various types, 50 hubs and switches,
and 60 Cisco routers. Netcool assimilates the information from
these diverse components and presents them as distinct service
views. Since installing Netcool in January 1997, MindSpring has
significantly increased the network infrastructure it maintains
(increasing from 7,500 managed devices to over 15,000) and the
customers it serves (100,000 to over 240,000) without increasing
the network operations staff. The entire operation is efficiently
managed by only 6 network administrators.
- ---------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 42
SALES AND MARKETING
The Company markets its software and services primarily through its direct
sales organization in San Francisco, Boston, Chicago, Dallas, New York, Los
Angeles, Washington, D.C., London and Sydney. Additionally, the Company has a
growing channel organization and expects to generate an increasing percentage of
total sales through its OEMs, value added resellers and systems integrators. As
of September 30, 1997, the Company's sales organization consisted of 31
individuals. Six members of the sales organization work exclusively with the
OEMs, value added resellers and systems integrators in both a sales and a
channel marketing capacity.
Typically, the sales process will include an initial sales presentation, a
product demonstration, at times a proof of concept evaluation, a closing meeting
and a purchase process. The sales process typically takes 90 to 180 days.
Companies often purchase Netcool products to manage their internal data network
initially and upon its demonstrated effectiveness subsequently make additional
and larger purchases. A significant portion of the Company's sales are from
repeat customers, who generally purchase additional software as their networks
expand or as additional sites within a customer learn of the services provided
by, and the benefits of, Netcool.
The Company has a number of marketing programs designed to inform potential
customers about the capabilities and benefits of the Company's products. The
Company's marketing efforts include technical leadership, participation in
industry trade shows, technical conferences and technology seminars, preparation
of competitive analyses, sales training, publication of technical and
educational articles in industry journals and advertising. As of September 30,
1997, the Company's marketing organization employed six people.
Although the Company increased the size of its sales organization from 14
to 31 individuals during the nine-month period ended September 30, 1997, the
Company experienced difficulty in recruiting a sufficient number of qualified
sales people during that period. If the Company is to achieve significant
revenue growth in the future, it must both train successfully the members of its
existing sales force and recruit additional sales personnel. Competition for
such persons is intense, and there can be no assurance that the Company will be
able to either retain and adequately train its current sales force or attract
qualified sales personnel in the future. During the last fiscal year, the
Company hired a Senior Vice President, Sales, who is expected to be heavily
involved, among other things, in the recruitment of additional sales personnel.
Consequently, the Company is expected to have additional management capacity to
assist in the recruitment of additional sales personnel. If the Company is
unable to hire such people on a timely basis, the Company's business, operating
results or financial condition could be adversely affected. See "Risk
Factors -- Need to Expand and Improve Productivity of Sales Force, Technical
Services and Customer Support Organization."
To achieve significant growth in revenues in the future the Company must
continue to expand its network of distribution partners. The Company's network
of distribution partners currently includes VARs, systems integrators and OEM
partners, including Bay, Cisco, Ericsson, Network Equipment Technologies,
Vanstar Corporation, and Wandel and Goltermann. Such partners license the
Company's products at a discount to list price for re-licensing and may provide
training, support and technical and customer services to the end users of the
Company's products. At times, members of the Company's technical services
organization will assist a channel partner with training and technical support.
The Company offers a comprehensive channel partnering program consisting of
training, certification, technical support, priority communications regarding
upcoming activities and products, and joint sales and marketing activities. The
Company also has joint marketing programs with Concord Communications and
Seagate Software. There can be no assurance that the Company will be able to
continue to attract and retain VARs, systems integrators and OEMs or that such
organizations will be able to market and sell the Company's products
effectively. In addition, there can be no assurance that the Company's existing
or future
41
<PAGE> 43
channel partners will continue to represent the Company's products. See "Risk
Factors -- Need to Expand Distribution Channels; Dependence on Third-Party
Relationships."
Because the Company first sold its software in the United Kingdom and was
previously domiciled in London, sales outside of the United States (i.e.,
"international sales") have historically comprised a significant portion of the
Company's total revenue. International sales accounted for 76%, 55%, and 48% of
total revenues in fiscal 1995, 1996, and 1997, respectively. The majority of
these international sales were made in the United Kingdom and Europe. While the
Company believes that there are significant opportunities in the United Kingdom
and Europe, it expects international revenues from the United Kingdom and Europe
as a percentage of total revenues to decline in future quarters as the Company
more fully exploits opportunities in the United States and in the Pacific Rim.
See "Risk Factors -- Risks Associated with International Licensing and
Operations."
TECHNICAL SERVICES
The Company's technical services organization provides customers with a
full range of support services including pre-sales demonstrations, evaluations,
implementations, consulting services, training, and ongoing technical support.
In addition, the technical services organization serves a variety of internal
functions, including drafting support and training documentation, product
management, product testing, research and development related to specific
customer industries. The Company believes that superior technical services and
support is critical to customer satisfaction and the development of customer
relationships. As of September 30, 1997, there were 32 individuals in the
Company's technical services organization. Members of the technical services
organization work closely with the Company's direct sales representatives and
channel partners to provide the following services to customers:
Pre-Sales Technical Support. Technical services personnel will often
accompany sales representatives to a customer site to provide a technical
overview and demonstration of the product or to educate customers about the
Company's products. In addition, they may help specify and implement a small
evaluation test environment at a customer site for more detailed customer review
of the product.
Post-Sales Technical Support and Consulting. Technical services personnel
will also assist end-users with the implementation and use of the Company's
products. In some cases, the Company's technical services personnel will be
engaged for limited post-sales consulting, which may include on-site custom
Probe development, implementation of the Company's products, or project
management. After full implementation, ongoing customer support obligations are
transferred to the Company's customer support organization, although technical
services personnel may be engaged for further support.
Education and Training. The technical services organization offers product
training to customers and product training and certification to channel
partners. The Company offers operator, administrator, and advanced administrator
training classes.
The recent growth of the Company and the expansion of the customer base of
Netcool has increased the demands on its technical services organization.
Competition for qualified technical personnel is intense. There can be no
assurance that the current resources in the Company's technical services
organization will be sufficient to manage any future growth in the Company's
business. Failure of the Company to expand its technical services organization
at least commensurate with the expansion in the installed base of Netcool
products would have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors -- Need to Expand
and Improve Productivity of Sales Force, Technical Services and Customer Support
Organization" and "-- Dependence on Key Personnel."
42
<PAGE> 44
CUSTOMER SUPPORT
The customer support organization is responsible for providing ongoing
technical support for the Company's customers after implementation of the
product and for training the next generation of the Company's software engineers
and technical services personnel. Based on feedback by customers, the Company
believes that the quality and responsiveness of its customer support
organization provides it with a significant competitive advantage. As of
September 30, 1997, the Company employed 11 customer support personnel.
For an annual fee, a customer will receive toll-free telephone and email
support, as well as new releases of the Company's products. The Company offers
two support packages to its customers: 8 hours a day, 5 days a week support or
24 hours a day, 7 days a week support. While support personnel generally answer
the technical support calls and resolve most problems over the phone, Micromuse
will deploy any one of its more than 30 technical support personnel in the event
that an on-site visit is necessary.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in large part on its
ability to continue to enhance existing products and develop new products that
maintain technological competitiveness and deliver rapid ROI to its customers.
The Company has historically developed and expects to continue to develop its
products in conjunction with its existing and potential customers. Extensive
product development input is obtained through customers, through the Company's
monitoring of end-user needs and changes in the marketplace and through
partnerships with leading research institutes such as Cambridge University
Centre for Communication Systems Research.
The Company's research and development organization is composed of two
related engineering groups. The core technology group is responsible for the
enhancement of Netcool/OMNIbus, including its real-time technologies and the
exploration of new directions and applications of the Company's core
ObjectServer, Probe, Gateway, and Desktop technologies. The application
development group is responsible for designing and developing off-the-shelf
products which leverage the technologies developed by the core technology group.
While both groups work closely with customers, the application development group
depends on customer contact and partnerships for the rapid development of new
SLM products. Both research and development groups work closely with the
Company's technical services organization and its marketing organization to
incorporate customer feedback and market requirements into their product
development agendas.
The Company has made and intends to continue to make substantial
investments in research and development. The Company's total expenses for
research and development for fiscal 1995, 1996 and 1997 were $708,000, $1.6
million and $2.0 million, respectively. Since the Company anticipates that it
will continue to commit substantial resources to research and development in the
future, product development expenses are expected to increase in absolute
dollars in future periods. To date, the Company's development efforts have not
resulted in any capitalized software development costs. As of September 30,
1997, the Company's research and development organization consisted of 29
people.
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory environments,
frequent new product introductions and rapid changes in customer requirements.
The introduction or announcement of products by the Company or its competitors
embodying new technologies and the emergence of new industry standards and
practices can render existing products obsolete and unmarketable. As a result,
the life cycles of the Company's products are difficult to estimate. The
Company's future success will depend on its ability to enhance its existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and product features that keep pace with technological developments and
emerging industry standards and address the increasingly sophis-
43
<PAGE> 45
ticated needs of its customers. There can be no assurance that the Company will
be successful in developing and marketing new products or product features that
respond to technological change or evolving industry standards, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and features, or
that its new products or product features will adequately meet the requirements
of the marketplace and achieve market acceptance. In particular, the widespread
adoption of the TMN architecture for managing telecommunications networks would
force the Company to adapt its products to such standard, and there can be no
assurance that this could be done on a timely or cost-effective basis, if at
all. In addition, to the extent that any product upgrade or enhancement requires
extensive installation and configuration, current customers may postpone or
forgo the purchase of new versions of the Company's products. If the Company is
unable, for technological or other reasons, to develop and introduce
enhancements of existing products or new products in a timely manner, the
Company's business, operating results and financial condition will be materially
adversely affected. See "Risk Factors -- New Products and Rapid Technological
Change; Need to Manage Product Transitions; Dependence on Third-Party Software
Platforms." In addition, software products as complex as those offered by the
Company may contain defects or failures when introduced or when new versions or
enhancements are released. See "Risk Factors -- Risk of Product Defects; Product
Liability."
COMPETITION
The Company's products are designed for use in the evolving SLM and
enterprise network management markets. Competition in these markets is intense
and is characterized by rapidly changing technologies, new and evolving industry
standards, frequent new product introductions and rapid changes in customer
requirements. The Company's current and prospective competitors offer a variety
of solutions to address the SLM and enterprise network management markets and
generally fall within the following five categories: (i) customer's internal
design and development organizations that produce SLM and network management
applications for their particular needs, in some cases using multiple instances
of products from hardware and software vendors such as Sun, HP and Cabletron;
(ii) vendors of network and systems management frameworks including Computer
Associates and IBM; (iii) vendors of network and systems management applications
including HP, Sun and IBM; (iv) providers of specific market applications
including Boole and Babbage and several smaller software vendors; and (v)
systems integrators who primarily provide programming services to develop
customer specific applications including TCSI and OSI. In the future, as the
Company enters new markets, the Company expects that such markets will have
additional, market-specific competitors. In addition, because there are
relatively low barriers to entry in the software market, the Company expects
additional competition from other established and emerging companies. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results or financial condition.
Many of the Company's existing and potential customers continuously
evaluate whether to design and develop their own network operations support and
management applications or purchase them from outside vendors. These customers
internally design and develop their own software solutions for their particular
needs and therefore may be reluctant to purchase products offered by independent
vendors such as the Company. As a result, the Company must continuously educate
existing and prospective customers as to the advantages of the Company's
products versus internally developed network operations support and management
applications.
Many of the Company's current and potential competitors have longer
operating histories and have significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and a larger
customer base, than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion, sale and support of
44
<PAGE> 46
their products than the Company. Existing competitors could also increase their
market share by bundling products having management functionality offered by the
Company's products with their current applications. Moreover, the Company's
current and potential competitors may increase their share of the SLM market by
strategic alliances and/or the acquisition of competing companies. In addition,
network operating system vendors could introduce new or upgrade and extend
existing operating systems or environments that include management functionality
offered by the Company's products, which could render the Company's products
obsolete and unmarketable. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results or financial condition. See "Risk Factors --
Competition."
The principal competitive factors affecting the market for the Company's
software are price/performance, functionality and speed of implementation. The
Company currently believes it presently competes favorably with respect to each
of these factors. However, the Company's market is still evolving, and there can
be no assurance that the Company will be able to compete successfully against
current and future competitors and the failure to do so successfully will have a
material adverse effect upon the Company's business operating results and
financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in significant
part upon its proprietary software technology. The Company relies on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its proprietary
rights. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that the steps taken by the Company to protect its proprietary
technology will prevent misappropriation of such technology, and such
protections may not preclude competitors from developing products with
functionality or features similar to the Company's products. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. While the Company believes that its products and
trademarks do not infringe upon the proprietary rights of third parties, there
can be no assurance that the Company will not receive future communications from
third parties asserting that the Company's products infringe, or may infringe,
the proprietary rights of third parties. The Company expects that software
product developers will be increasingly subject to infringement claims as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require the Company to develop non-infringing technology or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all. In the event of a successful claim of product infringement against
the Company and failure or inability of the Company to develop non-infringing
technology or license the infringed or similar technology, the Company's
business, operating results or financial condition could be materially adversely
affected.
The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms or at all. Although the Company
believes that alternative software is available from other third-party
suppliers, the loss of or inability to maintain any of these software licenses
or the inability of the third parties to enhance in a timely and cost-effective
manner their products in response to changing customer needs, industry standards
or technological developments could result in delays or reductions in product
45
<PAGE> 47
shipments by the Company until equivalent software could be developed internally
or identified, licensed and integrated, which would have a material adverse
effect on the Company's business, operating results and financial condition. See
"Risk Factors -- Dependence upon Proprietary Technology; Risk of Third-Party
Claims of Infringement."
EMPLOYEES
As of September 30, 1997, the Company had 135 employees, including 29
engaged in research and development activities, 37 in sales and marketing, 32 in
technical services, 26 in administration and finance and 11 in customer support.
None of the Company's employees is represented by a collective bargaining
agreement, nor has the Company experienced work stoppages. The Company believes
that its relations with its employees are good.
The Company believes that its future success will depend in large part on
its ability to attract and retain highly-skilled managerial, sales, technical
services, customer support and product development personnel. The Company has at
times experienced and continues to experience difficulty in recruiting qualified
personnel, including without limitation a Chief Financial Officer and a
controller for U.S. operations. Competition for qualified personnel in the
software industry is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. Failure to
attract and retain key personnel could materially adversely affect on the
Company's business, operating results or financial condition. See "Risk
Factors -- Management of Growth; Need to Improve Financial Systems and
Controls," "-- Need to Expand and Improve Productivity of Sales Force, Technical
Services and Customer Support Organization" and "-- Dependence on Key
Personnel."
FACILITIES
The Company's headquarters are located in 11,235 square feet of office
space in San Francisco, under a lease that expires on April 2002. The Company's
principal product development operations are located in approximately 16,085
square feet of office space in London. Approximately 7,210 square feet of this
office space is leased pursuant to a lease that expires on December 2002. The
remaining 8,875 square feet of office space is leased pursuant to a lease that
expires on March 2007. The Company also maintains offices in New York City,
Dallas and Sydney. The Company believes that its current facilities are adequate
for its needs through the next twelve months, and that, should it be needed,
suitable additional space will be available to accommodate expansion of the
Company's operations on commercially reasonable terms, although there can be no
assurance in this regard.
LITIGATION
The Company is not a party to any material legal proceeding.
46
<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of September 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- ------------------------------------------------------
<S> <C> <C>
Christopher J. Dawes........ 38 President, Chief Executive Officer and Chairman of the
Board of Directors
Stephen A. Allott........... 39 Senior Vice President, Finance
Charles M. Silvey........... 33 Senior Vice President, Marketing
David N. Dorrance........... 36 Senior Vice President, Sales
Timothy J. Tokarsky......... 34 Vice President, Application Development
Mark J. Peach............... 38 Vice President, Core Technology
Peter Shearan............... 33 Vice President, Technical Services
Helen M. Fairclough......... 36 Vice President, Operations
Angela Dawes................ 35 Director of Sales, Western Region; Director
Jeffrey M. Drazan(1)(2)..... 39 Director
David C. Schwab(1)(2)....... 40 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
CHRISTOPHER J. DAWES. Mr. Dawes has served as President, Chief Executive
Officer and Chairman of the Board of Directors of the Company since its
inception. Prior to co-founding the Company, Mr. Dawes served as Sales Manager
at Computer Associates International, Inc. ("Computer Associates") from June
1988 to September 1989. Mr. Dawes is a graduate of Electrical and Electronic
Engineering from the University of Adelaide, South Australia.
STEPHEN A. ALLOTT. Mr. Allott has served as the Company's Senior Vice
President, Finance since September 1997. From June 1997 to September 1997, Mr.
Allott served as Vice President, Global Telco Industry. From April 1996 to
September 1997, Mr. Allott served as Managing Director, Micromuse Europe. From
September 1995 to April 1996 he served as the Company's Business Development
Director. Prior to joining the Company, Mr. Allott served as a strategy
consultant with McKinsey & Company from September 1990 to September 1995. From
May 1988 to September 1990, Mr. Allott served as United Kingdom legal counsel
for Sun Microsystems, UK. Mr. Allott received his M.A., Law from Trinity
College, Cambridge and was called to the English Bar at Gray's Inn.
CHARLES M. SILVEY. Mr. Silvey has served as the Company's Senior Vice
President, Marketing since July 1997. From June 1994 to July 1997, Mr. Silvey
served as Vice President, Marketing. From January 1991 to June 1994, Mr. Silvey
served as Technical Marketing Manager. Prior to joining the Company, Mr. Silvey
served as Technical Marketing Executive for the European SunNet Manager program
for Sun Microsystems, UK from October 1989 to January 1991. Mr. Silvey received
his degree in Electronic and Electrical Engineering from City of Bath
University.
DAVID N. DORRANCE. Mr. Dorrance has served as the Company's Senior Vice
President, Sales since June 1997. Prior to joining the Company, Mr. Dorrance
served as Head of United Kingdom Oracle Applications Group for Deloitte & Touche
Consulting Group from March 1996 to June 1997. From September 1993 to May 1995,
Mr. Dorrance served as a sales manager at Sybase, Inc. ("Sybase"). From November
1989 to September 1993, Mr. Dorrance served as Director N.A. Sales and as a
director of SQL Solutions following its acquisition by Sybase. Mr. Dorrance
received his B.S. in Computer Science from the University of California at Santa
Barbara and an M.S. in Economics from the University of Oxford.
47
<PAGE> 49
TIMOTHY J. TOKARSKY. Mr. Tokarsky has served as the Company's Vice
President, Application Development since February 1997. Prior to joining the
Company, Mr. Tokarsky served as Vice President Distributed Systems Management
for Merrill Lynch & Co., Inc. from June 1995 to February 1997. From January 1994
to June 1995, Mr. Tokarsky served as Architect, Global Distributed Systems
Monitoring for Goldman Sachs & Co. From May 1993 to January 1994, Mr. Tokarsky
served as a system administrator for Standard and Poor's Rating Services. From
October 1992 to May 1993, Mr. Tokarsky served as a system administrator for
First Boston Corp. Mr. Tokarsky received his B.Sc. in Geophysics from McGill
University.
MARK J. PEACH. Mr. Peach has served as the Company's Vice President, Core
Technology since December 1996. From June 1994 to December 1996, Mr. Peach
served as an original architect and developer of Netcool/OMNIbus. Prior to
joining the Company, Mr. Peach served as Principal PreSales Engineer for Sun
Microsystems, Inc. and SunConnect from December 1989 to May 1994. Mr. Peach
received his B.Sc. in Mathematical Engineering Mathematics from Loughborough
University.
PETER SHEARAN. Mr. Shearan has served as the Company's Vice President,
Technical Services since February 1996. From November 1995 to February 1996, Mr.
Shearan served as Senior Consultant in the Company's Netcool Business
Development department. Prior to joining the Company, Mr. Shearan served as a
systems manager for British Telecommunications from June 1984 to November 1995.
Mr. Shearan received his Qualifications in Computer Science from Southbank
University, London.
HELEN M. FAIRCLOUGH. Ms. Fairclough has served as the Company's Vice
President, Operations since November 1995. From June 1994 to November 1995, Ms.
Fairclough served as the Company's Manager, Operations. Prior to joining the
Company, Ms. Fairclough served as Business Operations Manager for Cap Gemini,
PLC from October 1991 to June 1994. Ms. Fairclough received her B.Sc. in
Resource Sciences/Geology from Kingston University and is a Member of The
Chartered Institute of Secretaries and Administrators.
ANGELA DAWES. Mrs. Dawes has been a director of the Company since September
1997. Mrs. Dawes has also served as Director of Sales, Western Region since
January 1997. Since the Company's inception to January 1997, Mrs. Dawes served
in various capacities, most recently as Eastern Region Director of Sales. Prior
to joining the Company, Mrs. Dawes served at Computer Associates in various
capacities.
JEFFREY M. DRAZAN. Mr. Drazan has been a director of the Company since
December 1996. Mr. Drazan has been a general partner of Sierra Ventures, a
venture capital firm ("Sierra Ventures"), since 1984. Mr. Drazan also serves as
a director of FaxSav, Inc., an Internet messaging company; Retix, a
telecommunications equipment company; and Digital Generation Systems Inc., a
multimedia network services company. Mr. Drazan received his B.S.E. in
Management Systems from Princeton University and an MBA from New York
University's Graduate School of Business Administration.
DAVID C. SCHWAB. Mr. Schwab has been a director of the Company since
December 1996. Mr. Schwab has been a general partner of Sierra Ventures since
June 1996. Prior to joining Sierra Ventures, Mr. Schwab co-founded Scopus
Technology, Inc., a client-server software systems company, and served in
various capacities from August 1991 to June 1996, most recently as Vice
President of Sales. Mr. Schwab received his B.A. in Systems Engineering from
University of California San Diego, an M.S. and ENG. in Aerospace Engineering
from Stanford University, and an MBA from Harvard Business School.
BOARD COMPOSITION
The Board of Directors is currently comprised of four directors. Upon the
completion of this Offering, the terms of office of the Board of Directors will
be divided into two classes: Class I,
48
<PAGE> 50
whose term will expire at the next annual meeting of stockholders, and Class II,
whose term will expire at the subsequent annual meeting of stockholders. The
Class I directors are Angela Dawes and Jeffrey M. Drazan and the Class II
directors are Christopher J. Dawes and David C. Schwab. At each annual meeting
of stockholders after the initial classification, the successors to directors
whose term will then expire will be elected to serve from the time of election
and qualification until the second annual meeting following election. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than non-employee
directors, devotes substantially full time to the affairs of the Company. The
Company's non-employee directors devote such time to the affairs of the Company
as is necessary to discharge their duties. Christopher J. Dawes and Angela
Dawes, each a director and officer of the Company, are married. There are no
other family relationships among any of the directors, officers or key employees
of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee reviews, acts on and reports to the Board of Directors
with respect to various auditing and accounting matters, including the selection
of the Company's independent accountants, the scope of the annual audits, fees
to be paid to the independent accountants, the performance of the Company's
independent accountants and the accounting practices of the Company.
The Compensation Committee (effective upon the closing of this Offering)
establishes salaries, incentives and other forms of compensation for officers
and other employees of the Company and administers the incentive compensation
and benefit plans of the Company.
DIRECTOR COMPENSATION
Directors receive no cash remuneration for serving on the Board of
Directors but are reimbursed for reasonable expenses incurred by them in
attending meetings of the Board of Directors and Audit Committee. On July 15,
1997, the Company issued to each of Jeffrey M. Drazan and David C. Schwab 60,000
shares of Common Stock pursuant to the Company's 1997 Stock Option/Stock
Issuance Plan. Non-employee directors will also receive periodic option grants
under the Company's 1997 Stock Option/Stock Issuance Plan. See "-- 1997 Stock
Option/Stock Issuance Plan." See Note 6 of Notes to Consolidated Financial
Statements.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation limits the liability of
its directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The
49
<PAGE> 51
Company is not aware of any threatened litigation or proceeding that might
result in a claim for such indemnification.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee (effective upon the
closing of this Offering) is an officer or employee of the Company. No
interlocking relationship exists between the Company's Board or Compensation
Committee and the board of directors or compensation committee of any other
company, nor has such an interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer and the four other most highly
compensated officers whose salary and bonus for the fiscal year ended September
30, 1997 exceeded $100,000 (collectively, the "Named Executive Officers"), for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal year ended September 30, 1997.
50
<PAGE> 52
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ------------------------------- -------- -------- ---------------- ------------------------ ----------------
<S> <C> <C> <C> <C> <C>
Christopher J. Dawes........... $187,500 $157,495 $ 33,667(1) 0 $8,093(2)
President and Chief Executive
Officer
Stephen A. Allott.............. 161,581 -- -- 19,033 --
Senior Vice President,
Finance
Mark J. Peach.................. 108,614 -- 10,541(3) 15,320 --
Vice President, Core
Technology
Peter Shearan.................. 110,597 -- 12,123(4) 44,440 --
Vice President, Technical
Services
Timothy J. Tokarsky............ 108,814 -- -- 77,000 --
Vice President, Application
Development
</TABLE>
- ---------------
(1) Includes $14,162 car allowance, $6,530 payment for a golf club membership
and $8,720 payment for accounting fees.
(2) Company's contributions made to the Company's pension plan which is a
defined contribution plan. These contributions were paid in British pounds
sterling and have been translated into United States dollars solely for the
convenience of the reader at L1.00=$1.6185, based on the New York foreign
exchange selling rate at 4:00 p.m. Eastern time on September 30, 1997 as
reported in the Wall Street Journal.
(3) Includes $8,694 car allowance.
(4) Includes $9,919 car allowance.
51
<PAGE> 53
OPTION GRANTS
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers in the fiscal year ended September
30, 1997. No stock appreciation rights were granted to these individuals during
such year.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF INDIVIDUAL GRANT ANNUAL RATES OF
SECURITIES ---------------------------------------- STOCK
UNDERLYING % OF TOTAL PRICE APPRECIATION
OPTIONS OPTIONS GRANTED EXERCISE FOR OPTION TERM(3)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION ------------------
NAME (#) 1997(1) ($/SH)(2) DATE 5%($) 10%($)
- ----------------------- ---------- --------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Christopher J. Dawes... 0 -- -- -- -- --
Stephen A. Allott...... 18,033(4) 1.98% $2.50 03/09/04 $18,353 $ 42,771
500(4) .05 2.50 05/18/04 509 1,186
500(4) .05 2.50 06/30/04 509 1,186
Mark J. Peach.......... 14,820(4) 1.63 2.50 05/18/04 15,083 35,150
500(4) .05 2.50 06/30/04 509 1,186
Peter Shearan.......... 43,940(4) 4.82 2.50 05/18/04 44,720 104,217
500(4) .05 2.50 06/30/04 509 1,186
Timothy J. Tokarsky.... 77,000(4) 8.45 2.50 03/09/04 78,367 182,628
</TABLE>
- ---------------
(1) Based on an aggregate of 911,196 options granted in fiscal 1997.
(2) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the dates the respective
options were granted as determined by the Company's Board of Directors. The
Company's Common Stock was not traded publicly at the time of the option
grants to the Named Executive Officers. The exercise price may be paid in
cash, in shares of the Company's Common Stock valued at fair market value on
the exercise date or through a cashless exercise procedure involving a
same-day sale of the purchased shares. The Company may also finance the
option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
7-year option term will be at the assumed 5% or 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.
(4) Each of the options is immediately exercisable, but any shares purchased
under the options are subject to vesting requirements and may be repurchased
by the Company at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses with respect to 25% of the option shares upon
completion of one year of service from the vesting commencement date and the
balance in a series of equal monthly installments over the next 36 months of
service thereafter. The holder of purchased shares, whether or not subject
to the Company's repurchase right, is entitled to vote all such shares. The
option shares will vest immediately upon an acquisition of the Company by
merger or asset sale, unless the Company's repurchase right with respect to
the unvested option shares is assigned to the acquiring entity. Each option
has a maximum term of seven years, subject to earlier termination in the
event of the optionee's cessation of employment with the Company.
52
<PAGE> 54
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning the year-end number
and value of unexercised options with respect to each of the Named Executive
Officers. No options and no stock appreciation rights were exercised by the
Named Executive Officers in fiscal year 1997, and no stock appreciation rights
were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AT FY-END(#)(1) AT FY-END($)(2)
------------------- -----------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ------------------------------------------------- ------ ------ -------- --------
<S> <C> <C> <C> <C>
Christopher J. Dawes............................. 0 0 -- --
Stephen A. Allott................................ 65,604 19,033 $320,804 $ 74,800
Mark J. Peach.................................... 67,700 15,320 306,024 60,208
Peter Shearan.................................... 9,769 62,715 52,104 249,942
Timothy J. Tokarsky.............................. 0 77,000 -- 302,610
</TABLE>
- ---------------
(1) Each of the options listed in the table is immediately exercisable, but any
shares purchased under the options will be subject to vesting requirements
and may be repurchased at the original exercise price per share upon the
optionee's cessation of service prior to vesting in such shares.
(2) Based on the fair market value of the Company's Common Stock at fiscal year
end (September 30, 1997) ($6.43 per share), as determined by the Company's
Board of Directors less the exercise price payable for such shares.
EMPLOYEE BENEFIT PLANS
1997 Stock Option/Stock Issuance Plan
In March 1997, the Company's Board of Directors adopted the Company's 1997
Stock Option/Stock Issuance Plan (the "Stock Option Plan"). The Stock Option
Plan was approved by the Company's stockholders in March 1997.
The number of shares of Common Stock that are reserved for issuance under
the Stock Option Plan pursuant to the direct award or sale of shares or the
exercise of options is equal to shares. If any options granted under the
Stock Option Plan are forfeited or terminate for any other reason without having
been exercised in full, then the unpurchased shares subject to those options
will become available for additional grants under the Stock Option Plan. If
shares granted or purchased under the Stock Option Plan are forfeited, then
those shares will also become available for additional grants under the Stock
Option Plan. The number of shares reserved for issuance under the Stock Option
Plan will be increased automatically on October 1 of each fiscal year, starting
with October 1, 1999, by a number equal to the lesser of (a) shares or
(b) % of the shares of Common Stock outstanding at that time.
Under the Stock Option Plan, all employees (including officers) and
directors of the Company or any subsidiary and any independent contractor or
advisor who performs services for the Company or a subsidiary are eligible to
purchase shares of Common Stock and to receive awards of shares or grants of
nonstatutory options. Employees are also eligible to receive grants of incentive
stock options ("ISOs") intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The Stock Option Plan is
administered by the Board of Directors, which selects the persons to whom shares
will be sold or awarded or options will be granted, determines the number of
shares to be made subject to each sale, award or grant, and prescribes the other
terms and conditions of each sale, award or grant, including the type of
consideration to be paid to the Company upon sale or exercise and the vesting
schedule.
The exercise price under any nonstatutory options generally must be at
least 85% of the fair market value of the Common Stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value of
the Common Stock on the date of grant and, in the
53
<PAGE> 55
case of ISOs granted to holders of more than 10% of the voting power of the
Company, not less than 110% of such fair market value. The term of an ISO cannot
exceed 10 years, and the term of an ISO granted to a holder of more than 10% of
the voting power of the Company cannot exceed five years.
Each new nonemployee director who is elected to the Company's Board of
Directors after this Offering will automatically be granted as of the date of
election an option to purchase shares of Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of grant.
The shares subject to these options will vest in four equal annual installments,
commencing on the date of grant. In addition, each non-employee director who has
completed at least six months of service, and who will continue to serve
following any annual meeting of stockholders, will automatically be granted an
option as of the date of such meeting to purchase shares of Common
Stock at an exercise price equal to the fair market value of the Common Stock on
the date of grant. The shares subject to these options will vest on the first
anniversary of grant.
As of September 30, 1997, options to purchase an aggregate of 1,312,086
shares of Common Stock were outstanding under the Stock Option Plan at a
weighted average exercise price of $2.19. As of September 30, 1997, a total of
100,000 shares of Common Stock are available for future issuance under the Stock
Option Plan.
1997 Employee Stock Purchase Plan
In December 1997, the Board of Directors adopted the Company's Employee
Stock Purchase Plan (the "ESPP") to provide employees of the Company with an
opportunity to purchase Common Stock through payroll deductions. The ESPP was
approved by the stockholders of the Company in December 1997. Under the ESPP
shares of Common Stock have been reserved for issuance. The ESPP is
expected to become effective at the time of this Offering. All full-time regular
employees who are employed by the Company on the effective date of this Offering
will be eligible to participate in the ESPP after completing a three-month
waiting period.
Eligible employees may contribute up to 15% of their total cash
compensation to the ESPP. Amounts withheld are applied at the end of every
six-month accumulation period to purchase shares of Common Stock, but not more
than shares per accumulation period. The value of the Common Stock
(determined as of the beginning of the offering period) that may be purchased by
any participant in a calendar year is limited to $25,000. Participants may
withdraw their contributions at any time before stock is purchased.
The purchase price is equal to 85% of the lower of (a) the market price of
Common Stock immediately before the beginning of the applicable offering period
or (b) the market price of Common Stock at the time of the purchase. In general,
each offering period is 24 months long, but a new offering period begins every
six months. Thus up to four overlapping offering periods may be in effect at the
same time. An offering period continues to apply to a participant for the full
24 months, unless the market price of Common Stock is lower when a subsequent
offering period begins. In that event, the subsequent offering period
automatically becomes the applicable period for purposes of determining the
purchase price. The first accumulation and offering periods are expected to
commence on the effective date of this Offering and will end on ,
199 and , 199 , respectively.
CHANGE OF CONTROL ARRANGEMENTS
Upon a Change in Control, an award of an option, stock appreciation rights,
stock units or restricted shares will become fully exercisable as to all shares
subject to such award if such award is not assumed by the surviving corporation
or its parent and the surviving corporation or its parent does not substitute
such award with another award of substantially the same terms. A Change in
Control includes a merger or consolidation of the Company after which the
Company's then current
54
<PAGE> 56
stockholders own less than 50% of the surviving corporation, sale of all or
substantially all of the assets of the Company, a proxy contest that results in
replacement of more than one-third of the directors over a 24-month period or
acquisition of 50% or more of the Company's outstanding stock by a person other
than a trustee of any of the Company's employee benefit plans or a corporation
owned by the stockholders of the Company in substantially the same proportions
as their stock ownership in the Company. In the event of a merger or other
reorganization, outstanding options, stock appreciation rights, restricted
shares and stock units will be subject to the agreement of merger or
reorganization, which may provide for the assumption of outstanding awards by
the surviving corporation or its parent, for their continuation by the Company
(if the Company is a surviving corporation), for accelerated vesting and
accelerated expiration or for settlement in cash.
55
<PAGE> 57
CERTAIN TRANSACTIONS
Since October 1, 1994, the Company has issued and sold securities to the
following persons who are principal stockholders, executive officers or
directors of the Company.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C TOTAL SHARES
PREFERRED PREFERRED PREFERRED COMMON AS IF
INVESTOR(1) STOCK(2) STOCK(3) STOCK(4) STOCK CONVERTED(5)
- --------------------------- --------- --------- --------- ------ ------------
<S> <C> <C> <C> <C> <C>
Sierra Ventures V,
L.P.(6).................. 1,500,000 2,000,000 295,490 -- 3,795,490
CITICORP(7)................ -- -- 777,605 -- 777,605
Jeffrey M. Drazan(8)....... -- -- 15,552 60,000 75,552
David C. Schwab............ -- -- 15,552 60,000 75,552
</TABLE>
- ---------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Reflects shares purchaseable upon exercise of a warrant to purchase shares
of Series A Preferred Stock at a per share exercise price of $2.00.
(3) The per share purchase price for the Series B Preferred Stock was $2.50.
(4) The per share purchase price for the Series C Preferred Stock was $6.43.
(5) Reflects a one-to-one conversion to Common Stock ratio for each share of
Series A, Series B and Series C Preferred Stock.
(6) Each of Jeffrey M. Drazan and David C. Schwab, each a general partner of SV
Associates V, LP, the general partner of Sierra Ventures V, L.P., is a
director of the Company.
(7) In connection with this purchase, CITICORP and the Company entered into an
agreement whereby CITICORP agreed not to vote in any election for the
directors of the Company any shares it holds in excess of 4.99% of the
outstanding capital stock of the Company entitled to vote on such matters,
assuming for the purposes of such calculation the exercise or conversion of
any securities exercisable or convertible into shares of Common Stock.
(8) Includes 7,776 shares of Series C Preferred Stock registered in the name of
the Sandra Drazan Living Trust and 7,776 shares of Series C Preferred Stock
registered in the name of ZD. Air, Inc.
In addition, the Company has granted options to certain of its executive
officers. See "Management -- Option Grants."
MARCH 1997 FINANCING
On March 6, 1997, the Company entered into the following transactions with
Sierra Ventures V, L.P.: (i) the Company issued 2,000,000 shares of Series B
Preferred Stock at a per share purchase price of $2.50; (ii) the Company issued
a warrant to purchase 1,500,000 shares of Series A Preferred Stock at a per
share exercise price of $2.00; and (iii) the Company and Sierra Ventures V, L.P.
entered into a Credit Agreement (the "Credit Agreement") whereby Sierra Ventures
V, L.P. agreed to make revolving loans to the Company in an aggregate amount of
up to $3.0 million for a period of five years. The Company had borrowed and
repaid an aggregate of $1.0 million under the Credit Agreement and as of
September 30, 1997 there was no outstanding balance under the Credit Agreement.
The Credit Agreement will terminate upon the Offering.
SEPTEMBER 1997 FINANCING
On September 8, 1997, the Company issued an aggregate of 2,488,336 shares
of Series C Preferred Stock at a per share purchase price of $6.43 to 18
investors, including 295,490 shares to Sierra Ventures V, L.P., 777,605 shares
to CITICORP, 15,552 shares to David C. Schwab, 7,776 shares to the Sandra Drazan
Living Trust and 7,776 shares to ZD. Air, Inc.
STOCK PURCHASES BY DIRECTORS
On July 15, 1997, the Company issued to each of Jeffrey M. Drazan and David
C. Schwab 60,000 shares of Common Stock at a per share purchase price of $2.50
pursuant to the Company's 1997 Stock Option/Stock Issuance Plan. See
"Management -- Employee Benefit Plans."
56
<PAGE> 58
REPURCHASES OF STOCK FROM CERTAIN OFFICERS
On July 15, 1997, the Company repurchased 120,000 shares of Common Stock at
a per share purchase price of $2.50 from Christopher J. Dawes, President and
Chief Executive of the Company. On November 13, 1997, the Company repurchased
777,605 shares of Common Stock at a per share purchase price of $6.43 from Mr.
Dawes.
LOANS TO CERTAIN OFFICERS
The Company has loaned funds to Christopher J. Dawes pursuant to interest
free loans. These loans have had fluctuating balances equaling in the aggregate
$158,613 at September 30, 1996 and $1.2 million at September 30, 1997. The
outstanding loan balance as of September 30, 1996 has been translated from
British pounds sterling into United States dollars solely for the convenience of
the reader at L1.00 = $1.6185, based on the New York foreign exchange selling
rate at 4:00 p.m. Eastern time as reported in the Wall Street Journal.
All future transactions, including loans between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors.
57
<PAGE> 59
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of September 30, 1997 and
as adjusted to reflect the sale of the Common Stock offered hereby for: (i) each
of the directors and Named Executive Officers of the Company; (ii) all directors
and executive officers of the Company as a group; and (iii) each other person
known by the Company to own beneficially more than 5% of the Company's Common
Stock. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OFFERING SHARES OWNED AFTER THE OFFERING
-------------------------- BEING ---------------------------
NUMBER PERCENT(1)(2) OFFERED NUMBER PERCENT(1)(2)
---------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND
DIRECTORS
Christopher J. Dawes......... 3,609,231 28.7
Mark J. Peach(3)............. 83,020
Stephen A. Allott(4)......... 84,637 *
Timothy J. Tokarsky(5)....... 77,000 *
Peter Shearan(6)............. 72,484 *
Angela Dawes................. 1,830,236 14.6
Jeffrey M. Drazan(7)......... 3,863,266 30.7
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
David C. Schwab(8)........... 4,031,042 32.1
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
OTHER 5% STOCKHOLDERS
Sierra Ventures V, L.P.(9)... 3,795,490 30.2
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
CITICORP(10)................. 777,605 6.2
155 East 53rd Street
1 CITICORP Center
New York, NY 10043
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (11
PERSONS)(11)............... 10,037,810 76.9
</TABLE>
- ---------------
* Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Common Stock subject to options currently exercisable or
exercisable within 60 days of September 30, 1997 are deemed outstanding for
purposes of computing the percentage ownership of the person holding such
option but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Except where indicated, and
subject to community property laws where applicable, the persons in the
table above have sole voting and investment power with respect to all
Common Stock shown as beneficially owned by them. Unless otherwise
indicated, the address of each of the individuals listed in the table is
c/o Micromuse Inc., 139 Townsend Street, San Francisco, CA 94107.
(3) Includes 83,020 shares subject to options which are exercisable within 60
days of September 30, 1997.
(4) Includes 84,637 shares subject to options which are exercisable within 60
days of September 30, 1997.
(5) Includes 77,000 shares subject to options which are exercisable within 60
days of September 30, 1997.
(6) Includes 72,484 shares subject to options which are exercisable within 60
days of September 30, 1997.
58
<PAGE> 60
(7) Includes 3,795,490 shares held by Sierra Ventures V, L.P., including
1,500,000 shares issuable upon the exercise of a warrant for Series A
Preferred Stock of the Company at $2.00 per share issued to Sierra Ventures
V, L.P. and the conversion of such shares into Common Stock, and 7,776
shares held by ZD. Air, Inc., a corporation. Mr. Drazan, a director of the
Company, is a general partner of SV Associates V, LP, which is the general
partner of Sierra Ventures V, L.P. Mr. Drazan disclaims beneficial
ownership of the shares held by Sierra Ventures V, L.P. except to the
extent of his pecuniary interest therein arising from his general
partnership interest in SV Associates V, LP.
(8) Includes 3,795,490 shares held by Sierra Ventures V, L.P., including
1,500,000 shares issuable upon the exercise of a warrant for Series A
Preferred Stock of the Company at $2.00 per share issued to Sierra Ventures
V, L.P. and the conversion of such shares into Common Stock. Mr. Schwab, a
director of the Company, is a general partner of SV Associates V, LP, which
is the general partner of Sierra Ventures V, L.P. Mr. Schwab disclaims
beneficial ownership of the shares held by Sierra Ventures V, L.P. except
to the extent of his pecuniary interest therein arising from his general
partnership interest in SV Associates V, LP.
(9) Includes 1,500,000 shares issuable upon the exercise of a warrant for
Series A Preferred Stock of the Company issued to Sierra Ventures V, L.P.
and the conversion of such shares into Common Stock. Messrs. Drazan and
Schwab, each a director of the Company, are general partners of SV
Associates V, LP, which is the general partner of Sierra Ventures V, L.P.
Each of Messrs. Drazan and Schwab disclaim beneficial ownership of the
shares held by Sierra Ventures V, L.P. except to the extent of his
pecuniary interest therein arising from his general partnership interest in
SV Associates V, LP.
(10) Pursuant to the terms of an Agreement between the Company and CITICORP,
dated as of September 8, 1997, CITICORP may vote in an election of the
Company's directors a number of its shares up to but not exceeding 4.99% of
the Company's outstanding Common Stock, including shares of Common Stock
issuable upon the exercise of outstanding options and shares of Common
Stock reserved for issuance under the Company's stock plans. The terms of
such agreement do not affect the rights of CITICORP to vote on any other
matter.
(11) Includes 479,525 shares of Common Stock issuable upon exercise of
immediately exercisable options held by certain officers and 3,803,266
shares held by entities affiliated with Messrs. Drazan and Schwab.
59
<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $0.01 par value, and
5,000,000 shares of Preferred Stock, $0.01 par value.
COMMON STOCK
As of September 30, 1997, there were 12,574,189 shares of Common Stock
outstanding that were held of record by 32 stockholders (assuming the conversion
of all outstanding shares of Preferred Stock into 5,988,336 shares of Common
Stock, which includes the issuance of 1,500,000 shares of Common Stock as
converted upon the anticipated exercise of an outstanding warrant). There will
be shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and assuming no exercise after September 30,
1997 of outstanding options) after giving effect to the sale of the shares of
Common Stock to the public offered hereby and the conversion of the Company's
Preferred Stock into Common Stock at a one-to-one ratio.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this Offering will be
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws
The Company's Restated Certificate of Incorporation provides that, upon the
closing of this Offering, the Board of Directors will be divided into two
classes of directors, with each class serving a staggered two-year term. The
classification of the Board of Directors has the effect of generally requiring
at least two annual stockholder meetings, instead of one, to replace a majority
of the Board members. The Restated Certificate of Incorporation also provides
that, effective upon the closing of this Offering, all stockholder actions must
be effected at a duly called meeting and not by consent in writing. Provisions
of the Bylaws and the Restated Certificate of Incorporation provide that the
stockholders may amend the Bylaws or certain provisions of the Restated
60
<PAGE> 62
Certificate of Incorporation only with the affirmative vote of 75% of the
Company's capital stock. Further, the Bylaws (i) provide that only the Board of
Directors may call special meetings of the stockholders and (ii) establish an
advance notice procedure for stockholder proposals to be brought before an
annual meeting of stockholders of the Company, including proposed nominations of
persons for election to the Board of Directors. These provisions of the Restated
Certificate of Incorporation and Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal. The provisions also are intended to discourage
certain tactics that may be used in proxy fights. However, such provisions could
have the effect of discouraging others from making tender offers for the
Company's shares and, as a consequence, they also may inhibit fluctuations in
the market price of the Company's shares that could result from actual or
rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company. See "Risk
Factors -- Anti-takeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combinations to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this Offering, the holders of 12,274,189 shares of Common Stock will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the
61
<PAGE> 63
terms of the agreement between the Company and the holders of such registrable
securities, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders exercising registration rights, such holders are entitled to notice of
such registration and are entitled to include shares of such Common Stock
therein. Additionally, such holders are also entitled to certain demand
registration rights pursuant to which they may require the Company to file a
registration statement under the Securities Act at its expense with respect to
their shares of Common Stock, and the Company is required to use its best
efforts to effect such registration. Further, holders may require the Company to
file additional registration statements on Form S-3 at the Company's expense.
All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and the right of the Company
not to effect a requested registration within six months following an offering
of the Company's securities, including the Offering made hereby.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services and its telephone number is (415) 743-1444.
62
<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have approximately
shares of Common Stock outstanding (assuming no exercise of options or
issuance of Common Stock subsequent to September 30, 1997 other than the
issuance of 1,500,000 shares of Common Stock as converted upon the anticipated
exercise of an outstanding warrant). All of the shares sold in this
Offering are freely tradeable without restriction or further registration under
the Securities Act, except for any shares purchased by affiliates of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"), which may generally be sold only in compliance with certain of
the limitations of Rule 144 described below.
The remaining 12,988,333 shares of Common Stock are deemed "restricted
securities" under Rule 144. Restricted shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rules 144, 144(k) and 701, no shares will be available for
immediate sale in the public market on the date of this Prospectus. Beginning
180 days after the date of this Prospectus, upon the expiration of transfer
restrictions specified in preexisting agreements or in lock-up agreements with
Deutsche Morgan Grenfell Inc., (i) no shares will be available for immediate
sale in the public market in accordance with Rule 144(k) and (ii) approximately
9,945,371 shares will be available for sale in the public market in accordance
with Rule 144 or Rule 701, subject to the volume and other resale limitations of
Rule 144, other than the one year holding period. The remaining 2,568,818 shares
are eligible for sale in the public market more than 180 days after the date of
this Prospectus.
All officers and directors and certain stockholders and certain option
holders of the Company have agreed not to offer, pledge, sell, contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly (or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of), any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 180 days
after the date of this Prospectus, without the prior written consent of Deutsche
Morgan Grenfell Inc.
In general, under Rule 144, beginning approximately 90 days after the
effective date of the Registration Statement of which this Prospectus is a part,
a stockholder, including an Affiliate, who has beneficially owned his or her
restricted securities (as that term is defined in Rule 144) for at least one
year from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate, is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately shares immediately after this Offering) or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company, a stockholder who is not
an Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements of Rule
144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this Offering) are also restricted securities and, beginning 90 days after
the date of this Prospectus, may be sold by stockholders other than Affiliates
of the Company subject only to the manner of sale provisions of Rule 144 and by
an Affiliate under Rule 144 without compliance with its one-year holding period
requirement. As of September 30, 1997, the holders of options exercisable into
approximately
63
<PAGE> 65
1,312,086 shares of Common Stock will be eligible to sell their shares upon the
expiration of transfer restrictions specified in the Stock Option Plan 180 days
after the date of this Prospectus, subject in certain cases to vesting of such
options.
Prior to this Offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.
The Company intends to file after the effective date of this Offering a
Registration Statement on Form S-8 to register approximately shares of
Common Stock reserved for issuance pursuant to the Stock Option Plan and the
ESPP. Such Registration Statement will become effective automatically upon
filing. Shares issued under the foregoing plan, after the filing of a
Registration statement on Form S-8, may be sold in the open market, subject, in
the case of certain holders, to the Rule 144 limitations applicable to
affiliates, the above-referenced preexisting transfer restrictions and vesting
restrictions imposed by the Company.
In addition, following this Offering, the holders of 12,274,189 shares of
outstanding Common Stock will, under certain circumstances, have rights to
require the Company to register their shares for future sale. See "Description
of Capital Stock -- Registration Rights."
64
<PAGE> 66
UNDERWRITING
The Underwriters named below, for whom Deutsche Morgan Grenfell Inc.,
NationsBanc Montgomery Securities, Inc. and Smith Barney Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement (the form of which
will be filed as an exhibit to the Company's Registration Statement, of which
this Prospectus is a part), to purchase from the Company and the Selling
Stockholders the respective number of shares of Common Stock indicated below
opposite their respective names. The Underwriters are committed to purchase all
of the shares, if they purchase any.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Deutsche Morgan Grenfell Inc.....................................................
NationsBanc Montgomery Securities, Inc...........................................
Smith Barney Inc.................................................................
-------
Total..................................................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers
(who may include the Underwriters) a concession of not more than $ per
share. The selected dealers may reallow a concession of not more than $ per
share to certain other dealers. After the initial public offering, the price and
concessions and re-allowances to dealers and other selling terms may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part. The Underwriters do not intend to
sell any of the shares of Common Stock offered hereby to accounts for which they
exercise discretionary authority.
The Company and certain Selling Stockholders have granted an option to the
Underwriters to purchase up to maximum of additional shares of Common
Stock to cover over-allotments, if any, at the public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent the Underwriters exercise this option,
each of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover overallotments made in connection with this offering.
In connection with this offering, the Company and the directors, executive
officers, Selling Stockholders and certain other stockholders have agreed not to
offer or sell any Common Stock until the expiration of 180 days following the
date of the final Prospectus without the prior written consent of Deutsche
Morgan Grenfell Inc.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act, as amended,
or will contribute to payments the Underwriters may be required to make in
respect thereof.
In September 1997, the Company issued 155,521 shares of the Company's
Series C Preferred Stock at a per share purchase price of $6.43 to DMG
Technology Ventures L.L.C. ("DMG Technology"), an affiliate of Deutsche Morgan
Grenfell Inc. The shares owned by DMG Technology represent less than 2% of the
outstanding capital stock of the Company before the Offering. All of such shares
were acquired from the Company as a part of an equity financing on the
65
<PAGE> 67
same terms pursuant to which all other participants in the financing purchased
their shares. See "Certain Transactions -- September 1997 Financing."
In December 1996, Deutsche Bank AG ("Deutsche Bank"), an affiliate of
Deutsche Morgan Grenfell Inc., paid approximately $164,000 to the Company for a
license of the Company's software and a service and maintenance agreement in
connection therewith. In addition, the Company and Deutsche Bank entered into a
Software License Agreement dated September 19, 1997 whereby the Company granted
Deutsche Bank a non-exclusive irrevocable license to the Company's Netcool
products. Both transactions were consummated on terms established by arms-length
negotiations and on terms substantially similar to terms agreed upon by the
Company in other similar transactions entered into with its other customers at
approximately the same time.
Smith Barney, Inc. ("Smith Barney") paid approximately $160,000 to the
Company for a license of the Company's software and a service and maintenance
agreement in connection therewith. Smith Barney obtained such license and
service and maintenance agreement through arms-length negotiations on terms
substantially similar to terms obtained by other customers of the Company at
approximately the same time.
In May 1996, Smith Barney, Inc. ("Smith Barney") paid approximately
$160,000 to the Company for a license of the Company's software and a service
and maintenance agreement in connection therewith. Smith Barney obtained such
license and service and maintenance agreement through arms-length negotiations
on terms substantially similar to terms obtained by other customers of the
Company at approximately the same time.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation
between the Company and the Representatives. The principal factors to be
considered in determining the public offering price include the information set
forth in this Prospectus and otherwise available to the Representatives; the
history and the prospects for the industry in which the Company will compete;
the ability of the Company's management; the prospects for future earnings of
the Company; the present state of the Company's development and its current
financial condition; the general condition of the securities markets at the time
of this offering; and the recent market prices of, and the demand for, publicly
traded common stock of generally comparable companies. Each of the
Representatives has informed the Company that it currently intends to make a
market in the shares subsequent to the effectiveness of this offering, but there
can be no assurance that the Representatives will take any action to make a
market in any securities of the Company.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with this
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Menlo Park, California. As of September 30, 1997, an
investment partnership comprised of
66
<PAGE> 68
members of that firm beneficially owned 7,776 shares of the Company's Series C
Preferred Stock. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of Micromuse Inc. as of September 30, 1996 and
1997, and for each of the years in the three-year period ended September 30,
1997, have been included in this Prospectus and Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing in the Registration Statement.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part and
which term shall encompass any amendments thereto) on Form S-1 pursuant to the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules thereto, certain portions of which are omitted as
permitted by the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to any such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matters
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports and other
information with the Commission. The Registration Statement, the exhibits and
schedules forming a part thereof and the report and other information filed by
the Company with the Commission in accordance with the Exchange Act may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports
containing audited consolidated financial statements examined by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing interim unaudited consolidated financial information.
67
<PAGE> 69
MICROMUSE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of September 30, 1996 and 1997........................ F-3
Consolidated Statements of Operations for the Years Ended September 30, 1995, 1996,
and 1997........................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
September 30, 1995, 1996, and 1997................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1996,
and 1997........................................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Micromuse Inc.:
We have audited the accompanying consolidated balance sheets of Micromuse
Inc. and subsidiaries as of September 30, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Micromuse
Inc. and subsidiaries as of September 30, 1996, and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Palo Alto, California
December 10, 1997
F-2
<PAGE> 71
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1997
------ -------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 594 $13,741
Accounts receivable................................................. 5,682 4,461
Inventories......................................................... 399 --
Prepaid expenses and other current assets........................... 1,250 935
Related party loan.................................................. 159 1,153
------ ------
Total current assets........................................ 8,084 20,290
Property and equipment, net........................................... 1,023 2,450
------ ------
$9,107 $22,740
====== ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................... $4,048 $ 2,654
Bank overdraft...................................................... 1,351 --
Current portion of capital lease obligations........................ 114 --
Accrued expenses.................................................... 971 3,133
Short-term notes.................................................... 1,275 --
Deferred revenue.................................................... 1,172 1,322
------ ------
Total current liabilities................................... 8,931 7,109
Long-term liabilities:
Long-term portion of capital lease obligations...................... 130 --
Long-term notes..................................................... 268 --
Commitments and contingencies
Redeemable convertible preferred stock:
Series A, B, and C redeemable convertible preferred stock; $0.01 par
value; 1,500,000, 2,000,000, and 2,488,336 shares authorized,
respectively in 1997; none, 2,000,000, and 2,488,336 shares
issued and outstanding, respectively in 1997 (aggregate
liquidation value of $21,000,000)................................ -- 22,865
Stockholders' deficit:
Common stock, $0.01 par value; 18,500,000 shares authorized;
6,099,753 and 6,705,853 shares issued and outstanding in 1996 and
1997............................................................. 61 366
Additional paid-in capital.......................................... 264 2,091
Treasury stock, at cost: 120,000 shares............................. -- (300)
Deferred compensation............................................... -- (215)
Cumulative translation adjustment................................... 50 52
Accumulated deficit................................................. (597) (9,228)
------ ------
Total stockholders' deficit................................. (222) (7,234)
------ ------
$9,107 $22,740
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 72
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Revenues:
License................................................... $1,077 $3,374 $ 6,968
Maintenance and services.................................. 369 1,141 2,324
------ ------ -------
Total revenues.................................... 1,446 4,515 9,292
------ ------ -------
Cost of revenues:
License................................................... 163 311 523
Maintenance and services.................................. 102 384 1,042
------ ------ -------
Total cost of revenues............................ 265 695 1,565
------ ------ -------
Gross profit...................................... 1,181 3,820 7,727
------ ------ -------
Operating expenses:
Sales and marketing....................................... 728 1,768 8,970
Research and development.................................. 708 1,582 2,042
General and administrative................................ 584 996 4,244
------ ------ -------
Total operating expenses.......................... 2,020 4,346 15,256
------ ------ -------
Loss from operations.............................. (839) (526) (7,529)
Interest expense............................................ (106) (179) (1,404)
------ ------ -------
Loss before income taxes.......................... (945) (705) (8,933)
Income taxes................................................ -- 100 --
------ ------ -------
Loss from continuing operations................... (945) (805) (8,933)
Discontinued operations:
Income (loss) from discontinued operations, net of
taxes.................................................. 711 569 (104)
Gain on disposal of discontinued operations, net of
taxes.................................................. -- -- 1,161
------ ------ -------
Net loss.......................................... (234) (236) (7,876)
Accretion on redeemable convertible preferred stock......... -- -- (755)
------ ------ -------
Net loss applicable to holders of common stock.... $ (234) $ (236) $(8,631)
====== ====== =======
Per share of common stock:
Pro forma loss from continuing operations................. $ (0.83)
Pro forma loss from discontinued operations............... $ (0.01)
Pro forma gain on disposal of discontinued operations..... $ 0.11
Pro forma net loss applicable to holders of common
stock..................................................... $ (0.80)
=======
Shares used in per share calculation........................ 10,817
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 73
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK DEFERRED CUMULATIVE STOCKHOLDERS'
--------------- PAID-IN --------------- STOCK TRANSLATION ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION ADJUSTMENT DEFICIT (DEFICIT)
------ ------ ---------- ------ ------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
September 30,
1994................ 2,969 $ 30 $ 47 -- $ -- $ -- $-- $ 13 $ 90
Issuance of common
stock............... 2,968 29 48 -- -- -- -- (77) --
Foreign currency
translation
adjustment.......... -- -- -- -- -- -- 4 -- 4
Net loss.............. -- -- -- -- -- -- -- (234) (234)
Dividend.............. -- -- -- -- -- -- -- (63) (63)
----- ---- ------ ---- ------ ------ -------- -------- -------
Balances as of
September 30,
1995................ 5,937 59 95 -- -- -- 4 (361) (203)
Issuance of common
stock............... 163 2 2 -- -- -- -- -- 4
Deferred compensation
related to grants of
stock options....... -- -- 167 -- -- (167) -- -- --
Amortization of
deferred employee
compensation........ -- -- -- -- -- 167 -- -- 167
Foreign currency
translation
adjustment.......... -- -- -- -- -- -- 46 -- 46
Net loss.............. -- -- -- -- -- -- -- (236) (236)
----- ---- ------ ---- ------ ------ -------- -------- -------
Balances as of
September 30,
1996................ 6,100 61 264 -- -- -- 50 (597) (222)
Bonus shares issued... 450 5 1,138 -- -- -- -- -- 1,143
Stock options
exercised........... 36 -- 130 -- -- -- -- -- 130
Compensation expense
related to stock
transfers........... -- -- 210 -- -- -- -- -- 210
Treasury stock
purchased........... -- -- -- (120) (300) -- -- -- (300)
Issuance of common
stock............... 120 300 120 -- -- -- -- -- 420
Deferred compensation
related to grants of
stock options....... -- -- 229 -- -- (229) -- -- --
Amortization of
deferred employee
compensation........ -- -- -- -- -- 14 -- -- 14
Foreign currency
translation
adjustment.......... -- -- -- -- -- -- 2 -- 2
Net loss.............. -- -- -- -- -- -- -- (7,876) (7,876)
Accretion on
redeemable
convertible
preferred stock..... -- -- -- -- -- -- -- (755) (755)
----- ---- ------ ---- ------ ------ -------- -------- -------
Balances as of
September 30,
1997................ 6,706 $366 $2,091 (120) $(300) $ (215) $52 $(9,228) $(7,234)
===== ==== ====== ==== ====== ====== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 74
MICROMUSE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (234) $ (236) $ (7,876)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 489 603 669
Loss on disposal of assets................................. 484 242 51
Debt issuance costs........................................ -- -- 1,289
Amortization of deferred employee compensation............. -- 167 14
Compensation expense related to stock transfers............ -- -- 330
Compensation expense relating to bonus shares issued....... -- -- 1,143
Changes in operating assets and liabilities:
Accounts receivable...................................... (1,372) (2,495) 1,221
Inventories.............................................. 747 (53) 399
Prepaid expenses and other current assets................ (618) (294) 315
Related party loan....................................... (25) (127) (994)
Accounts payable......................................... 85 1,806 (1,394)
Accrued expenses......................................... 255 149 2,162
Deferred revenue......................................... 111 548 150
Long-term taxes payable.................................. 17 (22) --
-------- -------- --------
Net cash provided by (used in) operating activities... (61) 288 (2,521)
-------- -------- --------
Cash flows used in investing activities - capital
expenditures................................................. (397) (602) (2,147)
-------- -------- --------
Cash flows from financing activities:
Bank overdraft............................................... 309 677 (1,351)
Proceeds from short-term notes............................... 324 951 --
Payment of short-term notes.................................. -- -- (1,275)
Proceeds from long-term notes payable........................ 414 -- --
Payments on long-term notes payable.......................... (204) (205) (268)
Payments on capital lease obligations........................ (332) (577) (244)
Proceeds from issuance of common stock....................... -- 4 430
Purchase of treasury stock................................... -- -- (300)
Proceeds from issuance of redeemable convertible preferred
stock...................................................... -- -- 20,821
Payment of dividends......................................... (63) -- --
-------- -------- --------
Net cash provided by financing activities............. 448 850 17,813
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents... 4 46 2
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... (6) 582 13,147
Cash and cash equivalents at beginning of year................. 18 12 594
-------- -------- --------
Cash and cash equivalents at end of year....................... $ 12 $ 594 $ 13,741
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year - interest......................... $ 79 $ 159 $ 154
======== ======== ========
Noncash financing activities - accretion on redeemable
convertible preferred stock................................ $ -- $ -- $ 755
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 75
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1996, AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Micromuse Inc. and subsidiaries (the Company) develops, markets, and
supports a family of scaleable, highly configurable, rapidly deployable,
software solutions for the effective monitoring and management of multiple
elements underlying an enterprise's information technology infrastructure. The
Company maintains its U.S. headquarters in California and its European
headquarters in London, England.
Micromuse plc was incorporated in England in 1989 and operated in the
United States through its subsidiary, Micromuse (USA) Inc., a Texas corporation.
In 1997, Micromuse plc became a subsidiary of Micromuse Inc., a Delaware
corporation. The Company entered into a stock exchange agreement with the
stockholders of the English corporation in March 1997. The Company's Board of
Directors approved an exchange of one share in the English corporation for
5.9365 shares in the Delaware corporation. The Certificate of Incorporation of
the Delaware corporation authorizes 18,500,000 shares of common stock at $0.01
par value per share and 5,988,336 shares of preferred stock at $0.01 par value
per share. The accompanying consolidated financial statements have been
retroactively restated to give effect to the reorganization and exchange of
common stock.
Registration Statement
In December 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC)
permitting the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all the currently outstanding
shares of Series B preferred stock will automatically convert into 2,000,000
shares of common stock upon the closing of the proposed IPO. All of the
outstanding shares of Series C preferred stock will convert into 2,488,336
shares of common stock upon the written consent or agreement of the holders of
two-thirds of the outstanding shares of Series A, B, and C voting together as a
single class. The conversion of the preferred stock has been reflected in the
pro forma stockholders' equity as of September 30, 1997.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Cash Equivalents
The Company considers all highly liquid instruments with a purchased
maturity of 90 days or less to be cash equivalents.
F-7
<PAGE> 76
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
Concentration of Credit Risk
Financial instruments consist of cash and trade receivables. Trade
receivables potentially subject the Company to concentrations of credit risk.
The Company closely monitors extensions of credit and has not experienced
significant credit losses in the past. Credit losses have been provided for in
the consolidated financial statements and have been within management's
expectations.
Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and the redeemable convertible preferred stock
approximate their respective carrying amounts defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally three years.
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed Of. The adoption of SFAS No. 121
did not have a material effect on the Company's consolidated financial position
or results of operations.
Revenue Recognition
Revenues from software licenses are generally recognized upon shipment,
provided that no significant obligations remain and collection of the resulting
receivable is probable. Maintenance revenues for customer support are deferred
and recognized ratably over the term of the maintenance period, generally one
year. Consulting revenue is recognized when services are performed. In October
1997, the American Institute of Certified Public Accountants issued Statement of
Position 97-2, Software Revenue Recognition (SOP 97-2). SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, postcontract customer
support, installation and training to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence which is specific to the vendor. The revenue allocated to software
products, including specified upgrades or enhancements generally is recognized
upon delivery of the products. The revenue allocated to postcontract customer
support generally is recognized ratably over the term of the support, and
revenue allocated to service elements generally is recognized as the services
are performed. If evidence of the fair value for all element arrangement does
not exist, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered. The SOP is effective for fiscal
years beginning after December 15, 1997. The Company does not expect a material
change to its accounting for revenue as a result of adoption of SOP 97-2.
Research and Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, development costs related to
software products are expensed as incurred until the technological feasibility
of the product has been established. Technological
F-8
<PAGE> 77
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
feasibility in the Company's circumstances occurs when a working model is
completed. After technological feasibility is established, additional costs
would be capitalized. The Company believes its process for developing software
is essentially completed concurrent with the establishment of technological
feasibility, and, accordingly, no research and development costs have been
capitalized to date.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled.
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements using
the intrinsic value method. As such, compensation expense is recorded when on
the date of grant the fair value of the underlying common stock exceeds the
exercise price for stock options or the purchase price for issuance or sales of
common stock.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
foreign currency. The Company translates the assets and liabilities of its
foreign subsidiaries to U.S. dollars at the rates of exchange in effect at the
end of the year. Revenues and expenses are translated at the average rates of
exchange for the year. Translation adjustments are included in stockholders'
deficit in the consolidated balance sheets. Gains and losses resulting from
foreign currency transactions denominated in a currency other than the
functional currency are included in income and have not been significant to the
Company's consolidated operating results in any period.
Pro Forma Net Loss Per Share
Pro forma net loss per share data is based on the weighted-average number
of shares of common stock and, when dilutive, common equivalent shares from
stock options and warrants outstanding, using the treasury stock method, and
convertible preferred stock on an "as if converted" basis.
Pursuant to certain SEC Staff Accounting Bulletins, common stock and
convertible preferred stock issued for consideration below the assumed IPO
price, and stock options granted and warrants issued with exercise prices below
the assumed IPO price during the 12-month period prior to the date of the
initial filing of the registration statement, even when antidilutive, have been
included in the calculation of pro forma net loss per share, using the treasury
stock method based on the assumed IPO price, as if they were outstanding for all
periods presented prior to their issuance or grant.
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
128, Earnings Per Share. SFAS No. 128 requires the presentation of basic
earnings per share (EPS) and, for companies with complex capital structures,
diluted EPS. SFAS No. 128 is effective for annual and interim periods ending
after December 15, 1997, and requires restatement of all prior period
F-9
<PAGE> 78
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
earnings per share data presented. The Company expects that for profitable
periods basic EPS will be higher than earnings per share as presented in the
accompanying consolidated financial statements, and diluted EPS will not differ
materially from earnings per share as presented in the accompanying consolidated
financial statements. Computations for loss periods should not change
significantly. The Company will adopt SFAS No. 128 in the first quarter of
fiscal 1998.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements. It does not,
however, require a specific format for the statement, but requires the Company
to display an amount representing total comprehensive income for the period in
that financial statement. The Company is in the process of determining its
preferred format. This statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. The Company has not yet determined whether it
has any separately reportable business segments.
F-10
<PAGE> 79
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
2. DISCONTINUED OPERATIONS
In July 1997, the Company adopted a formal plan to discontinue its Systems
Integration division based in England. In September the Company sold the
division for approximately $400,000 in cash, net of fees. The disposition of the
division in September 1997 has been accounted for as a discontinued operation in
accordance with APB Opinion No. 30 and prior period consolidated financial
statements have been restated to reflect the discontinuation of the Systems
Integration business. Revenue from discontinued operations was $16.6 million,
$14.0 million and $15.7 million, respectively in fiscal 1995, 1996 and 1997. The
income (loss) from discontinued operations of $711,000, $569,000, and ($104,000)
in fiscal 1995, 1996, and 1997, respectively, represents the operation's
operating income, net of taxes. The gain on disposal of discontinued operations
of $1.2 million in fiscal 1997 represents the gain on disposal of the operation
including net income from operations of $256,000 from the measurement date to
the disposal date. The following assets and liabilities are included in the
consolidated balance sheet as of September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Cash and cash equivalents........................................ $ 162
Accounts receivable.............................................. 4,137
Inventory........................................................ 399
Prepaid expenses and other current assets........................ 692
Property and equipment........................................... 710
-------
Total assets..................................................... 6,100
Deferred revenue................................................. (1,049)
Other liabilities................................................ (6,131)
-------
Net liabilities.................................................. $(1,080)
=======
</TABLE>
If the revenues of the Systems Integration business and purchaser combined
exceed $22.9 million in the first year following the disposal date, additional
consideration of $250,000 is payable to the Company. At the end of the option
period, which expires at December 16, 1997, the purchaser has the option to pay
the Company further consideration of $250,000. If the purchaser decides not to
pay this amount, the Company is released from all obligations to perform any
services for the purchaser except as explicitly specified by the contract. As of
September 30, 1997, the Company has not recorded either of these amounts.
3. BALANCE SHEET COMPONENTS
Property and equipment
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
In thousands:
Computer equipment.................................... $ 1,583 $2,819
Furniture and fixtures................................ 196 959
Other................................................. 591 597
------ ------
2,370 4,375
Less accumulated depreciation......................... (1,347) (1,925)
------ ------
$ 1,023 $2,450
====== ======
</TABLE>
F-11
<PAGE> 80
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
Accrued expenses
<TABLE>
<S> <C> <C>
In thousands:
Payroll and commission related........................ $ 125 $ 996
Other................................................. 846 2,137
---- ------
$ 971 $3,133
==== ======
</TABLE>
4. RELATED PARTY TRANSACTIONS
In November 1997, the interest free loan to a stockholder who is an officer
and director of the Company was repaid through the Company's repurchase of
common stock. See Note 11 for subsequent event discussion.
5. NOTES PAYABLE
In February 1995, the Company entered into a $597,000 loan agreement with a
bank, bearing interest at 10% per annum, expiring in December 2000. The note was
repaid in full by the Company in 1997.
6. STOCKHOLDERS' EQUITY
Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock as of September 30, 1997, was
comprised of the following:
<TABLE>
<CAPTION>
SHARES
ISSUED AND CARRYING
OUTSTANDING VALUE
----------- -----------
<S> <C> <C>
Series A..................................... -- $ 1,468,000
Series B..................................... 2,000,000 5,333,000
Series C..................................... 2,488,336 16,064,000
---------- -----------
4,488,336 $22,865,000
========== ===========
</TABLE>
Holders of Series A, B, and C preferred stock may convert all or part of
their shares at any time after the date of issuance into such number of common
stock as is determined by dividing $2.00, $2.50 and $6.43, respectively, by the
conversion price in effect at the time. Conversion is automatic upon the closing
of an IPO of the Company's common stock, with respect to Series A and B, at a
price of not less than $6.86 per share and with aggregate proceeds of not less
than $10 million and with respect to Series C, at a price not less than $9.65
per share if such public offering occurs on or before September 8, 1998, and
$12.86 per share thereafter, and with aggregate proceeds of not less than $10
million or by written consent or agreement of the holders of two-thirds of the
outstanding shares of Series A, B, and C voting together as a single class.
The holders of the Series A, B, and C preferred stock shall be entitled to
receive noncumulative dividends of $0.20, $0.25, and $0.643 per share per annum,
respectively, when, and if, declared by the Board of Directors.
Upon the occurrence of a liquidation event, such as a dissolution of the
Company or a merger or sale of assets, the holders of Series A, B, and C
preferred stock shall be entitled to receive in preference to holders of common
stock an amount equal to the original issuance price and an
F-12
<PAGE> 81
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
amount equal to declared but unpaid dividends, and thereafter, share any
remaining proceeds on a pro rata basis with the holders of common stock based on
the number of shares of common stock held by each, assuming full conversion of
Series A, B, and C preferred stock.
The Company shall redeem the Series A, B, and C preferred stock at the
option of the holders of preferred stock after March 6, 2002, subject to
reasonable financial stability considerations, payable quarterly thereafter
until satisfied. The holders of preferred stock shall be entitled to a
redemption price per share equal to the original issuance price, plus an
annually compounded 15% cumulative rate of return thereon.
A $3.0 million line of credit was made available to the Company in March
1997. Interest under the line of credit was at no more than prime plus 2% and
funds drawn were to be used to finance an acquisition or other vehicle of growth
as approved by the Board of Directors. The $3.0 million line of credit was
available as of September 30, 1997. If exercised, the line of credit will become
due and payable upon the earliest of a qualified public offering, a qualified
acquisition, or expiration of the Series A warrant issued in conjunction with
the line of credit. During fiscal 1997, the Company drew down $1.0 million which
was repaid as of September 30, 1997. The warrant expires on the earlier of March
2002, or the closing date of a public offering, merger, or acquisition of the
Company. The warrant issued in conjunction with the line of credit allows the
holder to purchase 1,500,000 shares of the Series A preferred stock at an
exercise price of $2.00 per share. The warrant was initially recorded at fair
value and treated as a debt issuance cost. These costs are being amortized to
interest expense over the period from the date of issuance to the anticipated
date of the initial public offering, which resulted in a noncash interest charge
of $989,000 in fiscal 1997.
Common Stock
In March 1997, approximately 450,000 shares of common stock were issued to
stockholders as bonuses. The Company recorded compensation expense of $1,138,000
for the fair market value of such shares. During fiscal 1997, the principal
stockholders transferred shares of common stock to certain employees. The
Company recorded compensation expense of $210,000 for the difference between the
fair market value and the transfer price of the common stock.
Under the Company's 1997 Stock Option/Stock Issuance Plan (the Plan),
options to purchase up to an aggregate of approximately 1,532,000 shares of
common stock may be granted to employees, officers, directors, and consultants.
If the warrant to purchase 1,500,000 shares of Series A is exercised upon an
IPO, options to purchase an additional 166,666 shares of common stock will be
reserved under the Plan. The Plan provides for the issuance of incentive options
to employees that must be granted at an exercise price not less than 100% (110%
if the person to whom the option is granted is a 10% stockholder) of the fair
market value of the common stock on the date of grant. Options generally vest
over four years from the date of grant. The options expire between 5 and 10
years from the grant date, and any vested options must normally be exercised
within three months after termination of employment. The Plan is administered by
the Company's Board of Directors.
F-13
<PAGE> 82
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
A summary of the status of the Company's options under the plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE AVERAGE
OF EXERCISE FAIR
SHARES PRICE VALUE
-------- --------- ---------
<S> <C> <C> <C>
Balances as of September 30, 1994...... 444,875 $2.41 --
Granted at market value................ 31,208 2.40 --
Balances as of September 30, 1995...... 476,083 2.41 --
Granted at greater than market value... 212,266 3.21 0.10
Granted at market value................ 70,765 2.31 0.36
Granted at less than market value...... 133,915 1.06 1.43
Canceled............................... (317,650) 2.31 --
Balances as of September 30, 1996...... 575,379 2.43 --
Granted at greater than market value... 269,992 2.50 1.25
Granted at market value................ 640,856 2.55 0.43
Exercised.............................. (36,320) 3.50 --
Canceled............................... (137,821) 3.31 --
Balances as of September 30, 1997...... 1,312,086 2.38 --
========= ======= ====
</TABLE>
As of September 30, 1996 and 1997, 338,083 and 267,687 shares, with
weighted-average exercise prices of $2.43 and $1.97, were fully vested and
exercisable, respectively. As of September 30, 1997, 100,000 shares are
available for grant.
The following table summarizes information concerning outstanding and
exercisable options under the plans outstanding as of September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ----------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE LIFE (IN EXERCISE EXERCISE
PRICES SHARES YEARS) PRICE SHARES PRICE
- ------------- --------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
$0.03 - 2.50 1,237,984 9.13 $ 2.29 202,825 $ 1.43
$6.43 74,102 6.34 3.99 64,862 3.64
---- ----- --------- -----
1,312,086 8.97 $ 2.38 267,687 $ 1.97
==== ===== ========= =====
</TABLE>
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans. Accordingly, no compensation cost has
been recognized for its stock options in the accompanying consolidated financial
statements because the fair value of the underlying common stock equals or
exceeds the exercise price of the stock options at the date of grant, except
with respect to certain options issued in 1996 and during fiscal 1997. The
Company has recorded deferred stock compensation expense of $167,000 and
$229,000 for the difference at the grant date between the exercise price and the
fair value of the common stock underlying the options issued in September 1996
and fiscal 1997, respectively. The $167,000 was amortized in fiscal 1996 as the
options were fully vested upon issuance and $14,000 of the $229,000 was
amortized in fiscal 1997 as the options vest over four years.
Had compensation cost for the Company's stock options been determined in a
manner consistent with SFAS No. 123, Accounting for Stock-Based Compensation,
the Company's net loss
F-14
<PAGE> 83
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
and loss per share would not have been materially different from that disclosed
in the Consolidated Statements of Operations.
The per share weighted-average fair value of stock options granted during
1996 and 1997 was $0.57 and $0.67, respectively, on the date of grant using the
minimum value method with the following weighted assumptions: 1996 -- expected
dividend yield 0.0%, risk-free interest rate of 6.06%, and expected life of 3
years; 1997 -- expected dividend yield of 0.0%, risk-free interest rate of
6.28%, and expected life of 3 years.
In July 1997, 120,000 shares were issued to two directors at $2.50 per
share, under the Plan. The Company has recorded stock compensation expense of
$120,000, for the difference between the issuance price and the fair market
value of the common stock.
Preferred Stock
In 1997, the Board of Directors approved an amendment to the Certificate of
Incorporation to allow, upon completion of the IPO, the issuance of up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, and privileges, including voting and redemption rights of those
shares without further vote or action by the stockholders.
7. INCOME TAXES
The provision for income taxes attributable to continuing operations in
fiscal 1996 was primarily for current federal income taxes. As of September 30,
1997, the Company had approximately $2.4 million and $1.4 million of net
operating loss carryforwards for federal and state purposes, respectively. The
federal net operating loss carryforwards expire in 2012. The state net operating
loss carryforwards expire primarily in 2002. The difference between the federal
and state net operating loss carryforwards is due primarily to a 50% limitation
on net operating loss carryforwards for California purposes. As of September 30,
1997, the Company also had approximately $1.8 million and $200,000 of loss
carryforwards in England and Australia, respectively. The loss carryforwards of
the English company can be carried forward indefinitely. The Australian loss
carryforwards can also be carried forward indefinitely, subject to certain
restrictions.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of September 30, 1996 and 1997, are presented
below (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Various accruals and reserves not deductible for tax
purposes.................................................. $ -- $ 498
Net operating loss carryforwards............................ 28 1,525
Property and equipment...................................... 56 124
Other....................................................... -- 25
------- -------
Total deferred tax assets......................... 84 2,172
Valuation allowance......................................... (84) (2,172)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>
The valuation allowance increased by $2.1 million for the year ended
September 30, 1997.
Income (loss) before income taxes is comprised as follows (in thousands):
F-15
<PAGE> 84
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
United States.................................... $ (5) $ 851 $(4,931)
Europe........................................... (940) (1,556) (4,002)
------- ------- -------
Total....................................... $(945) $ (705) $(8,933)
======= ======= =======
</TABLE>
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an "ownership
change" as defined in Section 382 of the Internal Revenue Code. The Company has
not yet determined whether an ownership change occurred due to significant stock
transactions in each of the reporting years disclosed. If an ownership change
has occurred, utilization of the net operating loss carryforwards could be
significantly reduced. Additionally, loss carryforwards of either Micromuse Inc.
or Micromuse USA Inc. cannot be utilized against future profits generated by the
other company.
Total income tax expense from continuing operations differs from expected
income tax expense (computed by applying the U.S. federal corporate income tax
rate of 34% to profit (loss) before taxes, as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory
rate............................................... $(321) $(240) $(2,532)
State income taxes, net of federal income tax
benefit............................................ -- 10 --
Unutilized losses.................................... 321 345 2,514
Change in beginning of year valuation allowance...... -- (16) --
Other................................................ -- 1 18
----- ----- -------
$ -- $ 100 $ --
====== ====== =======
</TABLE>
8. GEOGRAPHIC INFORMATION
The Company markets its products primarily from its operations in the
United States. Direct sales in Europe are primarily to customers in France,
Germany, and the United Kingdom. Information regarding operations in different
geographic regions is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Revenues:
United States.................................... $ 349 $2,030 $ 4,810
Europe........................................... 1,097 2,485 4,482
------ ------ -------
Total.................................... $1,446 $4,515 $ 9,292
====== ====== =======
Income (loss) from continuing operations:
United States.................................... $ (5) $ 725 $(4,931)
Europe........................................... (940) (1,530) (4,002)
------ ------ -------
Total.................................... $ (945) $ (805) $(8,933)
====== ====== =======
Identifiable assets:
United States.................................... $ 164 $1,467 $15,398
Europe........................................... 5,603 7,640 7,342
------ ------ -------
Total.................................... $5,767 $9,107 $22,740
====== ====== =======
</TABLE>
Intercompany transfers between geographic areas are accounted for using the
transfer prices in effect for subsidiaries.
F-16
<PAGE> 85
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
9. MAJOR CUSTOMERS
A summary of the net sales to major customers that exceed 10% of total
revenues during each of the years in the three-year period ended September 30,
1997, and the amount due from these customers as of September 30, 1997, follows
(accounts receivable in thousands):
<TABLE>
<CAPTION>
ACCOUNTS
1995 1996 1997 RECEIVABLE
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Customer 1................................ -- -- 19% $311
Customer 2................................ 53% 14% 11% 898
</TABLE>
10. COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating leases. The lease agreements expire at various dates during the next
11 years.
Rent expense was approximately $80,000, $215,000 and $538,000 for the years
ended September 30, 1995, 1996, and 1997, respectively. Future minimum lease
payments under noncancelable operating leases will be approximately $890,000,
$822,000, $764,000, $667,000, $325,000 and $825,000 for each of the years in the
five-year period and thereafter, respectively.
In August 1997, the Company obtained a lease facility of $300,000 for
equipment. The term of the lease facility is 42 months. As of September 30,
1997, the lease facility remained unused.
11. SUBSEQUENT EVENT
In November 1997, the Company repurchased, from a stockholder who is an
officer and a director, 777,605 shares of common stock at $6.43 per share for a
total price of $5.0 million.
F-17
<PAGE> 86
MICROMUSE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1995, 1996, AND 1997
12. PRO FORMA INFORMATION (UNAUDITED)
The following table reflects the conversion of the redeemable convertible
preferred stock into 4,488,336 shares of common stock in the accompanying
consolidated balance sheet (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash..................................... $13,741 $ 3,000 $ 16,741
Other current assets..................... 6,549 -- 6,549
------- ------- ------
Total current assets............. 20,290 -- 23,290
Other noncurrent assets.................... 2,450 -- 2,450
------- ------- ------
Total assets..................... $22,740 $ 3,000 $ 25,740
======= ======= ======
Total liabilities.......................... $ 7,109 $ -- $ 7,109
Redeemable convertible preferred stock..... 22,865 (22,865) --
Stockholders' equity (deficit)
Common stock............................. 366 60 426
Additional paid-in capital............... 2,091 25,805 27,896
Treasury stock, at cost:
120,000 shares........................ (300) -- (300)
Deferred stock compensation.............. (215) -- (215)
Cumulative translation adjustment........ 52 -- 52
Accumulated deficit...................... (9,228) -- (9,228)
------- ------- ------
Total stockholders' equity
(deficit)........................... (7,234) 25,865 18,631
------- ------- ------
Total liabilities and
stockholders' equity
(deficit)...................... $22,740 $ 3,000 $ 25,740
======= ======= ======
</TABLE>
F-18
<PAGE> 87
Netcool(R), Micro Muse M(R) and the Micromuse logo are registered
trademarks of the Company and Micromuse(TM) NETCOOL/OMNIbus(TM) and
Netcool/Reporter(TM) are trademarks of the Company. All other trademarks or
service marks appearing in this Prospectus are trademarks or service marks of
the respective companies that utilize them.
<PAGE> 88
APPENDIX
Page 36: Graphical illustration of the architecture
of the Company's Netcool product suite.
<PAGE> 89
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 4
Risk Factors.......................... 5
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 31
Management............................ 47
Certain Transactions.................. 56
Principal and Selling Stockholders.... 58
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 63
Underwriting.......................... 65
Legal Matters......................... 66
Experts............................... 67
Additional Information................ 67
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
LOGO
SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
NATIONSBANC MONTGOMERY SECURITIES
SALOMON SMITH BARNEY
PROSPECTUS
, 1998
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee................................................... $ 9,160
NASD fee............................................................... 3,605
Nasdaq National Market listing fee..................................... 1,000
Printing and engraving expenses........................................ *
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
Blue sky fees and expenses............................................. *
Transfer agent fees.................................................... *
Miscellaneous fees and expenses........................................ *
--------
Total........................................................ $ *
========
</TABLE>
- ---------------
* To be disclosed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IX, Section 1, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Restated
Certificate of Incorporation provides that, pursuant to Delaware law, its
directors shall not be liable for monetary damages for breach of the directors'
fiduciary duty as directors to the Company and its stockholders. This provision
in the Restated Certificate of Incorporation does not eliminate the directors'
fiduciary duty, and in appropriate circumstances equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a form
of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. Reference is made to Section 6 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities.
II-1
<PAGE> 91
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 30, 1994, the Registrant has sold and issued the following
unregistered securities:
1. The Registrant issued and sold 120,000 shares of its Common Stock
to certain directors pursuant to direct issuances under its 1997 Stock
Option/Stock Issuance Plan (Exhibit 10.3).
2. On April 18, 1996, the Registrant issued and sold notes convertible
to Series A Preferred Stock in the aggregate principal amount of $1,000,000
to M.D. Strategic, L.P., Seedling Fund, L.P. and P.V. II, L.P. The notes
were repaid without conversion to Series A Preferred Stock.
3. On March 6, 1997, the Registrant issued and sold a warrant
exercisable for 1,500,000 shares of Series A Preferred Stock at $2.00 per
share in consideration for the execution and delivery of a Credit Agreement
whereby Sierra Ventures V, L.P. agreed to make revolving loans to the
Registrant in an aggregate amount of up to $3,000,000 for a period of five
years and 2,000,000 shares of Series B Preferred Stock for an aggregate
purchase price of $5,000,000 to Sierra Ventures V, L.P.
4. On September 8, 1997, the Registrant issued and sold 2,488,336
shares of Series C Preferred Stock for an aggregate purchase price of
$16,000,000.48 to a group of eighteen investors.
The issuances described in Item 15(a)(1) were deemed exempt from
registration under the Act in reliance upon Rule 701 promulgated under the Act.
The issuance of the securities described in items 15(a)(2), (3) and (4) were
deemed to be exempt from registration under the act in reliance on Section 4(2)
of the Act as transactions by an issuer not involving any public offering. In
addition, the recipients of the above-described securities represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof. Appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through employment or other relationships
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (preliminary form).
2.1 Agreement for the sale of the systems integration business of Micromuse plc by and
among Micromuse plc, Horizon Open Systems (UK) Limited and Horizon Computer Services
Limited, dated as of September 16, 1997.
3.1 Restated Certificate of Incorporation of the Registrant, as amended to date.
3.2* Form of Restated Certificate of Incorporation to be filed upon the closing of the
offering made pursuant to this Registration Statement.
3.3 Bylaws of the Registrant.
3.4* Form of Amended and Restated Bylaws to be effective upon the effectiveness of this
Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4. and 10.4.
4.2* Specimen Common Stock certificate.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.
</TABLE>
II-2
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
10.1 Form of Indemnity Agreement to be entered into between the Registrant and its
directors and officers prior to the effectiveness of this Registration Statement.
10.2* 1997 Stock Option/Stock Issuance Plan and forms of agreements thereunder.
10.3* 1997 Employee Stock Purchase Plan.
10.4* Amended and Restated Investors' Rights Agreement by and among the Registrant and
certain stockholders of the Registrant, dated as of September 8, 1997.
10.5 Office lease, dated as of March 25, 1997, by and between the Registrant and SOMA
Partners, L.P.
10.6 Office lease, dated as of March 3, 1997, by and between Micromuse plc, Marldown
Limited and Christopher J. Dawes.
10.7 Office lease, dated as of March 3, 1993, by and between Micromuse plc, Guildquote
Limited and Christopher J. Dawes.
10.8 Agreement for the sale of the systems integration business of Micromuse plc dated as
of September 16, 1997. Reference is made to Exhibit 2.1.
11 Computation of weighted average shares outstanding.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. Reference
is made to Exhibit 5.1.
24.1 Power of Attorney (see page II-5).
27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment
(B) FINANCIAL STATEMENT SCHEDULES
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Restated
Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance
II-3
<PAGE> 93
upon Rule 430A and contained in a form of Prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California, on this 12th day of December, 1997.
MICROMUSE INC.
By: /s/ CHRISTOPHER J. DAWES
------------------------------------
Christopher J. Dawes
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Christopher J. Dawes and Stephen A.
Allott, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------- --------------------
<C> <S> <C>
/s/ CHRISTOPHER J. DAWES President, Chief December 12, 1997
- --------------------------------------------- Executive Officer and
Christopher J. Dawes Director (Principal
Executive Officer)
/s/ STEPHEN A. ALLOTT Senior Vice President, December 12, 1997
- --------------------------------------------- Finance (Principal
Stephen A. Allott Financial and
Accounting Officer)
/s/ ANGELA DAWES Director of Sales, December 12, 1997
- --------------------------------------------- Western Region and
Angela Dawes Director
/s/ JEFFREY M. DRAZAN Director December 12, 1997
- ---------------------------------------------
Jeffrey M. Drazan
/s/ DAVID C. SCHWAB Director December 12, 1997
- ---------------------------------------------
David C. Schwab
</TABLE>
II-5
<PAGE> 95
EXHIBIT INDEX
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement (preliminary form).
2.1 Agreement for the sale of the systems integration business of Micromuse plc by and
among Micromuse plc, Horizon Open Systems (UK) Limited and Horizon Computer Services
Limited, dated as of September 16, 1997.
3.1 Restated Certificate of Incorporation of the Registrant, as amended to date.
3.2* Form of Restated Certificate of Incorporation to be filed upon the closing of the
offering made pursuant to this Registration Statement.
3.3 Bylaws of the Registrant.
3.4* Form of Amended and Restated Bylaws to be effective upon the effectiveness of this
Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, and 10.4.
4.2* Specimen Common Stock certificate.
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.
10.1 Form of Indemnity agreement to be entered into between the Registrant and its
directors and officers prior to the effectiveness of this Registration Statement.
10.2* 1997 Stock Option/Stock Issuance Plan and forms of agreements thereunder.
10.3* 1997 Employee Stock Purchase Plan.
10.4* Amended and Restated Investors' Rights Agreement by and among the Registrant and
certain stockholders of the Registrant, dated as of September 8, 1997.
10.5 Office lease, dated as of March 25, 1997, by and between the Registrant and SOMA
Partners, L.P.
10.6 Office lease, dated as of March 3, 1997, by and between Micromuse plc, Marldown
Limited and Christopher J. Dawes.
10.7 Office lease dated as of March 3, 1997, by and between Micromuse plc, Guildquote
Limited and Christopher J. Dawes.
10.8 Agreement for the sale of the systems integration business of Micromuse plc dated as
of September 16, 1997. Reference is made to Exhibit 2.1.
11 Computation of weighted average shares outstanding.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2* Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. Reference
is made to Exhibit 5.1.
24.1 Power of Attorney (see page II-5).
27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 1.1
DEUTSCHE MORGAN GRENFELL INC.
EQUITY CAPITAL MARKETS
Dated _________, 1998
MICROMUSE INC.
________ Shares
Common Stock
UNDERWRITING
AGREEMENT
-1-
<PAGE> 2
Micromuse Inc.
________ Shares
Plus an option to purchase up to ___
additional shares to cover over-allotments
Common Stock
UNDERWRITING AGREEMENT
____________, 1997
DEUTSCHE MORGAN GRENFELL INC.
NATIONSBANC MONTGOMERY SECURITIES, INC.
SMITH BARNEY INC.
As Representatives of the several Underwriters
c/o Deutsche Morgan Grenfell Inc.
31 West 52nd Street
New York, New York 10019
Dear Sirs:
Micromuse Inc., a Delaware corporation (the "Company"), and the persons
named in Schedule 2 hereto (the "Selling Stockholders") hereby confirm their
agreement with the several underwriters named in Schedule 1 hereto (the
"Underwriters"), for whom you have been duly authorized to act as
representatives (the one or more firms acting in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be references to the
Underwriters.
Section 1. Underwriting. Subject to the terms and conditions contained herein:
(a) The Company proposes to issue and sell ________ shares of common
stock, par value $0.01 per share (the "Common Stock"), of the Company, and the
Selling Stockholders propose to sell ________ shares of Common Stock (said
shares to be issued and sold by the Company and shares to be sold by the Selling
Stockholders collectively, the "Firm Shares") to the several Underwriters. The
Company also proposes to issue and sell not more than ________ additional shares
of Common Stock and the Selling Stockholders also propose to sell not more than
________ additional shares of Common Stock (collectively, the "Option Shares"
and, together with the Firm Shares, the "Shares") to the several Underwriters if
requested by the Representatives as provided in Section 2(b) hereof.
(b) Upon your authorization of the release of the Firm Shares, the
Underwriters propose to make a public offering (the "Offering") of the Firm
Shares upon the terms set forth in the Prospectus (as defined below) as soon
after the Registration Statement (as defined below) and this Agreement have
become effective as in the Representativeso sole judgment is advisable. As used
in this Agreement, the term "Original Registration Statement" means the
registration statement (File No. 333-____) initially filed with the Securities
and Exchange Commission (the "Commission") relating to the Shares, as amended at
the time when it was or is declared effective, including all financial schedules
and exhibits thereto and including any information omitted therefrom pursuant to
Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"),
and included in the
<PAGE> 3
Prospectus; the term "Rule 462(b) Registration Statement" means any registration
statement filed with the Commission pursuant to Rule 462(b) under the Securities
Act (including the Registration Statement and any Preliminary Prospectus (as
defined below) or Prospectus incorporated therein at the time such Registration
Statement becomes effective); the term "Registration Statement" includes both
the Original Registration Statement and any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with the Original Registration Statement or any amendment thereto
(including the prospectus subject to completion, if any, included in the
Original Registration Statement or any amendment thereto at the time it was or
is declared effective); the term "Prospectus" means:
(i) if the Company relies on Rule 434 under the Securities Act,
the Term Sheet (as defined below) relating to the Shares that is first
filed pursuant to Rule 424(b)(7) under the Securities Act, together with
the Preliminary Prospectus identified therein that such Term Sheet
supplements;
(ii) if the Company does not rely on Rule 434 under the
Securities Act, the prospectus first filed with the Commission pursuant
to Rule 424(b) under the Securities Act;
(iii) if the Company does not rely on Rule 434 under the
Securities Act and if no prospectus is required to be filed pursuant to
Rule 424(b) under the Securities Act, the prospectus included in the
Registration Statement; or
(iv) for purposes of the representations and warranties contained
in Section 5 hereof, if the prospectus is not in existence, the most
recent Preliminary Prospectus; and the term "Term Sheet" means any term
sheet that satisfies the requirements of Rule 434 under the Securities
Act. Any reference herein to the "date" of a Prospectus that includes a
Term Sheet shall mean the date of such Term Sheet.
Section 2. Purchase and Closing.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell, and the Selling Stockholders
propose to sell, to each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company and the Selling
Stockholders, at a purchase price of $___ per Share (the "Purchase Price"), the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule 1 hereto. Firm Shares shall be registered by ________ in the name of
the nominee of the Depository Trust Company ("DTC"), Cede & Co. ("Cede & Co."),
and credited to the accounts of such of its participants as the Representatives
shall request, upon notice to the Company and the Selling Stockholders at least
48 hours prior to the First Closing Date (as defined below), with any transfer
taxes payable in connection with the transfer of the Firm Shares to the
Underwriters duly paid, against payment by or on behalf of the Underwriters to
the account of the Company and the Selling Stockholders of the aggregate
Purchase Price therefor by wire transfer in immediately available funds. The
Company and the Selling Stockholders will make the certificate or certificates
for the Firm Shares available for checking and packaging by the Representatives
at the offices in New York, New York of the Companyos transfer agent or
registrar or of the Representatives at least 24 hours prior to the First Closing
Date. Delivery or registry of and payment for the Firm Shares shall be made at
the offices of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
155 Constitution Drive, Menlo Park, California 94025, at 9:30 A.M., New York
City time, on _________, 1998, or at such other place, time or date as the
Representatives, the Company and the Selling Stockholders may agree upon. Such
time and date of delivery against payment are herein referred to as the "First
Closing Date", and the implementation of all the actions described in this
Section 2(a) is herein referred to as the "First Closing."
(b) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Shares as contemplated by the Prospectus,
the Company and the Selling Stockholders hereby grant to
<PAGE> 4
the several Underwriters an option to purchase, severally and not jointly, the
Option Shares. The purchase price to be paid for any Option Shares shall be the
same as the Purchase Price for the Firm Shares set forth above in paragraph (a)
of this Section 2. The option granted hereby may be exercised as to all or any
part of the Option Shares from time to time within thirty days after the date of
the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday,
on the next business day thereafter when the New York Stock Exchange and the
Nasdaq Stock Marketos National Market (the "Nasdaq National Market") is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Shares prior to the exercise of such option. The Representatives may
from time to time exercise the option granted hereby by giving notice in writing
or by telephone (confirmed in writing) to the Company and the Selling
Stockholders setting forth the aggregate number of Option Shares as to which the
several Underwriters are then exercising the option and the date and time for
delivery or registry of and payment for such Option Shares. Any such date of
delivery or registry shall be determined by the Representatives but shall not be
earlier than two business days or later than five business days after such
exercise of the option and, in any event, shall not be earlier than the First
Closing Date. The time and date set forth in such notice, or such other time or
date as the Representatives, the Company and the Selling Stockholders may agree
upon or as the Representatives may determine pursuant to Section 2(a) hereof, is
herein called an "Option Closing Date" with respect to such Option Shares, and
the implementation of all the actions described in this Section 2(b) is herein
referred to as the "Option Closing". As used in this Agreement, the term
"Closing Date" means either the First Closing Date or any Option Closing Date,
as applicable, and the term "Closing" means either the First Closing or any
Option Closing, as applicable. If the option is exercised as to all or any
portion of the Option Shares, then either one or more certificates in definitive
form for such Option Shares shall be delivered or, if such Option Shares are to
be held through DTC, such Option Shares shall be registered and credited, on the
related Option Closing Date in the same manner, and upon the same terms and
conditions, set forth in paragraph (a) of this Section 2, except that reference
therein to the Firm Shares and the First Closing Date shall be deemed, for
purposes of this paragraph (b), to refer to such Option Shares and Option
Closing Date, respectively. Upon exercise of the option as provided herein, the
Company and the Selling Stockholders shall become obligated to sell to each of
the several Underwriters, and, on the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, each of the Underwriters (severally and not
jointly) shall become obligated to purchase from the Company and the Selling
Stockholders, the same percentage of the total number of the Option Shares as to
which the several Underwriters are then exercising the option as such
Underwriter is obligated to purchase of the aggregate number of Firm Shares, as
adjusted by the Representatives in such manner as they deem advisable to avoid
fractional shares. In the event that the option is exercised in part, the number
of Option Shares to be sold by each of the Selling Stockholders shall be, as
nearly as practicable, in the same proportion to each other as are the number of
Option Shares to be sold by each Selling Stockholder listed opposite their names
on Schedule 2 hereto.
(c) The Company and the Selling Stockholders hereby acknowledge that the
payment of monies pursuant to Section 2(a) hereof (a "Payment") by or on behalf
of the Underwriters of the aggregate Purchase Price for any Shares does not
constitute closing of a purchase and sale of the Shares. Only execution and
delivery, by facsimile or otherwise, of a receipt for Shares by the Underwriters
indicates completion of the closing of a purchase of the Shares from the Company
and the Selling Stockholders. Furthermore, in the event that the Underwriters
make a Payment to the Company and the Selling Stockholders prior to the
completion of the closing of a purchase of Shares, the Company and the Selling
Stockholders hereby acknowledge that until the Underwriters execute and deliver
such receipt for the Shares, the Company and the Selling Stockholders will not
be entitled to the Payment and shall return the Payment to the Underwriters as
soon as practicable (by wire transfer of same-day funds) upon demand. In the
event that the closing of a purchase of Shares is not completed and the Payment
is not returned by the Company and the Selling Stockholders to the Underwriters
on the same day the Payment was received by the Company and the Selling
Stockholders, the Company and the Selling Stockholders agree to pay to the
Underwriters in respect of each day the Payment is not returned by them, in
same-day funds, interest on the amount of such Payment in an amount representing
the Underwriterso cost of
<PAGE> 5
financing as reasonably determined by the Representatives, pro rata in
proportion to the percentage of such Payment received by each.
It is understood that any of you, individually and not as one of the
Representatives, may (but shall not be obligated to) make Payment on behalf of
any Underwriter or Underwriters for any of the Shares to be purchased by such
Underwriter or Underwriters. No such Payment shall relieve such Underwriter or
Underwriters from any of its or their obligations hereunder.
Section 3. Covenants.
(a) The Company covenants and agrees with the several Underwriters that:
(i) The Company will:
(x) use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as
promptly as possible. If required, the Company will file the
Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and
424(b) under the Securities Act. During any time when a
prospectus relating to the Shares is required to be delivered
under the Securities Act, the Company (I) will comply with all
requirements imposed upon it by the Securities Act and the rules
and regulations of the Commission thereunder to the extent
necessary to permit the continuance of sales of or dealings in
the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (II) will not
file with the Commission the Prospectus, Term Sheet, any
amendment or supplement to such Prospectus or Term Sheet, any
amendment to the Registration Statement (including the amendment
referred to in the second sentence of Section 5(a)(i) hereof) or
any Rule 462(b) Registration Statement unless the Representatives
previously have been advised of, and furnished with a copy within
a reasonable period of time prior to, the proposed filing and the
Representatives shall have given their consent to such filing.
The Company will prepare and file with the Commission, in
accordance with the rules and regulations of the Commission,
promptly upon request by the Representatives or counsel for the
Underwriters, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary
or advisable in connection with the distribution of the Shares by
the several Underwriters. The Company will advise the
Representatives, promptly after receiving notice thereof, of the
time when the Registration Statement or any amendment thereto has
been filed or declared effective or the Prospectus or Term Sheet
or any amendment or supplement thereto has been filed and will
provide evidence satisfactory to the Representatives of each such
filing or effectiveness.
(y) without charge, provide (I) to the Representatives and
to counsel for the Underwriters, an executed and a conformed copy
of the Original Registration Statement and each amendment thereto
or any Rule 462(b) Registration Statement (in each case including
exhibits thereto), (II) to each other Underwriter, a conformed
copy of the Original Registration Statement and each amendment
thereto or any Rule 462(b) Registration Statement (in each case
without exhibits thereto), and (III) so long as a prospectus
relating to the Shares is required to be delivered under the
Securities Act, as many copies of each Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. Without limiting the
application of clause (III) of the preceding sentence, the
Company, not later than (A) 9:00 A.M., New York City time, on the
business day following the date of
<PAGE> 6
determination of the public offering price, if such determination
occurred at or prior to 12:00 noon, New York City time, on such
date or (B) 6:00 P.M., New York City time, on the business day
following the date of determination of the public offering price,
if such determination occurred after 12:00 noon, New York City
time, on such date, will deliver to the Underwriters, without
charge, as many copies of the Prospectus and any amendment or
supplement thereto as the Representatives may reasonably request
for purposes of confirming orders that are expected to settle on
the First Closing Date.
(z) advise the Representatives, promptly after receiving
notice or obtaining knowledge thereof, of (I) the issuance by the
Commission of any stop order suspending the effectiveness of the
Original Registration Statement or any amendment thereto or any
Rule 462(b) Registration Statement or any order preventing or
suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (II) the
suspension of the qualification of the Shares for offering or
sale in any jurisdiction, (III) the institution, threatening or
contemplation of any proceeding for any purpose identified in the
preceding clause (I) or (II), or (IV) any request made by the
Commission for amending the Original Registration Statement or
any Rule 462(b) Registration Statement, for amending or
supplementing the Prospectus or for additional information. The
Company will use its best efforts to prevent the issuance of any
such stop order and, if any such stop order is issued, to obtain
the withdrawal thereof as promptly as possible.
(ii) The Company will arrange for the qualification of the Shares
for offering and sale in each jurisdiction as the Representatives shall
designate including, but not limited to, pursuant to applicable state
securities ("Blue Sky") laws of certain states of the United States of
America or other U.S. jurisdictions, and the Company shall maintain such
qualifications in effect for so long as may be necessary in order to
complete the placement of the Shares; provided, however, that the
Company shall not be obliged to file any general consent to service of
process or to qualify as a foreign corporation or as a securities dealer
in any jurisdiction or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject.
(iii) If, at any time prior to the final date when a prospectus
relating to the Shares is required to be delivered under the Securities
Act, any event occurs as a result of which the Prospectus, as then
amended or supplemented, would include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any other reason it
shall be necessary at any time to amend the Registration Statement or
amend or supplement the Prospectus to comply with the Securities Act or
the rules or regulations of the Commission thereunder or applicable law,
the Company will promptly notify the Representatives thereof and will
promptly, at its own expense, but subject to the second sentence of
Section 3(a)(i)(x) hereof: (x) prepare and file with the Commission an
amendment to the Registration Statement or amendment or supplement to
the Prospectus which will correct such statement or omission or effect
such compliance; and (y) supply any amended Registration Statement or
amended or supplemented Prospectus to the Underwriters in such
quantities as the Underwriters may reasonably request.
(iv) The Company will make generally available to the Companyos
securityholders and to the Representatives as soon as practicable an
earnings statement that satisfies the provisions of Section 11(a) of the
Securities Act, including Rule 158 thereunder.
(v) The Company will apply the net proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
<PAGE> 7
(vi) The Company will not, and will not allow any subsidiary to,
publicly announce any intention to, and will not itself, and will not
allow any subsidiary to, without the prior written consent of Deutsche
Morgan Grenfell Inc., on behalf of the Underwriters, (x) offer, pledge,
sell, offer to sell, contract to sell, sell any option or contract to
purchase, purchase any option to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock, or (y) enter
into any swap or other agreement that transfers, in whole or in part,
any of the economic consequences of ownership of the shares of Common
Stock or securities convertible into, or exercisable or exchangeable
for, shares of Common Stock (whether any such transaction described in
clause (x) or (y) above is to be settled by delivery of shares of Common
Stock (or securities convertible into, exercisable or exchangeable for
Common Stock), in cash or otherwise), for a period beginning from the
date hereof and continuing to and including the date 180 days after the
date hereof, except pursuant to this Agreement and other than with
respect to (x) shares of Common Stock to be issued upon the exercise of
warrants to purchase shares of Common Stock, or upon conversion or
exchange of securities convertible or exchangeable into shares of Common
Stock, in each case, which are outstanding on the date hereof and
disclosed in the Prospectus, and (y) shares of Common Stock (or any
securities convertible into or exchangeable for shares of Common Stock)
issued pursuant to any employee benefit plans, qualified stock option
plans or other employee compensation plans which are disclosed in the
Prospectus.
(vii) Neither the Company nor any of its affiliates, nor any
person acting on behalf of any of them will, directly or indirectly, (x)
take any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares or (y) (I) sell,
bid for, purchase, or pay anyone any compensation for soliciting
purchases of, the Shares or (II) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company.
(viii) The Company will obtain the agreements described in
Section 7(h) hereof prior to the First Closing Date.
(ix) If at any time during the 25-day period after the
Registration Statement becomes effective or during the period prior to
any Closing Date, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in the
Representativeso sole judgment the market price of the Shares has been
or is likely to be materially affected (regardless of whether such
rumor, publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after notice from the Representatives
advising the Company to the effect set forth above, forthwith prepare,
consult with the Representatives concerning the substance of, and
disseminate a press release or other public statement reasonably
satisfactory to the Representatives, responding to or commenting on such
rumor, publication or event.
(x) If the Company elects to rely on Rule 462(b), the Company
shall both file the Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 promulgated under the Securities Act by the
earlier of (x) 10:00 P.M. New York City time on the date of this
Agreement and (y) the time confirmations are sent or given, as specified
by Rule 462(b)(2) under the Securities Act.
<PAGE> 8
(xi) The Company will cause the Shares to be duly included for
quotation on the Nasdaq National Market prior to the First Closing Date.
The Company will ensure that the Shares remain included for quotation on
the Nasdaq National Market following the First Closing Date.
(xii) Prior to issuing any press release regarding the operating
results or financial condition with respect to any of the Company's
first three fiscal quarters in any of fiscal years 1998, 1999 or 2000,
and prior to filing a Quarterly Report on Form 10-Q relating to any of
such fiscal quarters, to retain KPMG Peat Marwick LLP or other
independent public accountants of recognized national standing who shall
review, in accordance with AICPA Statement on Auditing Standards No. 71,
the Company's unaudited consolidated financial statements at the end of
each such fiscal quarter; provided, however, that the Company's
obligations under this covenant may terminate after the second quarter
of fiscal year 1999 at the discretion of the Company's Board of
Directors if the Company's Board of Directors determines in good faith
that adequate financial controls are in place.
(b) Each Selling Stockholder agrees that:
(i) It will not, and no person acting on behalf of such Selling
Stockholder will, directly or indirectly, (x) take any action designed
to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Shares or (y) (I) sell, bid for, purchase, or pay anyone
any compensation for soliciting purchases of, the Shares or (II) pay or
agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of
Shares by the Selling Stockholders under this Agreement).
(ii) It will not, and will not allow any subsidiary to, publicly
announce any intention to, and will not itself, and will not allow any
subsidiary to, without the prior written consent of Deutsche Morgan
Grenfell Inc. on behalf of the Underwriters, (x) offer, pledge, sell,
offer to sell, contract to sell, sell any option or contract to
purchase, purchase any option to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, Common Stock, or
(y) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences of ownership of the shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock (whether any such transaction
described in clause (x) or (y) above is to be settled by delivery of
shares of Common Stock (or other securities convertible into,
exercisable or exchangeable for Common Stock), in cash or otherwise), in
each case, beneficially owned (within the meaning of Rule 13d-3 under
the Exchange Act) or otherwise controlled by such person on the date
hereof or hereafter acquired, for a period beginning from the date
hereof and continuing to and including the date 180 days after the date
hereof; provided, however, that such Selling Stockholder may, without
the prior written consent of Deutsche Morgan Grenfell Inc. on behalf of
the Underwriters, transfer shares of Common Stock or such other
securities to members of such Selling Stockholderos immediate family or
to trusts for the benefit of members of such Selling Stockholderos
immediate family or in connection with bona fide gifts, provided that
any transferee agrees to the transfer restrictions described above.
Section 4. Expenses.
(a) The Company shall bear and pay all costs and expenses incurred
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 9 hereof, including: (i) fees and expenses of
preparation, issuance and delivery of this Agreement to the Underwriters; (ii)
the fees and expenses of its counsel, accountants
<PAGE> 9
and any other experts or advisors retained by the Company; (iii) the costs of
delivering and distributing the Powers of Attorney (as defined below) and the
Custody Agreements (as defined below) and the fees and expenses of the Custodian
(as defined below) (and any other Attorney-in-Fact (as defined below)); (iv)
fees and expenses incurred in connection with the registration of the Shares
under the Securities Act and the preparation and filing of the Registration
Statement, the Prospectus and all amendments and supplements thereto; (v) the
printing and distribution of the Prospectus and any Preliminary Prospectus and
the printing and production of all other documents connected with the Offering
(including this Agreement and any other related agreements); (vi) expenses
related to the qualification of the Shares under the state securities or Blue
Sky laws, including filing fees and the fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of any Blue Sky memoranda; (vii) the filing fees and expenses, if any, incurred
with respect to any filing with the National Association of Securities Dealers,
Inc., including the fees and disbursements of counsel for the Underwriters in
connection therewith; (viii) fees and expenses of any independent underwriter
required in connection with the Offering; (ix) all expenses arising from the
quoting of the Shares on the Nasdaq National Market; (x) all arrangements
relating to the preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Shares, including transfer agentos and registraros
fees; (xi) the costs and expenses of the "roadshow" and any other meetings with
prospective investors in the Shares (other than as shall have been specifically
approved by the Representatives to be paid for by the Underwriters); and (xii)
the costs and expenses of advertising relating to the Offering (other than as
shall have been specifically approved by the Representatives to be paid for by
the Underwriters).
(b) The Selling Stockholders shall bear and pay all costs and expenses
incurred incident to the performance of their respective obligations under this
Agreement, whether or not the transactions contemplated herein are consummated
or this Agreement is terminated pursuant to Section 9 hereof, including: (i) any
stamp duties, capital duties and stock transfer taxes, if any, payable upon the
sale of the Shares of such Selling Stockholders to the Underwriters and (ii) the
fees and disbursements of their respective counsel, accountants and other
advisors.
Section 5. Representations and Warranties.
(a) As a condition of the obligation of the Underwriters to underwrite
and pay for the Shares, the Company and the Selling Stockholders jointly and
severally represent and warrant to, and agree with, each of the several
Underwriters as follows:
Registration Statement and Prospectus
(i) The Original Registration Statement, including the
Preliminary Prospectus, has been filed by the Company with the
Commission under the Securities Act, and one or more amendments to such
Registration Statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (x) if
such Registration Statement, as it may have been amended, has been
declared by the Commission to be effective under the Securities Act,
either (I) if the Company relies on Rule 434 under the Securities Act, a
Term Sheet relating to the Shares that shall identify the Preliminary
Prospectus that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Securities
Act or (II) if the Company does not rely on Rule 434 under the
Securities Act, a prospectus in the form most recently included in an
amendment to such Registration Statement (or, if no such amendment shall
have been filed, in such Registration Statement), with such changes or
insertions as are required by Rule 430A under the Securities Act or
permitted by Rule 424(b) under the Securities Act, and in the case of
either clause (I) or (II) of this sentence, as have been provided to and
approved by the Representatives prior to the execution of this
Agreement, or (y) if such Registration Statement, as it may have been
amended, has not been declared by the Commission to be effective under
the Securities Act, an amendment to such Registration
<PAGE> 10
Statement, including a form of prospectus, a copy of which amendment has
been furnished to and approved by the Representatives prior to the
execution of this Agreement. The Company may also file a Rule 462(b)
Registration Statement with the Commission for the purpose of
registering certain additional Shares, which registration shall be
effective upon filing with the Commission.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any Preliminary
Prospectus was filed with the Commission, it (x) contained all
statements required to be stated therein in accordance with, and
complied in all material respects with the requirements of, the
Securities Act and the rules and regulations of the Commission
thereunder and (y) did not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it (I) contained or will
contain all statements required to be stated therein in accordance with,
and complied or will comply in all material respects with the
requirements of, the Securities Act and the rules and regulations of the
Commission thereunder and (II) did not or will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. When the Prospectus or any Term Sheet that is a part thereof
or any amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing the
Prospectus or such amendment or supplement to the Prospectus was or is
declared effective) and on the Closing Date, the Prospectus, as amended
or supplemented at any such time, (A) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of, the Securities Act and the rules and regulations of the Commission
thereunder and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing provisions of this
paragraph (ii) do not apply to statements or omissions made in any
Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter through the Representatives specifically
for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement is not effective, (x) the Company
will file a Rule 462(b) Registration Statement in compliance with, and
that is effective upon filing pursuant to, Rule 462(b) and (y) the
Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 under the Securities
Act, or the Commission has received payment of such filing fee.
(iv) If the Company has elected to rely on Rule 434 under the
Securities Act, the Prospectus is not "materially different", as such
term is used in Rule 434, from the prospectus included in the
Registration Statement at the time of its effectiveness or an effective
post-effective amendment thereto (including such information that is
permitted to be omitted pursuant to Rule 430A under the Securities Act);
(v) The Company and the Selling Stockholders have not distributed
and, prior to the later of (x) any Closing Date and (y) the completion
of the distribution of the Shares, will not distribute any offering
material in connection with the Offering other than the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto.
<PAGE> 11
(vi) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (x) the
Company and its subsidiaries, taken as a whole, have not incurred any
material liability or obligation, direct or contingent, nor entered into
any material transaction not in the ordinary course of business; (y) the
Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (z) there has not been any material
change in the capital stock, short-term or long-term debt of the Company
and its subsidiaries, taken as a whole, except in each case as described
in or contemplated by the Prospectus.
The Shares
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus. All of the issued shares
of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in
compliance with all applicable federal and state securities laws and
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase such securities. The Shares
have been duly authorized by all necessary corporate action of the
Company and, after payment therefor in accordance herewith, will be
validly issued, fully paid and nonassessable at the Closing Date. No
holders of outstanding shares of capital stock of the Company are
entitled as such to any preemptive or other rights to subscribe for any
of the Shares, and no holder of securities of the Company has any right
which has not been fully exercised or waived to require the Company to
register the offer or sale of any securities owned by such holder under
the Securities Act in the Offering contemplated by this Agreement.
(viii) Except as disclosed in the Prospectus, there are no
outstanding (x) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of
the Company or any such subsidiary, (y) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any
such capital stock or any such convertible or exchangeable securities or
obligations, or (z) obligations of the Company or any such subsidiary to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(ix) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and such subsidiaries, neither the
Company nor any such subsidiary owns any shares of stock or any other
equity securities of any corporation or has any equity interest in any
firm, partnership, association or other entity, except as described in
or contemplated by the Prospectus.
Listing
(x) All of the Shares have been duly authorized and accepted for
quotation on the Nasdaq National Market, subject to official notice of
issuance.
Market Manipulation
(xi) Neither the Company nor any of its affiliates, nor any
person acting on behalf of any of them has, directly or indirectly, (x)
taken any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares, or (y) since the
filing of the Original Registration Statement (I) sold, bid for,
purchased, or paid anyone any compensation for
<PAGE> 12
soliciting purchases of, the Shares or (II) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other
securities of the Company.
Corporate Power and Authority
(xii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the law of its
jurisdiction of incorporation with full power and authority to own,
lease and operate its properties and assets and conduct its business as
described in the Prospectus, is duly qualified to transact business and
is in good standing in each jurisdiction in which its ownership, leasing
or operation of its properties or assets or the conduct of its business
requires such qualification, except where the failure to be so qualified
does not amount to a material liability or disability to the Company and
its subsidiaries, taken as a whole, and has full power and authority to
execute and perform its obligations under this Agreement; each
subsidiary of the Company is a corporation duly incorporated and validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and is duly qualified to transact business
and is in good standing in each jurisdiction in which its ownership,
leasing or operation of its properties or assets or the conduct of its
business requires such qualification, except where the failure to be so
qualified does not amount to a material liability or disability to the
Company and its subsidiaries, taken as a whole, and each has full power
and authority to own, lease and operate its properties and assets and
conduct its business as described in the Registration Statement and the
Prospectus; all of the issued and outstanding shares of capital stock of
each of the Companyos subsidiaries have been duly authorized and are
fully paid and nonassessable and are owned beneficially by the Company
free and clear of any security interests, liens, encumbrances, equities
or claims.
(xiii) The execution and delivery of this Agreement and the
issuance and sale of the Shares have been duly authorized by all
necessary corporate action of the Company, and this Agreement has been
duly executed and delivered by the Company and is the valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms.
(xiv) The issuance, offering and sale of the Shares to the
Underwriters by the Company pursuant to this Agreement, the compliance
by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (x)
require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained or made or such as may be required by the state securities
or Blue Sky laws of the various states of the United States of America
or other U.S. jurisdictions in connection with the offer and sale of the
Shares by the Underwriters, or (y) conflict with or result in a breach
or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or any of
their respective properties are bound, or the charter documents or
by-laws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or
any of its subsidiaries.
(xv) The Company is not, and will conduct its operations in a
manner so that it continues not to be, an "investment company" and,
after giving effect to the Offering and the application of the proceeds
therefrom, will not be an "investment company", as such term is defined
in the Investment Company Act of 1940, as amended (the "1940 Act").
Title, Licenses and Consents
<PAGE> 13
(xvi) The Company and each of its subsidiaries have good and
marketable title in fee simple to all items of real property and
marketable title to all personal property owned by each of them, in each
case free and clear of any security interests, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not interfere with
the use made or proposed to be made of such property by the Company or
such subsidiary, and any real property and buildings held under lease by
the Company or any such subsidiary are held under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or such subsidiary, in each case except as
described in or contemplated by the Prospectus.
(xvii) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, know-how, copyrights,
trade secrets and proprietary or other confidential information
necessary to operate the business now operated by them, and neither the
Company nor any such subsidiary has received any notice of infringement
of or conflict with asserted rights of any third party with respect to
any of the foregoing which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a materially
adverse effect on or constitute a materially adverse change in, or
constitute a development involving a prospective materially adverse
effect on or change in, the condition (financial or otherwise),
earnings, properties, business affairs or business prospects,
stockholderso equity, net worth or results of operations of the Company
or any of its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus.
(xviii)The Company and its subsidiaries possess all consents,
licenses, certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary
to conduct their respective businesses, and neither the Company nor any
such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a materially adverse
effect on or constitute a materially adverse change in, or constitute a
development involving a prospective materially adverse effect on or
change in, the condition (financial or otherwise), earnings, properties,
business affairs or business prospects, net worth or results of
operations of the Company or any of its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus.
Financial statements
(xix) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and
delivered their report with respect to the audited consolidated
financial statements and schedules included in the Registration
Statement and the Prospectus, are independent public accountants as
required by the Securities Act and the applicable rules and regulations
thereunder.
(xx) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus were prepared in accordance with generally
accepted accounting principles ("GAAP") consistently applied throughout
the periods involved (except as otherwise noted therein) and they
present fairly the financial condition of the Company as at the dates at
which they were prepared and the results of operations of the Company in
respect of the periods for which they were prepared.
Internal Accounting Controls
<PAGE> 14
(xxi) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (w) transactions are executed in accordance with
managementos general or specific authorizations; (x) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability; (y) access to
assets is permitted only in accordance with managementos general or
specific authorization; and (z) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
Litigation
(xxii) No legal or governmental proceedings are pending or
threatened to which the Company or any of its subsidiaries is a party or
to which the property of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement
or the Prospectus and are not described therein; and no statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not described therein
or filed as required.
Dividends and Distributions
(xxiii)No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, making
any other distribution on such subsidiaryos capital stock, repaying to
the Company any loans or advances to such subsidiary from the Company or
transferring any of such subsidiaryos property or assets to the Company
or any other subsidiary of the Company, and the Company is not currently
prohibited, directly or indirectly, from paying any dividends or making
any other distribution on its capital stock, in each case except as
described in or contemplated by the Prospectus.
Taxes
(xxiv) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a materially adverse effect on the Company and its
subsidiaries, taken as a whole) and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against it,
to the extent that any of the foregoing is due and payable, except for
any such assessment, fine or penalty that is currently being contested
in good faith or as described in or contemplated by the Prospectus.
Insurance
(xxv) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses
in which they are engaged; neither the Company nor any such subsidiary
has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, properties, business affairs or business
prospects, net worth or results of operations of the Company or any of
its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus.
Pension and Labor
<PAGE> 15
(xxvi) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (x) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (y) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "pension
plan" for which the Company would have any liability that is intended to
be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(xxvii)No labor dispute with the employees of the Company or any
of its subsidiaries exists or is threatened or imminent that could have
a materially adverse effect on or constitute a materially adverse change
in, or constitute a development involving a prospective materially
adverse effect on or change in, the condition (financial or otherwise),
properties, management, earnings, business affairs or business
prospects, net worth or results of operations of the Company or any of
its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus.
Environmental
(xxviii) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to
occupational safety and health or to the storage, handling or
transportation of hazardous or toxic materials and the Company and its
subsidiaries have received all permits, licenses or other approvals
required of them under applicable federal and state occupational safety
and health and environmental laws and regulations to conduct their
respective businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permit, license or
approval, except any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals which would not, singly or in the aggregate, have a materially
adverse effect on or constitute a materially adverse change in, or
constitute a development involving a prospective materially adverse
effect on or change in, the condition (financial or otherwise),
earnings, properties, business affairs or business prospects, net worth
or results of operations of the Company or any of its subsidiaries,
taken as a whole, except as described in or contemplated by the
Prospectus.
Other Agreements
(xxix) No default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries or any of their
respective properties is bound.
Absence of Materially Adverse Change
(xxx) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or
<PAGE> 16
governmental proceeding, and there has been no materially adverse change
(including, without limitation, a change in management or control), or
development involving a prospective materially adverse change, in the
condition (financial or otherwise), management, earnings, property,
business affairs or business prospects, stockholderso equity, net worth
or results of operations of the Company or any of its subsidiaries,
taken as a whole, other than as described in or contemplated by the
Prospectus (exclusive of any amendments or supplements thereto).
(xxxi) No receiver or liquidator (or similar person) has been
appointed in respect of the Company or any subsidiary of the Company or
in respect of any part of the assets of the Company or any subsidiary of
the Company; no resolution, order of any court, regulatory body,
governmental body or otherwise, or petition or application for an order,
has been passed, made or presented for the winding up of the Company or
any subsidiary of the Company or for the protection of the Company or
any such subsidiary from its creditors; and the Company has not, and no
subsidiary of the Company has, stopped or suspended payments of its
debts, become unable to pay its debts or otherwise become insolvent.
Reorganization
(xxxii) The execution and delivery of each of the Exchange
Agreement and the Option Exchange Agreement (the "Reorganization
Documents") was duly authorized by all necessary corporate action on the
part of each of the parties thereto. Each of the parties to the
Reorganization Documents had all corporate power and authority to
execute and deliver the Reorganization Documents and to consummate the
transactions contemplated therein and the Reorganization Documents
constituted valid and binding obligations of each of the parties
thereto.
(b) As a further condition of the obligation of the Underwriters to
underwrite and pay for the Shares, each Selling Stockholder represents and
warrants to, and agrees with, each of the several Underwriters that:
(i) Such Selling Stockholder has full power (corporate and other)
to enter into this Agreement and to sell, assign, transfer and deliver
to the Underwriters the Shares to be sold by such Selling Stockholder
hereunder in accordance with the terms of this Agreement; the execution
and delivery of this Agreement have been duly authorized by all
necessary corporate action of such Selling Stockholder; and this
Agreement has been duly executed and delivered by such Selling
Stockholder.
(ii) Such Selling Stockholder has duly executed and delivered a
power of attorney and custody agreement (with respect to such Selling
Stockholder, the "Power-of-Attorney" and the "Custody Agreement",
respectively), each in the form heretofore delivered to the
Representatives, appointing certain individuals as such Selling
Stockholderos attorney-in-fact (the "Attorney-in-Fact") with authority
to execute, deliver and perform this Agreement on behalf of such Selling
Stockholder and appointing ________, as custodian thereunder (the
"Custodian"). Certificates in negotiable form, endorsed in blank or
accompanied by blank stock powers duly executed, with signatures
appropriately guaranteed, representing the Shares to be sold by such
Selling Stockholder hereunder have been deposited with the Custodian
pursuant to the Custody Agreement for the purpose of delivery pursuant
to this Agreement. Such Selling Stockholder has full power (corporate
and other) to enter into the Custody Agreement and the Power-of-Attorney
and to perform its obligations under the Custody Agreement. The
execution and delivery of the Custody Agreement and the
Power-of-Attorney have been duly authorized by all necessary corporate
action of such Selling Stockholder; the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by such Selling
Stockholder and, assuming due authorization, execution and delivery by
the Custodian, are the legal, valid, binding and enforceable instruments
of such Selling Stockholder. Such Selling Stockholder agrees that each
of the Shares represented by the certificates on deposit with the
Custodian is subject to the interests of the
<PAGE> 17
Underwriters hereunder, that the arrangements made for such custody, the
appointment of the Attorney-in-Fact and the right, power and authority
of the Attorney-in-Fact to execute and deliver this Agreement, to agree
on the price at which the Shares (including such Selling Stockholder's
Shares) are to be sold to the Underwriters, and to carry out the terms
of this Agreement, are to that extent irrevocable and that the
obligations of such Selling Stockholder hereunder shall not be
terminated, except as provided in this Agreement or the Custody
Agreement, by any act of such Selling Stockholder, by operation of law
or otherwise, whether in the case of any individual Selling Stockholder
by the death or incapacity of such Selling Stockholder, in the case of a
trust or estate by the death of the trustee or trustees or the executor
or executors or the termination of such trust or estate, or in the case
of a corporate or partnership Selling Stockholder by its liquidation or
dissolution or by the occurrence of any other event. If any individual
Selling Stockholder, trustee or executor should die or become
incapacitated or any such trust should be terminated, or if any
corporate or partnership Selling Stockholder shall liquidate or
dissolve, or if any other event should occur, before the delivery of
such Shares hereunder, the certificates for such Shares deposited with
the Custodian shall be delivered by the Custodian in accordance with the
respective terms and conditions of this Agreement as if such death,
incapacity, termination, liquidation or dissolution or other event had
not occurred, regardless of whether or not the Custodian or the
Attorney-in-Fact shall have received notice thereof.
(iii) Such Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder hereunder and upon sale and
delivery of, and payment for, such Shares, as provided herein, such
Selling Stockholder will convey good and marketable title to such
Shares, free and clear of any security interests, liens, encumbrances,
equities, claims or other defects.
(iv) Neither such Selling Stockholder nor any person acting on
behalf of it has, directly or indirectly, (x) taken any action designed
to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Shares or (y) since the filing of the Original
Registration Statement (I) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Shares or (II) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of
Shares by the Selling Stockholders under this Agreement).
(v) Such Selling Stockholder has reviewed the Prospectus and the
Registration Statement, and the information regarding such Selling
Stockholder set forth therein is complete and accurate.
(vi) The sale by such Selling Stockholder of Shares pursuant
hereto is not prompted by any adverse information concerning the Company
or its subsidiaries that is not set forth in the Registration Statement
or the Prospectus.
(vii) The sale of the Shares to the Underwriters by such Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein
contemplated do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained, such as may be required under state
securities or blue sky laws and, if the registration statement filed
with respect to the Shares (as amended) is not effective under the
Securities Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the
Securities Act, or (ii) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which such Selling Stockholder or any of its subsidiaries
is a party or by which such Selling Stockholder or any of its
subsidiaries or any of their
<PAGE> 18
respective properties are bound, or the charter documents or by-laws of
such Selling Stockholder or any of its subsidiaries or any statute or
any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to such Selling
Stockholder or any of its subsidiaries.
(c) The above representations and warranties shall be deemed to be
repeated at each Closing, and all references therein to the Shares and the
Closing Date shall be deemed to refer to the Firm Shares or the Option Shares
and the First Closing Date or the applicable Option Closing Date, each as
applicable.
Section 6. Indemnity.
(a) The Company and each Selling Stockholder jointly and severally agree
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), against any and all losses, claims, damages or liabilities, joint or
several, to which such Underwriter or such controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company or such Selling Stockholder in Section 5 hereof,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse, as incurred, each
Underwriter and each such controlling person for any legal or other
costs or expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss,
claim, damage, liability or action; provided, however, that the Company
and such Selling Stockholder will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through
the Representatives specifically for use therein. The indemnity provided
for in this Section 6 shall be in addition to any liability which the
Company and such Selling Stockholder may otherwise have. Neither the
Company nor any Selling Stockholder will, without the prior written
consent of the Representatives, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought
hereunder (whether or not any such Representatives or any person who
controls any such Representatives is a party to such claim, action, suit
or proceeding), unless such settlement, compromise or consent includes
an unconditional release of all of the Underwriters and such controlling
persons from all liability arising out of such claim, action, suit or
proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement, each Selling Stockholder and each person, if any, who
controls the Company or such Selling Stockholder within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act against any losses,
claims, damages or liabilities to which
<PAGE> 19
the Company or any such director or officer of the Company, such Selling
Stockholder or any such controlling person of the Company or such Selling
Stockholder may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto or (ii) the omission or the alleged omission to state in
the Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person or
such Selling Stockholder or controlling person of such Selling Stockholder in
connection with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or any action
in respect thereof. The remedies provided for in this Section 6 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to paragraph (a) or (b) of this Section 6, such person (for
purposes of this paragraph (c), the "indemnified party") shall, promptly after
receipt by such party of notice of the commencement of such action, notify the
person against whom such indemnity may be sought (for purposes of this paragraph
(c), the "indemnifying party"), but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section 6. In case any such action
is brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or parties
and such indemnified party or parties shall have the right to select separate
counsel to defend such action on behalf of such indemnified party or parties.
After notice from the indemnifying party to such indemnified party of its
election so to assume the defense of any such action and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 6 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated in writing by the Representatives in
the case of paragraph (a) of this Section 6, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions), or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party, or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
All fees and expenses reimbursed pursuant to this paragraph (c) shall be
reimbursed as they are incurred. After such notice from the indemnifying party
to such indemnified party, the indemnifying party will not be liable for the
costs and expenses of any settlement of such action effected by such indemnified
party without the consent of the indemnifying party.
<PAGE> 20
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 6 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the Offering or (ii) if the allocation
provided by the foregoing clause (i) is not permitted by applicable law, not
only such relative benefits but also the relative fault of the indemnifying
party or parties on the one hand and the indemnified party on the other in
connection with the statements or omissions or alleged statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the Offering (before deducting expenses)
received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Selling Stockholders or the Underwriters, the
partieso relative intents, knowledge, access to information and opportunity to
correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company, the Selling
Stockholders and the Underwriters agree that it would not be equitable if the
amount of such contribution were determined by pro rata or per capita allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (d). Notwithstanding any
other provision of this paragraph (d), no Underwriter shall be obligated to make
contributions hereunder that in the aggregate exceed the total public offering
price of the Shares purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriterso
obligations to contribute hereunder are several in proportion to their
respective underwriting obligations and not joint, and contributions among
Underwriters shall be governed by the provisions of the Deutsche Morgan Grenfell
Inc. Master Agreement Among Underwriters. For purposes of this paragraph (d),
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act shall have the same
rights to contribution as such Underwriter, and each director of the Company,
each officer of the Company who signed the Registration Statement and each
person, if any, who controls the Company or any Selling Stockholder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
shall have the same rights to contribution as the Company or such Selling
Stockholder, as the case may be.
Section 7. Conditions Precedent.
The obligations of the several Underwriters to purchase and pay for the
Shares shall be subject, in the Representativeso sole discretion, to the
accuracy of the representations and warranties of the Company and the Selling
Stockholders contained herein as of the date hereof and as of each Closing Date,
as if made on and as of each Closing Date, to the accuracy of the statements of
the Companyos officers and the Selling Stockholders made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective covenants and agreements hereunder and to the
following additional conditions:
(a) (i) If the Original Registration Statement or any amendment thereto
filed prior to the First Closing Date has not been declared effective as of the
time of execution hereof, the Original Registration
<PAGE> 21
Statement or such amendment shall have been declared effective not later than
6:00 P.M. New York City time on the date of determination of the public offering
price, if such determination occurred at or prior to 4:30 P.M. New York City
time on such date, or 12:00 Noon New York City time on the business day
following the day on which the public offering price was determined, if such
determination occurred after 4:30 P.M. New York City time on such date, and (ii)
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have been declared effective not later than the
time confirmations are sent or given as specified by Rule 462(b)(2), or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 434 and 424(b) under the
Securities Act; no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or, to the knowledge
of the Company or the Representatives, shall be contemplated by the Commission;
and the Company shall have complied with any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise).
(b) The Representatives shall have received a legal opinion from
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Registration Statement is effective under the Securities
Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 434 and 424(b) has been
made in the manner and within the time period required by Rules 434 and
424(b); and no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued and, to
the best knowledge of such counsel, no proceedings for that purpose are
pending or threatened by the Commission;
(ii) the Original Registration Statement and each amendment
thereto, any Rule 462(b) Registration Statement and the Prospectus (in
each case, other than the financial statements and other financial
information contained therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the applicable
requirements of the Securities Act and the rules and regulations of the
Commission thereunder;
(iii) such counsel has no reason to believe that (in each case,
other than the financial statements and other financial information
contained therein, as to which such counsel need express no opinion) (x)
the Registration Statement, as of its effective date, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or (y) the Prospectus, as of its date or the date
of such opinion, included or includes any untrue statement of a material
fact or omitted or omits to state any material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(iv) if the Company elects to rely on Rule 434 under the
Securities Act, the Prospectus is not "materially different", as such
term is used in Rule 434, from the prospectus included in the
Registration Statement at the time of its effectiveness or an effective
post-effective amendment thereto (including such information that is
permitted to be omitted pursuant to Rule 430A under the Securities Act);
(v) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares
of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in
compliance with all applicable federal and state securities laws and
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities; the Shares have
been duly authorized by all
<PAGE> 22
necessary corporate action of the Company and, when issued and delivered
to and paid for by the Underwriters pursuant to this Agreement, will be
validly issued, fully paid and nonassessable;
(vi) no holders of outstanding shares of capital stock of the
Company are entitled as such to any preemptive or other rights to
subscribe for any of the Shares; and no holder of securities of the
Company has any right which has not been fully exercised or waived to
require the Company to register the offer or sale of any securities
owned by such holder under the Securities Act in the Offering
contemplated by this Agreement;
(vii) all of the Shares have been duly authorized and accepted
for quotation on the Nasdaq National Market, subject to official notice
of issuance;
(viii) the Company and each of its consolidated subsidiaries have
been duly organized and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation and are duly qualified to transact business as foreign
corporations and are in good standing under the laws of all other
jurisdictions where the ownership, leasing or operation of their
respective properties or assets or the conduct of their respective
businesses requires such qualification, except where the failure to be
so qualified does not amount to a material liability or disability to
the Company and its subsidiaries, taken as a whole; the Company and each
of its subsidiaries have full power and authority to own, lease and
operate their respective properties and assets and conduct their
respective businesses as described in the Registration Statement and the
Prospectus, and the Company has corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it; all of the issued and outstanding shares of capital
stock of each of the Companyos subsidiaries have been duly authorized
and validly issued, are fully paid and nonassessable and are owned
beneficially by the Company free and clear of any perfected security
interests or, to the best knowledge of such counsel, any other security
interests, liens, encumbrances, equities or claims;
(ix) the statements set forth (x) in the Prospectus under the
headings "Management--Director Compensation," "Management--Employee
Benefit Plans," "Management--Change of Control Arrangements," "Certain
Transactions," "Description of Capital Stock," and "Shares Eligible for
Future Sale" and (y) in the Registration Statement in Items 14 and 15,
in each case, insofar as such statements constitute a summary of
documents or matters of law or proceedings referred to therein, have
been reviewed by such counsel and fairly present the information called
for with respect to such documents and matters in all material respects
as required by the Securities Act and the rules and regulations
thereunder;
(x) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company; the
issuance, offering and sale of the Shares to the Underwriters by the
Company pursuant to this Agreement, the compliance by the Company with
the other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not (x) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained or made (and
specified in such opinion) or such as may be required by the securities
or Blue Sky laws of the various states of the United States of America
and other U.S. jurisdictions in connection with the offer and sale of
the Shares by the Underwriters, or (y) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, lease or other
agreement or instrument, known to such counsel, to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties are bound, or the
charter documents or by-laws of the Company or any of its subsidiaries,
or any statute or any judgment, decree, order, rule or regulation of any
court or other
<PAGE> 23
governmental authority or any arbitrator known to such counsel and
applicable to the Company or its subsidiaries;
(xi) the Company is not an "investment company" and, after giving
effect to the Offering and the application of the proceeds therefrom,
will not be an "investment company", as such term is defined in the 1940
Act;
(xii) there are no persons with registration or other similar
rights to have any securities registered by the Company under the
Securities Act, except as disclosed in the Registration Statement and
the Prospectus;
(xiii) the execution and delivery of the Reorganization Documents
effecting the reorganization of the Company under the laws of the State
of Delaware, was duly authorized by all necessary corporate (or other)
action on the part of each of the parties thereto;
(xiv) each of the parties to the Reorganization Documents had all
corporate power and authority to execute and deliver the Reorganization
Documents, to consummate the transactions contemplated therein and the
Reorganization Documents constituted a valid and binding obligation of
each of the parties thereto; and
(xv) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which the property of the Company or any
of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein
or any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not
described therein or filed as required.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company and public officials
and, as to matters involving the application of laws of any jurisdiction
other than the States of California and Delaware or the United States,
to the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion(s) of other counsel. The foregoing
opinion shall also state that the Underwriters are justified in relying
upon such opinion(s) of other counsel, and copies of such opinion(s)
shall be delivered to the Representatives and counsel for the
Underwriters.
References to the Registration Statement and the Prospectus in
this paragraph (b) shall include any amendment or supplement thereto at
the date of such opinion. The opinions of issueros counsel described
herein shall be rendered to the Underwriters at the request of the
Company and shall so state therein.
(c) The Representatives shall have received a legal opinion from
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the
Selling Stockholders, dated the Closing Date, to the effect that:
(i) each such Selling Stockholder has full power (corporate and
other) to enter into this Agreement, the Custody Agreement and the
Power-of-Attorney and to sell, assign, transfer and deliver the Shares
being sold by such Selling Stockholder hereunder in the manner provided
in this Agreement and to perform its obligations under the Custody
Agreement; this Agreement, the Custody Agreement and the
<PAGE> 24
Power-of-Attorney have been duly executed and delivered by each Selling
Stockholder; assuming due authorization, execution and delivery by the
Custodian, the Custody Agreement and the Power-of-Attorney are the
legal, valid, binding and enforceable instruments of such Selling
Stockholder, subject to applicable bankruptcy, insolvency and similar
laws affecting creditorso rights generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law);
(ii) the delivery by each Selling Stockholder to the several
Underwriters of certificates for the Shares being sold hereunder by such
Selling Stockholder against payment therefor as provided herein, will
convey good and marketable title to such Shares to the several
Underwriters, free and clear of all security interests, liens,
encumbrances, equities, claims or other defects;
(iii) the sale of the Shares to the Underwriters by such Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement and the Custody
Agreement and the consummation of the other transactions herein
contemplated do not (x) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained and such as may be required under
state securities or blue sky laws, or (y) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which such Selling Stockholder or any of its
subsidiaries is a party or by which such Selling Stockholder or any of
its subsidiaries or any of their respective properties are bound, or the
charter documents or by-laws of such Selling Stockholder or any of its
subsidiaries or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any
arbitrator applicable to such Selling Stockholder or any of its
subsidiaries.
In rendering such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Selling Stockholders and public officials
and, as to matters involving the application of laws of any jurisdiction
other than the States of California and Delaware or the United States,
to the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion(s) of other counsel. The foregoing
opinion shall also state that the Underwriters are justified in relying
upon such opinion(s) of other counsel, and copies of such opinion(s)
shall be delivered to the Representatives and counsel for the
Underwriters.
References to the Registration Statement and the Prospectus in
this paragraph (c) shall include any amendment or supplement thereto at
the date of such opinion.
(d) The Representatives shall have received a legal opinion from Wilson
Sonsini Goodrich & Rosati, counsel for the Underwriters, dated the Closing Date,
covering the issuance and sale of the Shares, the Registration Statement and the
Prospectus, and such other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
(e) The Representatives shall have received from KPMG Peat Marwick LLP,
a letter or letters dated, respectively, the date hereof and the Closing Date,
in form and substance satisfactory to the Representatives, to the effect that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Securities
Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules and pro forma financial statements examined by
them and included in the Registration Statement and the Prospectus
comply in form in all material respects with the applicable accounting
requirements of the
<PAGE> 25
Securities Act and the related published rules and regulations and Staff
Accounting Bulletins with respect to registration statements on Form
S-1;
(iii) on the basis of a reading of the latest available interim
unaudited consolidated condensed financial statements of the Company and
its consolidated subsidiaries, carrying out certain specified procedures
(which do not constitute an examination made in accordance with
generally accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth in this
paragraph (iii), a reading of the minute books of the shareholders, the
board of directors and any committees thereof of the Company and each of
its consolidated subsidiaries, and inquiries of certain officials of the
Company and its consolidated subsidiaries who have responsibility for
financial and accounting matters, nothing came to their attention that
caused them to believe that:
(x) the unaudited consolidated condensed financial
statements of the Company and its consolidated subsidiaries
included in the Registration Statement and the Prospectus do not
comply in form in all material respects with the applicable
accounting requirements of the Securities Act and the related
published rules and regulations thereunder or are not in
conformity with GAAP applied on a basis substantially consistent
with that of the audited consolidated financial statements
included in the Registration Statement and the Prospectus;
(y) the unaudited amounts for sales, net revenues and
total and per share amounts of net income included in the
Registration Statement and the Prospectus do not agree with the
amounts set forth in any unaudited consolidated financial
statements for those same periods or are not in conformity with
GAAP accounting principles applied; and
(z) at a specific date not more than three business days
prior to the date of such letter, there were any changes in the
capital stock or long-term debt of the Company and its
consolidated subsidiaries or any decreases in net current assets
or stockholderso equity of the Company and its consolidated
subsidiaries, in each case compared with amounts shown on the
December 31, 1998 unaudited consolidated balance sheet included
in the Registration Statement and the Prospectus, or for the
period from January 1, 1998 to ________ __, 1998 there were any
decreases, as compared with January 1, 1997 to ________ __, 1997,
and as compared with October 1, 1997 to December 31, 1997, in
sales, net revenues, net income before income taxes or total or
per share amounts of net income of the Company and its
consolidated subsidiaries, except in all instances for changes,
decreases or increases set forth in such letter.
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and are
included in the Registration Statement and the Prospectus and in Exhibit
11 to the Registration Statement, and have compared such amounts,
percentages and financial information with such records of the Company
and its consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any questions
of legal interpretation; and
(v) on the basis of a reading of the unaudited pro forma
consolidated condensed financial statements included in the Registration
Statement and the Prospectus, carrying out certain specified procedures
that would not necessarily reveal matters of significance with respect
to the comments set forth in this paragraph (v), inquiries of certain
officials of the Company and its consolidated subsidiaries who have
responsibility for financial and accounting matters and proving the
arithmetic accuracy of the application of the pro forma adjustments to
the historical amounts in the unaudited pro forma consolidated condensed
financial statements, nothing came to their attention that caused them
to believe
<PAGE> 26
that the unaudited pro forma consolidated condensed financial statements
do not comply in form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition to
the obligations of the Underwriters that (I) such letters shall be
accompanied by a written explanation of the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary, and (II) such changes, decreases or increases do not, in
the sole judgment of the Representatives, make it impractical or
inadvisable to proceed with the purchase and delivery of the Shares as
contemplated by the Registration Statement, as amended as of the date
hereof. References to the Registration Statement and the Prospectus in
this paragraph (e) with respect to either letter referred to above shall
include any amendment or supplement thereto at the date of such letter.
(f) The Company shall have furnished or caused to be furnished to the
Underwriters at the Closing a certificate of its Chairman of the Board, its
President or its Chief Executive Officer and its Chief Financial Officer
satisfactory to the Underwriters to the effect that:
(vi) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Closing Date;
the Registration Statement, as amended as of the Closing Date, does not
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Closing Date,
does not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and the Company has performed all covenants and
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Date;
(vii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to
the best of the Companyos knowledge, are contemplated by the Commission;
and
(viii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any materially adverse change
(including, without limitation, a change in management or control), or
development involving a prospective materially adverse change, in the
condition (financial or otherwise), management, earnings, properties,
business affairs or business prospects, stockholderso equity, net worth
or results of operations of the Company or any of its subsidiaries,
except in each case as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto).
(g) The Representatives shall have received from each Selling
Stockholder a certificate, signed by such Selling Stockholder, dated the Closing
Date, to the effect that:
(ix) the representations and warranties of such Selling
Stockholder in this Agreement are true and correct as if made on and as
of the Closing Date;
<PAGE> 27
(x) the Registration Statement, as amended as of the Closing
Date, does not include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and
(xi) such Selling Stockholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the
Closing Date.
(h) The Representatives shall have received from each person who is a
director or officer of the Company and substantially all holders of the
outstanding shares of Common Stock an agreement dated on or before the date of
this Agreement to the effect that such person will not publicly announce any
intention to and will not, without the prior written consent of Deutsche Morgan
Grenfell Inc. on behalf of the Underwriters, (i) offer, pledge, sell, offer to
sell, contract to sell, sell any option or contract to purchase, purchase any
option to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any of the shares of Common
Stock or any securities convertible into, or exercisable or exchangeable for,
Common Stock, or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for, shares of Common Stock (whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of shares of Common Stock (or
securities convertible into, exercisable or exchangeable for Common Stock), in
cash or otherwise), in each case, beneficially owned (within the meaning of Rule
13d-3 under the Exchange Act) or otherwise controlled by such person on the date
hereof or hereafter acquired, for a period beginning from the date hereof and
continuing to and including the date 180 days after the date hereof; provided,
however, that such person may, without the prior written consent of Deutsche
Morgan Grenfell Inc. on behalf of the Underwriters, transfer shares of Common
Stock or such other securities to members of such personos immediate family or
to trusts for the benefit of members of such personos immediate family or in
connection with bona fide gifts, provided that any transferee agrees to the
transfer restrictions described above.
(i) Prior to the commencement of the Offering, the Company shall have
made an application for the quotation of the Shares on the Nasdaq National
Market and the Shares shall have been included for trading on the Nasdaq
National Market, subject to official notice of issuance.
(j) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date, there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Companyos securities by any
"nationally recognized statistical rating organization", as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act.
(k) On or before the Closing Date, the Representatives and counsel for
the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company and the
Selling Stockholders.
(l) All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
satisfactory in all material respects to the Representatives and counsel for the
Underwriters. The Company and the Selling Stockholders shall furnish to the
Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the Representatives and counsel for the
Underwriters shall reasonably request.
<PAGE> 28
The respective obligations of the several Underwriters to purchase and
pay for any Shares shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Shares, except that all references therein
to the Shares and the Closing Date shall be deemed to refer to the Firm Shares
or the Option Shares and the First Closing Date or the related Option Closing
Date, each as applicable.
Section 8. Default of Underwriters.
If, at the First Closing, any one or more of the Underwriters shall fail
or refuse to purchase Shares that it has or they have agreed to purchase
hereunder on such date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is ten
percent or less of the aggregate number of the Shares to be purchased on such
date, the other Underwriters may make arrangements satisfactory to the
Representatives for the purchase of such Shares by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representatives), but if no such arrangements are made by the First Closing
Date, the other Underwriters shall be obligated severally in the proportions
that the number of Firm Shares set forth opposite their respective names in
Schedule 1 hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as the Representatives may specify, to purchase the Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date. If, at the First Closing, any Underwriter or Underwriters
shall fail or refuse to purchase Firm Shares and the aggregate number of Firm
Shares with respect to which such default occurs is more than ten per cent of
the aggregate number of Firm Shares to be purchased, and arrangements
satisfactory to the Representatives, the Company and the Selling Stockholders
for the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter, the Company or any Selling Stockholder. In any such
case either the Representatives or the Company shall have the right to postpone
the Closing, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and in the Prospectus or
in any other documents or arrangements may be effected. If, at any Option
Closing, any Underwriter or Underwriters shall fail or refuse to purchase Option
Shares, the non-defaulting Underwriters shall have the option to (i) terminate
their obligation hereunder to purchase Option Shares or (ii) purchase not less
than the number of Option Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 8. Any action taken under this Section 8 shall
not relieve any defaulting Underwriter from liability in respect of any default
of such Underwriter under this Agreement.
Section 9. Termination.
This Agreement shall be subject to termination in the sole discretion of
the Representatives by notice to the Company and the Selling Stockholders given
prior to any Closing Date in the event that the Company or any Selling
Stockholder shall have failed, refused or been unable to perform all obligations
and satisfy all conditions on its part to be performed or satisfied hereunder at
or prior thereto or, if at or prior to any Closing Date, (a) trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or materially limited or minimum or maximum
prices shall have been established by or on, as the case may be, the Commission
or the New York Stock Exchange or the Nasdaq National Market; (b) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market; (c) a general moratorium on commercial banking
activities shall have been declared by either Federal or New York State
authorities; (d) there shall have occurred (i) an outbreak or escalation of
hostilities between the United States and any foreign power, (ii) an outbreak or
escalation of any other insurrection or armed conflict involving the United
States, or (iii) any other calamity or crisis or materially adverse change in
general economic, political or financial conditions having an effect on the U.S.
financial markets that, in the sole judgment of the Representatives, makes it
impractical or inadvisable to proceed with the public offering or the delivery
of the Shares as contemplated by the Registration Statement, as amended as of
the date hereof; or (e) the
<PAGE> 29
Company or any of its subsidiaries shall have, in the sole judgment of the
Representatives, sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, or there shall have been any materially
adverse change (including, without limitation, a change in management or
control), or constitute a development involving a prospective materially adverse
change, in the condition (financial or otherwise), management, earnings,
properties, business affairs or business prospects, stockholderso equity, net
worth or results of operations of the Company or any of its subsidiaries, except
in each case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto). Termination of this Agreement pursuant to this
Section 9 shall be without liability of any party to any other party except for
the liability of the Company in relation to expenses as provided in Sections 4
and 10 hereof, the liability of the Selling Stockholders in relation to expenses
as provided in Sections 4 and 10 hereof, the indemnity provided in Section 6
hereof and any liability arising before or in relation to such termination.
Section 10. Reimbursement of Expenses.
If the sale of the Shares provided for herein is not consummated because
any condition to the obligations of the Underwriters set forth in Section 7
hereof is not satisfied or because of any termination pursuant to Section 9
hereof (other than by reason of a default by any of the Underwriters), the
Company shall reimburse the Underwriters, severally upon demand, for all
out-of-pocket expenses (including fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Shares. If the Company is required to make any payments to the Underwriters
under this Section 10 because of any Selling Stockholderos refusal, inability or
failure to satisfy any condition to the obligations of the Underwriters set
forth in Section 7 hereof, such defaulting Selling Stockholder, pro rata in
proportion to the percentage of Shares to be sold by each, shall reimburse the
Company on demand for all amounts so paid.
Section 11. Information Supplied by Underwriters.
The statements set forth under the heading "Underwriting" in any
Preliminary Prospectus or the Prospectus (to the extent such statements relate
to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Section 5(a)(ii) and Section 6 hereof. The Underwriters confirm that such
statements (to such extent) are correct.
Section 12. Notices.
In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by the Representatives. Any notice or notification in any form to be given
under this Agreement may be delivered in person or sent by telex, facsimile or
telephone (subject in the case of a communication by telephone to confirmation
by telex or facsimile) addressed to:
in the case of the Company:
Micromuse Inc.
139 Townsend Street
San Francisco, California 94107
Facsimile: 415/538-9091
Telephone: 415/538-9090
Attention: Christopher J. Dawes
in the case of the Underwriters:
<PAGE> 30
Deutsche Morgan Grenfell Inc.
31 West 52nd Street
New York, New York 10019
Facsimile: 650/614-5030
Telephone: 650/614-5000
Attention: William J. Brady
In the case of the Selling Stockholders, any such notice shall be addressed to
the Selling Stockholders at the addresses set forth in Schedule 2 hereto. Any
notice under this Section 12 shall take effect, in the case of delivery, at the
time of delivery and, in the case of facsimile, at the time of dispatch.
Section 13. Miscellaneous.
(a) Time shall be of the essence of this Agreement.
(b) The headings herein are inserted for convenience of reference only
and are not intended to be part of, or to affect, the meaning or interpretation
of this Agreement.
(c) For purposes of this Agreement, (a) "business day" means any day on
which the New York Stock Exchange is open for trading, and (b) "subsidiary" has
the meaning set forth in Rule 405 under the Securities Act.
(d) This Agreement may be executed in any number of counterparts, all of
which, taken together, shall constitute one and the same Agreement and any party
may enter into this Agreement by executing a counterpart.
(e) This Agreement shall inure to the benefit of and shall be binding
upon the several Underwriters, the Company, the Selling Stockholders and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person, except that (i)
the indemnities of the Company and the Selling Stockholders contained in Section
6 hereof shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 6 hereof shall also be for the benefit of the directors of the Company,
the officers of the Company who have signed the Registration Statement, each
Selling Stockholder and any person or persons who control the Company or such
Selling Stockholder within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter
shall be deemed a successor because of such purchase.
(f) The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers, the Selling
Stockholders and the several Underwriters set forth in this Agreement or made by
or on behalf of them, respectively, pursuant to this Agreement shall remain in
full force and effect, regardless of (i) any investigation made by or on behalf
of the Company, any of its officers or directors, the Selling Stockholders, any
Underwriter or any controlling person referred to in Section 6 hereof and (ii)
delivery of and payment for the Shares. The respective agreements, covenants,
indemnities and other statements set forth in Sections 4, 6 and 10 hereof shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement.
Section 14. Severability.
<PAGE> 31
It is the desire and intent of the parties that the provisions of this
Agreement be enforced to the fullest extent permissible under the law and public
policies applied in each jurisdiction in which enforcement is sought.
Accordingly, in the event that any provision of this Agreement would be held in
any jurisdiction to be invalid, prohibited or unenforceable for any reason, such
provision, as to such jurisdiction, shall be ineffective, without invalidating
the remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
Section 15. Governing Law.
The validity and interpretation of this Agreement, and the terms and
conditions set forth herein, shall be governed by and construed in accordance
with the laws of the State of New York, without giving effect to any provisions
relating to conflicts of laws. If the foregoing is in accordance with your
understanding, please sign and return to us eight (8) counterparts hereof, and
upon the acceptance hereof by you, on behalf of each of the Underwriters, this
letter and such acceptance hereof shall constitute a binding agreement among
each of the Underwriters and the Company. It is understood that your acceptance
of this letter on behalf of each of the Underwriters is pursuant to the
authority set forth in the Deutsche Morgan Grenfell Inc. Master Agreement Among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
<PAGE> 32
Very truly yours,
MICROMUSE INC.
By:
--------------------------------------------
Christopher J. Dawes
President and Chief Executive Officer
The Selling Stockholders named in Schedule 2 hereto,
acting severally
By:
--------------------------------------------
Name:
------------------------------------------
Attorney-in-Fact
The foregoing Agreement is hereby confirmed and
accepted as of the date first above written.
DEUTSCHE MORGAN GRENFELL INC.
NATIONSBANC MONTGOMERY SECURITIES, INC.
SMITH BARNEY INC.
Acting severally on behalf of themselves and the several Underwriters named in
Schedule 1 hereto.
By: DEUTSCHE MORGAN GRENFELL INC.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
<PAGE> 33
SIGNATURE PAGE TO UNDERWRITING AGREEMENT
SCHEDULE 1
Underwriters
Underwriter Number of Firm Shares
To Be Purchased
Deutsche Morgan Grenfell Inc.
NationsBanc Montgomery Securities, Inc.
Smith Barney Inc.
Total
------------------------
<PAGE> 34
SCHEDULE 1
<PAGE> 35
SCHEDULE 2
Selling Stockholders
<TABLE>
<S> <C> <C>
Name and Address of Number of Firm Shares Number of Option Shares
Selling Stockholders To Be Sold To Be Sold
</TABLE>
Total
------------------ ------------------------
SCHEDULE 2
<PAGE> 1
EXHIBIT 2.1
DATED 16TH SEPTEMBER 1997
(1) Micromuse plc
- and -
(2) Horizon Open Systems (UK) Limited
- and -
(3) Horizon Computer Services Limited
- ---------------------------------------------------
AGREEMENT
for the sale of the systems integration
business of Micromuse plc
- ---------------------------------------------------
Teacher Stern Selby
37-41 Bedford Row
London WC1R 4JH
Tel: 0171 242 3191
Fax: 0171 242 1156
Ref: (alpha) HOR.SOB.DOC
<PAGE> 2
DATED: 16TH SEPTEMBER 1997.
PARTIES:
(1) "Vendor": Micromuse plc (registered no. 2228951) whose registered office
is at Disraeli House 90 Putney Bridge Road London SW18 IDA
(2) "Purchaser": Horizon Open Systems (UK) Limited (registered no. 3084069)
whose registered office is at Unit 1 Wallbrook Business Centre Green Lane
Hounslow Middlesex TW4 6NW
(3) "Guarantor": Horizon Computer Services Limited (registered no. 133211)
whose registered office is at Lower Glanmire Road Cork Eire
OPERATIVE PROVISIONS:
1. Definitions
1.1 In this Agreement including the Schedules and the Appendices the following
words and expressions have the following meanings unless they are
inconsistent with the context;-
"Agreed Bundle"
the bundle of documents attached hereto in the Agreed Form
"Agreed Form"
the form agreed between the Vendor and the Purchaser on or prior to the
Effective Date and initialled for the purposes of identification by their
respective duly authorised representatives
"Assets"
the property assets and rights of the Business to be purchased by the
Purchaser as described in clause 2.1
"Auditors' Statement"
the statement to be prepared by the Purchaser's auditors in accordance
with clause 8.2
"Book Debts"
the trade debts owed to the Vendor at the Effective Date in connection
with the Business in respect of which invoices have been validly issued
and submitted by the Vendor prior to the Effective Date
"Business"
the systems integration business as carried on by the Vendor at the
Effective Date including without limitation the sale and supply of the
products from the companies listed in Appendix 6 and all related and
ancillary products consultancy and other services and training other than
the Netcool products and services sold and supplied by the Vendor as at
the Effective Date
<PAGE> 3
"Business Day"
a day on which banks in London are open for the transaction of all classes of
business (not being Saturday or Sunday)
"Completion"
completion of the sale and purchase of the Business in accordance with the
provisions of clause 7
"Consideration"
the total consideration payable pursuant to this Agreement as referred to in
clause 3.1
"Contracts"
the Customer Contracts the Maintenance Contracts the Multi Year Maintenance
Contracts and the Supply Contracts
"Creditors"
all and any amounts owed by the Vendor in connection with the Business to or in
respect of trade creditors and accrued charges trade bills payable and other
creditors in connection with the Business at the Effective Date but not
including liabilities for VAT or taxation on profits or chargeable gains
"Customer Contracts"
all the current contracts agreements and arrangements of and orders placed with
the Vendor for the supply of goods and/or services to customers of the Business
as listed in Appendix I
"Customer Lists"
the lists of customers and agents of the Business at any time during the period
from 1st October 1995 to the Effective Date being print outs (in paper or
electronic form) from the Vendor's accounts NOTES Contact and Helpdesk
databases and such other files and records of customers agents and suppliers
relating to the Business and all information relating to the marketing of the
Business but excluding books and records of the Vendor relating exclusively to
the Excluded Assets in each case as are in the possession of the Vendor or are
capable of being called for by the Vendor
"Deferred Consideration"
the sum of $250,000 (two hundred and fifty thousand US dollars)
"Disclosures"
the disclosures set out in a disclosure letter of today's date from the Vendor
to the Purchaser relating to the Warranties
"Effective Date"
the close of business on the date of this Agreement
<PAGE> 4
"Excluded Assets"
all assets relating to the Business (or otherwise) not specified in the Assets
such exclusion including without limitation:
(a) (subject to the provisions of clause 5) cash in hand or at the bank
(b) (subject to the provisions of clause 5) the Book Debts
(c) the Property
(d) all stock and fixed assets belonging to the Vendor and whether or not
previously utilized in relation to the Business
(e) the Vendor's customer magazine "Complexity" and all and any rights therein
(f) all and any rights in or to the Company's Help Desk and NOTES Contact
database software
(g) all intellectual property rights (of whatsoever nature) in or relating to
Netcool
"Excluded Employees"
the employees of the Vendor employed in the Business named in part 2 of
Appendix 4 and all other employees of the Vendor whether employed in the
Business or otherwise including without limitation all former existing and
future employees of the Vendor but excluding the Transferring Employees
"Further Consideration"
the sum of $250,000 (two hundred and fifty thousand US dollars)
"Goodwill"
the goodwill of the Vendor in relation to the Business together with the
exclusive right for the Purchaser or its assignee to represent itself as
carrying on the Business in succession to the Vendor but for the avoidance of
doubt excluding the right to use the name "Micromuse" or any derivative thereof
other than pursuant to the rights granted by clause 14
"Initial Consideration"
the sum of $500,000 (five hundred thousand US dollars)
"Liabilities"
all and any liabilities of the Business and/or the Vendor in relation to the
Business (other than the Creditors) outstanding at the Effective Date
"LSE Contract"
the contract made between the Vendor and the London Stock Exchange (pursuant to
invoice number 5569 and customer purchase order RO25431) being one of the
Maintenance Contracts
<PAGE> 5
"Maintenance Contracts"
all the current contracts agreements and arrangements (other than the Multi
Year Maintenance Contracts) of the Vendor for the supply of maintenance
services to customers of the Business as listed in Appendix 3
"Multi Year Maintenance Contracts"
all the current contracts agreements and arrangements of the Vendor for the
supply of maintenance services in excess of one year to customers of the
Business as listed in part A of Appendix 3
"Option Period"
the period of three months following the Effective Date
"Property"
the third floor mezzanine area of the Vendor's place of business at 90 Putney
Bridge Road London SW2 1DA
"Purchaser's Solicitors"
Teacher Stern Selby 37/41 Bedford Row London WC1R 4JH
"Regulations"
the Transfer of Undertakings (Protection of Employment) Regulations 1981
"Supply Contracts"
all the current contracts agreements and arrangements of or orders placed by
the Vendor for the supply of goods and/or services from suppliers to the
Business as listed in Appendix 2
"Trade Names"
Micromuse Systems Integration and such other name or names as may be agreed by
the Vendor and the Purchaser in writing from time to time
"Transferring Employees"
the employees of the Vendor employed in the Business named in part 1 of
Appendix 4
"Turnover"
the gross sales turnover of the Purchaser and (if applicable) any wholly owned
subsidiary that is registered in England (including for the avoidance of doubt
the gross sales turnover of the Business) for the twelve month period
immediately following the Effective Date as certified determined or agreed in
accordance with clauses 2,1 or 2,3
"VAT"
value added tax
"Vendors Account"
National Westminster Bank plc 153 Putney High Street London SW15 1RX sort code:
60-17-11 Swift NWBKGB2L dollar account: 140/04005414
<PAGE> 6
"Vendor's Solicitors"
Cameron McKenna Mitre House 160 Aldersgate London EC1A 4DD
"Warranties"
the warranties of the Vendor contained in Schedule 4
"Warranty Claim"
any valid claim made by the Purchaser for breach of any of the
Warranties in accordance with the provisions of clause 13
1.2 Unless the context otherwise requires any reference to any statutory
provision shall be interpreted as including a reference to:-
1.2.1 any statutory amendment modification consolidation or re-enactment
(whether before or after the date of this Agreement) for the time
being in force;
1.2.2 all statutory instruments or subordinate legislation or orders made
pursuant to a statutory provision;
1.2.3 all statutory provisions of which the statutory provision is an
amendment modification consolidation or re-enactment; but shall not
include any substituted provision.
1.3 Words denoting the singular include the plural and vice versa; words
denoting any gender include all genders; words denoting persons
include corporations and vice versa.
1.4 Unless otherwise stated a reference to a clause sub-clause or Schedule
is a reference to a clause or a sub-clause of or a schedule to this
Agreement.
1.5 Clause headings are for ease of reference only and do not affect the
construction of this Agreement.
1.6 The Appendices shall form part of this Agreement.
2. Agreement for sale
2.1 Subject to the terms and conditions of this Agreement the Vendor with
full title guarantee shall sell and transfer to the Purchaser which
shall purchase and take over as at the Effective Date:-
2.1.1 the Business as a going concern; and
2.1.2 all of the following property assets and rights of the Vendor used in
the conduct of the Business:-
(a) the Goodwill;
(b) the Customer Lists; and
(c) the benefit of the Contracts
but excluding the Excluded Assets.
2.2 Save as expressly provided for in this Agreement the Purchaser shall
not assume or be deemed to assume or be responsible for any debt
obligation or liability
<PAGE> 7
whatsoever incurred or suffered by or on behalf of the Vendor in
relation to the Business or the Assets.
3. Purchase consideration
3.1 The maximum consideration for the sale by the Vendor of the Business
and the Assets shall be a sum equal to the aggregate of the Initial
Consideration and (if payable in accordance with the provisions of
this Agreement) the Deferred Consideration and the Further
Consideration and the values attributable to the Goodwill the
Customer Lists and the Contracts shall be apportioned as stated in
Schedule 1.
3.2 The consideration shall be paid as follows:
3.2.1 as to the Initial Consideration in cash at the Effective Date;
3.2.2 as to the Deferred Consideration (if payable) in cash in accordance
with clause 8;
3.2.3 as to the Further Consideration (if payable) in cash in accordance
with clause 9.
3.3 The Consideration shall be exclusive of any applicable VAT.
4. Debtors
Where any debtor included in the Book Debts which belongs to the
Vendor is a continuing debtor of the Business following the Effective
Date the Vendor shall consult with the Purchaser at least 21 days
before instituting any legal proceedings for the recovery of the same.
5. Book Debts Receivables Creditors and Liabilities
5.1.1 As regards Customer Contracts relating to the supply of products the
Vendor shall be entitled to all revenues in relation to such Customer
Contracts in respect of which the "ship date" falls on or prior to
the Effective Date and the Purchaser shall be entitled to all
revenues under such Customer Contracts in respect of which the "ship
date" falls after the Effective Date for the avoidance of doubt in
each case irrespective of the date upon which any related invoice is
issued or submitted.
5.1.2 As regards Customer Contracts relating to the provision of consultancy
services and in respect of which an invoice has not been issued or
submitted on or prior to the Effective Date all revenues in relation
to such Customer Contracts shall be for the sole account of the
Purchaser.
5.1.3 As regards Customer Contracts relating to the provision of training
services all revenues in relation to such Customer Contracts where
the services thereunder have commenced on or prior to the Effective
Date shall be retained by or belong to the Vendor and where training
services in relation to such Customer Contracts commence following
the Effective Date all revenues shall belong to the Purchaser.
5.2 If the Vendor has issued or submitted any invoices in respect of the
provision of consultancy services under any contract on or prior to
the Effective Date all revenues in relation to such contracts shall
be for the sole account of the Vendor
<PAGE> 8
but to the extent that the services thereunder are to be performed after
the Effective Date the Vendor shall sub-contract the provision of such
services to the Purchaser (which the Purchaser hereby agrees to provide) on
so far as possible the same terms (including daily charge out rates).
5.3 Entitlement to proceeds in relation to the Maintenance Contracts and the
Multi Year Maintenance Contracts shall be dealt with in accordance with the
provisions of Appendix 3.
5.4 All costs relating to Supply Contracts and any other contracts required to
be entered into for the supply of products and/or services in relation to
the Customer Contracts the Maintenance Contracts and the Multi Year
Maintenance Contracts (for which purposes the costs of any supply of
consultancy services sourced in-house shall be treated as a third party
supply at a cost of Pound Sterling 500 per day) shall be borne by and in
proportion to the entitlement of the Purchaser and/or the Vendor (as
appropriate) to revenues in relation to such Customer Contracts Maintenance
Contracts and Multi Year Maintenance Contracts and in addition the
Purchaser shall be responsible for carrying out all telephone support
services pursuant to the Maintenance Contracts and the Multi Year
Maintenance Contracts and in addition the costs of performing all
warranties and/or guarantees relating to the Customer Contracts in relation
to the supply of product or as disclosed in the Agreed Bundle.
5.5 To the extent that any payment is made to or received by the Vendor or the
Purchaser in respect of a Book Debt an invoice or other monies belonging to
or for the account of the other (as appropriate having regard to the
provisions of this clause 5) such party shall receive such payment as
trustee for and on behalf of the party entitled to such payment and shall
account to the other for the same on the Effective Date or if received
thereafter within 7 Business Days of receipt by the relevant party.
5.6 Save in relation to the costs which the Purchaser shall be responsible for
pursuant to clause 5.4 the Vendor shall promptly discharge the Creditors
and Liabilities and shall indemnify the Purchaser fully and effectively at
all times from and against all and any claims proceedings demands
liabilities and related costs and expenses on a full indemnity basis in
connection with any claim that the Liabilities and Creditors are payable by
the Purchaser.
6. Contracts
---------
6.1 The Purchaser shall as from the Effective Date perform the obligations of
the Vendor under the Contracts insofar as such obligations relate
exclusively to the Business in a proper and workmanlike manner and shall
indemnify and keep indemnified the Vendor against all claims liabilities
demands proceedings and related costs and expenses on a full indemnity
basis arising out of the performance
<PAGE> 9
or non-performance or as a consequence of such obligations under the
Contracts but the Purchaser shall not indemnify the Vendor in respect of
anything arising out of the performance or non-performance or as a
consequence of a breach on the part of the Vendor its employees agents
or sub-contractors prior to the Effective Date.
6.2 The Vendor shall continue to perform the obligations under the Contracts
insofar as such obligations relate to the remaining businesses of the
Vendor as carried on at the Effective Date in a proper and workmanlike
manner and shall indemnify and keep indemnified the Purchaser against
all claims liabilities demands proceedings and related costs and
expenses on a full indemnity basis arising out of the performance or
non-performance or as a consequence of such obligations under the
Contracts.
6.3.1 Save in relation to the costs which the Purchaser shall be responsible
for pursuant to clause 5.4 the Vendor shall remain liable for and shall
indemnify the Purchaser fully and effectively at all times from and
against all and any claims losses actions proceedings demands
liabilities costs and expenses on a full indemnity basis in respect of
any goods and services (or parts thereof) sold or supplied by the Vendor
its employees agents or sub-contractors which relate to the Business
arising on or prior to the Effective Date.
6.3.2 Upon becoming aware of any such claim pursuant to clause 6.3.1 insofar
as the Vendor has conduct of such claim the Vendor will promptly give
notice of it to the Purchaser and shall not take any steps which might
reasonably be expected to damage the commercial interests of the
Purchaser without prior consultation with the Purchaser.
6.4 Insofar as any of the Contracts cannot effectively be assigned to the
Purchaser without the consent of a third party or except by an agreement
of novation:-
6.4.1 the Vendor and the Purchaser shall use all reasonable endeavors to
obtain consent or to procure a novation;
6.4.2 unless and until consent is obtained or such Contracts are novated the
Vendor shall hold the same on trust for the Purchaser and the Purchaser
shall for its own benefit and to the extent that such Contracts permit
perform on behalf of the Vendor (but at the Purchaser's expense) the
obligations of the Vendor arising after the Effective Date in relation
to such Contracts in accordance with the provisions of clause 6.1.
6.5 If consent or novation is not obtained within a reasonable time period
the Vendor will co-operate with the Purchaser in any reasonable
arrangements designed to provide for the Purchaser the benefits under
such Contracts including by way of the Vendor holding such Contracts on
trust for the Purchaser and to the extent that any such arrangements
cannot be made the Purchaser shall have no further obligation to the
Vendor in respect of any such Contracts from such date.
<PAGE> 10
6.6 In addition to the foregoing but acknowledging that this clause 6.6 shall
not have any legal or binding effect of whatsoever nature on the Purchaser
the Purchaser hereby agrees to take reasonable steps to deal with the
customer queries or problems arising out of contracts or arrangements
entered into by the Vendor in relation to the Business prior to the
Effective Date (and other than the Contracts) in good faith with a view to
dealing with the queries or problems raised by such customers (if any) to
their satisfaction.
6.7 Notwithstanding anything else contained in this Agreement the Vendor
hereby agrees to continue to perform and be responsible for carrying out
all telephone support services pursuant to the LSE Contract until (and
including) 12th December 1997 and with effect from 13th December 1997 the
Purchaser shall perform and be responsible for such telephone support
services and the foregoing provisions shall then apply.
7. Completion
7.1 The sale and purchase shall be completed at the offices of the Vendor's
Solicitors immediately upon the exchange of this Agreement when all the
matters set out in this clause 7 shall be affected.
7.2 The Vendor shall deliver to the Purchaser at the Property such of the
Assets as are capable of being transferred by delivery.
7.3 The Vendor shall cause to be delivered or (if so requested by the
Purchaser) made available to the Purchaser or the Purchaser's Solicitors:-
7.3.1 such documents as are required by the Purchaser's Solicitors to complete
the sale and purchase of the Assets and vest title to the Assets in the
Purchaser including (but without limitation) an assignment of the Goodwill
Customer Lists and Contracts in the Agreed Form;
7.3.2 all its books of account payroll records and information relating to
customers and suppliers (including without limitation the Customer Lists a
list of purchasers to which outstanding quotations have been given and a
list of unfulfilled orders as at the Effective Date) and other books and
documents in each case as are in the possession of the Vendor or capable
of being called for by the Vendor which relate exclusively to the Business
and copies thereof where such books records or information also relate to
the remaining business of the Vendor or where the Vendor is required to
retain such records by law;
7.3.3 all its instructional and promotional material sales publications
advertising materials terms and conditions of sale which relate
exclusively to the Business and copies thereof where the same also relate
to the remaining business of the Vendor;
<PAGE> 11
7.3.4 a list of sales distributors identifying sales by units and the
territory served during the last twelve months and copies of all the
current agreements with the distributors;
7.3.5 all records of National Insurance and PAYE relating to all the
Transferring Employees duly completed up to the Effective Date and
copies thereof where such records also relate to the Excluded
Employees;
7.3.6 a letter from the Vendor's bankers consenting to the sale of the
Assets and releasing such Assets from any security held (in the
Agreed Form) there being no other charges or encumbrances affecting
the same;
7.4 In addition to the above on the Effective Date (and by entering into
this Agreement) the Vendor and the Purchaser hereby agree to enter
into a consultancy agreement (on the terms and conditions set out in
Schedule 3).
7.5 Upon completion of the matters referred to above the Purchaser shall
pay to the Vendor by way of bankers draft or telegraphic transfer to
the Vendor's Account the Initial Consideration.
7.6 The Purchaser shall not be obliged to complete the purchase of the
Business or any of the Assets unless the Vendor shall have complied
with all of its obligations pursuant to this clause 7.
7.7 The Purchaser may in its absolute discretion waive any requirement
contained in clauses 7.2 or 7.3 or may waive any such requirement
subject (if agreed at the time) to a condition that the Vendor gives
at the Effective Date a written undertaking to the Purchaser executed
by the Vendor or on behalf of the Vendor by the Vendor's Solicitors
in form and substance as the Purchaser requires. The Vendor shall
duly and punctually comply with any such undertaking.
8. Deferred Consideration
8.1 If (and only if) the Turnover exceeds Pound Sterling 14,000,000
(fourteen million pounds sterling) (the "Condition") then the Vendor
shall within five Business Days of the certification agreement or
determination of the Turnover in accordance with the following
provisions of this clause 8 pay the Deferred Consideration to the
Vendor by way of telegraphic transfer to the Vendor's Account. The
parties shall establish whether the Condition has been satisfied and
accordingly the Deferred Consideration is payable in accordance with
the following provisions of this clause 8.
8.2 On the first anniversary of the Effective Date the Purchaser shall
instruct its auditors for the time being to prepare as soon as
practicable (but in any event no later than 21 days following the
first anniversary of the Effective Date) a written statement
certifying the Turnover and to deliver a copy of such statement to
the Vendor and the Purchaser together with a breakdown of the
Turnover on a quarterly basis.
<PAGE> 12
8.3 Within 21 days of the receipt by the Purchaser and the Vendor ("Notice
Period") of the Auditors' Statement (time being of the essence for the
purposes of this subclause) the Purchaser and the Vendor shall have the
opportunity to serve a notice on the other of them stating that such
party disagrees with the contents of the Auditors Statement and (by
reference to the available information at such time) detailing the nature
of such disagreement. Failing service of a notice as aforesaid the
Auditors Statement shall be deemed to have been accepted by and (save in
the case of manifest error) binding upon the parties hereto.
8.4 If notice is served during the Notice Period by the Vendor or the
Purchaser in accordance with clause 8.3 the disputing party shall be
entitled to a further period of 21 days ("Further Period") in which to
inspect (which inspection in the case of the Vendor may be carried out by
accountants instructed by it) such of the Purchaser's books and records
as were used in the preparation of the Auditors' Statement provided that
access to such books and records shall be subject to the same
confidentiality obligations as contained in 15.1.2 of this Agreement.
8.5 The Vendor and the Purchaser shall acting in good faith use all
reasonable endeavours to agree within the Further Period the Turnover. If
the Vendor and the Purchaser are unable to agree the Turnover within the
Further Period such dispute shall be referred for final determination to
a firm of chartered accountants nominated jointly by the Vendor and the
Purchaser or failing such nomination within 14 days after request by
either the Vendor or the Purchaser nominated at the request of either of
them by the President for the time being of the Institute of Chartered
Accountants in England and Wales. Such accountants shall be entitled to
call for and inspect the working papers of the Purchaser's auditors and
such other documents as they may reasonably consider necessary. In making
their determination the accountants shall act as experts and not as
arbitrators their decision shall (in the absence of manifest error) be
final and binding on the parties and their fees shall be borne and paid
by the Vendor and the Purchaser in such proportions as the accountants
shall determine.
8.6 The Purchaser hereby undertakes and agrees that unless otherwise agreed
in writing by the Vendor (such agreement not to be unreasonably withheld
or delayed but if being acknowledged that any step or proposed action that
has a detrimental effect on the Turnover constitutes reasonable grounds to
object) the Purchaser will ensure that until the first anniversary of the
Effective Date:-
8.6.1 no material change in the nature of the Purchaser's business or of
the Business occurs;
8.6.2 the Purchaser does not transfer all or any material part of its assets or
undertaking to any other person company or entity;
<PAGE> 13
8.6.3 the Purchaser will carry on its business as constituted at the Effective
Date and the Business in good faith and will not act with the intention
of running down the business of the Purchaser or the Business in order
to deprive the Vendor the Deferred Consideration;
8.6.4 it shall procure that all future business of a kind currently carried on
by the Purchaser as at the Effective Date and by the Vendor in relation
to the Business as at the Effective Date shall be channelled through and
only through the Purchaser.
8.7 In order that the Vendor may monitor the Turnover the Purchaser shall
provide the Vendor within 28 days following the end of each three month
period with a copy of the Purchaser's sales reports detailing the
turnover of the Purchaser during the relevant period.
8.8 For the avoidance of doubt the Purchaser shall not be entitled to set
off or deduct all or any part of the Deferred Consideration on account
of any claim purported claim or action by the Purchaser against the
Vendor pursuant to this Agreement.
9. Further Consideration
9.1 The parties acknowledge that the Consideration hereunder has been
structured in such a way so as to reflect the level of Warranties as
well as the timetable within which the purchase hereunder has been made
and in addition by reference to the anticipated future relationship
between the parties and in particular the goodwill and co-operation
which (subject to the provisions set out below) the Purchaser expects
the Vendor to extend to the Purchaser in relation to the Business
following the sale hereunder.
9.2 Having regard to the above the Purchaser shall be entitled (but not in
any way obliged) at the expiry of the Option Period to pay the Vendor
the Further Consideration by telegraphic transfer to the Vendor's
Account.
9.3 Whilst the Purchaser shall not be obliged to pay the Further
Consideration any failure to pay the Further Consideration to the Vendor
at the expiry of the Option Period in accordance with clause 9.2 shall
(automatically and without the need to serve any notice) and
notwithstanding anything else contained in this Agreement release the
Vendor from all and any obligations to perform any services or to assist
or co-operate with the Purchaser in any way following expiry of the
Option Period save for the provision of consultancy services in
accordance with Schedule 3 and except insofar as required in order for
the Vendor to comply with its obligations undertakings and restrictions
contained this Agreement or with any statutory requirement.
<PAGE> 14
10 Transferring Employees and Excluded Employees
10.1 The Regulations shall govern the transfer of the contracts of
employment of the Transferring Employees and the Vendor warrants that
it has complied with the provisions of Regulation 10 of the
Regulations applicable to it.
10.2 The Vendor shall indemnify the Purchaser fully and effectively at all
times against all and any claims losses actions proceedings damages
compensation tribunal awards fines demands liabilities costs and
expenses on a full indemnity basis which relate to or arise from any
act or omission of the Vendor or any event occurrence or circumstance
prior to or on the Effective Date and which the Purchaser may incur or
suffer in relation to the Transferring Employees and the Excluded
Employees pursuant to the Regulations or otherwise including without
limitation in connection with any claim for unfair dismissal
redundancy sex race or disability discrimination or in connection with
any share options (vested or otherwise) granted by the Vendor to the
Transferring Employees or the Excluded Employees (whether lapsing or
otherwise before or after the Effective Date).
10.3 It is acknowledged by the parties that the employment of the Excluded
Employees named in part 2 of Appendix 4 employed in relation to the
Business will transfer to the Purchaser by virtue of the Regulations
and the Vendor shall indemnify the Purchaser fully and effectively at
all times against all and any claims losses actions proceedings
damages compensation tribunal awards fines demands liabilities costs
and expenses on a full indemnity basis which the Purchaser may suffer
or incur whether by virtue of the Regulation or otherwise and which
relate to arise from or are as a consequence of the termination of
such Excluded Employee's employment by the Vendor or the Purchaser
following the Effective Date by way of the Purchaser giving such
persons full contractual notice or pay in lieu of notice without
deduction of any kind including without limitation in connection with
any contractual or statutory claim whether for unfair dismissal
redundancy sex race or disability discrimination or otherwise and in
connection with any share options (vested or otherwise) granted by the
Vendor to the Excluded Employees (whether lapsing or otherwise before
or after the Effective Date). If and to the extent that a claim is
made against the Purchaser and such claim is covered by the indemnity
contained in this clause 10.3 the Vendor shall be entitled by way of
service of notice on the Purchaser to call for conduct of such claim
in the name of the Purchaser (but subject to consulting with the
Purchaser within a reasonable period before any steps are to be taken)
and subject further to the Vendor bearing the cost of disputing or (as
appropriate) settling any such dispute or claim in addition to the
indemnity contained in this clause 10.3.
<PAGE> 15
10.4 The Vendor shall continue to employ Ms Debbie Brown in the remaining
business of the Vendor and the Vendor shall indemnify and keep
indemnified the Purchaser against all and any claims losses actions
proceedings damages compensation tribunal awards fines demands
liabilities costs and expenses on a full indemnity basis which the
Purchaser may suffer or incur in relation to her employment or its
termination at any time whether by virtue of the Regulations or
otherwise.
10.5 All salaries and other emoluments including holiday pay tax and
national insurance payments relating to the Transferring Employees shall
be borne by the Vendor up to and including the Effective Date and by the
Purchaser following the Effective Date and all necessary apportionment's
shall be made accordingly.
10.6 The Purchaser shall indemnify the Vendor and keep the Vendor indemnified
from and against all demands actions proceedings damages compensation
tribunal awards fines costs expenses and all other liabilities on a full
indemnity basis whatsoever arising out of or connected with any claim by
any of the Transferring Employees against the Vendor which relates to any
act or omission of the Purchaser (or any other event or occurrence)
following the Effective Date.
10.7 The Purchaser shall (at the Vendor's expense) provide to the Vendor as
soon as reasonably practicable such information in writing as the Vendor
reasonably requires to carry out its duties under Regulation 10 of the
Regulations.
11. VAT
11.1 The Vendor and the Purchaser shall use all reasonable endeavours to
procure that the sale of the Business and the Assets hereunder is treated
by HM Customs and Excise as a transfer of a business as a going concern
for the purposes of the Value Added Tax Act 1994 section 49(1) and
article 5 of the Value Added Tax (Special Provisions) Order 1995.
11.2 The Vendor and the Purchaser shall agree a form of letter to be sent by
the Vendor to HM Customs and Excise seeking confirmation that the Vendor
be permitted to keep and preserve the records referred to in section 49
of the Value Added Tax Act 1994 relating to the period prior to the
Effective Date for such period as may be required by law.
11.3 The Vendor shall on reasonable notice during normal business hours make
the records referred to in clause 11.2 available to the Purchaser or its
agents for inspection and copying at the Purchaser's cost.
12 Title apportionments and facilities
12.1 The Vendor shall at the Purchaser's cost take all necessary steps and
co-operate fully with the Purchaser to ensure that it obtains the full
benefit of the Business and Assets and shall execute such documents and
take such other steps (or procure other necessary parties so to do) as
are necessary for vesting in the Purchaser all its
<PAGE> 16
rights and interests in the Assets. The Vendor shall in the meantime hold
the legal estate in the Assets as nominee for the Purchaser.
12.2 The Vendor shall promptly give to the Purchaser and the Purchaser's
Solicitors on request all such evidence of ownership to the Assets as the
Purchaser may reasonably require.
12.3 The Purchaser shall at the Vendor's cost on reasonable notice during the
Purchaser's hours of business give to the Vendor such access to the books
and records relating to the Business which are handed over to the Purchaser
on the Effective Date as the Vendor may reasonably require in connection
with the collection of any Book Debts which belong to it pursuant to the
provisions of clause 5 or otherwise required in order to comply with any
statutory obligation.
12.4 The provisions of Schedule 2 shall apply to the licence of the Property in
favour of the Purchaser.
12.5 Subject to other provisions of this Agreement all outgoings relating to or
payable in respect of the Business up to the Effective Date shall be borne
by the Vendor and as from the Effective Date shall be borne by the
Purchaser and all royalties and other periodical payments receivable in
respect of the Business up to that time shall belong to and be payable to
the Vendor and as from that time shall belong to and be payable to the
Purchaser and such outgoings and payments receivable shall be apportioned
accordingly.
12.6 Where any amounts fall to be apportioned under this Agreement the Vendor or
the Purchaser (as the case may be) shall provide the other of them with
full details of the apportionments together with supporting vouchers or
similar documentation and in the absence of dispute the appropriate payment
shall be made by or to the relevant party forthwith. If the amount of any
apportionment is in dispute the provisions of clause 8.5 shall apply for
resolving the dispute and the amount determined in accordance with that
clause shall be paid within 14 days of the determination together with
interest calculated on a daily basis from the Effective Date until the date
of actual payment at the rate of 2 per cent. per annum above the base rate
from time to time of National Westminster Bank plc.
13. Warranties by the Vendor
------------------------
13.1 The Vendor warrants to the Purchaser that save as set out in the
Disclosures the Warranties are true and accurate in all material respects
at the date of this Agreement.
13.2 The rights and remedies of the Purchaser in respect of any breach of the
Warranties shall not be affected by completion of this Agreement by any
investigation made by or on behalf of the Purchaser into the affairs of the
Vendor by the Purchaser
<PAGE> 17
rescinding or failing to rescind this Agreement or by any other event
or matter whatsoever except a specific and duly authorised written
waiver or release.
13.3 The Purchaser confirms that it has not already formulated and does
not as at the Effective Date contemplate making any Warranty Claim.
13.4 Where any Warranty refers to the knowledge information and belief of
the Vendor or is made so far as the Vendor is aware or other similar
qualification it undertakes that it has made all reasonable enquiry
into the subject matter of the Warranty.
13.5 Each of the Warranties shall continue in full force and effect
notwithstanding completion of this Agreement.
13.6 No failure to exercise and no delay in exercising on the part of the
Purchaser any right or remedy in respect of any Warranty shall
operate as a waiver of the right or remedy or the Warranty and a
single or partial exercise of any right or remedy shall not preclude
any other or further exercise of the right or remedy or the exercise
of any other right or remedy.
13.7 No liability shall attach to the Vendor in respect of any Warrant
Claim unless such Warranty Claim is (when aggregated with all other
Warranty Claim or Warranty Claims previously made if any) in excess
of Pound Sterling 25,000 and if the result of making any such
Warranty Claim (aggregated with any other such Warranty Claim or
Warranty Claims) would be that such sum is exceeded the Vendor shall
(subject to the other provisions hereof) be liable for the whole of
such Warranty Claim or Warranty Claims and not merely for the excess.
13.8 Claims against the Vendor shall be wholly barred and unenforceable
unless notice thereof shall have been made in writing setting out the
amount and brief particulars thereof prior to the expiry of eighteen
months from the Effective Date.
13.9 Nothing in this Agreement shall in any way restrict or limit the
general obligation of the Purchaser to mitigate any loss or damage
which it may suffer in consequence of any breach of Warranty by the
Vendor.
13.10 The Purchaser acknowledges and declares that in entering into this
Agreement it has not relied and is not relying on any warranties
representations covenants undertakings indemnities or other
statements whatsoever whether written or oral (and whether implied or
otherwise) (collectively "Representations") other than those
expressly set out or referred to in this Agreement and the Purchaser
hereby irrevocably and unconditionally waives any right it may have
to claim damages for or to rescind this Agreement by reason of any
Representation not expressly set out in this Agreement unless such
Representation was made fraudulently.
13.11 The total liability of the Vendor in respect of any claims under the
Warranties shall be limited to the amount of Consideration actually
received by the Vendor pursuant to this Agreement.
<PAGE> 18
13.12 The Vendor shall have no liability in respect of any Warranty Claim to
the extent that such Warranty Claim or the subject matter thereof:-
(a) occurs or arises as a result of or is otherwise attributable to
an act or omission after the Effective Date by the Purchaser
otherwise in the ordinary course of business which could have
been reasonably avoided; or
(b) occurs or arises as a result of any legislation not in force at
the Effective Date or as a result of any change in legislation
made after the Effective Date which has a retrospective effect.
14. Trade Names
14.1 Subject to clause 14.3 the Purchaser shall have the exclusive right to
use the Trade Names in connection with the Business for a period of 6
months following the Effective Date provided always that the Purchaser
at all times draws clear attention to the fact that the Business is
owned by the Purchaser.
14.2 The Purchaser shall not use the name "Micromuse" or any derivative or
variation thereto in connection with the Business in any manner which
may be confused with the remaining business of the Vendor carried on
by it immediately following the Effective Date and if the Vendor
reasonably considers that the Purchaser is in breach of this
sub-clause it shall notify the Purchaser of the same and may require
the Purchaser to refrain from using the name "Micromuse" in such
manner.
14.3 If the Purchaser does not take steps to comply with the Vendor's
notice referred to in clause 14.2 within seven days of the receipt of
the same the Purchaser shall automatically and without the need to
serve any further notice cease to have the right referred to in
clause 14.1 to use the Trade Names.
14.4 Notwithstanding the provisions of this clause the Vendor shall not at
any time following the Effective Date use the Trade Names or any
derivative or variation thereto in any manner or in any combination of
words or phrases so as to infringe directly or indirectly upon the
Goodwill or the Business.
14.5 The Vendor shall not and shall not permit or enable any other third
party to use the Trade Name or any variation thereto for such time as
the Purchaser is entitled to use the Trade Name in accordance with
clause 14.1 in the United Kingdom.
15. Future activities
15.1 The Vendor covenants and undertakes with the Purchaser that:-
15.1.1 it shall during the Option Period and at its own expense co-operate
with assist and participate in the Purchaser's public relations and
marketing activities in relation to the transfer of the Business and
the Vendor shall use all reasonable endeavors to ensure the maximum
possible benefit of the Business to the Purchaser including without
limitation maintaining the level of sales turnover of the Business as
at the
<PAGE> 19
Effective Date and by referring business where possible in
addition to the foregoing matters;
15.1.2 it shall not at any time following the Effective Date disclose to any
person firm association or company (except as required by law or
disclosure to its professional advisers) any information as to the
practice dealings management finances clients customers suppliers and
affairs of the Business and the Assets or any business of the Purchaser
carried on as at the Effective Date;
15.1.3 it shall not for a period of 2 years following the Effective Date
either on its own account or through any other person directly or
indirectly;-
(a) make any announcements of any kind do or omit to do anything
with the intention of in any way impeding or harming the
development and profitability of the Business or the Purchaser
or otherwise in bad faith;
(b) solicit entice or procure any of the Transferring Employees to
leave the employment of the Purchaser (whether or not such
Transferring Employee would be in breach of his contract of
employment);
(c) solicit interfere with entice or procure any supplier in
connection with the Business to cease or restrict any supplies
to the Purchaser;
(d) solicit interfere with or endeavour to entice away from the
Purchaser any person firm association or company who is or has
during the two years preceding the Effective Date been a client
or customer of the Vendor in relation to the Business;
(e) directly or indirectly engage in the United Kingdom and such
other countries as the Vendor carries on the Business as at the
Effective Date in any activity which competes directly or
indirectly the Business or any material part of it.
15.2 The Purchaser covenants and undertakes with the Vendor that:-
15.2.1 it shall during the Option Period refer business where possible to the
Vendor in relation to its Netcool business as carried on as at the
Effective Date;
15.2.2 it shall not at any time following the Effective Date disclose to any
person firm association or company (except as required by law or
disclosure to its professional advisors) any information as to the
practice dealings management finances clients customers suppliers and
affairs of the business of the Vendor carried on as at the Effective
Date;
15.2.3 it shall not for a period of 2 years following the Effective Date
either on its own account or through any other person directly or
indirectly solicit entice or procure any of the Excluded Employees to
leave the employment of the Vendor (whether or not such Excluded
Employee would be in breach of his contract of employment);
15.4 Subject to the provisions of clause 15.1 for the avoidance of doubt a
number of customers clients or contacts of the Vendor in relation to the
Business are also
<PAGE> 20
customers clients or contacts of the Vendor in relation to the
Vendor's other business carried on as at the Effective Date and
following the Effective Date the Vendor may continue to supply
software developed by the Vendor and/or perform any other services
other than in relation to or competing with the Business to and/or for
such customers clients or contacts.
15.5 The Vendor and the Purchaser agree that the covenants and undertakings
contained in clauses 15.1 15.2 and 15.8 are reasonable and are entered
into for the purpose of protecting the respective goodwill and
businesses of the Vendor and the Purchaser.
15.6 Each covenant and undertaking contained in clauses 15.1 15.2 and 15.8
shall be construed as a separate covenant and undertaking and if one
or more of them is or are held to be against the public interest or
unlawful or in any way an unreasonable restraint of trade the
remaining covenants and undertakings shall continue to bind the
relevant party.
15.7 If any covenant or undertaking contained in clauses 15.1 15.2 and 15.8
were void but would be valid if the period of application were reduced
or if some part of the covenant or undertaking were deleted it shall
apply with such modification as may be necessary to make it valid.
15.8 The Vendor shall promptly refer to the Purchaser all enquiries
relating to the Business received during the Option Period including
enquiries relating to orders for any stocks spare parts accessories
other equipment and services sold or supplied in connection with the
Business.
15.9 The parties shall procure that all of its holding companies and
subsidiaries and all subsidiaries of such holding companies (as such
terms are defined in section 736 of the Companies Act 1985) and all of
their respective associated companies (as such term is defined in
section 416(1) of the Income and Corporation Taxes Act 1988) from time
to time shall comply with the covenants and undertakings contained in
this clause 15 (other than in relation to clauses 15.1.1 and 15.2.1).
16. Copyright and Information
16.1 The Vendor acknowledges that it owns certain copyright in software
written for customers of the Business and in written documents
produced by employees employed in the Business (together "Copyright").
The Vendor hereby assigns such right title and interest, in the
Copyright as it has to the Purchaser and the Copyright shall form part
of the Assets.
16.2 The Vendor shall preserve all information records and other documents
insofar as they relate to the Excluded Assets for a period of not less
than 3 years following the Effective Date and upon reasonable notice
by the Purchaser make such information records and documents available
for inspection and copying by the Purchaser or its
<PAGE> 21
authorised agents at reasonable times during normal business hours at
the Purchaser's cost.
17. Announcements
No announcement of any kind shall be made in respect of the subject
matter of this Agreement except as specifically agreed in writing
between the Vendor and the Purchaser.
18. Costs
All expenses incurred by or on behalf of the parties including all
fees of agents representatives solicitors and accountants employed or
engaged by either of the parties in connection with the negotiation
preparation and execution of this Agreement shall be borne solely by
the party which incurred them.
19. Guarantee
In further consideration of the obligations of the Vendor
hereunder the Guarantor hereby guarantees and undertakes to the Vendor
in respect of the Purchaser that the Purchaser will pay the Deferred
Consideration (if payable) in accordance with the terms of this
Agreement in the event that the Purchaser fails to pay the same when
due.
20. Communications
20.1 All communications between the parties with respect to this Agreement
shall be delivered by hand or sent by first class post to the address
of the addressee as set out in this Agreement or to such other address
as the addressee may from time to time have notified for the purpose
of this clause or sent by facsimile transmission (with confirmation
sent by first class post within 24 hours).
20.2 Communications shall be deemed to have been received:-
20.2.1 if sent by first class post--3 business days after posting exclusive
of the day of posting;
20.2.2 if delivered by hand--on the day of delivery;
20.2.3 if sent by facsimile transmission--at the time of transmission.
20.3 Communications addressed to the Vendor shall be marked for the
attention of Mr Stephen Allott. Communications addressed to the
Purchaser shall be marked for the attention of Mr Charles Garvey.
20.4 In proving service:-
20.4.1 by delivery by hand--it shall be necessary only to produce a receipt
for the communication signed by or on behalf of the addressee;
20.4.2 by post or facsimile transmission--it shall be necessary only to prove
that the communication or letter of confirmation was contained in an
envelope which was duly addressed and posted in accordance with this
clause.
<PAGE> 22
21. Entire agreement and Schedules
------------------------------
21.1 This Agreement and the Schedules shall constitute the entire
agreement and understanding between the parties with respect to all
matters which are referred to herein.
21.2 All the Schedules form part of this Agreement.
21.3 This Agreement shall be binding upon each party's successors and
assigns
22. Invalidity
----------
If any term or provision in this Agreement shall in whole or in
part be held to any extent to be illegal or unenforceable under any
enactment or rule of law that term or provision or part shall to
that extent be deemed not to form part of this Agreement and the
enforceability of the remainder of this Agreement shall not be
affected.
23. Proper law
----------
The construction validity and performance of this Agreement shall be
governed by the laws of England and the parties submit to the
non-exclusive jurisdiction of the High Court in London.
24. Non-Assignment
--------------
The benefits rights covenants undertaking and obligations of the
parties under this Agreement shall not be assigned charged or
mortgaged in whole or in part without the prior written consent of
the other of them.
IN WITNESS whereof the parties have duly executed this Agreement as a deed the
day and year first above written.
List of Schedules List of Appendices
- ----------------- ------------------
1. Consideration/Apportionment 1. Customer Contracts
2. Licence of Property Terms 2. Supply Contracts
3. Terms of consultancy 3. Maintenance Contracts and Multi
4. Warranties Year Maintenance Contracts
4. Transferring Employees (part 1) and
Excluded Employees (part 2)
5. Letter from Mr. Beken
6. List of companies
<PAGE> 23
SCHEDULE 1
Consideration/apportionment
<TABLE>
<CAPTION>
Item (if payable pursuant (if payable pursuant
- ---- to clause 8) to clause 9)
-------------------- --------------------
<S> <C> <C> <C>
$ $ $
Goodwill: 499,998 250,000 250,000
Customer Lists: 1 -- --
Contracts: 1 -- --
------- ------- -------
Sub totals: 500,000 250,000 250,000
------- ------- -------
Total: $1,000,000
</TABLE>
<PAGE> 24
SCHEDULE 2
Provisions relating to the licence of the Property
1. The provisions of this Schedule 2 shall apply with respect to the
Purchaser's rights as licensee to occupy the Property during the
Option Period:-
1.1 the Vendor hereby grants a licence to the Purchaser to enter the
Property and to exclusively occupy the same as the licensee of the
Vendor in consideration of the licence fee set out below;
1.2 the Purchaser may carry on the Business from the Property for its own
account and the Vendor shall permit all of the Transferring Employees
and up to three other employees of the Purchaser to continue to
operate the Business from the Property free from interruption and
hindrance;
1.3 the Vendor shall make available to the Purchaser all normal and usual
office and reception facilities and services including telephones and
fax lines office and computer furniture equipment hardware and
software used in the Business but other than fax and photocopying
machines;
1.4 subject to paragraph 1.5 below the Vendor shall continue to be
responsible for and shall indemnify and keep indemnified the Purchaser
against all rent rates service charges water rates insurance premiums
gas electricity telephone and other outgoings of whatsoever nature;
1.5 during its occupation of the Property the Purchaser shall pay the
Vendor a licence fee of pound sterling 3,333 per month inclusive of
all contributions towards all outgoings of any nature including
without limitation all telephone charges and all the facilities
referred to in paragraph 1.3 above but exclusive of VAT and which
shall be payable monthly in advance commencing from the Effective
Date.
2. The Vendor shall retain and use the telephone number 0181 875 9500
(the "Original Telephone Number") but the Vendor shall at its cost
install tie lines at the Property to enable all telephone calls the
Vendor receives on the Original Telephone Number relating to the
Business to be transferred to employees of the Purchaser located at
the Property and the Purchaser's other place of business at Hounslow.
3. The Purchaser hereby acknowledges that the licence granted to the
Purchaser pursuant to this Agreement to occupy the Property
constitutes a technical breach of the terms of lease relating to the
Property. In the event that the Vendor receives a written notification
from the landlord during the Option Period requiring the Purchaser or
the Vendor to vacate the Property:-
3.1 the Vendor shall promptly provide the Purchaser with a copy of such
notification;
3.2 the Vendor shall at its cost use all reasonable endeavours and
negotiate in good faith with the landlord to allow the Purchaser to
continue in occupation of the Property upon the
<PAGE> 25
terms contained in this Schedule 2 and shall inform the Purchaser at all
times of the progress of and allow the Purchaser (if it so desires) to
participate in such negotiations;
3.3 if the landlord refuses permission for the Purchaser to continue to occupy
the Property during the Option Period the Purchaser shall be obliged to
vacate the Property within any time limit set by the landlord provided that
the Vendor promptly re-imburses the Purchaser;-
(a) such part of the licence fee as relates to the period during which the
Purchaser does not occupy the Property; and
(b) one half of all and any costs exceeding pound sterling 3,333 per month
which the Purchaser is required to pay by way of rental or licence fee
(as appropriate) during the remainder of the Option Period which costs
for the avoidance of doubt shall include the costs of the facilities
referred to paragraph 1.3 above.
3.4 The Purchaser having due regard to the above agrees during the licence
period not to erect any signs bearing the "Horizon" name nor to take any
steps that are likely to draw attention to the licencing arrangements hereby
agreed.
<PAGE> 26
SCHEDULE 3
Terms of consultancy of Mr Beken
1. The Vendor shall provide general consultancy services to the Purchaser upon
the terms of this Schedule 3 for a period of 6 months commencing on the
Effective Date ("consultancy period") for the purposes of ensuring the
smooth and uninterrupted transfer of the Business to the Purchaser such
services to include but not limited to liaising with customers and such
other general consultancy services as the Purchaser may reasonably require
from time to time.
2. The Vendor shall procure that Mr Beken (and only Mr Beken) shall provide
the consultancy services and that he sign and deliver to the Purchaser on
the Effective Date a letter in the form contained in Appendix 5.
3. Mr Beken shall continue to be an employee of the Vendor at all times
during the consultancy period and his salary benefits and other emoluments
shall be paid by the Vendor both during and following the expiry or
termination of the consultancy period.
4. The Vendor agrees with the Purchaser that it will not terminate Mr Beken's
employment during the consultancy period save in circumstances which
justify his summary dismissal and in such an event the Vendor shall notify
the Purchaser at least 24 hours before it summarily dismisses Mr Beken and
provide details of the reasons for such dismissal.
5. The Purchaser may terminate the consultancy period immediately if Mr Beken
commits any act or makes any omission which would justify his dismissal if
he were employed by the Purchaser on its standard terms and conditions of
employment.
6. If Mr Beken ceases to be employed by the Vendor for any reason the
Purchaser may immediately terminate the consultancy period.
7. The consultancy period may be terminated by the Purchaser at any time upon
giving the Vendor not less than 1 week's prior notice.
8. During the consultancy period the Purchaser shall pay the Vendor a fee of
Pound Sterling 7,500 per month (pro rata where the consultancy period
commences expires or terminates other than at the end of a month)
exclusive of VAT payable monthly in arrears on the last day of each month
upon receipt of valid VAT invoices therefor. Such fee shall be inclusive
of all expenses incurred by the Vendor in connection with the consultancy
arrangement hereunder save for expenses incurred by Mr Beken in the proper
performance of the consultancy services hereunder which expenses have been
previously approved by the Purchaser in writing.
<PAGE> 27
SCHEDULE 4
Warranties
1. ASSETS
1.1 Ownership of Assets
1.1.1 The Vendor has good title to all the Assets and owns absolutely all the
Assets with full title guarantee free from all encumbrances.
1.1.2 The Vendor has not disposed of or agreed to dispose of or granted or
agreed to grant any security or other encumbrance in respect of any of
the Assets that remains outstanding at the Effective Date.
1.1.3 None of the Assets is subject to and there is no agreement or
commitment to give or create any option lien or encumbrance.
1.1.4 None of the Assets has been purchased on terms that property does not
pass to the Vendor until full payment is made by it to the supplier.
1.1.5 There has been no exercise purported exercise or claim for any charge
lien encumbrance or equity over any of the Assets and there is no
dispute directly or indirectly relating to any of the Assets.
2. TRADING
2.1 Litigation
2.1.1 The Vendor is not relation to the Business engaged in any litigation or
arbitration proceedings as plaintiff or defendant except for debt
collection of sums not exceeding an aggregate of pound sterling 1,000
and there are no such proceedings pending or so far as the Vendor is
aware threatened either by or against the Vendor affecting the Business
and so far as the Vendor is aware there are no facts which are likely to
give rise to any litigation arbitration or customer disputes.
2.1.2 No threat or claim of default under any of the Contracts or any other
agreement obligation or arrangement to which the Vendor is a party
relating to the Business or the Assets has been made and is outstanding
against the Vendor and the Vendor is not aware of any circumstances
whereby any of the Contracts may be terminated or rescinded by any other
party or the terms may be worsened as against the Vendor or the
Purchaser of the Business or the Assets may be prejudiced.
2.2 Vendor's activities
2.2.1 The Vendor is entitled to enter into and carry out the provisions of
this Agreement and has full power and authority to sell the Assets to
the Purchaser without obtaining the consent of any third party.
2.2.2 Compliance with the terms of this Agreement and any document entered
into by the Vendor in accordance with it does not and will not conflict
with or result in a breach of any of the provisions of the Vendor's
Memorandum or Articles of Association.
<PAGE> 28
2.2.3 The Vendor has at all times carried on the Business in accordance with
its Memorandum and Articles of Association for the time being in force
and so far as the Vendor is aware all other documents to which it is
currently has been a party and which relate to the Business.
2.2.4 Compliance with the terms of this Agreement does not conflict with
result in the breach of or constitute a default under the terms
conditions or provisions of any agreement or instrument to which the
Vendor is now a party relating to the Business save as regards any
Contract incorporating any prohibition or restriction on assignment
which has been disclosed in the Disclosures.
3. CONTRACTS
Disclosure of Contracts
Save as disclosed in the Disclosures the Contracts constitute all the
contracts and other engagements whether written or oral referable to
the Business to which the Vendor is now a party.
4. EMPLOYMENT
4.1 Transferring Employees
4.1.1 The Transferring Employees and the Excluded Employees listed in part 2
of Appendix 4 comprise all the persons now employed by the Vendor in
relation to the Business.
4.1.2 No Transferring Employee has given or received notice terminating his
employment and no Transferring Employee will be entitled to give
notice as a result of this Agreement other than as a consequence of
the Regulations.
4.1.3 The Vendor has not offered a contract of employment or services to any
person in connection with the Business which is to commence on or
after the Effective Date.
4.2 Terms of employment
4.2.1 True and accurate particulars of the terms and conditions of
employment of all the Transferring Employees including without
limitation ages length of service rates of remuneration notice periods
accrued holiday pay bonus profit sharing commission and discretionary
bonus arrangements are set out in Appendix 4 and/or the Disclosures.
4.2.2 Save as disclosed in the Disclosures there are no schemes in operation
by or in relation to the Vendor whereunder any Transferring Employee
is entitled to any shares or a commission or remuneration of any other
sort calculated by reference to the whole or part of the turnover
profits or sales of the Business.
4.2.3 The Vendor has properly operated the Pay As You Earn system and
deducted income tax as required by law from all payments to or treated
as made to any Transferring Employee and accounted to the Inland
Revenue for all tax so deducted and all tax chargeable on any benefits
provided to the Transferring Employees at any time by the Vendor in
accordance with applicable legislation.
<PAGE> 29
4.2.4 The Vendor has deducted and paid all National Insurance contributions
for which it is liable in respect of the Transferring Employees.
4.2.5 There are no Transferring Employees to whom the Vendor has issued
credit cards or charge cards or provided similar facilities.
4.3 Industrial disputes and agreements
4.3.1 None of the Transferring Employees is involved in any industrial
dispute and to the best of the Vendor's knowledge information and
belief there are no circumstances which may result in any industrial
dispute involving any Transferring Employees and none of the
provisions of this Agreement including the identity of the Purchaser
may lead to any industrial dispute.
4.3.2 No liability has been incurred by the Vendor and not yet discharged
for breach of any contract of service or employment or for redundancy
payments (including without limitation protective awards) or for
damages or compensation for wrongful or unfair dismissal or otherwise
or for failure to comply with any order for reinstatement or
re-engagement of any employee engaged in connection with the
Business or for the actual or proposed termination or suspension of
employment or variation of any contract of employment or in each
cash any Transferring Employee or any Excluded Employee listed in
part 2 of Appendix 4.
4.3.3 The Vendor has in relation to each Transferring Employee complied in
all material respects with all obligations imposed on it by all
statutes regulations and codes of conduct and practice relevant
to relations between it and each Employee (including without
limitation any obligations under any health and safety legislation
or any legislation relating to the environment).
4.3.4 The Vendor has not entered into any recognition agreement with a
trade union and has not done anything which might be construed as
recognition.
4.4 Pensions
The Vendor is not under any legal or moral liability or obligation or
ex-gratis arrangement or promise to pay pensions gratuities
superannuation allowances or the like to any of the Transferring
Employees.
5. GENERAL
Material information
All written information contained in the Agreed Bundle was when given
and remains true and accurate in all material respects and the
Vendor has not withheld any information from the Purchaser of which
it has actual or constructive knowledge of which is material in the
context of the acquisition hereunder.
<PAGE> 30
Executed as a deed by Micromuse plc )
acting by two directors/director )
and secretary:- )
/s/ Stephen A. Allott
------------------------------
Director
/s/ Anthony Beken
------------------------------
Director/Secretary
Executed as a deed by Horizon Open )
Systems (UK) Limited acting by two )
directors/director and secretary:- )
/s/ Charles Garvey
------------------------------
Director
/s/ [sig]
------------------------------
Director/Secretary
Executed as a deed by Horizon Computer )
Services Limited acting by two directors/ )
director and secretary:- )
/s/ Charles Garvey
------------------------------
Director
/s/ [sig]
------------------------------
Director/Secretary
<PAGE> 31
APPENDIX 1
Customer Contracts
This appendix consists of copies of purchase orders, order acknowledgments and
Horizon warranty listings covered under the agreement.
APPENDIX 2
Supply Contracts
This appendix consists of a listing of supply contracts covered under the
agreement.
APPENDIX 3
Maintenance Contracts and Multi Year Maintenance Contracts
This appendix consists of a listing of maintenance and multi-year maintenance
contracts to determine which invoices are payable to the purchaser.
APPENDIX 4
This appendix lists which employees are to be transferred and which employees
are to be excluded under the agreement.
APPENDIX 5
Terms of the provision of consultancy services to Horizon Open Systems (UK)
Limited
This appendix lists the terms under which Micromuse is to provide consultancy
services to Horizon Open Systems.
APPENDIX 6
This appendix lists the names of companies.
Micromuse Inc. hereby agrees to furnish supplementally a copy of any omitted
Schedule to the Commission upon request.
MICROMUSE INC.
By:
-------------------------------
Name: Stephen A. Allott
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MICROMUSE INC.
MICROMUSE INC., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows:
The Corporation filed its original Certificate of Incorporation
with the Secretary of State of the State of Delaware on May 1, 1996. A
Restated Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on March 7, 1997.
The Board of Directors of the Corporation, by written consent of
the Board of Directors dated as of September 7, 1997, duly adopted
resolutions setting forth the Second Amended and Restated Certificate of
Incorporation herein contained (the "Second Restated Certificate of
Incorporation"), declaring its advisability and directing that such
Second Restated Certificate of Incorporation be submitted to the holders
of the issued and outstanding Common Stock, $0.01 par value, and
Preferred Stock, $0.01 par value, of the Corporation, for approval in
accordance with the applicable provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware and the Corporation's
Restated Certificate of Incorporation, as currently in effect. The
Second Restated Certificate of Incorporation was duly adopted, after
having been declared advisable by the Board of Directors of the
Corporation, by written consent, dated as of September 7, 1997, of the
holders of greater than a majority of the Common Stock, $0.01 par value,
and the holders of greater than a majority of the Preferred Stock, $0.01
par value, of the Corporation, voting as a class and separately as a
single class, all in accordance with the applicable provisions of
Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware and the Corporation's Restated Certificate of Incorporation, as
currently in effect, and written notice of the written consent of the
holders of a majority of Common Stock has been given to those
stockholders who have not consented in writing as provided in Section
228(d) of the General Corporation Law of the State of Delaware.
The text of the Second Restated Certificate of Incorporation of the
Corporation, as restated and amended hereby, shall read in its entirety as
follows:
<PAGE> 2
FIRST: The name of the Corporation shall be:
MICROMUSE INC.
SECOND: The address of its registered office in the State of Delaware is
1013 Centre Road, Wilmington, Delaware 19805. The name of its registered agent
at such address is Corporation Service Company.
THIRD: The purpose or purposes of the Corporation shall be:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH:
A. Classes of Stock. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is authorized to issue
is Twenty-Four Million Four Hundred Eighty-Eight Thousand Three Hundred
Thirty-Six (24,488,336) shares. Eighteen Million Five Hundred Thousand
(18,500,000) shares shall be Common Stock and Five Million Nine Hundred
Eighty-Eight Thousand Three Hundred Thirty-Six (5,988,336) shares shall be
Preferred Stock. The Common Stock shall have a par value of $0.01 and the
Preferred Stock shall have a par value of $0.01.
B. Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by this Restated Certificate of Incorporation may be
issued from time to time in one or more series. The rights, preferences,
privileges, and restrictions granted to and imposed on the Series A Convertible
Preferred Stock, which series shall consist of One Million Five Hundred Thousand
(1,500,000) shares (the "Series A Preferred Stock"), and Series B Convertible
Preferred Stock, which series shall consist of Two Million (2,000,000) shares
(the "Series B Preferred Stock"), and the Series C Convertible Preferred Stock,
which series shall consist of Two Million Four Hundred Eighty-Eight Thousand
Three Hundred Thirty-Six (2,488,336) shares (the "Series C Preferred Stock"),
are as set forth below in this Article IV(B). The Board of Directors is hereby
authorized to fix or alter the rights, preferences, privileges and restrictions
granted to or imposed upon additional series of Preferred Stock, and the number
of shares constituting any such series and the designation thereof, or of any of
them. Subject to compliance with applicable protective voting rights which have
been or may be granted to the Preferred Stock or series thereof in Certificates
of Designation or the Corporation's Certificate of Incorporation ("Protective
Provisions"), but notwithstanding any other rights of the Preferred Stock or any
series thereof, the rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or senior to any of those of any present or future class or series of
2
<PAGE> 3
Preferred or Common Stock. Subject to compliance with applicable Protective
Provisions, the Board of Directors is also authorized to increase or decrease
the number of shares of any series (other than the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock), prior or subsequent to
the issue of that series, but not below 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.
1. Dividend Provisions. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, the holders of
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be entitled to receive dividends, on a pari passu basis,
out of any assets legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of this
Corporation) on the Common Stock of this Corporation, at the rate of $0.20 per
share of Series A Preferred Stock per annum, $0.25 per share of Series B
Preferred Stock per annum and $0.643 per share of Series C Preferred Stock per
annum or, if greater (as determined on a per annum basis and an as converted
basis for the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock), an amount equal to that paid on any other outstanding shares
of this Corporation, payable quarterly when, as and if declared by the Board of
Directors. Such dividends shall not be cumulative.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
this Corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock that may from time to time come into existence, the
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this Corporation to the holders of Common
Stock by reason of their ownership thereof, an amount per share equal to (i)
$2.00 for each outstanding share of Series A Preferred Stock (the "Original
Series A Issue Price"), $2.50 for each outstanding share of Series B Preferred
Stock (the "Original Series B Issue Price") and $6.43 per share for each
outstanding share of Series C Preferred Stock (the "Original Series C Issue
Price"), respectively, plus (ii) an amount equal to declared but unpaid
dividends on each such share (such amount of declared but unpaid dividends being
referred to herein as the "Premium"). If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of series of Preferred Stock
that may from time to time come into existence, the entire assets and funds of
the Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred
3
<PAGE> 4
Stock in proportion to the aggregate full aforesaid preferential amounts to
which each such holder would otherwise have been entitled to receive.
(b) After the distributions described in subsection (a) above
have been paid, subject to the rights of series of Preferred Stock which may
from time to time come into existence, the remaining assets of the Corporation
available for distribution to shareholders shall be distributed among the
holders of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Common Stock pro rata based on the number of shares of
Common Stock held by each (assuming for the purposes of such calculations full
conversion of all such Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock regardless of whether such shares are converted).
(c) For purposes of this Section 2, a liquidation, dissolution or
winding up of this Corporation shall be deemed to be occasioned by, or to
include, (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation but, excluding any
merger effected exclusively for the purpose of changing the domicile of the
Corporation), unless the Corporation's shareholders of record as constituted
immediately prior to such acquisition or sale will, immediately after such
acquisition (by virtue of securities issued as consideration for the
Corporation's acquisition) hold at least 50% of the voting power of the
surviving or acquiring entity; or (B) a sale of all or substantially all of the
assets of the Corporation. Notwithstanding anything to the contrary set forth in
this Section 2(c), no liquidation, dissolution or winding up of this Corporation
shall be deemed to have occurred under subsection (A) or (B) hereof with respect
to the Series A Preferred Stock and Series B Preferred Stock, if the
consideration to be paid for each share of Series A Preferred Stock and Series B
Preferred Stock is greater than $6.86 per share, and, with respect to the Series
C Preferred Stock, if the consideration to be paid for each share of Series C
Preferred Stock is greater than $9.65 per share (such per share prices subject
in each case to adjustment for stock splits, combinations, dividends or
recapitalizations) and is payable in cash or publicly-traded securities of a
company with a capitalization exceeding $250,000,000 prior to the consummation
of the events contemplated by subsection (A) or (B) hereof. In the event of any
transaction referred to in the preceding sentence, the holders of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
respectively, shall be entitled to receive the greater of (i) the amount per
share specified with respect to such series in the preceding sentence and (ii)
the amount the holders of such series would be entitled to receive had they
converted the shares of such series of Preferred Stock to Common Stock.
(i) In any of such events, if the consideration received by
the Corporation is other than cash, its value will be deemed its fair market
value, which shall be valued as follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability covered by (B) below:
4
<PAGE> 5
(1) If traded on a securities exchange or through
NASDAQ-NMS, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the thirty-day period ending three (3) days
prior to the closing;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by the Corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(ii) In the event the requirements of this subsection 2(c) are
not complied with, this Corporation shall forthwith either:
(A) cause such closing to be postponed until such time as
the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall revert to and be the
same as such rights, preferences and privileges existing immediately prior to
the date of the first notice referred to in subsection 2(c)(iii) hereof.
(iii) The Corporation shall give each holder of record of
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
written notice of such impending transaction not later than twenty (20) days
prior to the shareholders' meeting called to approve such transaction, or twenty
(20) days prior to the closing of such transaction, whichever is earlier, and
shall also notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this Section 2,
and the Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than
twenty (20) days after the Corporation has given the first notice provided for
herein or sooner than ten (10) days after the Corporation has given notice of
any material changes provided for herein; provided, however, that such periods
may be shortened upon the written consent of the holders of Preferred Stock that
are entitled to such
5
<PAGE> 6
notice rights or similar notice rights and that represent at least a majority of
the voting power of all then outstanding shares of such Preferred Stock.
3. Redemption.
(a) Subject to the rights of series of Preferred Stock which may
from time to time come into existence, at any time after March 6, 2002, the
holders of the then outstanding Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, shall have the right, but not the
obligation, to require that all of such holders' shares be redeemed and upon
written notice to the Company from all of the holders of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock (the "Redemption
Notice") and surrender by such holders of the certificates representing such
shares, this Corporation shall, to the extent it may lawfully do so and subject
to Section 3(b) below, within thirty (30) days of the receipt of the Redemption
Notice (the "Redemption Date"), redeem the shares specified in such request by
paying in cash therefor a sum per share equal to the Original Series A Issue
Price, the Original Series B Issue Price and the Original Series C Issue Price
(in each case as adjusted for any stock dividends, combinations or splits with
respect to such shares), as the case may be, plus an amount per share equal to
the cumulative return on the Original Series A Issue Price, the Original Series
B Issue Price and the Original Series C Issue Price, as the case may be, at a
compound annual rate of fifteen percent (15%) from the respective issue date of
each such share of Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock until the date such shares of Series A Preferred Stock, Series
B Preferred Stock or Series C Preferred Stock are redeemed by the Company (the
"Series A Redemption Price," the "Series B Redemption Price" and the "Series C
Redemption Price," as appropriate). Any redemption effected pursuant to this
subsection 3(a) shall be made on a pro rata basis among the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
in proportion to the number of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock then held by such holders.
(b)The obligation to redeem shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock pursuant to this Section 3
shall be subject to a maximum quarterly payment (the "Maximum Redemption
Payment") equal to twenty-five percent (25%) of this Corporation's working
capital (as determined in accordance with generally accepted accounting
principles ("GAAP") as of the end of the fiscal quarter immediately preceding
the Redemption Date. To the extent shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock surrendered for redemption are not
redeemed by operation of Section 3(b) hereto, then such shares shall remain
outstanding and entitled to all the rights and preferences provided herein.
Subject to the rights of Preferred Stock which may from time to time come into
existence, commencing after the end of the first fiscal quarter following such
Redemption Date and for each fiscal quarter thereafter until such time as all of
the shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock have been fully redeemed, any unredeemed shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
6
<PAGE> 7
redeemed on a pro rata basis in an amount equal to the Maximum Redemption
Payment (as determined as of the end of such fiscal quarter) within thirty (30)
days of the end of such fiscal quarter.
(c) After redemption of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, all rights of the holders
of shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock, as the case may be (except the right to receive the Series A
Redemption Price, Series B Redemption Price or and the Series C Redemption Price
upon surrender of their certificate or certificates) shall cease with respect to
such shares, and such shares shall not thereafter be transferred on the books of
this Corporation or be deemed to be outstanding for any purpose whatsoever.
Subject to the rights of series of Preferred Stock which may from time to time
come into existence and the terms of Section 3(b) hereof, if the funds of the
Corporation legally available for redemption of shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, are insufficient to
redeem the total number of shares of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock to be redeemed on such date, those
funds which are legally available will be used to redeem the maximum possible
number of such shares ratably among the holders of such shares to be redeemed
based upon their holdings of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock. The shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein.
Subject to the rights of series of Preferred Stock which may from time to time
come into existence and the terms of Section 3(b) hereof, at any time thereafter
when additional funds of the Corporation are legally available for the
redemption of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, such funds will immediately be used to redeem the
balance of the shares which the Corporation has become obliged to redeem but
which it has not redeemed.
4. Conversion. The holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of such
share, at the office of this Corporation or any transfer agent for such stock,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the Original Series A Issue Price, the Original Series B
Issue Price or the Original Series C Issue Price, as the case may be, by the
conversion price applicable to such share (the "Conversion Price"), determined
as hereafter provided, in effect on the date the certificate is surrendered for
conversion. The initial Conversion Price per share for shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
the Original Series A Issue Price, the Original Series B Issue Price and the
Original Series C Issue Price, as the case may be; provided, however,
7
<PAGE> 8
that the Conversion Price for the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock shall be subject to adjustment as set forth
in subsection 4(d).
(b) Automatic Conversion. Each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall automatically be
converted into shares of Common Stock at the Conversion Price at the time in
effect for such Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock immediately upon the earlier of (i) except as provided below in
subsection 4(c), the Corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement under the
Securities Act of 1933, as amended, where such shares of Common Stock are listed
on either the Nasdaq National Market System, the American Stock Exchange or the
New York Stock Exchange, the public offering price of which (x) with respect to
the Series A Preferred Stock and Series B Preferred Stock, is not less than
$6.86 per share (adjusted to reflect subsequent stock dividends, combinations,
splits or recapitalization) and with aggregate gross proceeds of not less than
$10,000,000 or (y) with respect to the Series C Preferred Stock, is not less
than $9.65 per share for a public offering consummated before September 8, 1998,
and $12.86 per share thereafter (in each case, such per share price shall be
adjusted to reflect subsequent stock dividends, combinations, splits or
recapitalization) and with aggregate gross proceeds of not less than $10,000,000
or (in each case with respect to (y) above, a "Qualified Public Offering") (ii)
the date specified by written consent or agreement of the holders of two-thirds
of the then outstanding shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, voting together as a single class.
(c) Mechanics of Conversion. Before any holder of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
entitled to convert the same into shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of this
Corporation or of any transfer agent for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and shall give written notice to
this Corporation at its principal corporate office, of the election to convert
the same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. This Corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with an underwritten offering
of securities registered pursuant to the Securities Act of 1933, the conversion
may, at the option of any holder tendering Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock for conversion, be conditioned upon
the closing with the underwriters of the sale of securities pursuant to such
offering, in which event the
8
<PAGE> 9
person(s) entitled to receive the Common Stock upon conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall not
be deemed to have converted such Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock until immediately prior to the closing of
such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
be subject to adjustment from time to time as follows:
(i) (A) If the Corporation shall issue, after the date upon
which any shares of Series A Preferred Stock, Series B Preferred Stock or Series
C Preferred Stock were first issued (the "Purchase Date" with respect to such
series), any Additional Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for such series in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for such series in effect immediately prior to each such issuance shall
forthwith (except as otherwise provided in this clause (i)) be adjusted to a
price equal to a price determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance (assuming the conversion of all
then outstanding shares of Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock) plus the number of shares of Common Stock that the
aggregate consideration received by the Corporation for such issuance would
purchase at such Conversion Price; and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issuance
assuming the conversion of all then outstanding shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock plus the number of
shares of such Additional Stock. For the purpose of computing the foregoing
calculation, the shares of Series A Preferred Stock issuable upon exercise of
the Series A Preferred Stock Warrant dated as of March 7, 1997 (the "Series A
Warrant") shall be deemed to be outstanding.
(B) No adjustment of the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
made in an amount less than one cent per share, provided that any adjustments
which are not required to be made by reason of this sentence shall be carried
forward and shall be either taken into account in any subsequent adjustment made
prior to 3 years from the date of the event giving rise to the adjustment being
carried forward, or shall be made at the end of 3 years from the date of the
event giving rise to the adjustment being carried forward. Except to the limited
extent provided for in subsections (E)(3) and (E)(4), no adjustment of such
Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of
increasing the Conversion Price above the Conversion Price in effect immediately
prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this
9
<PAGE> 10
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on or
after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii):
(1) The aggregate maximum number of shares
of Common Stock deliverable upon exercise (to the extent then
exercisable) of such options to purchase or rights to subscribe
for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for a consideration equal
to the consideration (determined in the manner provided in
subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by the
Corporation upon the issuance of such options or rights plus the
minimum exercise price provided in such options or rights for
the Common Stock covered thereby.
(2) The aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange
(to the extent then convertible or exchangeable) for any such
convertible or exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such convertible
or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued and
for a consideration equal to the consideration, if any, received
by the Corporation for any such securities and related options
or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by the Corporation upon
the conversion or exchange of such securities or the exercise of
any related options or rights (the consideration in each case to
be determined in the manner provided in subsections 4(d)(i)(C)
and (d)(i)(D)).
(3) In the event of any change in the number
of shares of Common Stock deliverable or in the consideration
payable to this Corporation upon exercise of such options or
rights or upon conversion of or in exchange for such convertible
or exchangeable securities, including, but not limited to, a
change resulting from the antidilution provisions thereof, the
10
<PAGE> 11
Conversion Price of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, to the extent in
any way affected by or computed using such options, rights or
securities, shall be recomputed to reflect such change, but no
further adjustment shall be made for the actual issuance of
Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion or
exchange of such securities.
(4) Upon the expiration of any such options
or rights, the termination of any such rights to convert or
exchange or the expiration of any options or rights related to
such convertible or exchangeable securities, the Conversion
Price of the Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock, to the extent in any way affected
by or computed using such options, rights or securities or
options or rights related to such securities, shall be
recomputed to reflect the issuance of only the number of shares
of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of
such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related
to such securities.
(5) The number of shares of Common Stock
deemed issued and the consideration deemed paid therefor
pursuant to subsections 4(d)(i)(E)(1) and (2) shall be
appropriately adjusted to reflect any change, termination or
expiration of the type described in either subsection
4(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E)) by this
Corporation after the Purchase Date other than the following:
(A) Common Stock issued pursuant to a transaction
described in subsection 4(d)(iii) hereof,
(B) Shares of Common Stock issuable or issued to
employees, consultants, directors or vendors (if in transactions
with primarily non-financing purposes) of this Corporation
directly or pursuant to a stock option plan or restricted stock
plan approved by the Board of Directors of this Corporation up to
a maximum of [1,286,666] shares.
(C) Up to 1,500,000 Shares of Series A Preferred
Stock issuable or issued pursuant to the Series A Warrant, and up
to 1,500,000 shares of Common Stock (as adjusted for any
adjustments pursuant to Section 4(d) hereto) issuable or issued
upon conversion of the Series A Preferred Stock issuable or
issued pursuant to the Series A Warrant, and
11
<PAGE> 12
(D) Up to 2,000,000 Shares of Common Stock (as
adjusted for any adjustments pursuant to Section 4(d) hereto)
issuable or issued upon conversion of the Series B Preferred
Stock sold pursuant to the Series B Convertible Preferred Stock
Purchase and Series A Convertible Preferred Stock Warrant
Agreement, dated December 6, 1996.
(E) Up to 2,488,336 shares of Common Stock (as
adjusted for any adjustments pursuant to Section 4(d) hereto)
issuable or issued upon conversion of the Series C Preferred
Stock sold pursuant to the Series C Preferred Stock Purchase
Agreement, dated September 8, 1997.
(iii) In the event the Corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of such series shall be
increased in proportion to such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to such Common Stock
Equivalents with the number of shares issuable with respect to Common Stock
Equivalents determined from time to time in the manner provided for deemed
issuances in subsection 4(d)(i)(E).
(iv) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion of each share
of such series shall be decreased in proportion to such decrease in outstanding
shares.
(e) Other Distributions. In the event this Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsection 4(d)(iii), then,
in each such case for the purpose of this subsection 4(e), the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
shall be entitled to a proportionate share of any such distribution as though
they were the holders of the number of shares of Common Stock of the Corporation
into
12
<PAGE> 13
which their shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock the
number of shares of stock or other securities or property of the Company or
otherwise, to which a holder of Common Stock deliverable upon conversion would
have been entitled on such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 4
with respect to the rights of the holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock after the recapitalization
to the end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(g) No Impairment. This Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, and the number of shares of Common Stock to be
issued shall be rounded to the nearest whole share. Whether or not fractional
shares are issuable upon such conversion shall be determined on the basis of the
total number of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock pursuant to this Section 4, this Corporation, at its
expense, shall promptly
13
<PAGE> 14
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. This Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price for such series of Preferred Stock at the
time in effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
Corporation shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, at least 20 days prior to the date
specified therein, a notice specifying the date on which any such record is to
be taken for the purpose of such dividend, distribution or right, and the amount
and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, in addition to such other remedies
as shall be available to the holder of such Preferred Stock, this Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite shareholder
approval of any necessary amendment to these articles.
(k) Notices. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of this Corporation.
14
<PAGE> 15
5. Voting Rights. (a) Except as set forth below in Article
Fourth, Sections C.4(b) and C.5, the holder of each share of Preferred Stock
shall have the right to one vote for each share of Common Stock into which such
share of Preferred Stock could then be converted, and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the bylaws of this Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote, except as otherwise provided by
law. Fractional votes shall not, however, be permitted and any fractional voting
rights available on an as-converted basis (after aggregating all shares into
which shares of Preferred Stock held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded upward).
(b) Voting for the Election of Directors. The holders of Series A
Preferred Stock and Series B Preferred Stock, voting together as a single class,
shall be entitled to elect two (2) directors of this Corporation at each annual
election of directors.
In the case of any vacancy (other than a vacancy caused by
removal) in the office of a director occurring among the directors elected by
the holders of a class or series of stock pursuant to this Section 5(b), the
remaining directors so elected by that class or series may by affirmative vote
of a majority thereof (or the remaining director so elected if there be but one,
if there are no such directors remaining, by the affirmative vote of the holders
of a majority of the shares of that class or series), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of a class or series of stock or by any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by, and only by, the
affirmative vote of the holders of the shares of the class or series of stock
entitled to elect such director or directors, given either at a special meeting
of such stockholders duly called for that purposed or pursuant to a written
consent of stockholders, and any vacancy thereby created may be filled by the
holders of that class or series of stock represented at the meeting or pursuant
to unanimous written consent.
6. Protective Provisions. Subject to the rights of series of
Preferred Stock which may from time to time come into existence,
(A) so long as any shares of Series A Preferred Stock or Series B
Preferred Stock are outstanding, this Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, voting together as a single class:
15
<PAGE> 16
(i) alter or change the rights, preferences, privileges or
increase or decrease the authorized number of the shares
of Series A Preferred Stock or Series B Preferred Stock,
respectively, so as to affect adversely the shares;
(ii) authorize or issue any other equity security, or security
convertible into or exercisable for any equity security,
having a preference over, or being on a parity with, the
Series A Preferred Stock or Series B Preferred Stock with
respect to voting, dividends, liquidation or redemption;
(iii) increase the authorized number of shares of Preferred
Stock; or
(iv) increase the number of directors of the Corporation.
(B) So long as the shares of Series C Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series C Preferred Stock to
(i) alter or change the rights, preferences, privileges or
increase or decrease the authorized number of the shares
of Series C Preferred Stock so as to affect adversely the
shares;
(ii) authorize or issue any other equity security, or security
convertible into or exercisable for any equity security,
having a preference over, or being on a parity with, the
Series C Preferred Stock with respect to voting,
dividends, liquidation or redemption;
(C) So long as any shares of Preferred Stock are outstanding,
this Corporation shall not without first obtaining the approval of (by vote or
written consent, as provided by law) of the holders of a majority of the then
outstanding shares of Preferred Stock, voting together a single class;
(i) increase the authorized number of shares of Preferred
Stock; or
(ii) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge
into or consolidate with any other corporation (other than
a wholly-owned subsidiary corporation) or effect any
transaction or series of related transactions in which
more than fifty percent (50%) of the voting power of the
Corporation is disposed of unless the net proceeds paid to
each holder of Preferred Stock is not less than $9.65 per
share if such transaction is consummated on or before
September 8, 1998, or $12.86 per share
16
<PAGE> 17
thereafter (such per share price subject, in each case, to
adjustment for splits, dividends, combinations or
recapitalization of such shares), and if such consideration
is for other than cash, its value shall be determined in
accordance with Section 2(c)(i)); and
7. Status of Converted or Redeemed Stock. In the event any shares
of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock shall be converted pursuant to Section 4 hereof, the shares so converted
shall be cancelled and shall not be issuable by the Corporation. The Certificate
of Incorporation of this Corporation shall be appropriately amended to effect
the corresponding reduction in the Corporation's authorized capital stock.
B. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation shall be
distributed as provided in Section 2 of Division (B) of this Article III hereof.
3. Redemption. The Common Stock shall not have redemption rights.
4. Voting Rights. (a) The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
shareholders' meeting in accordance with the bylaws of this Corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
(b) Voting for the Election of Directors. Until a Qualified
Public Offering, the holders of outstanding Common Stock (excluding any votes
with respect to then outstanding Preferred Stock which could be converted into
Common Stock) shall be entitled to elect two (2) directors of this Corporation
at each annual election of directors.
In the case of any vacancy (other than a vacancy caused by
removal) in the office of a director occurring among the directors elected by
the holders of a class or series of stock pursuant to this Section 4(b), the
remaining directors so elected by that class or series may by affirmative vote
of a majority thereof (or the remaining director so elected if there be but one,
if there are no such directors remaining, by the affirmative vote of the holders
of a majority of the shares of that class or series), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be
17
<PAGE> 18
vacant. Any director who shall have been elected by the holders of a class or
series of stock or by any directors so elected as provided in the immediately
preceding sentence hereof may be removed during the aforesaid term of office,
either with or without cause, by, and only by, the affirmative vote of the
holders of the shares of the class or series of stock entitled to elect such
director or directors, given either at a special meeting of such stockholders
duly called for that purposed or pursuant to a written consent of stockholders,
and any vacancy thereby created may be filled by the holders of that class or
series of stock represented at the meeting or pursuant to unanimous written
consent.
5. Protective Provisions. Until a Qualified Public
Offering, the Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least the
majority of the then outstanding shares of Common Stock (excluding any votes
with respect to then outstanding Preferred Stock which could be converted into
Common Stock):
(a) alter or change the rights set forth in Article
Fourth, Section C.4 or C.5 hereto;
(b) alter or change Article Fifth of this Second Restated
Certificate; or
(c) amend the by-laws of the Corporation.
FIFTH: Until a Qualified Public Offering (as defined in Article
Fourth) occurs:
A. Board of Directors. The number of directors shall be four (4).
Each director shall hold office until his successor is elected and qualified or
until his earlier death or resignation or removal in the manner herein provided
and in the by-laws of this Corporation
C. Quorum Required. All of the directors then in office shall be
present in person at any meeting of the Board in order to constitute a quorum
for the transaction of business at such meeting. In the absence of a quorum for
any such meeting, a majority of the directors then present thereat may adjourn
such meeting from time to time until a quorum shall be present.
D. Voting by Directors. The vote of a majority of those directors
present at any such meeting at which a quorum is present shall be necessary for
the passage of any resolution or act of the Board, except as otherwise expressly
required by law or herein; provided, however, that with respect to any matter,
contract or transaction relating to an interested director (within the meaning
of Section of 144(a) of the Delaware Code) the passage of any resolution or act
by the Board of Directors shall require the affirmative vote of (i) the majority
of the directors elected pursuant to Article Fourth, Section B.5(b) and (ii) the
majority of the directors elected pursuant to Article Fourth, Section C.4(b),
each such class of directors voting separately.
18
<PAGE> 19
SIXTH: In furtherance and not in limitation of the powers
conferred by the laws of the State of Delaware, subject to any Protective
Provisions set forth herein with respect to Preferred Stock or Common Stock.
A. The board of directors of the Corporation is expressly
authorized to adopt, amend, or repeal the by-laws of the
Corporation.
B. Elections of directors need not be by written ballot
unless the by-laws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place
within or without the State of Delaware as the by-laws of
the Corporation may provide or as may be designated from
time to time by the board of directors of the Corporation.
SEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
EIGHTH: The Corporation hereby elects in this Second Restated
Certificate of Incorporation not to be governed by Section 203 of the General
Corporation Law of Delaware.
NINTH: Except as stated in Article Fourth of this Second Restated
Certificate of Incorporation, the Corporation reserves the right to amend or
repeal any provision contained in this Second Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon a stockholder herein are granted subject to this
reservation.
19
<PAGE> 20
TENTH: A director of this Corporation shall to the fullest extent
permitted by the General Corporation Law of Delaware as it now exists or as it
may hereafter be amended, not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
notwithstanding any provision of law imposing such liability; provided, however,
that, to the extent provided by applicable law, this provision shall not
eliminate the liability of a director (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General Corporation Law of Delaware, or
(iv) for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director for or with respect
to any acts or omissions of such director occurring prior to such amendment or
repeal.
ELEVENTH: To the fullest extent permitted by applicable law, this
Corporation is authorized to provide indemnification of (and advancement of
expenses to) such agents of this Corporation (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to this
Corporation, its stockholders, and others.
TWELFTH: The Corporation is to have perpetual existence.
THIRTEENTH: That thereafter said amendment and restatement was duly
adopted in accordance with the provisions of Section 242 and Section 245 of the
General Corporation Law by obtaining a majority vote of the Common Stock, in
favor of said amendment and restatement in the manner set forth in Section 222
of the General Corporation Law.
20
<PAGE> 21
IN WITNESS WHEREOF, the undersigned has executed, signed, and
acknowledged this Second Restated Certificate of Incorporation this 8th day of
September, 1997.
MICROMUSE INC.
By: /s/ Christopher Dawes
---------------------------------
Christopher Dawes
21
<PAGE> 1
EXHIBIT 3.3
MICROMUSE INC.
Incorporated under the laws
of the State of Delaware
---------------------------
AMENDED AND RESTATED BYLAWS
---------------------------
As adopted on September 8, 1997
<PAGE> 2
MICROMUSE INC.
AMENDED AND RESTATED BYLAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I OFFICES..........................................................................1
1.1 Registered Office..................................................................1
1.2 Other Offices......................................................................1
ARTICLE II MEETING OF STOCKHOLDERS; STOCKHOLDERS' CONSENT IN LIEU OF MEETING................1
2.1 Annual Meetings....................................................................1
2.2 Special Meetings...................................................................1
2.3 Notice of Meetings.................................................................2
2.4 Quorum.............................................................................2
2.5 Organization.......................................................................2
2.6 Order of Business..................................................................3
2.7 Voting.............................................................................3
2.8 Inspection.........................................................................4
2.9 List of Stockholders...............................................................4
2.10 Stockholders' Consent in Lieu of Meeting...........................................4
ARTICLE III BOARD OF DIRECTORS...............................................................5
3.1 General Powers.....................................................................5
3.2 Number and Term of Office..........................................................5
3.3 Election of Directors..............................................................5
3.4 Resignation, Removal and Vacancies.................................................5
3.5 Meetings...........................................................................6
3.6 Directors' Consent in Lieu of Meeting..............................................7
3.7 Action by Means of Conference Telephone or Similar Communications Equipment........7
3.8 Committees.........................................................................7
ARTICLE IV OFFICERS.........................................................................7
4.1 Executive Officers.................................................................7
4.2 Authority and Duties...............................................................8
4.3 Other Officers.....................................................................8
4.4 Term of Office Resignation and Removal.............................................8
4.5 Vacancies..........................................................................8
4.6 The Chairman.......................................................................8
4.7 The President......................................................................9
4.8 The Secretary......................................................................9
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
4.9 The Treasurer......................................................................9
ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC....................................9
5.1 Execution of Documents............................................................10
5.2 Deposits..........................................................................10
5.3 Proxies with Respect to Stock or Other Securities of Other Corporations...........10
ARTICLE VI SHARES AND THEIR TRANSFER, FIXING RECORD DATE...................................10
6.1 Certificates for Shares...........................................................10
6.2 Record............................................................................11
6.3 Transfer and Registration of Stock................................................11
6.4 Addresses of Stockholders.........................................................11
6.5 Lost, Destroyed and Mutilated Certificates........................................11
6.6 Regulations.......................................................................12
6.7. Fixing Date for Determination of Stockholders of Record...........................12
ARTICLE VII SEAL............................................................................13
ARTICLE VIII FISCAL YEAR.....................................................................13
ARTICLE IX INDEMNIFICATION AND INSURANCE...................................................13
9.1 Indemnification...................................................................13
9.2 Insurance.........................................................................15
ARTICLE X AMENDMENT.......................................................................15
</TABLE>
ii
<PAGE> 4
AMENDED AND RESTATED BYLAWS OF
MICROMUSE INC.
ARTICLE I
OFFICES
1.1 Registered Office.
The registered office of MICROMUSE INC. (the "Corporation"), in
the State of Delaware shall be at 9 East Lookerman Street, Dover, DE 19901, and
the registered agent in charge thereof shall be National Registered Agents,
Inc., or such other office or agent as the Board of Directors of the Corporation
(the "Board") shall from time to time select.
1.2 Other Offices.
The Corporation may also have an office or offices, and keep the
books and records of the Corporation, at any other place or places within or
outside the State of Delaware, as the board may from time to time determine.
ARTICLE II
MEETING OF STOCKHOLDERS: STOCKHOLDERS'
CONSENT IN LIEU OF MEETING
2.1 Annual Meetings.
The annual meeting of the stockholders for the election of
directors, and for the transaction of such other business as may properly come
before the meeting, shall be held at such place, date and hour as shall be fixed
by the Board and designated in the notice or waiver of notice thereof, except
that no annual meeting need be held if all actions, including the election of
directors, required by the General Corporation Law of the State of Delaware (the
"General Corporation Law") to be taken at a stockholders' annual meeting are
taken by written consent in lieu of meeting pursuant to Section 2.10.
2.2 Special Meetings.
A special meeting of the stockholders for any purpose or purposes
may be called by the Board, the Chairman, the President or the record holders of
at least a majority of the issued and outstanding shares of Common Stock of the
Corporation, to be held at such place, date and hour as shall be designated in
the notice or waiver of notice thereof.
<PAGE> 5
2.3 Notice of Meetings.
Except as otherwise required by statute, the Certificate of
Incorporation of the Corporation (the "Certificate") or these Bylaws, notice of
each annual or special meeting of the stockholders shall be given to each
stockholder of record entitled to vote at such meeting not less than 10 nor more
than 60 days before the day on which the meeting is to be held, by delivering
written notice thereof to him personally, or by mailing a copy of such notice,
postage prepaid, directly to him at his address as it appears in the records of
the Corporation, or by transmitting such notice thereof to him at such address
by telegraph, cable or other telephonic transmission. Every such notice shall
state the place, the date and hour of the meeting, and, in case of a special
meeting, the purpose or purposes for which the meeting is called. Notice of any
meeting of stockholders shall not be required to be given to any stockholder who
shall attend such meeting in person or by proxy, or who shall, in person or by
attorney thereunto authorized, waive such notice in writing, either before or
after such meeting. Except as otherwise provided in these Bylaws, neither the
business to be transacted at, nor the purpose of, any meeting of the
stockholders need be specified in any such notice or waiver of notice. Notice of
any adjourned meeting of stockholders shall not be required to be given, except
when expressly required by law.
2.4 Quorum.
At each meeting of the stockholders, except where otherwise
provided by the Certificate or these Bylaws, the holders of a majority of the
issued and outstanding shares of Common Stock of the Corporation entitled to
vote at such meeting, present in person or represented by proxy, shall
constitute a quorum for the transaction of business. In the absence of a quorum,
a majority in interest of the stockholders present in person or represented by
proxy and entitled to vote, or, in the absence of all the stockholders entitled
to vote, any officer entitled to preside at, or act as secretary of, such
meeting, shall have the power to adjourn the meeting from time to time, until
stockholders holding the requisite amount of stock to constitute a quorum shall
be present or represented. At any such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally called.
2.5 Organization.
a. Unless otherwise determined by the Board, at each meeting of
the stockholders, one of the following shall act as chairman of the meeting and
preside thereat, in the following order of precedence:
(i) the Chairman;
(ii) the President;
(iii) any director, officer or stockholder of the
Corporation designated by the Board to act as chairman of such meeting and to
preside thereat if the Chairman or the President shall be absent from such
meeting; or
2
<PAGE> 6
(iv) a stockholder of record who shall be chosen
chairman of such meeting by a majority in voting interest of the stockholders
present in person or by proxy and entitled to vote thereat.
b. The Secretary or, if he shall be presiding over such meeting
in accordance with the provisions of this Section 5 or if he shall be absent
from such meeting, the person (who shall be an Assistant Secretary, if an
Assistant Secretary has been appointed and is present) whom the chairman of such
meeting shall appoint, shall act as secretary of such meeting and keep the
minutes thereof.
2.6 Order of Business.
The order of business at each meeting of the stockholders shall
be determined by the chairman of such meeting, but such order of business may be
changed by a majority in voting interest of those present in person or by proxy
at such meeting and entitled to vote thereat.
2.7 Voting.
Except as otherwise provided by law, the Certificate or these
Bylaws, at each meeting of the stockholders, every stockholder of the
Corporation shall be entitled to one vote in person or by proxy for each share
of Common Stock of the Corporation held by him and registered in his name on the
books of the Corporation on the date fixed pursuant to Section 7 of Article VI
as the record date for the determination of stockholders entitled to vote at
such meeting. Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. A person whose stock is pledged shall be entitled to
vote, unless, in the transfer by the pledgor on the books of the Corporation, he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his proxy may represent such stock and vote thereon. If shares or
other securities having voting power stand in the record of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary shall be
given written notice to the contrary and furnished with a copy of the instrument
or order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect:
a. if only one votes, his act binds all;
b. if more than one votes, the act of the majority so voting
binds all; and
c. if more than one votes, but the vote is evenly split on any
particular matter, such shares shall be voted in the manner provided by law.
If the instrument so filed shows that any such tenancy is held in
unequal interests, a majority or (even-split or the purposes of this Section 7
shall be a majority or even-split in interest. The Corporation shall not vote
directly or indirectly any share of its own capital stock. Any vote of stock may
be given by the stockholder entitled thereto in person or by his proxy
3
<PAGE> 7
appointed by an instrument in writing, subscribed by such stockholder or by his
attorney thereunto authorized, delivered to the secretary of the meeting;
provided, however, that no proxy shall be voted after three years from its date,
unless said proxy provides for a longer period. At all meetings of the
stockholders, all matters (except where other provision is made by law, the
Certificate or these Bylaws) shall be decided by the vote of a majority in
interest of the stockholders present in person or by proxy at such meeting and
entitled to vote thereon, a quorum being present. Unless demanded by a
stockholder present in person or by proxy at any meeting and entitled to vote
thereon, the vote on any question need not be by ballot. Upon a demand by any
such stockholder for a vote by ballot upon any question, such vote by ballot
shall be taken. On a vote by ballot, each ballot shall be signed by the
stockholder voting, or by his proxy, if there be such proxy, and shall state the
number of shares voted.
2.8 Inspection.
The chairman of the meeting may at any time appoint one or more
inspectors to serve at any meeting of the stockholders. Any inspector may be
removed, and a new inspector or inspectors appointed, by the Board at any time.
Such inspectors shall decide upon the qualifications of voters, accept and count
votes, declare the results of such vote, and subscribe and deliver to the
secretary of the meeting a certificate stating the number of shares of stock
issued and outstanding and entitled to vote thereon and the number of shares
voted for and against the question, respectively. The inspectors need not be
stockholders of the Corporation, and any director or officer of the Corporation
may be an inspector on any question other than a vote for or against his
election to any position with the Corporation or on any other matter in which he
may be directly interested. Before acting as herein provided, each inspector
shall subscribe an oath faithfully to execute the duties of an inspector with
strict impartiality and according to the best of his ability.
2.9 List of Stockholders.
It shall be the duty of the Secretary or other officer of the
Corporation who shall have charge of its stock ledger to prepare and make, at
least 10 days before every meeting of the stockholders, a complete list of the
stockholders entitled to vote thereat, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to any such meeting, during ordinary
business hours, for a period of at least 10 days prior to such meeting, either
at a place within the city where such meeting is to be held, which place shall
be specified in the notice of the meeting or, if not so specified, at the place
where the meeting is to be held. Such list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
2.10 Stockholders' Consent in Lieu of Meeting.
Any action required by the General Corporation Law to be taken at
any annual or special meeting of the stockholders of the Corporation, or any
action which may be taken at any
4
<PAGE> 8
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, by a consent in writing, as permitted
by the General Corporation Law.
ARTICLE III
BOARD OF DIRECTORS
3.1 General Powers.
The business, property and affairs of the Corporation shall be
managed by or under the direction of the Board, which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Certificate directed or required to be exercised or done by the
stockholders.
3.2 Number and Term of Office.
Except as otherwise required by the Certificate, the number of
directors shall be fixed from time to time by the Board. Directors need not be
stockholders. Each director shall hold office until his successor is elected and
qualified, or until his earlier death or resignation or removal in the manner
hereinafter provided.
3.3 Election of Directors.
Except as otherwise required by the Certificate, at each meeting
of the stockholders for the election of directors at which a quorum is present,
the persons receiving the greatest number of votes, up to the number of
directors to be elected, of the stockholders present in person or by proxy and
entitled to vote thereon shall be the directors; provided, however, that for
purposes of such vote no stockholder shall be allowed to cumulate his votes.
Unless an election by ballot shall be demanded as provided in Section 2.7,
election of directors may be conducted in any manner approved at such meeting.
3.4 Resignation, Removal and Vacancies.
a. Any director may resign at any time by giving written notice
to the Board, the Chairman, the President or the Secretary. Such resignation
shall take effect at the time specified therein or, if the time be not
specified, upon receipt thereof; unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
b. Except as otherwise required by the Certificate, any director
or the entire Board may be removed, with or without cause, at any time by vote
of the holders of a majority of the shares then entitled to vote at an election
of directors or by written consent of the stockholders pursuant to Section 2.10.
c. Except as otherwise required by the Certificate, vacancies
occurring on the Board for any reason may be filled by vote of the stockholders
or by the stockholders' written consent pursuant to Section 2.10, or by vote of
the Board or by the
5
<PAGE> 9
directors' written consent pursuant to Section 3.6. If the number of directors
then in office is less than a quorum, such vacancies may be filled by a vote of
a majority of the directors then in office.
3.5 Meetings.
a. Annual Meetings. As soon as practicable after each annual
election of directors, the Board shall meet for the purpose of organization and
the transaction of other business, unless it shall have transacted all such
business by written consent pursuant to Section 6 of this Article III.
b. Other Meetings. Other meetings of the Board shall be held at
such times and places as the Board, the Chairman, the President or any director
shall from time to time determine.
c. Notice of Meetings. Notice shall be given to each director of
each meeting, including the time, place and purpose of such meeting. Notice of
each such meeting shall be mailed to each director, addressed to him at his
residence or usual place of business, at least three days before the date on
which such meeting is to be held, or shall be sent to him at such place by
telegraph, cable, wireless or other form of recorded communication, or be
delivered personally or by telephone not later than two days before the day on
which such meeting is to be held, but notice need not be given to any director
who shall attend such meeting. A written waiver of notice, signed by the person
entitled thereto, whether before or after the time of the meeting stated
therein, shall be deemed equivalent to notice.
d. Place of Meetings. The Board may hold its meetings at such
place or places within or outside the State of Delaware as the Board may from
time to time determine, or as shall be designated in the respective notices or
waivers of notice thereof.
e. Quorum and Manner of Acting. Except as otherwise required by
the Certificate, a majority of the total number of directors then in office
shall be present in person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and the vote of a
majority of those directors present at any such meeting at which a quorum is
present shall be necessary for the passage of any resolution or act of the
Board, except as otherwise expressly required by law or these Bylaws. In the
absence of a quorum for any such meeting, a majority of the directors present
thereat may adjourn such meeting from time to time until a quorum shall be
present.
f. Organization. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(i) the Chairman;
(ii) the President (if a director); or
6
<PAGE> 10
(iii) any director designated by a majority of the
directors present.
The Secretary or, in the case of his absence, an Assistant
Secretary, if an Assistant Secretary has been appointed and is present, or any
person whom the chairman of the meeting shall appoint shall act as secretary of
such meeting and keep the minutes thereof.
3.6 Directors' Consent in Lieu of Meeting.
Any action required or permitted to be taken at any meeting of
the Board may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by all the directors then in office and such consent is filed with the
minutes of the proceedings of the Board.
3.7 Action by Means of Conference Telephone or Similar
Communications Equipment.
Any one or more members of the Board may participate in a meeting
of the Board by means of conference telephone or similar communications
equipment by which all persons participating in the meeting can hear each other,
and participation in a meeting by such means shall constitute presence in person
at such meeting.
3.8 Committees.
The Board may, by resolution or resolutions passed by a majority
of the whole Board, designate one or more committees, each such committee to
consist of one or more directors of the Corporation, which to the extent
provided in said resolution or resolutions shall have and may exercise the
powers of the Board in the management of the business and affairs of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers which may require it, such committee or committees to have such name or
names as may be determined from time to time by resolution adopted by the Board.
A majority of all the members of any such committee may determine its action and
fix the time and place of its meetings, unless the Board shall otherwise
provide. The Board shall have power to change the members of any such committee
at any time, to fill vacancies and to discharge any such committee, either with
or without cause, at any time.
ARTICLE IV
OFFICERS
4.1 Executive Officers.
The principal officers of the Corporation shall be a Chairman, if
one is appointed (and any references to the Chairman shall not apply if a
Chairman has not been appointed), a President, a Secretary, and a Treasurer, and
may include such other officers as the Board may appoint pursuant to Section
4.3. Any two or more offices may be held by the same person.
7
<PAGE> 11
4.2 Authority and Duties.
All officers, as between themselves and the Corporation, shall
have such authority and perform such duties in the management of the Corporation
as may be provided in these Bylaws or, to the extent so provided, by the Board.
4.3 Other Officers.
The Corporation may have such other officers, agents and
employees as the Board may deem necessary, including one or more Assistant
Secretaries, one or more Assistant Treasurers and one or more Vice Presidents,
each of whom shall hold office for such period, have such authority, and perform
such duties as the Board, the Chairman, or the President may from time to time
determine. The Board may delegate to any principal officer the power to appoint
and define the authority and duties of, or remove, any such officers, agents, or
employees.
4.4 Term of Office. Resignation and Removal.
a. All officers shall be elected or appointed by the Board and
shall hold office for such term as may be prescribed by the Board. Each officer
shall hold office until his successor has been elected or appointed and
qualified or until his earlier death or resignation or removal in the manner
hereinafter provided. The Board may require any officer to give security for the
faithful performance of his duties.
b. Any officer may resign at any time by giving written notice to
the Board, the Chairman, the President or the Secretary. Such resignation shall
take effect at the time specified therein or, if the time be not specified, at
the time it is accepted by action of the Board. Except as aforesaid, the
acceptance of such resignation shall not be necessary to make it effective.
c. Except as otherwise required by the Certificate, all officers
and agents elected or appointed by the Board shall be subject to removal at any
time by the Board with or without cause.
4.5 Vacancies.
If the office of Chairman, President, Secretary or Treasurer
becomes vacant for any reason, the Board shall fill such vacancy, and if any
other office becomes vacant, the Board may fill such vacancy. Any officer so
appointed or elected by the Board shall serve only until such time as the
unexpired term of his predecessor shall have expired, unless re-elected or
reappointed by the Board.
4.6 The Chairman.
The Chairman shall give counsel and advice to the Board and the
officers of the Corporation on all subjects concerning the welfare of the
Corporation and the conduct of its
8
<PAGE> 12
business and shall perform such other duties as the Board may from time to time
determine. Unless otherwise determined by the Board, he shall preside at
meetings of the Board and of the Stockholders at which he is present.
4.7 The President.
The President shall be the chief executive officer of the
Corporation. The President shall have general and active management and control
of the business and affairs of the Corporation subject to the control of the
Board and shall see that all orders and resolutions of the Board are carried
into effect. The President shall from time to time make such reports of the
affairs of the Corporation as the Board of Directors may require and shall
perform such other duties as the Board may from time to time determine.
4.8 The Secretary.
The Secretary shall, to the extent practicable, attend all
meetings of the Board and all meetings of the stockholders and shall record all
votes and the minutes of all proceedings in a book to be kept for that purpose.
He may give, or cause to be given, notice of all meetings of the stockholders
and of the Board, and shall perform such other duties as may be prescribed by
the Board, the Chairman or the President, under whose supervision he shall act.
He shall keep in safe custody the seal of the Corporation and affix the same to
any duly authorized instrument requiring it and, when so affixed, it shall be
attested by his signature or by the signature of the Treasurer or, if appointed,
an Assistant Secretary or an Assistant Treasurer. He shall keep in safe custody
the certificate books and stockholder records and such other books and records
as the Board may direct, and shall perform all other duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him by the Board, the Chairman or the President.
4.9 The Treasurer.
The Treasurer shall have the care and custody of the corporate
funds and other valuable effects, including securities, shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board, taking proper vouchers for such disbursements, shall
render to the Chairman, President and directors, at the regular meetings of the
Board, or whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Corporation and shall perform
all other duties incident to the office of Treasurer and such other duties as
from time to time may be assigned to him by the Board, the Chairman or the
President.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
9
<PAGE> 13
5.1 Execution of Documents.
The Board shall designate, by either specific or general
resolution, the officers, employees and agents of the Corporation who shall have
the power to execute and deliver deeds, contracts, mortgages, bonds, debentures,
checks, drafts and other orders for the payment of money and other documents for
and in the name of the Corporation, and may authorize such officers, employees
and agents to delegate such power (including authority to redelegate) by written
instrument to other officers, employees or agents of the Corporation; unless so
designated or expressly authorized by these Bylaws, no officer, employee or
agent shall have any power or authority to bind the Corporation by any contract
or engagement, to pledge its credit or to render it liable pecuniarily for any
purpose or amount.
5.2 Deposits.
All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation or otherwise as the
Board or Treasurer, or any other officer of the Corporation to whom power in
this respect shall have been given by the Board, shall select.
5.3 Proxies with Respect to Stock or Other Securities of Other
Corporations.
The Board shall designate the officers of the Corporation who
shall have authority from time to time to appoint an agent or agents of the
Corporation to exercise in the name and on behalf of the Corporation the powers
and rights which the Corporation may have as the holder of stock or other
securities in any other corporation, and to vote or consent with respect to such
stock or securities. Such designated officers may instruct the person or persons
so appointed as to the manner of exercising such powers and rights, and such
designated officers may execute or cause to be executed in the name and on
behalf of the Corporation and under its corporate seal or otherwise, such
written proxies, powers of attorney or other instruments as they may deem
necessary or proper in order that the Corporation may exercise its powers and
rights.
ARTICLE VI
SHARES AND THEIR TRANSFER; FIXING RECORD DATE
6.1 Certificates for Shares.
Every owner of stock of the Corporation shall be entitled to have
a certificate certifying the number and class of shares owned by him in the
Corporation, which shall be in such form as shall be prescribed by the Board.
Certificates shall be numbered and issued in consecutive order and shall be
signed by, or in the name of, the Corporation by the Chairman, the President or
any Vice President, and by the Treasurer (or an Assistant Treasurer, if
appointed) or the Secretary (or an Assistant Secretary, if appointed). In case
any officer or officers who shall have signed any such certificate or
certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
10
<PAGE> 14
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate had not
ceased to be such officer or officers of the Corporation.
6.2 Record.
A record in one or more counterparts shall be kept of the name of
the person, firm or corporation owning the shares represented by each
certificate for stock of the Corporation issued, the number of shares
represented by each such certificate, the date thereof and, in the case of
cancellation, the date of cancellation. Except as otherwise expressly required
by law, the person in whose name shares of stock stand on the stock record of
the Corporation shall be deemed the owner thereof for all purposes regarding the
Corporation.
6.3 Transfer and Registration of Stock.
a. The transfer of stock and certificates which represent the
stock of the Corporation shall be governed by Article 8 of Subtitle 1 of Title 6
of the Delaware Code (the Uniform Commercial Code), as amended from time to
time.
b. Registration of transfers of shares of the Corporation shall
be made only on the books of the Corporation upon request of the registered
holder thereof, or of his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary of the Corporation, and upon the
surrender of the certificate or certificates for such shares properly endorsed
or accompanied by a stock power duly executed.
6.4 Addresses of Stockholders.
Each stockholder shall designate to the Secretary an address at
which notices of meetings and all other corporate notices may be served or
mailed to him, and, if any stockholder shall fail to designate such address,
corporate notices may be served upon him by mail directed to him at his post
office address, if any, as the same appears on the share record books of the
Corporation or at his last known post office address.
6.5 Lost, Destroyed and Mutilated Certificates.
The holder of any shares of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of the certificate
therefor, and the Board may, in its discretion, cause to be issued to him a new
certificate or certificates for such shares, upon the surrender of the mutilated
certificates or, in the case of loss or destruction of the certificate, upon
satisfactory proof of such loss or destruction, and the Board may, in its
discretion, require the owner of the lost or destroyed certificate or his legal
representative to give the Corporation a bond in such sum and with such surety
or sureties as it may direct to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss or destruction of any such
certificate.
11
<PAGE> 15
6.6 Regulations.
The Board may make such rules and regulations as it may deem
expedient, not inconsistent with these Bylaws, concerning the issue, transfer
and registration of certificates for stock of the Corporation.
6.7 Fixing Date for Determination of Stockholders of Record.
a. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board, and which record date shall be not more than 60 nor less than 10
days before the date of such meeting. If no record date is fixed by the Board,
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
b. In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board, and which date
shall be not more than 10 days after the date upon which the resolution fixing
the record date is adopted by the Board. If no record date has been fixed by the
Board, the record date for determining stockholders entitled to consent to
corporate action. In writing without a meeting, when no prior action by the
Board is required by the General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the Corporation by delivery to its registered office in
this State, its principal place of business or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board and prior action by the Board is
required by the General Corporation Law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board adopts
the resolution taking such prior action.
c. In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than 60 days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto.
12
<PAGE> 16
ARTICLE VII
SEAL
The Board may provide a corporate seal, which shall be in the
form of a circle and shall bear the full name of the Corporation, the year of
incorporation of the Corporation and the words and figures "Corporate Seal -
Delaware."
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year
unless otherwise determined by the Board.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
9.1 Indemnification.
a. As provided in the Charter, to the fullest extent permitted by
the General Corporation Law as the same exists or may hereafter be amended, a
director of this Corporation shall not be liable to the Corporation or its
stockholders for breach of fiduciary duty as a director.
b. Without limitation of any right conferred by paragraph (a) of
this Section 9, each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director, officer or employee of the Corporation or is or was
serving at the request of the Corporation as a director, officer or employee of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity while serving as a director, officer or employee
or in any other capacity while serving as a director, officer or employee, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
permitted prior thereto), against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes or amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an indemnitee who has ceased to be a
director, officer or employee and shall inure to the benefit of the indemnitee's
heirs, testators, intestates, executors and administrators; provided, however,
that such person acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and with
respect to a criminal action or
13
<PAGE> 17
proceeding, had no reasonable cause to believe his conduct was unlawful;
provided further, however, that no indemnification shall be made in the case of
an action, suit or proceeding by or in the right of the Corporation in relation
to matters as to which it shall be adjudged in such action, suit or proceeding
that such director, officer, employee or agent is liable to the Corporation,
unless a court having jurisdiction shall determine that, despite such
adjudication, such person is fairly and reasonably entitled to indemnification;
provided further, however, that, except as provided in Section l(c) of this
Article IX with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof initiated by such indemnitee only if such proceeding (or part
thereof) initiated by such indemnitee was authorized by the Board of Directors
of the Corporation. The right to indemnification conferred in this Article IX
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise.
c. If a claim under Section 9.1(b) is not paid in full by the
Corporation with 60 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of any undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in the
General Corporation Law. Neither the failure of the Corporation (including the
Board, independent legal counsel, or the stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the General Corporation Law, nor an
actual determination by the Corporation (including the Board, independent legal
counsel, or the stockholders) that the indemnitee has not met such applicable
standard of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of
14
<PAGE> 18
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section or otherwise shall be on the
Corporation.
d. The rights to indemnification and to the advancement of
expenses conferred in this Article IX shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the Charter,
agreement, vote of stockholders or disinterested directors or otherwise.
9.2 Insurance.
The Corporation may purchase and maintain insurance, at its
expense, to protect itself and any person who is or was a director, officer,
employee or agent of the Corporation or any person who is or was serving at the
request of the Corporation as a director, officer, employer or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the
General Corporation Law.
ARTICLE X
AMENDMENT
Except as required by the Certificate, any bylaw (including these
Bylaws) may be adopted, amended or repealed by the vote of the holders of a
majority of the shares then entitled to vote or by the stockholders' written
consent pursuant to Section 2.10, or by the vote of the Board or by the
directors' written consent pursuant to Section 3.6.
15
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of
December __, 1997 between Micromuse Inc., a Delaware corporation ("the
Company"), and _____________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company;
and
WHEREAS, the Board of Directors of the Company has adopted Bylaws
(the "Bylaws") providing for the indemnification of the officers and directors
of the Company to the maximum extent authorized by Section 145 of the Delaware
General Corporation Law, as amended ("Law"); and
WHEREAS, the Bylaws and the Law, by their nonexclusive nature,
permit contracts between the Company and the officers or directors of the
Company with respect to indemnification of such officers or directors; and
WHEREAS, in accordance with the authorization as provided by the
Law, the Company may purchase and maintain a policy or policies of directors'
and officers' liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its officers or directors in the
performance of their obligations to the Company; and
WHEREAS, in order to induce Indemnitee to continue to serve as an
officer or director of the Company, the Company has determined and agreed to
enter into this contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's service as an
officer or director after the date hereof, the parties hereto agree as follows:
1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the Law, as such may be amended from time to time, and Article
VII, Section 6 of the Bylaws, as such may be amended. In furtherance of the
foregoing indemnification, and without limiting the generality thereof:
(a) PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE
RIGHT OF THE COMPANY. Indemnitee shall be entitled to the rights of
indemnification provided in this Section l(a) if, by reason of his Corporate
Status (as hereinafter defined), he is, or is threatened to be made, a party to
or participant in any Proceeding (as hereinafter defined) other than a
Proceeding by or in the right of the Company. Pursuant to this Section 1(a),
Indemnitee shall be indemnified against all Expenses (as hereinafter defined),
judgments, penalties, fines and
<PAGE> 2
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such Proceeding or any claim, issue or matter therein,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
Proceeding, had no reasonable cause to believe his conduct was unlawful.
(b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY.
Indemnitee shall be entitled to the rights of indemnification provided in this
Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to
be made, a party to or participant in any Proceeding brought by or in the right
of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified
against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; provided, however, that, if applicable law so provides, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Company unless and to the extent that the Court of
Chancery of the State of Delaware shall determine that such indemnification may
be made.
(c) INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS
WHOLLY OR PARTLY SUCCESSFUL. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee is, by reason of his Corporate Status,
a party to and is successful, on the merits or otherwise, in any Proceeding, he
shall be indemnified to the maximum extent permitted by law against all Expenses
actually and reasonably incurred by him or on his behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or matter.
For purposes of this Section and without limitation, the termination of any
claim, issue or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter.
2. ADDITIONAL INDEMNITY. In addition to, and without regard to
any limitations on, the indemnification provided for in Section 1, the Company
shall and hereby does indemnify and hold harmless Indemnitee against all
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the Company),
including, without limitation, all liability arising out of the negligence or
active or passive wrongdoing of Indemnitee. The only limitation that shall exist
upon the Company's obligations pursuant to this Agreement shall be that the
Company shall not be obligated to make any payment to Indemnitee that is finally
determined (under the procedures, and subject to the presumptions, set forth in
Sections 6 and 7 hereof) to be unlawful under Delaware law.
2
<PAGE> 3
3. CONTRIBUTION IN THE EVENT OF JOINT LIABILITY.
(a) Whether or not the indemnification provided in
Sections 1 and 2 hereof is available, in respect of any threatened, pending or
completed action, suit or proceeding in which Company is jointly liable with
Indemnitee (or would be if joined in such action, suit or proceeding), Company
shall pay, in the first instance, the entire amount of any judgment or
settlement of such action, suit or proceeding without requiring Indemnitee to
contribute to such payment and Company hereby waives and relinquishes any right
of contribution it may have against Indemnitee. Company shall not enter into any
settlement of any action, suit or proceeding in which Company is jointly liable
with Indemnitee (or would be if joined in such action, suit or proceeding)
unless such settlement provides for a full and final release of all claims
asserted against Indemnitee.
(b) Without diminishing or impairing the obligations of
the Company set forth in the preceding subparagraph, if, for any reason,
Indemnitee shall elect or be required to pay all or any portion of any judgment
or settlement in any threatened, pending or completed action, suit or proceeding
in which Company is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Company shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee in
proportion to the relative benefits received by the Company and all officers,
directors or employees of the Company other than Indemnitee who are jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, from the
transaction from which such action, suit or proceeding arose; provided, however,
that the proportion determined on the basis of relative benefit may, to the
extent necessary to conform to law, be further adjusted by reference to the
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, in connection with the events that resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
equitable considerations which the law may require to be considered. The
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, shall be determined by reference to, among other
things, the degree to which their actions were motivated by intent to gain
personal profit or advantage, the degree to which their liability is primary or
secondary, and the degree to which their conduct is active or passive.
(c) Company hereby agrees to fully indemnify and hold
Indemnitee harmless from any claims of contribution which may be brought by
officers, directors or employees of the Company other than Indemnitee who may be
jointly liable with Indemnitee.
4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
3
<PAGE> 4
5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision
of this Agreement, the Company shall advance all Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's
Corporate Status within ten (10) days after the receipt by the Company of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Any advances and undertakings to repay pursuant to this Section 5
shall be unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Company to advance Expenses pursuant to this Section 5 shall
be subject to the condition that, if, when and to the extent that the Company
determines that Indemnitee would not be permitted to be indemnified under
applicable law, the Company shall be entitled to be reimbursed, within thirty
(30) days of such determination, by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).
6. PROCEDURES AND PRESUMPTIONS FOR DETERMINATION OF ENTITLEMENT
TO INDEMNIFICATION. It is the intent of this Agreement to secure for Indemnitee
rights of indemnity that are as favorable as may be permitted under the law and
public policy of the State of Delaware. Accordingly, the parties agree that the
following procedures and presumptions shall apply in the event of any question
as to whether Indemnitee is entitled to indemnification under this Agreement:
(a) To obtain indemnification (including, but not
limited to, the advancement of Expenses and contribution by the Company) under
this Agreement, Indemnitee shall submit to the Company a written request,
including therein or therewith such documentation and information as is
reasonably available to Indemnitee and is reasonably necessary to determine
whether and to what extent Indemnitee is entitled to indemnification. The
Secretary of the Company shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has
requested indemnification.
(b) Upon written request by Indemnitee for
indemnification pursuant to the first sentence of Section 6(a) hereof, a
determination, if required by applicable law, with respect to Indemnitee's
entitlement thereto shall be made in the specific case by one of the following
three methods, which shall be at the election of Indemnitee: (1) by a majority
vote of the disinterested directors, even though less than a quorum, or (2) by
independent legal counsel in a written opinion, or (3) by the stockholders.
4
<PAGE> 5
(c) If the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b)
hereof, the Independent Counsel shall be selected as provided in this Section
6(c). The Independent Counsel shall be selected by Indemnitee (unless Indemnitee
shall request that such selection be made by the Board of Directors). Indemnitee
or the Company, as the case may be, may, within 10 days after such written
notice of selection shall have been given, deliver to the Company or to
Indemnitee, as the case may be, a written objection to such selection; provided,
however, that such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of "Independent
Counsel" as defined in Section 13 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. Absent a proper
and timely objection, the person so selected shall act as Independent Counsel.
If a written objection is made and substantiated, the Independent Counsel
selected may not serve as Independent Counsel unless and until such objection is
withdrawn or a court has determined that such objection is without merit. If,
within 20 days after submission by Indemnitee of a written request for
indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall
have been selected and not objected to, either the Company or Indemnitee may
petition the Court of Chancery of the State of Delaware or other court of
competent jurisdiction for resolution of any objection which shall have been
made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the court or by such other person as the court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 6(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting pursuant
to Section 6(b) hereof, and the Company shall pay all reasonable fees and
expenses incident to the procedures of this Section 6(c), regardless of the
manner in which such Independent Counsel was selected or appointed.
(d) In making a determination with respect to
entitlement to indemnification hereunder, the person or persons or entity making
such determination shall presume that Indemnitee is entitled to indemnification
under this Agreement if Indemnitee has submitted a request for indemnification
in accordance with Section 6(a) of this Agreement. Anyone seeking to overcome
this presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good
faith if Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties, or
on the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. Whether or not the foregoing provisions of this Section 6(e) are
satisfied, it shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests
5
<PAGE> 6
of the Company. Anyone seeking to overcome this presumption shall have the
burden of proof and the burden of persuasion, by clear and convincing evidence.
(f) If the person, persons or entity empowered or
selected under Section 6 to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within thirty (30) days
after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of a material fact
necessary to make Indemnitee's statement not materially misleading, in
connection with the request for indemnification, or (ii) a prohibition of such
indemnification under applicable law; provided, however, that such 30 day period
may be extended for a reasonable time, not to exceed an additional fifteen (15)
days, if the person, persons or entity making the determination with respect to
entitlement to indemnification in good faith requires such additional time for
the obtaining or evaluating documentation and/or information relating thereto;
and provided, further, that the foregoing provisions of this Section 6(g) shall
not apply if the determination of entitlement to indemnification is to be made
by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat.
(g) Indemnitee shall cooperate with the person, persons
or entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination under
the Agreement of the Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred by Indemnitee in
so cooperating with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Company hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.
(h) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party to
avoid expense, delay, distraction, disruption and uncertainty. In the event that
any action, claim or proceeding to which Indemnitee is a party is resolved in
any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without
payment of money or other consideration) it shall be presumed that Indemnitee
has been successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to
6
<PAGE> 7
overcome this presumption shall have the burden of proof and the burden of
persuasion, by clear and convincing evidence.
7. REMEDIES OF INDEMNITEE.
(a) In the event that (i) a determination is made
pursuant to Section 6 of this Agreement that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advancement of Expenses is not timely
made pursuant to Section 5 of this Agreement, (iii) no determination of
entitlement to indemnification shall have been made pursuant to Section 6(b) of
this Agreement within 90 days after receipt by the Company of the request for
indemnification, (iv) payment of indemnification is not made pursuant to this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within ten (10) days
after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made pursuant to
Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in
an appropriate court of the State of Delaware, or in any other court of
competent jurisdiction, of his entitlement to such indemnification. Indemnitee
shall commence such proceeding seeking an adjudication within 180 days following
the date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 7(a). The Company shall not oppose Indemnitee's right
to seek any such adjudication.
(b) In the event that a determination shall have been
made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled
to indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a de novo trial, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination under
Section 6(b).
(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 7, absent a prohibition of such
indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this
Section 7, seeks a judicial adjudication of his rights under, or to recover
damages for breach of, this Agreement, or to recover under any directors' and
officers' liability insurance policies maintained by the Company the Company
shall pay on his behalf, in advance, any and all expenses (of the types
described in the definition of Expenses in Section 13 of this Agreement)
actually and reasonably incurred by him in such judicial adjudication,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advancement of expenses or insurance recovery.
(e) The Company shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 7 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all the provisions of
this Agreement.
7
<PAGE> 8
8. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee
may at any time be entitled under applicable law, the certificate of
incorporation of the Company, the Bylaws, any agreement, a vote of stockholders
or a resolution of directors, or otherwise. No amendment, alteration or repeal
of this Agreement or of any provision hereof shall limit or restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal. To the extent that a change in the Law, whether by statute or judicial
decision, permits greater indemnification than would be afforded currently under
the Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and every other right and remedy shall be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an
insurance policy or policies providing liability insurance for directors,
officers, employees, or agents or fiduciaries of the Company or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise which such person serves at the request of the Company, Indemnitee
shall be covered by such policy or policies in accordance with its or their
terms to the maximum extent of the coverage available for any such director,
officer, employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
(d) The Company shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
9. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any
other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors of the
Company or (b) such Proceeding is being brought by the Indemnitee to assert,
interpret or enforce his rights under this Agreement.
10. DURATION OF AGREEMENT. All agreements and obligations of the
Company contained herein shall continue during the period Indemnitee is an
officer or director of the
8
<PAGE> 9
Company (or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise) and shall continue thereafter so long as Indemnitee
shall be subject to any Proceeding (or any proceeding commenced under Section 7
hereof) by reason of his Corporate Status, whether or not he is acting or
serving in any such capacity at the time any liability or expense is incurred
for which indemnification can be provided under this Agreement. This Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors (including any direct or indirect
successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), assigns, spouses,
heirs, executors and personal and legal representatives. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as an
officer or director of the Company or any other Enterprise at the Company's
request.
11. SECURITY. To the extent requested by the Indemnitee and
approved by the Board of Directors of the Company, the Company may at any time
and from time to time provide security to the Indemnitee for the Company's
obligations hereunder through an irrevocable bank line of credit, funded trust
or other collateral. Any such security, once provided to the Indemnitee, may not
be revoked or released without the prior written consent of the Indemnitee.
12. ENFORCEMENT.
(a) The Company expressly confirms and agrees that it
has entered into this Agreement and assumed the obligations imposed on it hereby
in order to induce Indemnitee to serve as an officer or director of the Company,
and the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as an officer or director of the Company.
(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied,
between the parties hereto with respect to the subject matter hereof.
13. DEFINITIONS. For purposes of this Agreement:
(a) "Corporate Status" describes the status of a person
who is or was a director, officer, employee or agent or fiduciary of the Company
or of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the express
written request of the Company.
(b) "Disinterested Director" means a director of the
Company who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(c) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is
9
<PAGE> 10
or was serving at the express written request of the Company as a director,
officer, employee, agent or fiduciary.
(d) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, participating, or being or
preparing to be a witness in a Proceeding.
(e) "Independent Counsel" means a law firm, or a member
of a law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent: (i)
the Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under this Agreement, or
of other indemnitees under similar indemnification agreements), or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's rights
under this Agreement. The Company agrees to pay the reasonable fees of the
Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
(f) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director of the Company, by reason of any
action taken by him or of any inaction on his part while acting as an officer or
director of the Company, or by reason of the fact that he is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other Enterprise; in each case
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement; including one pending on or before the date of this Agreement;
and excluding one initiated by an Indemnitee pursuant to Section 7 of this
Agreement to enforce his rights under this Agreement.
14. SEVERABILITY. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent
10
<PAGE> 11
possible, the provisions of this Agreement (including, without limitation, each
portion of any section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
thereby.
15. MODIFICATION AND WAIVER. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
16. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise unless and only
to the extent that such failure or delay materially prejudices the Company.
17. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth below
Indemnitee signature hereto.
(b) If to the Company, to:
Micromuse Inc.
139 Townsend Street
San Francisco, California
Attention: Chief Financial Officer
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
18. IDENTICAL COUNTERPARTS. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
11
<PAGE> 12
19. HEADINGS. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
20. GOVERNING LAW. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.
21. GENDER. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.
22. TERMINATION OF PRIOR INDEMNIFICATION AGREEMENTS. Upon the
effectiveness of this Agreement, any prior Indemnification Agreements between
the parties hereto shall terminate and be of no further force and effect, and
shall be superseded and replaced in its entirety by this Agreement.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
MICROMUSE INC.
By:
--------------------------------
Name: Christopher Dawes
Title: Chief Executive Officer
AGREED TO AND ACCEPTED
INDEMNITEE
-----------------------------------
Name:
----------------------------
Address:
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
Signature Page to Micromuse Inc.
Amended and Restated Indemnification Agreement
<PAGE> 1
EXHIBIT 10.5
139 TOWNSEND STREET
OFFICE LEASE
THIS LEASE is dated for reference purposes only as of March 25, 1997,
between SOMA PARTNERS, L.P., a California limited partnership ("Landlord"), and
MICROMUSE INC., a Delaware corporation ("Tenant").
W I T N E S S E T H:
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
the Premises described in Paragraph 1(g) below, for the term and subject to the
terms, covenants, agreements and conditions hereinafter set forth.
1. DEFINITIONS. In addition to terms that are defined elsewhere in this
Lease, unless the context otherwise specifies or requires, the following terms
shall have the meanings herein specified:
(a) The term "Base Expense Year" shall mean the calendar year set
forth in Paragraph G of the Summary of Lease Terms.
(b) The term "Base Tax Year" shall mean the calendar year set
forth in Paragraph H of the Summary of Lease Terms.
(c) The term "Building" shall mean the office building located at
139 Townsend Street in San Francisco, California.
(d) The term "Building Standard Improvements" shall mean those
improvements installed in the Premises at Landlord's expense.
(e) The term "Land" means the parcels) of land on which the
Building and the connected underground garage are located.
(f) 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 (as defined in Paragraph
1(h) hereof), 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 management, operation,
<PAGE> 2
repair, or maintenance of the Real Property and costs of training such
employees; (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) 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, boiler
and machinery, theft, rent interruption 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 15), all in such amounts as Landlord determines to be appropriate,
and, after the Base Year, costs of repairing an insured casualty to the extent
of the deductible amount under the applicable insurance policy; (5) water
charges and sewer rents or fees; (6) license, permit and inspection fees and
charges; (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
(subject to the limitation set forth in clause (xi) below) and expenses
(including fees and expenses for accounting, financial management, data
processing and information services) and costs of tenant service programs; (10)
repairs to and physical 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 otherwise included as an Operating
Expense pursuant to this Paragraph 1(f)); (11) janitorial, window cleaning,
guard, extermination, water treatment, rubbish removal, plumbing and other
services and inspection or service contracts for elevator, electrical,
mechanical, sanitary, heating, ventilation and air conditioning, and other
building equipment and systems or as may otherwise be necessary or proper for
the operation or maintenance of the Real Property; (12) supplies, tools,
materials and equipment used in connection with the operation, maintenance or
repair of the Real Property; (13) accounting, legal and other professional,
consulting or service fees and expenses; (14) 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) all
costs and expenses for electricity, chilled water, air conditioning, water for
heating, gas, fuel, steam, heat, lights, sewer service, communications service,
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 required under any governmental law,
regulation or
2.
<PAGE> 3
insurance requirement with which Real Property was not required to comply during
the Base Year, such cost or allocable portion to be amortized over the useful
life thereof, together with interest on the unamortized balance at a rate per
annum equal to the Reference Rate (as defined in Paragraph 3(d) hereof) charged
at the time such capital improvements or capital assets are constructed or
acquired or such higher rate as may have been paid by Landlord on funds borrowed
for the purpose of constructing or acquiring such capital improvements or
capital assets, but in either case not more than the maximum rate permitted by
law at the time such capital improvements or capital assets are constructed or
acquired; (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, such cost or allocable
portion thereof to be amortized over the useful life thereof (except that
Landlord may include as an Operating Expense in any calendar year a portion of
the cost of such a capital improvement or capital asset equal to Landlord's
estimate of the amount of the reduction of other Operating Expenses in such year
resulting from such capital improvement or capital asset), together with
interest on the unamortized balance at a rate per annum equal to the Reference
Rate charged at the time such capital improvements or capital assets are
constructed or acquired or such higher rate as may have been paid by Landlord on
funds borrowed for the purpose of constructing or acquiring such capital
improvements or capital assets, but in either case not more than the maximum
rate permitted by law at the time such capital improvements or capital assets
are constructed or acquired; (18) the cost of furniture, window coverings,
carpeting, decorations, landscaping and other customary and ordinary items of
personal property provided by Landlord for use in common areas of the Real
Property or in the Building office (to the extent that such Building office is
dedicated to the operation and management of the Real Property), such costs to
be amortized over the useful life thereof; (19) the cost of any capital
improvements made by Landlord to the Real Property or capital assets acquired by
Landlord after the Base Year to the extent that the cost of any such improvement
or asset is less than ten thousand dollars ($10,300); (20) the cost of any
capital improvements made by Landlord to the Real Property or capital assets
acquired by Landlord after the Base Year which have a useful life of five (5)
years or less (and the cost of which is not otherwise included in Operating
Costs pursuant to this Paragraph 1(f)), such cost to be amortized over the
useful life thereof, together with interest on the unamortized balance at a rate
per annum equal to the Reference Rate charged at the time such capital
improvements or capital assets are constructed or acquired or such higher rate
as may have been paid by Landlord on funds borrowed for the purpose of
constructing or acquiring such capital improvements or capital assets, but in
either case not more than the maximum rate permitted by law at the time such
3.
<PAGE> 4
capital improvements or capital assets are constructed or acquired; (21) any
such expenses and costs resulting from substitution of work, labor, material or
services in lieu of any of the above itemizations, or for any such additional
work, labor services or material resulting from compliance with any governmental
laws, rules, regulations or orders applicable to the Real Property or any part
thereof; (22) property management office rent or rental value; and (23) cost of
operation, repair and maintenance of the parking facility serving the Building,
including resurfacing, restriping and cleaning.
To the extent costs and expenses described above relate to both the Real
Property and other property, such costs and expenses shall, in determining the
amount of Operating Expenses, be equitably allocated as Landlord may determine
in good faith to be appropriate.
Operating Expenses shall not include the following: (i)
depreciation on the Building; (ii) debt service; (iii) rental under any ground
or underlying lease; (iv) interest (except as expressly provided in this
Paragraph 1(f)); (v) Real Property Taxes; (vi) attorneys' fees and expenses
incurred in connection with lease negotiations with prospective Building tenants
or in connection with disputes with tenants or other occupants of the Building
or enforcement of any leases or defense of Landlord's title to or interest in
the Building; (vii) the cost of any improvements or equipment which would be
properly classified as capital expenditures (except for any capital expenditures
expressly included in Operating Expenses pursuant to this Paragraph 1(f));
(viii) the cost of decorating, improving for tenant occupancy, painting or
redecorating portions of the Building to be demised to tenants; (ix) advertising
expenses relating to vacant space; (x) real estate brokers' or other leasing
commissions; (xi) property management fees to the extent in excess of two and
one-quarter percent (2.25%) of aggregate annual base rent for the Real Property
in any year; (xii) cost of repairing casualty damage to the extent of insurance
proceeds received by Landlord; (xiii) executive salaries and general overhead
expenses not related to the Building; (xiv) interest, penalties or other costs
arising out of Landlord's failure to make timely payment of its obligations;
(xv) the cost of any service provided to Tenant or other occupants of the
Building to the extent Landlord is reimbursed for such costs; (xvi) amounts paid
to subsidiaries or affiliates of Landlord for management or other services or
for supplies or other materials to the extent in excess of the amounts which
would have been paid for the same services, supplies or materials to an
unaffiliated third party on arms'-length terms under then-existing market
conditions; and (xvii) costs incurred to cleanup, abate, remove or otherwise
remedy hazardous substances (as defined in Paragraph 7(b)) from the Land to the
extent such hazardous substances either (A) were spilled or released in or on
the Land prior to the Commencement Date, or (B) were spilled or released in or
on the Land by Landlord.
4.
<PAGE> 5
(g) The term "Premises" shall mean the space in the Building
designated by cross-hatching on the floor plan(s) attached hereto as Exhibit A
(exclusive of the areas, if any, shown by shading) and situated on the floor(s)
of the Building specified in Paragraph D of the Summary of Lease Terms, together
with the appurtenant right to the use, in common with others, of lobbies,
entrances, stairs, elevators and other public portions of the Building. The
Premises shall include the space on the Mezzanine Level of the Building as shown
on Exhibit A (the "Mezzanine Space") and the space on the 5th Floor of the
Building as shown on Exhibit A (the "5th Floor Space"). Landlord and Tenant
agree that the premises contain the number of square feet of rentable area
specified in Paragraph E of the Summary of Lease Terms. All the outside walls
and windows of the Premises and any space in the premises used for shafts,
stacks, pipes, conduits, ducts, electric or other utilities, sinks or other
Building facilities, and the use thereof and access thereto through the Premises
for the purposes of operation, maintenance and repairs, are reserved to
Landlord.
(h) The term "Real Property" shall mean, collectively, the Land,
the Building, the connected parking garage, and the other improvements on the
Land.
(i) The term "Real Property Taxes" shall mean all taxes,
Assessments (whether general or special), excises, transit charges, housing fund
assessments or other housing charges, 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 or any part thereof, on the
Landlord with respect to the Real Property, on the act of entering into this
Lease or any other lease 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, 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 Real Property Taxes. Real Property Taxes shall include reasonable
attorneys' fees, costs and disbursements incurred in connection with proceedings
to contest, determine or reduce Real Property Taxes.
Real Property Taxes 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
5.
<PAGE> 6
(in whole or in part) for, or as an addition to, any other charge which would
otherwise constitute a part of Real Property Taxes. Real Property Taxes shall
not include interest or penalties assessed for nonpayment or late payment.
Landlord and Tenant acknowledge and agree that certain other buildings exist or
encroach upon the Land, that Tenant shall have no liability as to any item of
Real Property Taxes attributable or allocable to, or assessed against, buildings
other than the Building and that Landlord's good faith determination of the
proper allocation of any item of Real Property Taxes allocable to buildings
other than the Building shall be binding on Landlord and Tenant.
(j) The term "Rental" shall include the Basic Monthly Rental set
forth in Paragraph J of the Summary of Lease Terms, all additional rent, and
any other charges payable by Tenant to Landlord hereunder.
(k) The term "Tenant's Extra Improvements" shall mean those
improvements in addition to Building Standard Improvements which are to be
installed in the Premises.
(1) The term "Tenant's Percentage Share" shall mean the
percentage figure specified in Paragraph F of the Summary of Lease Terms
(subject to Landlord's right, from time to time, to adjust such percentage to
reflect accurate measurements of the Premises or other portions of the Building
and/or to reflect changes in Landlord's standard common area load factor).
2. TERM.
(a) Subject to Paragraph 2(c) hereof, the term of this Lease
shall commence and, unless ended sooner as herein provided, shall expire on the
dates respectively specified in Paragraph I of the Summary of Lease Terms
(respectively referred to hereinafter as the "Commencement Date" and the
"Expiration Date").
(b) Tenant shall accept the Premises "as is" on the Commencement
Date or the Early Occupancy Date if applicable. Landlord has no actual knowledge
of any material defect in the Building systems as of the date of this Lease.
Landlord shall have no obligation to construct or install any improvements in
the Premises. Tenant acknowledges that Tenant's possession of the Premises shall
constitute Tenant's acknowledgment that the Premises are in all respects in the
condition in which Landlord is required to deliver the Premises to Tenant under
this Lease and that Tenant has examined the Premises and is fully informed to
Tenant's satisfaction of the physical and environmental condition and the
utility of the Premises. Tenant acknowledges that Landlord, its agents and
employees and other persons acting on behalf of Landlord have made no
representation or warranty of any kind in connection with any matter relating to
the physical or environmental condition, value, fitness, use or zoning of the
6.
<PAGE> 7
Premises upon which Tenant has relied directly or indirectly for any purpose,
except as specifically set forth in this Lease.
(c) If Landlord for any reason whatsoever cannot deliver
possession of the Premises to Tenant on the Commencement Date, this Lease shall
not be void or voidable, no obligation of Tenant shall be affected hereby and
Landlord shall not be liable to Tenant for any loss or damage resulting
therefrom. Landlord agrees to use diligent efforts (including, if necessary in
Landlord's reasonable judgment, institution of unlawful detainer proceedings) to
recover possession of the 5th Floor Space from the existing tenant thereof as
promptly as practicable after the expiration of the existing tenant's lease
(April 30, 1997). If Landlord has not delivered possession of the Premises by
November 1, 1997, Tenant may terminate this Lease by notice to Landlord.
(d) Tenant shall have the right, upon and subject to the terms of
this Paragraph 2(d), to occupy all or any part of the Mezzanine Space at any
time after this Lease shall have been executed and delivered by Landlord and
Tenant, provided that (i) Tenant shall have made the payment required pursuant
to Paragraph 3(e) hereof, (ii) Tenant shall have delivered to Landlord, and
Landlord shall have approved, the certificates of insurance described in
Paragraph 14(d), and (iii) Tenant shall have given Landlord not less than five
(5) business days notice of Tenant's intent to take early occupancy. The date on
which Tenant takes occupancy pursuant to this Paragraph 2(d) is referred to
herein as the "Early Occupancy Date." From and after the Early Occupancy Date,
all of the terms of this Lease, to the extent applicable to the Mezzanine Space,
shall be in full force and effect and Landlord and Tenant shall observe all such
terms, except that Tenant shall not be required to pay Basic Monthly Rental
prior to the Commencement Date.
3. RENTAL; SECURITY DEPOSIT.
(a) Tenant agrees to pay to Landlord as Basic Monthly Rental for
the Premises the sum specified in Paragraph J of the Summary of Lease Terms.
Notwithstanding the foregoing, Tenant shall have no obligation to pay the
portion of the Basic Monthly Rental allocable to the Mezzanine Space ($6,195 per
month) during the period from the Commencement Date through October 31, 1997;
during such period, the Basic Monthly Rental shall be $14,802.
(b) Basic Monthly Rental shall be paid to Landlord, in advance,
on or before the first day of each and every successive calendar month during
the term hereof. In the event the term of this Lease commences on a day other
than the first day of a calendar month, or ends on a day other than the last day
of a calendar month, then the Basic Monthly Rental for the first and/or last
fractional months of the term shall be
7.
<PAGE> 8
appropriately prorated. All such prorations shall be made on the basis of a
360-day year consisting of twelve 30-day months.
(c) (intentionally omitted)
(d) Rental shall be paid to Landlord without notice, demand,
deduction or offset in lawful money of the United States in immediately
available funds or by good check as described below at the office of Landlord at
Landlord's address for notices specified in the Summary of Lease Terms, or to
such other person or at such other place as Landlord from time to time may
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. All amounts of Rental, if not paid within three
(3) days of the date when due, shall bear interest from the due date until paid
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 five (5) percentage points
over the publicly announced reference rate (the "Reference Rate") charged on
such due date by the San Francisco Main Office of Bank of America NT & SA (or
any successor bank thereto) (or if there is no such publicly announced rate, the
rate quoted by such bank in pricing ninety (90) day commercial loans to
substantial commercial borrowers). In addition, Tenant acknowledges that late
payment by Tenant to Landlord of Rental will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of such costs being extremely
difficult to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord by the
terms of any encumbrance and/or note secured by an encumbrance covering the
Premises. Therefore, if any installment of Rental due from Tenant is not
received within ten (10) days of when due, Tenant shall pay to Landlord an
additional sum of ten percent (10%) of the overdue Rental as a late charge;
provided that, if Rental is not paid when due three (3) times during the term of
this Lease, then thereafter Tenant shall not be entitled to such ten (10) day
grace period, and such late charge shall be assessed on any Rental not paid by
5:00 p.m. on the date due. The parties agree that this late charge represents a
fair and reasonable estimate of the costs that Landlord will incur by reason of
late payment of Rental by Tenant. Acceptance of any late charge shall not
constitute a waiver of Tenant's default with respect to the overdue amount, or
prevent Landlord from exercising any of the other rights and remedies available
to Landlord.
(e) Upon signing this Lease, Tenant shall pay to Landlord (a) an
amount equal to the Basic Monthly Rental for the seventh (7th) full calendar
month of the term of this Lease, which amount Landlord shall apply to the Basic
Monthly Rental for such seventh (7th) month, and (b) the amount of the security
8.
<PAGE> 9
deposit specified in Paragraph L of the Summary of Lease Terms (the "Deposit").
The Deposit shall be held by Landlord as security for the faithful performance
by Tenant of all of the provisions of this Lease to be performed or observed by
Tenant. If Tenant fails to pay any Rental, or otherwise defaults with respect to
any provision of this Lease, Landlord may (but shall not be obligated to) use,
apply or retain all or any portion of the Deposit for the payment of any Rental
in default or for the payment of any other sum to which Landlord may become
obligated by reason of Tenant's default, or to compensate Landlord for any loss
or damage which Landlord may suffer thereby. If Landlord so uses or applies all
or any portion of the Deposit, Tenant shall within ten (10) days after demand
therefor deposit cash with Landlord in an amount sufficient to restore the
Deposit to the full amount thereof, and Tenant's failure to do so shall, at
Landlord's option, be an Event of Default (as defined in Paragraph 18(a)) under
this Lease. Landlord shall not be required to keep the Deposit separate from its
general accounts. If Tenant performs all of Tenant's obligations hereunder, the
Deposit, or so much thereof as has not theretofore been applied by Landlord,
shall be returned, without payment of interest or other increment for its use,
to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's
interest hereunder) at the expiration of the term hereof and after Tenant has
vacated the Premises. Landlord's return of the Deposit or any part thereof shall
not be construed as an admission that Tenant has performed all of its
obligations under this Lease. No trust relationship is created herein between
Landlord and Tenant with respect to the Deposit.
4. TENANT'S SHARE OF OPERATING EXPENSES AND REAL PROPERTY TAXES.
(a) in addition to the Basic Monthly Rental payable during the
term of this Lease, Tenant shall pay to Landlord, as additional rent, Tenant's
Percentage Share of (i) the amount, if any, by which Operating Expenses paid or
incurred by Landlord in any calendar year subsequent to the Base Expense Year
exceed the amount of operating Expenses paid or incurred by Landlord during the
Base Expense Year, and (ii) the amount, if any, by which Real Property Taxes
paid or incurred by Landlord in any calendar year subsequent to the Base Tax
Year exceed the amount of Real Property Taxes paid or incurred by Landlord
during the Base Tax Year. Notwithstanding the foregoing, if the Building is less
than 100% occupied in any year during the term of this Lease, Operating Expenses
and Real Property Taxes for such year shall be adjusted, for purposes of the
foregoing calculation, to the amount which they would have been if the Building
had been 100% occupied. If it shall not be lawful for Tenant to reimburse
Landlord for any increase in Real Property Taxes as defined herein, the Basic
Monthly Rental payable to Landlord prior to the imposition of such increases in
Real Property Taxes shall be increased to net Landlord the same net Basic
Monthly Rental after imposition of such increases in Real Property Taxes as
9.
<PAGE> 10
would have been received by Landlord prior to the imposition of such increases
in Real Property Taxes.
(b) During December of each calendar year or as soon thereafter
as practicable, Landlord shall give Tenant notice of its estimate of the amounts
payable pursuant to Paragraph 4(a) above for the succeeding calendar year. On or
before the first day of each month during the succeeding calendar year, Tenant
shall pay to Landlord, as additional rent, one twelfth (1/12) of such estimated
amounts. If Landlord fails to deliver such notice to Tenant in December, Tenant
shall continue to pay Tenant's Percentage Share of increases in Operating
Expenses and Real Property Taxes on the basis of the prior year's estimate until
the first day of the next calendar month after such notice is given, provided
that on such date Tenant shall pay to Landlord the amount of such estimated
adjustment payable to Landlord for prior months during the year in question,
less any portion thereof previously paid by Tenant. If at any time it appears to
Landlord that the amounts payable under this paragraph 4(b) for the current
calendar year will vary from Landlord's estimate, Landlord may, by giving
written notice to Tenant, revise Landlord's estimate for such year, and
subsequent payments by Tenant for such year shall be based on such revised
estimate.
(c) (i) within ninety (90) days after the close of each calendar
year or AS soon after such ninety (90) day period as practicable, Landlord shall
deliver to Tenant a statement of the amounts payable under subparagraph (a)
above for such calendar year (the "annual statement") and such annual statement
shall be final and binding upon Landlord and Tenant, subject to the terms of
Paragraph 4(c)(ii) below. If on the basis of such statement Tenant owes an
amount that is more than the estimated payments for such calendar year
previously made by Tenant, Tenant shall pay the deficiency to Landlord within
fifteen (15) days after delivery of the statement. If on the basis of such
statement Tenant has paid to Landlord an amount in excess of the amounts payable
under subparagraph (a) above for the preceding calendar year and Tenant is not
in default in the performance of any of its covenants under this Lease, then
Landlord, at its option, shall either promptly refund such excess to Tenant or
credit the amount thereof to the Basic Monthly Rental next becoming due from
Tenant until such credit has been exhausted.
(ii) Tenant shall have the right, during the ninety (90) day period
following delivery of an annual statement, at Tenant's sole cost to review in
Landlord's offices Landlord's records of Operating Expenses and Real Property
Taxes for the subject calendar year. Such review shall be carried out only by
regular employees of Tenant or by a major national or regional firm of certified
public accountants, and not by any other third party. If, as of the ninetieth
day after delivery to Tenant of an annual statement, Tenant shall not have
delivered to Landlord an objection statement (as defined below), then such
annual
10.
<PAGE> 11
statement shall be final and binding upon Landlord and Tenant, and Tenant shall
have no further right to object to such annual statement. If within such ninety
(90) day period, Tenant delivers to Landlord a written statement specifying
objections to such annual statement (an "objection statement"), then Tenant and
Landlord shall meet to attempt to resolve such objection within thirty (30) days
after delivery of the objection statement. If such objection is not resolved
within such thirty (30) day period, then Tenant shall have the right, at
Tenant's cost, to require that the dispute be submitted to binding determination
by an independent certified public accountant ("CPA") approved by Landlord and
Tenant. Landlord shall reimburse Tenant for the reasonable charges of the CPA in
connection with such binding determination if, but only if, (A) the CPA shall
have determined that the aggregate amount of all Operating Expenses and Real
Property Taxes payable by Tenant for the subject year in accordance with the
annual statement exceeds one hundred five percent (105%) of the aggregate amount
of all Operating Expenses and Real Property Taxes payable by Tenant for the
subject year in accordance with the CPA's determination, and (B) the discrepancy
between such amount as set forth in the annual statement and such amount as set
forth in the CPA's determination is a result of the gross negligence or willful
misconduct of Landlord. Landlord and Tenant agree that such determination by a
CPA shall be the exclusive method of resolving disputes under this Paragraph
4(c). If Tenant does not elect, by notice to Landlord within one hundred fifty
(150) days after delivery of the annual statement, to require such binding
determination, then the annual statement shall be final and binding. So long as
any such dispute remains unresolved, Tenant shall not be obligated to pay
Landlord the disputed amount, but shall pay all other amounts payable in
accordance with this Paragraph 4(c).
(d) If this Lease terminates on a day other than the last day of
a calendar year, the amounts payable by Tenant under Paragraph 4(a) above with
respect to the calendar year in which such termination occurs shall be prorated
on the basis which the number of days from the commencement of such calendar
year, to and including such termination date, bears to 360. The termination of
this Lease shall not affect the obligations of Landlord and Tenant pursuant to
Paragraph 4(c) above to be performed after such termination.
(e) It is the intention of Landlord and Tenant that the Basic
Monthly Rental paid to Landlord throughout the term of this Lease shall be
absolutely net of all increases, respectively, in Real Property Taxes over Real
Property Taxes for the Base Tax Year and of Operating Expenses over Operating
Expenses for the Base Expense Year, and the foregoing provisions of this
Paragraph 4 are intended to so provide.
5. OTHER TAXES PAYABLE BY TENANT. Tenant shall reimburse Landlord upon
demand for any and all taxes, but not including
11.
<PAGE> 12
Real Property Taxes, payable by Landlord (other than net income taxes) whether
or not now customary or within the contemplation of the parties hereto:
(a) imposed upon, measured by or reasonably attributable to the
cost or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises or by the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, other than Building
Standard Improvements made by Landlord, regardless of title to such improvements
shall be in Tenant or Landlord;
(b) imposed upon or measured by the Basic Monthly Rental payable
hereunder, including, without limitation, any gross income tax or excise tax
levied by the City and County of San Francisco, the State of California, the
federal government or any other governmental body with respect to the receipt of
such rental;
(c) imposed upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises or any portion thereof; or
(d) imposed upon this transaction or any document to which Tenant
is a party creating or transferring an interest or an estate in the Premises.
In the event that it shall not be lawful for Tenant to so reimburse
Landlord, the Basic Monthly Rental payable to Landlord under this Lease shall be
revised to net Landlord the same income after imposition of any such tax upon
Landlord as would have been received by Landlord hereunder prior to the
imposition of any such tax.
6. USE. Tenant agrees to use the Premises for general office purposes
and agrees not to use nor permit the use of the Premises or any part thereof for
any other purpose. Tenant agrees not to do or permit to be done in or about the
Premises or the Building, nor to bring or keep or permit to be brought or kept
in or about the Premises or the Building, anything which is prohibited by or
will in any way conflict with any law, statute or governmental regulation now or
hereafter in effect, or which would subject Landlord or Landlord's agents to any
liability, or which is prohibited by the standard form of fire insurance policy,
or which will in any way increase the existing rate of (or otherwise affect)
fire or any other insurance on the Building or any of its contents. If any act
or omission of Tenant results in any such increase in premium rates, Tenant
shall pay to Landlord, as additional rent, upon demand the amount of such
increase. Tenant agrees not to do or permit to be done anything in, on or about
the Premises or the Building which will in any way obstruct or interfere with
the rights of other tenants or occupants of the Building, or injure or annoy
12.
<PAGE> 13
them, or use or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose. Tenant agrees not to cause, maintain or
permit any nuisance in, on or about the Premises or the Building, nor to use or
permit to be used any loudspeaker or other device, system or apparatus which can
be heard outside the Premises without the prior written consent of Landlord nor
to permit any objectionable odors, bright lights or electrical or radio
interference which may annoy or interfere with the rights of other tenants of
the Building or the public. Tenant agrees not to commit or suffer to be
committed any waste in or upon the Premises. The provisions of this Paragraph 6
are for the benefit of Landlord only and shall not be construed to be for the
benefit of any tenant or occupant of the Building.
7. COMPLIANCE WITH LAWS/ENVIRONMENTAL MATTERS.
(a) Tenant agrees at its sole cost and expense to promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter constituted; with any direction or occupancy
certificate issued pursuant to law by any public officer; and with the
provisions of all recorded documents affecting the Premises, insofar as any
thereof relates to or affects the condition, use or occupancy of the Premises,
excluding structural changes not related to or affected by Tenant's
improvements, acts or particular use of the Premises. The judgment of any court
of competent jurisdiction or the admission of Tenant in any action against
Tenant (whether Landlord be a party thereto or not) that Tenant has violated any
such law, statute, ordinance or governmental rule, regulation, requirement,
direction or provision, shall be conclusive of that fact as between Landlord and
Tenant. If Tenant's use or operation of the Premises or any of Tenant's
equipment therein requires a governmental permit, license or other authorization
or any notice to any governmental agency, Tenant shall promptly provide a copy
thereof to Landlord. Notwithstanding anything in this Lease to the contrary,
Landlord, and not Tenant, shall be responsible for any action, with respect to
the common areas of the Real Property, necessary to cause the Real Property to
comply with the Americans with Disabilities Act and other applicable laws
relating to access for the handicapped.
(b) Tenant shall not bring or keep, or permit to be brought or
kept, in the Premises or in or on the Real Property any hazardous substance (as
hereinafter defined) other than reasonable quantities of normal office and
janitorial supplies provided they are stored, used and disposed of in compliance
with all applicable environmental laws (as hereinafter defined) Tenant shall not
manufacture, generate, treat, handle, store or dispose of any hazardous
substance in the Premises or in or on the Real Property, or use the Premises for
any such purpose, or emit, release or discharge any hazardous substance into any
air, soil, surface water or groundwater comprising the Premises or the Real
Property, or permit any person using or occupying the Premises to do any of the
foregoing. Tenant shall comply, and
13.
<PAGE> 14
shall cause all persons using or occupying the Premises to comply, with all
environmental laws applicable to the Premises, the use or occupancy of the
Premises or any operation or activity therein. As used in this Lease, "hazardous
substance" shall mean any substance or material that is described as a toxic,
hazardous, corrosive, ignitable, flammable or reactive substance, waste or
material or a pollutant or contaminant, or words of similar import, in any of
the environmental laws, and includes asbestos, petroleum, petroleum products,
polychlorinated biphenyls, radon gas, radioactive matter, and chemicals which
may cause cancer or reproductive toxicity. As used in this Lease, "environmental
laws" shall mean all federal, state and local laws, ordinances, rules and
regulations now or hereafter in force, as amended from time to time, in any way
relating to or regulating human health or safety, or industrial hygiene or
environmental conditions, or protection of the environment, or pollution or
contamination of the air, soil, surface water or groundwater.
(c) Tenant shall immediately furnish Landlord with any (i)
notices received from any insurance company or governmental agency or inspection
bureau regarding any unsafe or unlawful conditions within the Premises, and (ii)
notices or other communications sent by or on behalf of Tenant to any person
relating to environmental laws or hazardous substances.
(d) Landlord is not aware of any violation of environmental laws
respecting the Real Property and acknowledges that Landlord shall be responsible
for correcting any such violation which exists as of the date hereof.
(e) The provisions of this Paragraph 7 are for the benefit of
Landlord only and shall not be construed to be for the benefit of any tenant or
occupant of the Building.
8. ALTERATIONS; LIENS.
(a) Tenant agrees not to make or suffer to be made any
alteration, addition or improvement to or of the Premises (hereinafter referred
to as "Alterations"), or any part thereof, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, Landlord's consent shall not be required for
alterations ("Minor Alterations") which (i) do not require a building permit
under applicable codes and (i) will not affect the structural components of the
Building, will not affect the appearance of the Building or any part thereof
outside of the Premises, and will not affect the Building systems, provided
however that all other provisions of this Paragraph 8 shall apply to all
Alterations, including Minor Alterations. Any such Alterations made by Tenant,
including without limitation any nonmovable partitions or carpeting, shall
become a part Of the Building and belong to Landlord; provided, however, that
equipment, trade fixtures and movable furniture shall remain the
14.
<PAGE> 15
property of Tenant. If Landlord consents to the making of any Alterations, the
same shall be designed by Tenant or its architect or engineer, and constructed
or installed by Landlord or a contractor selected by Landlord at Tenant's
expense (including expenses incurred in complying with applicable laws,
including laws relating to the handling and disposal of ACM). Landlord shall
assure that the cost of the Alterations does not exceed the range of
competitive costs then prevailing for such work. Tenant shall use engineers and
architects which are on Landlord's approved list of design professionals or are
otherwise approved by Landlord in its reasonable discretion. All Alterations
shall be made in accordance with plans and specifications approved in writing
by Landlord and shall be designed and constructed in compliance with all
applicable codes, laws, ordinances, rules and regulations. The design and
construction of any Alterations shall be performed in accordance with
Landlord's applicable rules, regulations and requirements. Under no
circumstances shall Landlord be liable to Tenant for any damage, loss, cost or
expense incurred by Tenant on account of Tenant's plans and specifications, the
design of any work, construction of any work, or delay in completion of any
work. Except with respect to Minor Alterations, Tenant shall pay to Landlord a
fee in the amount of seven percent (7%) of the cost of the Alterations for its
review of plans and its management and supervision of the progress of the work.
All sums due to the contractors and subcontractors performing the construction
work, if paid by Landlord due to Tenant's failure to pay such sums when due,
shall bear interest payable to Landlord at the Interest Rate until fully paid.
Upon the expiration or sooner termination of this Lease, Tenant, at its
expense, shall promptly remove any such Alterations made by Tenant and
designated by Landlord so to be removed and repair any damage to the Premises
caused by such removal; provided, however, that Tenant shall not be required to
remove any Alteration as to which Landlord has waived such removal requirement
at the time Landlord consented to such Alteration. Tenant shall use the general
contractor designated by Landlord for such removal and repair.
(b) Tenant agrees to keep the Premises and the Real Property free from
any liens arising out of any work performed, materials furnished or obligations
incurred by Tenant. Tenant shall promptly and fully pay and discharge all
claims on which any such lien could be based. In the event that Tenant does
not, within ten (10) days following the recording of notice of any such lien,
cause the same to be released of record, Landlord shall have, in addition to
all other remedies provided herein and by law, the right, but not the
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant, as additional rent, on
demand, together with interest at the Interest Rate from the date such expenses
are incurred by
15.
<PAGE> 16
Landlord to the date of the payment thereof by Tenant to Landlord. Landlord
shall have the right at all times to post and keep posted on the Premises any
notices permitted or required by law, or which Landlord shall deem proper for
the protection of Landlord, the Premises, the Building, or the Real Property,
from mechanic's and materialmen's and like liens. Tenant shall give Landlord at
least ten (10) days' prior written notice of the date of commencement of any
construction on the Premises in order to permit the posting of such notices.
9. MAINTENANCE AND REPAIR.
(a) By taking possession of the Premises, Tenant accepts the Premises
as being in the condition in which Landlord is obligated to deliver the
Premises. Tenant, at its expense, shall at all times keep the Premises and every
part thereof and all equipment, fixtures and improvements therein in good and
sanitary order, condition and repair (except insofar as such repair is
Landlord's responsibility under Paragraph 9(b), damage thereto by fire, the
perils of the extended coverage endorsement, and earthquake excepted, and Tenant
waives all rights under, and benefits of, subsection 1 of Section 1932 and
Sections 1941 and 1942 of the California Civil Code and under any similar law or
ordinance now or hereafter in effect. Upon the expiration or sooner termination
of this Lease, Tenant shall surrender the Premises and (unless designated by
Landlord to be removed in accordance with Paragraph 8 above) all Alterations
thereto to Landlord in the same condition as when received, ordinary wear and
tear (except such as Tenant is obligated to repair to keep the Premises in good
condition and repair) and damage thereto by fire, the perils of the extended
coverage endorsement, and earthquake excepted. It is agreed that Landlord has no
obligation, and has made no promises, to alter, add to, remodel, improve,
repair, decorate or paint the Premises or any part thereof and that no
representations respecting the condition of the Premises, the Building or the
Real Property have been made by Landlord to Tenant except as may be specifically
set forth herein. No representation or warranty, express or implied, is made
with respect to (i) the condition of the Premises or the Building, (ii) the
fitness of the Premises for Tenant's intended use, (iii) the degree of sound
transfer within the Building, (iv) the absence of electrical or radio
interference in the Premises or the Building, (v) the condition, capacity or
performance of electrical or communications systems or facilities, or (vi) the
absence of objectionable odors, bright lights or other conditions which may
affect Tenant's use and enjoyment of the Premises or the Building.
(b) Landlord agrees, at its expense (subject to Paragraph 4), to make
all necessary repairs to the structure, the exterior (including walls, roof
structure and roof covering), and the public and common areas of the Building
and the building systems therein, and to maintain the same in reasonably good
order and condition. Notwithstanding the
16.
<PAGE> 17
preceding sentence, any damage arising from the acts of Tenant, its agents,
employees, contractors, or invitees shall be repaired by Landlord at Tenant's
sole expense. Tenant shall pay Landlord on demand the cost of any such repair.
10. SERVICES.
(a) Provided that no Event of Default (as defined in Paragraph 18(a)
below) has occurred and is continuing and the Lease has not terminated,
Landlord, subject to the terms of this Paragraph 10 and the Building Rules and
Regulations attached hereto as Exhibit B and subject to applicable laws,
regulations and rules of public utilities, shall furnish, to the Premises
water, electrical power and elevator service; heating and air conditioning
suitable for the comfortable use and occupation of the Premises (assuming
normal office use thereof) during the period ("Business Hours") from 8:00 a.m.
to 6:00 p.m. on weekdays (excluding holidays), or during such other period as
may be prescribed by any applicable policies or regulations of any utility or
governmental agency; and basic janitorial service on weekdays (excluding union
holidays). Notwithstanding the foregoing, Tenant shall have access to the
Premises and use of the elevator twenty-four (24) hours per day every day of
the year. Tenant agrees that at all times it will cooperate fully with
Landlord and abide by all regulations and requirements that Landlord may
prescribe for the proper functioning and protection of the Building heating,
ventilating and air conditioning systems. Landlord shall not be liable for and
Tenant shall not be entitled to any abatement or reduction of Rental by reason
of Landlord's failure to furnish any of the foregoing or any other utilities or
services when such failure is caused by accident, breakage, repairs, strikes,
lockouts or other labor disturbances or disputes of any character, by the
limitation, curtailment, rationing or restrictions on use of electricity, gas
or any form of energy, or by any other cause, similar or dissimilar, beyond the
reasonable control of Landlord. No such failure and no interruption of
utilities or services from any cause whatsoever shall constitute an eviction of
Tenant, constructive or otherwise, or impose upon Landlord any liability
whatsoever, including, but not limited to, liability for consequential damage
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
law, ordinance or governmental regulation permitting the termination of this
Lease due to such failure or interruption. Landlord shall not be liable under
any circumstances for injury to or death of any person or damage to or
destruction of property, however, occurring, through or in connection with or
incidential to the furnishing of or the failure to furnish any of the foregoing
utilities or services or any other utilities or services.
(b) Landlord makes no representation to Tenant regarding the
adequacy or fitness of the heating, air conditioning or ventilation equipment
in the Building to
17.
<PAGE> 18
maintain temperatures that may be required for, or because of, any of Tenant's
equipment which uses other than 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. If the temperature
otherwise maintained in any portion of the Premises by the heating, air
conditioning or ventilation system is affected as a result of (i) any lights,
machines or equipment (including without limitation electronic data processing
machines) used by Tenant in the Premises, (ii) the occupancy of the Premises by
more than one person per two hundred (200) square feet of rentable area
therein, (iii) an electrical load for lighting or power in excess of the limits
per square foot of rentable area of the Premises specified in Paragraph 10(c)
below, or (iv) any rearrangement of partitioning or other improvements,
Landlord shall have the right to install supplementary air conditioning units
or other equipment Landlord reasonably deems appropriate in the Premises, and
the cost thereof, including the cost of installation, operation and maintenance
thereof, shall be paid by Tenant to Landlord, as additional rent, upon demand
by Landlord.
(c) Tenant agrees it will not, without the written consent of
Landlord, use any equipment, apparatus or device in the Premises (including,
without limitation, electronic data processing machines, computers or machines
using current in excess of 110 volts) which will, individually or in the
aggregate, in any way cause the amount of electricity, water or heating,
ventilation or air conditioning supplied to the Premises to exceed the amount
usually furnished or supplied to premises being used as general office space,
or connect with electric current (except through existing electrical outlets in
the Premises) or with water pipes any equipment, apparatus or device for the
purposes of using electric current or water. Landlord and Tenant agree that,
for purposes of this Paragraph 10, the amount of electricity normally furnished
to premises being used as general office space is .70 kilowatt hours per
rentable square foot per month (excluding electric power used in supplying
heating, ventilating and air conditioning). If Tenant shall require water or
electric current in excess of that usually furnished or supplied to premises
being used as general office space, Tenant shall first obtain the written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed, and Landlord may cause an electric current or water meter to be
installed in the Premises in order to measure the amount of electric current or
water consumed for any such excess use. The cost of any such meter and of the
installation, maintenance and repair thereof; all charges for such excess water
and electric current consumed (as shown by such meters and at the rates then
charged by the furnishing public utility); and any additional expense reasonably
incurred by Landlord in keeping account of electric current or water so
consumed shall be paid by Tenant, and Tenant
18.
<PAGE> 19
agrees to pay Landlord therefor, as additional rent, promptly upon demand by
Landlord.
(d) Tenant shall give reasonable notice in making any request for
utilities required outside of Business Hours. Tenant agrees to pay, as
additional rent, promptly on demand any and all costs reasonably incurred by
Landlord in connection with providing any additional utilities and services
Landlord may provide.
(e) In the event any governmental authority having jurisdiction over
the Real Property or the Building promulgates or revises any law, ordinance or
regulation 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.
11. ACCESS CONTROL.
(a) Landlord shall have the right from time to time to adopt such
policies, procedures and programs as it shall, in Landlord's reasonable
discretion, deem necessary or appropriate for the security of the Building, and
Tenant shall cooperate with Landlord in the enforcement of, and shall comply
with, the policies, procedures and programs adopted by Landlord insofar as the
same pertain to Tenant, its agents, employees, contractors and invitees.
(b) In no event shall Landlord be liable for damages resulting from
any error with regard to the admission to or the exclusion from the Building of
any person. In the case of invasion, mob, riot, public demonstration or other
circumstances rendering such action advisable in Landlord's opinion, Landlord
reserves the right to prevent access to the Building during the continuance of
the same by such action as Landlord may deem appropriate, including closing
doors.
(c) In the event of any picketing, public demonstration or other
threat to the security of the Building that is attributable in whole or in
part to Tenant, Tenant shall reimburse Landlord for any costs reasonably
incurred by Landlord in connection with such picketing, demonstration or other
threat in order to protect the security of the Building, and Tenant
19.
<PAGE> 20
shall indemnify and hold Landlord harmless from and protect and defend Landlord
against any and all claims, demands, suits, liability, damage or loss and
against all reasonable costs and expenses, including reasonable attorneys' fees
incurred in connection therewith, arising out of or relating to any such
picketing, demonstration or other threat. Tenant agrees not to employ any
person, entity or contractor for any work in the Premises (including moving
Tenant's equipment and furnishings in, our or around the Premises) whose
presence may give rise to a labor or other 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.
12. ASSIGNMENT AND SUBLETTING.
(a) Restriction on Transfers. Tenant shall not, either voluntarily
or by operation of law, (i) assign or transfer this Lease or any interest
herein, (ii) sublet the Premises, or any part thereof, or (iii) enter into a
license agreement or other arrangement whereby the Premises, or any portion
thereof, are held or utilized by another party (each of the foregoing defined
herein as a "Transfer"), without the express prior written consent of Landlord,
which consent Landlord shall not unreasonably withhold, condition or delay.
Any such act (whether voluntary or involuntary, by operation of law or
otherwise) without the consent of Landlord pursuant to the provisions of this
Paragraph 12 shall, at Landlord's option, be void and/or constitute an Event of
Default under this Lease. Consent to any Transfer shall neither relieve Tenant
of the necessity of obtaining Landlord's consent to any future Transfer nor
relieve Tenant from any liability under this Lease.
By way of example and without limitation, the failure to satisfy any of
the following conditions or standards shall be deemed to constitute sufficient
grounds for Landlord to refuse to grant its consent to the proposed Transfer.
(1) The proposed Transferee must expressly assume all of the
provisions, covenants and conditions of this Lease on the part of Tenant to
be kept and performed.
(2) The proposed Transferee must satisfy Landlord's then current
credit and other standards for tenants of the Building and, in Landlord's
reasonable opinion, have the financial strength and stability to perform
all of the obligations of the Tenant under this Lease (as they apply to the
transferred space) as and when they fall due.
(3) The proposed Transferee must be reasonably satisfactory to
Landlord as to character and professional standing and must not, in
Landlord's opinion, adversely affect the tenant mix in the Building.
20.
<PAGE> 21
(4) The proposed use of the Premises by the proposed Transferee must be,
in Landlord's opinion: (a) lawful; (b) appropriate to the location and
configuration of the Premises; (c) not in conflict with any exclusive
rights in favor of any other tenant or proposed tenant of the Building;
(d) unlikely to cause an increase in insurance premiums for insurance
policies applicable to the Building; (e) absent any new tenant
improvements that Landlord would be entitled to disapprove pursuant to
Paragraph V8 hereof; (f) unlikely to cause an increase in services to be
provided to the Premises; (g) unlikely to create any increased burden in
the operation of the Building, or in the operation of any of its
facilities or equipment; and (h) unlikely to impair the dignity,
reputation or character of the Building.
(5) The proposed use of the Premises must not result in the division of
the Premises into more than three (3) parcels or tenant spaces.
(6) Tenant must pay to Landlord any security deposit which is consistent
with prevailing market conditions for leases to comparable tenants in
first-class office buildings in the San Francisco area.
(7) At the time of the proposed Transfer, an Event of Default (as defined
in paragraph 18(a) below) shall not have occurred and be continuing, and
not event may have occurred that with notice, the passage of time, or
both, would become an Event of Default.
(8) The proposed Transferee shall not be a governmental entity or hold
any exemption from the payment of ad valorem or other taxes which would
prohibit Landlord from collecting from such Transferee any amounts
otherwise payable under this Lease.
(9) The proposed Transferee shall not be a then present tenant or
affiliate or subsidiary of a then present tenant in the Building unless
there is no other space available in the Building.
(10) Landlord shall not be negotiating with, and shall not have at any
time within the past sixty (60) days negotiated with, the proposed
Transferee for space in the Building.
(11) Any other conditions reasonably required by Landlord under the
circumstances at such time in accordance with good business practices must
be complied with.
(b) Landlord's Right of First Offer; Termination Right. Except in the
event of a proposed Transfer pursuant to Paragraph 12(e) or 12(f) below,
Landlord shall have no
21
<PAGE> 22
obligation to consent or consider granting its consent to any proposed Transfer
unless Tenant has first delivered to Landlord a written offer to enter into such
Transfer with Landlord, which offer shall include the base rent and other
economic terms of the proposed Transfer, the date upon which Tenant desires to
effect such Transfer and all of the other material terms of the proposed
Transfer ("Tenant's Offer"). Landlord shall have fifteen (15) days from receipt
of Tenant's Offer within which to notify Tenant in writing of its decision to
accept or reject such Transfer on the terms set forth in Tenant's Offer. If
Landlord does not accept Tenant's Offer within such fifteen (15) day period,
Tenant shall deliver to Landlord a second notice of such offer. If Landlord does
not accept Tenant's Offer within five (5) days after receipt of such second
notice, Tenant may enter into such Transfer with any bona fide independent
third-party Transferee (as defined in Paragraph 12(c) below) within one hundred
twenty (120) days of the end of such fifteen (15) day period, so long as such
Transfer is for base rent not less than ninety-five percent (95%) of that
offered to Landlord in Tenant's Offer and such Transfer otherwise contains terms
not more than five percent (5%) more favorable economically to the Transferee
than the terms stated in Tenant's Offer, taking into account all rent
concessions, tenant improvements, and any other terms which have an economic
impact on the Transfer; provided, however, that the prior written approval of
Landlord for such Transfer must be obtained, and the other provisions of this
Paragraph 12 must be complied with, all in accordance with this Paragraph 12. If
Landlord accepts Tenant's Offer, Landlord and Tenant shall enter into an
agreement for such Transfer within thirty (30) days of the date Landlord makes
its election. If Landlord accepts Tenant's Offer, then (i) Landlord may enter
into a new lease, sublease or other agreement covering the Premises or any
portion thereof with the intended Transferee on such terms as Landlord and such
Transferee may agree, or enter into a new lease or agreement covering the
Premises or any portion thereof with any other person or entity, and in any such
event, Tenant shall not be entitled to any portion of the profit, if any, which
Landlord may realize on account of such new lease or agreement, (ii) 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, neither
Tenant nor Landlord shall have any obligation to restore the subject space to
its original condition following the termination of a sublease, and (iii)
Landlord shall not have any 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 Transfer, and Tenant agrees to
indemnify, defend and hold harmless Landlord from and against any and all claims
(including, without limitation, claims for commissions) arising from such
proposed Transfer.
Except in the event of a proposed Transfer pursuant to paragraph 12(e) or
12(f) below, in the case of a proposed assignment of this Lease or a sublease of
substantially the
22.
<PAGE> 23
entire Premises for substantially the balance of the term of this Lease, then
in addition to the foregoing rights of Landlord. Landlord shall have the right,
by notice to Tenant within fifteen (15) days after receipt of Tenant's Offer,
to terminate this Lease, which termination shall be effective as of the date on
which the intended assignment or sublease would have been effective if Landlord
had not exercised such termination right. If Landlord elects to terminate this
Lease, then from and after the date of such termination, Landlord and Tenant
each shall have no further obligation to the other under this Lease with
respect to the Premises except for matters occurring or obligations arising
hereunder prior to the date of such termination.
Landlord's foregoing rights and options shall continue throughout the
entire term of this Lease.
(c) Landlord's Approval Process. Tenant shall, in each instance of
a proposed Transfer, give written notice to Landlord at least thirty (30) days
prior to the effective date of any proposed Transfer, specifying in such notice
(i) the nature of the proposed Transfer, (ii) the portion of the Premises to be
transferred, (iii) the intended use of the transferred Premises, (iv) all
economic terms of the proposed Transfer, (v) the effective date thereof, (vi)
the identity of the transferee under the proposed Transfer (the "Transferee"),
(vii) current financial statements of the Transferee, and (viii) detailed
documentation relating to the business experience of the Transferee
(collectively, "Tenant's Notice"). Tenant shall also promptly furnish Landlord
with any other information reasonably requested by Landlord relating to the
proposed Transfer or the proposed Transferee. Within twenty (20) days after
receipt by Landlord of Tenant's Notice and any additional information and data
requested by Landlord, Landlord shall notify Tenant of its determination to
either (i) consent to the proposed Transfer, or (ii) refuse to consent to such
proposed Transfer.
(d) Consideration for Transfer. One hundred percent (100%) of all
(i) consideration paid or payable by Transferee to Tenant as consideration for
any such Transfer, and (ii) rents received in connection with the Transfer by
Tenant from Transferee in excess of the Rental payable by Tenant to Landlord
under this Lease (net of actual out-of-pocket expenses incurred by Tenant for
reasonable legal fees, brokers commissions not in excess of prevailing rates,
and costs (amortized over the remaining term of the Lease) of tenant
improvements in connection with such Transfer) shall be paid by Tenant to
Landlord immediately upon receipt thereof by Tenant. 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
23.
<PAGE> 24
due under any other sublease. Upon Landlord's request, Tenant shall assign to
Landlord all amounts to be paid to Tenant by any Transferee and shall direct
such Transferee to pay the same directly to Landlord.
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 the amount collected from the assignee or subtenant to Tenant's monetary
obligations hereunder. Neither Landlord's collection of rent from a Transferee
nor any course of dealing between Landlord and any Transferee shall constitute
or be deemed to constitute Landlord's consent to any Transfer.
(e) Merger or Consolidation of Tenant; Major Changes. Any Transfer
to any corporation or entity Controlled (as hereinafter defined) by Tenant and
any merger, reorganization, refinancing, sale of all or substantially all of
the assets of Tenant or other transaction which does not constitute a Major
Change (as hereinafter defined) shall not require Landlord's consent but shall
be subject to all of the other terms and conditions of this Paragraph 12. Any
Major Change (as hereinafter defined) must be approved by Landlord in
accordance with Paragraph 12(c) above and, without such approval, shall at
Landlord's election to void and/or constitute an Event of Default. The term
"Controlled" as used herein shall mean the ownership of (i) fifty percent (50%)
or more of the voting stock of any corporation, or (ii) fifty percent (50%) or
more of the ownership interests in any other entity and, if any such entity is
a partnership, a general partner's interest in such partnership. The term
"Major Change" as used herein shall mean any merger, reorganization,
recapitalization, refinancing or other transaction or series of transactions
involving Tenant which results in the net worth of Tenant and its consolidated
subsidiaries immediately after such transaction(s) being less than fifty percent
(50%) of the net worth of Tenant and its consolidated subsidiaries as of the
end of the fiscal year immediately preceding the date of such Major Change.
(f) Transfer of Partnership Interest or Corporate Stock. Except in
the case of a Tenant described in Paragraph 12(e), a sale, transfer or
assignment of a general partner's interest or any portion thereof in Tenant, if
Tenant is a partnership, or a sale, transfer or assignment of twenty-five
percent (25%) or more of the voting stock of Tenant (other than transfers
through a major stock exchange) if Tenant is a corporation, whether such sale,
transfer or assignment occurs in a single transaction or a series of
transactions, shall be deemed a Transfer and require Landlord's consent in
accordance with the procedures specified in Paragraph 12(c) above.
24.
<PAGE> 25
(g) Documentation. Tenant agrees that any instrument by which Tenant
assigns this Lease or any interest therein or sublets or otherwise Transfers
all or any portion of the Premises shall expressly provide that the Transferee
may not further assign this Lease or any interest therein or sublet the sublet
space without Landlord's prior written consent (which consent shall be subject
to the provisions of this Paragraph 12), and that the Transferee will comply
with all of the provisions of this Lease and that Landlord may enforce the
Lease provisions directly against such Transferee. No permitted subletting by
Tenant shall be effective until there has been delivered to Landlord a
counterpart of the sublease in which the subtenant agrees to be and remain
jointly and severally liable with Tenant for the payment of rent pertaining to
the sublet space and for the performance of all of the terms and provisions of
this Lease; provided, however, that the subtenant shall be liable to Landlord
for rent only in the amount set forth in the sublease. No permitted assignment
shall be effective unless and until there has been delivered to Landlord a
counterpart of the assignment in which the assignee assumes all of Tenant's
obligations under this Lease arising on or after the date of the assignment.
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.
(h) Options Personal to Original Tenant. If Landlord consents to a
Transfer 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 Transferee, it being agreed by the parties
hereto that any such rights and options are personal to the original Tenant
named herein and may not be transferred.
(i) Encumbrance of Lease. Notwithstanding any provision of this Lease to
the contrary, Tenant shall not mortgage, encumber or hypothecate this Lease or
any interest herein without the prior written consent of Landlord, which
consent may be withheld in Landlord's sole and absolute discretion. Any such
act without the prior written consent of Landlord (whether voluntary or
involuntary, by operation of law or otherwise shall, at Landlord's option, be
void and/or constitute an Event of Default under this Lease.
(j) No Merger. The voluntary or other surrender of this Lease or of the
Premises by Tenant or a mutual cancellation of this Lease shall not work a
merger, and at the option of Landlord any existing subleases may be terminated
or be deemed assigned to Landlord in which latter event the subleases or
subtenants shall become tenants of Landlord.
(k) Landlord's Costs. Tenant shall pay to Landlord the amount of
Landlord's reasonable cost of processing each
25.
<PAGE> 26
proposed Transfer (including, without limitation, attorneys' and other
professional fees, and the cost of Landlord's administrative, accounting and
clerical time; collectively "Processing Costs"), and the amount of all
reasonable direct and indirect expenses incurred by Landlord arising from the
assignee or sublessee taking occupancy of 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 a
Transfer until Tenant has paid to Landlord the amount of Landlord's estimate of
the Processing Costs and all other reasonable direct and indirect costs and
expenses of Landlord and its agents arising from the assignee or subtenant
taking occupancy.
13. WAIVER; INDEMNIFICATION. Neither Landlord nor Landlord's agents, nor
any shareholder, constituent partner or other owner of Landlord or any agent of
Landlord, nor any contractor, officer, director or employee of any thereof shall
be liable to Tenant and Tenant waives all claims against Landlord and such other
persons for any injury to or death of any person or for loss of use of or damage
to or destruction of property in or about the Premises or the Building by or
from any cause whatsoever, including without limitation, earthquake or earth
movement, gas, fire, oil, electricity or leakage from the roof, walls, basement
or other portion of the Premises or the Building, unless caused by the gross
negligence or willful misconduct of Landlord, its agents or employees. Tenant
agrees to indemnify and hold Landlord, Landlord's agents, the shareholders,
constituent partners and/or other owners of Landlord or any agent of Landlord,
and all contractors, officers, directors and employees of any thereof
(collectively, "Indemnitees"), and each of them, harmless from and to protect
and defend each Indemnitee against any and all claims, demands, suits,
liability, damage or loss and against all costs and expenses, including
reasonable attorneys' fees incurred in connection therewith, (a) arising out of
any injury or death of any person or damage to or destruction of property
occurring in, on or about the Premises, from any cause whatsoever, unless caused
by the gross negligence or willful misconduct of such Indemnitee, or (b)
occurring in, on or about any facilities (including without limitation
elevators, stairways, passageways or hallways) the use of which Tenant has in
common with other tenants, or elsewhere in or about the Building or in the
vicinity of the Building, when such claim, injury or damage is caused in whole
or in part by the act, neglect, default, or omission of any duty by Tenant, its
former or current agents, contractors, employees, invitees, or subtenants or
other persons in or about the Building by reason of Tenant's occupancy of the
Premises, or otherwise by any conduct of any of said persons in or about the
Premises or the Real Property, or (c) arising from any failure of Tenant to
observe or perform any of its
26.
<PAGE> 27
obligations hereunder. If any action or proceeding is brought against any of the
Indemnitees by reason of any such claim or liability, 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 shall survive the termination of this Lease with respect to any
claims or liability occurring prior to such termination.
14. INSURANCE.
(a) At Tenant's expense, Tenant shall procure, carry and maintain in
effect throughout the term of this Lease, in a form reasonably acceptable to
Landlord and with such insurance companies as are reasonably acceptable to
Landlord (which companies shall have a Best's rating of A-X or better), the
following insurance coverage:
(i) Commercial general liability insurance on an occurrence
basis, with limits in an amount not less than $5,000,000 combined single limit
per occurrence, for claims or losses arising out of or resulting from personal
injury (including bodily injury), death and/or property damage sustained or
alleged to have been sustained by any person for any reason on the Premises, for
liability arising out of or resulting from Tenant's covenant in Paragraph 13 to
indemnify Landlord and all other Indemnities, its agents and employees, and for
contractual liability;
(ii) All Risk Replacement Cost insurance with an agreed amount
endorsement upon property of every description and kind owned by Tenant and
located in the Premises and for Tenant's Extra Improvements and Alterations in
an amount equal to 100% of the full replacement value thereof; and
(iii) Workers' compensation insurance, in accordance with
applicable law.
(b) Not more often than every year and upon not less than sixty (60)
days' prior written notice, Landlord may require Tenant to increase the
insurance limits set forth in Paragraphs 14(a)(i) and 14(a)(ii) above to amounts
which Landlord reasonably determines to be appropriate.
(c) All policies of liability insurance so obtained and maintained
shall be carried in the name of Tenant, name Landlord and Landlord's designated
agents as additional insureds, and shall provide that the insurance policy so
endorsed will be the primary insurance providing coverage for Landlord, and
contain a cross-liability endorsement stating that the rights of insureds shall
not be prejudiced by one insured making a claim or commencing an action against
another insured. Any other liability insurance maintained by Landlord shall be
excess and non-contributing. At Landlord's election, such
27.
<PAGE> 28
policies shall name the holder of any Superior Interest or any other interested
party as an insured party under a standard mortgagee endorsement.
(d) All insurance policies required under this Lease shall provide
that the insurer shall not cancel, reduce, modify or fail to renew such coverage
without thirty (30) days' prior written notice to Landlord. Tenant shall deliver
certificates of all insurance required hereunder upon the commencement of the
term of this Lease. In the event Tenant does not comply with the requirements of
this Paragraph 14, Landlord may, at its option and at Tenant's expense, purchase
such insurance coverage to protect Landlord. The cost of such insurance shall be
paid to Landlord by Tenant, as additional rent, immediately upon demand
therefor, together with interest at the Interest Rate until paid.
(e) The parties release each other, and their respective authorized
representatives, from any claims for loss or damage that are caused by or
result from perils insured under any insurance policies carried by the parties
in force at the time of any such damage. Each party shall cause each insurance
policy obtained by it to provide that the insurer waives all right of recovery
by way of subrogation against either party in connection with any loss or
damage covered by the policy. Neither party shall be liable to the other for
any loss or damage caused by the insured risks under any insurance policy
required by this Lease.
(f) Landlord shall maintain in force throughout the term of this
Lease commercial general liability insurance and an all-risk policy of casualty
insurance and such other insurance coverage as Landlord reasonable elects to
maintain, all in such amounts, on such terms and with such companies as
Landlord may, from time to time, reasonably determine is appropriate.
15. PROTECTION OF LENDERS.
(a) This Lease shall be subject and subordinate at all times to all
ground or underlying leases which may now or hereafter exist affecting the
Building or the Real Property, or both, and to the lien of any mortgage or deed
of trust in any amount or amounts whatsoever now or hereafter placed on or
against the Building or the Real Property, or both, or on or against Landlord's
interest or estate therein (such mortgages, deeds of trust and leases are
referred to herein, collectively, as "Superior Interests"), all without the
necessity of any further instrument executed or delivered by or on the part of
Tenant for the purpose of effectuating such subordination. Notwithstanding the
foregoing, Tenant covenants and agrees to execute and deliver, upon demand,
such further instruments evidencing such subordination of this Lease to any
such Superior Interest as may reasonably be required by Landlord, provided
28.
<PAGE> 29
that such instruments shall contain the protection referred to in Paragraph
15(b).
(b) Notwithstanding the foregoing, in the event of a foreclosure of
any such mortgage or deed of trust or of any other action or proceeding for the
enforcement thereof, or of any sale thereunder, this Lease shall not be
terminated or extinguished, nor shall the rights and possession of Tenant
hereunder be disturbed, if no Event of Default then exists under this Lease,
and Tenant shall attorn to the person who acquires Landlord's interest
hereunder through any such mortgage or deed of trust. Landlord shall use
diligent efforts to obtain from any holder of a Superior Interest in existence
as of the Commencement Date a written confirmation (in a separate writing or
in a subordination agreement) of its concurrence with the provisions of this
Paragraph 15(b).
(c) Within ten (10) days after Landlord's written request, Tenant
shall deliver to Landlord, or to any actual or prospective holder of a Superior
Interest ("Holder") that Landlord designates, such financial statements as are
reasonably required by such Holder to verify the financial condition of Tenant
(or any assignee, subtenant or guarantor of Tenant). Tenant represents and
warrants to Landlord and such Holder that each financial statement delivered by
Tenant shall be accurate in all material respect as of the date of such
statement. All financial statements shall be confidential and used only for the
purposes stated herein, and prior to delivering any non-public financial
information Tenant shall have the right to receive a written confidentiality
agreement imposing reasonable restrictions on the use and disclosure of any
such financial information.
(d) If Landlord is in default, Tenant will accept cure of any
default by any Holder whose name and address shall have been furnished to
Tenant in writing. Tenant may not exercise any rights or remedies for
Landlord's default unless Tenant gives notice thereof to each such Holder and
the default is not cured within thirty (30) days thereafter or such greater
time as may be reasonably necessary to cure such default. A default which
cannot reasonably be cured within said 30-day period shall be deemed cured
within said period if work necessary to cure the default is commenced within
such time and proceeds diligently thereafter until the default is cured.
(e) If any prospective Holder should require, as a condition of any
Superior Interest, a modification of the provisions of this Lease, Tenant shall
approve and execute any such modifications promptly after request, provided no
such modification shall relate to the Rental payable hereunder or the length of
the term hereof or otherwise materially alter the rights or obligations of
Landlord or Tenant hereunder.
29.
<PAGE> 30
16. ENTRY BY LANDLORD.
(a) Landlord reserves, and shall at all reasonable times have, the
right to enter the Premises to inspect them; to supply janitorial service and
any other service to be provided by Landlord hereunder; upon reasonable notice
to submit the Premises to prospective purchasers, mortgagees or tenants; to post
notices of nonresponsibility; and upon reasonable notice to alter, improve or
repair the Premises and any portion of the Building as permitted or provided
hereunder, all without abatement of Rental; and upon reasonable notice may erect
scaffolding and other necessary structures in or through the Premises where
reasonably required by the character of the work to be performed; provided,
however, that any such entrance or work shall not reasonably interfere with
Tenant's use of the Premises. If such entry is made as aforesaid, Tenant hereby
waives any claim for damages for any injury or inconvenience to or interference
with Tenant's business, any loss of occupancy or quiet enjoyment of the
Premises, and any other loss occasioned by such entry unless caused by the gross
negligence or willful misconduct of Landlord. For each of the foregoing
purposes, Landlord shall at all times have and retain a key and/or other access
device with which to unlock all of the doors in, on and about the Premises
(excluding Tenant's vaults, safes and similar areas designated in writing by
Tenant in advance and approved by Landlord); and Landlord shall have the right
to use any and all means which Landlord may deem proper to open said doors in an
emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord by any of said means, or otherwise, shall not
under any circumstances be construed or deemed to be a forcible or unlawful
entry into or a detainer of the Premises, or any portion thereof.
(b) Landlord shall also have the right at any time to change the
arrangement or location or times of access of entrances or passageways, doors
and doorways, and corridors, elevators, stairs, toilets or other public parts
of the Building (provided no such change shall unreasonably interfere in any
material respect with Tenant's use of the Premises), and to change the name,
number or designation by which the Building is commonly known, and none of the
foregoing shall be deemed an actual or constructive eviction of Tenant, nor
shall it entitle Tenant to any reduction of Rental hereunder or result in any
liability of Landlord to Tenant.
17. ABANDONMENT. Tenant shall not abandon the Premises or any part
thereof at any time during the term hereof. Tenant understands that if Tenant
leaves the Premises or any part thereof vacant, the risk of fire, other
casualty and vandalism to the Premises and the Building will be increased.
Accordingly, Tenant's abandonment of the Premises or any part thereof shall
constitute an Event of Default hereunder regardless of whether Tenant continues
to pay Basic Monthly Rental and other Rental under this Lease. If Tenant
abandons or
30.
<PAGE> 31
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 8(a). 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 17 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 17 shall not be construed as a waiver of
Landlord's right to require Tenant to remove its property, restore any damage
to the Building caused by such removal, an make any restoration required
pursuant to Paragraph 8(a) hereof.
18. DEFAULT AND REMEDIES.
(a) The occurrence of any one or more of the following events (each
an "Event of Default") shall constitute a breach of this Lease by Tenant:
(i) Tenant fails to pay any Basic Monthly Rental or additional
monthly rent under Paragraph 4(b) hereof as and when such rent becomes due and
payable and such failure continues for more than five (5) days after Landlord
gives written notice thereof to Tenant; provided, however, that after the
second such failure in a calendar year, only the passage of time, but no
further notice, shall be required to establish an Event of Default in the same
calendar year; or
(ii) Tenant fails to pay any additional rent or other amount of
money or charge payable by Tenant hereunder as and when such additional rent or
amount or charge becomes due and payable and such failure continues for more
than twenty (20) days after Landlord gives written notice thereof to Tenant;
provided, however, that after the second such failure in a calendar year, only
the passage of time, but no further notice, shall be required to establish an
Event of Default in the same calendar year; or
(iii) Tenant fails to perform or breaches any other agreement or
covenant of this Lease to be performed or
31.
<PAGE> 32
observed by Tenant as and when performance or observance is due and such failure
or breach continues for more than twenty (20) days after Landlord gives written
notice thereof to Tenant; provided, however, that if, by the nature of such
agreement or covenant, such failure or breach cannot reasonably be cured within
such period of twenty (20) days, an Event of Default shall not exist as long as
Tenant commences with due diligence and dispatch the curing of such failure or
breach within such period of ten (10) days and, having so commenced, thereafter
prosecutes with diligence and dispatch and completes the curing of such failure
or breach within a reasonable time; or
(iv) Tenant (A) is generally not paying its debts as they become due,
(B) files, or consents by answer or otherwise to the filing against it of, a
petition for relief or reorganization or arrangement or any other petition in
bankruptcy or for liquidation or to take advantage of any bankruptcy, insolvency
or other debtors' relief law of any jurisdiction, (C) makes an assignment for
the benefit of its creditors, (D) consents to the appointment of a custodian,
receiver, trustee or other officer with similar powers of Tenant or of any
substantial part of Tenant's property, or (E) takes action for the purpose of
any of the foregoing; or
(v) Without consent by Tenant, a court or government authority enters
an order, and such order is not vacated within sixty (60) days, (A) appointing a
custodian, receiver, trustee or other officer with similar powers with respect
to Tenant or with respect to any substantial part of Tenant's property, or (B)
constituting an order for relief or approving a petition for relief or
reorganization or arrangement or any other petition in bankruptcy or for
liquidation or to take advantage of any bankruptcy, insolvency or other debtors'
relief law of any jurisdiction, or (C) ordering the dissolution, winding-up or
liquidation of Tenant; or
(vi) This Lease or any estate of Tenant hereunder is levied upon under
any attachment or execution and such attachment or execution is not vacated
within sixty (60) days; or
(vii) Tenant abandons the Premises.
(b) If an Event of Default occurs, Landlord shall have the right at any
time to give a written termination notice to Tenant and, on the date specified
in such notice, Tenant's right to possession shall terminate and this Lease
shall terminate. Upon such termination, Landlord shall have the right to recover
from Tenant:
(i) The worth at the time of award of all unpaid rent which had been
earned at the time of termination;
32.
<PAGE> 33
(ii) The worth at the time of award of the amount by which all
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided;
(iii) The worth at the time of award of the amount by which all
unpaid rent for the balance of the term of this Lease after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided; and
(iv) All other amounts necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform all of Tenant's
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom.
The "worth at the time of award" of the amounts referred to in clauses (i) and
(ii) above shall be computed by allowing interest at the maximum annual interest
rate allowed by law for business loans (not primarily for personal, family or
household purposes) not exempt from the usury law at the time of termination or,
if there is no such maximum annual interest rate, at the rate of eighteen
percent (18%) per annum. The "worth at the time of award" of the amount referred
to in clause (iii) above shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%). For the purpose of determining unpaid rent under clauses
(i), (ii) and (iii) above, the rent reserved in this Lease shall be deemed to be
the total rent payable by Tenant under Articles 3 and 4 hereof.
(c) Even though Tenant has breached this Lease, this Lease shall
continue in effect for so long as Landlord does not terminate Tenant's right to
possession, and Landlord shall have all of its rights and remedies including the
right, pursuant to California Civil Code section 1951.4, to recover all rent as
it becomes due under this Lease. Acts of maintenance or preservation or efforts
to relet the Premises or the appointment of a receiver upon initiative of
Landlord to protect Landlord's interest under this Lease shall not constitute a
termination of Tenant's right to possession unless written notice of termination
is given by Landlord to Tenant.
(d) The remedies provided for in this Lease are in addition to all
other remedies available to Landlord at law or in equity by statute or
otherwise.
19. DAMAGE BY FIRE OR OTHER CASUALTY.
(a) If the Premises are partially destroyed or damaged by fire or
other casualty, Landlord shall, subject to Paragraphs 19(b), 19(c), 19(d) and
19(e) below, promptly repair such damage if, in Landlord's reasonable judgment,
such repair
33.
<PAGE> 34
can be completed within ninety (90) days under the laws and regulations of the
state, federal, county and municipal authorities having jurisdiction, and this
Lease shall remain in full force and effect, provided that if there shall be
damage to the Premises from any such cause and such damage is not the result of
the act, neglect, default or omission of Tenant, its agents, employees,
contractors or invitees, Tenant shall be entitled to a reduction of Basic
Monthly Rental from the date of the destruction while such repair is being made
in the proportion that the area of the Premises rendered untenantable by such
damage bears to the total area of the Premises. Tenant's right to a reduction
of Basic Monthly Rental under this Paragraph 19 shall be Tenant's sole remedy
in connection with any such damage.
(b) If such repairs cannot, in Landlord's reasonable judgment, be
completed within ninety (90) days, or if such damage occurs during the last six
(6) months of the term of this Lease, Landlord shall have the option either (i)
to repair such damage, this Lease continuing in full force and effect, but with
the Basic Monthly Rental proportionately reduced (subject to the condition set
forth in Paragraph 19(a) above), or (ii) to give notice to Tenant at any time
within thirty (30) days after the occurrence of such damage terminating this
Lease as of a date specified in such notice, which shall not be less than
thirty (30) nor more than sixty (60) days after the giving of such notice. If
such notice of termination is so given, the Lease and all interest of Tenant in
the Premises shall terminate on the date specified in such notice, and the
Basic Monthly Rental, reduced (subject to the condition set forth in Paragraph
19(a) above) in proportion to the area of the Premises rendered untenantable by
the damage, shall be paid up to the date of such termination, Landlord hereby
agreeing to refund to Tenant any Rental theretofore paid for any period of time
subsequent to the termination date.
(c) If the Building is damaged by fire or other casualty to the
extent that the repair cost would exceed twenty percent (20%) or more of its
replacement value, or if more than twenty percent (20%) of the rentable area of
the Building is affected by fire or other casualty and repairs to the
Building cannot, in Landlord's reasonable judgment, be completed within ninety
(90) days, or if insurance proceeds sufficient to complete the repairs are not
available due to exercise of rights of a Holder to collect such proceeds, then
in any such case, whether the Premises are damaged or not, Landlord shall have
the right, at its option, to terminate this Lease by giving Tenant notice
thereof within thirty (30) days of such casualty specifying the date of
termination which shall not be less than thirty (30) nor more than sixty (60)
days after the giving of such notice.
(d) If the Premises are damaged by fire or other casualty not
resulting in whole or in part from the negligence
34.
<PAGE> 35
or willful misconduct of Tenant or its employees, agents, contractors or
subtenants and the repair to the Premises cannot, in Landlord's reasonable
judgment, be completed within one hundred eighty (180) days, assuming the
availability of labor and materials, Tenant, at its option, may terminate this
Lease. Tenant's notice to Landlord of its election to terminate the Lease must
be delivered to Landlord within thirty (30) days after the occurrence of such
damage and the termination shall be as of a date specified in such notice which
shall be no less than 30 days nor more than sixty (60) days after the giving of
such notice. In the event of a termination of the Lease by Tenant under this
Paragraph 19(d), the Basic Monthly Rental shall be reduced in the same manner as
provided under Paragraph 19(b) above. If Tenant shall notify Landlord as to
Tenant's election to terminate this Lease, Landlord shall have the right by
giving Tenant notice within twenty (20) days of Tenant's election, to relocate
Tenant in substantially similar office space in the Building within thirty (30)
days of the date of Tenant's notice to Landlord and the Lease will then not be
deemed to have been terminated. If Landlord so elects to relocate Tenant,
Landlord shall bear the cost of moving Tenant to such other office space, and
Tenant shall continue to pay Basic Monthly Rental and other Rental to Landlord
as provided herein and Landlord shall bear the cost of any rental in excess
thereof for such other office space. Tenant's occupancy of such other office
space shall not exceed one (1) year from the date of Tenant's commencement of
occupancy in such other office space, Landlord shall notify Tenant in writing
not later than sixty (60) days prior to the expiration of such one-year period
and upon expiration of such one-year period, this Lease shall terminate. In the
event Landlord can complete such repairs within such one-year period, Landlord
shall so notify Tenant in writing and shall move Tenant back into the Premises
as soon as practicable after such repairs have been completed. The cost of
moving Tenant back into the Premises shall be borne by Landlord.
(e) Notwithstanding any of the provisions of this Lease, Landlord shall in
no event be required to repair any injury or damage by fire or other cause
whatsoever to, or to make any repairs or replacements of, any panelings,
decorations, partitions, railings, ceilings, floor coverings, trade or office
fixtures or any other property of, or improvements (including Tenant's Extra
Improvements and any Alterations) installed on the Premises by or at the
election of Tenant. Tenant hereby agrees to promptly repair any damage to
Tenant's Extra Improvements and any Alterations at its sole cost and expense in
the event that Landlord is required to, or elects to, repair the remainder of
the Premises pursuant to Paragraphs 19(a) and 19(b) above.
35.
<PAGE> 36
(f) Tenant hereby waives the provisions of subsection 2 of Section
1932, subsection 4 of Section 1933, and Sections 1941 and 1942 of the
California Civil Code.
20. EMINENT DOMAIN.
(a) If all or part of the Premises shall be taken by any public or
quasi-public authority under the power of eminent domain or conveyance in lieu
thereof, this Lease shall terminate as to any portion of the Premises so taken
or conveyed on the date when title or the right to possession vests in the
condemnor.
(b) If (i) a part of the Premises shall be taken by any public or
quasi-public authority under the power of eminent domain or conveyance in lieu
thereof; and (ii) Tenant is reasonably able to continue the operation of
Tenant's business in that portion of the Premises remaining; and (iii) Landlord
elects to restore the Premises to an architectural whole, then this Lease shall
remain in effect as to said portion of the Premises remaining, and the Basic
Monthly Rental payable from the date of the taking shall be reduced in the same
proportion as the area of the Premises taken bears to the total area of the
Premises. If, after a partial taking, Tenant is not reasonably able to continue
the operation of its business in the Premises or Landlord elects not to restore
the Premises as hereinabove described, this Lease may be terminated by either
Landlord or Tenant by giving written notice to the other party within thirty
(30) days of the date of the taking. Such notice shall specify the date of
termination which shall be not less than thirty (30) nor more than sixty (60)
days after the date of said notice.
(c) If a portion of the Building is taken, whether any portion of
the Premises is taken or not, and Landlord determines that it is not
economically feasible to continue operating the portion of the Building
remaining, then Landlord shall have the option for a period of thirty (30) days
after such determination to terminate this Lease. If Landlord determines that
it is economically feasible to continue operating the portion of the Building
remaining after such taking, then this Lease shall remain in effect, with
Landlord, at Landlord's cost, restoring the Building to an architectural whole.
(d) Landlord shall be entitled to any and all payment, income, rent,
award, or any interest therein whatsoever which may be paid or made in
connection with such taking or conveyance, and Tenant shall have no claim
against Landlord or otherwise for the value of any unexpired term of this Lease
or for the value of any improvements in or to the Premises. Tenant hereby
assigns any such claim to the Landlord. Notwithstanding the foregoing, to the
extent that the same shall not diminish Landlord's recovery for such taking,
Tenant shall have the right
36.
<PAGE> 37
to make a claim directly to the entity expressing the power of eminent domain
for moving expenses and for loss or damage to Tenant's trade fixtures,
equipment and movable furniture.
(e) Tenant hereby waives sections 1265.110 through 1265.160 of the
California Code of Civil Procedure.
21. HOLDING OVER. Any holding over after the expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall be construed to be a tenancy from month to month at
the Basic Monthly Rental in effect on the date of such expiration or
termination (subject to adjustment as provided in Paragraph 3(c) hereof) on the
terms, covenants and conditions herein specified so far as applicable. Any
holding over after the expiration or other termination of the term of this
Lease without the written consent of Landlord shall be construed to be a
tenancy at sufferance on all the terms set forth herein, except that the Basic
Monthly Rental shall be an amount equal to: for the first thirty (30) days
after such expiration or termination, one hundred fifty percent (150%) of the
Basic Monthly Rental payable immediately prior to such holding over; and
thereafter, two hundred percent (200%) of the Basic Monthly Rental payable by
Tenant immediately prior to such holding over. Acceptance by Landlord of Rental
after the expiration or termination of this Lease shall not constitute a
consent by Landlord to any such tenancy from month to month or result in any
other tenancy or any renewal of the term hereof. The provisions of this
Paragraph are in addition to, and do not affect, Landlord's right to re-entry
or other rights hereunder or provided by law.
22. PARKING. (a) Tenant may lease on a monthly basis permits for parking
on an up to six (6) automobiles in the parking lot located at 345 Brannan
Street (the "Lot") at the same monthly rates as are established from time to
time by the owner or operator for other spaces in the Lot. The use by Tenant,
its employees and invitees of the Lot shall be subject to the rules and
regulations established from time to time by the owner or operator of the Lot.
If Tenant has not rented the number of parking spaces to which it is entitled
within three months after the Commencement Date, or if any time thereafter
Tenant releases any parking space or spaces, Tenant shall lose its right to
rent the number of parking spaces by which its entitlement under this Paragraph
22(a) exceeds the parking spaces actually rented, but Landlord shall use
reasonable efforts to make such number of parking spaces available to
37.
<PAGE> 38
Tenant within six (6) months after Tenant delivers notice to Landlord of
Tenant's desire to rent the same.
(b) In addition to the parking rights granted pursuant to Paragraph 22(a),
Tenant may lease on a month-to-month basis permits for parking up to an
additional four (4) automobiles in the Lot, subject to the above-referenced
rules and regulations. Either Landlord or Tenant may terminate any or all of
such additional four (4) permits upon thirty (30) days notice to the other.
23. MISCELLANEOUS.
(a) Limitation of Landlord's Liability. Any liability of Landlord
(including without limitation Landlord's partners, shareholders, affiliates,
agents, and employees) to Tenant under this Lease shall be limited to the equity
interest of Landlord in the Building and Tenant agrees to look solely to such
interest for the recovery of any judgment, it being intended that Landlord and
such other persons shall not be personally liable for any deficiency or
judgment. Notwithstanding any other provision of this Lease, Landlord shall not
be liable for any consequential damages, 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, its agents, the constituent shareholders,
partners or other owners of Landlord or its agents, and the directors, officers,
and employees of Landlord and its agents and each such constituent shareholder,
partner or other owner.
(b) Sale by Landlord. In the event of a sale or conveyance of the
Building by any owner of the reversion then constituting Landlord, the
transferor shall thereby be released from any further liability upon any of the
terms, covenants or conditions (express or implied) herein contained in favor of
Tenant, and in such event, insofar as such transferor is concerned, Tenant
agrees to look solely to the successor in interest of such transferor in and to
the Building and this Lease. Tenant agrees to attorn to the successor in
interest of such transferor. If Tenant provides Landlord with any security for
Tenant's performance of its obligations hereunder, and Landlord transfers, or
provides a credit with respect to, 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.
38.
<PAGE> 39
(c) Estoppel Letter. Tenant shall, at any time and from time to time
within ten (10) days following request from Landlord, execute, acknowledge and
deliver to Landlord a statement in writing, (i) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease as so modified is in full force
and effect), (ii) certifying that there are not, to Tenant's knowledge, any
uncured defaults on the part of the Landlord hereunder, and that Tenant has no
defenses to or offsets against its obligations under this Lease, or specifying
such defaults, defenses or offsets if any are claimed, (iii) certifying the date
that Tenant entered into occupancy of the Premises, (iv) certifying the amount
of the Basic Monthly Rental and the Rental payable under Paragraph 4(b) and the
date to which Rental is paid in advance, if any, and certifying that Tenant is
entitled to no rent abatement or other economic concessions not specified in the
Lease, (v) evidencing the status of this Lease as may be required either by a
lender making a loan affecting, or a purchaser of, the Premises, the Building,
the Real Property or any interest therein from Landlord, (vi) certifying the
amount of the Deposit, if any, (vii) certifying that all Improvements to be
constructed in the Premises by Landlord are completed (or specifying any
obligations of Landlord respecting Improvements), and (viii) certifying such
other matters relating to this Lease and/or the Premises as may reasonably be
requested by a lender making a loan to Landlord or a purchaser of the Premises,
the Building, the Real Property or any interest therein from Landlord. Any such
statement may be relied upon by, and shall upon Landlord's request be addressed
to, any prospective purchaser or encumbrancer of all or any portion of the Real
Property or any interest therein; provided that, prior to delivering any
non-public financial information, Tenant shall have the right to receive a
written confidentiality agreement imposing reasonable restrictions on the use
and disclosure of any such financial information. Tenant shall, within ten (10)
days following request of Landlord, deliver such other documents including
Tenant's financial statements as are reasonably requested in connection with the
sale of, or loan to be secured by, the Real Property or any part thereof or
interest therein. Tenant's failure to deliver said statement in the time
required shall be conclusive upon Tenant that: (i) the 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 and Tenant has no right
of offset, counterclaim or deduction against Rental under the Lease and (iii) no
more than one month's Basic Monthly Rental has been paid in advance.
(d) Financial Statements. On or before April 1 of each year, Tenant
shall deliver to Landlord Tenant's financial statements ("Financial Statements")
for the fiscal year of Tenant ended on the previous December 31, which Financial
Statements shall include a combined balance sheet of Tenant and
39.
<PAGE> 40
its combined subsidiaries as at the end of such fiscal year, a combined
statement of operations of Tenant and its combined subsidiaries for such fiscal
year, and a certificate of Tenant's auditor (or, if audited Financial
Statements are not available, then a certificate of Tenant's Chief Financial
Officer) to the effect that such Financial Statements were prepared in
accordance with generally accepted accounting principles consistently applied
and fairly present the financial condition and operations of Tenant and its
combined subsidiaries for and as at the end of such fiscal year. Landlord
agrees that Landlord shall not disclose any non-public financial information
except to Landlord's agents and advisors (and Landlord shall take reasonable
steps to assure that such agents and advisors likewise agree not to disclose
such non-public financial information), and that the Financial Statements shall
be used solely for purposes related to Landlord's management and operation of,
and investment in, the Real Property.
(e) Right of Landlord To Perform. All terms and covenants of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's expense and without any reduction of Rental. If Tenant fails
to pay any Rental hereunder or fails to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
twenty (20) days (or such shorter period as may be reasonable under emergency
circumstances) after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may make
any such payment or perform any such other term or covenant on Tenant's part to
be performed but shall not be obligated to do so. All sums so paid by Landlord
and all necessary costs of such performance by Landlord, together with interest
thereon at the Interest Rate from the date of such payment or performance by
Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord
on demand by Landlord, and Landlord shall have (in addition to any other right
or remedy of Landlord) the same rights and remedies in the event of non-payment
thereof by Tenant as in the case of failure by Tenant in the payment of Rental
hereunder.
(f) Rules and Regulations. Tenant agrees to faithfully observe and
to comply with the Building Rules and Regulations attached hereto as Exhibit B
and incorporated herein by this reference, and all reasonable modifications of
and additions thereto from time to time put into effect by Landlord which are
applicable to all tenants of the Building and of which Tenant shall have
notice. Landlord shall not be responsible to Tenant for the non-performance by
any other tenant or occupant of the Building of any of said Building Rules and
Regulations. In the event any of the Building Rules and Regulations conflict
with any express provision of this Lease, the provisions of this Lease shall
govern.
40.
<PAGE> 41
(g) Attorneys' Fees. In case any suit or other proceeding shall be
brought for an unlawful detainer of the Premises or for the recovery of any
Rental due under the provisions of this Lease or because of the failure of
performance or observance of any other term or covenant herein contained on the
part of Landlord or Tenant, the unsuccessful party in such suit or proceeding
shall pay to the prevailing party therein reasonable attorneys' fees and costs
which shall include fees and costs of any appeal, all as fixed by the Court. If
Landlord or Tenant should be named as a defendant in any suit brought against
the other in connection with Tenant's occupancy of the Premises under this
Lease, the party defendant primarily responsible for the bringing of such suit
shall pay to the other party its costs and expenses incurred in such suit and
reasonable attorneys' fees.
(h) Waiver of Jury Trial. 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.
(i) Waiver. The failure of Landlord to object to or to assert any
remedy by reason of Tenant's failure to perform or observe any covenant or term
hereof or its failure to assert any rights by reason of the happening or
non-happening of any condition hereof shall not be deemed a waiver of its right
to assert and enforce any remedy it may have by reason of such failure on the
part of Tenant or the happening or non-happening of such condition or a waiver
of its rights to enforce any of its rights by reason of any subsequent failure
of Tenant to perform or observe the same or any other term or covenant or by
reason of the subsequent happening or non-happening of the same or any other
condition. No custom or practice which may develop between the parties hereto
during the term hereof shall be deemed a waiver of, or in any way affect, the
right of Landlord to insist upon performance and observance by Tenant in strict
accordance with the terms hereof. The acceptance of Rental hereunder by
Landlord shall not be deemed to be a waiver of any preceding failure of Tenant
to perform or observe any term or covenant of this Lease, other than the
failure of Tenant to pay the particular Rental so accepted, irrespective of any
knowledge on the part of Landlord of such preceding failure at the time of
acceptance of such Rental.
(j) Light, Air and View. Tenant agrees that no diminution or
shutting off of light, air or view by any structure which may be erected
(whether or not by Landlord) on property adjacent to the Building shall in any
way affect this Lease, entitle Tenant to any reduction of Rental hereunder or
result in any liability of Landlord to Tenant.
41
<PAGE> 42
(k) Notices. All notices, demands, requests, advices or designations
("Notices") which may be or are required to be given by either party to the
other hereunder shall be in writing. All Notices by Landlord to Tenant shall be
sufficiently given, made or delivered if personally served on Tenant by leaving
the same at the Premises, or if sent by United States certified or registered
mail, postage prepaid, addressed to Tenant at Tenant's address for notices as
set forth in the Summary of Lease Terms. All Notices by Tenant to Landlord
shall be sufficiently given, made or delivered if personally served on
Landlord, or sent by United States certified or registered mail, postage
prepaid, addressed to Tenant at Tenant's address for notices as set forth in
the Summary of Lease Terms. All Notices by Tenant to Landlord shall be
sufficiently given, made or delivered if personally served on Landlord, or sent
by United States certified or registered mail, postage prepaid, addressed to
Landlord at Landlord's address for notices specified in Paragraph B of the
Summary of Lease Terms. Each Notice shall be deemed received on the date of the
personal service or three (3) days after the mailing thereof, in the manner
herein provided, as the case may be.
(l) Name. Tenant agrees that it shall not, without first obtaining
the written consent of Landlord (which consent may be withheld in Landlord's
sole and absolute discretion): (i) use the name of the Building for any purpose
other than as the address of the business conducted by Tenant in the Premises,
or (ii) use for any purpose any image of, rendering of, or design based on, the
exterior appearance or profile of the Building.
(m) Governing Law; Severability. This Lease shall in all respects be
governed by and construed in accordance with the laws of California. If any
provision of this Lease shall be invalid, unenforceable or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in effect.
(n) Definitions and Paragraph Headings; Successors. The words
"include," "includes" and "including" shall be deemed to be followed by the
phrase "without limitation." The term "Landlord" or any pronoun used in place
thereof includes the plural as well as the singular and the successors and
assigns of Landlord. The term "Tenant" or any pronoun used in place thereof
includes the plural as well as the singular and individuals, firms,
associations, partnerships and corporations, and their and each of their
respective heirs, executors, administrators, successors and permitted assigns,
according to the context hereof. The provisions of this Lease shall inure to
the benefit of and bind Landlord and Tenant and their respective heirs,
executors, administrators, successors and permitted assigns. The term "person"
includes the plural as well as the singular and individuals, firms,
associations, partnerships and corporations. Words used in any gender include
other genders. If there be more than one Tenant the obligations of Tenant
hereunder are joint and several. The paragraph headings of this Lease are for
convenience of reference only and shall have no effect upon the construction or
interpretation of any provision hereof.
42.
<PAGE> 43
(o) Time. Time is of the essence of this Lease with respect to
the payment of Rental and the performance of all obligations.
(p) Examination of Lease. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or
option for a lease, and this instrument is not effective as a lease or
otherwise until its execution and delivery by both Landlord and Tenant.
(q) Brokerage. Tenant covenants and represents that it has
negotiated this Lease directly with the Tenant's Broker(s) designated on the
Summary of Lease Terms and has not acted by implication to authorize, nor has
authorized, any other real estate broker or salesman to act for it in these
negotiations. Tenant agrees to protect, defend, indemnify and hold Landlord
harmless from any and all claims, loss, cost, damage and/or expense (including,
without limitation, attorneys' fees and court costs) by any other real estate
broker or salesperson or other entity or party for a commission or finder's fee
as a result of Tenant's entering into this Lease to the extent Tenant has
agreed to pay such commission or fee. Landlord agrees to protect, defend,
indemnify and hold Tenant harmless from any and all claims, loss, cost, damage
and/or expense (including, without limitation, attorneys' fees and court costs)
by any real estate broker or salesperson or other entity or party for a
commission or finder's fee as a result of Tenant's entering into this Lease to
the extent Landlord has agreed to pay such commission or fee.
(r) Directory Board. Landlord agrees to list Tenant's name on the
directory board in the lobby of the Building and in the elevator lobbies on the
floors on which the Premises are located at Landlord's cost and expense;
provided, however, any change to the initial listing or any additional listings
shall be at Tenant's cost and expense. Landlord's acceptance of any name for
listing on the directory board shall in no event be, or be deemed to be, nor
will it substitute for, Landlord's consent, as required by this Lease, to any
sublease, assignment, or other occupancy of the Premises.
(s) Authority. If Tenant is a corporation (or other business
organization), Tenant and each person executing this Lease on behalf of Tenant
represents and warrants to Landlord that (a) Tenant is duly incorporated (or
organized) and validly existing under the laws of its state of incorporation
(or organization), (b) Tenant is qualified to do business in California, (c)
Tenant has full right, power and authority to enter into this Lease and to
perform all of Tenant's obligations hereunder, and (d) the execution, delivery
and performance of this Lease has been duly authorized by Tenant and each
person signing this Lease on behalf of the Tenant is duly and validly
authorized to do so. Concurrently with signing this Lease, Tenant shall
deliver to Landlord a true and correct copy of
43.
<PAGE> 44
resolutions duly adopted by the board of directors or constituent partners or
members of Tenant, certified by the secretary of Tenant to be true and
correct, unmodified and in full force, which authorize and approve this Lease
and authorize each person signing this Lease on behalf of Tenant to do so.
(t) Amendments. This Lease may not be amended or modified in any
respect whatsoever except by an instrument in writing signed by Landlord and
Tenant.
(u) Exhibits and Addenda; Entire Agreement. The Exhibits and Addenda
referenced in the Summary of Lease Terms are a part of this Lease and are
incorporated herein by this reference. In the event of any discrepancy between
the Lease and any such Exhibit or Addendum, the Exhibit or Addendum shall
control. This Lease is the entire and integrated agreement between Landlord and
Tenant with respect to the subject matter of this Lease, the Premises and the
Building. There are no oral agreements between Landlord and Tenant affecting
this Lease, and this Lease supersedes and cancels any and all previous
negotiations, arrangements, brochures, offers, agreements and understandings,
oral or written, if any, between Landlord and Tenant or displayed by Landlord
to Tenant with respect to the subject matter of this Lease, the Premises or the
Building. There are no representations between Landlord and Tenant or between
any real state broker and Tenant other than those expressly set forth in this
Lease and all reliance with respect to any representations is solely upon
representations expressly set forth in this Lease.
44.
<PAGE> 45
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year first above written.
LANDLORD:
SOMA PARTNERS, L.P., a California
limited partnership
By SKS/Rosenberg, LLC, a
Delaware limited liability
company, general partner
By Stein Kingsley Stein, a
California corporation,
Member
By /s/ Paul E. Stein
--------------------------
Its President
-------------------
TENANT:
MICROMUSE INC., a Delaware
corporation
By: /s/ Christopher J. Dawes
--------------------------
Its: President
-----------------------
45.
<PAGE> 46
EXHIBIT A
FLOOR PLAN
<PAGE> 47
EXHIBIT A
---------
[MEZZANINE FLOOR PLAN]
[HUNTSMAN ASSOCIATES LETTERHEAD]
<PAGE> 48
EXHIBIT A
(continued)
-----------
<PAGE> 49
EXHIBIT B
BUILDING RULES AND REGULATIONS
1. Sidewalks, halls, passages, exits, entrances, elevators, escalators
and stairways shall not be obstructed by tenants or used by them for any purpose
other than for ingress to and egress from their respective premises. The halls,
passages, exits, entrances, elevators, escalators and stairways are not for the
use of the general public and Landlord shall in all cases retain the right to
control and prevent access thereto by all persons whose presence, in the
judgment of Landlord, would be prejudicial to the safety, character, reputation
and interests of the Building and its tenants.
2. No sign, placard, picture, name, advertisement or notice, visible
from the exterior of leased premises shall be inscribed, painted, affixed or
otherwise displayed by any tenant either on its premises or any part of the
Building without the prior written consent of Landlord, and Landlord shall have
the right to remove any such sign, placard, picture, name, advertisement, or
notice without notice to and at the expense of the Tenant.
If Landlord shall have given such consent to any tenant at any time,
whether before or after the execution of the Lease, such consent shall in no way
operate as a waiver or release of any of the provisions hereof or of such Lease,
and shall be deemed to relate only to the particular sign, placard, picture,
name, advertisement or notice so consented to by Landlord and shall not be
construed as dispensing with the necessity of obtaining the specific written
consent of Landlord with respect to any other such sign, placard, picture, name,
advertisement or notice.
No signs will be permitted on any entry door unless the door is
glass. All glass door signs must be approved by Landlord. Signs or lettering
shall be printed, painted, affixed or inscribed at the expense of the Tenant by
a person approved by Landlord.
3. The bulletin board or directory of the Building will be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom. Landlord
reserves the right to restrict the amount of directory space utilized by Tenant.
4. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, hangings or decorations shall be attached to, hung or placed in, or
used in connection with, any window on any premises without the prior written
consent of Landlord. in any event, with the prior written consent of
<PAGE> 50
Landlord, all such items shall be installed inside of Landlord's standard
draperies and shall in no way be visible from the exterior of the Building. No
articles shall be placed or kept on the window sills so as to be visible from
the exterior of the Building.
5. Landlord reserves the right to exclude from the Building between the
hours of 6 P.M. and 6 A.M. and at all hours on Saturdays, Sundays and holidays
all persons who do not present a pass to the Building signed by Landlord.
Landlord will furnish passes to persons for whom any tenant requests the same in
writing. Each tenant shall be responsible for all persons for whom it requests
passes and shall be liable to Landlord for all acts of such persons.
Landlord shall in no case be liable for damages for any error with
regard to the admission to or exclusion from the Building of any person.
During any invasion, mob, riot, public excitement or other
circumstance rendering such action advisable in Landlord's opinion, Landlord
reserves the right to prevent access to the Building by closing the doors, or
otherwise, for the safety of tenants and protection of the Building and property
in the Building.
6. No tenant shall employ any person or persons other than the janitor
of Landlord for the purpose of cleaning the premises unless otherwise agreed to
by Landlord in writing. Except with the written consent of Landlord, no person
or persons other than those approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning the same. No tenant shall cause any
unnecessary labor by reason of such tenant's carelessness or indifference in the
preservation of good order and cleanliness. Landlord shall in no way be
responsible to any tenant for any loss of property on the premises, however
occurring, or for any damage done to the property of any tenant by the janitor
or any other employee or any other person. Janitorial service shall include
ordinary dusting and cleaning by the janitor assigned to such work and shall not
include beating or cleaning of carpets or rugs or moving of furniture or other
special services. Janitorial service will not be furnished on nights when rooms
are occupied after 9:30 p.m. Window cleaning shall be done only by Landlord, and
at such intervals and such hours as Landlord shall deem appropriate.
7. No tenant shall obtain for use upon its premises ice, drinking
water, food, beverage, towel or other similar services, or accept barbering or
bootblacking services in its premises, except from persons authorized by
Landlord, and at hours and under regulations fixed by Landlord.
2.
<PAGE> 51
8. Each tenant shall see that the doors of its premises are closed and
securely locked and must observe strict care and caution that all water faucets
or water apparatus are entirely shut off before the Tenant or its employees
leave such premises, and that all utilities shall likewise be carefully shut
off, so as to prevent waste or damage, and for any default or carelessness the
Tenant shall make good all injuries sustained by ocher tenants or occupants of
the Building or Landlord. On multiple-tenancy floors all tenants shall keep the
door or doors to the Building corridors closed at all times except for ingress
and egress.
9. No tenant shall alter any lock or install a new or additional lock
or any bolt on any door of its premises without the prior written consent of
Landlord. If Landlord shall give its consent, the tenant shall in each case
furnish Landlord with a key for any such lock.
10. Landlord will furnish Tenant without charge with two (2) keys to
each door lock provided in the Premises by Landlord. Landlord may make a
reasonable charge for any additional keys. Tenant shall not have any such keys
copied or any keys made. Each tenant, upon the termination of the tenancy, shall
deliver to Landlord all the keys of or to the Building, offices, rooms and
toilet rooms which shall have been furnished to the Tenant or which the Tenant
shall have had made. In the event of the loss of any keys so furnished by
Landlord, Tenant shall pay Landlord therefor.
11. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused it.
12. No tenant shall use or keep in its premises or the Building any
kerosene, gasoline or inflammable or combustible fluid or material or use any
method of heating or air conditioning other than that supplied by Landlord.
13. No tenant shall use, keep or permit to be used or kept in its
premises any foul or noxious gas or substance or permit or suffer such premises
to be occupied or used in a manner offensive or objectionable to Landlord or
other occupants of the Building by reason of noise, odors and/or vibrations or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds be brought or kept in or about any premises or the
Building.
14. No cooking shall be done or permitted by any tenant on its premises,
except that the preparation of coffee, tea, hot
3.
<PAGE> 52
chocolate and similar items for tenants and their employees shall be permitted,
nor shall such premises be used for lodging.
15. Except with the prior written consent of Landlord, no tenant shall
sell, or permit the sale, at retail of newspapers, magazines, periodicals,
theater tickets or any other goods or the merchandise in or on any premises, nor
shall any tenant carry on, or permit or allow any employee or other person to
carry on, the business of stenography, typewriting or any similar business in or
from any premises for the service or accommodation of occupants of any other
portion of the Building, nor shall the premises of any tenant be used for the
storage of merchandise or for manufacturing of any kind, or the business of a
public barber shop, beauty parlor, or any business or activity other than that
specifically provided for in such tenant's lease.
16. Landlord will direct electricians as to where and how telephone,
telegraph and electrical wires are to be introduced or installed. No boring or
cutting for wires will be allowed without the prior written consent of Landlord.
The location of telephones, call boxes and other office equipment affixed to all
premises shall be subject to the written approval of Landlord. All electrical
appliances must be grounded and must meet UL Label Standards.
17. No tenant shall install any radio or television antenna, loudspeaker
or any other device on the exterior walls of the Building.
18. No tenant shall lay linoleum, tile, carpet or any other floor
covering so that the same shall be affixed to the floor of its premises in any
manner except as approved in writing by Landlord. The expense of repairing any
damage resulting from a violation of this rule or the removal of any floor
covering shall be borne by the tenant by whom, or by whose contractors,
employees or invitees, the damage shall have been caused.
19. No furniture, freight, equipment, packages or merchandise will be
received in the Building or carried up or down the elevators, except between
such hours, through such entrances and in such elevators as shall be designated
by Landlord. Landlord reserves the right to require that moves be scheduled and
carried out during nonbusiness hours of the Building. Landlord shall have the
right to prescribe the weight, size and position of all safes and other heavy
equipment brought into the Building. Safes or other heavy objects shall, if
considered necessary by Landlord, stand on wood strips of such thickness as is
necessary to properly distribute the weight thereof. Landlord will not be
responsible for loss of or damage to any such safe or property from any cause,
and all damage done to the Building by moving or maintaining any such safe or
other property shall be repaired at the expense of the Tenant.
4.
<PAGE> 53
20. No tenant shall overload the floor of its premises or mark, or drive
nails, screw or drill into, the partitions, woodwork or plaster or in any way
deface such premises or any part thereof.
21. There shall not be used in any space, or in the public areas of the
Building, either by any tenant or others any hand trucks except those equipped
with rubber tires and side guards. No other vehicles of any kind shall be
brought by any tenant into or kept in or about any premises in the Building.
22. Each tenant shall store all its trash and garbage within the
interior of its premises. No material shall be placed in the trash boxes or
receptacles if such material is of such nature chat it may not be disposed of in
the ordinary and customary manner of removing and disposing of trash and garbage
in the City of San Francisco without violation of any law or ordinance governing
such disposal. All trash, garbage and refuse disposal shall be made only through
entryways and elevators provided for such purposes and at such times as Landlord
shall designate.
23. Canvassing, soliciting, distribution of handbills and other written
materials and peddling in the Building are prohibited and each tenant shall
cooperate to prevent the same.
24. Landlord shall have the right, exercisable without notice and
without liability to any tenant, to change the name and address of the Building.
25. The requirements of tenants will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties unless under
special instructions from Landlord, and no employee will admit any person
(tenant or otherwise) to any office without specific instructions from
Landlord.
26. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in favor
of any other tenant or tenants, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all tenants of the Building.
27. These Rules and Regulations may be changed from time to time, as
Landlord may deem appropriate, and are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the terms,
covenants and conditions of the Lease.
5.
<PAGE> 54
OFFICE LEASE
SUMMARY OF LEASE TERMS
139 Townsend Street San Francisco, California
A. Date: March 25, 1997
B. Landlord: SOMA PARTNERS, L.P., a California limited partnership
Landlord's address for notices: c/o Stein Kingsley Stein
[Paragraph 22(j)]
235 Montgomery Street
Suite 1810
San Francisco, CA 94104
C. Tenant: MICROMUSE INC., a Delaware corporation
Tenant's address for notices: 139 Townsend Street
[Paragraph 22(j)] San Francisco, CA 94107
Tenant Contact Person: Mr. Christopher Dawes
D. Floor(s) on which Premises situated: 5th and Mezzanine
[Paragraph 1(g)]
E. Rentable area of Premises: Suite 500: 7,105 rsf
[Paragraph 1(g)] Mezzanine: 4,130 rsf
Total : 11,235
F. Tenant's Percentage Share: 19.65%
[Paragraph l(l)]
G. Base Expense Year: 1997
[Paragraph 1(a)]
H. Base Tax Year: 1997
[Paragraph 1(b)]
I. Term; Commencement and Expiration Dates:
[Paragraph 2]
five (5) years, commencing on May 1, 1997, and
expiring on April 30, 2002.
J. Basic Monthly Rental: $20,997.00 ($14,802 for Suite 500
[Paragraph 3(a)] and $6,195 for Mezzanine)
Basic Annual Rental: $251,965 ($177,625 for Suite 500
and $74,340 for Mezzanine)
i.
<PAGE> 55
K. CPI Adjustment Dates: N/A
[Paragraph 3(c)]
L. Security Deposit: $37,170
[Paragraph 3(e)]
M. Landlord's Broker(s): None
[Paragraph 23(p)]
N. Tenant's Broker(s): None
[Paragraph 23(p)]
0. Exhibits and addenda: Exhibit A - Floor Plan
[Paragraph 23(t)] Exhibit B - Building Rules and
Regulations
The provisions of the Lease identified above in brackets are those provisions
where references to particular Lease Terms appear. Each such reference shall
incorporate the applicable Lease Terms. In the event of any conflict between the
Summary of Lease Terms and the Lease, the latter shall control.
LANDLORD:
SOMA PARTNERS, L.P., a California
limited partnership
By SKS/Rosenberg, LLC, a
Delaware limited liability
company, general partner
By Stein Kingsley Stein, a
California corporation,
Member
BY [sig]
-----------------------------
Its President
------------------------
(Signatures Continued on Next Page)
ii.
<PAGE> 56
TENANT:
MICROMUSE INC., a Delaware
Corporation
By: [sig]
------------------------------
Its: President
------------------------
<PAGE> 57
TABLE OF CONTENTS
1. DEFINITIONS............................................................ 1
2. TERM................................................................... 6
3. RENTAL; SECURITY DEPOSIT............................................... 7
4. TENANT'S SHARE OF OPERATING EXPENSES AND REAL PROPERTY TAXES........... 9
5. OTHER TAXES PAYABLE BY TENANT..........................................11
6. USE....................................................................12
7. COMPLIANCE WITH LAWS/ENVIRONMENTAL MATTERS.............................13
8. ALTERATIONS; LIENS.....................................................14
9. MAINTENANCE AND REPAIR.................................................16
10. SERVICES...............................................................16
11. ACCESS CONTROL.........................................................19
12. ASSIGNMENT AND SUBLETTING..............................................20
(a) Restriction on Transfers........................................20
(b) Landlord's Right of First Offer; Termination
Right...........................................................21
(c) Landlord's Approval Process.....................................23
(d) Consideration for Transfer......................................23
(e) Merger or Consolidation of Tenant: Major Changes................24
(f) Transfer of Partnership Interest or Corporate
Stock...........................................................24
(g) Documentation .. . . ...........................................24
(h) Options Personal to Original Tenant.............................25
(i) Encumbrance of Lease............................................25
(j) No Merger.......................................................25
(k) Landlord's Costs................................................25
13. WAIVER; INDEMNIFICATION................................................26
14. INSURANCE..............................................................27
15. PROTECTION OF LENDERS..................................................28
16. ENTRY BY LANDLORD......................................................29
17. ABANDONMENT............................................................30
18. DEFAULT AND REMEDIES...................................................31
iv.
<PAGE> 58
19. DAMAGE BY FIRE OR OTHER CASUALTY.......................................33
20. EMINENT DOMAIN.........................................................35
21. HOLDING OVER...........................................................36
22. PARKING................................................................37
23. MISCELLANEOUS..........................................................38
(a) Limitation of Landlord's Liability..............................38
(b) Sale by Landlord................................................38
(c) Estoppel Letter.................................................38
(d) Financial Statements............................................39
(e) Right of Landlord To Perform....................................40
(f) Rules and Regulations...........................................40
(g) Attorneys' Fees.................................................40
(h) Waiver of Jury Trial............................................41
(i) Waiver..........................................................41
(j) Light, Air and View.............................................41
(k) Notices.........................................................41
(1) Name............................................................42
(m) Governing Law; Severability.....................................42
(n) Definitions and Paragraph Headings; Successors..................42
(o) Time............................................................42
(p) Examination of Lease............................................42
(q) Brokerage.......................................................43
(r) Directory Board.................................................43
(s) Authority.......................................................43
(t) Amendments......................................................44
(u) Exhibits and Addenda; Entire Agreement..........................44
EXHIBIT A FLOOR PLAN
EXHIBIT B BUILDING RULES AND REGULATIONS
v.
<PAGE> 1
EXHIBIT 10.6
THIS LEASE is made the Third day of March One thousand nine hundred and
ninety-seven BETWEEN the Landlord the Tenant and the Surety whose respective
names and address are set out in the First Schedule
[LONDON STAMP OFFICE 1 STAMP]
[BRITISH TAX STAMPS]
WITNESSETH:
1. IN this Lease unless the context otherwise requires the various
expressions set out below shall have the meaning or bear the interpretation
there set out
(a) "the Landlord" shall include the reversioner and any other person for
the time being immediately expectant on the Term hereby created and for the
purpose of entering upon the Demised Premises shall include the Superior
Landlord (if any)
(b) "the Tenant" shall include the person from time to time entitled to
the Term and the personal representatives of the Tenant
(c) words importing the masculine gender shall where necessary be
construed as importing the feminine gender and words importing the neuter
gender shall where necessary be construed as importing the masculine gender
or the feminine gender as the case may be
(d) words importing the singular number only shall include the plural
number and vice versa and where there are two or more persons included in
the expression "the Landlord" or "the Tenant" or "the Surety" the covenants
expressed to be made by the Landlord or the Tenant or the Surety shall be
deemed to be made by such persons jointly and severally
1
<PAGE> 2
(e) "the Demised Premises" means all that premises described in the Second
Schedule
(f) "Conduits" means and includes chimney flues ventilating ducts air
conditioning systems cisterns tanks radiators water gas soil and waste
water pipes sewers and drains central heating boilers and pipes wires and
cables used for the conveyance of electrical current telephone cables valves
traps and switches and includes where relevant ancillary equipment and
structures
(g) "the Development" means the land comprised in Title Number TGL 54450 and
more particularly described in Part II of the Second Schedule hereto
(h) "the Access Road" means the roadway and the footpath adjacent thereto
shown for identification purposes only cross hatched brown on Plan B annexed
hereto
(i) "the Common Parts of the Development" means those parts of the Development
which at the date hereof have not been and are not intended to be let or sold
by the Landlord and are capable of benefitting and being used by the Tenant in
connection with the use of the Demised Premises and for the purpose of the Sixth
Schedule hereof the Common Parts of the Development shall be deemed to include
spaces for parking vehicles used by the Tenant and spaces used for parking
vehicles by other tenants in the Development
(j) "the Second Floor Lease" means a lease of the second floor and gallery
area of the Demised Premises dated 8th November 1996 and made between the
Landlord (1) and Imagination and Design Limited (2)
2
<PAGE> 3
Floor Plans
-----------
<PAGE> 4
2. THE LANDLORD demises to the Tenant the Demised Premises together with the
rights but subject to the exceptions and reservations mentioned in the Second
Schedule subject to and with the benefit of the Second Floor Lease TO HOLD unto
the Tenant for the term of years specified in the First Schedule ("the Term")
PAYING yearly for the first five years of the Term the RENT of NINETY-SEVEN
THOUSAND SIX HUNDRED AND TWENTY-FIVE POUNDS (Pound Sterling 97,625.00) per
annum exclusive and for the remainder of the Term such rent as shall be
calculated under the provisions of the Ninth Schedule herein such rent to be
paid by equal quarterly payments in advance on the usual quarter days in every
year or proportionately for any fraction of a year the first of such payments
to be made on the Third day of September One thousand nine hundred and
ninety-seven and to be a due proportion of the Rent calculated from the Third
day of September One thousand nine hundred and ninety-seven until the 29th day
of September One thousand nine hundred and ninety-seven
3. THE TENANT covenants with the Landlord to observe and perform the
covenants and stipulations set out in the Third Schedule
4. THE LANDLORD covenants with the Tenant to observe and perform the
covenants and stipulations set out in the Fourth Schedule
5. THE LANDLORD AND THE TENANT agree the provisions set out in the Fifth
Schedule
6. THE SURETY HEREBY COVENANTS with the Landlord to observe and perform the
covenants set out in the Seventh Schedule PROVIDED ALWAYS that the Surety will
cease to be liable under this clause and shall be released entirely from all
subsequent liability hereunder in the event that
3
<PAGE> 5
(1) The Tenant shall provide to the Landlord accounts for the most recent
three consecutive years audited by a Chartered Accountant and approved by
the directors of the Tenant not more than three months before such accounts
are provided to the Landlord showing for each such year net profits before
tax amounting to not less than three times the annual rent reserved by the
Lease under Clause 2 hereof in the year to which the said accounts relate
and PROVIDED FURTHER that at the time of production of such accounts no
monies shall be due from the Tenant or the Surety to the Landlord or
(2) on completion of a lawful assignment of the Lease in accordance with
the provisions hereto PROVIDED ALWAYS that there is produced in conjunction
with a grant of licence for such assignment a surety reasonably acceptable
to the Landlord who will covenant therein in equivalent form to the
provisions of the Seventh Schedule hereto or there is provided on the grant
of such licence a security deposit in an amount equivalent to one half of
the annual rent then payable under the Lease such amount to be placed in a
separate designated Deposit Account interest accruing to the Tenant and
otherwise upon the terms of the agreed draft deed set out in the Eighth
Schedule hereto
7. WE certify that there is no agreement for lease to which this Lease gives
effect
IN WITNESS whereof the parties hereto have caused this instrument to
be executed as a Deed in the presence of the person(s) mentioned below the
day and
4
<PAGE> 6
year first above written
THE FIRST SCHEDULE
THE LANDLORD : MARLDOWN LIMITED whose registered
office is situated at Barbican House 26/34
Old Street London EC1V 9HL
THE TENANT : MICROMUSE plc whose registered office is
situated at Disraeli House 90 Putney
Bridge Road London SW18 1DA
THE SURETY : CHRISTOPHER JOHN DAWES of 11
Tourney Road London SW6
THE TERM : 10 years
THE COMMENCEMENT DATE: 3rd March 1997
THE AUTHORISED USER : Use within Class B1 of the Town and
Country Planning (Use Classes) Order 1987
THE SECOND SCHEDULE
PART I
The Demised Premises
ALL THAT BUILDING situate at and known as Gladstone House Adelaide Road 90
Putney Bridge Road London SW18 (all of which premises are for the purposes of
identification only shown edged red on Plans A and B annexed hereto) and for
the purposes of obligation as well as grant include the structure roof and
foundations thereof and all conduits which are situate therein
TOGETHER WITH:-
(a) the Landlord's fixtures and fittings on the Demised Premises
5
<PAGE> 7
(b) the free and uninterrupted passage and running of water soil gas and
electricity and all other services to and from the Demised Premises in through
and along the Conduits which are now or may hereafter during the Term be in on
over or under the Development which serve the Demised Premises
(c) the right of support shelter and protection for the Demised Premises from
the remainder of the Development as enjoyed at the date hereof
(d) the right to pass and repass at all times and for all purposes connected
with the use and enjoyment of the Demised Premises to and from the Demised
Premises from and to the nearest highway maintainable at public expense:
(i) with or without vehicles of any description over and along the Access
Road
(ii) on foot only over and along those parts of the Common Parts of the
Development which give access to the Demised Premises
(e) a right of access on to any part of the Development for the purpose of
carrying out the Tenant's obligations herein to the extent that the Tenant
cannot otherwise do so
(f) the right to display a sign indicating the Tenant's name and business on
the exterior of the Demised Premises in a position approved by the Landlord
such approval not to be unreasonably withheld or delayed
(g) the exclusive right to park roadworthy vehicles within the car parking
area shown edged green on Plan B ("the Car Parking Spaces") subject to the
rights reserved in the Second Floor Lease for the tenants therein
EXCEPTING AND RESERVING to the Landlord and its lessees tenants servants and
licensees and the owners lessees and occupiers for the time being of the
Development and any adjoining or neighbouring property and all persons
authorised by them and all other persons from time to time having the like right
(a) the free and uninterruped passage and running of water soil gas and
electricity and all other services to and from the Demised Premises and such
adjoining neighbouring property through the Conduits which now are in on over
or under the Demised Premises or any part thereof together with a full right of
entry to the Demised Premises at all reasonable times on giving no less than
two days
6
<PAGE> 8
prior written notice (except in emergency) for the purposes of installing adding
to inspecting maintaining replacing and repairing the Conduits the person or
persons exercising such right making good all damage to the Demised Premises
occasioned by such entry or any works consequent thereon to the reasonable
satisfaction of the Tenant and provided that the person or persons so entering
shall cause as little inconvenience and interference as possible to the Tenant
and the business of the Tenant
(b) full right and liberty at any time or times to execute works repairs and
make erections upon or to erect upon rebuild reconstruct make additions to
modify or alter the Development or any part thereof (except the Demised
Premises) or the adjoining and neighbouring property and to use the Building
and the Development (except the Demised Premises) and the adjoining and
neighbouring property in such manner as they may think fit whether or not the
access of light and air to the Demised Premises or any part thereof shall
thereby be interfered with
(c) the right of support shelter and protection for the Development and any
adjoining and neighbouring property from the Demised Premises as enjoyed at the
date hereof
(d) the right to enter the Demised Premises at all reasonable times upon no
less than 48 hours prior written notice (except in case of emergency) for the
purpose of carrying out any works or doing anything whatsoever comprised within
the Landlord's rights and obligations in this Lease Provided that the person or
persons so entering the Demised Premises shall cause as little interference and
inconvenience as possible to the Tenant and shall not interfere with the
Tenant's ability to carry out business from the Demised Premises and shall make
good all damage occasioned by such entry or the carrying out of any works to the
reasonable satisfaction of the Tenant
PART II
The Development
ALL THAT parcel of land with the buildings erected thereon situate and known as
the Adelaide Centre Adelaide Road London SW18 1HR as the same is registered at
H M Land Registry under Title Number TGL 54450
7
<PAGE> 9
THE THIRD SCHEDULE
The Covenants by the Tenant
1. TO pay the reserved rents on the days and in the manner aforesaid without
any deduction and if the Landlord so requires to pay the same by Bankers
Standing Order direct to the bank account of the Landlord or as it shall direct
2. TO pay and contribute by way of further rent the Interim Charge and the
Service Charge (as those expressions are defined in the Sixth Schedule) at the
time and in the manner provided in that Schedule
3. (a) TO bear pay and discharge all existing and future rates taxes duties
assessments impositions charges liabilities and outgoings whatsoever (whether
parliamentary parochial or otherwise and whether or not of a capital or
non-recurring nature) which are now or may at any time hereafter be assessed
charged or imposed upon or payable in respect of the Demised Premises or any
part thereof or on the owner or occupier in respect thereof (excluding any
payable by the Landlord in respect of the receipt of rents or other payments
made by the Tenant in accordance with the provisions hereof except any Value
Added Tax payable on the rents or any other such payments on any disposition or
dealing with or the ownership of the reversion to this Lease)
(b) To pay all charges for electricity gas and water consumed at the
Demised Premises including any connection and hiring charges and meter rents
and to perform and observe all present and future regulations and requirements
of the electricity gas and water supply companies or boards in respect of the
supply and consumption of electricity gas and water to the Demised Premises
4. (a) AT all times during the Term to repair replace (if beyond economic
repair) rebuild cleanse and keep the Demised Premises and all additions and
improvements thereto and the Landlord's fixtures and fittings and the Conduits
therein in good and substantial repair and condition
(b) To paint with two coats of best quality paint or otherwise treat in a
proper and workmanlike manner all the wood and iron work of the Demised
Premises heretofore or usually painted or otherwise treated once in the fifth
year as regards the interior and once in every third year as regards the
exterior and in each case in the last year of the Term (whether determined by
effluxion of time or under
8
<PAGE> 10
the provisions for re-entry hereinafter contained or otherwise) provided that
the covenants relating to the last year of the Term shall not apply where the
Tenant shall have redecorated the Demised Premises less than eighteen months
prior to the expiry of the Term and also to grain varnish clean paper and
otherwise decorate in a proper and workmanlike manner all such internal parts
of the Demised Premises as have been or ought properly to be so treated and so
that in the last year of the Term the tints colours and patterns of all such
works of interior decoration shall be such as shall be approved by the Landlord
(such approval not to be unreasonably withheld or delayed)
(c) Without prejudice to the generality of the foregoing to repair
maintain upkeep renew (if beyond economic repair) and service the lift in the
Demised Premises using the services of such reputable contractor as shall be
approved by the Landlord from time to time and to produce to the Landlord
evidence of the service agreement and maintenance inspections and repairs
carried out provided always that if the Tenant shall not maintain and regularly
service the lift the Landlord shall be entitled on not less than 14 days prior
written notice to enter upon the Demised Premises with all necessary workmen
and execute such necessary maintenance and servicing at the expense of the
Tenant in accordance with the covenants herein contained and the proper and
reasonable cost thereof shall be a debt due from the Tenant to the Landlord and
be forthwith recoverable by action
(d) To maintain and keep in a clean and tidy condition at all times the
area for Refuse Bins shown on the Plan
5. TO yield up the Demised Premises with the fixtures and additions thereto
at the expiration or sooner determination of the Term in good and substantial
repair and condition in accordance with the covenants hereinbefore contained
6. TO permit the Landlord and its agent with or without workmen and others
authorised by the Landlord at all reasonable times and upon prior written
notice (except in emergency) during the Term to enter upon and view the
condition of the Demised Premises and if any breach of covenant shall be found
upon such inspection for which the Tenant is liable the Tenant shall as soon as
is reasonably practicable commence and diligently proceed to execute all
repairs and works properly required to be done by written notice given by the
Landlord PROVIDED ALWAYS that if the Tenant shall not within two months after
service of such notice (or earlier if appropriate) commence and proceed
diligently with the execution of the repairs and works mentioned in such notice
it shall be lawful for the Landlord to enter upon the Demised Premises with all
necessary workmen and execute such repairs and works
9
<PAGE> 11
at the expense of the Tenant in accordance with the covenants herein contained
and the proper costs thereof shall be a debt due from the Tenant to the
Landlord and be forthwith recoverable by action
7. TO permit the Landlord and its agents and workmen and other persons
authorised by the Landlord and the tenants or occupiers of other parts of the
Development and adjoining properties belonging to the Landlord upon no less
than 48 hours prior written notice (except in emergency) to enter upon the
Demised Premises to execute repairs or alterations to the Development or such
adjoining properties causing as little inconvenience as possible to the Tenant
and its business and making good all damage thereby occasioned to the Demised
Premises to the reasonable satisfaction of the Tenant
8.1 NOT to make any structural or external alterations to the Demised Premises
nor to erect or to permit or suffer to be erected any new building on the
Demised Premises or make or permit or suffer to be made any alteration of or
addition to or external projection in front of the Demised Premises whatsoever
save that telecommunications or satellite equipment may be erected on the
exterior of the Demised Premises subject to all relevant planning consents
first being obtained and with the prior written consent of the Landlord (such
consent not to be unreasonably withheld or delayed)
8.2 NOT without the previous consent in writing of the Landlord (such consent
not to be unreasonably withheld or delayed) (and then only in accordance with
plans previously approved by the Landlord and under the supervision of and to
the reasonable satisfaction of the Landlord's surveyor) to alter the internal
layout or arrangement of the Demised Premises or to make any internal
non-structural alterations or add to or alter any new buildings or alterations
erected or made in pursuance of the consent of the Landlord given under this
clause or to cut injure or permit or suffer to be cut or injured any of the
walls or timbers of the Demised Premises or any alterations or additions
thereto or to carry out or permit or suffer to be carried out any development
within the meaning of the Planning Acts PROVIDED ALWAYS that the Tenant shall
be entitled without any consent from the Landlord to effect internal
non-structural alterations to the Demised Premises subject to:-
(aa) the Tenant giving no less than 14 days prior written notice to the
Landlord of the nature of such proposed alterations and a full description
of the proposed alterations to satisfy the Landlord prior to commencement
that the works proposed are non-structural; and
10
<PAGE> 12
(bb) the Tenant delivering to the Landlord in duplicate the drawings
specifications and other details of such alterations within 28 days after
their completion
9. AT all times during the Term to comply in all respects with the provisions
and requirements of the Planning Acts and all regulations or orders made
thereunder whether as to the Authorised User or otherwise and to indemnify and
keep indemnified the Landlord against all liabilities whatsoever including all
actions proceedings costs expenses claims and demands in respect thereof AND
within seven days of receipt by the Tenant (or sooner if appropriate) to
produce to the Landlord a copy of any notice order or proposal therefor made
given or issued to the Tenant or any sub-tenant by a planning authority under
or by virtue of the Planning Acts affecting or relating to the Demised Premises
and at the request and cost of the Landlord to make or join with the Landlord
in making every such objection representation or appeal against the same as the
Landlord shall deem expedient
10. NOT to use or suffer to be used the Demised Premises for any purpose other
than the Authorised User specified in the First Schedule PROVIDED ALWAYS that
the Tenant hereby acknowledges and admits that notwithstanding the foregoing
provisions the Landlord does not thereby or in any other way give or make nor
has given or made at any other time any representation or warranty that the
Authorised User is or will remain a permitted use within the provisions of the
Planning Acts nor shall any consent in writing which the Landlord may hereafter
give to any change of use be taken as including any such representation or
warranty and that notwithstanding that the Authorised User is not a permitted
use within such provisions as aforesaid the Tenant shall remain fully bound and
liable to the Landlord in respect of the obligations undertaken by the Tenant
by virtue of this Lease without any compensation recompense or relief of any
kind whatsoever
11. NOT to do or permit or suffer to be done anything whereby the policy or
policies of insurance of the Demised Premises against the Insured Risks (as
hereinafter defined) may become void or voidable or whereby the rate of premium
thereon may be increased and to repay to the Landlord all sums paid by way of
increased premiums and all expenses properly incurred by it in or about any
renewal of such policy or policies rendered necessary by a breach of this
covenant (all of which payments shall be included in the rent herein reserved)
and to comply with all recommendations of the insurers as to fire precautions
12. NOT to do or permit or suffer to be done anything in or upon the Demised
Premises or any part thereof which may be or become a nuisance annoyance or
11
<PAGE> 13
damage to the Landlord or the tenants or occupiers of the remainder of the
Development or of other property in the neighbourhood
13. NOT to exhibit or permit or suffer to be exhibited on any part of the
exterior of the Development and the Demised Premises or in the windows or on the
external walls rails or fences thereof any placard poster signboard fascia board
or fascia sign or other advertisement PROVIDED ALWAYS that the Tenant may with
the prior written consent of the Landlord (such consent not to be unreasonably
withheld or delayed) erect on the exterior of the Demised Premises a sign of a
size approved by the Landlord consistent with the size of other tenants' signs
at the Development specifying the name and nature of the Tenant's business
14. TO comply as soon as reasonably practicable at the Tenant's own expense
with any nuisance sanitary or other statutory notices lawfully served by any
local or public authority upon either the Landlord or the Tenant so far as the
same relate to the Tenant's use or occupation of the Demised Premises and to
comply with all the requirements of the Office Shops and Railway Premises Act
1963 and the Fire Precautions Act 1971 and any Act or Acts for the time being
amending or replacing the same and to keep the Landlord fully indemnified
against all actions proceedings costs expenses claims and demands in respect
thereof incurred by the Landlord or for which the Landlord is responsible
15. IN connection with the Defective Premises Act 1972 or any legislation
modifying amending or replacing the same to:-
(a) notify the Landlord in writing immediately of any defect in the
Demised Premises of which the Tenant is aware
(b) erect and maintain within the Demised Premises prominent notices of
warning of relevant defects within the meaning of Section 4 of the said Act
in such form as the Landlord may from time to time reasonably require
(c) indemnify the Landlord against any actions proceedings costs expenses
claims and demands incurred thereunder by reason of the Tenant's failure to
erect and display such notices
(d) permit the Landlord and its agent with or without workmen and others
at any time on reasonable prior written notice (save in case of emergency)
to enter upon the Demised Premises erect and exhibit notices thereon giving
warning of relevant defects within the meaning of the said Section 4 in the
12
<PAGE> 14
Demised Premises and to install lighting or any other reasonable means of
warning or protection against such defects
16. NOT to hold or permit or suffer to be held any sale by auction on the
Demised Premises
17. (a) NOT to assign charge or part with possession of part only (as
distinct from the whole) of the Demised Premises nor share possession or
occupation of the whole of the Demised Premises whatsoever nor to create more
than a total of three separate underlettings of the Demised Premises at any one
time each of which underlettings must consist of the whole of one or more
floors of the Demised Premises and so that for the avoidance of doubt there
should at no time be more than three separate occupations within the Demised
Premises including the occupation of the Tenant and subject in all such cases
to compliance with the provisions in this clause (any sublet part of the Demised
Premises hereinafter referred to in this clause is hereinafter referred to as
"a permitted part")
(b) Not to assign underlet or part with possession of the whole of the
Demised Premises for all or any part of the said term except by an assignment
or underletting permitted under the provisions of this clause nor to assign
underlet or permit the occupation of the Demised Premises or any part thereof
by or the vesting of any interest or estate therein in any person firm company
or other body or entity which has the right to claim diplomatic immunity or
exemption in relation to the observance and performance of the covenants and
conditions of and contained in this Lease
(c) Not to assign the whole of the Demised Premises without first
obtaining the prior written consent of the Landlord (which subject to compliance
with the provisions of this clause shall not be unreasonably withheld or
delayed) and the Landlord and the Tenant hereby agree that for the purposes of
section 19(1A) of the Landlord and the Tenant Act 1927 the Landlord may
(without prejudice to the right of the Landlord to refuse consent on any other
reasonable ground) withhold consent to an assignment:
(i) If any of the following circumstances exist at the date of the
application for consent:
(A) There is in the reasonable opinion of the Landlord a substantial
breach of any of the Tenant's covenants in this Lease
13
<PAGE> 15
(B) The proposed assignee is not an Acceptable Assignee and for the
purposes of this paragraph an Acceptable Assignee shall in the case of
an individual or individuals be a person or persons who in the
reasonable opinion of the Landlord will be (1) a respectable and
responsible tenant (2) of sound financial standing and capable of
performing the Tenant's covenants in this Lease throughout the residue
of the Term and (3) is demonstrably capable of performing the Tenant's
covenants in this Lease throughout the residue of the Term AND in the
case of a limited or public liability company shall be a company which
in the reasonable opinion of the Landlord will be (1) a respectable
and responsible tenant (2) of sound financial standing and capable of
performing the Tenant's covenants in this Lease throughout the residue
of the Term and
(C) In the reasonable opinion of the Landlord the effect of the
proposed assignment would be to diminish or adversely affect the value
of the Landlord's interest in the Demised Premises on the assumption
(whether or not a fact) that the Landlord wished to sell its interest
on the day following completion of the proposed assignment
(ii) If the Landlord reasonably requires any one of the following
conditions to be complied with and which is not satisfied:
(A) On or before completion of any assignment the Tenant shall have
entered into an authorized guarantee agreement as defined in clause 16
of the Landlord and Tenant (Covenants) Act of 1995 in the form set out
in the Tenth Schedule hereto
(B) On or before completion of the assignment to it the assignee
shall have deposited with the Landlord an amount equal to the yearly
rent for six months payable at the date of the assignment as security
for the performance of the Tenant's covenants in this Lease and
entered into a deed in the form set out in the Eighth Schedule hereto
(C) On or before completion of the assignment if the Landlord shall
reasonably so require the assignee shall have procured an acceptable
guarantor or guarantors who shall execute and deliver to the Landlord
a deed containing direct covenants by such guarantor (or if more than
one such guarantor joint and several covenants) with the Landlord in
the form of those set out in the Seventh Schedule hereto
14
<PAGE> 16
(d) Not to underlet the whole or a permitted part of the Demised Premises
without:-
(i) obtaining the prior written consent of the Landlord (such consent not
to be unreasonably delayed or withheld subject as hereinafter provided)
(ii) procuring that any underlease to be granted hereunder shall
(A) be granted without a fine or premium and at a rent not less than
the rent specified herein (including any rent revision as provided for
herein) or the then open market value of the Demised Premises or a due
proportion thereof in the case of an underletting of a permitted part
(whichever shall be the higher)
(B) contain provisions for rent review in an upward direction only at
such times as to coincide with the rent reviews provided for in this
Lease
(C) contain a condition for re-entry on breach of any covenant by the
undertenant
(D) contain a covenant by the undertenant to perform and observe all
the Tenant's covenants and the other provision contained in this Lease
(other than the payment of the rents reserved in this Lease) or
(E) be in a form previously approved by the Landlord such approval not
to be unreasonably withheld or delayed and
(F) exclude the provisions of sections 24 to 28 of the Landlord &
Tenant Act 1954 and a copy of the Court Order provided to the Landlord
(iii) obtaining from the underlessee covenants with the Tenant (which
covenants the Tenant hereby covenants to enforce) not to assign transfer
mortgage or charge the whole of the Demised Premises without the Landlord's
consent subject to the provisions of clause 13(b) herein being complied with in
relation to any assignment and the Tenant having procured direct covenants from
such assignee with the Landlord on the same terms as are contained in paragraph
(v) of this clause
15
<PAGE> 17
(iv) obtaining from the underlessee a covenant not to further underlet the
whole or any part of the Demised Premises or a permitted part or assign
mortgage charge or share possession or occupation of any part of the
Demised Premises and
(v) obtaining a direct covenant by the underlessee with the Landlord to
perform and observe all the Tenant's covenants and the other provisions
contained in this Lease (other than the payment of the rent reserved in
this Lease) and the proposed underlease
(vi) if the Landlord shall reasonably so require the Tenant procuring an
acceptable guarantor for any person to whom the Demised Premises are to be
underlet who shall execute and deliver to the Landlord a deed containing
direct covenants by such guarantor (or if more than one such guarantor
joint and several covenants) with the Landlord in such terms as the
Landlord shall reasonably stipulate PROVIDED THAT the requirement for a
guarantor shall only apply in the case of an underletting for a term
exceeding three years
(e) to enforce the performance and observance by any such undertenant of
the covenants provisions and conditions of any underlease and not at anytime
knowingly to waive any breach of the same
(f) not to vary the terms of any permitted underlease or agree so to do
without the prior written consent of the Landlord (such consent not to be
unreasonably withheld or delayed)
(g) to procure that the rents reserved by any permitted underlease shall
not be commuted or payable more than one quarter in advance and not to permit
the reduction of any rents reserved by any such underlease
(h) not to agree any rent review under such underlease without first
obtaining the written consent of the Landlord (such consent not to be
unreasonably withheld or delayed)
(i) nothing in this clause 2(17) shall prevent the Tenant from sharing
occupation of the whole or any part of the Demised Premises with any company
which is in the same group as the Tenant (as defined by the Landlord & Tenant
Act 1954) PROVIDED THAT no relationship of landlord and tenant shall be created
or be deemed to exist between such company and the Tenant and the right of any
company to share possession of the Demised Premises or any part or parts thereof
16
<PAGE> 18
as aforesaid shall forthwith determine upon such company ceasing to be part of
the same group or upon the Tenant ceasing to be in occupation of the Demised
Premises or upon the determination of this Lease (howsoever determined)
whichever shall be the earliest
(j) within 21 days of the death during the Term of this Lease of any
person who has or shall have guaranteed to the Landlord the payment to the
Landlord of the rents and the observance and performance of the covenants on
the part of the Tenant herein contained or a person or body (as the case may
be) who has guaranteed to the Landlord as mention in sub-clause (d)(vi) herein
being adjudged a bankrupt or (being a company) going into liquidation (other
than a voluntary liquidation for the purposes of amalgamation or reconstruction
of a solvent company) in respect of which the Landlord's consent has first been
obtained (such consent not to be unreasonably withheld or delayed) or a
receiver administrator administrative receiver or other encumbrancer taking
possession of or being appointed in respect of the whole or any part of such
person's or body's assets at the Demised Premises or such person or body making
any arrangement with creditors for the liquidation of his or its debts by
composition or otherwise or any voluntary arrangement as defined in the
Insolvency Act 1986 or ceasing or threatening to cease to carry on his or its
business as a whole or becoming unable to pay its debts within the meaning of
Section 123 of the Insolvency Act 1986 THEN in each such case to give notice
thereof to the Landlord and if reasonably so required by the Landlord at the
expense of the Tenant within a further 6 weeks to procure some other person
reasonably acceptable to the Landlord to execute a guarantee in respect of the
payment of the rent and the observance and performance of the covenants in such
form as the Landlord may reasonably stipulate
18. WITHIN one month after the execution of any assignment assent transfer
charge or underlease or assignment of an underlease of or relating to the
Demised Premises to give notice thereof in writing with particulars thereof to
the solicitors for the time being of the Landlord and to produce to them a
certified copy of the deed evidencing such dealing or transmission (and in case
of a devolution of the interest of the Tenant not perfected by an assent within
six months of the happening thereof to produce to the said solicitors the grant
of representation under which such devolution arises) and to pay to them a
registration fee of TWENTY-FIVE POUNDS (pound sterling 25.00) together with
Value Added Tax thereon (or such other sum as the said solicitors may
reasonably require) in respect of each such dealing or transmission together
with such fees as may be payable to any Superior Landlord
19. (a) TO permit the Landlord during the three months immediately
17
<PAGE> 19
preceding the determination of this Lease to affix and retain without
interference upon any suitable part of the Demised Premises (but not so as to
materially affect the access of light or air to the Demised premises) a notice
for reletting the same and to permit persons with written authority from the
Landlord or its agent at all reasonable times in day time and by not less than
48 hours prior written notice to view the Demised Premises
(b) In the even of the Landlord wishing to sell or otherwise deal with
the reversion at any time during the said term to permit persons with written
authority from the Landlord or the Landlord's Agent at reasonable times in day
time and by no less than 48 hours prior written notice to view the Demised
Premises and to permit the Landlord to affix "For Sale" notices in a similar
manner as the notices referred to in the preceding sub-clause (19a)
20. TO pay to the Landlord all reasonable and properly incurred costs charges
and expenses (including solicitors counsels and surveyors and other professional
costs and fees and bailiffs costs charges expenses and commission) which may be
charged or incurred by the Landlord or any Superior Landlord:
(a) in any application by the Tenant to any planning authority or any
application by the Tenant to the Landlord for any consent pursuant to the
covenants herein contained
(b) in any proceedings under Section 146 or 147 of the Law of Property Act
1925 or the preparation or service of notice thereunder (notwithstanding
forfeiture is avoided otherwise than by relief granted by the Court) or for
the preparation and service of and negotiations consequent upon a Schedule
of Dilapidations served at any time during or within one month after the
expiry of the Term
(c) in connection with the recovery of any arrears of rent and monies
payable and recoverable as rent hereunder
(d) in connection with the enforcement of any of the Tenant's covenants
herein contained
AND to keep the Landlord fully indemnified against all actions proceedings
reasonably taken and reasonable costs expenses claims and demands whatsoever in
respect of all or any of the said applications consents notices negotiations
and proceedings PROVIDED ALWAYS that whenever in this Lease the consent or
18
<PAGE> 20
license of the Landlord is required in any matter then the Landlord shall be
entitled to withhold its consent or license unless and until it has obtained
the consent of any Superior Landlord
21. NOT knowingly to allow any encroachment to be made or easement acquired on
or over the Demised Premises and in particular not to allow the right of access
of light from or over the Demised Premises to any neighboring property to be
acquired and if any encroachment or easement shall be made or threatened to be
made or if any window or opening shall be opened or made or threatened to be
opened or made in any neighboring property which if not obstructed might by
lapse of time confer the right to such access of light on the owner of any
neighboring property to give notice thereof to the Landlord and to permit it
and its servants to enter the Demised Premises and to do all such things as may
be proper for the purpose of preventing the making of such encroachment or the
acquisition of such easement or right to light
22. TO reimburse the Landlord upon demand the cost of periodic valuations or
assessments of the cost of reinstatement of the Demised Premises for insurance
purposes provided that the Tenant shall be liable to pay such costs no more
than once every two years of the Term
23. (a) IN the event that Value Added Tax shall be chargeable on the Landlord
in respect of any supplies made to the Tenant the Tenant shall in addition to
any amounts otherwise payable pay the Landlord the amount of the Value Added
Tax so chargeable payable on the later of the date of supply and the date of
delivery to the Tenant of a VAT invoice and further in the event of the
Landlord electing at any time during the Term to waive exemption from Value
Added Tax in respect of the Demised Premises to pay the amount of Value Added
Tax chargeable on the rents hereby reserved and on the Interim Charge and the
Service Charge as defined in the Sixth Schedule as a result of such election
having been made and all or any of such payments shall be made by way of rent
(b) The Tenant shall indemnify and keep indemnified the Landlord against
all losses costs claims demands and liabilities which the Landlord may suffer or
incur as a result of the Tenant's inability to recover Value Added Tax in full
including in particular any liability on the part of the Landlord to repay any
sum or sums to HM Customs & Excise or any inability of the Landlord to recover
in full as input tax any Value Added Tax paid by it to a third party
19
<PAGE> 21
(c) The Tenant shall inform the Landlord at any time where the
Tenant becomes an entity which is not a taxable entity for the purposes of the
Value Added Tax Act 1994 or if the rate at which the Tenant is able to recover
Value Added Tax (in respect of supplies made from the Demised Premises or
generally) altering such as to permit or prevent (as the case may be) any
election made or which might be made by the Landlord under paragraph 2 of
Schedule 10 of the Value Added Tax Act 1995 applying to the grant of this Lease
or to the supplies made to the Tenant under this Lease
24. (a) IF the rent hereby reserved or any part thereof or any other
sum payable by the Tenant to the Landlord pursuant to the provisions of this
Lease shall not have been paid upon the date whereon payment of the same was due
then the Tenant shall pay to the Landlord interest upon such rent or other sum
at the Prescribed Rate until the said rent or other sum shall have been paid
(b) By "Prescribed Rate" is meant Four per centum (4%) over the
base rate published from time to time of National Westminster Bank plc or if
the same shall cease to exist or publish a base rate during the Term of such
other London Clearing Bank as the Landlord may nominate
(c) Interest payable by the Tenant pursuant to this sub-clause
shall be calculated from day to day
(d) Interest payable by the Tenant upon arrears of rent shall not
itself be deemed to be rent
25. NOT to use the Car Parking Spaces for any purposes whatsoever other than
(i) for loading and unloading or (ii) to park thereon no more than six
roadworthy vehicles and to keep the Car Parking Spaces clean and tidy at all
times
26. NOT to cause or permit any obstruction of any of the common accessways
within the Development
27. TO comply with all the Landlord's covenants in the Second Floor Lease
except insofar as such covenants are the responsibility of the Landlord in this
Lease and to keep the Landlord indemnified in respect of any claims in respect
of any breach of this covenant
20
<PAGE> 22
THE FOURTH SCHEDULE
The Covenants of the Landlord
1. THAT the Tenant paying the rents hereby reserved and observing and
performing the several covenants and stipulations herein on its part contained
shall peaceably hold and enjoy the Demised Premises during the Term without any
lawful interruption by the Landlord or any person rightfully claiming under or
in trust for it
2. TO maintain repair amend renew cleanse repaint and redecorate as and when
the Landlord reasonably thinks fit and otherwise keep in good and tenantable
condition
(a) the boundary walls and fences of and in the curtilage of the
Development
(b) the Access Road and the Common Parts of the Development
(c) the Car Parking Spaces
PROVIDED THAT the Landlord shall not be liable to the Tenant for any defect or
want of repair hereinbefore mentioned unless the Landlord has had notice
thereof nor in respect of any obligations hereunder that is within the ambit of
any of the Tenant's covenants hereinbefore contained.
3. TO maintain in good working order and repair all Conduits in under and
upon the Development and which shall serve the Demised Premises (excluding
nevertheless any which exclusively serve the Demised Premises)
4. SO far as possible and subject always as provided in Clause 7 of the Fifth
Schedule to perform the following services:
(a) to keep the Common Parts of the Development clean and tidy
(b) to supply maintain repair and renew as need be such alarms and
firefighting equipment in the Common Parts of the Development as the
Landlord may reasonably consider necessary or as may be required to be
supplied and maintained by the Landlord by statute or by the fire authority
for the district
21
<PAGE> 23
(c) to supply provide purchase maintain renew replace repair and
keep in good and serviceable order and condition all appurtenances
appointments fixtures and fittings bins receptacles tools appliances
materials and other things which the Landlord may reasonably in the
interests of good estate management deem necessary for the maintenance
upkeep or cleanliness of the Development
(d) to employ such staff as the Landlord may at its discretion reasonably
deem necessary to enable the Landlord to carry out or maintain the said
services or any of them and for the general conduct management and security
of the Common Parts of the Development.
PROVIDED ALWAYS that the Landlord may at the Landlord's discretion add to
extend vary or alter the rendering of the said services or any of them from
time to time if the Landlord shall reasonably deem it desirable so to do for the
more convenient or efficient conduct and management of the Development.
5. TO insure and keep insured in the full reinstatement value the Demised
Premises and the Common Parts of the Development and the Landlord's fixtures
therein against loss or damage by fire lightning explosion aircraft (or
other aerial device) or articles dropped therefrom riot civil commotion
malicious person earthquake storm tempest flood bursting and overflowing
of water pipes tanks and other apparatus impact by road vehicles and such
other risks as the Landlord may deem desirable or expedient including loss of
rent hereunder for up to four years and architects' and surveyors' fees and
demolition and clearance and similar expenses ("the Insured Risks") in some
insurance office or with underwriters of repute in the full rebuilding value
thereof or such greater sum as required by the Tenant and upon request by the
Tenant the Landlord shall supply the Tenant no more than once in any year with
a copy of the then current insurance schedule and shall procure that the
interest of the Tenant is noted on the policy and to produce to the Tenant a
copy of such policy and of the annual premium receipt and in case of
destruction or of damage to the Demised Premises or the Common Parts of the
Development or any part thereof from any cause covered by such insurance to lay
out all monies received in respect of such insurance (other than monies
received for loss of rent and architects' and surveyors' fees and for
demolition and clearance expenses) in rebuilding and reinstating the same as
soon as reasonably practicable PROVIDED ALWAYS that if such rebuilding or
reinstating be prevented or frustrated all such insurance monies (other than as
aforesaid) shall be retained by the Landlord and this Lease shall thereupon
determine
22
<PAGE> 24
6. TO bear pay and discharge all existing and future rates (including water
rates) taxes duties assessments charges impositions and outgoings whatsoever
assessed charged and imposed upon the Common Parts of the Development
THE FIFTH SCHEDULE
Proviso Agreements and Declarations
1.1 AT any time after any of the following events shall happen the Landlord
may re-enter upon all or any parts of the Demised Premises:
1.1.1 the whole or any part of the rent shall be unpaid for twenty one
days after becoming payable whether formally demanded or not or
1.1.2 there shall be any breach of any of the Tenant's covenants or
1.1.3 the Tenant or any surety for the Tenant (being a company) shall
enter into liquidation whether compulsory or voluntary (save for the
liquidation of a solvent company for the purpose of amalgamation or
reconstruction) or suffers an administrative receiver to be appointed or
enters into a voluntary arrangement as defined in Section 1 of the
Insolvency Act of 1986 or does or suffers anything which would entitle a
receiver to take possession of any of its assets or does or suffers
anything which would entitle any person to present a petition for winding
up or apply for an administration order to cease to exist or is dissolved
or
1.1.4 the Tenant or any surety for the Tenant (being an individual) shall
be unable to pay a debt or have no reasonable prospect of being able to
pay a debt within the meaning of Section 268 of the Insolvency Act 1986
or makes an application to the Court for an interim order under Section
253 of the Insolvency Act 1986 or does anything which would entitle a
petition for a bankruptcy order to be made or makes any assignment for the
benefit of or enters into any arrangement with his creditors either by
composition or otherwise PROVIDED ALWAYS that if any of the events in
paragraphs 1.1.3 or 1.1.4 shall occur to a surety of the Tenant rather
than the Tenant or if the Surety shall die then the Landlord may not
re-enter under paragraph 1.1 for a period of two months thereafter
PROVIDED FURTHER that if the Tenant within such period shall provide the
Landlord with an alternative
23
<PAGE> 25
surety reasonably acceptable to the Landlord or a security deposit for
rent equivalent to six months value of the then passing rent such deposit
to be in the form of the Ninth Schedule hereto the Landlord shall not be
entitled to re-enter the Demised Premises because of such an event having
occurred to a surety
1.2 If the Landlord shall re-enter in accordance with Clause 1.1 of this
Schedule then this Lease shall thereupon terminate but without prejudice to any
right of action or remedy of the Landlord in respect of any breach
non-observance or non-performance of any of the Tenant's covenants or the
conditions herein contained
2.1 IN case the Demised Premises or any part thereof of any necessary access
thereto shall at any time during the Term be so damaged or destroyed by the
Insured Risks so as to be unfit for occupation and use then (unless the
insurance money shall be wholly or partially irrecoverable by reason solely or
in part of any act or default of the Tenant) (or where such loss of insurance
proceeds does occur the Tenant promptly on demand makes good that shortfall)
the rent hereby reserved including any service rent and insurance rent or a
fair proportion thereof according to the nature and extent of the damage
sustained shall be suspended for the period for which loss of rent insurance is
maintained under Clause 5 of the Fourth Schedule or if earlier until the
Demised Premises shall again be rendered fit for occupation and use and any
dispute with reference to this proviso shall be determined by the Landlord's
Surveyor whose decision shall be final and binding on the parties hereto
2.2 PROVIDED THAT if the Demised Premises shall be destroyed or damaged by any
of the Insured Risks so as to become unfit for occupation and use and the
damage is not made good within the period in respect of which loss-of-rent
insurance cover is effected then the Tenant or the Landlord may on the
expiration of such period by written notice given to the other elect to
determine this Lease and upon the service of such notice (PROVIDED ALWAYS that
in the case of notice given by the Tenant to the Landlord there is no material
subsisting breach of the Tenant's covenants hereunder) this Lease shall
forthwith determine and the parties hereto shall forthwith be released from all
and singular their further duties and obligations hereunder but without
prejudice to the rights of either party in respect of any antecedent breach of
any of the covenants herein contained
3. IT is hereby agreed between the Landlord and the Tenant that the
provisions for compensation contained in Section 37 of the Landlord and Tenant
Act of 1954 shall not apply to this Lease except in the events specified in
Section 38(2) of that Act
24
<PAGE> 26
4. THIS Lease shall incorporate the regulations as to notices contained in
Section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery
Service Act 1962.
5. THE expression "the Planning Acts" shall in this Lease include any Act or
Acts for the time being in force amending or replacing the Town and Country
Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act
1990 the Listed Buildings Act 1990 and the Planning (Consequential Provisions)
Act 1990 and any other legislation of a similar nature and any statutory
modification or reenactment thereof for the time being in force and any orders
instruments plans rules regulations permissions consents and directives made
under or in pursuance of the said Acts or any of them
6. ANY reference to a statute (whether specifically named or not) shall
include any amendment or re-enactment of it for the time being in force and all
instruments orders notices regulations directions bye-laws permissions and
plans for the time being made issued or given under it or deriving validity
from it
7. NOTWITHSTANDING anything herein contained the Landlord shall not be liable
to the Tenant nor shall the Tenant have any claim against the Landlord in
respect of:-
(a) any interruption in any of the services hereinbefore mentioned by
reason of necessary repair or maintenance of any installations or
apparatus or damage thereto or destruction thereof by fire water act of
god or other cause beyond the Landlord's control or by reason of
mechanical or other defect or breakdown or frost or other inclement
conditions or unavoidable shortage of fuel materials water or labour or
(b) any act omission or negligence of any porter attendant or other
servant of the Landlord in or about the performance or purported
performance of any duty relating to the provision of the said services or
any of them
THE SIXTH SCHEDULE
The Service Charge
1. THE Service Charge hereinbefore made payable means 29.48 per centum of
25
<PAGE> 27
the Annual Service Cost (as hereinafter defined) in respect of each calendar
year running from the 1st day of January and ending on the 31st day of December
next following or such other period as the Landlord may determine ("the
Accounting Period") SAVE THAT in respect of any part of the Annual Service Cost
as under paragraph 3(a) to (g) of this Schedule relates directly to the Access
Road and the Car Parking Spaces and the area edged yellow on Plan B the Service
Charge means 55.36% of such part of the Annual Service Cost as so relates and
further in respect of any part of the Annual Service Cost which relates
directly to costs incurred in complying with the Landlord's insurance
obligations hereinbefore contained in paragraph 5 of the Fourth Schedule (other
than so far as the same relates to the Common Parts of the Development) the
Service Charge means 100% PROVIDED ALWAYS that for the period ending on 8th
November 1997 the Tenant shall not be required to pay any greater sum for that
period than calculated at the rate of pounds sterling 1.25 per square foot for
the Demised Premises.
2. THE Interim Charge hereinbefore made payable means such sum to be paid on
account of the Service Charge in respect of each Accounting Period as the
Landlord shall specify to be a fair and reasonable payment. The first payment
of the Interim Charge (on account of the Service Charge for the Accounting
Period during which this Lease is executed) shall be made on the execution
hereof and thereafter shall be by equal payments in advance on the twenty
fourth day of June and the Twenty fifth day of December in each year and in
case of default shall be recoverable as rent in arrear
3. THE Annual Service Cost in each Accounting Period shall be the aggregate
of the sums actually expended or liabilities incurred by the Landlord in
connection with the following matters:-
(a) the cost of the observance and performance of the covenants on the
part of the Landlord hereinbefore contained in paragraphs 2 3 4 5 and 6 of
the Fourth Schedule
(b) the reasonable fees charges and expenses payable to any qualified
person whom the Landlord may reasonably employ to inspect repair and keep
in running order the alarm systems including the Landlord's costs from
time to time incurred in entering into a contract or contracts in usual
form with any such qualified persons
(c) the reasonable costs of taking out and maintaining in force an
effective insurance policy or policies against any and every liability of
the Landlord
26
<PAGE> 28
for injury to or death of any person (including every agent servant and
workman of the Landlord) and damage to or destruction of the property of
any such person arising out of the management and/or maintenance of the
Common Parts of the Development and in particular but without prejudice to
the generality of the foregoing the cost of insurance against such injury
death damage or destructoin as aforesaid due to the act neglect default or
misconduct of any agent servant or workman of the Landlord employed in
connection with the management and/or maintenance of the Common Parts of
the Development
(d) in addition to the wages from time to time payable by the Landlord the
employers National Insurance and Industrial Injuries Contributions and any
taxes or similar levies from time to time payable by the employer in
respect of all agents servants and workmen employed by the Landlord solely
in connection with the performance and observance of any of the covenants
on its part herein contained
(e) the reasonable cost of the carrying out of other work or services of
any kind whatsoever which the Landlord may reasonably consider desirable
for the purpose of maintaining or improving serves in the Development
(f) all reasonable fees and expenses payable to any person firm or company
whom the Landlord may from time to time reasonably employ in connection
with the management and/or maintenance of the Common Parts of the
Development including the cost of preparing statements of the Annual
Service Cost and including legal costs incurred relating to the management
and maintenance of the Development and in the collection of service charges
and rent
(g) the cost of complying with all statutory requirements regulations or
requirements of any competent local or other authority relating to the
Common Parts of the Development
4. THE Landlord shall be entitled to make such reasonable provision for a
reserve for anticipated future expenditure to be incurred in the performance of
the covenants on the part of the Landlord contained herein as the Landlord may
reasonably deem appropriate and the amounts so provided shall form part of the
Annual Service Cost
5. THE Landlord will use its best endeavours to maintain the Annual Service
27
<PAGE> 29
Cost at the lowest reasonable figure consistent with due performance and
observance of its obligations hereunder but the Tenant shall not be entitled to
object to any items comprised therein by the reason only that the materials
work or service in question might have been provided or performed at a lower
cost
6. AS soon as practicable after the end of each Accounting Period the
Landlord will submit to the Tenant an itemised statement certified by the
Managing Agents for the time being to the Landlord containing the following
information:-
(a) the amount of the Annual Service Cost
(b) the amount of the Interim Charge paid by the Tenant in respect of that
Accounting Period together with any surplus carried forward from the
previous Accounting Period
(c) the amount of the Service Charge in respect of that Accounting Period
and of any excess or deficiency of the Service Charge over the
Interim Charge
7. THE Tenant shall be entitled within twenty-eight days of the receipt of
such statement to inspect the vouchers and receipts for all items included in
such statement
8. IF the Interim Charge paid by the Tenant in respect of any Accounting
Period exceeds the Service Charge for that period the surplus of the Interim
Charge so paid over the above the Service Charge shall be carried forward by
the Landlord and credited to the account of the Tenant in computing the Service
Charge in succeeding Accounting Periods as hereinbefore provided except in
respect of the final year of the Term (howsoever determined) when any such
overpayment by the Tenant shall be repaid to the Tenant within 21 days of the
issue of the aforementioned statement subject to the right of the Landlord to
set off such sum against any sums due by the Tenant under its covenants herein
9. IF the Service Charge in respect of any Accounting Period exceeds the
Interim Charge paid by the Tenant in respect of that Accounting Period together
with any surplus from previous years carried forward as aforesaid then the
Tenant shall pay the excess to the Landlord within twenty-one days of service
upon the Tenant of the statement referred to above and in case of default the
same shall be recoverable from the Tenant as rent in arrear
28
<PAGE> 30
THE SEVENTH SCHEDULE
The Covenant of the Surety
1. THE Surety in consideration of the demise hereinbefore contained having
been made at his request HEREBY COVENANTS with the Landlord that the Tenant
will throughout the Term hereby created or any extension or continuation
thereof under Section 24 of the Landlord and Tenant Act 1954 or any statutory
modification thereof for the time being in force or otherwise by statute or
common law pay the said rents hereby reserved or subsequently increased on the
days and in manner aforesaid and will perform and observe all the Tenant's
covenants hereinbefore contained and that in case of default in such payment of
rents or in the performance or observance of such covenants as aforesaid the
Surety will pay and make good to the Landlord on demand all losses damages
costs and expenses thereby arising or incurred by the Landlord
notwithstanding:-
(a) any neglect or forbearance of the Landlord in endeavouring to
obtain payment or to enforce performance of the several
stipulations herein on the Tenant's part contained (and any time
which may be given to the Tenant by the Landlord shall not
release or exonerate or in any way affect the liability of the
Surety under this covenant)
(b) that the terms of this Lease have been varied by agreement
between the Landlord and the Tenant where such variation is
immaterial and not prejudicial to the Surety
(c) any other act or thing whereby but for this provision the Surety
would have been released
2. IF a liquidator or trustee in bankruptcy shall disclaim this Lease and
if the Landlord shall by notice in writing have to required the Surety will
take from the Landlord a lease of the Demised Premises for a term commensurate
with the residue of the Term which would have remained had there been no
disclaimer at the same rent and subject to substantially the same covenants and
conditions as are reserved by and contained in this Lease such lease to take
effect from the date of such disclaimer and in such case the surety shall
without delay take or join in all acts necessary for the grant of such new
lease and will pay all reasonable and proper costs relating to the grant of such
new lease and execute and deliver to the Landlord a counterpart thereof
29
<PAGE> 31
3. IF the Landlord shall not require the Surety to take a lease of the
Demised Premises pursuant to Clause 2 above the Surety shall nevertheless upon
demand pay to the Landlord a sum equal to the rent that would have been payable
under this Lease but for the disclaimer or other event putting an end to the
effect of the Lease in respect of that period from the date of the said
disclaimer or the Lease ceasing to have effect as aforesaid until the
expiration of three months therefrom or until the Demised Premises shall have
been relet by the Landlord whichever shall first occur
THE EIGHTH SCHEDULE
Form of Rent Deposit Deed
THIS DEED is made the day of 199
BETWEEN:-
(1) THE Landlord (which expression shall mean only the person for the time
being in whom the reversion immediately expectant upon the determination of the
Lease is vested) who is currently [ ]
(2) THE Tenant (which expression shall mean only the person in whom the
benefit of the term of the Lease is vested) who is currently [ ]
SUPPLEMENTAL TO -
A Lease ("the Lease") date the day of 199 and made between
MARLDOWN LIMITED of the first part
of the second part and of the third
part relating to the premises known as
NOW THIS DEED WITNESSETH as follows:
1.1 "The Initial Deposit" shall mean a sum equivalent to one half of the
annual rent payable at the date hereof or such greater sum as shall represent
one half of the annual rent from time to time reserved under the Lease
(excluding any rent-free period)
1.2 "The Deposit Account" means the interest earning deposit account opened by
30
<PAGE> 32
the Landlord's Solicitors (as hereinafter defined) at one of the London Clearing
Banks ("the Bank") on or before the date of this Deed and in which the
Landlord's Solicitors shall place the Initial Deposit
1.3 "The Deposit Balance" means the amount from time to time standing to the
credit of the Deposit Account
2. The Landlord and the Tenant irrevocably instruct the Landlord's Solicitors
("the Landlord's Solicitors") by this Deed to act as stakeholders the operation
of the Deposit Account in accordance with this Deed and in particular to act in
accordance with this Deed in:
2.1 the making of payments into the Deposit Account
2.2 the withdrawal of sums from the Deposit Account and
2.3 accounting to the Landlord and the Tenant for money due to either of them
from the Deposit Account
3.1 The Tenant shall on the execution hereof deposit with the Landlord's
Solicitors the Initial Deposit as security for the due performance and
observance of the covenants on the part of the Tenant contained in the Lease
without prejudice to the rights and remedies of the Landlord under the Lease
3.2 The Landlord's Solicitors are instructed to forthwith pay the Initial
Deposit into and to keep it in the Deposit Account and the Tenant may with the
Landlord's prior agreement (such agreement not to be unreasonably withheld)
authorise the Landlord's Solicitors to vary the terms of the Deposit Account
4.1 The interest which shall accrue upon the Deposit Balance shall be added to
the Deposit Balance and shall remain in the Deposit Account and shall be dealt
with as part of the Deposit Balance
4.2 The Tenant (acting on its own behalf or by its Solicitors) shall after
reasonable intervals following the date of this Deed or any payment made to the
Tenant pursuant to this Clause be entitled by notice in writing to require the
Landlord's Solicitors to draw upon the Deposit Account in payment to the Tenant
of an amount equal to the Interest which at the date of such notice has accrued
to the Deposit Balance.
31
<PAGE> 33
5. The Landlord shall whenever so reasonably requested by the Tenant supply
to the Tenant copies of all statements and other information relating to the
Deposit Account as the Tenant may from time to time reasonably require
6. The Tenant hereby covenants with the Landlord as follows:
6.1 Until the release of the Deposit Balance or appropriation from the
Deposit Balance under Clause 7 hereof to maintain the Deposit held by the
Landlord's Solicitors in an amount equal (excluding any interest accrued to the
Deposit) to one half of the annual rent from time to time reserved under the
Lease, and
6.2 If the rent reserved by the Lease shall be increased pursuant to the
provisions for the review of rent therein contained or if any monies shall be
appropriated from the Deposit Balance by the Landlord in the manner hereinafter
authorised under Clause 7 hereof within twenty-one days of written request from
the Landlord so to do to deposit with the Landlord's Solicitors an amount
necessary to maintain the Deposit Balance at the appropriate level
7.1 The Landlord shall be entitled at any time to require the Landlord's
Solicitors to draw from the Deposit Account in payment to the Landlord of any
amount not exceeding any sum then due to the Landlord arising out of default by
the Tenant if:
7.1.1 The Landlord shall have previously given to the Tenant not less
than fourteen days notice in writing of the Landlord's intention to
procure any withdrawal from the Deposit Account and the notice shall have
specified the default to which the withdrawal relates, and;
7.1.2 The Tenant shall not have remedied the default complained of or
commenced and be diligently proceeding to remedy the default to the
reasonable satisfaction of the Landlord by the expiration of the notice.
8. The Deposit Balance (including interest thereon) and unpaid accrued
interest thereon will be released to the Tenant by the Landlord following
whichever shall be the earlier of:
8.1 The completion of a lawful assignment of the Premises by the Tenant with
the consent of the Landlord in accordance with the terms of the Lease to an
assignee who shall (if reasonably required by the Landlord) provide an
equivalent deposit in the terms of this Deed whereupon the provisions of this
Deed shall automatically cease and determine
32
<PAGE> 34
8.2 The expiry or sooner determination of the Term created by the Lease
subject to the Landlord's prior right of withdrawal under Clause 7.1 hereof in
the event of any default by the Tenant whereupon the provisions of this Deed
shall automatically cease and determine
8.3 In the event that the Lease becomes vested in a company which is
registered in the United Kingdom such company providing the Landlord with its
most recent three consecutive years accounts audited by a Chartered Accountant
the most recent of which must have been approved by the directors of such
company not more than three months before such accounts are provided to the
Landlord and each set of such accounts showing net profits amounting to not
less than three times the annual rent first reserved by the Lease in the year
to which the said accounts relate whereupon the provision of this Deed shall
automatically cease and determine
9. DEALINGS WITH REVERSION
In the event of the Landlord assigning subletting or otherwise disposing of the
reversion expectant upon the termination of the Term created by the Lease it is
hereby agreed that the Landlord will procure that such persons entitled to the
reversion expectant upon the termination of the Term created by the Lease shall
enter into a new Deed of Rent Deposit and that the Tenant will at the
Landlord's cost following a written request from the Landlord so to do and upon
the monies then standing in the Deposit Account enter into a new Deed of Rent
Deposit in the same terms (mutatis mutandis) as this Deed save that the
expression "the Initial Deposit" shall mean half the yearly rent then reserved
and the term "the Landlord's Solicitors" shall mean the solicitors acting on
behalf of the part in whom the term expectant upon the determination of the
said term is vested and the Deposit Account shall be held at the Bank or such
bank as the Solicitors for the Assignee of the reversion shall reasonably
require.
10. The Tenant hereby
10.1 Acknowledges that the Landlord's right of re-entry contained in the Lease
shall be exercisable in the event of any breach by the Tenant of any of the
terms of this Deed to the intent that all covenants herein shall be deemed to
be covenants contained in the Lease
10.2 Hereby agrees to charge the Rent Deposit to the Landlord as security for
the performance of its obligations in the Lease and in this Deed
33
<PAGE> 35
THE NINTH SCHEDULE
Rent and Rent Review
1. DEFINITIONS
1.1 The terms defined in this paragraph shall for all purposes of this
Schedule have the meanings specified
1.2 "Review Dates" mean the 3 day of March in the year 2002 and the
penultimate day of the Term and "Review Date" means any one of the Review Dates
1.3 "Review Period" means the period between any Review Date and the day prior
to next Review Date (inclusive)
1.4 "the Assumptions" means the following assumptions at the relevant Review
Date:
1.4.1 that no work has been carried out on the Demised Premises by the
Tenant its subtenants or their predecessors in title during the Term which
has diminished the rental value of the Demised Premises other than work
carried out in compliance with paragraph 14 of the Third Schedule
1.4.2 that if the Demised Premises have been destroyed or damaged they
have been fully restored
1.4.3 that the covenants contained in this Lease on the part of the
Landlord and the Tenant have been fully performed and observed
1.4.4 that the Demised Premises are available to let by a willing landlord
to a willing tenant by one lease without a premium being paid by either
party and with vacant possession
1.4.5 that the Demised Premises are ready for and fitted out and equipped
for immediate occupation and use for the purpose or purposes required by
the willing tenant referred to in paragraph 1.4.4 and that all the
services required for such occupation and use are connected to the Demised
Premises
34
<PAGE> 36
1.4.6 that the Lease referred to in paragraph 1.4.4 contains the same
terms at Lease except the amount of the Initial Rent and any rent-free
period to which a new tenant may otherwise be entitled but including the
provisions for rent review on the Review Dates and at similar intervals
after the last Review Date and except as set out in paragraphs 1.4.7 and
1.4.8
1.4.7 that the term of the Lease referred to in paragraph 1.3.4 is equal
in length to a term of 10 years and that such term begins on the relevant
Review Date and that the rent shall commence to be payable from that date
and that the years during which the Tenant covenants to decorate the
Demised Premises are at similar intervals after the beginning of the term
of such Lease as those specified in this Lease
1.4.8 on the basis that the User is as permitted in this Lease
1.5 "the Disregarded Matters" means:
1.5.1 any effect on rent of the fact that the Tenant its subtenants or
their respective predecessors in title have been in occupation of the
Demised Premises
1.5.2 any goodwill attached to the Demised Premises by reason of the
carrying on at the Demised Premises of the business of the Tenant its
subtenants or their predecessors in title or other persons lawfully at the
Demised Premises in their respective businesses
1.5.3 any increase in rental value of the Demised Premises attributable to
the existence at the relevant Review Date of improvement to the Demised
Premises or any part thereof carried out otherwise than in pursuance of an
obligation to the Landlord or its predecessors in title under this Lease
1.6 "the President" means the President for the time being of the Royal
Institution of Chartered Surveyors the duly appointed deputy of the President
or any person authorised by the President to make appointments on his behalf
1.7 "the Surveyor" means a person appointed by agreement between the parties
or in the absence of agreement within 14 days of one party giving notice to the
other of its nomination or nominations nominated by the President on the
application of either party made not earlier than 6 months before the relevant
Review Date or at any time afterwards
35
<PAGE> 37
2. ASCERTAINING THE RENT
2.1 The Rent shall be:
2.1.1 until the first Review Date the Rent set out in clause 1 hereof
and
2.1.2 during each successive Review Period a rent equal to the
greater of:-
2.1.2.1 the Rent payable immediately prior to the relevant
Review Date or if payment of Rent has been suspended pursuant to
the proviso to that effect contained in this Lease the Rent
which would have been payable had there been no such suspension
or
2.1.2.2 such Rent as may be ascertained in accordance with
this Schedule
2.2 Such revised Rent for any Review Period may be agreed in writing at any
time between the parties or (in the absence of agreement) will be determined by
the Surveyor
2.3 The revised Rent to be determined by the Surveyor shall be such as he
shall decide to be the rent at which the Demised Premises might reasonably be
expected to be let on the open market at the relevant Review Date making the
Assumptions but disregarding the Disregarded Matters
2.4 At the sole discretion of the Landlord the Surveyor shall act either as
an expert or as an arbitrator and if the Surveyor nominated pursuant to
paragraph 1.6 shall die or decline to act the President may on the application
of either party discharge the Surveyor and appoint another in his place
2.5 Whenever the rent shall have been ascertained in accordance with this
Schedule memoranda to this effect shall be signed by or on behalf of the
parties and annexed to this Lease and its counterpart and the parties shall
bear their own costs in this respect
36
<PAGE> 38
3. ARRANGEMENTS PENDING ASCERTAINMENT OF REVISED RENT
3.1 If the revised Rent payable during any Review Period has not been
ascertained by the relevant Review Date Rent shall continue to be payable at
the rate previously payable such payments being on account of the Rent for that
Review Period
3.2 If one party shall upon publication of the Surveyor's award pay all the
Surveyor's fees and expenses such party shall be entitled to recover (in
default of payment within 21 days of a demand to that effect in the case of the
Landlord as Rent in arrears or in the case of the Tenant by deduction from
Rent) such proportion of them (if any) as the Surveyor shall award against the
other party
4. PAYMENT OF REVISED RENT
4.1 If the revised Rent shall be ascertained on or before the relevant Review
Date and that date is not a quarter day the Tenant shall on that Review Date
pay to the Landlord the amount by which one quarter's Rent at the rate payable
on the immediately preceding quarter day is less than one quarter's Rent at the
rate of the revised Rent apportioned on a daily basis for that part of the
quarter during which the revised Rent is payable.
4.2 If the revised Rent payable during any Review Period has not been
ascertained by the relevant Review Date then immediately after the date when
the same has been agreed between the parties or the date upon which the
Surveyor's award shall be received by one party the Tenant shall pay to the
Landlord:
4.2.1 any shortfall between the Rent which would have been paid on
the Review Date and on any subsequent quarter days had the revised
Rent been ascertained on or before the relevant Review Date and the
payments made by the Tenant on account and
4.2.2 interest at the base lending rate of the bank referred to in
or nominated pursuant to clause 2(2)(d) prevailing on the day upon
which the shortfall is paid in respect of each instalment of Rent
due on or after the Review Date on the amount by which the
instalment of revised rent which would have been paid on the
relevant Review Date or such quarter day exceeds the amount paid on
account and such interest shall be payable for the period from the
date upon which the instalment was due up to the date of payment of
the shortfall
37
<PAGE> 39
5. ARRANGEMENTS WHEN INCREASING RENT PREVENTED ETC
5.1 If at any of the Review Dates there shall be in force a statute which shall
prevent restrict or modify the Landlord's right to review the Rent in
accordance with this Lease and/or to recover any increase in the Rent the
Landlord shall when such restriction or modification is removed relaxed or
modified be entitled (but without prejudice to its right (if any) to recover
any Rent the payment of which has only been deferred by law) on giving not less
than one month's nor more than 3 months' notice in writing to the Tenant at any
time within 6 months of the restriction or modification being removed relaxed
or modified to invoke the provisions of paragraph 5.2
5.2 Upon the service of a notice pursuant to paragraph 5.1 the Landlord shall
be entitled:
5.2.1 to proceed with any review of the Rent which may have been prevented
or further to review the Rent in respect of any review where the Landlord's
right was restricted or modified and the date of expiry of such notice
shall be deemed for the purposes of this Lease to be a Review Date
(provided that without prejudice to the operation of this paragraph nothing
in this paragraph shall be construed as varying any subsequent Review Dates
except that the revised Rent shall nevertheless be calculated by reference
to rental values at the Review Date subjected to the rent restriction and
provided that there shall be no more than one additional rent review
between any two Review Dates
5.2.2 to recover any increase in Rent with effect from the earliest date
permitted by law
6. Time shall not be of the essence in relation to the machinery for fixing the
rent
38
<PAGE> 40
THE TENTH SCHEDULE
AUTHORIZED GUARANTEE AGREEMENT
THIS DEED is made the day of 19 Between
("the Lessor") and of
("the Lessee")
INTRODUCTION
(A) The term granted by the Lease is vested in the Lessee and the Lessor is
entitled to the reversion
(B) The Lease contains a covenant against assignment without the written
consent of the Lessor and provide that the consent may be given subject to a
condition that the Lessee enters into an authorized guarantee agreement (as
defined in the Act)
(C) The Lessee has requested the Lessor's consent to the assignment of the
Lease to the Assignee which the Lessor has agreed to grant subject to the
completion of this Deed pursuant to that condition
AGREED TERMS
1. In this Deed (including the introduction) the following words and
expressions shall have the following meaning:
"Act" means the Landlord & Tenant (Covenants) Act 1995
"Assignee" means
"Lease" means the lease of the Demised Premises dated
made between
"Demised Premises" means
39
<PAGE> 41
2. The Lessee hereby covenants with the Lessor as a primary obligation
(a) that the Assignee shall at all times duly pay the rents reserved by
the Lease in the manner and at the time therein specified and shall duly
perform and observe all the Lessee's covenants contained in the Lease
until such times as the Assignee shall be released from those covenants by
virtue of the Act and
(b) to indemnify the Lessor against all claims demands losses damages
liability costs fees and expenses whatsoever sustained by the Lessor by
reason of or arising in any way directly or indirectly out of any act or
default by the Assignee in the performance and observance of any of the
Lessee's covenants contained in the lease
3. None of the following or any combination thereof shall release determine
discharge or in any way lessen or affect the liability of the Lessee as
principal debtor under this Deed or otherwise prejudice or affect the right of
the Lessor to recover from the Lessee to the full extent of this guarantee:-
(a) any neglect delay or forbearance of the Lessor in endeavouring to
obtain payment of the rents or other amounts reserved by the lease or in
enforcing the performance or observance of any of the obligations of the
Assignee under the Lease
(b) any refusal by the Lessor to accept rent tended by or on behalf of
the Lessee at a time when the Lessor was entitled (or would after the
service of a notice under Section 146 of the Law of Property Act 1925 have
been entitled) to re-enter the Demised Premises
(c) any extension of time given by the Lessor to the Lessee or the
Assignee
(d) to the extent permitted by the Act any variation of the terms of this
Lease or the transfer of the Lessor's reversion
(e) any reviews of the rent payable under the Lease
(f) any change in the constitution structure or powers of either the
lessee any surety or the liquidation administration receivership or
bankruptcy (as the case may be) of either the Lessee or the Assignee
40
<PAGE> 42
(g) any legal limitation or any immunity, disability or incapacity of
the Assignee (whether or not known to the Lessor) or the fact that any
dealings with the Lessor by the Lessee may be outside or in excess of
the powers of the Assignee, or
(h) any other act, omission, matter or thing whatsoever whereby but for
this provision the Lessee would be exonerated either wholly or in part
(other than a re lease under seal given by the Lessor)
4. The Lessee hereby further covenants with the Lessor that
(i) if there should be a disclaimer or surrender of this Lease, whether
by a liquidator, trustee in bankruptcy, the Crown, or otherwise,
(ii) if this Lease shall be forfeited, or
(iii) if the Assignee (being a company) shall be dissolved or if
otherwise a corporate Lessee shall cease to exist THEN the Lessee shall,
if the Lessor by notice in writing given to the Lessee within 6 months
after such disclaimer or other event so requires accept from and execute
and deliver to the Lessor a counterpart of a new lease of the Demised
Premises for a term commencing on the date of the disclaimer or other
event and continuing for the residue then remaining unexpired of the
term, such new lease to be at the cost of the Lessee and to be at the
same rents and subject to the same covenants, conditions and provisions
as are contained in the Lease
5. This guarantee shall enure for the benefit of the successors and assigns
of the Lessor under the Lease without the necessity for any assignment thereof.
IN WITNESS whereof this agreement has been executed and delivered as a deed the
41
<PAGE> 43
day and year first above written
SIGNED AND DELIVERED AS A DEED )
by the aforementioned MARLDOWN )
LIMITED acting by a director and )
secretary or two directors:- )
/s/ M. D. POSEN
- ----------------------------------
Director M. D. Posen
/s/ M. T. HARRWON
- ----------------------------------
Director M. T. Harrwon
42
<PAGE> 44
DATED _____________________ 1997
MARLDOWN LIMITED
- and -
MICROMUSE plc
- and -
CHRISTOPER JOHN DAWES
-------------------------
L E A S E
relating to
Gladstone House, Adelaide Road,
London SW18
-------------------------
<PAGE> 1
EXHIBIT 10.7
Page 1
Dated 3rd March 1993
B E T W E E N
GUILDQUOTE LIMITED (1)
-a n d-
MICROMUSE LIMITED (2)
-a n d-
CHRISTOPHER JOHN DAWES (3)
- --------------------------------------------------------------------------------
L E A S E
relating to
Disraeli House, Adelaide Road, London, SW15
- --------------------------------------------------------------------------------
Russell-Cooke Potter & Chapman
2 Putney Hill
London
SW15 6AB
Tel: 01.789 9111
Ref: SPC/GUILDQUOTE
<PAGE> 2
Page 2
THIS LEASE is made the 3rd day of March 1993
BETWEEN the Landlord and the Tenant and the Surety whose respective names and
addresses are set out in the First Schedule
WITNESSETH:-
1. In this Lease unless the context otherwise requires the various
expressions set out below shall have the meaning or bear the
interpretation there set out
(a) "the Landlord" shall include the reversioner and any other
person for the time being immediately expectant on the term
hereby created and for the purpose of entering upon the Demised
Promises shall include the Superior Landlord (if any)
(b) "the Tenant" shall include the person from time to time
entitled to the Term and the personal representatives of the
Tenant
(c) words importing the masculine gender shall where necessary be
construed as importing the feminine gender and words importing
the neuter gender shall where necessary be construed as
importing the masculine gender or the feminine gender as the
case may be
(d) words importing the singular number only shall include the
plural number and vice versa and where there are two or more
persons included in the expression "the Landlord" or "the
Tenant" or "the Surety" the covenants expressed to be made by
the Landlord or the Tenant or the Surety shall be deemed to be
made by such persons jointly and severally
<PAGE> 3
Page 3
(e) "the Demised Premises" means all that premises described in Part
I of the Second Schedule
(f) "Conduits" means and includes chimney flues ventilating ducts
air conditioning systems cisterns tanks radiators water gas soil
and waste water pipes sewers and drains central heating boilers
and pipes wires and cables used for the conveyance of electrical
current telephone cables valves traps and switches
(g) "the Development" means the land shown edged green on the Plan
annexed and more particularly described in Part II of the Second
Schedule
(h) "the Access Road" means the roadways and the footpaths adjacent
thereto shown hatched brown on the Plan annexed
(i) "the Common Parts of the Development" means those parts of the
Development which at the date hereof have not been and are not
intended to be let or sold by the Landlord and are capable of
benefiting and being used by the Tenant in connection with the
use of the Demised Premises and for the purpose of the Seventh
Schedule hereof the Common Parts of the Development shall be
deemed to include spaced for parking vehicles used by the
Lessee and spaces used for parking vehicles by other lessees in
the Development
2. THE Landlord demises to the Tenant the Demised Premises together with
the rights but subject to the exceptions and reservations mentioned in
the Second Schedule TO HOLD unto the Tenant for the term of years
specified in the First Schedule ("the Term") PAYING yearly, during the
Term the rent specified in the Third Schedule such rent to be paid by
equal quarterly payments in advance on the usual quarter days in every
year or proportionately for any fraction of a year the first of such
payments to be made on the execution hereof or if later the date upon
which the Fitting Out Works as defined in Clause 7.1
<PAGE> 4
Page 4
of the Contract hereinafter defined are completed as evidenced by the
certificate referred to in Clause 7.3 of the agreement dated 23rd
December 1992 and made between the parties hereto and in this latter
case such rent shall not be payable for the period ending on the day
before such date and in each case without deduction
3. THE Tenant covenants with the Landlord to observe and perform the
covenants and stipulations set out in the Fourth Schedule
4. THE Landlord covenants with the Tenant to observe and perform the
covenants and stipulations set out in the Fifth Schedule
5. THE Landlord and the Tenant agree the provisions set out in the Sixth
Schedule
6. THE Surety hereby covenants with the Landlord to observe and perform the
covenants set out in the Eighth Schedule PROVIDED ALWAYS that the Surety
will cease to be liable under this clause and shall be released entirely
from all subsequent liability hereunder in the event that
(1) The Tenant shall provide to the Landlord accounts for the most
recent three consecutive years audited by a Chartered Accountant
and approved by the directors of the Tenant not more than three
months before such accounts are provided to the Landlord showing
for each such year net profits before tax amounting to not less
than three times the annual rent reserved by the lease under
Clause 2 hereof in the year to which the said accounts relate
and PROVIDED FURTHER that at the time of production of such
accounts no monies shall be due from the Tenant or the Surety to
the Landlord or
<PAGE> 5
Page 5
(2) on completion of lawful assignment of the Lease in accordance
with the provisions hereto PROVIDED ALWAYS that there is
produced a grant of license for such assignment a surety
reasonably acceptable to the Landlord who will covenant therein
in equivalent form to the provisions of the Eighth Schedule
hereto or there is provided on the grant of such license a
security deposit in an amount equivalent to one half of the
annual rent then payable under the Lease such amount to be
placed in a separate designated Deposit Account interest
accruing to the Tenant and otherwise upon the terms of the
agreed draft deed set out in the Ninth Schedule hereto
IN WITNESS whereof the parties hereto have caused this instrument to be executed
as a Deed in the presence of the person(s) mentioned below the day and year
first before written
T H E F I R S T S C H E D U L E
THE LANDLORD : Guildquote Limited of 54 Brodrick Road London SW17
THE TENANT : MicroMuse Limited whose registered office is situated at
Bridge House, Station Road; Hayes, Middlesex
THE SURETY : Christopher John Dawes of 11 Tournay Road; London SW6
THE TERM : 10 years
<PAGE> 6
Floorplan A
<PAGE> 7
Page 6
THE COMMENCEMENT DATE : 25th December 1992
THE AUTHORISED USER : Use within Class Bl of the Town and
Country Planning (Use Classes) Order 1987
T H E S E C O N D S C H E D U L E
The Demised Premises
ALL THAT BUILDING situate and known as Disraeli House Adelaide Road (all of
which premises are for the purposes of identification only shown edged red on
the plan annexed hereto ('the Plan') and for the purposes of obligation as
well as grant INCLUDE:-
the structure roof and foundations thereof and all pipes wires cables
channels sewers and drains which are situate therein
TOGETHER WITH:-
(a) the Landlords fixture and fittings on the Demised Premises
(b) the free and uninterrupted passage and running of water soil gas and
electricity and all other services to and form the Demised Premised in
through and along the Conduits which are now or may hereafter during the
Term be in on over or under the Development which serve the Demised
Premises
(c) the right of support shelter and protection for the Demised Premises
from the remainder of the Development as enjoyed at the date hereof
<PAGE> 8
Page 7
(d) the right to pass and repass for all purposes connected with the use and
enjoyment of the Demised Premises to and from the Demised Premises from
to and to the nearest highway maintainable at public expense:-
(i) with or without vehicles of any description over and along the
Access Road
(ii) on foot only over and along those parts of the Common Parts of
the Development which give access to the Demised Premises
(e) a right of access on to any part of the Development for the purpose of
inspecting maintaining repairing renewing and replacing any part of
the Demised Premises or any of the Conduits exclusively serving the
same to the extent that the Tenant cannot otherwise do so
(f) the right to display a sign indicating the Tenant's name and business on
the exterior of the Demised Premises in a position approved by the
Landlord such approval not to be unreasonably withheld
(g) the exclusive right to park twelve roadworthy vehicles in the car
parking spaces shown edged yellow on the Plan ("the Car Parking Spaces")
EXCEPTING AND RESERVING to the Landlord and its Lessees tenants servants and
licensees and the owners lessees and occupiers for the time being of the
Development and any adjoining or neighbouring property and all other persons
from time to time having the like right
<PAGE> 9
Page 8
(a) the free and uninterrupted passage and running of water soil gas and
electricity and all other services to and from the Demised Premises and
such adjoining neighbouring property through the Conduits which now are
in on over or under the Demised Premises or any part thereof together
with a full right of entry to the Demised Premises at all reasonable
times on giving reasonable notice for the purposes of installing adding
to inspecting maintaining replacing and repairing the Conduits the
person or persons exercising such right making good all damage to the
Demised Premises occasioned by such entry or any works consequent
thereon and provided that the person or persons so entering shall cause
as little inconvenience and interference as possible to the Tenant and
the business of the Tenant
(b) full right and liberty at any time or times to execute works repairs
and make erections upon or to erect upon rebuild reconstruct modify or
alter the Development or any part thereof (except the Demised Premises)
or the adjoining and neighbouring property and to use the Development
(except the Demised Premises) and the adjoining and neighbouring
property in such manner as they may think fit provided that the access
of light and air to the Demised Premises or any part thereof shall not
materially thereby be interfered with
(c) the right of support shelter and protection for the Development and any
adjoining and neighbouring property as enjoyed at the date hereof
(d) the right to enter the Demised Premises at all reasonable times upon 48
hours prior notice (except in case of emergency) for the purpose of
carrying out any works or doing anything whatsoever comprised within the
Landlords rights and obligations in this Lease Provided that the person
or persons so entering the Demised Premises shall cause as little
<PAGE> 10
Page 9
interference and inconvenience as possible to the Tenant shall not
interfere with the Tenant's ability to carry out business from the
Demised Premises and shall make good all damage occasioned by such entry
or the carrying out of the any works to the reasonable satisfaction of
the Tenant
PART II
The Development
ALL THAT parcel of land with the buildings erected thereon situate and known as
the Adelaide Centre Adelaide Road London SW15 1HR as the same is registered at H
M Land Registry under Title Numbers TGL 54450 and LN159125
T H E T H I R D S C H E D U L E
The Rents
1. IN this Schedule "Review Date" means the 25th day of December in the
year 1997 and "Review Period" means the period starting with the Review
Date up to the end of the Term
2. THE yearly rent shall be:-
(a) until the first Review Date the rent of Fifty Thousand Four
Hundred and Seventy POUNDS (L50,470)
(b) during the Review Period a rent equal to the rent previously
payable hereunder or such revised rent as may be ascertained as
herein provided whichever be the greater
<PAGE> 11
Page 10
3. SUCH revised rent for the Review Period may be agreed at any time
between the Landlord and the Tenant or (in the absence of agreement)
determined not earlier than the Review Date by an arbitrator such
arbitrator to be nominated in the absence of agreement by or on behalf
of the President for the time being of the Royal Institution of
Chartered Surveyors on the application of the Landlord or the Tenant
made not earlier than six months before the Review Date and so that in
the case of such arbitration the revised rent to be awarded by the
arbitrator shall be such as he shall decide should be the yearly rent at
the Review Date for the Demised Premises
(A) On the following assumptions at that date:-
(i) that the Demised Premises are fit for immediate
occupation and use and that no work has been carried out
thereon by the Tenant its sub-tenants or their
predecessors in title during the Term which has
diminished the rental value of the Demised Premises and
that in case the Demised Premises have been destroyed or
damaged they have been fully restored
(ii) that the Demised Premises are available to let by a
willing landlord to a willing tenant as a whole without
a premium but with vacant possession and subject to the
provisions of this Lease (other than the amount of the
rent hereby reserved but including the provisions for
rent review after five years) for a term equal to the
original term of this Lease
(iii) that the covenants herein contained on the part of the
Tenant have been fully performed and observed
<PAGE> 12
Page 11
AND having regard to open market rental values current at the relevant
Review Date
(B) BUT disregarding:
(i) any effect on rent of the fact that the Tenant its sub-tenants
or their respective predecessors in title have been in
Occupation of the Demised Premises
(ii) any goodwill attached to the Demised Premises by reason of the
carrying on thereat of the business of the Tenant its
sub-tenants or their predecessors in title in their respective
businesses and
(iii) any increase in rental value of the Demised Premises
attributable to the existence at the Review Date of any
improvement to the Demised Premises or any part thereof carried
out with consent where required otherwise than in pursuance of
an obligation to the Landlord or its predecessors in title by
the Tenant its sub-tenants or their respective predecessors in
title during the Term or during any period of occupation prior
thereto arising out of an agreement to grant such Term PROVIDED
ALWAYS that it is hereby for the avoidance of doubt agreed that
any improvements carried out by or under an obligation to the
Tenant in carpeting and in the installation of air conditioning
in so far as any work would tend to increase the rental value of
the Demised Premises on review shall not be disregarded but that
any such improvements carried out by or under an obligation to
the Tenant in partitioning the Demised Premises shall be
disregarded
<PAGE> 13
Page 12
(iv) insofar as permitted by law all restrictions whatsoever
relating to rent contained in any statute or order rules
or regulations thereunder and any directions thereby
given relating to any method of determination of rent
(v) any effect reducing the rent (but not disregarding any
effect increasing the rent) that may result from the
Landlord either having elected to charge VAT in addition
to the rent or reserving the right to do so
4. IT IS PROVIDED AND AGREED in relation to the said revised rent:
(A) in the case of a revised rent being determined by an arbitrator
the arbitration shall be conducted in accordance with the
Arbitration Acts 1950 to 1979 or any statutory modifications or
reenactments thereof for the time being in force
(B) When the amount of the rent to be ascertained as hereinbefore
provided shall have been so ascertained memoranda thereof shall
thereupon be signed by or on behalf of the Landlord and the
Tenant and annexed to this Lease and counterpart thereof and the
parties shall bear their own costs in respect thereof
(C) (i) if the revised rent payable on and from the Review Date
has not been ascertained by the Review Date rent shall
thereafter be a payable at the initial yearly rent
previously payable and forthwith upon the revised rent
being ascertained the Tenant shall pay to the Landlord
any shortfall between the rent previously payable and
the revised rent payable up
<PAGE> 14
Page 13
to and on the preceding quarter day together with
interest thereon from the Review Date to the date of
payment at 3% below the Prescribed Rate
(ii) for the purposes of this proviso the revised rent shall
be deemed to have been ascertained on the date when the
same has been agreed between the parties or as the case
may be the date of the award of the arbitrator
T H E F 0 U R T H S C H E D U L E
The Covenants by the Tenant
1. TO pay the reserved rents on the days and in the manner aforesaid
without any deduction and if the Landlord so requires to pay the same by
Bankers Standing Order direct to the bank account of the Landlord or as
it shall direct
2. TO pay and contribute the Interim Charge and the Service Charge (as
those expressions are defined in the Seventh Schedule) at the time and
in the manner provided in that Schedule
3. TO bear pay and discharge all existing and future rates taxes duties
assessments impositions charges liabilities and outgoings whatsoever
(whether parliamentary parochial or otherwise and whether or not of a
capital or non-recurring nature) which are now or may at any time
hereafter be assessed charged or imposed upon or payable in respect of
the Demised Premises or any part thereof or on the owner or occupier in
respect thereof (excluding any payable by the Landlord in respect of the
receipt of rents or other payments made by the Tenant in accordance with
the provisions hereof except any Value Added Tax payable on the rents or
any other such payments on any disposition or dealing with or the
ownership of the reversion to this Lease)
<PAGE> 15
Page 14
4. (a) AT all times during the Term to repair replace rebuild cleanse
and keep the Demised Premises and all additions and improvements
thereto and the Landlord's fixtures and fittings and the
Conduits therein in good and substantial repair and condition
provided always that the Tenant shall not be liable hereunder
where the damage is caused by an insured risk (as hereinafter
defined) except where the insurance money is irrecoverable
through the fault of the Tenant or its sub-tenants
(b) to paint with two coats of best quality paint or otherwise treat
in a proper and workmanlike manner all the wood and iron work of
the Demised Premises heretofore or usually painted or otherwise
treated once in every fifth year as regards the interior of the
Demised Premises and once in every third year as regards the
exterior thereof and in each case in the last year of the Term
(whether determined by effluxion of time or under the
provisions for re-entry hereinafter contained or otherwise) and
also to grain varnish clean paper and otherwise decorate in a
proper and workmanlike manner all such internal parts of the
Demised Premises as have been or ought properly to be so
treated and so that in the last year of the Term the tints
colours and patterns of all such works of interior decoration
shall be such as shall be approved by the Landlord
(c) Without prejudice to the generality of the foregoing to
maintain, repair and service at all necessary times the air
conditioning system in the Demised Premises using the services
of Barrier Air Conditioning Limited or such other contractor as
the Landlord may nominate and to produce to the Landlord
evidence of the service agreement and maintenance inspections
and repairs carried out provided always that if the Tenant shall
not maintain and regularly
<PAGE> 16
Page 15
service the air conditioning system, the Landlord shall be
entitled on not less than 14 days notice to enter upon the
Demised Premises with all necessary workmen and execute such
necessary maintenance and servicing at the expense of the Tenant
in accordance with the covenants herein contained, and the cost
thereof shall be a debt due from the Tenant to the Landlord and
be forthwith recoverable by action
(d) Without prejudice to the generality of the foregoing to repair
maintain upkeep renew and service the lift in the Demised
Premises using the services of Hammond and Champness Limited or
such other contractor as the Landlord may nominate and to
produce to the Landlord evidence of the service agreement and
maintenance inspections and repairs carried out provided always
that if the Tenant shall not maintain and regularly service the
lift, the Landlord shall be entitled on not less than 14 days
notice to enter upon the Demised Premises with all necessary
workmen and execute such necessary maintenance and servicing at
the expense of the Tenant in accordance with the covenants
herein contained, and the cost thereof shall be a debt due from
the Tenant to the Landlord and be forthwith recoverable by
action
PROVIDED ALWAYS that the Tenant shall be entitled to obtain
quotations for services comparable to those to be provided by
the nominated contractors under the provisions of sub-clauses
(c) and (d) from three other reputable contractors and in the
event that the charges of such nominated contractor are 20%
higher than the average of such quotations the Tenant shall be
reimbursed by the Landlord for the amount equal to the
difference between 120% of such average and the actual charges
of such nominated sub-contractor
<PAGE> 17
Page 16
5. TO yield up the Demised Premises with the fixtures and additions thereto
at the expiration or sooner determination of the Term in good and
substantial repair and condition in accordance with the covenants
hereinbefore contained
6. TO permit the Landlord and its agent with or without workmen and others
authorised by the Landlord at all reasonable times during the Term to
enter upon and view the condition of the Demised Premises and forthwith
(so far as the Tenant is liable) to execute all repairs and works
required to be done by written notice given by the Landlord PROVIDED
ALWAYS that if the Tenant shall not within two months after service of
such notice commence and proceed diligently with the execution of the
repairs and works mentioned in such notice it shall be lawful for the
Landlord to enter upon the Demised Premises with all necessary workmen
and execute such repairs and works at the expense of the Tenant in
accordance with the covenants herein contained and the costs thereof
shall be a debt due from the Tenant to the Landlord and be forthwith
recoverable by action
7. TO permit the Landlord and its agents and workmen and other persons
authorised by the Landlord and the tenants or occupiers of other parts
of the Development and adjoining properties belonging to the Landlord at
all reasonable times to enter upon the Demised Premises to execute
repairs or alterations to the Development or such adjoining properties
causing as little inconvenience as possible and making good all damage
thereby occasioned to the Demised Premises
8.1 NOT to make any structural or external alterations to the Demised
Premises nor to erect to or permit or suffer to be erected any new
building on the Demised Premises or make or permit or suffer to be made
any alteration of or addition to or external projection in front of the
Demised Premises save that telecommunications or satellite equipment may
be erected on the
<PAGE> 18
Page 17
exterior of the Demised Premises with the prior written consent of the
Landlord such consent not to be unreasonably withheld or delayed
8.2 NOT without the previous consent in writing of the Landlord (and then
only in accordance with plans previously approved by the Landlord and
under the supervision of and to the satisfaction of the Landlords
Surveyor) to alter the layout or arrangement of the Demised Premises or
to make any internal non-structural alterations or add to or alter any
new buildings or alterations erected or made in pursuance of the consent
of the Landlord given under this Clause or to cut injure or permit or
suffer to be cut or injured any of the walls or timbers of the Demised
Premises or any alterations or additions thereto or to carry out or
permit or suffer to be carried out any development within the meaning of
the Planning Acts PROVIDED ALWAYS that the Tenant shall be entitled to:-
without any consent from the Landlord to effect internal non-structural
alterations to the Demised Premises subject to:-
(aa) the Tenant giving not less than 14 days prior notice in writing to
the Landlord of the nature of such proposed alterations and
(bb) the Tenant delivering to the Landlord in duplicate the drawings
specification and other details of such alterations within 28 days after
their completion
9. AT all times during the Term to comply in all respects with the
provisions and requirements of the Planning Acts and all regulations or
orders made thereunder whether as to the Authorised User or otherwise
and to indemnify and keep indemnified the Landlord against all
liabilities whatsoever including all actions proceedings costs expenses
claims and demands in respect thereof AND forthwith to produce to the
<PAGE> 19
Page 18
Landlord a copy of any notice order or proposal therefor made given or
issued to the Tenant or any sub-tenant by a planning authority under or
by virtue of the Planning Acts affecting or relating to the Demised
Premises and at the request and cost of the Landlord to make or join
with the Landlord in making every such objection representation or
appeal against the same as the Landlord shall deem expedient
10. TO use or suffer to be used the Demised Premises for the Authorised
User specified in the First Schedule PROVIDED ALWAYS that the Tenant
hereby acknowledges and admits that notwithstanding the foregoing
provisions the Landlord does not thereby or in any other way give or
make nor has given or made at any other time any representation or
warranty that the Authorised User is or will remain a permitted use
within the provisions of the Planning Acts nor shall any consent in
writing which the Landlord may hereafter give to any change of use be
taken as including any such representation or warranty and that
notwithstanding that the Authorised User is not a permitted use within
such provisions as aforesaid the Tenant shall remain fully bound and
liable to the Landlord in respect of the obligations undertaken by the
Tenant by virtue of this Lease without any compensation recompense or
relief of any kind whatsoever
11. NOT to do or permit or suffer to be done anything whereby the policy or
policies of insurance of the Demised Premises against the Insured Risks
(as hereinafter defined) may become void or voidable or whereby the rate
of premium thereon may be increased and to repay to the Landlord all
sums paid by way of increased premiums and all expenses incurred by it
in or about any renewal of such policy or policies rendered necessary by
a breach of this covenant (all of which payments shall be included in
the rent herein reserved) and to comply with all recommendations of the
insurers as to fire precautions
<PAGE> 20
Page 19
12. NOT to do or permit or suffer to be done anything in or upon the Demised
Premises or any part thereof which may be or become a nuisance annoyance
or damage to the Landlord or the tenants or occupiers of the remainder
of the Development or of other property in the neighbourhood
13. NOT to exhibit or permit or suffer to be exhibited on any part of the
exterior of the Development and the Demised Premises or in the windows
or on the external walls rails or fences thereof any placard poster
signboard fascia board or fascia sign or other advertisement PROVIDED
ALWAYS that the Tenant may with the prior written consent of the
Landlord (such consent not to be unreasonably withheld or delayed) erect
on the exterior of the Demised Premises a sign of a size approved by the
Landlord consistent with the size of other tenants' signs at the
Development specifying the name and nature of the Tenant's business
14. TO comply forthwith at the Tenant's own expense with any nuisance
sanitary or other statutory notices lawfully served by any local or
public authority upon either the Landlord or the Tenant so far as the
same relate to the Demised Premises and to comply with all the
requirements of the Office Shops and Railway Premises Act 1963 and the
Fire Precautions Act 1971 and any Act or Acts for the time being
amending or replacing the same and to keep the Landlord fully
indemnified against all actions proceedings costs expenses claims and
demands in respect thereof
15. IN connection with the Defective Premises Act 1972 or any legislation
modifying amending or replacing the same to:-
<PAGE> 21
Page 20
(a) notify the Landlord in writing immediately of any defect in the
Demised Premises of which the Tenant is aware
(b) erect and maintain within the Demised Premises prominent notices
of warning of relevant defects within the meaning of Section 4
of the said Act in such form as the Landlord may from time to
time require
(c) indemnify the Landlord against any actions proceedings costs
expenses claims and demands incurred thereunder by reason of the
Tenant's failure to erect and display such notices
(d) permit the Landlord and its agent with or without workmen and
others at any time on reasonable notice to enter upon the
Demised Premises erect and exhibit notices thereon giving
warning of relevant defects within the meaning of the said
Section 4 in the Demised Premises and to install lighting or any
other reasonable means of warning or protection against such
defects
16. NOT to hold or permit or suffer to be held any sale by auction on the
Demised Premises
17. (a) NOT to assign charge underlet or part with or share
possession of any part or parts (as distinct from the whole) of
the Demised Premises or to part with or share possession of the
whole of the Demised Premises for all or any part of the Term or
to permit any company or person to occupy the same save by way
of an assignment or underlease of the whole of the Demised
Premises
Save that the Tenant may share occupation of the Demised
Premises with another company which is a holding or subsidiary
company (as defined by Section 736 of the Companies Act 1985) of
the Tenant or a subsidiary company
<PAGE> 22
Page 19
12. NOT to do or permit or suffer to be done anything in or upon the Demised
Premises or any part thereof which may be or become a nuisance annoyance
or damage to the Landlord or the tenants or occupiers of the remainder
of the Development or of other property in the neighbourhood
13. NOT to exhibit or permit or suffer to be exhibited on any part of the
exterior of the Development and the Demised Premises or in the windows
or on the external walls rails or fences thereof any placard poster
signboard fascia board or fascia sign or other advertisement PROVIDED
ALWAYS that the Tenant may with the prior written consent of the
Landlord (such consent not to be unreasonably withheld or delayed) erect
on the exterior of the Demised Premises a sign of a size approved by the
Landlord consistent with the size of other tenants' signs at the
Development specifying the name and nature of the Tenant's business
14. TO comply forthwith at the Tenant's own expense with any nuisance
sanitary or other statutory notices lawfully served by any local or
public authority upon either the Landlord or the Tenant so far as the
same relate to the Demised Premises and to comply with all the
requirements of the Office Shops and Railway Premises Act 1963 and the
Fire Precautions Act 1971 and any Act or Acts for the time being
amending or replacing the same and to keep the Landlord fully
indemnified against all actions proceedings costs expenses claims and
demands in respect thereof
15. IN connection with the Defective Premises Act 1972 or any legislation
modifying amending or replacing the same to:-
<PAGE> 23
Page 20
(a) notify the Landlord in writing immediately of any defect in the
Demised Premises of which the Tenant is aware
(b) erect and maintain within the Demised Premises prominent notices
of warning of relevant defects within the meaning of Section 4
of the said Act in such form as the Landlord may from time to
time require
(c) indemnify the Landlord against any actions proceedings costs
expenses claims and demands incurred thereunder by reason of the
Tenant's failure to erect and display such notices
(d) permit the Landlord and its agent with or without workmen and
others at any time on reasonable notice to enter upon the
Demised Premises erect and exhibit notices thereon giving
warning of relevant defects within the meaning of the said
Section 4 in the Demised Premises and to install lighting or any
other reasonable means of warning or protection against such
defects
16. NOT to hold or permit or suffer to be held any sale by auction on the
Demised Premises
17. (a) NOT to assign charge underlet or part with or share possession
of any part or parts (as distinct from the whole) of the Demised
Premises or to part with or share possession of the whole of the
Demised Premises for all or any part of the Term or to permit
any company or person to occupy the same save by way of an
assignment or underlease of the whole of the Demised Premises
Save that the Tenant may share occupation of the Demised
Premises with another company which is a holding or subsidiary
company (as defined by Section 736 of the Companies Act 1985) of
the Tenant or a subsidiary company
<PAGE> 24
Page 21
of such holding company provided that no relationship of landlord and
tenant shall be thereby created nor shall any such company otherwise
acquire any interest in the Demised Premises provided further that such
arrangements shall cease and each such company shall quit the Demised
Premises forthwith upon it ceasing to be a holding or subsidiary company
(as defined aforesaid) of the Tenant or subsidiary company of such
holding company or in any event no later than the day prior to the
determination of the Term
(b) Subject to Paragraph (a) of this Clause not to assign charge or underlet
the whole of the Demised Premises without the previous written consent
of the Landlord but so that such consent shall not be unreasonably
withheld or delayed
(c) On any assignment of the Demised Premises to procure that the Assignee
covenants directly with the Landlord to pay the rents reserved by and
to observe and perform the covenants and conditions on the part of the
Tenant contained in this Lease throughout the remainder of the Term and
covenants not further to assign or underlet the Demised Premises without
such consent as aforesaid PROVIDED THAT if the intended Assignee shall
be a private limited liability company then if the Landlord shall in its
absolute discretion so require the Tenant shall procure that one (or
more if the Landlord so reasonably requires) acceptable surety for the
intended Assignee shall covenant with the Landlord in the terms set out
in the Eighth Schedule
(d) Not to underlet the whole of the Demised Premises at a fine or premium
nor at a rent (including without prejudice to the generality of that
expression any insurance rent or
<PAGE> 25
Page 22
service charge rent) less than the greater of the rent payable hereunder
or the open market rent of the Demised Premises at the date of such
underlease
(e) To procure that any underlease of the Demised Premises shall contain:-
(i) an unqualified covenant on the part of the underlessee with the
Landlord that the underlessee will not assign or charge any
part or parts of the Demised Premises (as distinct from the
whole) and will not underlet or (save by way of an assignment of
the whole) part with or share possession of or permit any person
or company to occupy the whole or any part of the Demised
Premises
(ii) a covenant on the part of the underlessee with the Landlord that
the underlessee will not assign or charge the whole of the
Demised Premises without the previous written consent of the
Landlord
(iii) such covenants by the underlessee (which the Tenant hereby
undertakes to enforce) as to prohibit the underlessee from doing
or suffering any act or thing upon or in relation to the Demised
Premises which will contravene any of the Tenant's obligations
in this Lease
(iv) provision for review of the rent reserved by the underlease
(which the Tenant hereby undertakes to operate and enforce)
corresponding both as to terms and dates with the provisions set
out in the Third Schedule hereto for revision of the rent
hereby reserved
<PAGE> 26
Page 23
(v) a condition for re-entry on breach of any covenant on the part
of the underlessee
(vi) to procure in any underletting of the Demised Premises that the
rent under such underletting is reviewed in accordance with the
terms of such review but not to agree the rent payable
thereunder with the underlessee without the prior written
consent of the Landlord such consent not to be unreasonably
withheld and to procure the Landlord's written representations
as to the rent payable thereunder are made to any arbitrator
appointed
18. WITHIN one month after the execution of any assignment assent transfer
charge or underlease or assignment of an underlease of or relating to
the Demised Premises to give notice thereof in writing with particulars
thereof to the solicitors for the time being of the Landlord and to
produce to them a certified copy of the deed evidencing such dealing or
transmission (and in case of a devolution of the interest of the Tenant
not perfected by an assent within six months of the happening thereof to
produce to the said Solicitors the grant of representation under which
such devolution arises) and to pay to them a registration fee of TEN
POUNDS (L10.00) together with Value Added Tax thereon (or such other sum
as the said Solicitors may reasonably require) in respect of each such
dealing or transmission together with such fees as may be payable to any
Superior Landlord
19. TO permit the Landlord during the three months immediately preceding the
determination of this Lease to affix and retain without interference
upon any part of the Demised Premises or the Building a notice for
reletting the same and to permit
<PAGE> 27
Page 24
persons with written authority from the Landlord or its agent at all
reasonable times and by prior notice to view the Demised Premises
20. TO pay to the Landlord all reasonable costs charges and expenses
(including solicitors counsels and surveyors and other professional
costs and fees and bailiffs costs charges expenses and commission) which
may be charged or incurred by the Landlord or any Superior Landlord:
(a) in any application by the Tenant to any planning authority or
any application by the Tenant to the Landlord for any consent
pursuant to the covenants herein contained
(b) in or in contemplation of any proceedings under Sections 146 or
147 of the Law of Property Act 1925 or the preparation or
service of notice thereunder (notwithstanding forfeiture is
avoided otherwise than by relief granted by the Court) or for
the preparation and service of and negotiations consequent upon
a Schedule of Dilapidations served at any time during or within
one month after the expiry of the Term
(c) in connection with the recovery of any arrears of rent and
monies payable and recoverable as rent hereunder
(d) in connection with the enforcement of any of the Tenants
covenants herein contained
AND to keep the Landlord fully indemnified against all actions
proceedings reasonably taken and reasonable costs expenses claims and
demands whatsoever in respect of all or any of the said applications
consents notices negotiations and proceedings PROVIDED ALWAYS that
whenever in this Lease the consent or licence of the Landlord is
required in any matter then the
<PAGE> 28
Page 25
Landlord shall be entitled to withhold its consent or licence unless and
until it has obtained the consent of any Superior Landlord
21. NOT to allow any encroachment to be made or easement acquired on or over
the Demised Premises and in particular not to allow the right of access
of light from or over the Demised Premises to any neighbouring property
to be acquired and if any encroachment or easement shall be made or
threatened to be made or if any window or opening shall be opened or
made or threatened to be opened or made in any neighbouring property
which if not obstructed might by lapse of time confer the right to such
access of light on the owner of any neighbouring property to give notice
thereof to the Landlord and to permit it and its servants to enter the
Demised Promises and to do all such things as may be proper for the
purpose of preventing the making of such encroachment or the acquisition
of such easement or right to light
22. TO reimburse the Landlord upon demand the cost of periodic valuations or
assessments of the cost of reinstatement of the Demised Promises for
insurance purposes
23. IN the event that Value Added Tax shall be chargeable on the Landlord in
respect of any supplies made to the Tenant the Tenant shall in addition
to any amounts otherwise payable pay the Landlord the amount of the
Value Added Tax so chargeable and further in the event of the Landlord
electing at any time during the term to waive exemption from Value Added
Tax in respect of the Demised Premises to pay the amount of Value Added
Tax chargeable on the rents hereby reserved and on the interim charge
and the service charge as defined in the Seventh Schedule as a result of
such election having been made and all or any of such payments shall be
made by way of rent
<PAGE> 29
Page 26
24. (a) IF the rent hereby reserved or any part thereof or any other sum
payable by the Tenant to the Landlord pursuant to the provisions
of this Lease shall not have been paid upon the date whereon
payment of the same was due then the Tenant shall pay to the
Landlord interest upon such rent or other sum at the Prescribed
Rate until the said rent or other sum shall have been paid
(b) BY "Prescribed Rate" is meant 4% over the base rate published
from time to time of Hill Samuel & Co Limited or if the same
shall cease to exist or publish a base rate during the Term of
such other London Clearing Bank as the Landlord may nominate
(c) INTEREST payable by the Tenant pursuant to this Sub-Clause shall
be calculated from day to day
(d) INTEREST payable by the Tenant upon arrears of rent shall not
itself be deemed to be rent
25. NOT to use the Car Parking Spaces for any purposes whatsoever other
than (i) for loading and unloading or (ii) to park thereon twelve
roadworthy vehicles
26. NOT to cause or permit any obstruction of any of the common accessways
within the Development
T H E F I F T H S C H E D U L E
The Covenants of the Landlord
1. THAT the Tenant paying the rents hereby reserved and observing and
performing the several covenants and stipulations herein on its part
contained shall peaceably hold and enjoy the Demised
<PAGE> 30
Page 27
Premises during the Term without any lawful interruption by the Landlord
or any person rightfully claiming under or in trust for it
2. TO maintain repair amend renew cleanse repaint and redecorate and
otherwise keep in good and tenantable condition
(a) the boundary walls and fences of and in the curtilage of the
Development
(b) the Access road and the Common Parts of the Development
(C) the Car Parking Spaces
PROVIDED THAT the Landlord shall not be liable to the Tenant for any
defect or want of repair herein before mentioned unless the Landlord has
had notice thereof nor in respect of any obligations hereunder that is
within the ambit of any of the Tenants covenants hereinbefore contained
3. TO maintain in good working order and repair all Conduits in under and
upon the Development and which shall serve the Demised Premises
(excluding nevertheless any which exclusively serve the Demised
Premises)
4. SO far as possible and subject always as provided in Clause 6 of the
Sixth Schedule to perform the following services:-
(a) to keep the Common Parts of the Development clean and well
lighted
(b) to supply maintain repair and renew as need be such alarms and
fire-fighting equipment in the Common Parts of the Development
as the Landlord may doom desirable or
<PAGE> 31
Page 28
necessary or as may be required to be supplied and maintained by
the Landlord by statute or by the fire authority for the
district
(c) to supply provide purchase maintain renew replace repair and
keep in good and serviceable order and condition all
appurtenances appointments fixtures and fittings bins
receptacles tools appliances materials and other things which
the Landlord may in the interests of good estate management
deem desirable or necessary for the maintenance upkeep or
cleanliness of the Development
(d) to employ such staff as the Landlord may at its discretion deem
desirable or necessary to enable the Landlord to carry out or
maintain the said services or any of then and for the general
conduct management and security of the common Parts of the
Development
PROVIDED ALWAYS that the Landlord may at the Landlords discretion add to
extend vary or alter the rendering of the said services or any of them
from time to time if the Landlord shall reasonably deem it desirable so
to do for the more convenient or efficient conduct and management of the
Development
5. TO insure and keep insured in the full reinstatement value the Demised
Premises and the Common Parts of the Development and the Landlords
fixtures therein against lose or damage by fire lightning, explosion,
aircraft (or other aerial device) or articles dropped therefrom, riot,
civil commotion, malicious person, earthquake, storm, tempest, flood,
bursting and overflowing of water pipes, tanks and other apparatus,
impact by road vehicles and such other risks as the Landlord may deem
desirable or expedient including loss of rent hereunder for
<PAGE> 32
Page 29
four years and architects and surveyors fees and demolition and
clearance and similar expenses ("the Insured Risks") in some insurance
office or with underwriters of repute and shall procure that the
interest of the Tenant is noted on the policy and to produce to the
Tenant at the Tenant's own expense a copy of such policy and of the
annual premium receipt and in case of destruction of or damage to the
Demised Premises or the Common Parts of the Development any part thereof
from any cause covered by such insurance to lay out all monies received
in respect of such insurance (other than monies received for loss of
rent and architects and surveyors fees and for demolition and clearance
expenses) in rebuilding and reinstating the same as soon as reasonably
practicable PROVIDED ALWAYS that if such rebuilding or reinstating be
prevented or frustrated all such insurance monies (other than as
aforesaid) shall be retained by the Landlord and this Lease shall
thereupon determine
6. TO bear pay and discharge all existing and future rates (including
water rates) taxes duties assessments charges impositions and outgoings
whatsoever assessed charged and imposed upon the Common Parts of the
Development
7. In the event that any third party shall require that any part of the
land in the Development being the whole or part of title LN159125 be
excluded from the Development so that the Tenant is no longer able to
park twelve vehicles in the Car Parking Spaces the Landlord shall
procure at its expense that alternative car parking spaces are made
available on the Development so that the Tenant maintains the exclusive
right to park twelve cars in a designated area of the Development and
further shall at its own expense re-fence and landscape the new
boundaries of the Development resulting from the removal of any such
land
<PAGE> 33
Page 30
T H E S I X T H S C H E D U L E
Proviso Agreements and Declarations
1. 1.1 AT any time after any of the following events shall happen the
Landlord may re-enter upon all or any part of the Demised
Premises:-
1.1.1 the whole or any part of the rent shall be unpaid for twenty one
days after becoming payable whether formally demanded or not or
1.1.2 there shall be any breach of any of the Tenant's covenants or
1.1.3 the Tenant or any surety for the Tenant (being a company) shall
enter into liquidation whether compulsory or voluntary (save for
the liquidation of a solvent company for the purpose of
amalgamation or reconstruction) or suffers an administrative
receiver to be appointed or enters into a voluntary arrangement
as defined in Section I of the Insolvency Act 1986 or does or
suffers anything which would entitle a receiver to take
possession of any of its assets or does or suffers anything
which would entitle any person to present a petition for winding
up or apply for an administration order to cease to exist or is
dissolved or
1.1.4 the Tenant or any surety for the Tenant (being an individual)
shall be unable to pay a debt or have no reasonable prospect of
being able to pay a debt within the meaning of Section 268 of
the Insolvency Act 1986 or make an application to the Court for
an interim order under Section 253 of the Insolvency Act 1986 or
does anything
<PAGE> 34
Page 31
which would entitle A petition for a bankruptcy order to be made
or makes any assignment for the benefit of or enters into any
arrangement with his creditors either by composition or
otherwise
PROVIDED ALWAYS that if any of the events in paragraphs 1.1.3 or
1.1.4 shall occur to a surety of the Tenant rather than the
Tenant or if the surety shall die (then the Landlord may not
re-enter under paragraph 1.1. for a period of two months
thereafter
PROVIDED FURTHER that if the Tenant within such period shall
provide the Landlord with an alternative surety reasonably
acceptable to the Landlord or a security deposit for rent
equivalent to six months value of the then passing rent such
deposit to be in the form of the Ninth Schedule hereto the
Landlord shall not be entitled to re-enter the Demised Premises
because of such an event having occurred to a surety
1.2 If the Landlord shall re-enter in accordance with Clause 1.1. of
this Schedule then this Lease shall thereupon terminate but
without prejudice to any right of action or remedy of the
Landlord in respect of any breach non-observance or
non-performance of any of the Tenants covenants or the
conditions herein contained
2.1 IN case the Demised Premises or any part thereof shall at any time
during the Term be so damaged or destroyed by the Insured Risks so as to
be unfit for occupation and use then (unless the insurance money shall
be wholly or partially irrecoverable by reason solely or in part of any
act or default of the Tenant) the rent hereby reserved or a fair
proportion thereof according to the nature and extent of the damage
sustained shall be suspended for the period for which loss of rent
insurance is maintained under Clause 5 of the Fifth Schedule or if
earlier until the Demised Premises shall again be rendered fit for
<PAGE> 35
Page 32
occupation and use and any dispute with reference to this proviso shall
be determined by the Landlords Surveyor whose decision shall be final
and binding on the parties hereto
2.2 PROVIDED THAT if the Demised Premises shall be destroyed or damaged by
any of the insured risks so as to become unfit for occupation and use
and the damage is not made good within four years of such destruction or
damage then the Tenant or the Landlord may on the expiration of such
period of four years of such destruction or damage by written notice
given to the other elect to determine this Lease and upon the service of
such notice(PROVIDED ALWAYS that in the case of notice given by the
Tenant to the landlord the Ten ant has complied with the covenants in
the lease on the Tenant's part contained) this Lease shall forthwith
determine and the parties hereto shall forthwith be released from all
and singular their further duties and obligations hereunder but without
prejudice to the rights of either party in respect of any antecedent
breach of any of the covenants herein contained
3. IT is hereby agreed between the Landlord and the Tenant that the
provisions for compensation contained in Section 37 of the Landlord and
Tenant Act 1954 shall not apply to this Lease except in the events
specified in Section 38(2) of that Act
4. THIS Lease shall incorporate the regulations as to notices contained in
Section 196 of the Law of Property Act 192S as amended by the Recorded
Delivery Service Act 1962
5. THE expression "the Planning Acts" shall in this Lease include any Act
or Acts for the time being in force amending or replacing the Town and
Country Planning Act 1990 the Planning (Listed Buildings and
Conservation Areas)Act 1990, the Listed Buildings Act 1990 and the
Planning (Consequential Provisions) Act 1990 and any other legislation
of a similar nature and any statutory modification or re-enactment
thereof for the time
<PAGE> 36
Page 33
being in force and any orders instruments plans rules regulations
permissions consents and directives made under or in pursuance of the
said Acts or any of them
6. NOTWITHSTANDING anything herein contained the Landlord shall not be
liable to the Tenant nor shall the Tenant have any claim against the
Landlord in respect of:-
(a) any interruption in any of the services hereinbefore mentioned
by reason of necessary repair or maintenance of any
installations or apparatus or damage thereto or destruction
thereof by fire water Act of God or other cause beyond the
Landlords control or by reason of mechanical or other defect or
breakdown or frost or other inclement conditions or unavoidable
shortage of fuel materials water or labour or
(b) any act omission or negligence of any porter attendant or other
servant of the Landlord in or about the performance or purported
performance of any duty relating to the provision of the said
services or any of them
T H E S E V E N T H S C H E D U L E
The Service Charge
1. THE Service Charge hereinbefore made payable means 23.77 per centum of
the Annual Service Cost (as hereinafter defined) in respect of each
calendar year running from the lot day of January and ending on the 31st
day of December next following or such other period as the Landlord may
determine ("the Accounting Period") SAVE THAT in respect of any part of
the Annual Service-Cost as under Paragraph 3(a) to (g) of this Schedule
relates directly to that part of the Access Road as forms the Parking
Access Road as the same is shown cross hatched brown on the Plan and the
Car Parking Spaces and the
<PAGE> 37
Page 34
area hatched green on the plan the Service Charge means 44.60 percent of
such part of the Annual Service Cost as so relates and further in
respect of any part of the Annual Service Cost which relates directly to
costs incurred in complying with the Landlord's insurance obligations
hereinbefore contained in paragraph 5 of the Fifth Schedule (other than
so far as the same relates to the Common Parts of the Development) the
Service Charge means 100 per cent
2. THE Interim Charge hereinbefore made payable means such sum to be paid
on account of the Service Charge in respect of each Accounting Period as
the Landlord shall specify to be a fair and reasonable payment The first
payment of the Interim Charge (on account of the Service Charge for the
Accounting Period during which this Lease is executed) shall be made on
the execution hereof and thereafter shall be by equal payments in
advance on the 24th day of June and the 25th day of December in each
year and in case of default shall be recoverable as rent in arrear
3. THE Annual Service Cost in each Accounting Period shall be the aggregate
of the sums actually expended or liabilities incurred by the Landlord in
connection with the following matters:-
(a) the cost of the observance and performance of the covenants on
the part of the Landlord hereinbefore contained in paragraphs
2,3,4,5,6 of the Fifth Schedule
(b) the reasonable fees charges and expenses payable to any
qualified person whom the "Landlord may reasonably employ to
inspect repair and keep in running order the alarm systems
including the Landlords costs from time to time incurred in
entering into a contract or contracts in usual form with any
such qualified persons
<PAGE> 38
Page 35
(c) the reasonable costs of taking out and maintaining in force an
effective insurance policy or policies against any and every
liability of the Landlord for injury to or death of any person
(including every agent servant and workman of the Landlord) and
damage to or destruction of the property of any such person
arising out of the management and/or maintenance of the Common
Parts of the Development and in particular but without prejudice
to the generality of the foregoing the cost of insurance against
such injury death damage or destruction as aforesaid due to the
act neglect default or misconduct of any agent servant or
workman of the Landlord employed in connection with the
management and/or maintenance of the Common Parts of the
Development
(d) in addition to the wages from time to time payable by the
Landlord the employers National Insurance and Industrial
Injuries Contributions and any taxes or similar levies from time
to time payable by the employer in respect of all agents
servants and workmen employed by the Landlord solely in
connection with the performance and observance of any of the
covenants on its part herein contained
(e) the reasonable cost of the carrying out of other work or
services of any kind whatsoever which the Landlord may
reasonably consider desirable for the purpose of maintaining or
improving services in the Development
(f) all reasonable fees and expenses payable to any person firm or
company whom the Landlord may from time to time employ in
connection with the management and/or maintenance of the Common
Parts of the Development including the cost of preparing
statements of the Annual
<PAGE> 39
Page 36
Service Cost and including legal costs incurred relating to the
management and maintenance of the Development and in the
collection of service charges and rent
(g) the cost of complying with all statutory requirements
regulations or requirements of any competent local or other
authority relating to the Common Parts of the Development
4. THE Landlord shall be entitled to make such reasonable provision for a
reserve for anticipated future expenditure to be incurred in the
performance of the covenants on the part of the Landlord contained
herein as the Landlord may reasonably deem appropriate and the amounts
so provided shall form part of the Annual Service Cost
5. THE Landlord will use its best endeavours to maintain the Annual Service
Cost at the lowest reasonable figure consistent with due performance
and observance of its obligations hereunder but the Tenant shall not be
entitled to object to any items comprised therein by the reason only
that the materials work or service in question might have been provided
or performed at a lower cost
6. AS soon as practicable after the end of each Accounting Period the
Landlord will submit to the Tenant an itemised statement certified by
the Managing Agents for the time being to the Landlord containing the
following information:-
(a) the amount of the Annual Service Cost
(b) the amount of the Interim Charge paid by the Tenant in respect
of that Accounting Period together with any surplus carried
forward from the previous Accounting Period
<PAGE> 40
Page 37
(c) the amount of the Service Charge in respect of that Accounting
Period and of any excess or deficiency of the Service Charge
over the Interim Charge
7. THE Tenant shall be entitled within twenty-eight days of the receipt of
such statement to inspect the vouchers and receipts for all items
included in such statement
8. IF the Interim Charge paid by the Tenant in respect of any Accounting
Period exceeds the Service Charge for that period the surplus of the
Interim Charge so paid over and above the Service Charge shall be
carried forward by the Landlord and credited to the account of the
Tenant in computing the Service Charge in succeeding Accounting Periods
as hereinbefore provided
9. IF the Service Charge in respect of any Accounting Period exceeds the
Interim Charge paid by the Tenant in respect of that Accounting Period
together with any surplus from previous years carried forward as
aforesaid then the Tenant shall pay the excess to the Landlord within
twenty-one days of service upon the Tenant of the statement referred to
above and in case of default the same shall be recoverable from the
Tenant as rent in arrear
T H E E I G H T H S C H E D U L E
The Covenant of the Surety
1. THE Surety in consideration of the demise hereinbefore contained having
been made at his request HEREBY COVENANTS with the Landlord that the
Tenant will throughout the Term hereby created or any extension or
continuation thereof under Section 24 of the Landlord and Tenant Act
1954 or any statutory modification thereof for the time being in force
or otherwise
<PAGE> 41
Page 38
by statute or common law pay the said rents hereby reserved or
subsequently increased on the days and in manner aforesaid and will
perform and observe all the Tenant's covenants hereinbefore contained
and that in case of default in such payment of rents or in the
performance or observance of such covenants as aforesaid the surety will
pay and make good to the Landlord on demand all losses damages costs and
expenses thereby arising or incurred by the Landlord notwithstanding:-
(a) any neglect or forbearance of the Landlord in endeavouring to
obtain payment or to enforce performance of the several
stipulations herein on the Tenant's part contained (and any time
which may be given to the Tenant by the Landlord shall not
release or exonerate or in any way affect the liability of the
Surety under this covenant)
(b) that the terms of this Lease may have been varied by agreement
between the Landlord and the Tenant where such variation is
immaterial and not prejudical to the Surety
(c) any other act or thing whereby but for this provision the surety
would have been released
2. IF a liquidator or trustee in bankruptcy shall disclaim this Lease and
if the Landlord shall by notice in writing have so required the Surety
will take from the Landlord a lease of the Demised Premises for a term
commensurate with the residue of the Term which would have remained had
there been no disclaimer at the same rent and subject to the same
covenants and conditions as are reserved by and contained in thin Lease
such lease to take effect from the date of such disclaimer and in such
case the Surety shall without delay take or join in all acts necessary
for the grant of such new lease and will pay all costs relating to the
grant of such new lease and execute and deliver to the Landlord a
counterpart thereof
<PAGE> 42
Page 39
3. IF the Landlord shall not require the Surety to take a lease of the
Demised Premises pursuant to Clause 2 above the Surety shall
nevertheless upon demand pay to the Landlord a sum equal to the rent
that would have been payable under this Lease but for the disclaimer or
other event putting an end to the effect of the Lease in respect of that
period from the date of the said disclaimer or the Lease ceasing to have
effect as aforesaid until the expiration of three months therefrom or
until the Demised Premises shall have been relet by the Landlord
whichever shall first occur
T H E N I N T H S C H E D U L E
Form of Rent Deposit Deed
THIS DEED is made the day of 199
BETWEEN:
(1) THE Landlord (which expression shall mean only the person for the time
being in whom the reversin immediately expectant upon the determination
of the Lease is vested) who is currently
(2) THE Tenant (which expression shall mean only the person in whom the
benefit of the term of the Lease is vested) who is currently
SUPPLEMENTAL TO
A Lease ("the Lease") dated the day of 199
and made between GUILDQUOTE LIMITED of the first part MICROMUSE
<PAGE> 43
Page 40
LIMITED of the second part and CHRISTOPHER JOHN DAWES of the third part relating
to the premises known as Disraeli House, the Adelaide Centre, Putney Bridge
Road, London, SW.15
NOW THIS DEED WITNESSETH as follows:
1.1 "The Initial Deposit" shall mean a sum equivalent to one half of the
annual rent payable at the date hereof or such greater sum as shall
represent one half of the annual rent from time to time reserved under
the Lease
1.2 "The Deposit Account" means the interest earning deposit account opened
by the Landlord's Solicitors (as hereinafter defined) at one of the
London Clearing Banks ("the Bank") on or before the date of this Deed
and in which the Landlord's Solicitors shall place the Initial Deposit
1.3 "The Deposit Balance" means the amount from time to time standing to the
credit of the Deposit Account
2. The Landlord and the Tenant irrevocably instruct the Landlords
Solicitors Messrs Russell Cooke, Potter & Chapman ("the Landlord's
Solicitors") by this Deed to act as stakeholders the operation of the
Deposit Account in accordance with this Deed and in particular to act in
accordance with this Deed in:
2.1 the making of payments into the Deposit Account
2.2 the withdrawal of sums from the Deposit Account and
2.3 accounting to the Landlord and the Tenant for money due to either of
them from the Deposit Account
<PAGE> 44
Page 41
3.1 The Tenant shall on the execution hereof deposit with the Landlord's
Solicitors the Initial Deposit as security for the due performance and
observance of the covenants on the part of the tenant contained in the
lease without prejudice to the rights and remedies of the Landlord under
the Lease
3.2 The Landlord's Solicitors are instructed to forthwith pay the Initial
Deposit into and to keep it in the Deposit Account and the Tenant may
with the Landlords prior agreement (such agreement not to be
unreasonably withheld) authorise the Landlord's Solicitors to vary the
terms of the Deposit Account
4.1 The interest which shall accrue upon the Deposit Balance shall be added
to the Deposit Balance and shall remain in the Deposit Account and shall
be dealt with as part of the Deposit Balance
4.2 The Tenant (acting on its own behalf or by its Solicitors) shall after
reasonable intervals following the date of this Deed or any payment made
to the Tenant pursuant to this clause be entitled by notice in writing
to require the Landlord's Solicitors to draw upon the Deposit Account in
payment to the Tenant of an amount equal to the interest which at the
date of such notice has accrued to the Deposit Balance
5. The Landlord shall whenever so reasonably requested by the Tenant supply
to the Tenant copies of all statements and other information relating to
the Deposit Account as the Tenant may from time to time reasonably
require
6. The Tenant hereby covenants with the Landlord as follows:
6.1 Until the release of the Deposit Balance or appropriation from the
Deposit Balance under Clause 7 hereof to maintain the Deposit held by
the Landlord's Solicitors in an amount equal (excluding any interest
accrued to the Deposit) to one half of the annual rent from time to time
reserved under the Lease and
<PAGE> 45
Page 42
6.2 If the rent reserved by the Lease shall be increased pursuant to the
provisions for the review of rent therein contained or if any monies
shall be appropriated from the Deposit Balance by the Landlord in the
manner hereinafter authorised under Clause 7 hereof within twenty one
days of written request from the Landlord so to do to deposit with the
Landlord's Solicitors an amount necessary to maintain the Deposit
Balance at the appropriate level
7.1 The Landlord shall be entitled at any time to require the Landlord's
Solicitors to draw from the Deposit Account in payment to the Landlord
of any amount not exceeding any sum then due to the Landlord arising out
of default by the Tenant if:
7.1.1 The Landlord shall have previously given to the Tenant not less
than fourteen days notice in writing of the Landlords intention
to procure any withdrawal from the Deposit Account and the
notice shall have specified the default to which the withdrawal
relates and;
7.1.2 The Tenant shall not have remedied the default complained of by
the expiration of the notice
8. The Deposit Balance (including interest thereon) and unpaid accrued
interest thereon will be released to the Tenant by the Landlord
following whichever shall be the earlier of:
8.1 The completion of a lawful assignment of the Premises by the Tenant with
the consent of the Landlord in accordance with the terms of the Lease
to an assignee who shall provide an equivalent deposit in the terms of
this Deed whereupon the provisions of this Deed shall automatically
cease and determine
<PAGE> 46
Page 43
8.2 The expiry or sooner determination of the term created by the Lease
subject to the Landlords prior right of withdrawal under clause 7.1
hereof in the event of any default by the Tenant whereupon the
provisions of this Deed shall automatically cease and determine
8.3 In the event that the lease becomes vested in a company which is
registered in the United Kingdom such company providing the Landlord
with its most recent three consecutive years accounts audited by a
Chartered Accountant the most recent of which must have been approved by
the directors of such company not more than three months before such
accounts are provided to the Landlords and each set of such accounts
showing net profits amounting to not less than three times the annual
rent first reserved by the Lease in the year to which the said accounts
relate whereupon the provision of this Deed shall automatically cease
and determine
9. DEALINGS WITH REVERSION
In the event of the Landlord assigning subletting or otherwise disposing of the
reversion expectant upon the termination of the term created by the Lease it is
hereby agreed that the Landlord will procure that such persons entitled to the
reversion expectant upon the termination of the term created by the Lease shall
enter into a new Deed of Rent Deposit and that the Tenant will following a
written request from the Landlord so to do and upon the monies then standing in
the Deposit Account enter into a new Deed of Rent Deposit in the same terms
(mutatis mutandis) as this Deed save that the expression "the Initial Deposit"
shall mean half the yearly rent then reserved and the term "the Landlord's
Solicitors shall mean the solicitors acting on behalf of the party in whom the
term expectant upon the determination of the said term is vested and the deposit
account shall be held at the Bank or such other bank as the Solicitors for the
Assignee of the reversion shall reasonably require
<PAGE> 47
Page 44
10. The Tenant hereby
10.1 acknowledges that the Landlord's right of re-entry contained in the
Lease shall be exercisable in the event of any breach by the Tenant of
any of the terms of this Deed to the intent that all covenants herein
shall be deemed to be covenants contained in the Lease
10.2 hereby agrees to charge the Rent Deposit to the Landlord as security
for the performance of its obligations in the Lease and in this Deed
IN WITNESS whereof the parties hereto have signed this instrument as their Dead
in the presence of the person(s) mentioned below the day and year first before
written
The Common Seal of GUILDQUOTE
LIMITED was hereunto affixed [SEAL]
in the presence of:
Director [sig]
Secretary [sig]
<PAGE> 1
EXHIBIT 11
MICROMUSE INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF PROFORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Net loss applicable to holders of common stock.............................. $(8,631)
-------------
Weighted average shares outstanding during the period....................... 6,329
Preferred stock on an "as if" converted basis............................... 1,290
Common shares issued and stock options granted in accordance with Staff
Accounting Bulletin No. 83:...............................................
Common stock option......................................................... 577
Preferred stock............................................................. 1,454
Preferred stock warrant..................................................... 1,167
-------------
Shares used in per share calculation........................................ 10,817
-------------
Pro forma loss from continuing operations per share......................... $ (0.83)
-------------
Pro forma loss from discontinued operations per share....................... $ (0.01)
Pro forma gain on disposal of discontinued operations per share............. $ .11
Pro forma net loss applicable to holders of common stock per share\......... $ (0.80)
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Micromuse plc, a company registered in England and Wales.
Micromuse USA Inc., a Texas corporation, a wholly owned subsidiary
of Micromuse plc.
Micromuse (Australia) Pty. Limited, an Australian corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Micromuse Inc.:
We consent to the use of our report included herein and to the references
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Palo Alto, California
December 12, 1997
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 13,741
<SECURITIES> 0
<RECEIVABLES> 4,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,290
<PP&E> 4,375
<DEPRECIATION> 1,925
<TOTAL-ASSETS> 22,740
<CURRENT-LIABILITIES> 7,109
<BONDS> 0
0
22,865
<COMMON> 66
<OTHER-SE> (7,300)
<TOTAL-LIABILITY-AND-EQUITY> 22,740
<SALES> 0
<TOTAL-REVENUES> 9,292
<CGS> 0
<TOTAL-COSTS> 1,565
<OTHER-EXPENSES> 15,256
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,404
<INCOME-PRETAX> (8,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,933)
<DISCONTINUED> 1,057
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,876)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> 0
</TABLE>
