<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
GEMSTONE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OREGON 3600 93-1044032
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
20575 NW VON NEUMANN DRIVE
BEAVERTON, OREGON 97006
(503) 533-3000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
BRYAN R. GRUMMON
PRESIDENT
GemStone Systems, Inc.
20575 NW von Neumann Drive
Beaverton, Oregon 97006
(503) 533-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------
COPIES TO:
RONALD L. GREENMAN, ESQ. TIMOTHY J. MOORE, ESQ.
JEFFREY E. HARMES, ESQ. BRETT D. WHITE, ESQ.
WILLIAM C. STONE, ESQ. DAVID L. WILKE, ESQ.
Tonkon Torp LLP Cooley Godward LLP
1600 Pioneer Tower Five Palo Alto Square
888 SW Fifth Avenue 3000 El Camino Real
Portland, OR 97204-2099 Palo Alto, CA 94306-2155
(503) 221-1440 (650) 843-5000
---------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock(2)............................ 2,875,000 $12.00 $34,500,000 $10,178
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(2) Includes 375,000 shares of Common Stock that the Underwriters have the
option to purchase to cover overallotments, if any.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS (Subject to Completion)
Dated July 23, 1998
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 registration or qualification under the securities laws of any such State.
<PAGE>
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,000,000 shares are
being issued and sold by GemStone Systems, Inc. ("GemStone" or the "Company")
and 500,000 shares are being sold by a stockholder of the Company (the "Selling
Stockholder"). See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholder.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price of the Common Stock will be between $10.00 and $12.00 per share. See
"Underwriting" for information relating to the determination of the initial
public offering price. The Company intends to apply for listing of the Common
Stock on the Nasdaq National Market under the symbol "GSTN."
---------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
-------------------
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>
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(1) The Company, the Selling Stockholder and a controlling person of the Selling
Stockholder have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $750,000.
(3) The Company and the Selling Stockholder have granted to the Underwriters an
option, exercisable within 30 days of the date hereof, to purchase an
aggregate of up to 375,000 additional shares of Common Stock at the Price to
Public, less Underwriting Discounts and Commissions, to cover
over-allotments, if any. If all such additional shares are purchased, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Stockholder will be $ , $ , $ and
$ , respectively. See "Underwriting."
---------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of SG Cowen Securities Corporation, New York, New York on or about
, 1998.
---------------------
SG COWEN
PIPER JAFFRAY INC.
VOLPE BROWN WHELAN & COMPANY
, 1998
<PAGE>
The Dependable Platform
for Enterprise-class
Java Applications
[Graphic]
Rendering of 3 computer workstations on left side with lines leading
into a box representing GemStone's products. Box includes the words:
"Business Applications, Enterprise JavaBeans*, OTS, JTS, ORB, Request
Broker, Persistent Cache, and Persistent Cache Architecture and other
technical designations of components of GemStone's products. Box has
lines leading right to a rendering of a Database, a rendering of
Enterprise Applications and a rendering of a Mainframe computer.
[/Graphic]
*Gemstone/J 2.0, scheduled for release in late 1998, is being designed to
provide support for Enterprise JavaBeans.
GemStone/J is a Java application server platform designed to meet the
demanding requirements of enterprise applications. GemStone/J provides a
transaction management environment with a high degree of scalability, integrity,
performance, availability and security for essential applications in a 3-tier
heterogeneous environment.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
GemStone-Registered Trademark- and GemSmith-Registered Trademark- are registered
trademarks of the Company, and other trademarks of the Company include
GemStone/S-TM-, GemStone/J-TM-, GemBuilder-TM-, GemSmith-TM-, GemConnect-TM-,
GemEnterprise-TM-, GemAccess-TM- and Persistent Cache Architecture-TM-. This
Prospectus also makes reference to trademarks of other companies.
<PAGE>
GemStone Reduces
the Time & Risk of
Deploying Enterprise
Applications
Increased competition, economic globalization, industry deregulation and
consolidation all contribute to the need for more timely, highly functional and
well integrated corporate IT solutions. GemStone provides platforms for new
enterprise-class applications based on standards from the Internet and World
Wide Web combined with evolving distributed object computing technologies.
The Company offers enterprise application servers for both Java and Smalltalk.
These servers provide an open platform that:
- - Simplifies development of applications with object software development tools
- - Integrates existing corporate databases and legacy systems
- - Enables broad access via intranets, extranets and the Internet
- - Provides enterprise-class capabilities such as scalability, integrity,
performance, availability and security.
Gemstone Serves A Broad Range of Industries
[Graphic]
Six photos surround the text, depicting different industries.
Photos, clockwise from upper right corner: underground train station;
satellite dish; person working in laboratory; electricity-generating
windmills; city building; and person working in manufacturing assembly
setting.
[/Graphic]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMMON STOCK
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS." EXCEPT WHERE
OTHERWISE NOTED HEREIN, ALL OF THE INFORMATION APPEARING IN THIS PROSPECTUS: (I)
REFLECTS A 0.55-FOR-1 REVERSE SPLIT OF THE COMPANY'S COMMON STOCK AND PREFERRED
STOCK, AND SUBSEQUENT CONVERSION OF THE PREFERRED STOCK INTO COMMON STOCK AT A
1:1 CONVERSION RATIO, IN EACH CASE EFFECTED PRIOR TO COMPLETION OF THIS
OFFERING; (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION;
AND (III) ASSUMES THE COMPLETION OF THE REORGANIZATION OF THE COMPANY'S PARENT
CORPORATION.
THE COMPANY
GemStone Systems, Inc. ("GemStone" or the "Company") designs, develops,
markets and supports enterprise application server software platforms. The
Company's application servers support the development, deployment and management
of distributed, business-critical core competency applications in heterogeneous
environments. In September 1997, the Company first commercially shipped its
GemStone/J product, an application server platform for a new generation of
enterprise server-based applications written in Java. These applications require
a scalable Java application server platform that provides enterprise-class
quality of service and integrates Internet and World Wide Web technology with
existing information infrastructure, including relational databases, packaged
enterprise software and legacy applications. The Company also provides an
application server platform for Smalltalk, GemStone/S, which the Company has
been shipping since 1986. The Company has leveraged both significant technology
expertise and experience from working with GemStone/S customers to create the
GemStone/J platform.
Organizations today are under increasing pressure to respond to a changing
competitive landscape, driven in part by globalization of business and industry
deregulation. To that end, companies have implemented information technology
("IT") applications that automate and manage functions critical to their core
competencies. The evolution of the enterprise computing platform and the
emergence of distributed object computing have contributed to and benefited from
the adoption of Java, an object language and platform. Java has been
increasingly accepted by application developers due to its high degree of
hardware platform independence and the popularity of the World Wide Web. The use
of Java for building enterprise applications on an application server leverages
the pervasive Web and Internet infrastructure, provides a mechanism to integrate
information and applications from legacy systems and corporate databases and
provides a flexible and productive environment for building new IT applications.
Initial attempts at developing and deploying enterprise-class Java applications
have been challenging because developers have lacked the software infrastructure
in Java to provide the level of enterprise-class capabilities, including
scalability, integrity, performance, availability and security, required of core
competency applications. The Company believes there is a significant opportunity
for delivering enterprise application servers that help simplify and reduce the
risk of developing business-critical distributed Java applications.
The Company's objective is to be the leading provider of application server
platforms for enterprise computing based on distributed object technologies in a
heterogeneous environment. Since its inception, the Company has developed
significant experience and technology in server platforms for enterprise-class
distributed object computing environments. The Company's strategy is to maintain
its technological leadership, target a broad range of industries, promote
successful customer adoption of its products, expand its global sales capability
and leverage its third-party marketing and selling relationships.
GemStone's products are marketed and sold through the Company's direct sales
force, distributors and value-added resellers ("VARs") in the Americas, Europe,
Asia and Australia. Customers from a wide variety of industries, including
banking, government, insurance, manufacturing, pharmaceutical, retail,
telecommunications, transportation and utilities have deployed applications on
GemStone platforms.
3
<PAGE>
Through June 30, 1998, over 500 customers had licensed GemStone products,
including Banque Generale du Luxembourg S.A., Florida Power and Light Company,
J.P. Morgan & Co. Incorporated, Lucent Technologies Inc., Millenium
Pharmaceuticals, Inc., Northern Telecom Limited, Orient Overseas Container Line,
Systems & Computer Technology Corporation and Texas Instruments Incorporated.
GemStone Systems, Inc. was originally incorporated in Oregon in 1990. Prior
to 1990, the activities of the Company were conducted by Servio Logic
Corporation ("SLC"), the Company's founding parent corporation, and SLC's
subsidiary Servio Logic Development Corporation. As part of a corporate
reorganization expected to occur prior to the completion of this offering (the
"Reorganization"), GemStone's direct parent company will become Lex Magna
Limited ("Lex Magna"), a British Virgin Islands corporation. All references to
the Company herein include the Company and its predecessors. The Company's
principal executive offices are located at 20575 NW von Neumann Drive,
Beaverton, OR 97006 and its telephone number is (503) 533-3000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company............................................ 2,000,000 shares
By the Selling Stockholder................................ 500,000 shares
Common Stock to be outstanding after the offering........... 8,995,061 shares(1)
Use of proceeds............................................. Working capital and other
corporate purposes, including
research and development and
expansion of general sales
and customer support
activities. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...................... GSTN
</TABLE>
- --------------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes: (i)
711,687 shares of Common Stock issuable upon exercise of outstanding
options, and 65,419 additional shares of Common Stock available for future
grant, under the Company's Restated 1992 Employees' Stock Option Plan; (ii)
300,000 shares of Common Stock reserved for issuance under the Company's
1998 Employee Stock Purchase Plan; and (iii) 700,000 shares of Common Stock
reserved for issuance under the Company's 1998 Employees Stock Option Plan.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 4 and 7 of Notes to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues.............................. $ 4,827 $ 3,674 $ 6,893 $ 13,715 $ 18,708 $ 10,180 $ 10,294
Gross profit................................ 3,517 2,547 4,802 10,393 11,662 6,701 6,882
Loss from operations........................ (5,523) (5,556) (7,496) (6,637) (8,265) (3,377) (1,177)
Net loss.................................... $ (5,356) $ (5,436) $ (7,293) $ (6,791) $ (8,277) $ (3,367) $ (1,242)
Pro forma basic and diluted net loss per
share (1)................................. $ (1.25) $ (0.18)
Shares used in computing pro forma basic and
diluted net loss per share (1)............ 6,606,224 6,980,634
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
AS
ACTUAL ADJUSTED(2)
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 771 $ 20,481
Working capital (deficit)........................................................... (1,495) 18,215
Total assets........................................................................ 8,940 28,650
Capital lease obligations, less current portion..................................... 412 412
Total stockholders' equity.......................................................... 476 20,186
</TABLE>
- ------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the shares used in computing pro forma basic and
diluted net loss per share.
(2) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $11.00
per share after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company and the receipt and
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN OR IMPLIED BY
THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER THE HEADINGS "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; UNCERTAIN FUTURE OPERATING RESULTS
The Company has incurred net losses in all of its fiscal years since it
began operations and for the six months ended June 30, 1998. As of June 30,
1998, the Company had an accumulated deficit of approximately $42.9 million.
There can be no assurance that the Company will be profitable on a quarterly
basis or on an annual basis in the future. In addition, although the Company has
experienced revenue growth in recent periods, there can be no assurance that the
Company's revenue will be maintained or continue to grow. In particular,
revenues from licenses of the Company's non-Java based products have fluctuated
significantly since 1996. The Company has recently begun a shift in product
emphasis to software solutions based on the Java programming language and as a
result may experience declining revenues in its non-Java based products. There
can be no assurance that the Company's shift in focus to Java based products
will be successful or result in positive operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's historical operating results have fluctuated significantly and
the Company expects its operating results to continue to fluctuate in the
future. Future operating results in any period will depend upon many factors,
including: the size and timing of individual license transactions; the delay or
deferral of customer orders or deployments; the budget cycles of the Company's
customers; the growth rate in the overall market for the Company's products; the
level of product and price competition; the length of the Company's sales cycle;
the Company's success in expanding its direct sales force and indirect
distribution channels; demand for the Company's products and services; the mix
in direct sales versus indirect distribution channel sales; the mix of products
and services licensed or sold; the success of the Company in penetrating
international markets; the impact on timing of revenue recognition associated
with the adoption of SOP 97-2 and SOP 98-4; changes in pricing policy by the
Company and its competitors; the timing of new product introductions and product
enhancements; publication of opinions about the Company, its products and object
computing technology by industry analysts; and personnel changes and the ability
to hire new employees. A decline in sales or utilization of the Company's
products may cause a decline in service, maintenance and training services,
thereby exacerbating fluctuations in results of operations.
The sales cycles associated with the licensing of the Company's products are
often lengthy and are subject to a number of significant delays over which the
Company has little or no control. The Company's products typically are licensed
as a portion of a significant enhancement to a customer's IT system. The
implementation of some of the Company's products involves a significant
commitment of resources by prospective customers and may require substantial
re-engineering of customers' computer environments. Accordingly, potential
customers are cautious in making commitments to purchase the Company's products.
The Company generally is required to provide a significant amount of education
to prospective customers regarding the uses and benefits of the Company's
products. Licensing of the Company's products is subject to a number of
uncertainties over which the Company has little or no control, including
6
<PAGE>
customers' internal acceptance reviews, the success and continued internal
support of customers' own development efforts, competition and the efforts of
distributors and VARs. The uncertain outcome of the Company's sales effort and
the uncertainty of the sales cycle with new customers could result in
substantial fluctuations in quarterly operating results. Due to the relatively
large size of some licenses, a lost sale or delayed sale could have a material
adverse effect on the Company's quarterly operating results.
The Company historically has earned a substantial portion of its revenue in
the last two weeks of each quarter due to customer purchasing practices. Because
a substantial portion of the Company's costs are relatively fixed and based on
anticipated revenues, any reduction in revenues would not be accompanied by a
corresponding reduction in costs and could result in significant variations in
results of operations. Accordingly, the failure to achieve projected revenue
during any given quarter could have a material adverse effect on the Company's
business, financial condition and results of operations for the quarter. The
Company believes that the typical budgeting cycles of its customers can have an
adverse effect on the Company's first quarter revenue. Due to all of the
foregoing factors, the Company believes that the Company's results of operations
will experience substantial fluctuations and that period-to-period comparisons
of its results of operations should not be relied upon as an indication of
future performance. In addition, in the event that in some future quarter the
Company's operating results are below the expectations of public market analysts
and investors, the price of the Company's Common Stock would likely be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON LARGE ORDERS FROM LIMITED NUMBER OF CUSTOMERS
Historically, a substantial portion of the Company's revenues in any given
period have been derived from licenses and services provided to relatively few
customers. For the year ended December 31, 1997, and the six months ended June
30, 1998, the Company's top five customers accounted for approximately 44% and
39%, respectively, of the Company's total revenues. For the second quarter of
1998, one customer, Sprint Communications Company, L.P. ("Sprint"), accounted
for approximately 58% of the Company's license revenue and approximately 30% of
total revenues. In addition, the identity of the Company's top five customers
has changed from year to year. There can be no assurance that the loss of a
significant customer, or a reduction in commitments by such customers, would be
offset by sales to other customers. Therefore, the loss of or a reduction in
sales to one or more significant customers would likely have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Customers and Markets."
DEPENDENCE ON JAVA TECHNOLOGY AND EMERGING MARKET FOR DISTRIBUTED OBJECT
COMPUTING
The Company's products are designed for use with object software
applications that are based specifically on the Smalltalk and Java programming
languages. Through June 30, 1998, a substantial majority of the Company's
revenue has been attributable to sales of products and maintenance and
consulting services related to Smalltalk. In recent periods, the Company has
substantially increased its emphasis on the development and marketing of
Java-based products and services. The Company believes that its growth depends
significantly upon broad market acceptance of distributed object computing in
general, and Java tools and application servers in particular. There can be no
assurance that the market for Java-based software products will continue to grow
or that the Company will be able to respond effectively to the evolving
requirements of the market. If the Java programming language does not gain
market acceptance, or is replaced by another programming language, the Company's
business, financial condition and results of operations would be materially and
adversely affected. See "Business--Industry Background."
The Company's GemStone/J software product is based on certain technology
licensed from Sun Microsystems, Inc. ("Sun") under the terms of a Technology
License and Distribution Agreement (the
7
<PAGE>
"Java Agreement"). The Java Agreement gives Sun the right to define and control
its Java brand technology in numerous respects. For example, the Java Agreement
requires that the Company's products pass certain test suites defined by Sun
prior to being labeled "Java compatible." The inability of the Company's
products to pass such test suites as defined by Sun would likely have an adverse
effect on sales. The Java Agreement also imposes strict limitations on the
Company's right to modify the Java technology incorporated in the Company's
products. In addition, the recently announced impending acquisition by Sun of
one of the Company's competitors, NetDynamics, Inc. ("NetDynamics"), may cause
Sun to use such restrictions to benefit Sun's own products at the expense of the
Company. In particular, if Sun were to restrict the Company's ability to access
future improvements to the Java technology for modification and use with the
Company's software, the Company's product development efforts likely would be
materially and adversely affected, which would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"--Competition" and "Business--Major Industry Alliances--Sun Microsystems."
MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS; DEPENDENCE ON A SINGLE PRODUCT LINE
The Company's future revenues and operating results depend on market
acceptance of the Company's enterprise application server line of products.
There can be no assurance that a significant number of organizations will choose
to use the Company's products or will pay prices that will yield profitable
results for the Company. In particular, there can be no assurance that the
Company will be successful in marketing its new Java-based product, GemStone/J.
Any publicized performance problems relating to object software technology or
products offered by the Company, or by any competitor of the Company, could slow
customer acceptance of the Company's products. To the extent that the Company is
associated with unsuccessful customer projects, even if due to factors beyond
the Company's control, the Company's reputation and competitive position could
be materially and adversely affected, which would in turn have a material
adverse effect on the Company's business, financial condition and results of
operations.
Substantially all of the Company's total revenues for the year ended
December 31, 1997, and the substantial majority of total revenues for the six
months ended June 30, 1998, were from licenses of and services related to
GemStone/S. The Company expects to continue to derive a substantial portion of
its revenue from GemStone/S in the near term, and to derive an increasing
percentage of its total revenues from licenses of and support services related
to GemStone/J. There can be no assurance, however, that the Company will be
successful in marketing, selling and supporting its GemStone/J product, or that
it will continue to derive substantial revenues from its GemStone/S product,
even in the near term. Failure to successfully market GemStone/J, particularly
given the potential decline in sales of GemStone/S, would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Rapid Technological Change; Introduction of New Products and
Product Enhancements."
RISKS ASSOCIATED WITH EXPANDING INDIRECT DISTRIBUTION
To date, the Company has sold its products primarily through its direct
sales force. The Company has been developing relationships with third-party
distributors and VARs, and intends to continue to develop such relationships in
order to increase its product distribution channels. The Company's ability to
achieve significant revenue growth in the future will depend in large part on
its success in establishing and maintaining such third-party relationships.
Although the Company is currently investing, and plans to continue to invest,
significant resources to develop distribution relationships with third-party
distributors and VARs, the Company has at times experienced and continues to
experience difficulty in establishing necessary third-party relationships. There
can be no assurance that the Company will be able to successfully expand its
third-party distribution channels or that any such expansion will result in an
increase in revenues. Any failure by the Company to expand its third-party
distribution channels, or for such third parties to perform as expected under
such contracts, would materially and adversely affect the Company's business,
financial condition and results of operations. For example, in June 1998 the
Company entered
8
<PAGE>
into a Development, Deployment and Reseller's Agreement with Systems & Computer
Technology Corporation ("SCT") pursuant to which the Company granted to SCT a
non-exclusive license to the Company's GemStone/J product for incorporation into
SCT's application programs for distribution worldwide. There can be no
assurance, however, that SCT will commercially ship, or continue to actively
market, any products incorporating GemStone/J. See "Business--Major Industry
Alliances."
COMPETITION
The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company believes that the
principal competitive factors in its market are product quality, performance and
flexibility, use of standards-based technology, quality of support and service,
company reputation and, to a lesser extent, price. The Company also believes
that to remain competitive, products in the market for enterprise application
servers must deliver high degrees of scalability, integrity, performance,
availability and security, and must integrate easily with existing enterprise
systems. The Company's competitors include both public and privately held
enterprises, including BEA Systems Inc. ("BEA"), Inprise Corporation ("Inprise,"
formerly Borland International, Inc.), IONA Technologies PLC ("IONA"),
NetDynamics and WebLogic, Inc. ("WebLogic"). Many of these competitors have
longer operating histories, greater financial, technical, marketing and other
resources, greater name recognition and larger installed bases of customers than
the Company. Further, Sun recently announced an agreement to acquire
NetDynamics. The substantial resources of Sun and its leadership in Java,
combined with the enterprise application server technology of NetDynamics, may
pose a significant source of competition. In addition, there are other very
large and established software companies that may compete with the Company,
including International Business Machines Corporation ("IBM"), Microsoft
Corporation ("Microsoft"), Netscape Communications Corp. ("Netscape") and Oracle
Corporation ("Oracle"). These competitors and potential competitors 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 and
sale of their products than the Company. See "--Dependence on Java Technology
and Emerging Market for Distributed Object Computing."
The Company expects competition to increase as new emerging competitors and
established companies seek to develop and market Java-based object computing
solutions. The Company also expects that competition will increase as a result
of software industry consolidation. Increased competition may result in price
reductions, reduced gross margins and loss of market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially and adversely affect its business, financial condition and
results of operations.
CONTROL BY SIGNIFICANT STOCKHOLDER
The Selling Stockholder currently holds substantially all of the outstanding
Common Stock of the Company, and will hold approximately 71.6% of the
outstanding Common Stock immediately after the offering. The Selling Stockholder
is a closely held corporation, ultimately controlled by Mr. Putera Sampoerna, a
resident of Singapore with global diversified business interests. As a result,
Mr. Sampoerna has the ability to control the Company and to direct its business
affairs and management. As long as Mr. Sampoerna retains a controlling position,
Mr. Sampoerna will control the outcome of shareholder votes on such matters as
the election of directors, changes in the Company's Articles of Incorporation
and other charter documents, and certain significant transactions such as
mergers or sales. In addition, the sale of a substantial block of the Company's
shares by the Selling Stockholder, at the direction of Mr. Sampoerna or
otherwise, would likely have an adverse effect on the market price of the Common
Stock. See "Shares Eligible for Future Sale" and "Principal and Selling
Stockholders."
9
<PAGE>
MANAGEMENT OF POTENTIAL GROWTH
The Company recently has experienced a period of transition and aggressive
product development that has placed, and may continue to place, a significant
strain on its resources, including its personnel. Additional product development
and product introductions will place a further strain on the Company's resources
and personnel. Failure to successfully manage growth or to timely achieve
product development targets could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's future performance depends in significant part upon attracting
and retaining its key technical, sales and senior management personnel. None of
the Company's current key employees is bound by an employment agreement and many
of the Company's key employees are fully vested or nearly fully vested with
respect to Company stock options previously awarded to them. The Company
believes that the technical and creative skills of its personnel are essential
to establishing and maintaining a leadership position. The loss of the services
of one or more of the Company's key personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
Competition for highly qualified personnel is intense, and there can be no
assurance that the Company will retain its key technical, sales and managerial
employees, or that it can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future. The Company has at
times experienced and continues to experience difficulty in recruiting qualified
personnel. If the Company is unable to continue to attract and retain highly
qualified personnel, the Company's business, financial condition and results of
operations will be materially and adversely affected.
RAPID TECHNOLOGICAL CHANGE; INTRODUCTION OF NEW PRODUCTS AND PRODUCT
ENHANCEMENTS
The market for the Company's products and services is characterized by rapid
technological change, dynamic customer demands and frequent new product
introductions and enhancements. Customer requirements for products can change
rapidly as a result of innovation in software applications and hardware
configurations and the emergence, evolution or adoption of new industry
standards. The Company's future success will depend on its ability to continue
to enhance its current products and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments. For example, Sun recently introduced Enterprise JavaBeans
specification 1.0 ("EJB"), as the emerging standard for Java-based enterprise
servers. The Company plans to introduce a new version of its GemStone/J product
by the end of 1998 that is designed to support EJB. There can be no assurance,
however, that the Company will be successful in releasing its new version of
GemStone/J in a timely manner, or that once released it will be fully
functional. Moreover, there can be no assurance that the Company will continue
to develop and market on a timely and cost-effective basis fully functional
product enhancements or new products that respond to customer needs, or that its
enhanced and new products will achieve market acceptance. Any failure by the
Company to anticipate or respond adequately to changes in technology and
customer needs, or any significant delays in product development or
introduction, would have a material adverse effect on the Company's business,
financial condition and results of operations.
INTERNATIONAL BUSINESS RISKS
For the year ended December 31, 1997, and for the six months ended June 30,
1998, approximately 33% and 18%, respectively, of the Company's revenues were
comprised of international revenue, which the Company defines as revenue
generated outside the United States and Canada. The Company expects
international revenue to continue to represent a significant portion of its
total revenues. Risks related to such future revenues include exposure to
political and economic instability, the need to comply with a wide variety of
foreign and United States export laws, trade restrictions, changes in tariffs
and taxes, longer
10
<PAGE>
payment cycles typically associated with international sales and, to a lesser
extent, currency fluctuations. The Company's international sales activities are
also subject to the difficulties of managing overseas distributors or
representatives, and difficulties of staffing and managing foreign operations.
In addition, because the Company's international sales are predominantly
denominated in United States dollars, the Company's ability to compete overseas
could be adversely affected by currency fluctuations resulting in a
strengthening United States dollar. The Company does not currently engage in any
hedging transactions to reduce exposure to the effects of currency fluctuations.
Although the Company attempts to meet applicable technical standards established
by foreign standard setting organizations, there can be no assurance that the
Company will be able to comply with foreign standards. The inability of the
Company to design products to comply with foreign requirements or any
significant or prolonged decline in the Company's international revenue could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements.
RISK OF SOFTWARE DEFECTS; PRODUCT LIABILITY
Software products as complex as those offered by the Company often contain
errors or failures, especially when first introduced or when new versions are
released. Also, new products or enhancements may contain undetected errors, or
"bugs," or performance problems that, despite testing, are discovered only after
a product has been installed and used by customers. There can be no assurance
that such errors or performance problems will not be discovered in the future,
causing delays in product introduction and licensing or requiring design
modifications that could materially and adversely affect the Company's
reputation, competitive position and operating results. The Company's products
are typically intended for use in applications that may be critical to a
customer's business. As a result, the Company expects that its customers and
potential customers have a greater sensitivity to product defects than do
customers in the general software market. There can be no assurance that errors
will not be found in new products or releases after commencement of commercial
shipments. Any of such events could have a material adverse effect upon the
Company's business, financial condition and results of operations.
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims and to consequential damages. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreements
may not be effective as a result of existing or future federal, state or local
laws or ordinances or unfavorable judicial decisions. Product liability and
consequential damages claims attributable to the sale and support of Company
products could be substantial given their intended usage in mission-critical
applications. The assertion of any such product liability or consequential
damages claim could have a damaging effect on the reputation of the Company and
its products, and could have the effect of diverting substantial time and focus
of management. In addition, the cost of litigating any such product liability or
consequential damages claim brought against the Company, whether successful or
not, or settling such claim, could be significant. Any such events could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
PROTECTION OF PROPRIETARY TECHNOLOGY
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. In addition, the Company has filed a patent
application relating to its virtual machine technology supporting enterprise
computing platforms. There can be no assurance, however, that the United States
Patent and Trademark Office will issue the Company's requested patent, or that
the Company would be successful in defending such patent, if challenged.
Furthermore, there can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology or design around the
Company's pending patent. Moreover, the Company's pending patent relates only to
a portion of the Company's products and
11
<PAGE>
is not sufficient to protect the Company's competitive position with respect to
its application server solutions. Trade secret and copyright laws, upon which
the Company primarily depends, however, afford only limited protection.
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. The
Company's software is designed to be modified and adapted to each customer's
particular needs by Company consultants, customer personnel and third-party
consultants. As such, policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. Such policing is likely to become more difficult to the
extent the Company is successful at increasing product distribution through
VARs, who typically receive broader rights to the Company's technology. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States. There can be no
assurance that the Company's means of protecting its proprietary rights in the
United States or abroad will be adequate or that competition will not
independently develop similar technology.
From time to time third parties may assert that the Company's technology
infringes on their rights. The Company expects that software product developers
may increasingly be 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 to defend, result in costly litigation,
divert management's attention and resources, cause product development delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, if at all. In the event of a successful claim of product
infringement against the Company and the failure or inability of the Company to
license the infringed or similar technology, the Company's business, financial
condition and results of operations could be materially and adversely affected.
POTENTIAL BUSINESS ACQUISITIONS
The Company believes that it operates in a fragmented industry that will
experience significant consolidation. Although the Company currently has no
arrangements to do so, the Company may in the future selectively acquire
complementary technologies, products or businesses. Potential acquisitions of
complementary technologies, products or businesses by the Company may result in
the diversion of management's attention from the day-to-day operations of the
Company's business and may include numerous other risks, including difficulties
in the integration of the operations, products and personnel of the acquired
companies. Future acquisitions by the Company may also result in dilutive
issuances of equity securities, the incurrence of debt and amortization of
expenses related to goodwill and other intangible assets. Any failure by the
Company to successfully evaluate and manage future acquisitions may have a
material adverse effect on the Company's business, financial condition and
results of operations.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained following this offering. The initial
public offering price of the Common Stock has been determined by negotiations
among the Company and the Underwriters, based upon several factors. See
"Underwriting." The trading price of the Company's Common Stock may be subject
to significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant orders, changes in earnings estimates
by analysts, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the software and computer
industries, economic conditions in regional or global markets and other events
or factors, many of which are beyond the Company's control. In
12
<PAGE>
addition, the stock market has recently experienced extreme price and volume
fluctuations that have affected the market price for many companies in
industries similar or related to that of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales, or the potential for sales whether or not such sales actually occur,
of substantial numbers of shares of Common Stock in the public market following
this offering could adversely affect the market price for the Common Stock. Upon
completion of this offering, based upon the number of shares outstanding as of
June 30, 1998 the Company will have outstanding an aggregate of 8,995,061 shares
of Common Stock, assuming no exercise of the Underwriters' over-allotment option
and no exercise of outstanding employee stock options. Of these shares, the
2,500,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act. Holders of an
aggregate of 6,436,761 shares of Common Stock (after giving effect to the
offering) have agreed that after the offering they will not, without the prior
written consent of SG Cowen Securities Corporation, directly or indirectly,
offer, sell, assign, transfer, encumber, pledge, contract to sell, or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
shares of Common Stock owned by them during the 180-day period commencing on the
date of this Prospectus. Upon expiration of the lock-up period, all such shares
will be eligible for sale, subject to compliance with Rule 144 under the
Securities Act. In addition, as of June 30, 1998, 711,687 shares were subject to
outstanding options granted by the Company under its stock option plans and
approximately 455,885 shares subject to such options were vested. Moreover,
315,700 shares held by the Selling Stockholder were as of June 30, 1998 subject
to options granted to a total of five GemStone employees and directors under the
Servio Logic Corporation Restated 1992 Employees' Stock Option Plan, all of
which options will be fully vested upon consummation of the offering. Promptly
after the completion of the offering, the Company intends to file a Registration
Statement on Form S-8 with respect to approximately 2,107,106 shares which may
be acquired upon exercise of options granted, or available for grant, under all
such stock option plans. Such shares will be freely tradable, except to the
extent held by Company affiliates whose shares will remain subject to certain
limitations under Rule 144 under the Securities Act. See "Shares Eligible For
Future Sale."
DILUTION
Purchasers of the Common Stock under this offering will incur immediate and
substantial dilution in the amount of $8.76 per share, based on net tangible
book value as of June 30, 1998, assuming an initial public offering price of
$11.00 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses. To the extent that outstanding options to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
NO DIVIDENDS
The Company has never paid any cash dividends on its shares of capital
stock. The Company currently anticipates that it will retain any future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. See "Dividend Policy."
UNCERTAINTY AS TO USE OF PROCEEDS
As of the date of this Prospectus, the Company has no specific plans to use
the net proceeds from this offering other than for working capital and general
corporate purposes. Accordingly, the Company's management will retain broad
discretion regarding the allocation of the net proceeds from this offering.
Pending the uses described above, the Company plans to invest the net proceeds
in short-term, investment-grade, interest-bearing securities. See "Use of
Proceeds."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,000,000 shares of Common
Stock offered by the Company hereby, at an assumed initial public offering price
of $11.00 per share and after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
$19.7 million ($22.8 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Stockholder. See "Principal and Selling
Stockholders." The Company intends to use the net proceeds of this offering
primarily for working capital and other general corporate purposes, including
research and development, and expansion of general sales and customer support
activities. The amounts actually expended by the Company for working capital
purposes will vary significantly depending upon a number of factors, including
future revenue growth, the amount of cash generated by the Company's operations
and the progress of the Company's product development efforts. Therefore,
Company management will retain broad discretion in the allocation of the
proceeds from this offering. In addition, the Company may use a portion of the
proceeds to invest in or acquire certain technologies, products or businesses
that the Company believes are complementary. The Company has no specific
agreements or commitments, however, and currently is not engaged in any
negotiations for any such transaction. Pending the uses described above, the
Company plans to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
The Company has never paid any cash dividends on its shares of capital
stock. The Company currently anticipates that it will retain any future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
conversion of all outstanding Preferred Stock of the Company into Common Stock
automatically upon the completion of this offering and (iii) on a pro forma as
adjusted basis to give effect to the sale and issuance of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $11.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company and receipt and application
of the estimated net proceeds therefrom. See "Use of Proceeds." This table
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, less current portion(1).......................... $ 412 $ 412 $ 412
---------- ----------- -----------
Stockholders' equity (deficit):
Convertible Preferred Stock, $0.01 par value; 10,000,000 shares
authorized, 4,021,761 shares issued and outstanding actual; 5,000,000
shares authorized, no shares issued and outstanding, pro forma and pro
forma as adjusted....................................................... 37,972 -- --
Common Stock, $0.01 par value; 15,000,000 shares authorized, 2,973,300
shares issued and outstanding actual; 25,000,000 shares authorized,
6,995,061 shares issued and outstanding, pro forma, 8,995,061 shares
issued and outstanding, pro forma as adjusted(2)........................ 5,406 43,378 63,088
Foreign currency translation adjustment................................... 21 21 21
Accumulated deficit....................................................... (42,923) (42,923) (42,923)
---------- ----------- -----------
Total stockholders' equity.............................................. 476 476 20,186
---------- ----------- -----------
Total capitalization.................................................. $ 888 $ 888 $ 20,598
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- --------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) Excludes as of June 30, 1998: (i) 711,687 shares of Common Stock issuable
upon exercise of outstanding options, and 65,419 additional shares of Common
Stock available for future grant, under the Company's Restated 1992
Employees' Stock Option Plan; (ii) 300,000 shares of Common Stock reserved
for issuance under the Company's 1998 Employee Stock Purchase Plan; and
(iii) 700,000 shares of Common Stock reserved for issuance under the
Company's 1998 Employees Stock Option Plan. See "Management--Employee
Benefit Plans," "Description of Capital Stock" and Notes 4 and 7 of Notes to
Consolidated Financial Statements.
15
<PAGE>
DILUTION
As of June 30, 1998, the pro forma net tangible book value of the Company
was $476,000, and the pro forma net tangible book value per share of Common
Stock was $0.07. Pro forma net tangible book value per share represents the
amount of total tangible assets less total liabilities of the Company, divided
by the number of shares of Common Stock outstanding after giving effect to the
conversion of all outstanding shares of Preferred Stock into Common Stock. After
giving effect to the sale by the Company of 2,000,000 shares of Common Stock in
the offering, assuming an initial public offering price of $11.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, the pro forma net tangible book value of the
Company as of June 30, 1998 would have been $20.2 million, or $2.24 per share of
Common Stock. This represents an immediate dilution in net tangible book value
of $8.76 per share to new investors purchasing Common Stock in the offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 11.00
---------
Pro forma net tangible book value per share................ $ 0.07
---------
Increase in pro forma net tangible book value per share
attributable to new investors............................ 2.17
---------
Pro forma net tangible book value per share after the
offering................................................... 2.24
---------
Dilution per share to new investors.......................... $ 8.76
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by new investors purchasing shares of Common Stock offered by the Company
hereby, assuming an initial public offering price of $11.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 6,995,061 77.8% $ 43,378,000 66.3% $ 6.20
New investors.................. 2,000,000 22.2 22,000,000 33.7 11.00
------------ ----- ------------- -----
Total........................ 8,995,061 100.0% $ 65,378,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options to
purchase Common Stock after June 30, 1998. Excludes as of June 30, 1998: (i)
711,687 shares of Common Stock issuable upon exercise of outstanding options,
and 65,419 additional shares of Common Stock available for future grant, under
the Company's Restated 1992 Employees' Stock Option Plan; (ii) 300,000 shares of
Common Stock reserved for issuance under the Company's 1998 Employee Stock
Purchase Plan; and (iii) 700,000 shares of Common Stock reserved for issuance
under the Company's 1998 Employees Stock Option Plan. See "Management--Employee
Benefit Plans," "Description of Capital Stock" and Notes 4 and 7 of Notes to
Consolidated Financial Statements.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The consolidated statements of
operations data for the years ended December 31, 1995, 1996 and 1997, and the
consolidated balance sheet data at December 31, 1996 and 1997, are derived from
the consolidated financial statements of the Company, which are included
elsewhere in this Prospectus and have been audited by Ernst & Young LLP,
independent auditors, whose report thereon is also included herein. The
consolidated balance sheet data at June 30, 1998, and the consolidated
statements of operations data for the six months ended June 30, 1997 and 1998,
are derived from unaudited consolidated financial statements included elsewhere
in this Prospectus. The consolidated statements of operations data for the years
ended December 31, 1993 and 1994, and the consolidated balance sheet data at
December 31, 1993, 1994, and 1995 are derived from consolidated financial
statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, that are not included in this Prospectus. The unaudited
financial statements include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the consolidated results of operations for these periods. The
consolidated results of operations for the six months ended June 30, 1998 are
not necessarily indicative of future results.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Licenses................................ $ 3,880 $ 2,430 $ 4,698 $ 8,942 $ 6,192 $ 2,667 $ 5,147
Services................................ 947 1,244 2,195 4,773 12,516 7,513 5,147
--------- --------- --------- --------- --------- --------- ---------
Total revenues............................ 4,827 3,674 6,893 13,715 18,708 10,180 10,294
Cost of revenues:
Licenses................................ 640 139 268 397 458 211 280
Services................................ 670 988 1,823 2,925 6,588 3,268 3,132
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenues.................... 1,310 1,127 2,091 3,322 7,046 3,479 3,412
--------- --------- --------- --------- --------- --------- ---------
Gross profit.............................. 3,517 2,547 4,802 10,393 11,662 6,701 6,882
Operating expenses:
Research and development................ 2,350 2,820 3,416 4,790 5,228 2,811 2,469
Sales and marketing..................... 4,544 3,287 6,201 8,932 10,083 5,213 3,465
General and administrative.............. 2,146 1,996 2,681 3,308 4,616 2,054 2,125
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................. 9,040 8,103 12,298 17,030 19,927 10,078 8,059
--------- --------- --------- --------- --------- --------- ---------
Loss from operations...................... (5,523) (5,556) (7,496) (6,637) (8,265) (3,377) (1,177)
Interest expense and other, net........... 167 120 203 (154) 80 54 (17)
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes.................. (5,356) (5,436) (7,293) (6,791) (8,185) (3,323) (1,194)
Provision for income taxes................ -- -- -- -- 92 44 48
--------- --------- --------- --------- --------- --------- ---------
Net loss.................................. $ (5,356) $ (5,436) $ (7,293) $ (6,791) $ (8,277) $ (3,367) $ (1,242)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma basic and diluted net loss per
share (1)............................... $ (1.25) $ (0.18)
--------- ---------
--------- ---------
Shares used in computing pro forma basic
and diluted net loss per share (1)...... 6,606,224 6,980,634
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 215 $ 148 $ 664 $ 117 $ 1,447 $ 771
Working capital (deficit)................................. 358 (779) (1,720) (9,450) (627) (1,495)
Total assets.............................................. 2,640 1,943 3,789 6,397 8,267 8,940
Capital lease obligations, less current portion........... -- -- 113 178 297 412
Total shareholders' equity (deficit)...................... 1,121 89 (434) (7,221) 1,619 476
</TABLE>
- ------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the weighted average shares of Common Stock outstanding used to compute
pro forma net loss per share.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE MATTERS DISCUSSED BELOW CONTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON
CURRENT EXPECTATIONS AND ENTAIL VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AS WELL AS THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company designs, develops, markets and supports enterprise application
server software platforms. The Company's application servers support the
development, deployment and management of distributed, business-critical core
competency applications in heterogeneous environments. The Company originally
was incorporated in December 1990 as Servio Corporation, an Oregon corporation,
and changed its name to Gemstone Systems, Inc. in June 1995. Prior to December
1990, its activities were included in the operations of Servio Logic
Corporation, its parent at the time, and Servio Logic Corporation's wholly owned
subsidiary Servio Logic Development Corporation. As part of the Reorganization,
GemStone's direct parent company will become Lex Magna.
The Company derives revenue from software licenses and services, including
related software maintenance arrangements and professional services. The Company
recognizes software license revenue when a noncancelable license agreement has
been executed, the product has been shipped, the license fee is fixed or
determinable and collectibility is reasonably assured. Software maintenance and
support revenue related to software licenses is recognized ratably over the term
of the related agreement. Revenue from professional services, including training
and consulting, is recognized on either a time-and-materials or
percentage-of-completion basis as the services are performed and amounts due
from customers are deemed collectible. Amounts collected or billed prior to
satisfying the above recognition criteria are reflected as deferred revenue.
International revenue includes all revenue generated outside the United
States and Canada. International revenue comprised approximately 10%, 9% and 33%
of total revenues for the years ended December 31, 1995, 1996 and 1997,
respectively, and 48% and 18% for the six months ended June 30, 1997 and 1998,
respectively. Approximately 57% of the international revenue recognized in the
year ended December 31, 1997 was attributable to a $3.5 million engagement with
IBM Japan, Ltd. ("IBM/Japan"). The Company expects that international license
revenue and related maintenance and professional services revenue will continue
to account for a significant portion of its total revenue in the future. The
Company has committed and continues to commit significant management time and
financial resources to developing direct and indirect international sales and
support channels. See "Risk Factors--International Business Risks" and Note 1 of
Notes to Consolidated Financial Statements.
GemStone employs a multi-channel sales and marketing strategy. The Company
has made substantial investments in its sales and marketing infrastructure to
increase its sales coverage and to support its customers and promote its
products. The Company expects that sales and marketing expenses will increase in
total dollar terms as the Company continues to hire additional direct sales and
marketing personnel and increase promotional activities. In addition to its
direct sales force, the Company utilizes distributors, VARs, systems integrators
and independent consultants to market its products and services. For their sales
and marketing efforts, these organizations are typically granted a discount from
the Company's standard list price or are paid a fee on sales.
In June 1998, the Company entered into a Development, Deployment and
Reseller's Agreement with SCT, pursuant to which the Company licensed GemStone/J
to SCT on a nonexclusive basis for incorporation into SCT's application programs
for distribution worldwide. Under the terms of the agreement,
18
<PAGE>
GemStone received a one-time lump sum license fee, and is entitled to receive
ongoing license, professional service, maintenance and support fees payable
depending upon the number of licenses of GemStone/J sold by SCT and the usage of
professional services, maintenance and support services. There can be no
assurance, however, that SCT will commercially ship, or continue to actively
market, any products incorporating GemStone/J or use any such services.
Furthermore, although the Company intends to enter into similar arrangements
with other VARs, there can be no assurance that such opportunities will arise on
terms favorable to the Company, or at all.
Historically, a substantial portion of the Company's revenues in any given
quarter have been derived from licenses and services provided to relatively few
customers, and the identity of the Company's most significant customers has
changed from year to year. Because the Company's results for any quarter are
dependent on a few number of large orders, the Company's quarterly results are
subject to significant fluctuation. See "Risks--Dependence on Large Orders from
Limited Number of Customers."
The sales cycles associated with the licensing of the Company's products are
often lengthy and are subject to a number of significant delays over which the
Company has little or no control. The Company's products typically are licensed
as a portion of a significant enhancement to a customer's IT system. The
implementation of some of the Company's products involves a significant
commitment of resources by prospective customers and may require substantial
re-engineering of customers' computer environments. Accordingly, potential
customers are cautious in making commitments to purchase the Company's products.
The Company generally is required to provide a significant amount of education
to prospective customers regarding the uses and benefits of the Company's
products. Licensing of the Company's products is subject to a number of
uncertainties over which the Company has little or no control, including
customers' internal acceptance reviews, the success and continued internal
support of customers' own development efforts, competition and the efforts of
distributors and VARs. The uncertain outcome of the Company's sales effort and
the uncertainty of the sales cycle with new customers could result in
substantial fluctuations in quarterly operating results. Due to the relatively
large size of some licenses, a lost sale or delayed sale could have a material
adverse effect on the Company's quarterly operating results.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company incurred a net loss and consequently paid no federal or state income
taxes in 1996 or 1997. In 1997 and the six months ended June 30, 1998, the
Company recorded a tax provision related to foreign income tax payments based on
the operations of the Company's foreign subsidiaries. As of December 31, 1997,
the Company had approximately $32.2 million in federal net operating loss
carryforwards and approximately $123,000 in research and development tax credit
carryforwards. The federal net operating loss and research and development
credit carryforwards expire in the years 2006 through 2012. The Company is
included in the consolidated return of Sanpao Industries, Inc., which owns
greater than 80% of Servio Logic Corporation, the direct parent of the Company
prior to the Reorganization. The income tax disclosures represent the tax
attributes for the Company, as if it had filed on a separate company basis, net
of any losses and credits utilized by other members of the consolidated group.
Due to the "change of ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss and credit carryforwards
may be subject to a substantial annual limitation. If a change of ownership
should occur, the annual limitation may result in the expiration of net
operating losses and credit carryforwards before utilization.
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management periodically evaluates the recoverability of the deferred tax assets
and the level of the valuation allowance. If it is determined that it is more
likely than not that deferred tax assets are realizable, then at such time the
valuation allowance will be appropriately reduced. See Note 5 of Notes to
Consolidated Financial Statements.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Consolidated Statements of Operations
Data of the Company, expressed as a percentage of total revenues for the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1995 1996 1997 1997 1998
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues:
Licenses............................ 68.2% 65.2% 33.1% 26.2% 50.0%
Services............................ 31.8 34.8 66.9 73.8 50.0
-------- ------- ------- ------- -------
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Licenses............................ 3.9 2.9 2.5 2.1 2.7
Services............................ 26.4 21.3 35.2 32.1 30.4
-------- ------- ------- ------- -------
Total cost of revenues................ 30.3 24.2 37.7 34.2 33.1
Gross profit.......................... 69.7 75.8 62.3 65.8 66.9
Operating expenses:
Research and development............ 49.5 35.0 27.9 27.6 24.0
Sales and marketing................. 90.0 65.1 53.9 51.2 33.7
General and administrative.......... 38.9 24.1 24.7 20.2 20.6
-------- ------- ------- ------- -------
Total operating expenses.............. 178.4 124.2 106.5 99.0 78.3
-------- ------- ------- ------- -------
Loss from operations.................. (108.7) (48.4) (44.2) (33.2) (11.4)
Interest expense and other, net....... 2.9 (1.1) 0.4 0.5 (0.2)
-------- ------- ------- ------- -------
Loss before income taxes.............. (105.8) (49.5) (43.8) (32.7) (11.6)
Provision for income taxes............ 0.0 0.0 0.5 0.4 0.5
-------- ------- ------- ------- -------
Net Loss.............................. (105.8)% (49.5)% (44.3)% (33.1)% (12.1)%
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Total revenues consist of license revenue and services revenue,
the latter including consulting and training professional services revenue and
maintenance revenue. Total revenues increased 1.0% from $10.2 million for the
six months ended June 30, 1997 to $10.3 million for the six months ended June
30, 1998. License revenue increased 88.9% from $2.7 million for the six months
ended June 30, 1997 to $5.1 million for the comparable period in 1998, primarily
attributable to increased demand for the Company's GemStone/J and GemStone/S
products. Services revenue decreased 32.0% from $7.5 million for the six months
ended June 30, 1997 to $5.1 million for the comparable period in 1998, primarily
due to a $3.5 million engagement with IBM/Japan, all of which was performed
during the three months ended June 30, 1997. Of the $10.3 million in total
revenues for the six months ended June 30, 1998, $1.7 million was attributable
to a GemStone/S sale to Sprint. The order was effected pursuant to an existing
license, and there can be no assurance that the Company will continue to derive
significant additional revenue from licenses and services provided to Sprint.
COST OF REVENUES. Cost of revenues consists of cost of license revenue and
cost of services revenue. Cost of license revenue consists of product packaging,
documentation, production and shipping as well as any royalties payable to third
parties for technologies licensed as part of or in conjunction with the
Company's products. Cost of services revenue consists of costs to provide
consulting, implementation, maintenance, technical support and training to the
Company's customers, the cost of providing periodic updates and the direct costs
of managing the professional services and technical support organization.
20
<PAGE>
Total cost of revenues decreased 2.9% from $3.5 million for the six months ended
June 30, 1997 to $3.4 million for the six months ended June 30, 1998. Total cost
of revenues as a percentage of total revenues decreased from 34.2% to 33.1%,
respectively. Cost of license revenue increased 32.7% from $211,000 for the six
months ended June 30, 1997 to $280,000 for the comparable period in 1998,
primarily attributable to increased sales of software licenses, which resulted
in greater shipment and royalty costs. Cost of services revenue decreased 6.1%
from $3.3 million for the six months ended June 30, 1997 to $3.1 million for the
comparable period in 1998, primarily attributable to the higher level of service
activity in the prior period associated with the engagement with IBM/Japan
during the quarter ended June 30, 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products and enhancements to
existing products and primarily consist of salaries and other personnel-related
expenses, depreciation of development equipment, purchased and licensed
development software and technologies and associated maintenance contracts.
Research and development expenses decreased 10.7% from $2.8 million for the six
months ended June 30, 1997 to $2.5 million for the six months ended June 30,
1998. Research and development expenses as a percentage of total revenues
decreased from 27.6% to 24.0%, respectively. The decrease in expenses was
primarily attributable to the reduction of costs associated with third-party
development of tools and products for the GemStone/S product family. The Company
believes that a significant level of investment for product development is
required to remain competitive. The Company anticipates that it will continue to
devote substantial resources to product development and that product development
expenses may increase in total dollar terms in 1998 and 1999. Because costs
incurred in the research and development of software products and enhancements
to existing software products have been expensed as incurred, cost of license
revenue includes no amortization of capitalized software development costs.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
sales and marketing personnel costs and marketing program costs, including sales
commissions, recruiting, travel, advertising, public relations, seminars, trade
shows, product descriptive literature and facility and communication costs for
direct sales offices. Sales and marketing expenses decreased 32.7% from $5.2
million for the six months ended June 30, 1997 to $3.5 million for the six
months ended June 30, 1998. Sales and marketing expenses as a percentage of
total revenues decreased from 51.2% to 33.7%, respectively. The decrease in
expenses was attributable in part to a reduction in marketing activities and
related costs, including advertising, trade shows, Company-sponsored seminars,
market research and collateral materials incurred in 1997 associated with the
GemStone/J product announcement and launch. The decrease was also attributable
to a reduction in personnel and associated costs resulting from a reorganization
of the sales and marketing departments, and large sales commissions and
international travel and related costs incurred by sales and marketing personnel
associated with the engagement with IBM/Japan in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries of executive, financial, information services, human
resources and administrative personnel, as well as corporate facility rents and
outside professional fees. General and administrative expenses remained
virtually flat at $2.1 million for the six months ended June 30, 1997 and for
the comparable period in 1998. General and administrative expenses as a
percentage of total revenues increased slightly from 20.2% to 20.6%,
respectively. The Company believes that its general and administrative expenses
will increase in dollar terms in 1998 and 1999 as a result of an expansion of
the Company's administrative staff to support its growing operations and as a
result of an increase in expenses associated with being a public company.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net,
represents interest expense on notes payable and capital leases, offset by
interest earned by the Company on its cash and short-term investments and
miscellaneous other income. For the six months ended June 30, 1997, interest
expense and other, net, was $54,000 of other income in excess of interest
expense, and for the six months ended June 30, 1998 the Company had interest
expense and other, net, of $17,000 of expense in excess of other income.
21
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Total revenues increased 36.5% from $13.7 million for the year
ended December 31, 1996 to $18.7 million for the year ended December 31, 1997.
The increase in revenues was primarily attributable to a significant growth in
services revenue which more than offset a decrease in license revenue. License
revenue decreased 30.3% from $8.9 million for the year ended December 31, 1996
to $6.2 million for the year ended December 31, 1997, attributable to a decline
in sales of the Company's GemStone/S products. Total services revenue increased
160.4% from $4.8 million for the year ended December 31, 1996 to $12.5 million
for the year ended December 31, 1997, primarily attributable to an increased
demand for professional services, including the $3.5 million engagement with
IBM/Japan, and sales of maintenance contracts.
COST OF REVENUES. Cost of revenues increased 112.1% from $3.3 million for
the year ended December 31, 1996 to $7.0 million for the year ended December 31,
1997. Cost of revenues as a percentage of total revenues increased from 24.2% to
37.7%, respectively. Cost of services revenue increased 127.6% from $2.9 million
in 1996 to $6.6 million in 1997. These increases were primarily attributable to
the increase in personnel and related expenses and subcontractor costs incurred
in providing consulting, training and customer support services to support the
increased demand for those services, as well as the additional costs incurred in
connection with the engagement with IBM/Japan.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 8.3%
from $4.8 million for the year ended December 31, 1996 to $5.2 million for the
year ended December 31, 1997. Research and development expenses as a percentage
of total revenues decreased from 35.0% to 27.9%, respectively. The increase in
expenses was primarily attributable to an increase in personnel and related
costs as the Company invested in development of the GemStone/J product. The
decrease as a percentage of total revenues was attributable to the overall
increase in total revenues.
SALES AND MARKETING. Sales and marketing expenses increased 13.5% from $8.9
million for the year ended December 31, 1996 to $10.1 million for the year ended
December 31, 1997. Sales and marketing expenses as a percentage of total
revenues decreased from 65.1% to 53.9%, respectively. The increase in expenses
was primarily attributable to higher costs associated with an increase in sales
and marketing personnel, including salary and commission expenses, increased
costs associated with the establishment of the European sales offices and
increased travel costs to support expanded global sales efforts. The decrease as
a percentage of total revenues was attributable to the overall increase in total
revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
39.4% from $3.3 million for the year ended December 31, 1996 to $4.6 million for
the year ended December 31, 1997. General and administrative expenses as a
percentage of total revenues increased from 24.1% to 24.7%, respectively. The
increases were primarily attributable to increased rents and utilities
associated with the move to a larger facility, increased depreciation expense
associated with new office furniture and fixtures and investments in the
Company's IT infrastructure.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net, was
$154,000 of interest expense in excess of other income for the year ended
December 31, 1996, and $80,000 of other income in excess of interest expense for
the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues increased 98.6% from $6.9 million for the year
ended December 31, 1995 to $13.7 million for the year ended December 31, 1996.
License revenue increased 89.4% from $4.7 million for the year ended December
31, 1995 to $8.9 million for the year ended December 31, 1996, due to an
increase in sales of the Company's GemStone/S product. Services revenue
increased 118.2% from $2.2 million for the year ended December 31, 1995 to $4.8
million for the year ended December 31, 1996,
22
<PAGE>
primarily attributable to an increase in demand for professional services and a
larger installed base of customers purchasing and renewing maintenance
contracts.
COST OF REVENUES. Total cost of revenues increased 57.1% from $2.1 million
for the year ended December 31, 1995 to $3.3 million for the year ended December
31, 1996. Total cost of revenues as a percentage of total revenues decreased
from 30.3% to 24.2%, respectively. Cost of services revenue increased 61.1% from
$1.8 million in 1995 to $2.9 million in 1996. The increase in cost of total
revenues was primarily attributable to the increase in personnel and related
expenses and subcontractor costs incurred in providing consulting, training and
customer support services to support the increased revenue earned on those
services. The decrease as a percentage of total revenues was due to the overall
increase in total revenues.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 41.2%
from $3.4 million for the year ended December 31, 1995 to $4.8 million for the
year ended December 31, 1996. Research and development expenses as a percentage
of total revenues decreased from 49.5% to 35.0%, respectively. The increase in
expenses was primarily attributable to the fee for licensing the Sun Java
Application Environment in connection with developing the GemStone/J product,
and the related maintenance costs and costs associated with third-party
development of tools and products for the GemStone/S product line. The decrease
as a percentage of total revenues was due to the overall increase in total
revenue.
SALES AND MARKETING. Sales and marketing expenses increased 43.5% from $6.2
million for the year ended December 31, 1995 to $8.9 million for the year ended
December 31, 1996. Sales and marketing expenses as a percentage of total
revenues decreased from 90.0% to 65.1%, respectively. The increase in expenses
was primarily attributable to higher costs associated with an increase in sales
and marketing personnel, including salary and commission expenses, increased
marketing activities including the production of collateral materials and an
increase in rents associated with expanding the number of sales field offices,
both domestically and internationally. The decrease as a percentage of total
revenues was attributable to the overall increase in total revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
22.2% from $2.7 million for the year ended December 31, 1995 to $3.3 million for
the year ended December 31, 1996. General and administrative expenses as a
percentage of total revenues decreased from 38.9% to 24.1%, respectively. The
increase in expenses was primarily attributable to higher costs associated with
an increase in information services, human resources, financial and
administrative personnel, including salaries and wages and associated benefits
and increased rents related to expanded facilities. The decrease as a percentage
of total revenues was attributable to the overall increase in total revenues.
INTEREST EXPENSE AND OTHER, NET. Interest expense and other, net, was
$203,000 of other income in excess of interest expense for the year ended
December 31, 1995, and $154,000 of interest expense in excess of other income
for the year ended December 31, 1996.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated quarterly
statements of operations data for each of the ten quarters in the period ended
June 30, 1998, as well as such data presented as a percentage of the Company's
total revenue for the periods indicated. This data, in management's opinion, has
been prepared on the same basis as the audited consolidated financial statements
and includes all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of such information. This information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- --------- ---------- --------- --------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Licenses.................. $2,756 $ 1,830 $ 2,087 $ 2,269 $ 805 $1,862 $ 1,580 $ 1,945
Services.................. 820 1,013 1,118 1,822 2,078 5,435 2,520 2,483
-------- --------- ---------- --------- --------- -------- ---------- ---------
Total revenues.............. 3,576 2,843 3,205 4,091 2,883 7,297 4,100 4,428
Cost of revenues:
Licenses.................. 30 95 148 124 65 146 120 127
Services.................. 535 718 726 946 1,464 1,804 1,565 1,755
-------- --------- ---------- --------- --------- -------- ---------- ---------
Total cost of revenues...... 565 813 874 1,070 1,529 1,950 1,685 1,882
-------- --------- ---------- --------- --------- -------- ---------- ---------
Gross profit................ 3,011 2,030 2,331 3,021 1,354 5,347 2,415 2,546
Operating expenses:
Research and development.. 884 959 1,331 1,616 1,461 1,350 1,246 1,171
Sales and marketing....... 2,130 1,963 1,983 2,856 2,219 2,994 2,439 2,431
General and
administrative.......... 855 804 816 833 1,094 960 1,055 1,507
-------- --------- ---------- --------- --------- -------- ---------- ---------
Total operating expenses.... 3,869 3,726 4,130 5,305 4,774 5,304 4,740 5,109
-------- --------- ---------- --------- --------- -------- ---------- ---------
Income (loss) from
operations................ (858) (1,696) (1,799) (2,284) (3,420) 43 (2,325) (2,563)
Interest expense and other,
net....................... (8) -- (66) (80) 19 35 9 17
-------- --------- ---------- --------- --------- -------- ---------- ---------
Net income (loss) before
income taxes.............. (866) (1,696) (1,865) (2,364) (3,401) 78 (2,316) (2,546)
Provision for income
taxes..................... -- -- -- -- 22 22 20 28
-------- --------- ---------- --------- --------- -------- ---------- ---------
Net income (loss)........... $ (866) $(1,696) $(1,865) $(2,364) $(3,423) $ 56 $(2,336) $(2,574)
-------- --------- ---------- --------- --------- -------- ---------- ---------
-------- --------- ---------- --------- --------- -------- ---------- ---------
AS A PERCENT OF TOTAL
REVENUES:
Revenues:
Licenses.................. 77.1% 64.4% 65.1% 55.5% 27.9% 25.5% 38.5% 43.9%
Services.................. 22.9 35.6 34.9 44.5 72.1 74.5 61.5 56.1
-------- --------- ---------- --------- --------- -------- ---------- ---------
Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Licenses.................. 0.8 3.3 4.6 3.0 2.2 2.0 2.9 2.9
Services.................. 15.0 25.3 22.7 23.1 50.8 24.7 38.2 39.6
-------- --------- ---------- --------- --------- -------- ---------- ---------
Total cost of revenues...... 15.8 28.6 27.3 26.1 53.0 26.7 41.1 42.5
Gross profit................ 84.2 71.4 72.7 73.9 47.0 73.3 58.9 57.5
Operating expenses:
Research and development.. 24.7 33.7 41.5 39.5 50.7 18.5 30.4 26.5
Sales and marketing....... 59.6 69.1 61.9 69.8 77.0 41.0 59.5 54.9
General and
administrative.......... 23.9 28.3 25.4 20.4 37.9 13.2 25.7 34.0
-------- --------- ---------- --------- --------- -------- ---------- ---------
Total operating expenses.... 108.2 131.1 128.8 129.7 165.6 72.7 115.6 115.4
-------- --------- ---------- --------- --------- -------- ---------- ---------
Income (loss) from
operations................ (24.0) (59.7) (56.1) (55.8) (118.6) 0.6 (56.7) (57.9)
Interest expense and other,
net....................... (0.2) -- (2.1) (2.0) 0.7 0.5 0.2 0.4
-------- --------- ---------- --------- --------- -------- ---------- ---------
Net income (loss) before
income taxes.............. (24.2) (59.7) (58.2) (57.8) (117.9) 1.1 (56.5) (57.5)
Provision for income
taxes..................... -- -- -- -- 0.8 0.3 0.5 0.6
-------- --------- ---------- --------- --------- -------- ---------- ---------
Net income (loss)........... (24.2)% (59.7)% (58.2)% (57.8)% (118.7)% 0.8% (57.0)% (58.1)%
-------- --------- ---------- --------- --------- -------- ---------- ---------
-------- --------- ---------- --------- --------- -------- ---------- ---------
<CAPTION>
THREE MONTHS ENDED
---------------------
MAR. 31, JUNE 30,
1998 1998
--------- ---------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Licenses.................. $ 2,154 $2,993
Services.................. 2,366 2,781
--------- ---------
Total revenues.............. 4,520 5,774
Cost of revenues:
Licenses.................. 112 168
Services.................. 1,592 1,540
--------- ---------
Total cost of revenues...... 1,704 1,708
--------- ---------
Gross profit................ 2,816 4,066
Operating expenses:
Research and development.. 1,345 1,124
Sales and marketing....... 1,599 1,866
General and
administrative.......... 1,019 1,106
--------- ---------
Total operating expenses.... 3,963 4,096
--------- ---------
Income (loss) from
operations................ (1,147) (30)
Interest expense and other,
net....................... 2 (19)
--------- ---------
Net income (loss) before
income taxes.............. (1,145) (49)
Provision for income
taxes..................... 24 24
--------- ---------
Net income (loss)........... $(1,169) $ (73)
--------- ---------
--------- ---------
AS A PERCENT OF TOTAL
REVENUES:
Revenues:
Licenses.................. 47.7% 51.8%
Services.................. 52.3 48.2
--------- ---------
Total revenues.............. 100.0 100.0
Cost of revenues:
Licenses.................. 2.5 2.9
Services.................. 35.2 26.7
--------- ---------
Total cost of revenues...... 37.7 29.6
Gross profit................ 62.3 70.4
Operating expenses:
Research and development.. 29.8 19.5
Sales and marketing....... 35.4 32.3
General and
administrative.......... 22.5 19.1
--------- ---------
Total operating expenses.... 87.7 70.9
--------- ---------
Income (loss) from
operations................ (25.4) (0.5)
Interest expense and other,
net....................... 0.0 (0.3)
--------- ---------
Net income (loss) before
income taxes.............. (25.4) (.8)
Provision for income
taxes..................... 0.5 0.4
--------- ---------
Net income (loss)........... (25.9)% (1.2)%
--------- ---------
--------- ---------
</TABLE>
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The Company's historical operating results have fluctuated significantly and
the Company expects its operating results to continue to fluctuate in the
future. Future operating results in any period will depend upon many factors,
including: the size and timing of individual license transactions; the delay or
deferral of customer orders or deployments; the budget cycles of the Company's
customers; the growth rate in the overall market for the Company's products; the
level of product and price competition; the length of the Company's sales cycle;
the Company's success in expanding its direct sales force and indirect
distribution channels; demand for the Company's products and services; the mix
in direct sales versus indirect distribution channel sales; the mix of products
and services licensed or sold; the success of the Company in penetrating
international markets; the impact on timing of revenue recognition associated
with the adoption of SOP 97-2 and SOP 98-4; changes in pricing policy by the
Company and its competitors; the timing of new product introductions and product
enhancements; publication of opinions about the Company, its products and object
computing technology by industry analysts; and personnel changes and the ability
to hire new employees. A decline in sales or utilization of the Company's
products may cause a decline in service, maintenance and training services,
thereby exacerbating fluctuations in results of operations.
The Company historically has earned a substantial portion of its revenue in
the last two weeks of each quarter due to customer purchasing practices. Because
a substantial portion of the Company's costs are relatively fixed and based on
anticipated revenues, any reduction in revenues would not be accompanied by a
corresponding reduction in costs and could result in significant variations in
results of operations. Accordingly, the failure to achieve projected revenue
during any given quarter could have a material adverse effect on the Company's
business, financial condition and results of operations for the quarter. The
Company believes that the typical budgeting cycles of its customers can have an
adverse effect on the Company's first quarter revenue. Due to all of the
foregoing factors, the Company believes that the Company's results of operations
will experience substantial fluctuations and that period-to-period comparisons
of its results of operations should not be relied upon as an indication of
future performance. In addition, in the event that in some future quarter the
Company's operating results are below the expectations of public market analysts
and investors, the price of the Company's Common Stock would likely be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations and met its capital
expenditure requirements primarily through the private sale of Preferred Stock
and Common Stock and, to a lesser extent, with loans from its principal
stockholder and equipment-leasing arrangements.
As of June 30, 1998, the Company had $771,000 in cash and cash equivalents
compared to $1.4 million as of December 31, 1997. The Company's working capital
deficit as of June 30, 1998 was $1.5 million. Excluding deferred revenue of $3.9
million, the Company would have had working capital of $2.4 million as of June
30, 1998. Deferred revenue consists primarily of the unrecognized portion of
revenue under maintenance and support contracts (which revenue is deferred and
recognized ratably over the term of such contracts) and advance payment of
software license fees and consulting and training professional services.
Currently, the Company does not have a line of credit arrangement with any
financial institution.
The Company's operating activities used $5.8 million, $5.8 million and $7.6
million for the years ended December 31, 1995, 1996 and 1997, respectively, and
$563,000 for the six months ended June 30, 1998, principally for sales and
marketing and research and development.
The Company's investing activities used $888,000, $943,000 and $1.0 million
for the years ended December 31, 1995, 1996 and 1997, respectively, and $41,000
for the six months ended June 30, 1998, principally for the purchase of property
and equipment, predominantly computer equipment and software and office
furniture and equipment to support the Company's growth.
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The Company's financing activities provided $7.2 million, $6.2 million and
$10.0 million for the years ended December 31, 1995, 1996 and 1997,
respectively. Such cash was primarily attributable to proceeds from private
placements of the Company's Preferred Stock, all of which was purchased by
Servio Logic Corporation, the Selling Stockholder's corporate predecessor.
Financing activities used $119,000 for the six months ended June 30, 1998,
primarily relating to principal payments under capital lease obligations.
The Company believes that cash and cash equivalents, net proceeds from the
offering and cash from operations, if any, will be adequate to meet its needs
for at least the next 12 months. Thereafter, the Company may require additional
sources of funds to continue to support its business. There can be no assurance
that such capital, if needed, will be available on acceptable terms, or at all.
YEAR 2000
The Company does not believe that it has a material exposure to the Year
2000 issue with respect to its own information systems because its existing
systems correctly define the year 2000. Although the Company believes that the
information systems of its major vendors (insofar as they relate to the
Company's business) comply with Year 2000 requirements, there can be no
assurance that the Year 2000 issue will not affect the information systems of
the Company's major vendors as they relate to the Company's business, or that
any such impact of a major vendor's information system would not have a material
adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENT
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position No. 97-2, "Software
Revenue Recognition" ("SOP 97-2"), which supersedes SOP 91-1. In March 1998, the
AICPA issued Statement of Position No. 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2, Software Revenue Recognition," which defers for one
year the application of certain provisions of SOP 97-2. These provisions limit
what is considered vendor-specific objective evidence of the fair value of the
various elements in a multiple element arrangement. All other provisions of SOP
97-2 remain in effect. The Company believes its revenue recognition policies and
practices comply with these pronouncements in all material respects. However,
SOP 97-2 includes restrictive provisions regarding specific terms of software
arrangements, which, if present, require deferral of revenue recognition beyond
the point of delivery of the software. Future competitive conditions may arise
that could necessitate changes in the Company's business practices and the
contract terms of its software arrangements. Such changes may require deferral
of revenue recognition and, if so, periodic operating results could be
materially and adversely affected.
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BUSINESS
INTRODUCTION
GemStone designs, develops, markets and supports enterprise application
server software platforms. The Company's application servers support the
development, deployment and management of distributed, business-critical core
competency applications in heterogeneous environments. In September 1997, the
Company first commercially shipped its GemStone/J product, an application server
platform for a new generation of enterprise server-based applications written in
Java. These applications require a scalable Java application server platform
that provides enterprise-class quality of service and integrates Internet and
World Wide Web technology with existing information infrastructure, including
corporate databases, packaged enterprise software and legacy applications. The
Company also provides an application server platform for Smalltalk, GemStone/S,
which the Company has been shipping since 1986. The Company has leveraged both
significant technology expertise and experience from working with GemStone/S
customers to create the GemStone/J platform.
GemStone's products are marketed and sold through the Company's direct sales
force, distributors and VARs in the Americas, Europe, Asia and Australia.
Customers from a wide variety of industries, including banking, government,
insurance, manufacturing, pharmaceutical, retail, telecommunications,
transportation and utilities have deployed applications on GemStone platforms.
Through June 30, 1998, over 500 customers have licensed GemStone products,
including Banque Generale du Luxembourg S.A., Florida Power and Light Company,
J.P. Morgan & Co. Incorporated, Lucent Technologies Inc., Millenium
Pharmaceuticals, Inc., Northern Telecom Limited, Orient Overseas Container Line,
SCT and Texas Instruments Incorporated.
INDUSTRY BACKGROUND
Organizations today are under increasing pressure to respond to a changing
competitive landscape, driven in part by globalization of business and industry
deregulation. In order to compete more effectively, companies grow through
acquisition, diversify geographically and re-engineer business processes, while
strengthening relationships with customers, suppliers, distributors and other
key business partners. To accomplish these objectives, companies have
implemented IT business applications that automate and manage functions critical
to their core competencies. These core competency applications are designed to
enable efficient decision processing and often are considered strategic and
competitive assets.
Although packaged enterprise software products perform adequately for
standard application types such as general financial accounting and human
resources, applications that are more specific to a company and address its core
competencies typically must be custom developed. Examples of these core
competency applications include systems that manage and track shipments for
transportation companies, customer care and billing systems for
telecommunications companies and applications for trading and pricing complex
products for financial institutions. Companies require flexible IT architectures
for core competency applications that enable them to:
- Develop and modify applications easily and rapidly to respond to changing
business requirements and market demands.
- Deploy applications for use across their global enterprise by customers,
suppliers, partners and other interested parties.
- Integrate applications with existing systems, resources and data without
requiring extensive modifications to legacy applications and databases.
- Provide applications with necessary enterprise-class capabilities that
help ensure their scalability, integrity, performance, availability and
security.
EVOLUTION OF THE ENTERPRISE COMPUTING PLATFORM
Business-critical software applications historically were developed for use
on large mainframe computer systems for access by terminals within an
enterprise. Mainframe systems generally provided the high
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levels of scalability, integrity, performance, availability and security
required for enterprise applications. Many organizations continue to rely on
these time tested legacy systems for applications that have high volume
transaction processing requirements or that manage critical corporate data.
However, these systems can be very difficult to modify to meet new requirements
or to integrate with other enterprise applications.
The establishment of the PC as a standard desktop computing platform and the
availability of high-end networked database systems from companies such as
Informix Corporation ("Informix"), Oracle and Sybase, Inc. ("Sybase") enabled
the emergence of the client/server computing model. Client/server systems
enabled work groups and departments to speed development of new business
applications. By reducing reliance upon centralized IT organizations for
application development, these systems delivered greater autonomy across an
organization. However, two-tier client/server systems generally lack high
degrees of scalability and therefore are unable to support the broad number of
users required for large enterprise applications. Also, enterprise deployments
of two-tier systems typically require the use of large amounts of memory and
other expensive resources on desktop PC clients and introduce significant
difficulties in managing and integrating applications with diverse legacy
systems and databases within an enterprise.
As a result of these drawbacks, client/server architectures are evolving
from this initial two-tier model to a three-tier, or "n-tier" architecture. The
three-tier architecture locates critical application processing on server
computers, as opposed to each user's PC, enabling significantly greater
scalability, improvements in application management and reduction of client
platform requirements. For these reasons, companies have begun to implement
three-tier architectures as a more economical "thin client" enterprise computing
model. Three-tier computing is used as a basis for both packaged enterprise
applications, such as those from Oracle and SAP, as well as core competency
business applications that are developed to meet companies' specific and unique
business requirements.
[Graphic]
Graphic under heading TWO-TIER SYSTEMS: Rendering of 3 overlapping
computer screens with multiple lines leading to 3 cylinders labeled
"Database."
Under the computer screens are the following: User interface;
Application logic; Data access. Under the Databases are the following:
Transaction Management; Data.
Graphic under heading THREE-TIER SYSTEMS: Rendering of 6 overlapping
computer screens on left of page with lines leading to box in center of
page with words "Enterprise Application Server," with lines leading to 5
cylinders on right of page labeled, "Database."
Under the computer screens is the following: User interface ("thin
client"). Under the box are the following: Application logic; Data
access; Transaction management. Under the Databases is the following:
Data.
[/Graphic]
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Although the three-tier model provides significant benefits, it also
introduces the need to use sophisticated middleware, software that integrates
and manages connections between enterprise clients on the front end and
databases and legacy systems on the back end. In addition to this
connection-oriented middleware, the middle tier in a three-tier architecture
must provide high degrees of scalability, integrity, performance, availability
and security that previously had been provided by mainframes and relational
databases.
The evolution in tiered computing has coincided with the emergence of the
Internet and the World Wide Web. Companies have developed intranets that enable
employees with Web browsers to access information and business applications
within the enterprise. These networks are often extended into extranets to
include business partners and suppliers and to conduct electronic transactions
with customers and other interested parties. This Web-based infrastructure has
been implemented using three-tier architectures that leverage widely deployed
Web clients and powerful server computers. To support applications designed for
use with Internet and Web technologies, enterprise application servers based on
open architecture and industry standards are emerging to provide a scalable and
robust application platform.
EMERGENCE OF DISTRIBUTED OBJECT COMPUTING
Advances in object software technology have also contributed significantly
to the evolution of enterprise computing architectures away from centralized
mainframe systems with terminals and toward PCs and Web clients in three-tier
systems. Business applications for mainframes typically were created using
procedural software languages, primarily COBOL, and were built in monolithic
styles that made them difficult and time consuming to change or integrate with
other business applications. Subsequently, software tools emerged to support
development of client/server applications. However, applications built with
these tools tended not to work well at the enterprise level, were based on
proprietary technologies and did not provide the flexibility for on-going
application enhancement or integration.
Object software allows corporations to more easily create and manage custom
business applications in modules composed of software "chunks" called objects.
Objects can be designed to closely emulate specific business processes, rules,
work flows and structures, and can be combined into modules that form new
business applications. By tailoring objects to particular business environments,
resulting applications can be more distinctive and valuable, and easier to
modify and enhance as business requirements change, thereby contributing to a
lower cost of ownership. Because of their modularity, business applications
using object software can also be easier to integrate into existing computing
environments composed of heterogeneous computer systems, networks and databases.
Distributed object computing combines the use of object software with a
standardized communications middleware that results in a three-tier environment
for enterprise applications. Using this software infrastructure, application
developers can independently develop software modules and rapidly integrate them
with existing applications and databases. Additionally, distributed object
computing provides shared software services that help reduce the amount of
infrastructure-related development required by application developers and
support deployed applications in meeting the demanding requirements of
enterprise-class environments.
EMERGENCE OF JAVA
Invented over a decade ago, object technology has gained recognition only in
the last few years with the popularity of the Web and the emergence of Java.
Organizations have begun to use Java to provide platform-independent IT
infrastructure and development. Java is an object software language and platform
that has evolved from prior generations of object technology. Java is similar in
architecture to Smalltalk, also an object software language and platform, and
the Java architecture reflects many of the concepts and techniques used in
Smalltalk. For instance, Java, like Smalltalk, is a dynamic object software
environment, and uses a virtual machine providing platform independence and
built-in memory management called "garbage collection."
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Although Java technology initially was used primarily as part of Web
browsers to enable more interactive applications, it recently has been adopted,
among other purposes, for use on application servers as a basis for enterprise
applications. Sun, the inventor of the Java programming language, has been a
major proponent for the specification and adoption of standards for the use of
Java technology within the enterprise, and this effort has gained significant
commitment from major industry players. A May 1998 Forrester Research study
indicates that 48% of IT executives surveyed are using Java technology today in
their companies' development activities, and nearly half of these respondents
believe that in two years Java technology will be a critical or important factor
in their firms' software development strategies. The Company believes that the
emerging standards based on Sun's Java technology, and particularly the emerging
Enterprise JavaBeans ("EJB") standard for enterprise application servers, should
further encourage the use of Java technology as a computing platform for the
enterprise. The use of Java technology for building enterprise applications on
an application server leverages the pervasive Web and Internet infrastructure,
provides a mechanism to integrate information and applications from legacy
systems and corporate databases and provides a flexible and productive
environment for building new IT applications.
Three-tier architectures and distributed object computing technologies have
matured in recent years; however, the availability of Java technology within
these environments is very recent. As a result, initial attempts to develop and
deploy enterprise-class business applications written in the Java programming
language have been challenging because developers have lacked the Java software
infrastructure required to provide enterprise-class capabilities required of
core competency applications, including scalability, integrity, performance,
availability and security. The Company believes there is a significant
opportunity for an organization with extensive distributed object computing
expertise to provide enterprise application servers that simplify and reduce the
risk in developing and deploying enterprise Java applications. These servers
would become a stable foundation for business applications providing
enterprise-class capabilities and services and integration with existing systems
while supporting three-tier, distributed object computing architectures based on
Web and Internet technologies.
THE GEMSTONE SOLUTION
GemStone designs, develops, markets and supports enterprise application
server software platforms. The Company's application servers support the
development, deployment and management of distributed business-critical core
competency applications in heterogeneous environments. Building on its
proprietary Persistent Cache Architecture ("PCA"), the Company's GemStone/J
platform enables the execution and management of large, complex Java-based
applications that are integrated with existing corporate databases and legacy
systems. The GemStone/J platform delivers the scalability, integrity,
performance, availability and security necessary to support enterprise-class
business applications.
GemStone has been working closely with customers for over a decade to
deliver object enterprise application server solutions for Smalltalk, and the
Company currently derives the substantial majority of its revenues from licenses
and services relating to its GemStone/S product. By leveraging both the
technology created for the GemStone/S enterprise application server and its
expertise in working with customers on implementing enterprise applications in
Smalltalk, the Company developed GemStone/J, an enterprise application server,
and first commercially shipped it in September 1997. The Company's experience
with Smalltalk technologies and enterprise applications has enabled it to
develop the GemStone/J enterprise application server platform and provide it
with capabilities and technology that support large-scale, distributed object
applications in Java.
The GemStone/J environment, through its proprietary PCA technology, features
support for large numbers of objects, client/server partitioning, highly
efficient memory management, distributed transaction management and object
persistence. GemStone/J provides a suite of enterprise services that reduce
application development time by supporting programmers with basic software
infrastructure operations, such as naming, security, transactions and
collections. These services are designed to enable these
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applications to deliver required enterprise-class capabilities while freeing
developers to concentrate on situation-specific business logic. Companies can
leverage the GemStone platform to help speed the delivery of large-scale core
competency applications and provide their customers new services not previously
available with the existing computing infrastructure. Core competency
applications provide automation and decision processing for key functions that
contribute to an enterprise's competitive advantage.
By means of adherence to open standards, GemStone's enterprise application
server platforms act as a hub in a three-tier architecture for integrating and
working with existing corporate databases, legacy computing systems and external
data sources, providing broad-based access to applications from standard desktop
computers through Web and Internet technologies. The Company's products use a
standard communications mechanism for interoperability with other systems and
standard software drivers for working with relational databases and communicate
with legacy systems via integration with message queuing systems, such as IBM
MQSeries. The next release of GemStone/J is being designed to support the EJB
standard released by Sun in March 1998, to enable customers to leverage the
Company's technology while adhering to emerging industry standards for
enterprise services. GemStone/J runs on standard Sun Solaris and Microsoft NT
server platforms, and Java applications deployed on GemStone/J can be accessed
from standard Java-enabled Web browsers, such as Netscape Navigator and
Microsoft Internet Explorer running on Microsoft Windows and other operating
systems.
STRATEGY
The Company's objective is to be the leading provider of enterprise
application server platforms for enterprise computing based on distributed
object technologies in a heterogeneous environment. The Company's strategy
incorporates the following key elements.
MAINTAIN TECHNOLOGICAL LEADERSHIP
The Company intends to maintain a leadership position in supporting
platforms for distributed object enterprise computing. The Company has developed
a number of advanced technologies that provide a high-end platform for
enterprise applications using distributed object computing. GemStone has over a
decade of experience developing application server technologies for enterprise
environments based on object-based software. The Company has developed
proprietary technology and algorithms for brokering access to pools of shared
virtual machines, partitioning of client/server object-based applications,
managing large, server-based object environments, caching and sharing objects
among many virtual machines, managing memory for large, server-based
applications and managing distributed transactions for object-based software
applications. The Company's proprietary PCA embodies many of these technologies
and enhances the scalability, integrity, performance, availability and security
of enterprise Java applications. The Company intends to remain a leader as it
supports the EJB standard; the next release of GemStone/J, scheduled for the end
of 1998, is being designed to support the EJB standard. GemStone has played, and
plans to continue to play, an active role contributing to the development of
this specification.
TARGET ENTERPRISE JAVA APPLICATIONS IN A BROAD RANGE OF INDUSTRIES
The Company has designed the GemStone/J enterprise application server to
satisfy the requirements for building, deploying and managing enterprise Java
applications of businesses in a wide variety of industries. Companies in
banking, manufacturing, telecommunications and retail, among others, currently
are engaged in pilot programs with GemStone/J. The advanced technologies
provided by GemStone/J enable GemStone customers to create strategic business
applications that support their core competencies with decision processing,
providing them with the ability to develop their competitive advantage.
PROMOTE SUCCESSFUL CUSTOMER ADOPTION OF GEMSTONE PRODUCTS
The Company's success is dependent upon its customers' successful
development and deployment of new enterprise Java applications using GemStone/J.
GemStone employs an experienced professional
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services staff in building, deploying and managing enterprise-scale applications
based on distributed object technologies. To promote successful adoption of
distributed object technologies, GemStone provides consulting and training
services to assist the customer in creating an architecture and design best
suited to allow the customer to easily develop and deploy applications
successfully with GemStone/J.
EXPAND GLOBAL SALES CAPABILITY
The Company markets its products through a direct major account field
organization covering major markets in North America, Europe and Asia, and
through distributors in other areas of the world. GemStone intends to expand its
global sales capabilities by increasing the size of its direct sales
organization in major North American, European and Asian markets, and by adding
additional distributors in other selected markets. In addition, the Company
plans to expand its direct sales and marketing activities in the United States
and Europe, and to begin building its VAR channel through sales development
initiatives with enterprise application software companies and other targeted
accounts. For example, the Company recently entered into an agreement with SCT,
a large enterprise application software company, pursuant to which the Company
has licensed GemStone/J to SCT as a platform for new enterprise applications.
LEVERAGE THIRD-PARTY RELATIONSHIPS
The Company seeks to promote the widespread adoption of the GemStone/J
enterprise application server platform by establishing close relationships with
complementary software developers, enterprise application software vendors,
systems integrators, hardware systems vendors and professional services
organizations. The Company expects these third parties to assist GemStone
customers in implementing enterprise applications in Java for the GemStone/J
platform. The Company has established formal relationships with a number of
these third parties and intends to establish additional relationships. For
example, the Company has formal relationships with large computing companies,
including Sun, IBM, Hewlett-Packard Company ("Hewlett-Packard") and Oracle, that
include some combination of technology licensing, joint marketing and selling
activities and early access to new products to ensure integration and
compatibility.
TECHNOLOGY
The Company has focused on distributed object technologies for over a
decade. Over this period, the Company has developed significant expertise and
technology in server platforms for enterprise-class distributed object computing
environments. GemStone has numerous customers who have successfully deployed and
are operating enterprise applications based on the Company's products.
GemStone products use an open architecture that is based on industry
standards. The Company's technology base includes use of and compliance with
standards such as Java, Common Object Request Broker Architecture ("CORBA"),
Windows NT and UNIX, TCP/IP and others. Although based on industry standards,
GemStone has developed numerous proprietary technologies designed to add value
to an enterprise Java application server platform. These technologies include:
request brokering; load balancing and managing access to, and the transactional
state of pools of, shared virtual machines; partitioning for object-based
client/server applications; managing large, server-based object environments;
caching and sharing objects among many virtual machines by means of shared
memory and cache coherency algorithms; efficient memory management, including
garbage collection, for large, server-based applications; and distributed
transaction management for object software applications. The Company's
GemStone/J platform embodies many of these technologies and enhances the
scalability, integrity, performance, availability and security of enterprise
Java applications.
The Company's experience with the Smalltalk server and virtual machine has
been a significant factor in enabling GemStone to leverage its long developed
technology base into a technologically advanced enterprise Java platform. The
Smalltalk virtual machine architecture, capabilities and technical constructs
are similar in nature and function to those provided by Java. GemStone's
technology and proprietary
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algorithms have been used in creating the highly scalable, transaction-based
GemStone/J enterprise application server platform.
PERSISTENT CACHE ARCHITECTURE-TM-
GemStone/J's Persistent Cache Architecture provides an integration of
GemStone/J's Java virtual machine with a shared and permanent (persistent)
object environment that is managed through a transaction service. This shared
and persistent technology provides applications with the ability to share large
numbers of Java objects managed and cached in the enterprise server. This
sharing and caching in the server provides higher performance for Java
applications, and the persistent nature of the architecture provides
availability for shared information in a heterogeneous environment. Typically,
GemStone/J applications use the persistent cache for information retrieved from
relational databases and legacy systems and for newly created information that
can be stored in GemStone/J or stored and then updated to relational databases
via the standard Java Database Connectivity ("JDBC") interface mechanism.
DISTRIBUTED TRANSACTION MANAGEMENT
The emergence of distributed object computing architectures has resulted in
the need for distributed transaction management. The Company has developed
technology that is designed to optimize transaction management for server-based
object software. GemStone products provide support for distributed transaction
management that maintains integrity and coordinates between relational
databases, legacy systems, and GemStone/J's persistent cache. Distributed
transaction management is standardized in Java with EJB and the Java Transaction
Service ("JTS"). JTS is an interface to the standard Object Transaction Service
("OTS") which is based on the CORBA distributed object standard promulgated by
the Object Management Group ("OMG"), an organization with hundreds of members of
which GemStone is a member and holds a seat on the Board of Directors. In the
next release of GemStone/J, scheduled for the end of 1998, the Company plans to
include a JTS and OTS compliant transaction service that will include
proprietary technology that is covered by a recent GemStone patent submission.
DISTRIBUTED JAVABEANS APPLICATION PARTITIONING
GemStone has developed technology to support flexible partitioning of object
software applications between multiple clients and server components. GemStone's
technology for partitioning of object applications includes an efficient
mechanism for communication between client and server objects and a fine level
of control for application developers to define the partitioning boundary for
enhanced application performance. GemStone/J includes tools that simplify and
automate much of the partitioning process. This technology is based on and
extends the JavaBeans component model, the standard component model developed by
Sun for Java applications.
UTILIZATION AND ENHANCEMENT OF JVMS
GemStone licenses Sun's Java Application Environment ("JAE") including Sun's
Java virtual machine ("JVM") and the source code for the Java Development Kit
("JDK"). GemStone/J utilizes multiple JVMs and enhances them with added
functionality and capabilities. GemStone/J includes extensions for the PCA,
management of very large numbers of active Java objects (up to one billion) and
the GemStone/J garbage collector. GemStone/J's garbage collector provides memory
management technology designed to efficiently identify and delete the large
quantity of objects that are no longer in use, thereby enhancing the use of
system resources.
OPEN, JAVA-COMPATIBLE, 100% PURE
The GemStone/J server has been certified through Sun's official process as
Java compatible. This certification means that Gemstone/J has successfully
passed over 6,000 Java compatibility tests and will run all Java software that
is considered by Sun's system of measurement to be 100% Pure Java. GemStone/J
also supports other open standards such as Sun's Remote Message Invocation
protocol and CORBA and
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will run on standard Sun Solaris and Microsoft NT server platforms. Being an
open platform, GemStone/J supports applications using popular Java development
environments, such as IBM VisualAge for Java, Microsoft Visual J++ and Symantec
Visual Cafe. GemStone/J also works with standard Java-enabled Web browsers, such
as Microsoft Internet Explorer and Netscape Navigator.
ENTERPRISE JAVABEANS
Enterprise JavaBeans is an emerging standard for the server platform for
enterprise Java applications. EJB is a transaction-oriented component model for
three-tier server-based applications established by Sun with contributions from
GemStone as well as many other industry participants. The Company is planning to
provide an EJB-compatible version of the GemStone/J product in its next release,
which is scheduled for the end of 1998. Compatibility with EJB will enable the
Company to leverage its Persistent Cache Architecture while adhering to a
standard interface.
GemStone also has developed technology, in the area of enterprise
application services, that provides applications with capabilities that
otherwise would need to be created by the developer. Some of these services,
such as transaction management, persistence, naming and administration, will
gain standardized interfaces with EJB and Sun's "Java for the Enterprise"
services. Others, such as collections and security, are provided to support
functionality not covered by or as enhancements to these standards.
PRODUCTS AND SERVICES
The Company provides advanced, enterprise application server platforms for
deploying and managing applications created using distributed object
technologies. The Company has two application server product lines. The
GemStone/S product is an enterprise application server platform based on the
Smalltalk language that is being used by over 165 customers of the Company
worldwide. Since GemStone/S's initial release in 1986, it has been enhanced and
extended through subsequent releases. The Company began shipping the most recent
GemStone/S release, version 5.1.3, in June 1998. For the year ended December 31,
1997, and for the six months ended June 30, 1998, the Company derived the
substantial majority of its revenues from licensing and services relating to its
Gemstone/S product line. The GemStone/J product is an enterprise application
server platform for Java applications. GemStone/J was first commercially shipped
by the Company in September 1997 and as of June 30, 1998 was licensed by over 30
companies.
GEMSTONE/J
GemStone/J is an enterprise Java application server platform for
business-critical, server-based Java applications, based on distributed object
computing technology, in a heterogeneous environment. GemStone/J provides a
suite of application services that support development, deployment, maintenance
and management of enterprise-class Java applications providing them with the
required scalability, integrity, performance, availability and security.
GemStone/J provides transaction management for enterprise applications that
interface with relational databases and legacy systems and includes a
comprehensive security framework for enterprise applications, among other
capabilities.
GemStone/J is licensed separately for development of enterprise Java
applications and for deployment of these applications. The development license
includes access to tools and application service interfaces (application
programming interfaces or APIs) required to build, debug and test GemStone/J
applications. The deployment license for GemStone/J includes the runtime
application server as well as management tools and APIs for deploying and
managing enterprise Java applications.
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In April 1998, the Company commercially shipped version 1.1 of GemStone/J.
Version 1.1 provides enhanced scalability of GemStone/J through increased
performance in client transport mechanism, improvements to the connection
management technology and other general enhancements, tuning and optimizations.
The next release of GemStone/J, version 2.0, is currently scheduled to enter
beta test in late 1998 and to be generally available by the end of 1998.
GemStone/J 2.0 will include additional Java technology licensed from third
parties, including software covered under the Company's licensing agreement with
Sun. GemStone/J 2.0 is being designed to include support for EJB, among other
new capabilities and enhancements. The Company intends to extend the
functionality of GemStone/J and to continue to commit significant resources to
the development of new capabilities and technologies for the product as well as
expand its support for hardware platforms, operating systems and relational
database management systems.
GEMSTONE/S
GemStone/S is an application server platform for enterprise applications
written in the Smalltalk language, one of the first object software languages.
The GemStone/S server product contains a server-optimized Smalltalk virtual
machine with a suite of application services for scalable, transaction-oriented,
client/server applications. GemStone/S also includes a multi-user persistence
engine that can manage the large numbers of active objects common in complex
enterprise applications. This capability is referred to as Persistent Cache
Architecture in the GemStone/J product, and the technical architecture of this
capability is very similar between the two products.
The GemStone/S product line includes the GemStone/S server and a number of
optional modules that support three-tier, client/server enterprise applications
in Smalltalk. GemBuilder for Smalltalk and Java enable developers working with
Smalltalk and Java application development environments, respectively, to build
applications that work with GemStone/S. GemBuilder for Smalltalk provides tools
and software components to enable developers to work with IBM VisualAge for
Smalltalk and ObjectShare VisualWorks, the two most popular Smalltalk
development environments. GemBuilder for Java enables use of popular Java
development environments such as IBM VisualAge for Java and Symantec Visual Cafe
to build Java client applications that work with GemStone/S server-based
Smalltalk applications. GemConnect contains a set of tools and software
components that enable GemStone/S client/server applications to work with
popular relational database management systems. GemEnterprise is a module that
works with GemStone/S to provide high availability and distribution of
information on a geographic basis. GemAccess for ODBC provides a standard open
database connectivity (ODBC) interface to the GemStone/S shared Smalltalk object
environment.
SERVICES
The Company offers an array of services to its customers to assist in better
understanding and using the GemStone products. The Company's service offerings
include professional services, such as training and consulting, and technical
support services for both the GemStone/J and GemStone/S products. GemStone
maintains staff at its Beaverton, Oregon headquarters, as well as in regional
locations elsewhere in North America and Europe, to provide services in a
convenient fashion to its customers. GemStone also maintains a network of third
party professional services firms experienced in object technology and GemStone
products to act as subcontractors in serving GemStone customers.
The Company recommends to each customer a plan to utilize a spectrum of
professional services provided by the Company to prepare, educate and assist the
customer through the development phase of their project into implementation and
deployment. These services include a number of training classes as well as
ongoing consulting in architecture, design, performance tuning, application
development, deployment planning and project management. Because of the complex
nature of its customers' enterprise applications, the Company believes that its
professional services organization, with its extensive experience
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with larger-scale enterprise systems, plays a key role in facilitating the
initial license sales and enabling customers to successfully develop, deploy and
manage such applications.
CUSTOMERS AND MARKETS
Through June 30, 1998, over 500 customers had licensed the Company's
products. The Company's target end-user customers are organizations that utilize
sophisticated, high-end information systems with heterogeneous computing
environments based on diverse hardware and software products and back end
corporate databases and legacy computing environments. The Company expects most
customers to use GemStone products to create new business applications that work
within their existing IT infrastructure and increasingly leverage the new
capabilities and accessibility derived from the Internet and World Wide Web. For
the year ended December 31, 1997, IBM/Japan accounted for 19% of the Company's
total revenues and the Company's top five customers accounted for 44% of the
Company's total revenues. For the six months ended June 30, 1998, Sprint
accounted for 19% of total revenues and the Company's top five customers
accounted for 39% of total revenues.
A representative list of current customers by industry using GemStone
products and services includes as of June 30, 1998:
<TABLE>
<S> <C>
BANKING/FINANCE MANUFACTURING
Banque Generale du Luxembourg S.A. AMP Incorporated
J.P. Morgan & Co., Incorporated Celestica, Inc.
Private Business, Inc. Ford Motor Company
Rand Merchant Bank Hewlett-Packard Company
Union Bank of Switzerland Texas Instruments Incorporated
GOVERNMENT/EDUCATION RETAIL/ENTERTAINMENT
Lawrence Livermore National Laboratory NIKE, Inc.
State of California Health and Welfare Agency Sony International (Europe) GmbH
Data Center Time Warner Communications Holding, Inc.
INSURANCE TELECOMMUNICATIONS
AgriCorp Bell Atlantic
The Canada Life Assurance Company GST, Telecom Inc.
Principal Mutual Life Insurance Company Lucent Technologies Inc.
Progressive Casualty Insurance Co. Sprint Communications Company, L.P.
MEDICAL/PHARMACEUTICAL UTILITIES
Lutheran Health Systems Brooklyn Union Gas Company
PacifiCare Health Systems, Inc. Florida Power and Light Company
TRANSPORTATION
Orient Overseas Container Line
</TABLE>
The following examples illustrate how selected customers are using the
Company's technology:
INTERNATIONAL BANKING
Banque Generale du Luxembourg S.A., a major European banking company with
$25 billion in assets, has launched a new customer care system that centralizes
customer service agents' ability to view all customer transactions with the
bank. Agents formerly relied on a series of individual, mainframe-based
applications to maintain the data concerning each customer's stock, bond,
savings and other accounts. The new system employs the GemStone/J enterprise
application server in a middle tier between the agents' terminals and the legacy
mainframe systems that house the bank's account data. In the middle tier,
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GemStone/J executes new business logic as well as the encapsulation into
components of existing applications and data on the mainframe. The system not
only speeds agents' response time to deal with ordinary customer account
inquiries, but also provides a context for identifying new sales opportunities
for banking products based on customer composite profiles. Created with the
component reuse advantages of Java in mind, the system was designed to deliver a
competitive advantage in the future by allowing business process experts to
create new application functionality using building blocks that automatically
leverage the scalable and function-rich application server platform of
GemStone/J.
SEMICONDUCTOR EQUIPMENT AND PROCESS CONTROL
Supplying systems and services to major semiconductor manufacturers
throughout the world, Adventa Control Technologies Inc.'s "Works" software
package was developed with Texas Instruments to monitor and control
semiconductor fab processes--a system based on GemStone/S servers. The Works
system monitors and controls semiconductor lines, wafer processing yield
parameters and machine data that are crucial to feed forward adjustments to keep
the manufacturing process on track. In addition, Works was constructed using a
component-based approach which has streamlined application development and
tuning through reuse techniques. For example, in days developers now are able to
implement and test code which formerly took weeks using COBOL and mainframes.
Finally, because the GemStone/S server is capable of absorbing updated
functionality while the server is in production operation, fully tested new
functionality can be staged and added without impacting the manufacturing
process, saving millions of dollars in downtime and lost production.
INFORMATION TECHNOLOGY FOR GOVERNMENT, HIGHER EDUCATION AND UTILITIES
Systems & Computer Technology Corporation, a leading provider of
client/server software for mission-critical enterprise applications for
government agencies, higher education institutions, manufacturing and
distribution companies and utilities, is adapting its higher education solutions
to utilize the GemStone/J enterprise application server. With 2,500 customers
worldwide, SCT's packaged applications automate and support administration
functions for large user populations such as university enrollment, finance and
manufacturing ERP. In development today for a planned 1999 deployment,
GemStone/J is used as a component of the architecture for the SCT Workflow
application. The goal for SCT Workflow is to allow institutions to design and
capture their business processes and best practices and put them into wide use
throughout the institution. The ability for workflow-based applications to
manage complexity and enhance productivity is increasingly required to further
reduce unwanted expenses in today's large institutions.
SALES AND MARKETING
The Company markets its software and services primarily through its direct
sales organization, complemented by other sales channels, international
distributors and VARs. As of June 30, 1998, the Company's direct sales force
included nine sales representatives located in eight field offices throughout
North America and three sales representatives located in the Company's
international sales offices in France and Germany. The direct sales force is
supported by nine technical sales engineers. As of June 30, 1998, the Company
was represented by nine international distributors, which principally operate in
the major markets of Europe, Asia and Latin America. The Company intends to add
to its direct sales and support force and to its network of international
distributors and indirect distribution channels in North America, Europe and
Asia.
The Company's marketing efforts are directed at broadening the market for
GemStone/J by increasing awareness of the importance of the enterprise
application server for Java business applications, generating leads of
prospective customers for GemStone/J and supporting the Company's worldwide
direct and indirect sales channels. The Company's web site is also a key
marketing tool that provides prospective customers and other interested parties
with information and background on the benefits, technical
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capabilities and industry analyst views on GemStone products and services.
Marketing personnel engage in a variety of activities, including conducting
public relations and product presentations and seminars, issuing newsletters,
marketing direct mailings and preparing other marketing materials. The marketing
personnel also design and maintain the web site, coordinate the Company's
participation in industry programs, forums and events, establish and maintain
close relationships with recognized industry analysts and work with other
industry participants.
An important element of the Company's sales and marketing strategy is to
expand its relationships with third parties to increase market awareness and
acceptance of GemStone products and services, and to provide greater value and
easier adoption of GemStone products. The Company often benefits from third-
party selling assistance and believes that, in a number of instances, its
relationships with such third parties have reduced the Company's sales cycle.
Third-party sellers often generate or qualify sales leads, make initial customer
contacts, assess needs and recommend contact with the Company and work with the
Company in joint marketing and sales efforts, including mailings, seminars and
joint sales calls. The Company has established relationships with organizations
in five primary categories, including systems integrators, value-added
resellers, international resellers, computer industry companies and
complementary product and services companies (through its GemSmith Partners
program). GemStone has marketing personnel that develop and manage third-party
relationships and is planning to add additional personnel specifically to
develop the VAR channel for GemStone/J.
A representative list of third-party organizations that have provided
indirect channels includes:
<TABLE>
<CAPTION>
SYSTEMS INTEGRATORS VARS INTERNATIONAL RESELLERS
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
Alta Software, Inc. Ascent Logic Corporation Clover Tools & Services
American Management DSC Telecom L.P. Computadoras, Objectos y
Systems, Incorporated Eimco-Process Equipment Comunicaciones S.A. de C.V.
Andersen Consulting LongView International, Inc. EDOR Metodi Quantitativi
Electronic Data Millenium Pharmaceuticals, s.r.l.
Systems Corporation Inc. Entra Business Objects AB
IBM Northern Telecom Limited Japan Information Processing
MCI Systemhouse Corp. Siemens AG RHE & Associates Limited
Systems & Computer SmartData Solutions Ltd.
Technology Corporation Software Research
Associates, Inc.
SPL WorldGroup B.V.
</TABLE>
The Company has established relationships with Hewlett-Packard, IBM,
Informix, Inprise, Microsoft, Netscape, Oracle, Sybase, Sun and other computer
industry companies in connection with such companies' vendor or product
development programs. Through these programs, the Company typically obtains the
right to purchase or sell or license hardware and software products at a
discount and access to information and technical support to enable the Company
to develop products that are compatible with or complementary to such companies'
products.
The Company's GemSmith Partners program includes relationships with
complementary products and services providers. Some of these companies also may
become subcontractors to the GemStone professional services organization.
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MAJOR INDUSTRY ALLIANCES
GemStone works with major industry participants to increase visibility and
credibility of the Company's products and services, to promote compatibility
with leading company products and standards and to better serve customers. Two
examples of these are:
SUN MICROSYSTEMS. The Company was an early licensee from Sun, almost two
years ago, for the Java Application Environment, which includes source code for
the Sun Java virtual machine as well as the Java Development Kit. GemStone
continues to work with the development group responsible for the evolution of
the Java platform technology, and interacts and contributes ideas to development
groups within Sun responsible for new versions of the JAE and related
technologies. GemStone was among the original group of companies contributing to
the definition of the EJB specification. GemStone has also extended its
relationship with Sun to its Professional Services unit by working with its Java
Design Centers and undertaking the steps required for GemStone consultants to
act as subcontractors on certain enterprise engagements as a Sun Authorized Java
Design Center. The Company's license agreement with Sun extends through July
2001 and is subject to five one-year extensions by GemStone. Upon expiration of
the license, GemStone will be able to continue to distribute its products
containing the JAE and JDK already incorporated in the Company's products, so
long as the Company continues to pay royalties as provided in the agreement.
Although the Company believes that its relationship with Sun is beneficial to
both companies, the Company's dependence on Sun and the Java platform also
entails certain risks, including Sun's strict control over the licensed Java
technology. See "Risk Factors--Dependence on Java Technology and Emerging Market
for Distributed Object Computing."
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION. SCT is a leading provider of
client/server, mission-critical enterprise software and IT services for
government agencies, higher education institutions, manufacturing and
distribution companies and utilities. In June 1998, the Company entered into a
VAR agreement with SCT, pursuant to which the Company licensed to SCT the
GemStone/J product on a nonexclusive basis for incorporation into SCT's
application programs, such as Workflow, for distribution worldwide. Under the
agreement, the Company received a one-time lump sum license fee payment in
exchange for the right to distribute certain GemStone products to SCT's existing
client base as of a date certain, and for the term of the agreement will receive
ongoing license, sublicense, maintenance and support fees in accordance with the
number of licenses of GemStone/J sold and the usage of maintenance and support
services. The agreement is cancelable by SCT prior to the first commercial
shipment of an SCT product incorporating GemStone/J. If not sooner terminated,
the agreement expires on May 31, 2001. SCT represents a class of company that
will be targeted in a concerted sales development effort by the Company to
develop the VAR channel for GemStone/J. The Company expects the SCT partnership
to be an important factor in pursuing this effort as a public reference and
credible source of information. The Company also expects to increase its
knowledge of serving enterprise software company VARs through its relationship
with SCT. There can be no assurance, however, that the Company will receive the
anticipated future benefits from the SCT agreement. See "Risk Factors--Risks
Associated with Expanding Indirect Distribution."
In addition, GemStone participates in programs that enable early access to
products and information and provide opportunities to leverage joint sales and
marketing programs with companies, including Hewlett-Packard and IBM. These
relationships assist the Company in designing products that are compatible with
the products from these and other companies, and enhance the Company's ability
to support its customers using GemStone products within a heterogeneous
environment.
CUSTOMER SERVICE AND SUPPORT
The Company typically assigns an account team to work with each customer,
including the major account sales representative, a field systems engineer and a
technical support representative. The Company maintains a technical support
staff at its headquarters location that provides answers to technical
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questions and remedies or workarounds for customer problems. This staff is
responsible for escalating, tracking and managing customer problems through to
successful resolution. The technical support staff works closely with the
GemStone engineering personnel and field professional services personnel to
identify and characterize problems and execute the means to respond to technical
issues from customers and partners. Technical support is typically handled by
telephone and electronic mail. Updates, patches and workarounds are generally
available to customers who have active maintenance and support contracts through
the GemStone web site. The web site also provides general technical information
and captures bug and enhancement requests.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance GemStone/J, develop new products and capabilities,
maintain technological leadership and satisfy an evolving range of customer
requirements for enterprise application server platforms. The Company's
engineering organization is responsible for product architecture, core
technology and functionality, product testing, user interface development and
interoperability with the leading hardware platforms, operating systems,
relational database management systems and networking and communications
protocols.
Since inception, the Company has made substantial investments in product
development and related activities. GemStone/S and GemStone/J have been
developed primarily by the Company's internal development staff and in some
cases with the assistance of external consultants. Certain technologies have
been acquired and integrated into GemStone products through licensing
agreements.
In April 1998, the Company commercially shipped version 1.1 of GemStone/J.
Version 1.1 provides enhanced scalability of GemStone/J through increased
performance in client transport mechanism, improvements to the connection
management technology and other general enhancements, tuning and optimizations.
The next release of GemStone/J, version 2.0, is currently scheduled to enter
beta test by late 1998 and to be generally available by the end of 1998.
GemStone/J 2.0 will include additional Java technology licensed from third
parties, including software covered under the Company's licensing agreement with
Sun. GemStone/J 2.0 is being designed to include support for EJB, among other
new capabilities and enhancements. The Company intends to extend the
functionality of GemStone/J and to continue to commit significant resources to
the development of new capabilities and technologies for the product as well as
expanding its support for hardware platforms, operating systems and relational
database management systems.
As of June 30, 1998, the Company's product development organization
consisted of 43 employees. The Company has made significant investments in
product development during 1996, 1997 and 1998 to bring the new GemStone/J
product to market quickly. These substantial investments have been necessitated
by the complex and extensive nature of the product and rapidly evolving market
and technology. There can be no assurance that the Company will realize a
substantial return on these investments. See "Risk Factors--Market Acceptance of
Company's Products; Dependence on a Single Product Line" and "--Rapid
Technological Change; Introduction of New Products and Enhancements."
For the years ended December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1998, the Company spent $3.4 million, $4.8 million, $5.2 million
and $2.5 million, respectively, on research and development.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. In addition, the Company has filed a patent
application relating to its virtual machine technology supporting enterprise
computing platforms. There can be no assurance, however, that the United States
Patent and Trademark Office will issue the Company's requested patent, or that
the Company would be successful in defending
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such patent, if challenged. Furthermore, there can be no assurance that others
will not develop technologies that are similar or superior to the Company's
technology or design around the Company's pending patent. Moreover, the
Company's pending patent relates only to a portion of the Company's products and
is not sufficient to protect the Company's competitive position with respect to
its application server solutions. Trade secret and copyright laws, upon which
the Company primarily depends, however, afford only limited protection.
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. The
Company's software is designed to be modified and adapted to each customer's
particular needs by Company consultants, customer personnel and third-party
consultants. As such, policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. Such policing is likely to become more difficult to the
extent the Company is successful at increasing product distribution through
VARs, who typically receive broader rights to the Company's technology. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights as fully as do the laws of the United States. There can be no
assurance that the Company's means of protecting its proprietary rights in the
United States or abroad will be adequate or that competition will not
independently develop similar technology.
From time to time third parties may assert that the Company's technology
infringes on their rights. The Company expects that software product developers
may increasingly be 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 to defend, result in costly litigation,
divert management's attention and resources, cause product development delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, if at all. In the event of a successful claim of product
infringement against the Company and the failure or inability of the Company to
license the infringed or similar technology, the Company's business, financial
condition and results of operations could be materially and adversely affected.
COMPETITION
The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company believes that the
principal competitive factors in its market are product quality, performance and
flexibility, use of standards-based technology, quality of support and service,
company reputation and, to a lesser extent, price. The Company also believes
that to remain competitive, products in the market for enterprise application
servers must deliver high degrees of scalability, integrity, performance,
availability and security, and must integrate easily with existing enterprise
systems. The Company's competitors include both public and privately held
enterprises, including BEA, Inprise, IONA, NetDynamics and WebLogic. Many of
these competitors have longer operating histories, greater financial, technical,
marketing and other resources, greater name recognition and larger installed
bases of customers than the Company. Further, Sun recently announced an
acquisition of NetDynamics. The substantial resources of Sun and its leadership
in Java, combined with the enterprise application server technology of
NetDynamics, may pose a significant source of competition. In addition, there
are other very large and established software companies that may compete with
the Company, including IBM, Microsoft, Netscape and Oracle. These competitors
and potential competitors 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 and sale of their products than the
Company.
The Company expects competition to increase as new emerging competitors and
established companies seek to develop and market Java-based object computing
solutions. The Company also expects that competition will increase as a result
of software industry consolidation. Increased competition may result
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in price reductions, reduced gross margins and loss of market share. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, financial
condition and results of operations.
EMPLOYEES
As of June 30, 1998, the Company had a total of 132 employees, of which 124
were based in the United States and eight were based in Europe. Of the total, 36
were in sales and marketing, 43 were in product development, 33 were in customer
support and consulting, and 20 were in finance, administration and operations.
The Company's future performance depends in significant part upon the continued
service of its key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. The loss of the services of one or
more of the Company's key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success also depends on its continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key technical, sales and managerial personnel in the future. The
Company has not experienced any work stoppages and considers relations with its
employees to be good. See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales, marketing, support,
consulting and product development offices are located in a leased facility
comprised of approximately 55,850 square feet in Beaverton, Oregon. The lease
for the facility expires in 2002. As of June 30, 1998, the Company leases a
total of 11 other sales, development and support offices in various cities
throughout the United States and in Europe, ranging in size from approximately
150 to 800 square feet. The Company believes that its existing facilities are
adequate for its current needs and that suitable additional or alternative space
will be available in the future on commercially reasonable terms as needed.
LITIGATION
The Company is involved from time to time in various claims and legal
actions arising in the ordinary course of business. The Company currently is not
a party to any material legal proceedings.
CORPORATE HISTORY
GemStone Systems, Inc. was originally incorporated in 1990 by its parent,
Servio Logic Corporation. Prior to 1990, the activities of the Company were
conducted by Servio Logic Corporation and Servio Logic Development Corporation.
Pursuant to the Reorganization, to occur prior to consummation of this offering,
Servio Logic Corporation will be merged into an affiliated entity and GemStone's
direct parent company will become Lex Magna, a British Virgin Islands
corporation. Lex Magna is currently the indirect parent company of Servio Logic
Corporation. As part of the Reorganization, GemStone Systems, Inc. will be
merged into a wholly owned subsidiary of Lex Magna, and the resulting
corporation will adopt the GemStone name.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of June 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
James P. Barnes(1).................. 51 Chairman of the Board and a Director
Bryan R. Grummon.................... 50 President, Chief Executive Officer and a Director
Kenneth J. Irinaga.................. 45 Executive Vice President, Chief Financial Officer and Secretary
Dan J. Ware......................... 42 Senior Vice President Worldwide Operations
T. Lougenia Anderson, Ph.D.......... 48 Vice President Engineering
Richard H. Lamb..................... 47 Vice President Professional Services
Douglas G. Pollack.................. 45 Vice President Marketing
Jesse Rifkind(1).................... 66 Director
</TABLE>
- --------------
(1) Member of the Compensation Committee and the Audit Committee.
JAMES P. BARNES has been Chairman of the Board and a director of GemStone
since 1990. He is the President of Sampoerna International Pte, Ltd., a
privately held enterprise based in Singapore. He is also the President and a
director of Servio Logic Corporation, the holding company which is the founding
company of GemStone and which prior to the Reorganization is the majority
stockholder of the Company. Mr. Barnes serves in various capacities with
affiliates of Servio Logic Corporation. He is an attorney and has served in
various capacities with Servio Logic Corporation and its affiliates since 1982.
Mr. Barnes earned a B.S. in political science from Lewis and Clark College and a
J.D. from the University of California, Davis.
BRYAN R. GRUMMON joined GemStone as President and Chief Executive Officer
and a director in March 1994. Prior to joining GemStone, Mr. Grummon was
President of Digital Sound Corp. from 1988 until 1991 and President of Aptec
Computer Systems, Inc. from 1991 to 1993. Mr. Grummon earned a B.S. in
electrical engineering from the Illinois Institute of Technology.
KENNETH J. IRINAGA has served as the Company's Chief Financial Officer and
Executive Vice President since January 1997. In April 1998, he was appointed
Secretary of the Company. He also serves as the Chief Financial Officer and
Secretary of Servio Logic Corporation and in various capacities with other
affiliates of Servio Logic Corporation. Mr. Irinaga is a Certified Public
Accountant and has served in various capacities with Servio Logic Corporation
and its affiliates since 1986. Mr. Irinaga earned a B.S. in accounting from the
University of Oregon.
DAN J. WARE joined GemStone in October 1994, as Senior Vice President
Worldwide Operations. His most recent positions prior to joining the Company
were as Vice President Worldwide Operations for Logic Modeling Corporation, a
provider of simulation models for electrical design engineering, from 1993 to
1994, and as Director of Major Accounts for Mentor Graphics Corporation from
1989 to 1993. Mr. Ware earned a B.S. in international relations from Lewis and
Clark College.
T. LOUGENIA ANDERSON, PH.D. joined GemStone as Vice President Engineering in
1997. Prior to joining the Company, Dr. Anderson was Senior Director, Solution
Engineering, at Sequent Computer Systems, Inc. She was responsible for product
development of database, distributed computing and Internet-related products for
Sequent. Dr. Anderson earned a B.S. in physics and a B.S. in mathematics, and an
M.S. and Ph.D. in computer science, all from the University of Washington.
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RICHARD H. LAMB has served as Vice President Professional Services since
1997. Prior to that time, from 1990 to 1996, he was Director of
Marketing-Professional Services at Mentor Graphics Corporation. Mr. Lamb earned
a B.A. in English and philosophy from Cornell University.
DOUGLAS G. POLLACK joined GemStone in January 1995 as Vice President
Marketing. Prior to joining the Company, Mr. Pollack was Vice
President-Marketing for Objectivity, Inc. from 1993 to 1994 and Vice
President-Marketing for Parc Place Systems, Inc. from 1989 to 1992. Mr. Pollack
earned a B.S. in electrical engineering from Cornell University, and an M.B.A.
from Stanford University.
JESSE RIFKIND has been a director of GemStone since 1991. He is an
independent management consultant providing counsel to clients in the areas of
management, finance and high technology. Prior to establishing his management
consulting business in 1982, Mr. Rifkind held operating and research executive
positions with Xerox Corporation for 15 years. Mr. Rifkind also serves on the
board of directors of You Bet International, Inc., a publicly held company in
the on-line interactive gaming industry. Mr. Rifkind earned a B.S. in electrical
engineering from the University of Southern California.
COMMITTEES
The Audit Committee and Compensation Committee consist of Mr. Barnes and Mr.
Rifkind. The Audit Committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by the Company's independent auditors
and reviews and evaluates the Company's audit and control functions. The
Compensation Committee makes recommendations regarding the Company's Restated
1992 Employees' Stock Option Plan and makes decisions concerning salaries and
incentive compensation for employees and consultants of the Company.
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors are
reimbursed for certain expenses in connection with attendance at Board and
committee meetings. Mr. Rifkind provides consulting services to the Company from
time to time. In 1997, the Company paid Mr. Rifkind a total of approximately
$41,000 for his consulting services, including reimbursement for service-related
expenses.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the other most highly compensated executive officers
(collectively, the "Named Executive Officers") who
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<PAGE>
earned over $100,000 for services rendered in all capacities to the Company
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------
---------------------- SECURITIES UNDERLYING
NAME AND POSITION SALARY($) BONUS($) OPTIONS(#)
- ---------------------------------------------------------------------- --------- ----------- ---------------------
<S> <C> <C> <C>
Bryan R. Grummon...................................................... 190,000 -- --
President and Chief Executive Officer
Dan J. Ware........................................................... 160,000 34,605(1) --
Senior Vice President Worldwide Operations
Richard H. Lamb....................................................... 125,000 45,000 5,500(2)
Vice President Professional Services
Douglas G. Pollack.................................................... 150,000 6,000 --
Vice President Marketing
</TABLE>
- --------------
(1) Includes $28,205 paid as commission on sales.
(2) Represents options granted to Mr. Lamb to purchase 5,500 shares of Common
Stock at an exercise price of $9.09 per share, pursuant to the Company's
Restated 1992 Employees' Stock Option Plan.
OPTION GRANTS IN 1997
The following table sets forth certain information concerning stock options
granted during the fiscal year ended December 31, 1997 with respect to the only
Named Executive Officer who received stock options during the period.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3)
OPTIONS TO EMPLOYEES IN BASE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR(2) PRICE($/SH) DATE 5%($) 10%($)
- ------------------------------------------ ----------- ----------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Lamb(1)........................ 5,500 9.0% 9.09 5/12/07 31,445 79,687
</TABLE>
- --------------
(1) Option granted under the Company's Restated 1992 Employees' Stock Option
Plan.
(2) Based on options to purchase an aggregate of 61,325 shares of the Common
Stock granted during 1997 to employees of the Company, including the Named
Executive Officers.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
capital stock prices. The actual value realized may be greater or less than
the potential realizable values set forth in the table.
45
<PAGE>
YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
the value of unexercised options as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL
YEAR-END(#): YEAR-END($)(1):
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------------- --------------------------------------- -------------------------------
<S> <C> <C>
Bryan R. Grummon....................... 166,477 / 110,985 1,528,259 / 1,018,842
Dan J. Ware............................ 44,000 / 38,500 403,920 / 353,430
Richard H. Lamb........................ -- / 13,750 -- / 26,263
Douglas G. Pollack..................... 27,500 / 41,250 252,450 / 378,675
</TABLE>
- --------------
(1) Calculated based on an assumed initial public offering price of $11.00 per
share, less the exercise price.
EMPLOYEE BENEFIT PLANS
1998 EMPLOYEES STOCK OPTION PLAN
On July 9, 1998, the Company adopted the 1998 Employees Stock Option Plan
(the "1998 Option Plan"). The 1998 Option Plan is intended to enable the Company
to attract, motivate and retain the services of officers and management
employees who contribute materially to the Company's growth and success, and to
provide an incentive to such persons to more closely identify their interests
with those of the Company and its shareholders. The 1998 Option Plan permits the
issuance of a total of 700,000 shares of the Company's Common Stock to officers,
employees, consultants and directors of the Company or any subsidiary of the
Company.
Incentive stock options ("ISOs"), as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") and Nonqualified Stock Options
("NSOs"), may be granted under the 1998 Option Plan. ISOs may be granted only to
employees of the Company. The 1998 Option Plan may be administered by the Board
of Directors or by a committee of the Board of Directors. The Board of Directors
interprets the 1998 Option Plan and determines the terms of options granted
under the 1998 Option Plan, including the number of shares issuable upon
exercise and the exercise price of options granted under the 1998 Option Plan.
The exercise price of all ISOs granted under the 1998 Option Plan must be at
least equal to the fair market value of the Common Stock at the date of grant,
and the exercise price of all NSOs must be equal to at least 85% of the fair
market value of the Common Stock at the date of grant. With respect to any
person who, on the date the option is granted, owns stock of the Company
possessing more than 10% of the combined voting power of all classes of stock of
the Company or of any affiliate, the exercise price of any ISOs or NSOs granted
under the 1998 Option Plan must equal at least 110% of the fair market value of
the Common Stock at the date of grant, and the maximum term of any such option
is five years. The aggregate fair market value of Common Stock, determined at
the date of grant, issuable with respect to incentive stock options granted
under the 1998 Option Plan or any other plan of the Company or an affiliate, for
the first time in any one calendar year by an optionee may not exceed $100,000.
In the event that the Company's Common Stock is increased or decreased by
reason of a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company, adjustments will be made in the number of shares
of Common Stock reserved under the 1998 Option Plan and the number of shares and
price per share of Common Stock covered by each outstanding option.
In the event of a merger, consolidation plan of exchange or similar
transaction affecting the Company, outstanding options shall continue in full
force and effect. However, in the event of such a transaction, or
46
<PAGE>
in the event of a dissolution or liquidation of the Company, the Board may, in
its discretion, set a 30-day period prior to the event during which holders
shall have a right to exercise outstanding options, after which period all
outstanding options shall immediately terminate.
NSOs are not transferable except by will or by the laws of descent and
distribution, and are exercisable during an optionee's lifetime only by the
optionee, or if incapacitated, by his guardian or legal representative. ISOs are
not transferrable except by will or by the laws of descent and distribution, and
are exercisable during the optionee's lifetime only by the optionee.
The 1998 Stock Option Plan will continue in effect until all options granted
thereunder have been exercised. However, no options may be granted after July 9,
2008. As of the date of this Prospectus, no options have been granted under the
1998 Option Plan.
RESTATED 1992 EMPLOYEES' STOCK OPTION PLAN
The Company's Restated 1992 Employees' Stock Option Plan (the "1992 Option
Plan") was adopted by the Board of Directors and approved by the stockholders on
June 30, 1992. The 1992 Option Plan was amended and restated on July 1, 1995.
The 1992 Option Plan permits the issuance of a total of 835,406 shares of the
Company's Common Stock to officers, regular key employees, consultants and
directors of the Company. Options may be ISOs or NSOs.
In the event of dissolution or liquidation of the Company, unexercised
options granted under the 1992 Option Plan will terminate immediately prior to
the event, although the Board may, in its discretion, set a prior date by which
options may be exercised, including shares as to which the options would not
otherwise be exercisable. In the event of a merger or sale of substantially all
the assets of the Company, or a merger or consolidation in which the Company is
not the surviving corporation, or a reverse merger in which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then to the extent
permitted by applicable law: (i) any surviving corporation is required to assume
any options outstanding under the Option Plan or to substitute similar options
or rights for those outstanding under the Option Plan, or (ii) such options
shall continue in full force and effect. In the event any surviving corporation
refuses to assume or continue such options, or to substitute similar options or
rights for those outstanding under the Option Plan, then, with respect to
outstanding options, the time during which such options may be exercised shall
be accelerated and the options terminated if not exercised prior to such event.
The 1992 Option Plan will continue in effect until all options granted under
the Plan have been exercised. However, no options may be granted after July 30,
2002. As of June 30, 1998, there were 711,687 shares of Common Stock issuable
upon exercise of outstanding options granted under the Option Plan, at a
weighted average exercise price of $3.27 per share, and 65,419 shares available
for future grant under the 1992 Option Plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
On July 9, 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "ESPP"). Under the ESPP, 300,000 shares of Common Stock have been reserved
for issuance to and purchase by employees of the Company. As of the date of this
Prospectus, no shares of Common Stock have been sold under the ESPP.
All employees with over six months of service who work more than 20 hours
per week and who do not own stock or options for more than 5% of the Company's
stock are eligible to participate in the ESPP.
The Company may implement the ESPP through periodic issuances of Common
Stock or through open market purchases of Common Stock. At the beginning of each
applicable subscription period, the Company will offer to each participant in
the ESPP an option to purchase a maximum number of shares
47
<PAGE>
based upon a percentage of the participant's base compensation for the period
divided by 85% of the market value of the Common Stock at that time. At the end
of each period, each participant can acquire such shares at the lower of 85% of
the fair market value at the beginning or at the end of the period. The ESPP
allows participants to authorize payroll deductions or to make cash payments to
be applied toward the purchase of shares of Common Stock. Unless a participant
gives written notice to the Company, the option to purchase Common Stock with
the cash value of his or her account is deemed to have been automatically
exercised at the end of each applicable period. Upon written notice at any time
prior to the end of an applicable period, a participant may elect to withdraw
the value of his or her account at such time.
The ESPP is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. Under that Code section, employees may not be granted
options if immediately after the grant such employee would own stock or hold
options to purchase stock possessing 5% or more of the voting power or value of
all stock of the Company, nor may any participant purchase Common Stock having a
fair market value exceeding $25,000 in any calendar year.
The Board of Directors may at any time amend or terminate the ESPP, except
that the approval of the Company's stockholders is required within 12 months of
the adoption of any amendment increasing the number of shares authorized for
issuance under the ESPP. Unless extended by the Board of Directors, the ESPP
will terminate on the earlier of ten years from its effective date, or when all
of the shares reserved for issuance under the ESPP have been issued.
SERVIO LOGIC PLAN
In 1992, Servio Logic Corporation, the Company's parent prior to the
Reorganization, established a stock option plan (the "Servio Plan") for the
purpose of attracting, motivating and retaining employees of Servio Logic
Corporation and employees of any parent or subsidiary of Servio Logic
Corporation. In connection with the Reorganization, the Selling Stockholder will
assume the obligation under the Servio Plan. Under the Servio Plan, options may
be granted to purchase issued and outstanding shares of the Company's Common
Stock owned by the Selling Stockholder. Options granted under the Servio Plan
may be ISOs or NSOs. A total of 330,000 shares of the Company's Common Stock may
be sold under the Servio Plan. The Servio Plan will be administered by the Board
of Directors of the Selling Stockholder or by a committee thereof. No options
may be granted under the Servio Plan after July 30, 2002. As of June 30, 1998,
options were held by five persons exercisable for an aggregate of 315,700
shares, all of which are fully vested. See "Certain Transactions."
401(k) PLAN
The Company's employees who have completed at least six months of service
and who are at least 21 years of age are eligible to participate in the Servio
Group Consolidated 401(k) Retirement Savings Plan, as amended (the "401(k)
Plan.") The 401(k) Plan is intended to qualify under Section 401(k) of the Code.
Employees may elect to defer compensation (subject to certain limitations) and
have the deferred compensation contributed to the 401(k) Plan. The Company may
elect to match all or a portion of any employee's contribution, subject to
certain limitations. The Company made no contributions to the 401(k) Plan during
1997.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Articles of Incorporation (the "Articles") and Bylaws
include provisions that limit the personal liability of directors to the Company
or its shareholders for monetary damages for conduct as a director. The
provisions eliminate such liability to the fullest extent permitted by law.
Oregon law currently permits elimination of such liability, except in the
following cases: (i) any breach of the director's duty of loyalty to the Company
or its shareholders; (ii) any act or omission not in good faith or
48
<PAGE>
which involved intentional misconduct or a knowing violation of law; (iii) any
unlawful distribution, as defined by Oregon law; or (iv) any transaction from
which the director derived an improper personal benefit. The general effect of
the provisions is to eliminate monetary damages as one of the remedies available
to shareholders for enforcement of the duty of care. As a result, shareholders
may be left without any means to recover a loss suffered as a result of the
negligence or gross negligence of directors in discharging their duty of care.
The Company's Articles and Bylaws provide for the indemnification of any
person, to the fullest extent permitted by law, for all liabilities (including
attorney fees, judgments, fines and amounts paid in settlement) actually and
reasonably incurred in connection with any actual or threatened proceeding
(including, to the extent permitted by law, any derivative action) by reason of
the fact that the person is or was serving as a director or officer of the
Company, or any of its subsidiaries, or is or was serving at the request of the
Company, or any of its subsidiaries, as a director, officer, employee or agent
of another entity. In addition, the Company intends to enter into an
indemnification agreement with each director, pursuant to which the Company will
agree to indemnify the director to the fullest extent permitted by Oregon law.
The Company intends to purchase and maintain insurance on behalf of the officers
and directors insuring them against liabilities that they may incur in such
capacities or arising out of such status. There is no pending litigation or
proceeding involving a director or officer of the Company as to which
indemnification is being sought, nor is the Company aware of any pending of
threatened litigation that may result in claims for indemnification by any
director or officer.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described above or otherwise, the Company 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.
49
<PAGE>
CERTAIN TRANSACTIONS
From 1993 to 1995, the Company issued 1,746,626 shares of its Preferred
Stock, Series I to Servio Logic Corporation, the Company's majority shareholder,
at a price of $9.09 per share, for total consideration of approximately
$15,879,000. On September 4, 1996, the Company issued 1,100,000 shares of its
Preferred Stock, Series II to Servio Logic Corporation at a price of $4.55 per
share, for total consideration of $5,000,000. On December 31, 1997, the Company
issued 1,175,135 shares of its Preferred Stock, Series III to Servio Logic
Corporation at a price of $14.55 per share, for total consideration of
$17,092,872, which consideration was paid, in part, by conversion of outstanding
notes payable. Servio Logic Corporation held more than 99% of the Company's
issued and outstanding Common Stock immediately prior to such transactions. At
these times, Mr. Barnes was a director and President of Servio Logic
Corporation, and Mr. Irinaga was the Chief Financial Officer and Secretary of
Servio Logic Corporation. All of the share numbers listed above give effect to
the 0.55-for-1 reverse split of the Preferred Stock prior to the consummation of
this offering.
In 1995 and 1996, the Company received a total of $6,704,000 in cash from
Servio Logic Corporation in exchange for notes payable. These notes accrued
interest at 9% per annum and were due on demand. The notes converted into Series
III Preferred Stock during 1997.
In 1992, Servio Logic Corporation established a stock option plan, pursuant
to which it has granted options to purchase issued and outstanding shares of
Common Stock of the Company held by Servio Logic Corporation to directors and
employees of the Company. As of June 30, 1998, options to purchase 315,700
shares of Common Stock had been granted under the Servio Plan and 14,300
additional shares are available for future grant under the Servio Plan. The
Servio Plan was adopted to provide performance incentives to certain officers
and directors of Servio Logic Corporation and its affiliates, including the
Company.
Kenneth J. Irinaga, the Company's Chief Financial Officer since 1997, also
has served in various capacities for Servio Logic Corporation and other
affiliated corporations. Prior to July 1, 1998, all salary and benefits paid to
Mr. Irinaga for his services to Servio Logic Corporation, including his service
as the Company's Chief Financial Officer, were paid by Servio Logic Corporation.
The Company did not reimburse Servio Logic Corporation for any portion of such
payments in 1997; however, for the six months ended June 30, 1998, the Company
paid Servio Logic Corporation $60,000 in reimbursement for Mr. Irinaga's
allocated salary and benefits paid during such period. Effective July 1, 1998,
the Chief Financial Officer will be paid directly by the Company.
The Company receives services from Servio Logic Corporation for the
administration of the Company's health and welfare benefit plan for which the
Company is charged its pro rata share of the related insurance premiums. Fees
assessed by Servio Logic Corporation to the Company for these services were not
material in 1995, 1996 or 1997. This arrangement will not continue following the
Reorganization.
Jesse Rifkind, a director of the Company, performs consulting services from
time to time to the Company. In 1997, the Company paid Mr. Rifkind a total of
approximately $41,000 for his consulting services, and for the first six months
of 1998 Mr. Rifkind billed the Company $22,841 including reimbursement for
service-related expense.
The Company intends to enter into an indemnification agreement with each
director pursuant to which the Company will agree to indemnify the director to
the fullest extent permitted by Oregon law.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Common Stock as of June 30,
1998, and as adjusted to reflect the sale of the Common Stock offered hereby by
(i) each person (or group of affiliated persons) who is known by the Company to
own beneficially more than 5% of the Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, (iv) the Selling
Stockholder and (v) all directors and executive officers of the Company as a
group. Unless otherwise specified, the address of the stockholder is the address
of the Company set forth herein.
<TABLE>
<CAPTION>
SHARES
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT BENEFICIALLY PERCENTAGE PRIOR TO PERCENTAGE AFTER
SHAREHOLDER OWNED(1) THE OFFERING(1) THE OFFERING(2)
- -------------------------------------------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
Lex Magna Limited(3).................................... 6,936,761 99.2% 71.6%
Bryan R. Grummon(4)..................................... 221,969 3.1 2.4
James P. Barnes(5)...................................... 137,500 1.9 1.5
Jesse Rifkind........................................... -- -- --
Kenneth J. Irinaga(6)................................... 68,750 * *
Richard H. Lamb......................................... 3,300 * *
Douglas G. Pollack(7)................................... 38,500 * *
Dan J. Ware(8).......................................... 44,000 * *
All executive officers and directors as a group (8
persons)(9)........................................... 514,019 6.8 5.4
</TABLE>
- --------------
* Less than 1%
(1) Based upon 6,995,061 shares outstanding as of June 30, 1998. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by
a person and the percentage of ownership of shares, the Common Stock
issuable upon exercise of options that are currently exercisable or become
exercisable within 60 days following June 30, 1998 are deemed to be
outstanding with respect to such person, but are not deemed to be
outstanding for purposes of computing the percentage ownership of any other
person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Assumes that the Reorganization occurred prior to June 30, 1998. See
"Business--Corporate History." The address of Lex Magna is Trident Chambers,
Wickhams Cay, Road Town, Tortola, British Virgin Islands. Lex Magna is
selling 500,000 shares of Common Stock in this offering and, following the
offering, will beneficially own 6,436,761 shares, or 71.6%, of the Common
Stock. If the over-allotment option is exercised in full, Lex Magna will
sell an additional 75,000 shares of Common Stock and, following the
offering, will beneficially own 6,361,761 shares, or 68.4%, of the Common
Stock. Lex Magna is owned by a sole corporate shareholder, which is wholly
owned, indirectly, by Mr. Sampoerna. See "Risk Factors--Control by
Significant Stockholder."
(4) Consists solely of shares issuable upon exercise of stock options granted by
the Company under the 1992 Option Plan.
(5) Consists solely of shares issuable upon exercise of stock options granted
under the Servio Plan.
(6) Consists solely of shares issuable upon exercise of stock options granted
under the Servio Plan.
(7) Consists solely of shares issuable upon exercise of stock options granted by
the Company under the 1992 Option Plan.
(8) Consists solely of shares issuable upon exercise of stock options granted by
the Company under the 1992 Option Plan.
(9) Consists solely of shares issuable upon exercise of stock options.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Articles of Incorporation ("Articles") and
Bylaws is a summary and is qualified in its entirety by the provisions of the
Articles and Bylaws, which have been filed with the Securities and Exchange
Commission as exhibits to the Company's Registration Statement, of which this
Prospectus is a part.
Upon completion of this offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, $.01 par value, and
5,000,000 shares of Preferred Stock, $.01 par value. As of June 30, 1998, there
were 6,995,061 shares of Common Stock issued and outstanding and 24 holders of
record of the Company's Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share for the
election of directors and on all other matters to be voted upon by the
stockholders. Subject to the rights of any holders of Preferred Stock, the
holders of Common Stock are entitled to receive, when and if declared by the
Board of Directors, out of funds legally available therefor, any dividends on a
pro rata basis in accordance with their share ownership. In the event of
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 the Preferred Stock, if
any, then outstanding. The Common Stock has no pre-emptive or conversion rights
or other subscription rights and there are no redemption or sinking fund
provisions available to the Common Stock. The outstanding shares of Common Stock
are, and the shares to be issued in connection with this offering will be, when
issued, fully paid and non-assessable.
PREFERRED STOCK
Prior to the completion of this offering, all issued and outstanding shares
of Preferred Stock will be converted into shares of Common Stock. After the
offering, the Board of Directors will be authorized to issue up to 5,000,000
shares of 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,
liquidation preferences and the number of shares constituting any series,
without further vote or action by the stockholders. The issuance of Preferred
Stock could adversely affect the voting power of the holders of Common Stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation of the Company, and may have the effect of delaying, deterring,
or preventing a change in control of the Company. The Company has no current
plans to issue any shares of Preferred Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company is subject to certain provisions of the Oregon Business
Combination Act that govern business combinations between corporations and
interested stockholders (the "Business Combination Act"). The Business
Combination Act generally provides that if a person or entity acquires 15% or
more of the voting stock of an Oregon corporation (an "Interested Shareholder"),
the corporation and the Interested Shareholder, or any affiliated entity of the
Interested Shareholder, may not engage in certain business combination
transactions for three years following the date the person became an Interested
Shareholder. Business combination transactions for this purpose include (a) a
merger or plan of share exchange, (b) any sale, lease, mortgage or other
disposition of 10% or more of the assets of the corporation and (c) certain
transactions that result in the issuance of capital stock to the Interested
Shareholder. These restrictions do not apply if (i) the Interested Shareholder,
as a result of the transaction in which such person became an Interested
Shareholder, owns at least 85% of the outstanding voting stock of the
corporation (disregarding shares owned by directors who are also officers and
certain employee
52
<PAGE>
benefit plans), (ii) the board of directors approves the share acquisition or
business combination before the Interested Shareholder acquires 15% or more of
the corporation's outstanding voting stock or (iii) the board of directors and
the holders of at least two-thirds of the outstanding voting stock of the
corporation (disregarding shares owned by the Interested Shareholder) approve
the transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock.
The Company is also subject to the Oregon Control Share Act (the "Control
Share Act"). The Control Share Act generally provides that a person (the
"Acquiror") who acquires voting stock of an Oregon corporation in a transaction
which results in the Acquiror holding more than each of 20%, 33 1/3% or 50% of
the total voting power of the corporation (a "Control Share Acquisition") cannot
vote the shares it acquires in the Control Share Acquisition ("Control Shares")
unless voting rights are accorded to the Control Shares by (a) a majority of
each voting group entitled to vote and (b) the holders of a majority of the
outstanding voting shares, excluding the Control Shares held by the Acquiror and
shares held by the corporation's officers and inside directors. The term
"Acquiror" is broadly defined to include persons acting as a group.
The Acquiror may, but is not required to, submit to the corporation an
"Acquiring Person Statement" setting forth certain information about the
Acquiror and its plans with respect to the corporation. The Acquiring Person
Statement may also request that the corporation call a special meeting of
stockholders to determine whether the voting rights will be restored to the
Control Shares. If the Acquiror does not request a special meeting of
stockholders, the issue of voting rights of Control Shares will be considered at
the next annual or special meeting of stockholders. If the Acquiror's Control
Shares are accorded voting rights and represent a majority or more of all voting
power, stockholders who do not vote in favor of the restoration of such voting
rights will have the right to receive the appraised "fair value" of their
shares, which may not be less than the highest price paid per share by the
Acquiror for the Control Shares.
The Company's Articles provide that if at any time the Board of Directors is
comprised of six or more members, the directors will be divided into classes,
each of which will be elected to serve staggered three-year terms. This
provision may have the effect of delaying, deferring or preventing a change of
control of the Company, and may discourage bids for Common Stock at a premium
over the market price.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
LISTING
The Company has applied to have the Common Stock listed on the Nasdaq
National Market System under the symbol "GSTN."
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to time.
Furthermore, since no shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock of the Company in
the public market after these restrictions lapse could adversely affect the
prevailing market price of the Common Stock and the ability of the Company to
raise equity capital in the future.
Upon completion of the offering, the Company will have outstanding an
aggregate of 8,995,061 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
based upon the number of shares outstanding as of June 30, 1998. Of these
shares, all of the shares sold in this offering will be freely tradable without
restriction or further registration under
53
<PAGE>
the Securities Act. The remaining 6,495,061 shares of Common Stock are
"restricted" shares, subject to restrictions upon resale under Rule 144 of the
Securities Act (the "Restricted Shares"). Of such shares, 58,300 will be
eligible for resale 90 days following this offering, under Rule 701 and Rule 144
under the Securities Act. Of the Restricted Shares, 6,436,761 are subject to a
lock-up agreement with the Underwriters, described more fully below.
In general, under Rule 144 a person (or persons whose shares are aggregated
with those of others) who has beneficially owned Restricted Shares for at least
one year is entitled to sell in brokers' transactions or directly to market
makers, within any three-month period, a number of Restricted Shares that does
not exceed the greater of (i) 1.0% of the Common Stock then outstanding
(approximately 90,000 shares immediately after the offering) or (ii) the average
weekly trading volume of the Common Stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of such sale is filed
with the Securities and Exchange Commission. A person (or persons whose shares
are aggregated with those of others) who is not an affiliate of the Company at
any time during the three months preceding any sale by such person, is entitled
to sell such shares under Rule 144(k) without regard to the limitations
described above, provided that at least two years have lapsed since the
Restricted Shares were fully paid for and acquired from the Company or an
affiliate of the Company. However, Rule 144(k) is not expected to be available
to the Selling Stockholder for the foreseeable future. The above is a summary of
Rule 144 and is not intended to be a complete description thereof or a complete
description of the rights of the parties to sell shares of Common Stock
thereunder.
Executive officers and directors of the Company and the Selling Stockholder
have agreed, subject to certain limited exceptions, that they will not, without
the prior written consent of SG Cowen, directly or indirectly, offer, sell,
assign, transfer, encumber, pledge, contract to sell, or otherwise dispose of
any shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire shares of Common
Stock owned by them owned by them for a period of 180 days after the date of
this Prospectus.
Promptly after completion of this offering, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act to register a total
of 2,107,106 shares of Common Stock reserved for issuance under the Company's
stock option plans and under the Servio Plan, thus permitting the resale of such
shares by non-affiliates, and by affiliates subject to Rule 144 volume
limitations applicable thereto, in the public market without restriction under
the Securities Act.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the Underwriters named below, through SG Cowen
Securities Corporation, Piper Jaffray Inc. and Volpe Brown Whelan & Company, LLC
(collectively, the "Representatives"), have agreed to purchase from the Company
and the Selling Stockholder the following respective numbers of shares of Common
Stock.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
SG Cowen Securities Corporation......................................................................
Piper Jaffray Inc....................................................................................
Volpe Brown Whelan & Company, LLC....................................................................
----------
Total................................................................................ 2,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all shares of Common Stock offered hereby if any of such
shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at a price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ per share to certain brokers and dealers.
After the shares of Common Stock are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company and the Selling Stockholder have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to an aggregate of 375,000 additional shares of Common Stock at the
public offering price, less the underwriting discount, set forth on the cover
page of this Prospectus to cover over-allotments, if any. If the Underwriters
exercise this option, the Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares of Common Stock to be purchased by them shown in
the above table bears to the total number of shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover over-allotments
made in connection with the sale of shares of Common Stock offered hereby.
The Company, the Selling Stockholder and a controlling person of the Selling
Stockholder have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Selling Stockholder and the executive officers and directors of the
Company, who will own in the aggregate 6,436,761 shares of Common Stock after
the offering, have agreed not to offer, sell, assign, transfer, encumber,
pledge, contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire shares of Common Stock owned by them for a period
of 180 days after the date of this Prospectus, without the prior written consent
(which consent may be given without notice to the Company, the stockholders or
by other public announcement) of SG Cowen Securities Corporation.
55
<PAGE>
The Representatives have advised the Company that they currently intend to
make a market in the Common Stock following this offering, although they have no
obligation to do so and may cease such market making at any time. There can be
no assurance that a market in the Common Stock will develop after the offering.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares being offered hereby to
any account over which they exercise discretionary authority.
In order to facilitate the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot in connection
with the offering, creating a short position in the Common Stock for their own
account. In addition, to cover over-allotments or to stabilize the price of the
Common Stock, the Underwriters may bid for, and purchase, shares of the Common
Stock in the open market. The Underwriters may also reclaim selling concessions
allowed to an underwriter or a dealer for distributing the Common Stock in the
offering, if the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short positions, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of the
Common Stock in market making transactions and impose penalty bids. These
activities may stabilize or maintain the market price of the Common Stock above
market levels that may otherwise prevail. The Underwriters are not required to
engage in these activities and may end any of these activities at any time.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined by negotiations among the Company and the Representatives. Among the
factors to be considered in such negotiations, in addition to prevailing market
conditions, will be the Company's recent results of operations, the market
capitalizations and stages of development of other companies believed to be
comparable to the Company, the present state of the Company's development and
other factors deemed to be relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Tonkon Torp LLP, Portland, Oregon. Certain legal matters
in connection with this offering will be passed upon for the Underwriters by
Cooley Godward LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 (Reg. No. 333- ) (the "Registration Statement") under
the Act with respect to the Common Stock being offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules filed therewith. For further information with
respect to the Company and the Common Stock being offered hereby, reference is
made to the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus concerning the contents of any contract
or other document are not necessarily complete, and, in each instance, reference
is made to the copy of the contract or other document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its
56
<PAGE>
entirety by reference to such exhibit. A copy of the Registration Statement,
including exhibits and schedules thereto may be inspected without charge at the
public reference facility maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Seven World Trade Center, Suite 1300, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from such
offices at the Commission's prescribed rates. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements, this
Registration Statement and other information filed electronically with the
Commission. The address of the site is http://www.sec.gov.
57
<PAGE>
GEMSTONE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................................................. F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
GemStone Systems, Inc.
We have audited the accompanying consolidated balance sheets of GemStone
Systems, Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of GemStone
Systems, Inc. at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
April 23, 1998,
except for Note 7, as to which the date is
July 21, 1998
- --------------------------------------------------------------------------------
The foregoing opinion is in the form that will be signed upon the completion
of the 0.55-for-one reverse stock split as described in Note 7 to the
consolidated financial statements.
/S/ ERNST & YOUNG LLP
Walnut Creek, California
July 22, 1998
F-2
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- JUNE 30, JUNE 30,
1996 1997 1998 1998
--------- --------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 117 $ 1,447 $ 771
Accounts receivable, less allowance for doubtful accounts of
$130 in 1996, $161 in 1997 and $192 in 1998................. 3,757 4,018 5,415
Prepaid expenses and other current assets..................... 116 259 371
--------- --------- -----------
Total current assets............................................ 3,990 5,724 6,557
Property and equipment:
Office and computer equipment................................. 2,287 2,643 2,673
Furniture and fixtures........................................ 331 691 692
Leasehold improvements........................................ 89 417 417
--------- --------- -----------
2,707 3,751 3,782
Accumulated depreciation...................................... 1,011 1,564 1,762
--------- --------- -----------
Property and equipment, net..................................... 1,696 2,187 2,020
Deposits and other assets....................................... 711 356 363
--------- --------- -----------
Total assets.................................................... $ 6,397 $ 8,267 $ 8,940
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 1,609 $ 774 $ 975
Accrued compensation and related expenses..................... 1,475 1,631 1,648
Accrued expenses.............................................. 373 782 1,164
Deferred revenue.............................................. 2,894 2,792 3,899
Current portion of capital lease obligations.................. 146 291 338
Note payable and accrued interest due to Servio Logic
Corporation................................................. 6,943 -- --
Other current liabilities..................................... -- 81 28
--------- --------- -----------
Total current liabilities....................................... 13,440 6,351 8,052
Capital lease obligations, less current portion................. 178 297 412
Commitments (Note 3)
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value:
Authorized shares--10,000,000
Issued and outstanding shares--2,846,626 in 1996, 4,021,761
in 1997 and 1998 (aggregate liquidation preference of
$37,972 at December 31, 1997 and June 30, 1998)(pro
forma--none).............................................. 20,879 37,972 37,972 $ --
Common stock, $0.01 par value:
Authorized shares--15,000,000
Issued and outstanding shares--2,916,980 in 1996, 2,944,920
in 1997 and 2,973,300 in 1998 (pro forma-- 6,995,061)..... 5,304 5,354 5,406 43,378
Foreign currency translation adjustment....................... -- (26) 21 21
Accumulated deficit........................................... (33,404) (41,681) (42,923) (42,923)
--------- --------- ----------- ------------
Total stockholders' equity (deficit)............................ (7,221) 1,619 476 $ 476
--------- --------- ----------- ------------
------------
Total liabilities and stockholders' equity (deficit)............ $ 6,397 $ 8,267 $ 8,940
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Licenses........................................... $ 4,698 $ 8,942 $ 6,192 $ 2,667 $ 5,147
Services........................................... 2,195 4,773 12,516 7,513 5,147
--------- --------- ------------ --------- ------------
Total revenues....................................... 6,893 13,715 18,708 10,180 10,294
Cost of revenues:
Licenses........................................... 268 397 458 211 280
Services........................................... 1,823 2,925 6,588 3,268 3,132
--------- --------- ------------ --------- ------------
Total cost of revenues............................... 2,091 3,322 7,046 3,479 3,412
--------- --------- ------------ --------- ------------
Gross profit......................................... 4,802 10,393 11,662 6,701 6,882
Operating expenses:
Research and development........................... 3,416 4,790 5,228 2,811 2,469
Sales and marketing................................ 6,201 8,932 10,083 5,213 3,465
General and administrative......................... 2,681 3,308 4,616 2,054 2,125
--------- --------- ------------ --------- ------------
Total operating expenses............................. 12,298 17,030 19,927 10,078 8,059
--------- --------- ------------ --------- ------------
Loss from operations................................. (7,496) (6,637) (8,265) (3,377) (1,177)
Interest expense and other, net...................... 203 (154) 80 54 (17)
--------- --------- ------------ --------- ------------
Loss before income taxes............................. (7,293) (6,791) (8,185) (3,323) (1,194)
Provision for income taxes........................... -- -- 92 44 48
--------- --------- ------------ --------- ------------
Net loss............................................. $ (7,293) $ (6,791) $ (8,277) $ (3,367) $ (1,242)
--------- --------- ------------ --------- ------------
--------- --------- ------------ --------- ------------
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (1.25) $ (0.18)
------------ ------------
------------ ------------
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)..................... 6,606,224 6,980,634
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, 1997 AND THE SIX MONTHS ENDED JUNE
30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE FOREIGN
PREFERRED STOCK COMMON STOCK PREFERRED CURRENCY
---------------------- ---------------------- STOCK TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SUBSCRIBED ADJUSTMENT DEFICIT
--------- ----------- --------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.............. 1,551,935 $ 14,104 2,915,000 $ 5,300 $ 5 $ -- $ (19,320)
Cash paid for convertible preferred
stock subscribed...................... -- -- -- -- 6,770 -- --
Issuance of convertible preferred
stock................................. 194,691 1,775 -- -- (1,775) -- --
Comprehensive loss:
Net loss................................ -- -- -- -- -- -- (7,293)
Comprehensive loss........................
--------- ----------- --------- ----------- ----------- ----- ------------
Balance at December 31, 1995.............. 1,746,626 15,879 2,915,000 5,300 5,000 -- (26,613)
Exercise of common stock options........ -- -- 1,980 4 -- -- --
Issuance of convertible preferred
stock................................. 1,100,000 5,000 -- -- (5,000) -- --
Comprehensive loss:
Net loss................................ -- -- -- -- -- -- (6,791)
Comprehensive loss........................
--------- ----------- --------- ----------- ----------- ----- ------------
Balance at December 31, 1996.............. 2,846,626 20,879 2,916,980 5,304 -- -- (33,404)
Exercise of common stock options........ -- -- 27,940 50 -- --
Conversion of notes payable and cash
paid by Servio Logic Corporation for
convertible preferred stock........... 1,175,135 17,093 -- -- -- -- --
Comprehensive loss:
Net loss................................ -- -- -- -- -- -- (8,277)
Foreign currency translation
adjustment............................ -- -- -- -- -- (26) --
Comprehensive loss........................
--------- ----------- --------- ----------- ----------- ----- ------------
Balance at December 31, 1997.............. 4,021,761 37,972 2,944,920 5,354 -- (26) (41,681)
Exercise of common stock options
(unaudited)........................... -- -- 28,380 52 -- -- --
Comprehensive loss:
Net loss (unaudited).................... -- -- -- -- -- -- (1,242)
Foreign currency translation adjustment
(unaudited)........................... -- -- -- -- -- 47 --
Comprehensive loss (unaudited)............
--------- ----------- --------- ----------- ----------- ----- ------------
Balance at June 30, 1998 (unaudited)...... 4,021,761 $ 37,972 2,973,300 $ 5,406 $ -- $ 21 $ (42,923)
--------- ----------- --------- ----------- ----------- ----- ------------
--------- ----------- --------- ----------- ----------- ----- ------------
<CAPTION>
TOTAL
TOTAL STOCKHOLDERS'
COMPREHENSIVE EQUITY
INCOME (LOSS) (DEFICIT)
--------------- -------------
<S> <C> <C>
Balance at December 31, 1994.............. -- $ 89
Cash paid for convertible preferred
stock subscribed...................... -- 6,770
Issuance of convertible preferred
stock................................. -- --
Comprehensive loss:
Net loss................................ $ (7,293) (7,293)
-------
Comprehensive loss........................ (7,293)
------- -------------
-------
Balance at December 31, 1995.............. (434)
Exercise of common stock options........ -- 4
Issuance of convertible preferred
stock................................. -- --
Comprehensive loss:
Net loss................................ (6,791) (6,791)
-------
Comprehensive loss........................ (6,791)
------- -------------
-------
Balance at December 31, 1996.............. (7,221)
Exercise of common stock options........ -- 50
Conversion of notes payable and cash
paid by Servio Logic Corporation for
convertible preferred stock........... -- 17,093
Comprehensive loss:
Net loss................................ (8,277) (8,277)
Foreign currency translation
adjustment............................ (26) (26)
-------
Comprehensive loss........................ (8,303)
------- -------------
-------
Balance at December 31, 1997.............. 1,619
Exercise of common stock options
(unaudited)........................... -- 52
Comprehensive loss:
Net loss (unaudited).................... (1,242) (1,242)
Foreign currency translation adjustment
(unaudited)........................... 47 47
-------
Comprehensive loss (unaudited)............ $ (1,195)
------- -------------
-------
Balance at June 30, 1998 (unaudited)...... $ 476
-------------
-------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
GEMSTONE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................ $ (7,293) $ (6,791) $ (8,277) $ (3,367) $ (1,242)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 500 708 965 433 545
(Gain) loss on sale of property and equipment................. 149 10 5 -- (4)
Changes in operating assets and liabilities:
Accounts receivable......................................... (827) (2,135) (261) (678) (1,397)
Prepaid expenses and other current assets................... (56) (13) (143) (227) (112)
Accounts payable............................................ 33 1,438 (835) (622) 201
Accrued compensation and related expenses................... 665 162 156 156 17
Accrued expenses............................................ 121 304 409 379 382
Deferred revenue............................................ 920 1,093 (102) 335 1,107
Other current liabilities................................... -- -- 81 8 (53)
Deposits and other assets................................... -- (570) 355 244 (7)
--------- --------- --------- --------- ---------
Net cash used in operating activities........................... (5,788) (5,794) (7,647) (3,339) (563)
INVESTING ACTIVITIES
Purchases of property and equipment............................. (891) (969) (1,006) (719) (60)
Proceeds from sale of property and equipment.................... 3 26 6 -- 19
--------- --------- --------- --------- ---------
Net cash used in investing activities........................... (888) (943) (1,000) (719) (41)
FINANCING ACTIVITIES
Principal payments on capital lease obligations................. (32) (64) (198) (119) (171)
Proceeds from issuance of notes payable to Servio Logic
Corporation................................................... 454 6,250 -- -- --
Proceeds from issuance of preferred stock....................... 6,770 -- 10,150 4,250 --
Exercise of common stock options................................ -- 4 51 -- 52
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities............. 7,192 6,190 10,003 4,131 (119)
--------- --------- --------- --------- ---------
Effect of exchange rate on cash................................. -- -- (26) (1) 47
Net increase (decrease) in cash................................. 516 (547) 1,330 72 (676)
Cash and cash equivalents at beginning of year.................. 148 664 117 117 1,447
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of year........................ $ 664 $ 117 $ 1,447 $ 189 $ 771
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURES
Income taxes paid............................................. $ -- $ -- $ 22 $ 8 $ 70
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchases of property and equipment under capital leases...... $ 208 $ 212 $ 462 $ 50 $ 333
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Subscribed stock exchanged for preferred stock................ $ 1,775 $ 5,000 $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Conversion of notes payable and accrued interest due to Servio
Logic Corporation into preferred stock...................... $ -- $ -- $ 6,943 $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GemStone Systems, Inc. (the Company) designs, develops, markets and supports
enterprise application server software platforms. The Company's application
servers support the development, deployment and management of distributed,
business-critical core competency applications in heterogeneous environments.
The Company was originally incorporated in December 1990 as Servio Corporation,
an Oregon corporation, and changed its name to Gemstone Systems, Inc. in June
1995. Prior to December 1990, its activities were included in the operations of
Servio Logic Corporation, its parent at the time, and Servio Logic Corporation's
wholly owned subsidiary Servio Logic Development Corporation.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The Company translates the accounts of its
foreign subsidiaries using the local foreign currency as the functional
currency. The assets and liabilities of the foreign subsidiaries are translated
into U.S. dollars using exchange rates in effect at the balance sheet date,
revenues and expenses are translated using the average exchange rate for the
period, and gains and losses from this translation process are credited or
charged to stockholders' equity. Foreign currency transaction gains and losses
have not been material.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998 are unaudited, but include all adjustments,
consisting only of normal recurring adjustments, that management considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for any future periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at cost which approximates fair value. Cash
equivalents consist principally of money market funds, and demand deposits and
are held primarily with one financial institution.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
The Company licenses its products primarily to customers in North America,
Europe, and Japan. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral.
F-7
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reserves are maintained for estimated losses in the collection of accounts
receivable. Actual losses could differ from such estimates and such differences
could be material to the financial statements.
SIGNIFICANT CUSTOMERS
Revenues from one customer accounted for 21% and 37% of total revenues for
the year ended December 31, 1997 and for the six months ended June 30, 1997,
respectively. Receivables from the same customer were $31,000 as of December 31,
1997.
For the six months ended June 30, 1998, revenues from one customer accounted
for 19% of total revenues. At June 30, 1998, receivables due from this customer
were $2,266,000. For the year ended December 31, 1996, revenues from two
customers were 18% and 12% of total revenues. For the year ended December 31,
1995, revenues from two different customers were 23% and 20% of total revenues.
REVENUES BY GEOGRAPHIC AREA
The following table shows revenues by geographic region as a percentage of
total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
United States and Canada......................... 90% 91% 67% 52% 82%
Europe, Middle East and Africa................... 5 6 11 10 13
Asia and other................................... 5 3 22 38 5
--------- --------- --------- --------- ---------
100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
REVENUE RECOGNITION
License revenue is recognized when a noncancelable license agreement has
been executed, the product has been shipped, the license fee is fixed or
determinable and collectibility is reasonably assured. Maintenance and support
revenue is recognized ratably over the term of the related agreement. Revenue
from professional services and training arrangements is recognized on either a
time and materials or percentage-of-completion basis as the services are
performed and amounts due from customers are deemed collectible.
Amounts collected or billed prior to satisfying the above recognition
criteria are reflected as deferred revenue in the accompanying consolidated
balance sheets.
SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. The
Company
F-8
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
begins capitalization upon completion of a working model. To date, such
capitalizable costs have not been material. Accordingly, the Company has charged
all such costs to research and development expense. Future capitalized costs, if
any, will be amortized on a straight-line basis over the estimated life of the
products or the ratio of current revenue to the total of current and anticipated
future revenue, whichever expense is greater.
PROPERTY AND EQUIPMENT
Property and equipment consist of office and computer equipment, furniture
and fixtures, and leasehold improvements, which are stated at cost. Depreciation
and amortization are computed using the straight-line method over the estimated
useful lives, which range from three to five years, or the lesser of the
estimated useful lives or lease term for assets acquired under capital lease
agreements and leasehold improvements.
INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (FAS 109). Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rules and laws that
will be in effect when the differences are expected to reverse.
STOCK BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and has adopted the disclosure-only alternative described in
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123).
NET LOSS PER SHARE
Net loss per share is presented under Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (FAS 128). FAS 128 requires the
presentation of basic earnings (loss) per share and diluted earnings (loss) per
share, if more dilutive, for all periods presented. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
for nominal consideration, prior to the anticipated effective date of the IPO
are included in the calculation of basic and diluted net loss per share as if
they had been outstanding for all periods presented. To date, the Company has
not had any issuances or grants for nominal consideration.
In accordance with FAS 128, basic net loss per share has been computed using
the weighted-average number of shares of common stock outstanding during the
period. Basic pro forma net loss per share as presented in the statement of
operations has been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock that will automatically convert upon completion of
the Company's proposed initial public offering (using the if-converted method)
from the original date of issuance. If the offering contemplated by this
F-9
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prospectus is consummated, all of the convertible preferred stock outstanding as
of June 30, 1998 will automatically be converted into an aggregate of 4,021,761
shares of common stock, based on the shares of convertible preferred stock
outstanding as of June 30, 1998. Unaudited pro forma shareholders' equity at
June 30, 1998, as adjusted for the conversion of convertible preferred stock, is
disclosed on the balance sheet.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows (in thousands except share and per share
information):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ---------- ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss..................................... $ (7,293) $ (6,791) $ (8,277) $ (3,367) $ (1,242)
---------- ---------- ------------ ---------- ------------
---------- ---------- ------------ ---------- ------------
Denominator:
Weighted-average shares of common stock
outstanding................................ 2,915,000 2,915,660 2,932,509 2,924,717 2,958,873
---------- ---------- ------------ ---------- ------------
---------- ---------- ------------ ---------- ------------
Basic and diluted net loss per share........... $ (2.50) $ (2.33) $ (2.82) $ (1.15) $ (0.42)
---------- ---------- ------------ ---------- ------------
---------- ---------- ------------ ---------- ------------
Pro forma:
Shares used above
Adjusted to reflect the weighted effect of
the assumed conversion of convertible
preferred stock.......................... 3,673,715 4,021,761
------------ ------------
Shares used in computing pro forma basic
and diluted net loss per share........... 6,606,224 6,980,634
------------ ------------
------------ ------------
Pro forma basic and diluted net loss per
share (unaudited)........................ $ (1.25) $ (0.18)
------------ ------------
------------ ------------
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants Statement of Position No. 97-2, "Software Revenue
Recognition" (SOP 97-2), which supersedes SOP 91-1. In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position No. 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" (SOP 98-4), which defers for one year the application of certain
provisions of SOP 97-2. These provisions limit what is considered
vendor-specific objective evidence of the fair value of the various elements in
a multiple-element arrangement. All other provisions of SOP 97-2 remain in
effect. Adopting these pronouncements did not have a material effect on the
results of operations of the Company.
F-10
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130), which requires that all items that
are recognized under accounting standards as components of comprehensive income
(revenues, expenses, gains and losses) be reported in a financial statement that
is displayed with the same prominence as other financial statements. Prior year
financial statements have been reclassified to conform to the requirements of
FAS 130.
In 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information," (FAS
131) which establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. In addition, it establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company will comply with the requirements of FAS 131 in
its consolidated financial statements for the year ending December 31, 1998.
2. RELATED PARTY TRANSACTIONS
In 1995 and 1996, the Company received a total of $6,704,000 in cash from
Servio Logic in exchange for notes payable. These notes accrued interest at 9%
per annum. At December 31, 1996, the balance of these notes plus accrued
interest totaled $6,943,000. In August 1997, the notes were converted to
subscriptions to purchase shares of Series III preferred stock at $14.55 per
share to Servio Logic Corporation. On December 31, 1997, the Company issued
1,175,135 shares of Series III Preferred Stock in exchange for $10,150,000 in
cash and the $6,943,000 subscription, representing amounts outstanding under the
notes payable plus accrued interest.
3. LEASE COMMITMENTS
The Company leases certain premises under operating lease agreements as well
as property and equipment under operating lease and capital lease agreements.
Amounts included in property and equipment under capitalized lease arrangements,
net of accumulated amortization at December 31, 1996 and 1997, were $335,000 and
$617,000, respectively.
F-11
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
3. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments are as follows at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998..................................................................... $ 342 $ 861
1999..................................................................... 227 598
2000..................................................................... 105 570
2001..................................................................... -- 570
2002..................................................................... -- 47
----- -----------
Total minimum lease payments............................................. 674 $ 2,646
-----------
-----------
Less interest............................................................ 86
-----
Present value of minimum lease payments.................................. 588
Less current portion..................................................... 291
-----
Long-term capital lease obligations...................................... $ 297
-----
-----
</TABLE>
Rent expense totaled $724,000, $806,000 and $995,000 in 1995, 1996 and 1997,
respectively. Most capital leases contain a renewal or purchase option at fair
market value.
F-12
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company has 10,000,000 shares of preferred stock authorized of which
5,000,000 shares are designated Series I, 2,000,000 shares are designated Series
II, and 3,000,000 shares are designated Series III. All of the shares of
preferred stock outstanding are held by Servio Logic Corporation.
The preferred stock is entitled to noncumulative cash dividends, when and if
declared by the Board of Directors, prior to any dividends on the common stock.
Each share of preferred stock is convertible into one share of common stock at
the option of the holder. Each share will be automatically converted into common
stock upon the closing of a public offering of the Company's common stock at a
price per share that equates to a total value of the Company's capital stock of
at least $20,000,000, an aggregate offering price of at least $7,500,000, or at
any such time as 67% of the preferred stock has been converted to common stock.
Each share of preferred stock has voting rights equal to the number of
common shares into which it is convertible. Upon voluntary or involuntary
liquidation or merger with another corporation, the holders of Series I, Series
II and Series III preferred stock are entitled to receive an amount equal to the
original issuance price per share of $9.09, $4.55 and $14.55, respectively,
before adjustments, plus any declared but unpaid dividends, before any
distribution may be made to the holders of common stock.
STOCK OPTION PLAN
The Restated 1992 Employees' Stock Option Plan (the Plan) provides for the
issuance of options to purchase shares of the Company's common stock to eligible
employees, consultants, and directors at a price not less than 100% and 85% of
the fair value on the date of the grant for incentive stock options and
nonqualified stock options, respectively. The Company authorized 835,406 shares
of common stock for issuance under the Plan. Options granted under the Plan
expire not more than ten years from the date of grant and generally become
exercisable at varying rates over a five-year period. Unvested options and
vested but unexercised options are canceled and returned to the Company for
regrant upon termination of employment or expiration of the option.
F-13
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- -----------------
<S> <C> <C>
Balance at December 31, 1994................................... 121,000 $ 1.82
Granted...................................................... 688,862 1.82
Canceled..................................................... (10,450) 1.82
---------- -----
Balance at December 31, 1995................................... 799,412 $ 1.82
Granted...................................................... 60,500 9.09
Canceled..................................................... (35,970) 2.44
Exercised.................................................... (1,980) 1.82
---------- -----
Balance at December 31, 1996................................... 821,962 $ 2.33
Granted...................................................... 61,325 13.20
Canceled..................................................... (77,385) 2.33
Exercised.................................................... (27,940) 1.82
---------- -----
Balance at December 31, 1997................................... 777,962 $ 3.20
Granted (unaudited).......................................... 5,500 14.55
Canceled (unaudited)......................................... (43,395) 4.40
Exercised (unaudited)........................................ (28,380) 1.82
---------- -----
Balance at June 30, 1998 (unaudited)........................... 711,687 $ 3.27
---------- -----
---------- -----
</TABLE>
Options to purchase 396,653 and 455,885 shares were vested and exercisable
at December 31, 1997 and June 30, 1998, respectively, at weighted average
exercise prices of $1.82 and $1.98 per share, respectively. As of June 30, 1998,
65,419 shares were available for future grant. The weighted average fair value
of options granted to employees under the Plan in 1995, 1996 and 1997 were
$0.51, $2.92 and $4.04 per share, respectively. The weighted average remaining
contractual life of options outstanding under the Plan at December 31, 1997 was
7.37 years.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------- OPTIONS
WEIGHTED-AVERAGE EXERCISABLE
REMAINING -----------
EXERCISE NUMBER OF CONTRACTUAL LIFE NUMBER OF
PRICE SHARES (YEARS) SHARES
- ------------- ----------- ------------------- -----------
<S> <C> <C> <C>
$ 1.82 664,662 7.09 396,213
9.09 67,100 8.70 440
14.55 46,200 9.50 --
----------- --- -----------
777,962 7.37 396,653
----------- --- -----------
----------- --- -----------
</TABLE>
F-14
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
common stock on the grant date, no compensation expense is recorded.
Pro forma information regarding net income (loss) is required by FAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of FAS 123. Under this method, the estimated fair
value of the options is amortized to expense over the vesting period of the
options. The effect of applying the fair value method of FAS 123 to the
Company's stock-based awards results in net loss and net loss per share as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net loss, as reported (in thousands).......................... $ (7,293) $ (6,791) $ (8,277)
Net loss, pro forma (in thousands)............................ $ (7,298) $ (6,888) $ (8,398)
Basic and diluted net loss per share, as reported............. $ (2.50) $ (2.33) $ (2.82)
Basic and diluted net loss per share, pro forma............... $ (2.50) $ (2.36) $ (2.86)
</TABLE>
The fair value for these options were estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield........................................ 0% 0% 0%
Expected volatility............................................ 0% 0% 0%
Risk-free interest rate........................................ 5.48% 6.48% 6.11%
Expected life of the option.................................... 6 years 6 years 6 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Because FAS 123 is applicable only to options granted subsequent to December
31, 1994, its adjusted effect will not be fully reflected until 2000.
F-15
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. INCOME TAXES
The Company is included in the consolidated return of Sanpao Industries,
Inc., which owns greater than 80% of Servio Logic Corporation, the direct parent
of the Company. The income tax disclosures represent the tax attributes for the
Company, as if it had filed on a separate company basis, net of any losses and
credits utilized by other members of the consolidated group.
There was no provision for U.S. federal or state income taxes for any period
as the Company has incurred operating losses and there can be no assurance that
the Company will realize the benefit of the net operating loss carryforwards. In
the six months ended June 30, 1997 and 1998 and the year ended December 31,
1997, the Company recorded foreign tax provisions related to income taxes paid
by foreign subsidiaries.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's current and non-current deferred tax
assets and liabilities for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 10,781,000 $ 12,820,000
Deferred revenue............................................ 1,158,000 1,026,000
Research and development credit carryforwards............... 109,000 123,000
Other....................................................... 238,000 385,000
-------------- --------------
Total deferred tax assets................................... 12,286,000 14,354,000
Valuation allowance........................................... (12,286,000) (14,354,000)
-------------- --------------
Total net deferred tax assets................................. -- --
-------------- --------------
-------------- --------------
</TABLE>
During fiscal year 1996 and 1997, the valuation allowance on the deferred
tax assets increased by $2,336,000 and $2,068,000, respectively.
As of December 31, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $32,240,000. The Company also
had federal research and development tax credit carryforwards of approximately
$123,000. The federal net operating loss and credit carryforwards will expire at
various dates beginning in the fiscal years 2006 through 2012 if not utilized.
During 1996 and 1997, $1,880,000 and $1,540,000, respectively, of losses
generated by the Company were utilized by other entities in the Sanpao group.
Due to the "change in ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss credit carryforwards may be
subject to an annual limitation against taxable income in future periods if a
change in ownership of more than 50% of the value of the Company's stock should
occur over a three-year period, which could substantially limit the eventual
utilization of these
F-16
<PAGE>
GEMSTONE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND RELATING TO THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
carryforwards. In addition, the losses and credits generated by the Company may
be utilized by other members of the consolidated group prior to utilization by
the Company.
6. RETIREMENT PLAN
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code (the 401(k) Plan) with its parent, Servio Logic Corporation, and
other affiliated companies, which covers substantially all full-time employees.
Participating employees may individually elect to have 1% to 18% of their total
annual compensation contributed to the 401(k) Plan. The Company may contribute a
discretionary matching contribution on behalf of each participant to be
determined each year by the Company. The Company made no contributions to the
401(k) Plan in 1995, 1996 or 1997.
7. SUBSEQUENT EVENTS
PROPOSED OFFERING OF COMMON STOCK
On July 9, 1998, the Company's Board of Directors authorized management of
the Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell 2,300,000 shares of its common stock
in connection with a proposed initial public offering (IPO). Effective upon the
closing of the IPO, the Company will be authorized to issue 5,000,000 shares of
undesignated preferred stock and 25,000,000 shares of common stock.
REVERSE STOCK SPLIT
On July 21, 1998, the Company's Board of Directors approved a 0.55-for-1
reverse split of the Company's common and preferred stock which will be
effective prior to completion of the offering. All share and per share amounts
in the accompanying consolidated financial statements have been adjusted
retroactively.
EMPLOYEE STOCK PURCHASE PLAN
On July 9, 1998, the Company's 1998 Employee Stock Purchase Plan was adopted
by the Board of Directors, to be effective upon the completion of the Company's
initial public offering of its common stock. The Company has reserved a total of
300,000 shares of common stock for issuance under the plan. Eligible employees
may purchase common stock at 85% of the lesser of the fair market value of the
Company's stock on the first day or the last day of the applicable purchase
period.
STOCK OPTION PLAN
On July 9, 1998, the Company's Board of Directors approved the 1998
Employees Stock Option Plan (the 1998 Plan). The Company has reserved 700,000
shares of common stock for exercise of stock options under the 1998 Plan.
F-17
<PAGE>
SCHEDULE II
GEMSTONE SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS BALANCE AT
YEAR ENDED DECEMBER 31, YEAR EXPENSES WRITE-OFFS END OF YEAR
- -------------------------------------------------------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995.......................................................... $ 26,000 $ 62,000 $ 41,000 $ 47,000
1996.......................................................... 47,000 90,000 7,000 130,000
1997.......................................................... 130,000 202,000 171,000 161,000
</TABLE>
F-18
<PAGE>
GemStone/J's
Persistent Cache Architecture-TM-
[Graphic]
Rendering of virtual machines imbedded in a representation of the Persistent
Cache.
[/Graphic]
GemStone/J includes a server-based Java virtual machine that incorporates a
GemStone technology called Persistent Cache Architecture (PCA). PCA extends the
typical capabilities included in the virtual machine by adding a proprietary
architecture for enterprise-class Java applications. This architecture includes
virtual machine support for enterprise services such as transactions and
persistence, as well as technology for managing large numbers of active Java
objects (up to 1 billion) in conjunction with databases.
GemStone/J with PCA is certified Java-compatible and as a result will run
all 100% pure Java software. The benefits of PCA are also well-suited to support
the services standardized in Enterprise JavaBeans (EJB). GemStone/J 2.0 is being
designed to support EJB and is scheduled to be released in late 1998.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS OR ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON STOCK OFFERED HEREBY,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 27
Management................................................................ 43
Certain Transactions...................................................... 50
Principal and Selling Stockholders........................................ 51
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 55
Legal Matters............................................................. 56
Experts................................................................... 56
Available Information..................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
2,500,000 SHARES
GEMSTONE SYSTEMS, INC.
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
SG COWEN
PIPER JAFFRAY INC.
VOLPE BROWN WHELAN
& COMPANY
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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 the securities being registered. All amounts are estimates
except for fees payable to the SEC and the NASD.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee.............................................................. $ 10,454
NASD filing fee................................................................... 3,950
Nasdaq listing fee................................................................ 45,000
Printing expenses................................................................. 65,000
Legal fees and expenses........................................................... 250,000
Accounting fees and expenses...................................................... 300,000
Blue sky fees and expenses........................................................ 10,000
Transfer Agent's and Registrar's fees............................................. 15,000
Miscellaneous..................................................................... 50,596
----------
Total........................................................................... $ 750,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Restated Articles of Incorporation (the "Articles") and Bylaws
include provisions that limit the personal liability of directors to the Company
or its shareholders for monetary damages for conduct as a director. The
provisions eliminate such liability to the fullest extent permitted by law.
Oregon law currently permits elimination of such liability, except in the
following cases: (i) any breach of the director's duty of loyalty to the Company
or its shareholders; (ii) any act or omission not in good faith or which
involved intentional misconduct or a knowing violation of law; (iii) any
unlawful distribution, as defined by Oregon law; or (iv) any transaction from
which the director derived an improper personal benefit. The general effect of
the provisions is to eliminate monetary damages as one of the remedies available
to shareholders for enforcement of the duty of care. As a result, shareholders
may be left without any means to recover a loss suffered as a result of the
negligence or gross negligence of directors in discharging their duty of care.
The Company's Articles and Bylaws provide for the indemnification of any
person, to the fullest extent permitted by law, for all liabilities (including
attorney fees, judgments, fines and amounts paid in settlement) actually and
reasonably incurred in connection with any actual or threatened proceeding
(including, to the extent permitted by law, any derivative action) by reason of
the fact that the person is or was serving as a director or officer of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another entity.
The Company intends to enter into an indemnification agreement with each
director, pursuant to which the Company will agree to indemnify the director to
the fullest extent permitted by Oregon law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From 1993 to 1995, the Company issued an aggregate of 3,175,685 shares of
its Preferred Stock, Series I to Servio Logic Corporation, the Company's
majority shareholder, at a price of $5.00 per share, for total consideration of
$15,879,000. On September 4, 1996, the Company issued 2,000,000 shares of its
Preferred Stock, Series II to Servio Logic Corporation at a price of $2.50 per
share, for total consideration of $5,000,000. On December 31, 1997, the Company
issued 2,136,609 shares of its Preferred Stock,
II-1
<PAGE>
Series III to Servio Logic Corporation at a price of $8.00 per share, for total
consideration of $17,092,872. The issuances were made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act,
relating to sales by an issuer not involving any public offering.
Through June 30, 1998, the Company issued an aggregate of 106,000 shares of
Common Stock to 24 employees and former employees of the Company, pursuant to
the exercise of options granted under the Company's Stock Option Plan, at a
price of $1.00 per share, for an aggregate consideration of $106,000. The
issuances were made in reliance upon Section 4(2) of the Securities Act, and
upon Rule 701 thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1 Restated Articles of Incorporation dated August 12, 1993, as amended
on May 12, 1995, June 26, 1995, September 4, 1996 and November 18,
1997 (to be superseded by Restated Articles as set forth in Exhibit
3.2 upon effectiveness of Registration Statement)
3.2 Form of Restated Articles of Incorporation (to be effective on the
effective date of the Registration Statement)
3.3 Bylaws, dated as of January 1, 1991 (to be superseded by Restated
Bylaws as set forth in Exhibit 3.4 upon effectiveness of
Registration Statement)
3.4 Restated Bylaws (to be effective upon the effective date of the
Registration Statement)
4.1 Articles 3, 4 and 6 of the Restated Articles of Incorporation (see
Exhibit 3.2)
4.2 Article 1 of the Restated Bylaws (see Exhibit 3.4)
4.3+ Specimen Stock Certificate
5.1+ Opinion of Tonkon Torp LLP
10.1* Registrant's Restated 1992 Employees' Stock Option Plan
10.2* Form of Registrant's 1998 Employees Stock Option Plan
10.3* Form of Option Certificate and Stock Option Agreement related to
Registrant's 1992 and 1998 stock option plans.
10.4* Form of Registrant's 1998 Employee Stock Purchase Plan
10.5+ Office/Flex Lease dated for reference purposes July 29, 1996 between
Amberjack, Ltd. and the Registrant, for the Registrant's corporate
headquarters
10.6+** Technology License and Distribution Agreement between Registrant and
Sun Microsystems, Inc., dated July 18, 1996, as amended by Amendment
No. 1 dated November 19, 1996, Amendment No. 2 dated February 23,
1998 and Amendment No. 3 dated effective January 9, 1998
10.7** Development, Deployment and Reseller's Agreement between Registrant
and Systems & Computer Technology Corporation, dated effective June
1, 1998
10.8 Software License Agreement between the Registrant and Sprint
Communications Company, L.P. dated August 29, 1996
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------
<C> <S>
10.9* Form of Indemnity Agreement between the Registrant and the directors
of the Registrant
10.10+* Consulting Agreement with Jesse Rifkind
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2+ Consent of Tonkon Torp LLP (included as part of Exhibit 5.1)
24.1 Power of Attorney (see Page II-4)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- --------------
+ To be filed by amendment
* Designates management contract or compensatory plan or arrangement
** Certain portions of this exhibit are omitted pursuant to a request for
confidential treatment.
ITEM 17. UNDERTAKINGS
(a) 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.
(b) 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 provisions described in Item 14 above, 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, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that: (i) 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 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;
and (ii) 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, GemStone
Systems, Inc. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Beaverton,
State of Oregon, on July 23, 1998.
<TABLE>
<S> <C> <C>
GEMSTONE SYSTEMS, INC.
By: /s/ BRYAN GRUMMON
-----------------------------------------
Bryan R. Grummon
PRESIDENT
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of Bryan R. Grummon and Kenneth J. Irinaga with full power to act without
the other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
(including post-effective amendments) to this Registration Statement, to file
the same, together with all exhibits thereto and other documents in connection
therewith, with the SEC, to sign any and all applications, registration
statements, notices and other documents necessary or advisable to comply with
the applicable state securities laws, and to file this same, together with all
other documents in connection therewith, with the appropriate state securities
authorities, granting unto said attorneys-in-fact and agents or any of them or
their or his substitute or substitutes, full power and authority to perform and
do each and every act and thing necessary and advisable as fully to all intents
and purposes as he might or could perform and do in person, thereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed below by the
following persons in the indicated capacities on July 23, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S> <C>
/s/ JAMES BARNES
- ------------------------------ Chairman of the Board
James P. Barnes
/s/ BRYAN GRUMMON
- ------------------------------ President, Chief Executive
Bryan R. Grummon Officer and Director
/s/ JESSE RIFKIND
- ------------------------------ Director
Jesse Rifkind
/s/ KENNETH IRINAGA Chief Financial Officer
- ------------------------------ (Chief Accounting
Kenneth J. Irinaga Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------
<C> <S>
1.1+ Form of Underwriting Agreement
3.1 Restated Articles of Incorporation dated August 12, 1993, as amended
on May 12, 1995, June 26, 1995, September 4, 1996 and November 18,
1997 (to be superseded by Restated Articles as set forth in Exhibit
3.2 upon effectiveness of Registration Statement)
3.2 Form of Restated Articles of Incorporation (to be effective on the
effective date of the Registration Statement)
3.3 Bylaws, dated as of January 1, 1991 (to be superseded by Restated
Bylaws as set forth in Exhibit 3.4 upon effectiveness of
Registration Statement)
3.4 Restated Bylaws (to be effective upon the effective date of the
Registration Statement)
4.1 Articles 3, 4 and 6 of the Restated Articles of Incorporation (see
Exhibit 3.2)
4.2 Article 1 of the Restated Bylaws (see Exhibit 3.4)
4.3+ Specimen Stock Certificate
5.1+ Opinion of Tonkon Torp LLP
10.1* Registrant's Restated 1992 Employees' Stock Option Plan
10.2* Form of Registrant's 1998 Employees Stock Option Plan
10.3* Form of Option Certificate and Stock Option Agreement related to
Registrant's 1992 and 1998 stock option plans.
10.4* Form of Registrant's 1998 Employee Stock Purchase Plan
10.5+ Office/Flex Lease dated for reference purposes July 29, 1996 between
Amberjack, Ltd. and the Registrant, for the Registrant's corporate
headquarters
10.6+** Technology License and Distribution Agreement between Registrant and
Sun Microsystems, Inc., dated July 18, 1996, as amended by Amendment
No. 1 dated November 19, 1996, Amendment No. 2 dated February 23,
1998 and Amendment No. 3 dated effective January 9, 1998
10.7** Development, Deployment and Reseller's Agreement between Registrant
and Systems & Computer Technology Corporation, dated effective June
1, 1998
10.8 Software License Agreement between the Registrant and Sprint
Communications Company, L.P. dated August 29, 1996
10.9* Form of Indemnity Agreement between the Registrant and the directors
of the Registrant
10.10+* Consulting Agreement with Jesse Rifkind
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2+ Consent of Tonkon Torp LLP (included as part of Exhibit 5.1)
24.1 Power of Attorney (see Page II-4)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
- --------------
+ To be filed by amendment
* Designates management contract or compensatory plan or arrangement
** Certain portions of this exhibit are omitted pursuant to a request for
confidential treatment.
<PAGE>
Exhibit 3.1
*FILED NOVEMBER 18, 1997
OREGON SECRETARY OF STATE
[SEAL OF STATE OR OREGON]
Phone: (503) 986-2200
Facsimile (503) 378-4381
ARTICLES OF AMENDMENT--Business/Professional/Nonprofit
- ------------------------------------------------------------------------------
Secretary of State
Corporation Division
255 Capitol Street NE, Suite 151
Salem, OR 97310-1327
Registry Number: 228114-83
ATTACH ADDITIONAL SHEET IF NECESSARY
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
1. Name of the corporation prior to amendment:
GemStone Systems, Inc.
-----------------------------------------------------------------
2. State the article number(s) and set forth the article(s) as it is
amended to read. (Attach a separate sheet if necessary)
See attached.
3. The amendment was adopted on: September 23, 1997
(If more than one amendment was adopted, identify the date of adoption
of each amendment.)
4. Check the appropriate statement:
/X/ Shareholder action was required to adopt the amendment(s). The vote
was as follows:
<TABLE>
<CAPTION>
Number of
Class or Number of votes Number of Number of
series of shares entitled to votes votes
shares outstanding be cast cast for cast against
- --------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Common 5,300,000 Same Same -0-
Preferred 5,175,685 Same Same -0-
</TABLE>
/ / Shareholder action was not required to adopt the amendment(s). The
amendment(s) was adopted by the board of directors without shareholder action.
/ / The corporation has not issued any shares of stock. Shareholder action
was not required to adopt the amendment(s). The amendment(s) was adopted by
the incorporators or by the board of directors.
6. Execution
Printed Name Signature Title
------------------ ---------------------- -------------
Ronald L. Greenman /s/ Ronald L. Greenman Asst. Secretary
7. CONTACT NAME DAYTIME PHONE NUMBER
------------------ --------------------
Ronald L. Greenman (503) 221-1440
FEES
-------------------------------
Make check for $10 payable to
"Corporation Division."
NOTE: Filing fees may be paid
with VISA or MasterCard. The
card number and expiration
date should be submitted on a
separate sheet for your
protection.
<PAGE>
GEMSTONE SYSTEMS, INC.
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
2.4 SERIES III PREFERRED STOCK.
There shall be reserved out of the total authorized shares of
Series Preferred Stock a total of 3,000,000 shares of Series III preferred
stock (the "Series III Preferred"). The Series III Preferred shall rank pari
passu with the Series I Preferred and the Series II Preferred in all matters,
and shall have the following preferences, limitations and relative rights:
2.4.1 DIVIDENDS.
(a) The holders of Series III Preferred shall be entitled to
receive, out of any funds legally available for the purpose, when, as and if
declared by the Board of Directors, cash dividends thereon at such rate per
annum as shall be fixed by resolution of the Board of Directors in declaring
any such dividend, payable as to all shares of Series III Preferred on the
days fixed for such payment by the Board of Directors.
(b) So long as any shares of Series III Preferred shall be
outstanding, the Corporation shall not: (i) declare or pay any dividends
(other than dividends payable solely in shares of the Common Stock and/or any
other series or class of stock ranking junior to the Series III Preferred as
to dividends and rights upon liquidation) or make, directly or indirectly,
any other distribution of any sort (other than stock redemptions permitted
elsewhere in these Articles) in respect of shares of the Common Stock or
shares of any other series or class of stock ranking junior to the Series III
Preferred as to dividends or rights upon liquidation in any fiscal year,
unless a dividend in any amount equal to 7 percent of the original issue
price of the Series III Preferred is simultaneously or has been previously
declared on the Series III Preferred and all cash dividends previously
declared shall have been paid or set apart for payment, or (ii) purchase or
redeem any shares of the Common Stock or shares of any other series or class
of stock ranking junior to the Series III Preferred either as to dividends or
rights upon liquidation if at the time of such purchase or redemption the
Corporation shall have declared but unpaid cash dividends on any Series III
Preferred; provided that notwithstanding the foregoing, the Corporation may
at any time redeem, purchase or otherwise acquire shares of the Common Stock
or shares of any series or class of stock ranking junior to the Series III
Preferred either as to dividends or rights upon liquidation in exchange for,
or out of the net cash proceeds from the concurrent sale of, other shares of
the Common Stock or such other shares of stock ranking junior to the Series
Preferred and further provided that the terms "dividend" and "distribution"
as used in this paragraph (b) shall not include within their respective
meanings rights or warrants to subscribe for or purchase any security.
(c) For the purposes of this Section 2.4.1, the phrase "set apart
for payment" shall not be construed as the required deposit of any funds in
trust or in any special account, but shall mean that out of the funds
available for the payment of dividends, a sum sufficient for the payment of
dividends on the Series Preferred be reserved by appropriate notation on the
books of the Corporation.
(d) So long as any Series III Preferred are outstanding, no
dividend or other distribution whatsoever shall be declared or paid on the
Corporation's Common Stock unless a dividend or distribution shall be
simultaneously paid on each outstanding share of Series III Preferred in an
amount equal to the dividend or distribution paid on such date on each share
of Common Stock times the number of shares of Common Stock into which each
such share of Series III Preferred is then convertible under Section 2.4.3
below.
<PAGE>
2.4.2 LIQUIDATION.
(a) Upon liquidation or dissolution of the Corporation, whether
voluntary or involuntary, or any deemed liquidation or dissolution of the
Corporation as described below, each share of Series III Preferred shall
entitle its holder to receive, out of the assets of the Corporation available
for distribution to shareholders, whether from capital, surplus or earnings,
a liquidation preference of an amount equal to the original issue price per
share of the Series III Preferred Stock (as adjusted to reflect any stock
splits, stock dividends or other corporate events resulting in the issuance
of additional Series I shares without consideration) plus declared and unpaid
dividends, if any. The original issue price of the Series III Preferred (the
Original Issue Price) prior to any adjustment is $8.00 per share. Such
liquidation preference shall be paid before any distribution of such assets
(i) to the holders of Common Stock, or (ii) to the holders of other classes
or series of Series Preferred in an amount per share which exceeds the total
capital attributable to such shares as determined by generally accepted
accounting principles immediately prior to the liquidation or dissolution of
the Corporation (the "Cost Basis" of such share), plus any unpaid dividends
declared or accumulated. Thereafter, if further assets remain available for
distribution, they shall be distributed to holders of both Common Stock and
Series III Preferred, and to the holders of any other series of Series
Preferred which is convertible to Common Stock and which is entitled by its
terms to participate beyond its initial liquidation preference, in pro rata
proportions based upon the number of shares held by each holder of Common
Stock and the number of shares of Common Stock which would be held by each
holder of Series III Preferred and by each holder of any other series of
Series Preferred if such holder were to convert its shares of Series III
Preferred or its shares of any other series of Series Preferred into Common
Stock at that time. If, upon liquidation or dissolution of the Corporation,
the assets of the Corporation available for distribution to its shareholders
shall be insufficient to pay the holders of Series III Preferred and the
holders of any series of Series Preferred which rank in parity with the
Series III Preferred with respect to liquidation rights the full preferences
to which they are entitled hereunder, then such holders shall share ratably in
any distribution of assets according to the respective preferences that would
have been payable in respect of the shares held by them upon such
distribution if all preferences payable on or with respect to said shares
were paid in full.
(b) The merger or consolidation of the Corporation into or with
another corporation in which this Corporation is not the surviving
corporation, or the sale, transfer or lease of all or substantially all of
the assets of the Corporation, shall be deemed to be a liquidation or
dissolution of the Corporation as those terms are used in these Restated
Articles; and in any such case the liquidation preference which the holders
of Series III Preferred shall be entitled to receive shall be computed in the
same manner as if the Corporation's available assets were actually being
distributed to all shareholders (even though holders of Common Stock and
other classes or series of preferred stock are not or may not be entitled to
receive any actual distribution upon such deemed liquidation or dissolution),
and the value of the Corporation's assets for purposes of computing the
amount of such liquidation preference shall be deemed to be the fair market
value of all consideration proposed to be paid or exchanged for all of the
Corporation's outstanding capital stock upon any such merger or
consolidation, or the fair market value of all consideration proposed to be
paid to the Corporation upon any sale, transfer or lease of all or
substantially all of the assets of the Corporation.
2.4.3 CONVERSION.
The holders of the Series III Preferred shall have conversion
rights as follows (the "Conversion Rights"):
<PAGE>
(a) RIGHT TO CONVERT.
(i) Each share of Series III Preferred 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 the Corporation or any transfer agent for the
Series III Preferred, into that number of fully paid and nonassessable shares
of Common Stock that is equal to $8.00 divided by the Conversion Price. The
Conversion Price shall initially be $8.00, subject to adjustment as provided
herein. The number of shares of Common Stock into which each share of Series
III Preferred may be converted is hereinafter referred to as the Conversion
Rate. Upon any decrease or increase in the Conversion Price or the Conversion
Rate, as described in this Section 2.4.3, the Conversion Rate or Conversion
Price, as the case may be, shall be appropriately increased or decreased.
(ii) Each share of Series III Preferred shall, at the
election of the Corporation's Board of Directors, automatically be converted
into shares of Common Stock at the then effective Conversion Rate for such
share in the manner specified below either (i) immediately upon the
consummation of the Corporation's sale of Common Stock pursuant to a
registration statement under the Securities Act of 1933, as amended, pursuant
to an underwritten firm commitment public offering, provided that the price
per share equates to a total value of the Corporation's capital stock of $20
million or more and the gross aggregate offering price is more than
$7,500,000; or (ii) at any such time as the number of shares of Series III
Preferred which have been converted plus those as to which written notice of
conversion has been given shall equal at least 67 percent of the total shares
of Series III Preferred which have at any time been issued.
(b) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Series III Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then fair
market value of such fractional shares as determined by the Board of
Directors of the Corporation. Before any holder of Series III Preferred shall
be entitled to convert the same into full shares of Common Stock, the holder
shall surrender the certificate or certificates therefor, duly endorsed, at
the office of the Corporation or of any transfer agent for the Series III
Preferred, and shall give written notice to the Corporation at such office
that he elects to convert the same; provided, however, that in the event of
an automatic conversion pursuant to subsection (a) (ii) above, the
outstanding shares of Series III Preferred if so elected by the Board of
Directors shall be converted automatically without any further action by the
holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent; provided
further, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
automatic conversion unless either the certificates evidencing such shares of
Series III Preferred are delivered to the Corporation or its transfer agent
as provided above, or the holder notifies the Corporation or its transfer
agent that such certificates have been lost, stolen or destroyed and executes
an agreement satisfactory to the Corporation to indemnify the Corporation
from any loss incurred by it in connection with such certificates.
<PAGE>
The Corporation shall, as soon as practicable after such delivery, or
after such agreement and indemnification, issue and deliver at such office to
such holder of Series III Preferred, a certificate or certificates for the
number of shares of Common Stock to which he shall be entitled and a check
payable to the holder in the amount of any cash amounts payable as the result
of a conversion into fractional shares of Common Stock, plus any declared and
unpaid dividends on the converted Series III Preferred unless the Board of
Directors in its discretion elects to convert such amount into additional
whole shares of Common Stock, rounded to the nearest whole number. 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 III
Preferred 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 on
such date; provided, however, that if the conversion is in connection with an
underwritten offer of securities registered pursuant to the Securities Act of
1933, as amended, the conversion may, at the option of any holder tendering
Series III Preferred for conversion, be conditioned upon the closing of the
sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock issuable upon such conversion of the
Series III Preferred shall not be deemed to have converted such Series III
Preferred until immediately prior to the closing of the sale of such
securities.
(c) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES. The
provisions of this subparagraph (c) of Section 2.4.3 regarding adjustments to
the Conversion Price for diluting issues shall be identical with the
provisions of Section 2.2.3 above for the Series I Preferred, which
provisions are incorporated herein by reference.
(d) NO IMPAIRMENT. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
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 the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of
this section 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 III Preferred against impairment.
(e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this section,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder
of Series III Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series III Preferred, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of Series III
Preferred.
(f) NOTICES OF RECORD DATE. In the event that this Corporation
shall propose at any time: (i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of earnings or
earned surplus; (ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights; (iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or (iv) to merge with or into any other corporation, or sell,
lease or convey
<PAGE>
all or substantially all its property or business, or to liquidate, dissolve
or wind up; then, in connection with each such event, this Corporation shall
send to the holders of the Series III Preferred at least ten days' prior
written notice of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying the date on
which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (iii) and
(iv) above, and in the case of the matters referred to in (iii) and (iv)
above, at least ten days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event). Each such written
notice shall be given by first-class mail, postage prepaid, addressed to the
holders of the Series III Preferred at the address for each such holder as
shown on the books of this Corporation.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The 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 III Preferred, such number of its
shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all then outstanding shares of the Series III Preferred; 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 III Preferred, the 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 purpose.
2.4.4 VOTING.
Holders of the Corporation's outstanding Series III Preferred
shall be entitled to cast, on all matters submitted to a vote of the
shareholders of the Corporation and on which shareholders are entitled to
vote under the provisions of the Oregon Business Corporation Act, that number
of votes which the shares of Common Stock into which such outstanding shares
of Series III Preferred are then convertible would be entitled to cast
thereon. Holders of Series III Preferred shall vote together with the holders
of Common Stock on all such matters except that, in voting upon (1) any
proposed amendment to these Restated Articles, including without limitation
any alteration or change in any of the preferences, privileges or rights of
the Series III Preferred, or any increase in the authorized number of shares
of Series III Preferred or (2) the proposed creation of any new class or
series of preferred or special stock having preferences prior to those of the
Series III preferred as to dividends, liquidation or redemption, or (3) any
proposed merger or consolidation or sale, transfer or lease of all or
substantially all of the Corporation's assets, or (4) any proposed corporate
dissolution or liquidation, the holders of outstanding shares of Series III
Preferred shall vote together with the holders of the Series I Preferred and
the Series II Preferred as a separate voting group and the percentage vote
required by law for the approval of any such action shall be required, unless
these Articles require a higher percentage vote.
2.4.5 MODIFICATION OF TERMS OF SERIES III PREFERRED.
The Corporation shall not amend or modify any of the terms
affecting the Series III Preferred without first obtaining approval (either
by vote or written consent) of the holders of at least 67 percent of the then
outstanding shares of Series III Preferred.
2.4.6 PROTECTIVE LIMITATIONS.
So long as any shares of Series III Preferred shall remain
outstanding, and in addition to the separate voting matters referred to in
Section 2.4.4 above, the holders of the Series III shares shall vote together
with the holders of the Series I Preferred and Series II Preferred shares as
to all matters requiring 67 percent approval as set forth in section 2.2.6
above.
<PAGE>
Submit the original *FILED SEPTEMBER 4, 1996
and one true copy SECRETARY OF STATE
$10.00
THIS SPACE FOR OFFICE USE ONLY
CORPORATION DIVISION-BUSINESS REGISTRY
255 Capitol Street NE, Suite 151
Salem, OR 97310-1327
(503) 986-2200 Facsimile (503) 378-4381
Registry Member:
228114-83
- ----------------
ARTICLES OF AMENDMENT
BUSINESS CORPORATION
(BY INCORPORATORS, DIRECTORS, OR SHAREHOLDERS)
PLEASE TYPE OR PRINT LEGIBLYIN BLACK INK
1. Name of the corporation prior to amendment:
GemStone Systems, Inc.
--------------------------------------------------------------------------
2. State the article number(s) and set forth the article(s) as it is amended
to read or attach a separate sheet.
See attached.
3. The amendment was adopted on: June 15, 1995. (If more than one
amendment was adopted, identify the date of adoption of each amendment.)
4. Check the appropriate statement:
/ / Shareholder action was required to adopt the amendment(s). The vote was
as follows:
<TABLE>
<CAPTION>
Number of
Class or Number of votes Number of Number of
series of shares entitled to votes votes
shares outstanding be cast cast for cast against
--------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Common 5,300,000 5,300,000 5,300,000 -0-
Preferred 3,175,685 3,175,685 3,175,685 -0-
</TABLE>
/ / Shareholder action was not required to adopt the amendment(s). The
amendment(s) was adopted by the board of directors without shareholder action.
/ / The corporation has not issued any shares of stock. Shareholder action
was not required to adopt the amendment(s). The amendment(s) was adopted by
the incorporators or by the board of directors.
Execution: /s/ Ronald L. Greenman Ronald L. Greenman Secretary
---------------------- ------------------ ---------
Signature Printed Name Title
Person to Contact about this filing: Ronald L. Greenman 503/221-1440
------------------- ----------------
Name Daytime
phone number
MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION OR INCLUDE YOUR VISA OR
MASTERCARD NUMBER AND EXPIRATION DATE ___-___-___-___ __/__, SUBMIT THE
COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR FAX TO (503) 378-4381
<PAGE>
GEMSTONE SYSTEMS, INC.
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
2.3 SERIES II PREFERRED STOCK.
There shall be reserved out of the total authorized shares of Series
Preferred Stock a total of 3,000,000 shares of Series II preferred stock (the
"Series II Preferred"). The Series II Preferred shall rank pari passu with
the Series I Preferred in all matters, and shall have the following
preferences, limitations and relative rights:
2.3.1 DIVIDENDS.
(a) The holders of Series II Preferred shall be entitled to
receive, out of any funds legally available for the purpose, when, as and if
declared by the Board of Directors, cash dividends thereon at such rate per
annum as shall be fixed by resolution of the Board of Directors in declaring
any such dividend, payable as to all shares of the Series II Preferred on the
days fixed for such payment by the Board of Directors.
(b) So long as any shares of Series II Preferred shall be
outstanding, the Corporation shall not: (i) declare or pay any dividends
(other than dividends payable solely in shares of the Common Stock and/or any
other series or class of stock ranking junior to the Series II Preferred as
to dividends and rights upon liquidation) or make, directly or indirectly,
any other distribution of any sort (other than stock redemptions permitted
elsewhere in these Articles) in respect of shares of the Common Stock or
shares of any other series or class of stock ranking junior to the Series II
Preferred as to dividends or rights upon liquidation in any fiscal year,
unless a dividend in an amount equal to 7 percent of the original issue price
of the Series II Preferred is simultaneously or has been previously declared
on the Series II Preferred and all cash dividends previously declared shall
have been paid or set apart for payment, or (ii) purchase or redeem any
shares of the Common Stock or shares of any other series or class of stock
ranking junior to the Series II Preferred either as to dividends or rights
upon liquidation if at the time of such purchase or redemption the
Corporation shall have declared but unpaid cash dividends on any Series II
Preferred; provided that notwithstanding the foregoing, the Corporation may
at any time redeem, purchase or otherwise acquire shares of the Common Stock
or shares of any series or class of stock ranking junior to the Series II
Preferred either as to dividends or rights upon liquidation in exchange for,
or out of the net cash proceeds from the concurrent sale of, other shares of
the Common Stock or such other shares of stock ranking junior to the Series
Preferred and further provided that the terms "dividend" and "distribution"
as used in this paragraph (b) shall not include within their respective
meanings rights or warrants to subscribe for or purchase any security.
(c) For the purposes of this Section 2.3.1, the phrase "set apart
for payment" shall not be construed as the required deposit of any funds in
trust or in any special account, but shall mean that out of the funds
available for the payment of dividends, a sum sufficient for the payment of
dividends on the Series Preferred be reserved by appropriate notation on the
books of the Corporation.
(d) So long as any Series II Preferred are outstanding, no dividend
or other distribution whatsoever shall be declared or paid on the
Corporation's Common Stock unless a dividend or distribution shall be
simultaneously paid on each outstanding share of Series II Preferred in an
amount equal to the dividend or distribution paid on such date on each share
of Common Stock times the number of shares of Common Stock into which each
such share of Series II Preferred is then convertible under Section 2.3.3
below.
<PAGE>
2.3.2 LIQUIDATION.
(a) Upon liquidation or dissolution of the Corporation, whether
voluntary or involuntary, or any deemed liquidation or dissolution of the
Corporation as described below, each share of Series II Preferred shall
entitle its holder to receive, out of the assets of the Corporation available
for distribution to shareholders, whether from capital, surplus or earnings,
a liquidation preference of an amount equal to the original issue price per
share of the Series II Preferred Stock (as adjusted to reflect any stock
splits, stock dividends or other corporate events resulting in the issuance
of additional Series I shares without consideration) plus declared and unpaid
dividends, if any. The original issue price of the Series II Preferred (the
Original Issue Price) prior to any adjustment is $2.50 per share. Such
liquidation preference shall be paid before any distribution of such assets
(i) to the holders of Common Stock, or (ii) to the holders of other classes
or series of Series Preferred in an amount per share which exceeds the total
capital attributable to such shares as determined by generally accepted
accounting principles immediately prior to the liquidation or dissolution of
the Corporation (the "Cost Basis" of such share), plus any unpaid dividends
declared or accumulated. Thereafter, if further assets remain available for
distribution, they shall be distributed to holders of both Common Stock and
Series II Preferred, and to the holders of any other series of Series
Preferred which is convertible to Common Stock and which is entitled by its
terms to participate beyond its initial liquidation preference, in pro rata
proportions based upon the number of shares held by each holder of Common
Stock and the number of shares of Common Stock which would be held by each
holder of Series II Preferred and by each holder of any other series of
Series Preferred if such holder were to convert its shares of Series II
Preferred or its shares of any other series of Series Preferred into Common
Stock at that time. If, upon liquidation or dissolution of the Corporation,
the assets of the Corporation available for distribution to its shareholders
shall be insufficient to pay the holders of Series II Preferred and the
holders of any series of Series Preferred which rank in parity with the
Series II Preferred with respect to liquidation rights the full preferences
to which they are entitled hereunder, then such holders shall share ratably
in any distribution of assets according to the respective preferences that
would have been payable in respect of the shares held by them upon such
distribution if all preferences payable on or with respect to said shares
were paid in full.
(b) The merger or consolidaiton of the Corporation into or with
another corporation in which this Corporation is not the surviving
corporation, or the sale, transfer or lease of all or substantially all of
the assets of the Corporation, shall be deemed to be a liquidation or
dissolution of the Corporation as those terms are used in these Restated
Articles; and in any such case the liquidation preference which the holders
of Series II Preferred shall be entitled to receive shall be computed in the
same manner as if the Corporation's available assets were actually being
distributed to all shareholders (even though holders of Common Stock and
other classes or series of preferred stock are not or may not be entitled to
receive any actual distribution upon such deemed liquidation or dissolution),
and the value of the Corporation's assets for purposes of computing the
amount of such liquidation preference shall be deemed to be the fair market
value of all consideration proposed to be paid or exchanged for all of the
Corporation's outstanding capital stock upon any such merger or
consolidation, or the fair market value of all consideration proposed to be
paid to the Corporation upon any sale, transfer or lease of all or
substantially all of the assets of the Corporation.
2.3.3 CONVERSION.
The holders of the Series II Preferred shall have conversion
rights as follows (the "Conversion Rights"):
<PAGE>
(a) RIGHT TO CONVERT.
(i) Each share of Series II Preferred 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 the Corporation or any transfer agent for the
Series II Preferred, into that number of fully paid and nonassessable shares
of Common Stock that is equal to $2.50 divided by the Conversion Price. The
Conversion Price shall initially be $2.50, subject to adjustment as provided
herein. The number of shares of Common Stock into which each share of Series
II Preferred may be converted is hereinafter referred to as the Conversion
Rate. Upon any decrease or increase in the Conversion Price or the Conversion
Rate, as described in this Section 2.3.3, the Conversion Rate or Conversion
Price, as the case may be, shall be appropriately increased or decreased.
(ii) Each share of Series II Preferred shall, at the election
of the Corporation's Board of Directors, automatically be converted into
shares of Common Stock at the then effective Conversion Rate for such share
in the manner specified below either (i) immediately upon the consummation of
the Corporation's sale of Common Stock pursuant to a registration statement
under the Securities Act of 1933, as amended, pursuant to an underwritten
firm commitment public offering, provided that the price per share equates to
a total value of the Corporation's capital stock of $20 million or more and
the gross aggregate offering price is more than $7,500,000; or (ii) at any
such time as the number of shares of Series II Preferred which have been
converted plus those as to which written notice of conversion has been given
shall equal at least 67 percent of the total shares of Series II Preferred
which have at any time been issued.
(b) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Series II Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then fair
market value of such fractional shares as determined by the Board of
Directors of the Corporation. Before any holder of Series II Preferred shall
be entitled to convert the same into full shares of Common Stock, the holder
shall surrender the certificate or certificates therefor, duly endorsed, at
the office of the Corporation or of any transfer agent for the Series II
Preferred, and shall give written notice to the Corporation at such office
that he elects to convert the same; provided, however, that in the event of
an automatic conversion pursuant to subsection (a)(ii) above, the outstanding
shares of Series II Preferred if so elected by the Board of Directors shall
be converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided further,
however, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic conversion
unless either the certificates evidencing such shares of Series II Preferred
are delivered to the Corporation or its transfer agent as provided above, or
the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable after such delivery,
or after such agreement and indemnification, issue and deliver at such office
to such holder of Series II Preferred, a certificate or certificates for the
number of shares of Common Stock to which he shall be entitled and a check
payable to the holder in the amount of any cash amounts payable as the result
of a conversion into fractional shares of Common Stock, plus any declared and
unpaid dividends on the converted Series II Preferred unless the Board of
Directors in its discretion elects to convert such amount into additional
whole shares of Common Stock, rounded to the nearest whole number. 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 II
Preferred to be converted, and the person or persons entitled to receive the
shares of Common Stock
<PAGE>
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date; provided,
however, that if the conversion is in connection with an underwritten offer
of securities registered pursuant to the Securities Act of 1933, as amended,
the conversion may, at the option of any holder tendering Series II Preferred
for conversion, be conditioned upon the closing of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive
the Common Stock issuable upon such conversion of the Series II Preferred
shall not be deemed to have converted such Series II Preferred until
immediately prior to the closing of the sale of such securities.
(c) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES. The
provisions of this subparagraph (c) of Section 2.3.3 regarding adjustments to
the Conversion Price for diluting issues shall be identical with the
provisions of Section 2.2.3 above for the Series I Preferred, which
provisions are incorporated herein by reference.
(d) NO IMPAIRMENT. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
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 the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of
this section 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 II Preferred against impairment.
(e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this section,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder
of Series II Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series II Preferred, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of Series II
Preferred.
(f) NOTICES OF RECORD DATE. In the event that this Corporation
shall propose at any time: (i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of earnings or
earned surplus; (ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights; (iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or (iv) to merge with or into any other corporation, or sell,
lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up; then, in connection with each such event,
this Corporation shall send to the holders of the Series II Preferred at
least ten days' prior written notice of the date on which a record shall be
taken for such dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be entitled thereto) or
for determining rights to vote in respect of the matters referred to in (iii)
and (iv) above, and in the case of the matters referred to in (iii) and (iv)
above, at least ten days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event). Each such
written notice shall be given by
<PAGE>
first-class mail, postage prepaid, addressed to the holders of the Series II
Preferred at the address for each such holder as shown on the books of this
Corporation.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The 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 II Preferred, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of the Series II Preferred; 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 II Preferred, the 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 purpose.
2.3.4 VOTING.
Holders of the Corporation's outstanding Series II Preferred shall
be entitled to cast, on all matters submitted to a vote of the shareholders
of the Corporation and on which shareholders are entitled to vote under the
provisions of the Oregon Business Corporation Act, that number of votes which
the shares of Common Stock into which such outstanding shares of Series II
Preferred are then convertible would be entitled to cast thereon. Holders of
Series II Preferred shall vote together with the holders of Common Stock on
all such matters except that, in voting upon (1) any proposed amendment to
these Restated Articles, including without limitation any alteration or change
in any of the preferences, privileges or rights of the Series II Preferred,
or any increase in the authorized number of shares of Series II Preferred or
(2) the proposed creation of any new class or series of preferred or special
stock having preferences prior to those of the Series II Preferred as to
dividends, liquidation or redemption, or (3) any proposed merger or
consolidation or sale, transfer or lease of all or substantially all of the
Corporation's assets, or (4) any proposed corporate dissolution or
liquidation, the holders of outstanding shares of Series II Preferred shall
vote together with the holders of the Series I Preferred as a separate voting
group and the percentage vote required by law for the approval of any such
action shall be required, unless these Articles require a higher percentage
vote.
2.3.5 MODIFICATION OF TERMS OF SERIES II PREFERRED.
The Corporation shall not amend or modify any of the terms
affecting the Series II Preferred without first obtaining approval (either by
vote or written consent) of the holders of at least 67 percent of the then
outstanding shares of Series II Preferred.
2.3.6 PROTECTIVE LIMITATION.
So long as any shares of Series II Preferred shall remain
outstanding, and in addition to the separate voting matters referred to in
Section 2.3.4 above, the holders of the Series II shares shall vote together
with the holders of the Series I shares as to all matters requiring 67
percent approval as set forth in section 2.2.6 above.
<PAGE>
Submit the original *FILED JUNE 26, 1998
and one true copy SECRETARY OF STATE
$10.00
SEAL SECRETARY OF STATE
Registry Number STATE Corporation Division
228114-83 OF Business Registry
OREGON 151 Public Service Building
255 Capitol Street NE
Salem, OR 97310-1327
(503) 378-4166
ARTICLES OF AMENDMENT
By Incorporators, Directors or Shareholders
- -------------------------------------------------------------------------------
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
- -------------------------------------------------------------------------------
1. Name of corporation prior to amendment:
Servio Corporation
-------------------------------------------------------------------------
2. State the article number(s) and set forth the article(s) as it is
amended to read or attach a separate sheet.
Article 1 has been amended to read in its entirety as follows:
Article 1. The name of this corporation is Gemstone Systems, Inc.
3. The amendment(s) was adopted on June 2, 1995. (If more than one
amendment was adopted, identify the date of adoption of each amendment.)
4. Check the appropriate statement:
/X/ Shareholder action was required to adopt the amendment(s). The vote was
as follows:
<TABLE>
<CAPTION>
Number of
Class or Number of votes Number of Number of
series of shares entitled to votes votes
shares outstanding be cast cast for cast against
- --------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Common 5,300,000 5,300,000 5,300,000 -0-
Preferred 1,532,000 1,532,000 1,532,000 -0-
</TABLE>
/ / Shareholder action was not required to adopt the amendment(s). The
amendment(s) was adopted by the board of directors without shareholder action.
/ / The corporation has not issued any shares of stock. Shareholder action
was not required to adopt the amendment(s). The amendment(s) was adopted by
the incorporators or by the board of directors.
Execution: /s/ Bryan Grummon Bryan Grummon President
----------------- ------------- ----------
Signature Printed Name Title
Person to contact about this filing: Ronald L. Greenman 503/221-1440
------------------- ------------
Name Daytime
Phone Number
Make checks payable to the Corporation Division. Submit the completed
form and fee to: Corporation Division, Business Registry, 151 Public Service
Building, 255 Capitol Street NE, Salem, OR 37310-1327
<PAGE>
Submit the original *FILED MAY 12, 1995
and one true copy SECRETARY OF STATE
$10.00
SEAL SECRETARY OF STATE
Registry Number STATE Cosperation Division
228114-83 OF Business Registry
OREGON 158 12th Street NE
Salem, OR 97310-0210
(503) 378-4166
ARTICLES OF AMENDMENT
By Incorporators, Directors or Shareholders
- ------------------------------------------------------------------------------
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
- ------------------------------------------------------------------------------
1. Name of the corporation prior to amendment:
Servio Corporation
---------------------------------------------------------------------------
2. State the article number(s) and set forth the article(s) as it is amended
to read or attach a separate sheet.
See separate sheet.
3. The amendemnt was adopted on:___________________, 19___. (If more than one
amendment was adopted, identify the date of adoption of each amendment.)
4. Check the appropriate statement:
/X/ Shareholder action was required to adopt the amendment(s). The vote was
as follows:
<TABLE>
<CAPTION>
Number of
Class or Number of votes Number of Number of
series of shares entitled to votes votes
shares outstanding be cast cast for cast against
--------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Common 5,300,000 5,300,000 5,300,000 -0-
Series I
Preferred 1,532,000 1,532,000 1,532,000 -0-
</TABLE>
/ / Shareholder action was not required to adopt the amendment(s). The
amendment(s) was adopted by the board of directors without shareholder
action.
/ / The corporation has not issued any shares of stock. Shareholder action
was not required to adopt the amendment(s). The amendment(s) was adopted
by the incorporators or by the board of directors.
Execution: /s/ James P. Barnes James P. Barnes Secretary
--------------------- --------------- ---------
Signature Printed Name Title
Person to contact about this filing: Ronald L. Greenman 503/221-1440
------------------ ------------
Name Daytime
phone number
Make checks payable to the Corporation Division. Submit the completed form
and fees to: Corporation Division, Business Registry, 158 12th Street NE,
Salem, Oregon 97310-0210.
<PAGE>
ATTACHMENT FOR ARTICLES OF AMENDMENT
FOR SERVIO CORPORATION
The first paragraph of Section 2.1 of Article 2 of the Restated Articles of
Incorporation is amended to read in its entirety as follows:
The Corporation shall have authority to issue 25 million shares of stock in
the aggregate. Such shares shall be divided into two classes as follows:
(a) 15 million shares of Common Stock, $.01 par value (the "Common
Stock");
(b) 10 million shares of Series Preferred Stock, $.01 par value (the
"Series Preferred Stock").
The first paragraph of Section 2.2 of Article 2 of the Restated Articles of
Incorporation is amended to read in its entirety as follows:
There shall be reserved out of the total authorized shares
of Series Preferred Stock a total of 5 million shares of
Series I Preferred Stock (the "Series I Preferred") having
the following preferences, limitations and relative rights:
<PAGE>
Submit the original *FILED AUGUST 12, 1993
and one true copy SECRETARY OF STATE
$10.00
SEAL SECRETARY OF STATE
Registry Number STATE Corporation Division
228114-83 OF Business Registry
- --------- OREGON 158 12th Street NE
Salem, OR 97310-0210
(503) 378-4166
RESTATED ARTICLES OF INCORPORATION
Business Corporation
- -------------------------------------------------------------------------------
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
- -------------------------------------------------------------------------------
1. Name of the corporation prior to amendment: Servio Corporation
------------------------------
2. New name of the corporation (if changed):
------------------------------
3. A copy of the restated articles is attached.
4. Check the appropriate statement(s):
/ / The restated articles contain amendments which do not require
shareholder approval. These amendments were duly adopted by the board of
directors.
/X/ The restated articles contain amendments which require shareholder
approval. The date of adoption of the restated articles was 7-1, 1993,
which is the date of adoption of amendments included in the restated
articles. The vote of the shareholders was as follows:
<TABLE>
<CAPTION>
Number of
Class or Number of votes Number of Number of
series of shares entitled to votes votes
shares outstanding be cast cast for cast against
--------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Common 5,300,000 5,300,000 5,300,000 -0-
</TABLE>
5. Other provisions, if applicable.
Execution: /s/ James P. Barnes James P. Barnes Secretary
-------------------- --------------- ---------
Signature Printed Name Title
Person to contact about this filing: Ronald L. Greenman 503/221-1440
------------------ ------------
Name Daytime
phone number
Make checks payable to the Corporation Division, Submit the completed form
and fee to: Corporation Division, Business Registry, 158 12th Street NE,
Salem, Oregon 97310-0210
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SERVIO CORPORATION
Restated Articles of Incorporation
ARTICLE 1
The name of this corporation in Servio Corporation.
ARTICLE 2
2.1 AUTHORIZED CAPITAL STOCK.
The Corporation shall have authority to issue 20,000,000 shares of
stock in the aggregate. Such shares shall be divided into two classes as
follows:
(a) 15,000,000 shares of common stock, $.01 par value (the "Common
Stock");
(b) 5,000,000 shares of series preferred stock, $.01 par value (the
"Series Preferred"):
The Series Preferred may be issued from time to time in one or more
series in any manner permitted by law, as determined from time to time by the
Board of Directors and stated in the resolution or resolutions adopted by the
Board of Directors pursuant to authority hereby vested in it, each series to
be appropriately designated, prior to the issue of any shares thereof, by
some distinguishing letter, number or title. All shares of the same series of
Series Preferred shall be identical in every particular and, except as
otherwise stated with respect to the particular preferences, limitations and
relative rights in the resolution or resolutions creating any series,
identical with respect to other series within the same class. The designation
and terms of each particular series of Series Preferred shall be fixed and
determined by the Board of Directors in any manner permitted by law and
stated in the resolution or resolutions providing for the issue of such stock
before any shares of such series are issued.
The Board of Directors may from time to time increase the number of
shares of any series of Series Preferred already created by providing that
any unissued shares of Series Preferred shall constitute part of such series,
or may decrease (but not below the number of shares thereof then outstanding)
the number of shares of any series of Series Preferred already created by
providing that any unissued shares previously assigned to such series shall
no longer constitute a part thereof. The Board of Directors is further
empowered to classify or reclassify any unissued Series Preferred by fixing
or altering the terms thereof and by assigning all or any portion thereof to
an existing or newly created series from time to time before the issuance of
such stock.
2.2 SERIES I PREFERRED STOCK.
There shall be reserved out of the total authorized shares of
Series Preferred Stock a total of 2,000,000 shares of Series I preferred
stock (the "Series I Preferred") having the following preferences,
limitations and relative rights:
2.2.1 DIVIDENDS.
(a) The holders of Series I Preferred shall be entitled to receive,
out of any funds legally available for the purpose, when, as and if declared
by the Board of Directors, cash dividends thereon at such rate per annum as
shall be fixed by resolution of the Board of Directors in declaring any such
dividend, payable as to all shares of Series I Preferred on the days fixed
for such payment by the Board of Directors.
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(b) So long as any shares of Series I Preferred shall be
outstanding, the Corporation shall not: (i) declare or pay any dividends
(other than dividends payable solely in shares of the Common Stock and/or any
other series or class of stock ranking junior to the Series I Preferred as to
dividends and rights upon liquidation) or make, directly or indirectly, any
other distribution of any sort (other than stock redemptions permitted
elsewhere in these Articles) in respect of shares of the Common Stock or
shares of any other series or class of stock ranking junior to the Series I
Preferred as to dividends or rights upon liquidation in any fiscal year,
unless a dividend in an amount equal to 7 percent of the original issue price
of the Series I Preferred is simultaneously or has been previously declared
on the Series I Preferred and all cash dividends previously declared shall
have been paid or set apart for payment, or (ii) purchase or redeem any shares
of the Common Stock or shares of any other series or class of stock ranking
junior to the Series I Preferred either as to dividends or rights upon
liquidation if at the time of such purchase or redemption the Corporation
shall have declared but unpaid cash dividends on any Series I Preferred;
provided that notwithstanding the foregoing, the Corporation may at any time
redeem, purchase or otherwise acquire shares of the Common Stock or shares of
any series or class of stock ranking junior to the Series I Preferred either
as to dividends or rights upon liquidation in exchange for, or out of the net
cash proceeds from the concurrent sale of, other shares of the Common Stock
or such other shares of stock ranking junior to the Series Preferred and
further provided that the terms "dividend" and "distribution" as used in this
paragraph (b) shall not include within their respective meanings rights or
warrants to subscribe for or purchase any security.
(c) For the purposes of this Section 2.2.1, the phrase "set apart
for payment" shall not be construed as the required deposit of any funds in
trust or in any special account, but shall mean that out of the funds
available for the payment of dividends, a sum sufficient for the payment of
dividends on the Series Preferred be reserved by appropriate notation on the
books of the Corporation.
(d) So long as any Series I Preferred are outstanding, no dividend
or other distribution whatsoever shall be declared or paid on the
Corporation's Common Stock unless a dividend or distribution shall be
simultaneously paid on each outstanding share of Series I Preferred in an
amount equal to the dividend or distribution paid on such date on each share
of Common Stock times the number of shares of Common Stock into which each
such share of Series I Preferred is then convertible under Section 2.2.3
below.
2.2.2 LIQUIDATION.
(a) Upon liquidation or dissolution of the Corporation, whether
voluntary or involuntary, or any deemed liquidation or dissolution of the
Corporation as described below, each share of Series I Preferred shall
entitle its holder to receive, out of the assets of the Corporation available
for distribution to shareholders, whether from capital, surplus or earnings,
a liquidation preference of an amount equal to the original issue price per
share of the Series I Preferred Stock (as adjusted to reflect any stock
splits, stock dividends or other corporate events resulting in the issuance
of additional Series I shares without consideration) plus declared and unpaid
dividends, if any. The original issue price of the Series I Preferred (the
Original Issue Price) prior to any adjustment is $5.00 per share. Such
liquidation preference shall be paid before any distribution of such assets
(i) to the holders of Common Stock, or (ii) to the holders of other classes
or series of Series Preferred in an amount per share which exceeds the total
capital attributable to such shares as determined by generally accepted
accounting principles immediately prior to the liquidation or dissolution of
the Corporation ( the "Cost Basis" of such share), plus any unpaid dividends
declared or accumulated. Thereafter, if further assets remain available for
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distribution, they shall be distributed to holders of both Common Stock and
Series I Preferred, and to the holders of any other series of Series
Preferred which is convertible to Common Stock and which is entitled by its
terms to participate beyond its initial liquidation preference, in pro rata
proportions based upon the number of shares held by each holder of Common
Stock and the number of shares of Common Stock which would be held by each
holder of Series I Preferred and by each holder of any other series of Series
Preferred if such holder were to convert its shares of Series I Preferred or
its shares of any other series of Series Preferred into Common Stock at that
time. If, upon liquidation or dissolution of the Corporation, the assets of
the Corporation available for distribution to its shareholders shall be
insufficient to pay the holders of Series I Preferred and the holders of any
series of Series Preferred which rank in parity with the Series I Preferred
with respect to liquidation rights the full preferences to which they are
entitled hereunder, then such holders shall share ratably in any distribution
of assets according to the respective preferences that would have been
payable in respect of the shares held by them upon such distribution if all
preferences payable on or with respect to said shares were paid in full.
(b) The merger or consolidation of the Corporation into or with
another corporation in which this Corporation is not the surviving
corporation, or the sale, transfer or least of all or substantially all of
the assets of the Corporation, shall be deemed to be a liquidation or
dissolution of the Corporation as those terms are used in these Restated
Articles; and in any such case the liquidation preference which the holders
of Series I Preferred shall be entitled to receive shall be computed in the
same manner as if the Corporation's available assets were actually being
distributed to all shareholders (even though holders of Common Stock and
other classes or series of preferred stock are not or may not be entitled to
receive any actual distribution upon such deemed liquidation or dissolution),
and the value of the Corporation's assets for purposes of computing the
amount of such liquidation preference shall be deemed to be the fair market
value of all consideration proposed to be paid or exchanged for all of the
Corporation's outstanding capital stock upon any such merger or
consolidation, or the fair market value of all consideration proposed to be
paid to the Corporation upon any sale, transfer or lease of all or
substantially all of the assets of the Corporation.
2.2.3 CONVERSION.
The holders of the Series I Preferred shall have conversion rights
as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT.
(i) Each share of Series I Preferred 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 the Corporation or any transfer agent for the
Series I Preferred, into that number of fully paid and nonassessable shares
of Common Stock that is equal to $5.00 divided by the Conversion Price. The
Conversion Price shall initially be $5.00, subject to adjustment as provided
herein. The number of shares of Common Stock into which each share of Series
I Preferred may be converted is hereinafter referred to as the Conversion
Rate. Upon any decrease or increase in the Conversion Price or the Conversion
Rate, as described in this Section 2.2.3, the Conversion Rate or Conversion
Price, as the case may be, shall be appropriately increased or decreased.
(ii) Each share of Series I Preferred shall, at the election of
the Corporation's Board of Directors, automatically be converted into shares
of Common Stock at the then effective Conversion Rate for such share in the
manner specified below either (i) immediately upon the consummation of the
Corporation's sale of Common Stock pursuant to a registration statement under
the Securities Act of 1933, as amended, pursuant to an underwritten firm
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commitment public offering, provided that the price per share equates to a
total value of the Corporation's capital stock of $20 million or more and the
gross aggregate offering price is more than $7,500,000; or (ii) at any such
time as the number of shares of Series I Preferred which have been converted
plus those as to which written notice of conversion has been given shall
equal at least 67 percent of the total shares of Series I Preferred which
have at any time been issued.
(b) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Series I Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then fair
market value of such fractional shares as determined by the Board of
Directors of the Corporation. Before any holder of Series I Preferred shall
be entitled to convert the same into full shares of Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Series I
Preferred, and shall give written notice to the Corporation at such office
that he elects to convert the same; provided, however, that in the event of
an automatic conversion pursuant to subsection (a)(ii) above, the outstanding
shares of Series I Preferred if so elected by the Board of Directors shall be
converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided further,
however, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic conversion
unless either the certificates evidencing such shares of Series I Preferred
are delivered to the Corporation or its transfer agent as provided above, or
the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable after such delivery,
or after such agreement and indemnification, issue and deliver at such office
to such holder of Series I Preferred, a certificate or certificates for the
number of shares of Common Stock to which he shall be entitled and a check
payable to the holder in the amount of any cash amounts payable as the result
of a conversion into fractional shares of Common Stock, plus any declared and
unpaid dividends on the converted Series I Preferred unless the Board of
Directors in its discretion elects to convert such amount into additional
whole shares of Common Stock, rounded to the nearest whole number. 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 I Preferred
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 on such date;
provided, however, that if the conversion is in connection with an
underwritten offer of securities registered pursuant to the Securities Act of
1933, as amended, the conversion may, at the option of any holder tendering
Series I Preferred for conversion, be conditioned upon the closing of the
sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock issuable upon such conversion of the
Series I Preferred shall not be deemed to have converted such Series I
Preferred until immediately prior to the closing of the sale of such
securities.
(c) ADJUSTMENT TO CONVERSION PRICE FOR DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this paragraph (c),
the following definitions shall apply:
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(1) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Additional Shares of
Common Stock or Convertible Securities.
(2) "Original Issue Date" shall mean, with respect to a
particular series of Preferred Stock, the first date on which the first share
of such series of Preferred Stock was issued.
(3) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities (other than the shares of Series I
Preferred) convertible into or exchangeable for Additional Shares of Common
Stock.
(4) "Additional Shares of Common" shall mean all shares of
Common Stock issued (or, pursuant to this paragraph (c), deemed to be issued)
by the Corporation after the Original Issue Date of a particular series of
Series Preferred, other than shares of Common Stock issued or issuable; (x)
upon conversion of shares of Series Preferred; (y) to officers, directors and
employees of consultants or other providers of services to, the Corporation
pursuant to stock grants, option plans, purchase plans or other employee
stock incentive programs or arrangements approved by the Board of Directors
or upon exercise of options or warrants granted to such parties pursuant to
any such plan or arrangement; or (z) as a dividend or distribution on Series
Preferred or pursuant to any event for which adjustment is made pursuant to
subparagraphs (vi), (vii) or (viii) hereof.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
Conversion Price of Series I Preferred shall be made in respect of the
issuance of Additional Shares of Common unless the consideration per share
for an Additional Share of Common issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to, such issue.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON.
(1) OPTIONS AND CONVERTIBLE SECURITIES. In the event the
Corporation at any time or from time to time after the Original Issue Date of
the Series I Preferred shall issue any Options or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities,
then the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable upon the exercise of such
Options or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities or exercise of such
Options, shall, except to the extent excluded under subparagraph (i)(4)
above, be deemed to be Additional Shares of Common issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the
close of business on such record date, provided that Additional Shares of
Common shall not be deemed to have been issued unless the consideration per
share (determined pursuant to subparagraph (v) hereof) of such Additional
Shares of Common would be less than the Conversion Price of the Series I
Preferred in effect on the date of and immediately prior to such issue, or
such record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common are deemed to be issued;
(aa) no further adjustment in the Conversion Price of the
Series I Preferred shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
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(bb) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Corporation, or decrease in the number of shares
of Common Stock issuable, upon the exercise, conversion or exchange thereof,
the Conversion Price of Series I Preferred computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and
any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
(cc) no readjustment pursuant to clause (bb) above shall have
the effect of increasing the Conversion Price of the Series I Preferred to an
amount which exceeds the lower of (i) the Conversion Price of such Series on
the original adjustment date, or (ii) the Conversion Price of the Series I
Preferred that would have resulted from any issuance of Additional Shares of
Common between the original adjustment date and such readjustment date;
(dd) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Prices computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto) and
any subsequent adjustments based thereon shall, upon such expiration, be
recomputed as if: (x) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common issued were the shares of
Common Stock, if any, actually issued upon the exercise of such Options or
the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by
the Corporation for the issue of such exercised Options plus the
consideration actually received by the Corporation upon such exercise or for
the issue of all such Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange, and (y) in the case of
Options for Convertible Securities, only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued at the time of issue of
such Options, and the consideration received by the Corporation for the
Additional Shares of Common deemed to have been then issued was the
consideration actually received by the Corporation for the issue of such
exercised Options, plus the consideration deemed to have been received by the
Corporation (determined pursuant to subparagraph (v) below) upon the issue of
the Convertible Securities which respect to which such Options were actually
exercised;
(ee) in the case of any Options which expire by their terms
not more than 30 days after the date of issue thereof, no adjustment of the
Conversion Prices shall be made until the expiration or exercise of all such
Options issued on the same date, whereupon such adjustment shall be made in
the same manner provided in clause (cc) above; and
(ff) if such record date shall have been fixed and such
Options or Convertible Securities are not issued on the date fixed therefor,
the adjustment previously made in the Conversion Prices which became
effective on such record date shall be cancelled as of the close of business
on such record date, and thereafter the Conversion Prices shall be adjusted
pursuant to this subparagraph (iii) as of the actual date of their issuance.
(2) STOCK DIVIDENDS. In the event the Corporation at any time or
from time to time after the Original Issue Date of the Series I Preferred
shall declare or pay any dividend on the Common Stock payable in Common
Stock, and with respect to which no similar Common Stock dividend is to be
distributed to holders of the Series I Preferred, then and in any such event,
Additional Shares of Common shall be deemed to have been issued
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immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON. Upon the first issuance by this Corporation of Additional
Shares of Common (including Additional Shares of Common deemed to be issued
pursuant to subparagraph (iii) above) to any person who is not a stockholder
of the Corporation at January 1, 1993 in a single transaction or series of
related transactions that results in $1 million or more of stock sale
proceeds being received by the Corporation, in which the shares are issued
without consideration or for a consideration per share less than the
Conversion Price for the Series I Preferred in effect on the date of and
immediately prior to such issue, then and in such event, such Conversion
Price shall be reduced, concurrently and automatically with such issue of
Additional shares of Common, to a price (calculated to the nearest cent)
equal to the consideration per share received upon the issuance of such
Additional Shares of Common. In the event this Corporation shall issue
Additional Shares of Common (including Additional Shares of Common deemed to
be issued pursuant to paragraph (3)(cc)(iii)) at any time after such first
issuance of Additional Shares without consideration or for a consideration
per share less than the Conversion Price for a particular series of Preferred
Stock in effect on the date of and immediately prior to such issue, then and
in such event, such Conversion Price shall be reduced, concurrently with such
issue, to a price (calculated to the nearest cent) 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 issue
plus the number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of Additional Shares of
Common so issued 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 issue plus the number of such Additional Shares of
Common so issued; and provided further that, for the purposes of this
paragraph (3)(cc)(iv), all shares of Common Stock issuable upon exercise,
conversion or exchange of outstanding Options or Convertible Securities, as
the case may be, shall be deemed to be outstanding, and immediately after any
Additional Shares of Common are deemed issued pursuant to paragraph
(3)(cc)(iii), such Additional Shares of Common shall be deemed to be
outstanding. For purposes of this subparagraph, any such issuance for no
consideration shall be deemed to be an issuance for $.000001 per share.
(v) DETERMINATION OF CONSIDERATION. For purposes of this subsection
(c), the consideration received by the Corporation for the issue of any
Additional Shares of Common shall be computed as follows:
(1) CASH AND PROPERTY. If the consideration consists of cash,
it shall be computed at the aggregate amount of cash received by the
Corporation excluding amounts paid or payable for accrued interest or accrued
dividends. If the consideration consists of property other than cash, the
property shall be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board. In the event Additional
Shares of Common are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, the
consideration shall be the proportion of such consideration so received,
computed as provided above, as determined in good faith by the Board.
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(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration
per share received by the Corporation for Additional Shares of Common deemed
to have been issued pursuant to subparagraph (iii) (1) above, relating to
Options and Convertible Securities, shall be determined by dividing (x) the
total amount, if any, received or receivable by the Corporation as
consideration for the issue of such Options or Convertible Securities, plus
the minimum aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration) payable to the
Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for convertible Securities and the
conversion or exchange of such Convertible Securities by (y) the maximum
number of shares of Common Stock (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(3) STOCK DIVIDENDS. Any Additional Shares of Common Stock
deemed to have been issued relating to stock dividends shall be deemed to
have been issued for no consideration.
(vi) ADJUSTMENTS FOR SUBDIVISIONS OR COMBINATIONS OF COMMON. In
the event the outstanding shares of Common Stock shall be subdivided (by
stock split or otherwise than by payment of a dividend in Common Stock), into
a greater number of shares of Common Stock, the Conversion Price in effect
immediately prior to such subdivision shall, concurrently with the
effectiveness of such subdivision, be proportionately decreased. In the event
the outstanding shares of Common Stock shall be combined (by reclassification
or otherwise) into a lesser number of shares of Common Stock, the Conversion
Price in effect immediately prior to such combination shall, concurrently
with the effectiveness of such combination, by proportionately increased.
(vii) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the
Corporation at any time or from time to time makes or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted elsewhere in this
subsection (c), then and in each such event provision shall be made so that
the holders of Series I Preferred shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable thereupon, the
amount of securities of the Corporation which they would have received had
their Series I Preferred then converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such event
to and including the date of conversion, retained such securities receivable
by them as aforesaid during such period, subject to all other adjustments
called for during such period under this subsection (c) with respect to the
rights of the holders of the Series I Preferred.
(viii) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If the Common Stock issuable upon conversion of the Series I Preferred shall
be changed into the same or a different number of shares of any other class
or classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for
above), the Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately
adjusted such that the Series I Preferred shall be convertible into, in lieu
of the number of shares of Common Stock which the holders would otherwise
have been entitled to receive, a number of shares of such other class or
classes of stock equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon conversion of the
Series I Preferred immediately before that change.
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(ix) NO ADJUSTMENT OF CONVERSION PRICE. Notwithstanding any prior
provision of this subsection (c). No adjustment in the number of shares of
Common Stock into which the Series I Preferred is convertible shall be made
if prior to any issuance of Additional Shares of Common Stock which would
otherwise cause an adjustment under the provisions of this subsection (c) the
Corporation receives written notice from the holders of at least 67 percent
of the then outstanding shares of the Series I Preferred specifying that no
such adjustment shall be made as the result of the issuance of Additional
Shares of Common Stock.
(d) NO IMPAIRMENT. The Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
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 the Corporation but will at
all times in good faith assist in the carrying out of all the provisions
of this section 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 I Preferred against impairment.
(e) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this section,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder
of Series I Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series I Preferred, furnish or cause to be furnished to
such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of Series I Preferred.
(f) NOTICES OF RECORD DATE. In the event that this Corporation shall
propose at any time: (i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus; (ii) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series
or other rights; (iii) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge with or into any other corporation, or sell, lease or convey
all or substantially all its property or business, or to liquidate, dissolve
or wind up; then, in connection with each such event, this Corporation shall
send to the holders of the Series I Preferred at least ten days' prior
written notice of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying the date on
which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (iii) and
(iv) above, and in the case of the matters referred to in (iii) and (iv)
above, at least ten days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event). Each such
written notice shall be given by first-class mail, postage prepaid, addressed
to the holders of the Series I Preferred at the address for each such holder
as shown on the books of this Corporation.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The 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 I Preferred, such number of its shares
of Common Stock as shall from time to time be sufficient to
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effect the conversion of all then outstanding shares of the Series I
Preferred; 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 I Preferred, the 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 purpose.
2.2.4 VOTING
Holders of the Corporation's outstanding Series I Preferred shall
be entitled to cast, on all matters submitted to a vote of the shareholders
of the Corporation and on which shareholders are entitled to vote under
the provisions of the Oregon Business Corporation Act, that number of votes
which the shares of Common Stock into which such outstanding shares of Series
I Preferred are then convertible would be entitled to cast thereon. Holders
of Series I Preferred shall vote together with the holders of Common Stock on
all such matters except that, in voting upon (1) any proposed amendment to
these Restated Articles, including without limitation any alteration or
change in any of the preferences, privileges or rights of the Series I
Preferred, or any increase in the authorized number of shares of Series I
Preferred or (2) the proposed creation of any new class or series of
preferred or special stock having preferences prior to those of the Series I
Preferred as to dividends, liquidation or redemption, or (3) any proposed
merger or consolidation or sale, transfer or lease of all or substantially
all of the Corporation's assets, or (4) any proposed corporate dissolution or
liquidation, the holders of outstanding shares of Series I Preferred shall
vote as a separate voting group and the percentage vote required by law for
the approval of any such action shall be required, unless these Articles
require a higher percentage vote.
2.2.5 MODIFICATION OF TERMS OF SERIES I PREFERRED.
The Corporation shall not amend or modify any of the terms
affecting the Series I Preferred without first obtaining approval (either by
vote or written consent) of the holders of at least 67 percent of the then
outstanding shares of Series I Preferred.
2.2.6 PROTECTIVE LIMITATIONS.
So long as any shares of Series I Preferred shall remain
outstanding, and in addition to the separate voting matters referred to in
Section 2.2.4 above, the Corporation shall not, without the approval (either
by vote or written consent) of the holders of at least 67 percent of the then
outstanding shares of Series I Preferred:
(a) Declare, pay or obligate itself to pay any dividends or make
any other distributions (including payments upon redemption or repurchase)
relative to any shares of its Common Stock, other than share redemptions of
any kind from employees or former employees of the Company which have been
specifically approved by the Board of Directors)
(b) Issue or contract to issue any additional shares of preferred
stock (including shares of Series Preferred), or any other class of stock of
the Corporation, which have (or which entitle their holders to acquire shares
or securities which have) priority over the Series I Preferred as to
dividends, liquidation or redemption preferences;
(c) Merge or consolidate with or into any other corporation, except
into or with a wholly owned subsidiary corporation with the requisite
shareholder approval and except with any merger or consolidation in which the
Corporation is the surviving and the relative rights, preferences, privileges
and restrictions of the Series I Preferred remain unchanged;
10
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(d) Sell, convey, or otherwise dispose of, all or substantially all
of the property or business of the Corporation; or
(e) Issue, sell or contract to issue or sell any common, preferred
or special stock or other securities of the Corporation (either outright or
by way of options, warrants, conversion rights or otherwise) to any company
whose predominant business is not equity or debt investing in other
companies, or which is not an insurance company, if such issuance,
contracting or sale when aggregated with all prior or contemporaneous
issuances or sales to or contracts with such company would result in a
transfer to such company (including transfers to any entity controlling,
controlled by or under common control with such company) of 10 percent or
more, in interest, of the Corporation's voting capital stock (including
Common Stock) on a fully diluted basis or the ability to acquire through
conversion of preferred stock, exercise of warrants or options, or otherwise
10 percent or more in interest of the Corporation's voting capital stock on a
fully diluted basis.
2.3 RESIDUAL RIGHTS.
All rights which pursuant to the Oregon Business Corporation Act
must accrue to one or more classes of shares of this Corporation not expressly
provided for to the contrary herein shall be vested in the Common Stock.
ARTICLE 3
3.1 The Corporation shall indemnify its directors and officers, and may
indemnify its employees and agents, to the full extent and under the
circumstances permitted by the Oregon Business Corporation Act.
3.2 To the fullest extent permitted by law, no director of this
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for conduct as a director. No amendment or repeal of
this Article 3, nor the adoption of any provision of these Restated Articles
inconsistent with this Article 3, shall adversely affect any right or
protection of a director, which right or protection is based upon this
Article 3 and exists at the time of such amendment or repeal. No change in
the law shall reduce or eliminate the rights and protections applicable at
the time this provision shall become effective unless the change in the law
shall specifically require such reduction or elimination. If the Oregon
Business Corporation Act is amended, after this Article III shall become
effective, to authorize corporate action further eliminating or limiting the
personal liability of directors, officers, employees or agents, then the
liability of directors, officers, employees or agents of this Corporation
shall be eliminated or limited to the fullest extent permitted by the
Oregon Business Corporation Act, as so amended.
ARTICLE 4
4.1 No contract or other transaction between the Corporation and one or
more of its directors or any other corporation, firm, association or entity in
which one or more of its directors are directors or officers or are
financially interested, shall be either void or voidable because of such
relationship or interest or because such director or directors are present at
the meeting of the Board of Directors or a committee thereof which authorizes,
approves or ratifies such contract or transaction or because his or their
votes are counted for such purposes, if:
4.1.1 The fact of such relationship or interest is disclosed or
known to the Board of Directors or committee which authorizes, approves or
ratifies the contract or transaction by a vote or consent sufficient for the
purpose without counting the votes or consents of such interested directors;
or
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4.1.2 The fact of such relationship or interest is disclosed or
known to the shareholders entitled to vote and they authorize, approve or
ratify such contract or transaction by vote or written consent; or
4.1.3 The contract or transaction is fair to the Corporation.
4.2 Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes or ratifies such contract or transaction.
ARTICLE 5
No shareholder shall have any preemptive right arising under the Oregon
Business Corporation Act to acquire unissued tor treasury shares of the
Corporation or securities convertible into such shares or carrying a right to
Subscribe to or acquire such shares.
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GEMSTONE SYSTEMS, INC.
RESTATED ARTICLES OF INCORPORATION
ARTICLE 1
The name of this corporation is GemStone Systems, Inc.
ARTICLE 2
2.1 AUTHORIZED CAPITAL STOCK. The Corporation shall have authority to
issue 30,000,000 shares of stock in the aggregate. Such shares shall be divided
into two classes as follows:
(a) 25,000,000 shares of common stock, $.01 par value (the
"Common Stock").
(b) 5,000,000 shares of series preferred stock, $.01 par value
(the "Series Preferred").
The Series Preferred may be issued from time to time in one or more series
in any manner permitted by law, as determined from time to time by the Board of
Directors and stated in the resolution or resolutions adopted by the Board of
Directors pursuant to authority hereby vested in it, each series to be
appropriately designated, prior to the issue of any shares thereof, by some
distinguishing letter, number or title. All shares of the same series of Series
Preferred shall be identical in every particular and, except as otherwise stated
with respect to the particular preferences, limitations and relative rights in
the resolution or resolutions creating any series, identical with respect to
other series within the same class. The designation and terms of each
particular series of Series Preferred shall be fixed and determined by the Board
of Directors in any manner permitted by law and stated in the resolution or
resolutions providing for the issue of such stock before any shares of such
series are issued.
The Board of Directors may from time to time increase the number of shares
of any series of Series Preferred already created by providing that any unissued
shares of Series Preferred shall constitute part of such series, or may decrease
(but not below the number of shares thereof then outstanding) the number of
shares of any series of Series Preferred already created by providing that any
unissued shares previously assigned to such series shall no longer constitute a
part thereof. The Board of Directors is further empowered to classify or
reclassify any unissued Series Preferred by fixing or altering the terms thereof
and by assigning all or any portion thereof to an existing or newly created
series from time to time before the issuance of such stock.
<PAGE>
2.2 RESIDUAL RIGHTS. All rights which pursuant to the Oregon Business
Corporation Act must accrue to one or more classes of shares of this Corporation
not expressly provided for to the contrary herein shall be vested in the Common
Stock.
ARTICLE 3
3.1 The Corporation shall indemnify its directors and officers, and may
indemnify its employees and agents, to the full extent and under the
circumstances permitted by the Oregon Business Corporation Act.
3.2 To the fullest extent permitted by law, no director of this
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for conduct as a director. No amendment or repeal of this
Article 3, nor the adoption of any provision of these Restated Articles
inconsistent with this Article 3, shall adversely affect any right or protection
of a director, which right or protection is based upon this Article 3 and exists
at the time of such amendment or repeal. No change in the law shall reduce or
eliminate the rights and protections applicable at the time this provision shall
become effective unless the change in the law shall specifically require such
reduction or elimination. If the Oregon Business Corporation Act is amended,
after this Article 3 shall become effective, to authorize corporate action
further eliminating or limiting the personal liability of directors, officers,
employees or agents, then the liability of directors, officers, employees or
agents of this Corporation shall be eliminated or limited to the fullest extent
permitted by the Oregon Business Corporation Act, as so amended.
ARTICLE 4
4.1 No contract or other transaction between the Corporation and one or
more of its directors or any other corporation, firm, association or entity in
which one or more of its directors are directors or officers or are financially
interested, shall be either void or voidable because of such relationship or
interest or because such director or directors are present at the meeting of the
Board of Directors or a committee thereof which authorizes, approves or ratifies
such contract or transaction or because his or their votes are counted for such
purposes, if:
4.1.1 The fact of such relationship or interest is disclosed or
known to the Board of Directors or committee which authorizes, approves or
ratifies the contract or transaction by a vote or consent sufficient for the
purpose without counting the votes or consents of such interested directors; or
4.1.2 The fact of such relationship or interest is disclosed or
known to the shareholders entitled to vote and they authorize, approve or ratify
such contract or transaction by vote or written consent; or
4.1.3 The contract or transaction is fair to the Corporation.
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4.2 Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes or ratifies such contract or transaction.
ARTICLE 5
No shareholder shall have any preemptive right arising under the Oregon
Business Corporation Act to acquire unissued or treasury shares of the
Corporation or securities convertible into such shares or carrying a right to
subscribe to or acquire such shares.
ARTICLE 6
6.1 The number of directors of the Corporation shall be fixed as provided
by the Bylaws and may be changed from time to time by amending the Bylaws, as
therein provided, but the number of directors shall be not less than three. The
Board of Directors is authorized to increase the number of persons to comprise
the Board of Directors in any period between annual shareholder meetings by the
affirmative vote of a majority of the directors. In the event the Board of
Directors is divided into classes, such additional director or directors shall
be allocated by the Board of Directors among the three classes of directors so
as to maintain equal classes to the extent possible. Without the unanimous
consent of the existing Board of Directors, no more than two additional
directors shall be added to the Board of Directors within any 12-month period.
Without the unanimous consent of the Board of Directors, no person who is
affiliated as an owner, director, officer or employee of a company or business
deemed by the Board of Directors to be competitive with that of the Corporation
shall be eligible to serve on the Board of Directors of the Corporation.
6.2 At any time when the Board of Directors shall consist of six or more
members, in lieu of electing the entire number of directors annually, the Board
of Directors of the Corporation shall be divided into three classes. The method
of classification shall be to assign the longest terms to those directors with
the most seniority as directors. In the event there are more directors with
identical seniority than there are class positions to be filled, the initial
designation of classification shall be made by the director then serving as
Chairman of the Board. The classes shall be Class 1, Class 2 and Class 3. The
term of office of directors of Class 1 shall expire at the first annual meeting
of shareholders after their election, that of Class 2 shall expire at the second
annual meeting after their election, and that of Class 3 shall expire at the
third annual meeting after their election. When classification of directors is
in effect, at each annual meeting of shareholders the number of directors equal
to the number of the class whose term expires at the time of such meeting shall
be elected to hold office until the third succeeding annual meeting. No
classification of directors shall be effective in the event the authorized
number of members of the Board is reduced to fewer than six.
6.3 If the Board of Directors is divided into classes and in the event of
any increase or decrease in the authorized number of directors, then (i) each
director then serving as such shall nevertheless continue as a director of the
class of which he is a member until the expiration of his
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current term, or upon his earlier resignation, removal from office or death;
(ii) the newly created or eliminated directorships resulting from such increase
or decrease shall be allocated by the Board of Directors among the three classes
of directors so as to maintain equal classes to the extent possible; and (iii)
in the event such decrease in the authorized number of directors makes the total
number of directors less than six, then the Board of Directors shall become
declassified and the directors remaining in office shall continue their terms
until the next annual meeting of shareholders, at which time all of said
remaining directors shall be re-elected to one-year terms or until their
successors are duly elected and qualified.
ARTICLE 7
Notwithstanding any of the provisions of these Restated Articles of
Incorporation or the Bylaws of the Corporation, and notwithstanding the fact
that some lesser percentage may be allowed by law, any amendment, change or
repeal of Article 6 or this Article 7, or any other amendment of these Restated
Articles of Incorporation which would have the effect of modifying or permitting
circumvention of the provisions of Articles 6 or 7, shall require the
affirmative vote of 75% of the outstanding shares of Common Stock of the
Corporation.
ARTICLE 8
Each share of the Corporation's Common Stock outstanding on the date of
filing of these Restated Articles is without necessity for further action
converted into 0.55 of a share, with any resulting fractional shares rounded
up to the next whole number of shares.
4
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SERVIO CORPORATION
BYLAWS
ARTICLE 1
SHAREHOLDERS: MEETINGS AND VOTING
Section 1. PLACE OF MEETINGS
Meetings of the shareholders of Servio Corporation (the
"Corporation") will be held at the principal office of the Corporation, or
any other place, either within or without the state of California, selected
by the Board of Directors.
Section 2. ANNUAL MEETINGS
(a) The annual meeting of the shareholders will be held on such
date and at such time as may be prescribed by the Board of Directors. At the
annual meeting, the shareholders shall elect by vote a Board of Directors,
consider reports of the affairs of the Corporation and transact such other
business as may properly be brought before the meeting.
(b) If the annual meeting is not held within the earlier of six
months after the end of the Corporation's fiscal year or 15 months after its
last annual meeting, the circuit court of the county where the Corporation's
principal office is located, or, if the principal office is not in Oregon,
where the registered office of the Corporation is or was last located, may
summarily order a meeting to be held upon the application of any shareholder
of the Corporation entitled to participate in an annual meeting.
(c) At the annual meeting of the shareholders, only such matters
as shall have been properly brought before the meeting shall be considered
and acted upon. To be properly brought before an annual meeting, a matter
must be (i) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (ii) otherwise
brought before the meeting by or at the direction of the Board of Directors,
or (iii) properly brought before the meeting by a shareholder. For any
matter to be properly brought before the annual meeting by a shareholder, the
shareholder must have given prior written notice to the Secretary of the
Corporation which must be received at the principal executive offices of the
Corporation not less than 30 days nor more than 60 days prior to the meeting.
In the event that less than 30 days' notice of the date of the meeting is
given or made to shareholders, notice by a shareholder shall be timely
received if received not later than the close of business on the tenth day
following the date on which such notice of the date of the annual meeting was
mailed. A shareholder's notice to the Secretary in order to be valid must
set forth as to each matter the shareholder proposes to bring before the
annual meeting (i) a brief description of the matter proposed to be brought
before the annual meeting, (ii) the name
<PAGE>
and address, as they appear on the Corporation's books, of the shareholder
proposing such business, (iii) the class and number of shares of the
Corporation which are beneficially owned by the shareholder, and (iv) any
material interest of the shareholder in the matter. No matter shall be
considered or acted upon at an annual meeting except in accordance with the
procedures set forth in this Section 2. The presiding officer at any annual
meeting shall determine whether any matter was properly brought before the
meeting in accordance with the provisions of this section. If he should
determine that any matter has not been properly brought before the meeting,
he shall so declare at the meeting and any such matter shall not be
considered or acted upon.
Section 3. SPECIAL MEETINGS
(a) The Corporation shall hold a special meeting of shareholders
upon the call of the Corporation's chief executive officer or the Board of
Directors, or if the holders of at least 10 percent of all votes entitled to
be cast on any issue proposed to be considered at the proposed special
meeting sign, date and deliver to the Secretary of the Corporation one or
more written demands for the meeting describing the purpose or purposes for
which it is to be held.
(b) The circuit court of the county where the Corporation's
principal office is located, or, if the principal office is not in Oregon,
where the registered office of the Corporation is or was last located, may
summarily order a special meeting to be held upon the application of a
shareholder of the Corporation who signed a valid demand for a special
meeting if notice of the special meeting was not given within 30 days after
the date the demand was delivered to the Corporation's Secretary or if the
special meeting was not held in accordance with the notice.
Section 4. NOTICE OF MEETINGS
(a) The Corporation shall notify shareholders in writing of the
date, time and place of each annual and special shareholders meeting not
earlier than 60 days nor less than ten days before the meeting date. Unless
Oregon law or the Articles of Incorporation require otherwise, the
Corporation is required to give notice only to shareholders entitled to vote
at the meeting. Such notice is effective when mailed if it is mailed postage
prepaid and is correctly addressed to the shareholder's address shown in the
Corporation's current record of shareholders. Unless required by law or by
the Articles of Incorporation, notice of an annual meeting need not include a
description of the purpose or purposes for which the meeting is called.
Notice of a special meeting shall include a description of the purpose or
purposes for which the meeting is called.
(b) If an annual or special shareholders meeting is adjourned to a
different date, time or place, notice need not be
<PAGE>
given of the new date, time or place if the new date, time or place is
announced at the meeting before adjournment. If a new record date for the
adjourned meeting is fixed, or is required by law to be fixed, notice of the
adjourned meeting shall be given to persons who are shareholders as of the
new record date. A determination of shareholders entitled to notice of or to
vote at a shareholders meeting is effective for any adjournment of the
meeting unless the Board of Directors fixes a new record date, which it must
do if the meeting is adjourned to a date more than 120 days after the date
fixed for the original meeting.
(c) A shareholder's attendance at a meeting waives objection to
(i) lack of notice or defective notice of the meeting, unless the shareholder
at the beginning of the meeting objects to holding the meeting or transacting
business at the meeting; and (ii) consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
Section 5. QUORUM AND VOTING REQUIREMENTS FOR VOTING GROUPS
(a) Shares entitled to vote as a separate voting group may take
action on a matter at a meeting only if a quorum of those shares exists with
respect to that matter. Unless otherwise required by law, a majority of the
votes entitled to be cast on the matter by the voting group constitutes a
quorum of that voting group for action on that matter. Once a share is
represented for any purpose at a meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for that adjourned meeting.
(b) In the absence of a quorum, a majority of those present in
person or represented by proxy may adjourn the meeting from time to time
until a quorum exists. Any business that might have been transacted at the
original meeting may be transacted at the adjourned meeting if a quorum
exists.
Section 6. VOTING RIGHTS
(a) The persons entitled to receive notice of and to vote at any
shareholders meeting shall be determined from the records of the Corporation
on the close of business on the day before the mailing of the notice or on
such other date not more than 70 nor less than 10 days before such meeting as
may be fixed in advance by the Board of Directors.
(b) Except as otherwise provided in the Articles of Incorporation
or by law, each outstanding share, regardless of class, is entitled to one
vote on each matter voted on at a shareholders meeting. Only shares are
entitled to vote.
(c) Unless otherwise provided in the Articles of
<PAGE>
Incorporation or by law, if a quorum exists, action on a matter, other than
the election of directors, by a voting group is approved if the votes cast
within the voting group favoring the action exceed the votes cast within the
voting group opposing the action.
(d) Unless otherwise provided in the Articles of Incorporation,
directors are elected by a plurality of the votes cast by holders of the
shares entitled to vote in the election at a meeting at which a quorum is
present.
Section 7. VOTING OF SHARES BY CERTAIN HOLDERS
(a) If the name signed on a vote, consent, waiver or proxy
appointment corresponds to the name of a shareholder, the Corporation, if
acting in good faith, is entitled to accept the vote, consent, waiver or
proxy appointment and give it effect as the act of the shareholder. If the
name signed on a vote, consent, waiver or proxy appointment does not
correspond to the name of its shareholder, the Corporation, if acting in good
faith, is nevertheless entitled to accept the vote, consent, waiver or proxy
appointment and give it effect as the act of the shareholder if:
(i) The shareholder is an entity and the name signed purports
to be that of an officer or agent of the entity;
(ii) The name signed purports to be that of an administrator,
executor, guardian or conservator representing the shareholder and, if the
Corporation requests, evidence of fiduciary status acceptable to the
Corporation has been presented with respect to the vote, consent, waiver or
proxy appointment;
(iii) The name signed purports to be that of a receiver or
trustee in bankruptcy of the shareholder and, if the Corporation requests,
evidence of this status acceptable to the Corporation has been presented with
respect to the vote, consent, waiver or proxy appointment;
(iv) The name signed purports to be that of a pledgee,
beneficial owner or attorney-in-fact of the shareholder and, if the
Corporation requests, evidence acceptable to the Corporation of the
signatory's authority to sign for the shareholder has been presented with
respect to the vote, consent, waiver or proxy appointment; or
(v) Two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one of
the co-owners and the person signing appears to be acting on behalf of all
co-owners.
(b) Shares of the Corporation are not entitled to be voted if
(i) they are owned, directly or indirectly, by another domestic or foreign
corporation, and (ii) the Corporation owns, directly or indirectly, a
majority of the shares entitled to be
<PAGE>
voted for directors of such other corporation. This paragraph does not limit
the power of a corporation to vote any shares, including its own shares, held
by it in a fiduciary capacity.
(c) Any redeemable shares which the Corporation may issue are not
entitled to be voted after notice of redemption is mailed to the holders and
a sum sufficient to redeem the shares has been deposited with a bank, trust
company or other financial institution under an irrevocable obligation to pay
the holders the redemption price on surrender of the shares.
Section 8. PROXIES
A shareholder may vote shares either in person or by proxy. A
shareholder may appoint a proxy to vote or otherwise act for the shareholder
by signing an appointment form, either personally or by the shareholder's
attorney-in-fact. An appointment of a proxy is effective when received by
the Secretary or other officer or agent of the Corporation authorized to
tabulate votes. An appointment is valid for 11 months unless a longer period
is expressly provided in the appointment form. An appointment of a proxy is
revocable by the shareholder unless the appointment form conspicuously states
that it is irrevocable and the appointment is coupled with an interest.
Section 9. SHAREHOLDER LISTS
(a) After fixing a record date for a meeting, the Corporation
shall prepare an alphabetical list of the names of all of its shareholders
who are entitled to notice of the meeting. The list must be arranged by
voting group, and within each voting group, by class or series of shares and
show the address of and the number of shares held by each shareholder.
(b) The shareholder list shall be available for inspection by any
shareholder, beginning two business days after notice of the meeting for
which the list was prepared is given and continuing through the meeting.
Such list shall be kept on file at the Corporation's principal office or at a
place identified in the meeting notice in the city where the meeting will be
held. A shareholder, or the shareholder's agent or attorney, shall be
entitled on written demand to inspect and, subject to the requirements of
law, to copy the list during regular business hours and at the shareholder's
expense during the period it is available for inspection.
(c) The Corporation shall make the shareholder list available at
the meeting, and any shareholder, or the shareholder's agent or attorney, is
entitled to inspect the list at any time during the meeting or any
adjournment.
(d) Refusal or failure to prepare or make available the
shareholder list does not affect the validity of action taken at the meeting.
<PAGE>
ARTICLE 2
DIRECTORS: MANAGEMENT
Section 1. POWERS
The Corporation will have a Board of Directors. All corporate
powers will be exercised by or under the authority of, and the business and
affairs of the Corporation managed under the direction of, the Board of
Directors, subject to any limitation set forth in the Articles of
Incorporation.
Section 2. NUMBER AND QUALIFICATIONS
The Board of Directors will consist of not less than one nor more
than seven members. Until increased by a resolution of the Board of
Directors, the number of directors shall be two. Any decrease in the number
of directors implemented by the Board of Directors does not shorten an
incumbent director's term. Directors need not be residents of the state of
Oregon or shareholders of the Corporation, unless required by the Articles of
Incorporation.
Section 3. ELECTION AND TENURE OF OFFICE
The directors shall be elected by ballot at the annual meeting of
the shareholders. The terms of all directors expire at the next annual
shareholders meeting following their election. The term of a director elected
to fill a vacancy expires at the next shareholders meeting at which directors
are elected. Despite the expiration of a director's term, the director
continues to serve until the director's successor is elected or until there
is a decrease in the number of directors. Subject to paragraph (c) of
Section 4 of Article 2, a director's term of office will begin immediately
after election.
Section 4. VACANCIES
(a) A vacancy in the Board of Directors will exist upon the death,
resignation or removal of any director or upon an increase in the number of
directors.
(b) Unless the Articles of Incorporation provide otherwise, if a
vacancy occurs on the Board of Directors the Board of Directors may fill the
vacancy. If the directors remaining in office constitute fewer than a quorum
of the Board, they may fill the vacancy by the affirmative vote of a majority
of all the directors remaining in office.
(c) A vacancy that will occur at a specific later date, by reason
of a resignation effective at the later date or otherwise, may be filled
before the vacancy occurs, but the new director may not take office until the
vacancy occurs.
(d) If the vacancy has not been filled by action of
<PAGE>
the Board of Directors prior to the next meeting of the shareholders
occurring after the vacancy was created, the shareholders may fill the
vacancy.
Section 5. RESIGNATION OF DIRECTORS
A director may resign at any time by delivering written notice to
the Board of Directors, its chairperson or the Corporation. Unless the
notice specifies a later effective date, a resignation is effective at the
earliest of the following: (a) when received; (b) five days after its
deposit in the United States mail, as evidenced by the postmark, if mailed
postage prepaid and correctly addressed; or (c) on the date shown on the
return receipt, if sent by registered or certified mail, return receipt
requested and the receipt is signed by or on behalf of the addressee. Once
delivered, a notice of resignation is irrevocable unless revocation is
permitted by the Board of Directors.
Section 6. REMOVAL OF DIRECTORS
The shareholders may remove one or more directors with or without
cause unless the Articles of Incorporation provide that the directors may be
removed only for cause. A director may be removed by the shareholders only
at a meeting called for the purpose of removing the director and the meeting
notice must state that the purpose, or one of the purposes, of the meeting is
removal of the director.
Section 7. MEETINGS
(a) The Board of Directors may hold regular or special meetings in
or out of the state of Oregon.
(b) Annual meetings of the Board of Directors will be held without
notice immediately following the adjournment of the annual meetings of the
shareholders.
(c) Unless the Articles of Incorporation provide otherwise,
regular meetings of the Board of Directors may be held without notice of the
date, time, place or purpose of the meeting. The Board of Directors may fix,
by resolution, the time and place for the holding of regular meetings.
(d) Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Corporation's chief executive
officer. The person calling a special meeting of the Board of Directors may
fix the time and place of the special meeting.
<PAGE>
Section 8. NOTICE OF SPECIAL MEETINGS
(a) Special meetings of the Board of Directors shall be preceded
by at least 24 hours' notice of the date, time and place of the meeting. The
notice need not describe the purpose of the special meeting unless required
by the Articles of Incorporation. The notice may be given orally, in person
or by telephone, or delivered in writing either personally, by mail or by
telegram. If in writing, such notice is effective at the earliest of the
following: (i) when received; (ii) five days after its deposit in the United
States mail, as evidenced by the postmark, if it is mailed postage prepaid
and is correctly addressed to the director's address shown in the
Corporation's records; or (iii) on the date shown on the return receipt, if
sent by registered or certified mail, return receipt requested, and the
receipt is signed by or on behalf of the addressee. If given orally, such
notice is effective when communicated.
(b) A director's attendance at or participation in a meeting
waives any required notice to the director of the meeting unless the director
at the beginning of the meeting, or promptly upon the director's arrival,
objects to holding the meeting or transacting business at the meeting and
does not thereafter vote for or assent to action taken at the meeting.
(c) Notice of the time and place of holding an adjourned meeting
need not be given if such time and place are fixed at the meeting adjourned.
Section 9. QUORUM AND VOTE
(a) Unless the Articles of Incorporation provide otherwise, a
majority of the directors in office will constitute a quorum for the
transaction of business. A majority of the directors present, in the absence
of a quorum, may adjourn from time to time but may not transact any business.
(b) If a quorum is present when a vote is taken, the affirmative
vote of a majority of directors present is the act of the Board of Directors
unless the Articles of Incorporation require the vote of a greater number of
directors.
(c) A director of the Corporation who is present at a meeting of
the Board of Directors, or is present at a meeting of a committee of the
Board of Directors, when corporate action is taken is deemed to have assented
to the action taken unless (i) the director objects at the beginning of the
meeting, or promptly upon the director's arrival, to holding the meeting or
transacting business at the meeting, (ii) the director's dissent or
abstention from the action taken is entered in the minutes of the meeting, or
(iii) the director delivers written notice of dissent or abstention to the
presiding officer of the meeting before its adjournment or to the Corporation
immediately after
<PAGE>
adjournment of the meeting. The right of dissent or abstention is not
available to a director who votes in favor of the action taken.
Section 10. COMPENSATION
The Board of Directors may, by resolution, provide that the
directors be paid their expenses, if any, of attendance at each meeting of
the Board of Directors, and provide that directors be paid a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment will preclude any director from serving the
Corporation in any other capacity and receiving compensation for that service.
ARTICLE 3
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. GENERAL AUTHORITY
Subject to law, the provisions of the Articles of Incorporation and
these Bylaws, the Board of Directors may appoint such committees as may be
necessary from time to time, consisting of such number of its members and
having such powers as it may designate. Each such committee will have two or
more members, who serve at the pleasure of the Board of Directors.
Section 2. ACTION OF COMMITTEES
All actions of a committee will be reflected in minutes to be kept
of such meetings and reported to the Board of Directors at the next
succeeding meeting thereof. The provisions of Article 2 of these Bylaws
governing meetings, notice and waiver of notice, and quorum and voting
requirements of the Board of Directors apply to committees and their members
as well.
ARTICLE 4
OFFICERS
Section 1. DESIGNATION; ELECTION
(a) The officers of the Corporation shall be a President, a
Secretary and such other officers and assistant officers as the Board of
Directors will from time to time appoint, none of whom need be members of the
Board of Directors. The officers shall be elected by, and hold office at the
pleasure of, the Board of Directors. A duly appointed officer may appoint
one or more officers or assistant officers if such appointment is authorized
by the Board of Directors. The same individual may simultaneously hold more
than one office in the Corporation.
(b) A vacancy in any office because of death, resignation, removal
or any other cause will be filled in the manner prescribed in these Bylaws
for regular appointments to such office.
<PAGE>
Section 2. COMPENSATION AND TERM OF OFFICE
(a) The compensation and term of office of all the officers of the
Corporation shall be fixed by the Board of Directors.
(b) The Board of Directors may remove any officer at any time,
either with or without cause.
(c) Any officer may resign at any time by giving written notice to
the Board of Directors, the Corporation's chief executive officer or the
Secretary of the Corporation. Unless the notice specifies a later effective
date, a resignation is effective at the earliest of the following: (a) when
received; (b) five days after its deposit in the United States mail, as
evidenced by the postmark, if mailed postage prepaid and correctly addressed;
or (c) on the date shown on the return receipt, if sent by registered or
certified mail, return receipt requested and the receipt is signed by or on
behalf of the addressee. Once delivered, a notice of resignation is
irrevocable unless revocation is permitted by the Board of Directors. If a
resignation is made effective at a later date and the Corporation accepts the
future effective date, the Board of Directors may fill the pending vacancy
before the effective date, if the Board of Directors provides that the
successor will not take office until the effective date.
(d) This section will not affect the rights of the Corporation or
any officer under any express contract of employment.
Section 3. CHAIRMAN OF THE BOARD
The Chairman of the Board, if and when elected, shall preside at
all meetings of the Board of Directors and at meetings of the shareholders,
and shall have all powers and responsibilities attendant therewith.
Section 4. PRESIDENT
The President shall be the chief executive officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and affairs of the
Corporation. In the absence of the Chairman of the Board, the President will
perform the duties and responsibilities of the Chairman of the Board. The
President will be ex officio a member of all the standing committees of the
Board of Directors (including the executive committee, if any), will have the
general powers and duties of management usually vested in the office of
president of a corporation and will have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws.
<PAGE>
Section 5. VICE PRESIDENTS
The Vice Presidents, if any, shall perform such duties as the Board
of Directors prescribes. In the absence or disability of the President, the
President's duties and powers shall be performed and exercised by a senior
Vice President, as designated by the Board of Directors.
Section 6. SECRETARY
(a) The Secretary shall keep or cause to be kept at the principal
office, or such other place as the Board of Directors may order, a book of
minutes of all meetings of directors and shareholders showing the time and
place of the meeting, and if a special meeting, how authorized, the notice
given, the names of those present at directors meetings, the number of shares
present or represented at shareholders meetings and the proceedings thereof.
(b) The Secretary shall keep or cause to be kept, at the principal
office or at the office of the Corporation's transfer agent, a share
register, or a duplicate share register, showing the names of the
shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for such shares and the
number and date of cancellation of certificates surrendered for cancellation.
(c) The Secretary shall give or cause to be given such notice of
the meetings of the shareholders and of the Board of Directors as is required
by these Bylaws. If the Corporation elects to have a seal, the Secretary
shall keep the seal and affix it to all documents requiring a seal. The
Secretary shall have such other powers and perform such other duties as may
be prescribed by the Board of Directors or these Bylaws.
Section 7. TREASURER
The Treasurer, if any, shall be responsible for the funds of the
Corporation, shall pay them out only on the checks of the Corporation signed
in the manner authorized by the Board of Directors, shall deposit and
withdraw such funds in such depositories as may be authorized by the Board of
Directors, and shall keep full and accurate accounts of receipts and
disbursements in books maintained at the Corporation's principal offices.
Section 8. ASSISTANTS
The Board of Directors may appoint or authorize the appointment of
assistants to the Secretary or Treasurer, or both. Such assistants may
exercise the powers of the Secretary or Treasurer, as the case may be, and
will perform such duties as are prescribed by the Board of Directors.
ARTICLE 5
<PAGE>
CORPORATE RECORDS AND REPORTS - INSPECTION
Section 1. RECORDS
The Corporation shall maintain all records required by law. All
such records will be kept at its principal office, registered office or at
any other place designated by the Corporation's chief executive officer, or
as otherwise provided by law.
Section 2. INSPECTION OF RECORDS
The records of the Corporation will be open to inspection by the
shareholders or the shareholders' agents or attorneys in the manner and to
the extent required by law.
Section 3. CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for payment of money, notes or
other evidences of indebtedness, issued in the name of or payable to the
Corporation, will be signed or endorsed by such person or persons and in such
manner as may be determined from time to time by resolution of the Board of
Directors.
Section 4. EXECUTION OF DOCUMENTS
The Board of Directors may, except as otherwise provided in these
Bylaws, authorize any officer or agent of the Corporation to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation. Such authority may be general or confined to specific
instances. Unless so authorized by the Board of Directors, or unless inherent
in the authority vested in the office under the provision of these Bylaws, no
officer, agent or employee of the Corporation will have any power or
authority to bind the Corporation by any contract or engagement, or to pledge
its credit, or to render it liable for any purpose or for any amount.
ARTICLE 6
CERTIFICATES AND TRANSFER OF SHARES
Section 1. CERTIFICATES FOR SHARES
(a) Certificates for shares will be in such form as the Board of
Directors may designate, will designate the name of the Corporation and the
state law under which the Corporation is organized, will state the name of
the person to whom the shares represented by the certificate are issued, and
will state the number and class of shares and the designation of the series,
if any, the certificate represents. If the Corporation is authorized to
issue different classes of shares or different series within a class, the
designations, relative rights, preferences and limitations applicable to each
class, the variations and rights, preferences and limitations determined for
each series and the
<PAGE>
authority of the Board of Directors to determine variations for future series
will be summarized on the front or back of each certificate, or each
certificate may state conspicuously on its front or back that the Corporation
will furnish shareholders with this information on request in writing and
without charge.
(b) Each certificate for shares must be signed, either manually or
in facsimile, by the Chairman, the President or a Vice President and the
Secretary or an Assistant Secretary of the Corporation. The certificates may
bear the corporate seal or its facsimile.
(c) If any officer who has signed a share certificate, either
manually or in facsimile, no longer holds office when the certificate is
issued, the certificate is nevertheless valid.
Section 2. TRANSFER ON THE BOOKS
Upon surrender to the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, and subject to any limitations on transfer appearing
on the certificate or in the Corporation's stock transfer records, the
Corporation shall issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 3. LOST, STOLEN OR DESTROYED CERTIFICATES
In the event a certificate is represented to be lost, stolen or
destroyed, a new certificate will be issued in place thereof upon such proof
of the loss, theft or destruction and upon the giving of such bond or other
indemnity as may be required by the Board of Directors.
Section 4. TRANSFER AGENTS AND REGISTRARS
The Board of Directors may from time to time appoint one or more
transfer agents and one or more registrars for the shares of the Corporation
who will have such powers and duties as the Board of Directors may specify.
Section 5. CLOSING STOCK TRANSFER BOOKS
The Board of Directors may close the transfer books for a period
not exceeding 70 days nor less than 10 days preceding any annual or special
meeting of the shareholders or the day appointed for the payment of a
dividend.
ARTICLE 7
GENERAL PROVISIONS
Section 1. SEAL
If the Corporation elects to have a corporate seal, the
<PAGE>
seal will be circular in form and will have inscribed thereon the name of the
Corporation and the state of its incorporation.
Section 2. AMENDMENT OF BYLAWS
(a) Except as otherwise provided by law or by the Articles of
Incorporation, the Board of Directors may amend or repeal these Bylaws unless:
(i) The Articles of Incorporation or Oregon law reserve this
power exclusively to the shareholders in whole or in part; or
(ii) The shareholders in amending or repealing a particular
Bylaw provide expressly that the Board of Directors may not amend or repeal
that Bylaw.
(b) The Corporation's shareholders may amend or repeal these
Bylaws even though these Bylaws may also be amended or repealed by the Board
of Directors.
(c) Whenever an amendment or new Bylaw is adopted, it will be
copied in the minute book with the original Bylaws in the appropriate place.
If any Bylaw is repealed, the fact of repeal and the date on which the repeal
occurred will be stated in such book and place.
Section 3. WAIVER OF NOTICE
(a) A shareholder may at any time waive any notice required by
law, the Articles of Incorporation or these Bylaws. Except as otherwise
provided in paragraph (c) of Section 4 of Article 1 of these Bylaws, the
waiver shall be in writing, shall be signed by the shareholder entitled to
the notice, and shall be delivered to the Corporation for inclusion in the
minutes or filing with the corporate records.
(b) A director may at any time waive any notice required by law,
the Articles of Incorporation or these Bylaws. Except as otherwise provided
in paragraph (b) of Section 8 of Article 2 of these Bylaws, the waiver shall
be in writing, shall be signed by the director entitled to the notice, shall
specify the meeting for which notice is waived and shall be filed with the
minutes or appropriate records.
<PAGE>
Section 4. ACTION WITHOUT A MEETING
(a) Action required or permitted by law to be taken at a
shareholders meeting may be taken without a meeting if the action is taken by
all the shareholders entitled to vote on the action. The action shall be
evidenced by one or more written consents describing the action taken, signed
by all the shareholders entitled to vote on the action and delivered to the
Corporation for inclusion in the minutes or filing with the corporate
records. Action taken under this Section 4 is effective when the last
shareholder signs the consent, unless the consent specifies an earlier or
later effective date. If not otherwise determined by law, the record date
for determining shareholders entitled to take action without a meeting is the
date the first shareholder signs the consent. A consent signed under this
Section 4 has the effect of a meeting vote and may be described as such in
any document.
(b) Unless the Articles of Incorporation or Bylaws provide
otherwise, action required or permitted by law to be taken at a meeting of
the Board of Directors, or at a meeting of a committee of the Board of
Directors, may be taken without a meeting if the action is taken by all
members of the Board. The action shall be evidenced by one or more written
consents describing the action taken, signed by each director and included in
the minutes or filed with the corporate records reflecting the action taken.
Action taken under this section is effective when the last director signs the
consent, unless the consent specifies an earlier or later effective date. A
consent signed under this section has the effect of a meeting vote and may be
described as such in any document.
Section 5. TELEPHONIC MEETINGS
Unless the Articles of Incorporation provide otherwise, the Board
of Directors may permit any or all directors to participate in a regular or
special meeting by, or conduct the meeting through, use of any means of
communication by which all directors participating may simultaneously hear
each other during the meeting. A director participating in a meeting by this
means is deemed to be present in person at the meeting.
ARTICLE 8
INDEMNIFICATION
(a) The Corporation shall indemnify to the fullest extent
permitted by law, any person who is made, or threatened to be made, a party
to or witness in, or is otherwise involved in, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, investigative, or otherwise (including any action, suit or
proceeding by or in the right of the Corporation) by reason of the fact that:
<PAGE>
(i) the person is or was a director or officer of the
Corporation or any of its subsidiaries;
(ii) the person is or was serving as a fiduciary within the
meaning of the Employee Retirement Income Security Act of 1974 with respect
to any employee benefit plan of the Corporation or any of its subsidiaries; or
(iii) the person is or was serving, at the request of the
Corporation or any of its subsidiaries, as a director or officer, or as a
fiduciary of an employee benefit plan, of another corporation, partnership,
joint venture, trust or other enterprise.
(b) The Corporation may indemnify its employees and other agents
to the fullest extent permitted by law.
(c) The expenses incurred by a director or officer or other
indemnified person in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
investigative, or otherwise, which the director or officer is made or
threatened to be made a party to or witness in, or is otherwise involved in,
shall be paid by the Corporation in advance upon written request if the
indemnified person:
(i) furnishes the Corporation a written affirmation that in
good faith the person believes that he or she is entitled to be indemnified
by the Corporation; and
(ii) furnishes the Corporation a written undertaking to repay
such advance to the extent that it is ultimately determined by a court that
such person is not entitled to be indemnified by the Corporation. Such
advances will be made without regard to the person's ability to repay such
expenses and without regard to the person's ultimate entitlement to
indemnification under this Article or otherwise.
(d) The rights of indemnification provided in this Article 8 will
be in addition to any rights to which a person may otherwise be entitled
under any articles of incorporation, bylaw, agreement, statute, policy of
insurance, vote of shareholders or Board of Directors, or otherwise; will
continue as to a person who has ceased to be a director, officer, employee or
agent of the Corporation; and will inure to the benefit of the heirs,
executors and administrators of such person.
(e) Any repeal of this Article 8 will be prospective only and no
repeal or modification of this Article 8 will adversely affect any right or
protection that is based upon this Article 8 and pertains to an act or
omission that occurred prior to the time of such repeal or modification.
<PAGE>
ARTICLE 9
TRANSACTIONS WITH INTERESTED DIRECTORS
Section 1. VALIDITY OF TRANSACTION
No transaction involving the Corporation will be voidable by the
Corporation solely because of a director's direct or indirect interest in the
transaction if:
(a) The material facts of the transaction and the director's
interest were disclosed or known to the Board of Directors or a committee of
the Board of Directors, and the Board of Directors or committee authorized,
approved or ratified the transaction; or
(b) The material facts of the transaction and the director's
interest were disclosed or known to the shareholders entitled to vote and a
majority of those shareholders authorized, approved or ratified the
transaction; or
(c) The transaction was fair to the Corporation.
Solely for purposes of this Article 9, a director of the
Corporation has an indirect interest in a transaction if another entity in
which the director has a material financial interest or in which the director
is a general partner is a party to the transaction or the transaction is with
another entity of which the director is a director, officer or trustee and
the transaction is or should be considered by the Board of Directors.
Section 2. APPROVAL BY BOARD
For purposes of Section 1, a transaction in which a director has an
interest is authorized, approved or ratified if it receives the affirmative
vote of a majority of the directors on the Board of Directors, or on the
committee, who have no direct or indirect interest in the transaction. A
transaction may not be authorized, approved or ratified under this Article 9
by a single director. If a majority of the directors who have no direct or
indirect interest in the transaction vote to authorize, approve or ratify the
transaction, a quorum shall be deemed to be present for the purpose of taking
action under this Article 9. The presence of, or a vote cast by, a director
with a direct or indirect interest in the transaction does not affect the
validity of any action taken by the Board of Directors or a committee thereof
if the transaction is otherwise authorized, approved or ratified in any
manner as provided in Section 1.
Section 3. APPROVAL BY SHAREHOLDERS
For purposes of Section 1, a transaction in which a director has an
interest is authorized, approved or ratified if it receives the vote of a
majority of the shares entitled to be
<PAGE>
counted under this Article 9, voting as a single voting group. Shares owned
by or voted under the control of a director who has a direct or indirect
interest in the transaction, and shares owned by or voted under the control
of any entity affiliated with the director as described in Section 1 may be
counted in a vote of shareholders to determine whether to authorize, approve
or ratify a transaction by vote of the shareholders under this Article 9. A
majority of the shares, whether or not present, that are entitled to be
counted in a vote on the transaction under this Article 9 constitutes a
quorum for the purpose of taking action under this Article 9.
ARTICLE 10
LIMITATION OF DIRECTOR LIABILITY
To the fullest extent permitted by law, no director of the
Corporation will be personally liable to the Corporation or its shareholders
for monetary damages for conduct as a director. For example, without limiting
the generality of the foregoing, if the Oregon Revised Statutes are amended,
after this Article 10 becomes effective, to authorize corporate action
further eliminating or limiting the personal liability of directors of the
Corporation, then the liability of directors of the Corporation will be
eliminated or limited to the fullest extent permitted by the Oregon Revised
Statutes, as so amended. No amendment or repeal of this Article 10, nor the
adoption of any provision of these Bylaws inconsistent with this Article 10,
nor a change in the law, will adversely affect any right or protection that
is based upon this Article 10 and pertains to conduct that occurred prior to
the time of such amendment, repeal, adoption or change. No change in the law
will reduce or eliminate the rights and protections set forth in this
Article 10 unless the change in the law specifically requires such reduction
or elimination.
The foregoing Bylaws were adopted by written consent on January 1, 1991.
/s/ James P. Barnes
-------------------------------
James P. Barnes
Secretary
<PAGE>
GEMSTONE SYSTEMS, INC.
RESTATED BYLAWS
ARTICLE 1
SHAREHOLDERS: MEETINGS AND VOTING
Section 1. PLACE OF MEETINGS
Meetings of the shareholders of GemStone Systems, Inc. (the
"Corporation") will be held at the principal office of the Corporation, or
any other place, either within or without the state of Oregon, selected by
the Board of Directors.
Section 2. ANNUAL MEETINGS
(a) The annual meeting of the shareholders will be held on
such date and at such time as may be prescribed by the Board of Directors.
At the annual meeting, the shareholders shall elect by vote a Board of
Directors, consider reports of the affairs of the Corporation and transact
such other business as may properly be brought before the meeting.
(b) If the annual meeting is not held within the earlier of
six months after the end of the Corporation's fiscal year or 15 months after
its last annual meeting, the circuit court of the county where the
Corporation's principal office is located, or, if the principal office is not
in Oregon, where the registered office of the Corporation is or was last
located, may summarily order a meeting to be held upon the application of any
shareholder of the Corporation entitled to participate in an annual meeting.
(c) At the annual meeting of the shareholders, only such
matters as shall have been properly brought before the meeting shall be
considered and acted upon. To be properly brought before an annual meeting,
a matter must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (ii)
otherwise brought before the meeting by or at the direction of the Board of
Directors, or (iii) properly brought before the meeting by a shareholder.
For any matter to be properly brought before the annual meeting by a
shareholder, the shareholder must have given prior written notice to the
Secretary of the Corporation which must be received at the principal
executive offices of the Corporation not less than 30 days nor more than 60
days prior to the meeting. In the event that less than 30 days' notice of
the date of the meeting is given or made to shareholders, notice by a
shareholder shall be timely received if received not later than the close of
business on the tenth day following the date on which such notice of the date
of the annual meeting was mailed. A shareholder's notice to the Secretary in
order to be valid must set forth as to each matter the shareholder proposes
to bring before the annual meeting (i) a brief description of the matter
proposed to be brought before the annual meeting, (ii) the name and address,
as they appear on the Corporation's books, of the shareholder proposing such
business, (iii) the class and number of shares of the Corporation which are
<PAGE>
beneficially owned by the shareholder, and (iv) any material interest of the
shareholder in the matter. No matter shall be considered or acted upon at an
annual meeting except in accordance with the procedures set forth in this
Section 2. The presiding officer at any annual meeting shall determine whether
any matter was properly brought before the meeting in accordance with the
provisions of this section. If he should determine that any matter has not been
properly brought before the meeting, he shall so declare at the meeting and any
such matter shall not be considered or acted upon.
Section 3. SPECIAL MEETINGS
(a) The Corporation shall hold a special meeting of
shareholders upon the call of the Board of Directors or the Chairman of the
Board, or if the holders of at least 10% of all votes entitled to be cast on
any issue proposed to be considered at the proposed special meeting sign,
date and deliver to the Secretary of the Corporation one or more written
demands for the meeting describing the purpose or purposes for which it is to
be held.
(b) The circuit court of the county where the Corporation's
principal office is located, or, if the principal office is not in Oregon,
where the registered office of the Corporation is or was last located, may
summarily order a special meeting to be held upon the application of a
shareholder of the Corporation who signed a valid demand for a special
meeting if notice of the special meeting was not given within 30 days after
the date the demand was delivered to the Corporation's Secretary or if the
special meeting was not held in accordance with the notice.
Section 4. NOTICE OF MEETINGS
(a) The Corporation shall notify shareholders in writing of
the date, time and place of each annual and special shareholders meeting not
earlier than 60 days nor less than ten days before the meeting date. Unless
Oregon law or the Articles of Incorporation require otherwise, the
Corporation is required to give notice only to shareholders entitled to vote
at the meeting. Such notice is effective when mailed if it is mailed postage
prepaid and is correctly addressed to the shareholder's address shown in the
Corporation's current record of shareholders. Unless required by law or by
the Articles of Incorporation, notice of an annual meeting need not include a
description of the purpose or purposes for which the meeting is called.
Notice of a special meeting shall include a description of the purpose or
purposes for which the meeting is called.
(b) If an annual or special shareholders meeting is adjourned
to a different date, time or place, notice need not be given of the new date,
time or place if the new date, time or place is announced at the meeting
before adjournment. If a new record date for the adjourned meeting is fixed,
or is required by law to be fixed, notice of the adjourned meeting shall be
given to persons who are shareholders as of the new record date. A
determination of shareholders entitled to notice of or to vote at a
shareholders meeting is effective for any adjournment of the meeting unless
the Board of Directors fixes a new record date, which it must do if the
meeting is adjourned to a date more than 120 days after the date fixed for
the original meeting.
(c) A shareholder's attendance at a meeting waives objection
to (i) lack of notice or defective notice of the meeting, unless the
shareholder at the beginning of the meeting objects to
2
<PAGE>
holding the meeting or transacting business at the meeting; and (ii)
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the shareholder
objects to considering the matter when it is presented.
Section 5. QUORUM AND VOTING REQUIREMENTS FOR VOTING GROUPS
(a) Shares entitled to vote as a separate voting group may
take action on a matter at a meeting only if a quorum of those shares exists
with respect to that matter. Unless otherwise required by law, a majority of
the votes entitled to be cast on the matter by the voting group constitutes a
quorum of that voting group for action on that matter. Once a share is
represented for any purpose at a meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for that adjourned meeting.
(b) In the absence of a quorum, a majority of those present
in person or represented by proxy may adjourn the meeting from time to time
until a quorum exists. Any business that might have been transacted at the
original meeting may be transacted at the adjourned meeting if a quorum
exists.
Section 6. VOTING RIGHTS
(a) The persons entitled to receive notice of and to vote at
any shareholders meeting shall be determined from the records of the
Corporation on the close of business on the day before the mailing of the
notice or on such other date not more than 70 nor less than 10 days before
such meeting as may be fixed in advance by the Board of Directors.
(b) Except as otherwise provided in the Articles of
Incorporation or by law, each outstanding share, regardless of class, is
entitled to one vote on each matter voted on at a shareholders meeting. Only
shares are entitled to vote.
(c) Unless otherwise provided in the Articles of
Incorporation or by law, if a quorum exists, action on a matter, other than
the election of directors, by a voting group is approved if the votes cast
within the voting group favoring the action exceed the votes cast within the
voting group opposing the action.
(d) Unless otherwise provided in the Articles of
Incorporation, directors are elected by a plurality of the votes cast by
holders of the shares entitled to vote in the election at a meeting at which
a quorum is present.
Section 7. VOTING OF SHARES BY CERTAIN HOLDERS
(a) If the name signed on a vote, consent, waiver or proxy
appointment corresponds to the name of a shareholder, the Corporation, if
acting in good faith, is entitled to accept the vote, consent, waiver or
proxy appointment and give it effect as the act of the shareholder. If the
name signed on a vote, consent, waiver or proxy appointment does not
correspond to the name of its
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shareholder, the Corporation, if acting in good faith, is nevertheless entitled
to accept the vote, consent, waiver or proxy appointment and give it effect as
the act of the shareholder if:
(i) The shareholder is an entity and the name signed purports to be
that of an officer or agent of the entity;
(ii) The name signed purports to be that of an administrator,
executor, guardian or conservator representing the shareholder and, if the
Corporation requests, evidence of fiduciary status acceptable to the
Corporation has been presented with respect to the vote, consent, waiver or
proxy appointment;
(iii) The name signed purports to be that of a receiver or trustee
in bankruptcy of the shareholder and, if the Corporation requests, evidence
of this status acceptable to the Corporation has been presented with respect
to the vote, consent, waiver or proxy appointment;
(iv) The name signed purports to be that of a pledgee, beneficial
owner or attorney-in-fact of the shareholder and, if the Corporation
requests, evidence acceptable to the Corporation of the signatory's authority
to sign for the shareholder has been presented with respect to the vote,
consent, waiver or proxy appointment; or
(v) Two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one of
the co-owners and the person signing appears to be acting on behalf of all
co-owners.
(b) Shares of the Corporation are not entitled to be voted if (i) they
are owned, directly or indirectly, by another domestic or foreign
corporation, and (ii) the Corporation owns, directly or indirectly, a
majority of the shares entitled to be voted for directors of such other
corporation. This paragraph does not limit the power of a corporation to
vote any shares, including its own shares, held by it in a fiduciary capacity.
(c) Any redeemable shares which the Corporation may issue are not
entitled to be voted after notice of redemption is mailed to the holders and
a sum sufficient to redeem the shares has been deposited with a bank, trust
company or other financial institution under an irrevocable obligation to pay
the holders the redemption price on surrender of the shares.
Section 8. PROXIES
A shareholder may vote shares either in person or by proxy. A
shareholder may appoint a proxy to vote or otherwise act for the shareholder
by signing an appointment form, either personally or by the shareholder's
attorney-in-fact. An appointment of a proxy is effective when received by the
Secretary or other officer or agent of the Corporation authorized to tabulate
votes. An appointment is valid for 11 months unless a longer period is
expressly provided in the appointment form. An appointment of a proxy is
revocable by the shareholder unless the appointment form conspicuously states
that it is irrevocable and the appointment is coupled with an interest.
Section 9. SHAREHOLDER LISTS
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(a) After fixing a record date for a meeting, the Corporation shall
prepare an alphabetical list of the names of all of its shareholders who are
entitled to notice of the meeting. The list must be arranged by voting
group, and within each voting group, by class or series of shares and show
the address of and the number of shares held by each shareholder.
(b) The shareholder list shall be available for inspection by any
shareholder, beginning two business days after notice of the meeting for
which the list was prepared is given and continuing through the meeting.
Such list shall be kept on file at the Corporation's principal office or at a
place identified in the meeting notice in the city where the meeting will be
held. A shareholder, or the shareholder's agent or attorney, shall be
entitled on written demand to inspect and, subject to the requirements of
law, to copy the list during regular business hours and at the shareholder's
expense during the period it is available for inspection.
(c) The Corporation shall make the shareholder list available at the
meeting, and any shareholder, or the shareholder's agent or attorney, is
entitled to inspect the list at any time during the meeting or any
adjournment.
(d) Refusal or failure to prepare or make available the shareholder
list does not affect the validity of action taken at the meeting.
ARTICLE 2
DIRECTORS: MANAGEMENT
Section 1. POWERS
The Corporation will have a Board of Directors. All corporate powers
will be exercised by or under the authority of, and the business and affairs
of the Corporation managed under the direction of, the Board of Directors,
subject to any limitation set forth in the Articles of Incorporation.
Section 2. NUMBER AND QUALIFICATIONS
The Board of Directors will consist of not less than three nor more than
seven members. Until increased by a resolution of the Board of Directors,
the number of directors shall be three. Any decrease in the number of
directors implemented by the Board of Directors does not shorten an incumbent
director's term. Directors need not be residents of the state of Oregon or
shareholders of the Corporation, unless required by the Articles of
Incorporation.
Section 3. ELECTION AND TENURE OF OFFICE
The directors shall be elected by ballot at the annual meeting of the
shareholders. The terms of all directors expire at the next annual
shareholders meeting following their election. The term of a director
elected to fill a vacancy expires at the next shareholders meeting at which
directors are elected. Despite the expiration of a director's term, the
director continues to serve until the director's successor is elected or
until there is a decrease in the number of directors. Subject to
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paragraph (c) of Section 4 of Article 2, a director's term of office will begin
immediately after election.
Section 4. VACANCIES
(a) A vacancy in the Board of Directors will exist upon the death,
resignation or removal of any director or upon an increase in the number of
directors.
(b) Unless the Articles of Incorporation provide otherwise, if a
vacancy occurs on the Board of Directors the Board of Directors may fill the
vacancy. If the directors remaining in office constitute fewer than a quorum
of the Board, they may fill the vacancy by the affirmative vote of a majority
of all the directors remaining in office.
(c) A vacancy that will occur at a specific later date, by reason of a
resignation effective at the later date or otherwise, may be filled before
the vacancy occurs, but the new director may not take office until the
vacancy occurs.
(d) If the vacancy has not been filled by action of the Board of
Directors prior to the next meeting of the shareholders occurring after the
vacancy was created, the shareholders may fill the vacancy.
Section 5. RESIGNATION OF DIRECTORS
A director may resign at any time by delivering written notice to the
Board of Directors, its chairperson or the Corporation. Unless the notice
specifies a later effective date, a resignation is effective at the earliest
of the following: (a) when received; (b) five days after its deposit in the
United States mail, as evidenced by the postmark, if mailed postage prepaid
and correctly addressed; or (c) on the date shown on the return receipt, if
sent by registered or certified mail, return receipt requested and the
receipt is signed by or on behalf of the addressee. Once delivered, a notice
of resignation is irrevocable unless revocation is permitted by the Board of
Directors.
Section 6. REMOVAL OF DIRECTORS
The shareholders may remove one or more directors with or without cause
unless the Articles of Incorporation provide that the directors may be
removed only for cause. A director may be removed by the shareholders only
at a meeting called for the purpose of removing the director and the meeting
notice must state that the purpose, or one of the purposes, of the meeting is
removal of the director.
Section 7. MEETINGS
(a) The Board of Directors may hold regular or special meetings in or
out of the state of Oregon.
(b) Annual meetings of the Board of Directors will be held without
notice immediately following the adjournment of the annual meetings of the
shareholders.
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(c) Unless the Articles of Incorporation provide otherwise, regular
meetings of the Board of Directors may be held without notice of the date,
time, place or purpose of the meeting. The Board of Directors may fix, by
resolution, the time and place for the holding of regular meetings.
(d) Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Corporation's chief executive
officer. The person calling a special meeting of the Board of Directors may
fix the time and place of the special meeting.
Section 8. NOTICE OF SPECIAL MEETINGS
(a) Special meetings of the Board of Directors shall be preceded by at
least 24 hours' notice of the date, time and place of the meeting. The
notice need not describe the purpose of the special meeting unless required
by the Articles of Incorporation. The notice may be given orally, in person
or by telephone, or delivered in writing either personally, by mail or by
facsimile. If in writing, such notice is effective at the earliest of the
following: (i) when received; (ii) five days after its deposit in the United
States mail, as evidenced by the postmark, if it is mailed postage prepaid
and is correctly addressed to the director's address shown in the
Corporation's records; or (iii) on the date shown on the return receipt, if
sent by registered or certified mail, return receipt requested, and the
receipt is signed by or on behalf of the addressee. If given orally, such
notice is effective when communicated.
(b) A director's attendance at or participation in a meeting waives any
required notice to the director of the meeting unless the director at the
beginning of the meeting, or promptly upon the director's arrival, objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
(c) Notice of the time and place of holding an adjourned meeting need
not be given if such time and place are fixed at the meeting adjourned.
Section 9. QUORUM AND VOTE
(a) Unless the Articles of Incorporation provide otherwise, a majority
of the directors in office will constitute a quorum for the transaction of
business. A majority of the directors present, in the absence of a quorum,
may adjourn from time to time but may not transact any business.
(b) If a quorum is present when a vote is taken, the affirmative vote
of a majority of directors present is the act of the Board of Directors
unless the Articles of Incorporation require the vote of a greater number of
directors.
(c) A director of the Corporation who is present at a meeting of the
Board of Directors, or is present at a meeting of a committee of the Board of
Directors, when corporate action is taken is deemed to have assented to the
action taken unless (i) the director objects at the beginning of the meeting,
or promptly upon the director's arrival, to holding the meeting or
transacting business at the meeting, (ii) the director's dissent or
abstention from the action taken is entered in the minutes
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of the meeting, or (iii) the director delivers written notice of dissent or
abstention to the presiding officer of the meeting before its adjournment or
to the Corporation immediately after adjournment of the meeting. The right
of dissent or abstention is not available to a director who votes in favor of
the action taken.
Section 10. COMPENSATION
The Board of Directors may, by resolution, provide that the directors be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors, and provide that directors be paid a fixed sum for attendance at
each meeting of the Board of Directors or a stated salary as director. No
such payment will preclude any director from serving the Corporation in any
other capacity and receiving compensation for that service.
ARTICLE 3
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. GENERAL AUTHORITY
Subject to law, the provisions of the Articles of Incorporation and
these Bylaws, the Board of Directors may appoint such committees as may be
necessary from time to time, consisting of such number of its members and
having such powers as it may designate. Each such committee will have two or
more members, who serve at the pleasure of the Board of Directors.
Section 3. AUDIT COMMITTEE
An Audit Committee of the Board of Directors of the Corporation,
composed of at least two members of the Board of Directors and at least one
of whom shall not be an officer of the Corporation, shall be appointed at the
annual meeting of the Board of Directors. Each member of the committee shall
serve until the next annual meeting of the Board of Directors and the due
appointment and qualification of his or her successor. Directors who are
appointed to the Audit Committee shall be free of any relationship that, in
the opinion of the Board of Directors, would interfere with the exercise of
independent judgment as a committee member. Any vacancy in the Audit
Committee shall be filled by a majority vote of the Board of Directors. A
majority of the members shall constitute a quorum and a majority of the
quorum shall be required to adopt or approve any matters.
(a) The Audit Committee shall have the responsibility and power to:
(i) review and make recommendations to the Board
of Directors with respect to the engagement or discharge of
the Corporation's independent auditors and the terms of the
engagement, including the cost, scope and timing of the
audit, and any other services to be provided by the
independent auditors;
(ii) review the independence of the independent
auditors;
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(iii) review and approve each material professional
service provided by the independent auditors prior to the
performance of such service;
(iv) review the policies and procedures of the
Corporation and management with respect to maintaining the
Corporation's books and records and furnishing the
information necessary to the independent auditors to enable
a timely, full and accurate presentation of the
Corporation's financial statements for the fiscal year;
(v) review procedures to encourage access to the
committee and facilitate the timely reporting during the
year by the Corporation's independent auditors to the
committee of their recommendations and advice with respect
to maintenance of the Corporation's books, records and
accounts, and accounting procedures and controls;
(vi) review the implementation by management of
the recommendations made by the independent auditors in
their annual management letter, if any;
(vii) review the adequacy and implementation of the
Corporation's internal auditing, accounting and financial
controls, and meet with the Corporation's internal auditor
and financial staff to discuss internal accounting and
auditing controls and the implementation of recommendations
for the improvement therefor;
(viii) review with the independent auditors upon
completion of their audit the results of the auditing
engagements, their opinion of the Corporation's financial
and accounting personnel, the cooperation received during
the audit, methods to improve the efficiency and quality of
the audit, significant proposed adjustments, any material
changes in accounting principles and practices, and any
other recommendations the auditors may have with respect to
the Corporation's financial, accounting or auditing systems;
(ix) review the Corporation's policies concerning
business practices, and direct and supervise investigations
relating to the Corporation's records and accounts; and
(x) review such other matters relating to the
Corporation's financial affairs and accounts, communications
to the public and to shareholders and filings with
governmental agencies as the committee may, in its own
discretion, deem desirable.
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(b) The Audit Committee is authorized to employ such experts and
personnel, including those who are already employed or engaged by the
Corporation, as the committee may deem to be reasonably necessary to enable
it to ably perform its duties and satisfy its responsibilities.
Section 3. COMPENSATION COMMITTEE
A Compensation Committee of the Board of Directors of the Corporation,
composed of at least two members of the Board of Directors, at least one of
whom shall not be an officer of the Corporation, shall be appointed at the
annual meeting of the Board of Directors. Each member of the committee shall
serve until the next annual meeting of the Board of Directors and the due
appointment and qualification of his or her successor. Any vacancy in the
Compensation Committee shall be filled by a majority vote of the Board of
Directors. A majority of the members of the Compensation Committee shall
constitute a quorum, and a majority of the quorum shall be required to adopt
or approve any matters. The Compensation Committee shall have the
responsibility and power to review and make recommendations to the Board of
Directors with respect to the salaries and bonuses to be paid to the officers
of the Corporation, and other compensation matters referred to it by the
Board of Directors. In addition, the committee shall further have the
responsibility and power to make recommendations to the Board of Directors
concerning the granting of bonuses, stock options, or other forms of
incentive compensation to the officers of the Corporation. The Compensation
Committee is authorized to employ such experts and consultants as the
committee may deem to be reasonably necessary to enable it to perform its
duties and satisfy its responsibilities.
Section 4. ACTION OF COMMITTEES
All actions of a committee will be reflected in minutes to be kept of
such meetings and reported to the Board of Directors at the next succeeding
meeting thereof. The provisions of Article 2 of these Bylaws governing
meetings, notice and waiver of notice, and quorum and voting requirements of
the Board of Directors apply to committees and their members as well.
ARTICLE 4
OFFICERS
Section 1. DESIGNATION; ELECTION
(a) The officers of the Corporation shall be a President, a Chief
Financial Officer, a Secretary and such other officers and assistant officers
as the Board of Directors will from time to time appoint, none of whom need
be members of the Board of Directors. The officers shall be elected by, and
hold office at the pleasure of, the Board of Directors. A duly appointed
officer may appoint one or more officers or assistant officers if such
appointment is authorized by the Board of Directors. The same individual may
simultaneously hold more than one office in the Corporation.
(b) A vacancy in any office because of death, resignation, removal or
any other cause will be filled in the manner prescribed in these Bylaws for
regular appointments to such office.
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Section 2. COMPENSATION AND TERM OF OFFICE
(a) The compensation and term of office of all the officers of the
Corporation shall be fixed by the Board of Directors.
(b) The Board of Directors may remove any officer at any time, either
with or without cause.
(c) Any officer may resign at any time by giving written notice to the
Board of Directors, the Corporation's chief executive officer or the
Secretary of the Corporation. Unless the notice specifies a later effective
date, a resignation is effective at the earliest of the following: (a) when
received; (b) five days after its deposit in the United States mail, as
evidenced by the postmark, if mailed postage prepaid and correctly addressed;
or (c) on the date shown on the return receipt, if sent by registered or
certified mail, return receipt requested and the receipt is signed by or on
behalf of the addressee. Once delivered, a notice of resignation is
irrevocable unless revocation is permitted by the Board of Directors. If a
resignation is made effective at a later date and the Corporation accepts the
future effective date, the Board of Directors may fill the pending vacancy
before the effective date, if the Board of Directors provides that the
successor will not take office until the effective date.
(d) This section will not affect the rights of the Corporation or any
officer under any express contract of employment.
Section 3. CHAIRMAN OF THE BOARD
The Chairman of the Board, if and when elected, shall preside at all
meetings of the Board of Directors and at meetings of the shareholders, and
shall have all powers and responsibilities attendant therewith.
Section 4. PRESIDENT
The President shall be the chief executive officer of the Corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and affairs of the
Corporation. In the absence of the Chairman of the Board, the President will
perform the duties and responsibilities of the Chairman of the Board. The
President will be ex officio a member of all the standing committees of the
Board of Directors (including the executive committee, if any), will have the
general powers and duties of management usually vested in the office of
president of a corporation and will have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws.
Section 5. VICE PRESIDENTS
The Vice Presidents, if any, shall perform such duties as the Board of
Directors prescribes. In the absence or disability of the President, the
President's duties and powers shall be performed and exercised by a senior
Vice President, as designated by the Board of Directors.
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Section 6. SECRETARY
(a) The Secretary shall keep or cause to be kept at the principal
office, or such other place as the Board of Directors may order, a book of
minutes of all meetings of directors and shareholders showing the time and
place of the meeting, and if a special meeting, how authorized, the notice
given, the names of those present at directors meetings, the number of shares
present or represented at shareholders meetings and the proceedings thereof.
(b) The Secretary shall keep or cause to be kept, at the principal
office or at the office of the Corporation's transfer agent, a share
register, or a duplicate share register, showing the names of the
shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for such shares and the
number and date of cancellation of certificates surrendered for cancellation.
(c) The Secretary shall give or cause to be given such notice of the
meetings of the shareholders and of the Board of Directors as is required by
these Bylaws. If the Corporation elects to have a seal, the Secretary shall
keep the seal and affix it to all documents requiring a seal. The Secretary
shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors or these Bylaws.
Section 7. CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall be responsible for all financial
affairs of the Corporation, including the establishment of relationships with
one or more financial institutions for the borrowing, depositing and
withdrawal of funds, and shall cause to be kept full and accurate accounts of
receipts and disbursements in books maintained at the Corporation's principal
offices.
Section 8. ASSISTANTS
The Board of Directors may appoint or authorize the appointment of
assistants to the Secretary or Chief Financial Officer, or both. Such
assistants may exercise the powers of he Secretary or Treasurer, as the case
may be, and will perform such duties as are prescribed by the Board of
Directors.
ARTICLE 5
CORPORATE RECORDS AND REPORTS - INSPECTION
Section 1. RECORDS
The Corporation shall maintain all records required by law. All such
records will be kept at its principal office, registered office or at any
other place designated by the Corporation's chief executive officer, or as
otherwise provided by law.
Section 2. INSPECTION OF RECORDS
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The records of the Corporation will be open to inspection by the
shareholders or the shareholders' agents or attorneys in the manner and to
the extent required by law.
Section 3. CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness, issued in the name of or payable to the
Corporation, will be signed or endorsed by such person or persons and in such
manner as may be determined from time to time by resolution of the Board of
Directors.
Section 4. EXECUTION OF DOCUMENTS
The Board of Directors may, except as otherwise provided in these
Bylaws, authorize any officer or agent of the Corporation to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation. Such authority may be general or confined to specific
instances. Unless so authorized by the Board of Directors, or unless
inherent in the authority vested in the office under the provision of these
Bylaws, no officer, agent or employee of the Corporation will have any power
or authority to bind the Corporation by any contract or engagement, or to
pledge its credit, or to render it liable for any purpose or for any amount.
ARTICLE 6
CERTIFICATES AND TRANSFER OF SHARES
Section 1. CERTIFICATES FOR SHARES
(a) Certificates for shares will be in such form as the Board of
Directors may designate, will designate the name of the Corporation and the
state law under which the Corporation is organized, will state the name of
the person to whom the shares represented by the certificate are issued, and
will state the number and class of shares and the designation of the series,
if any, the certificate represents. If the Corporation is authorized to
issue different classes of shares or different series within a class, the
designations, relative rights, preferences and limitations applicable to each
class, the variations and rights, preferences and limitations determined for
each series and the authority of the Board of Directors to determine
variations for future series will be summarized on the front or back of each
certificate, or each certificate may state conspicuously on its front or back
that the Corporation will furnish shareholders with this information on
request in writing and without charge.
(b) Each certificate for shares must be signed, either manually or in
facsimile, by the Chairman, the President or a Vice President and the
Secretary or an Assistant Secretary of the Corporation. The certificates may
bear the corporate seal or its facsimile.
(c) If any officer who has signed a share certificate, either manually
or in facsimile, no longer holds office when the certificate is issued, the
certificate is nevertheless valid.
Section 2. TRANSFER ON THE BOOKS
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Upon surrender to the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, and subject to any limitations on transfer appearing
on the certificate or in the Corporation's stock transfer records, the
Corporation shall issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 3. LOST, STOLEN OR DESTROYED CERTIFICATES
In the event a certificate is represented to be lost, stolen or
destroyed, a new certificate will be issued in place thereof upon such proof
of the loss, theft or destruction and upon the giving of such bond or other
indemnity as may be required by the Board of Directors.
Section 4. TRANSFER AGENTS AND REGISTRARS
The Board of Directors may from time to time appoint one or more
transfer agents and one or more registrars for the shares of the Corporation
who will have such powers and duties as the Board of Directors may specify.
Section 5. CLOSING STOCK TRANSFER BOOKS
The Board of Directors may close the transfer books for a period not
exceeding 70 days nor less than 10 days preceding any annual or special
meeting of the shareholders or the day appointed for the payment of a
dividend.
ARTICLE 7
GENERAL PROVISIONS
Section 1. SEAL
If the Corporation elects to have a corporate seal, the seal will be
circular in form and will have inscribed thereon the name of the Corporation
and the state of its incorporation.
Section 2. AMENDMENT OF BYLAWS
(a) Except as otherwise provided by law or by the Articles of
Incorporation, the Board of Directors may amend or repeal these Bylaws unless:
(i) The Articles of Incorporation or Oregon law reserve this
power exclusively to the shareholders in whole or in part; or
(ii) The shareholders in amending or repealing a particular Bylaw
provide expressly that the Board of Directors may not amend or repeal that
Bylaw.
(b) The Corporation's shareholders may amend or repeal these Bylaws
even though these Bylaws may also be amended or repealed by the Board of
Directors.
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(c) Whenever an amendment or new Bylaw is adopted, it will be copied in
the minute book with the original Bylaws in the appropriate place. If any
Bylaw is repealed, the fact of repeal and the date on which the repeal
occurred will be stated in such book and place.
Section 3. WAIVER OF NOTICE
(a) A shareholder may at any time waive any notice required by law, the
Articles of Incorporation or these Bylaws. Except as otherwise provided in
paragraph (c) of Section 4 of Article 1 of these Bylaws, the waiver shall be
in writing, shall be signed by the shareholder entitled to the notice, and
shall be delivered to the Corporation for inclusion in the minutes or filing
with the corporate records.
(b) A director may at any time waive any notice required by law, the
Articles of Incorporation or these Bylaws. Except as otherwise provided in
paragraph (b) of Section 8 of Article 2 of these Bylaws, the waiver shall be
in writing, shall be signed by the director entitled to the notice, shall
specify the meeting for which notice is waived and shall be filed with the
minutes or appropriate records.
Section 4. ACTION WITHOUT A MEETING
(a) Action required or permitted by law to be taken at a shareholders
meeting may be taken without a meeting if the action is taken by all the
shareholders entitled to vote on the action. The action shall be evidenced
by one or more written consents describing the action taken, signed by all
the shareholders entitled to vote on the action and delivered to the
Corporation for inclusion in the minutes or filing with the corporate
records. Action taken under this Section 4 is effective when the last
shareholder signs the consent, unless the consent specifies an earlier or
later effective date. If not otherwise determined by law, the record date
for determining shareholders entitled to take action without a meeting is the
date the first shareholder signs the consent. A consent signed under this
Section 4 has the effect of a meeting vote and may be described as such in
any document.
(b) Unless the Articles of Incorporation or Bylaws provide otherwise,
action required or permitted by law to be taken at a meeting of the Board of
Directors, or at a meeting of a committee of the Board of Directors, may be
taken without a meeting if the action is taken by all members of the Board.
The action shall be evidenced by one or more written consents describing the
action taken, signed by each director and included in the minutes or filed
with the corporate records reflecting the action taken. Action taken under
this section is effective when the last director signs the consent, unless
the consent specifies an earlier or later effective date. A consent signed
under this section has the effect of a meeting vote and may be described as
such in any document.
Section 5. TELEPHONIC MEETINGS
Unless the Articles of Incorporation provide otherwise, the Board of
Directors may permit any or all directors to participate in a regular or
special meeting by, or conduct the meeting through, use of any means of
communication by which all directors participating may simultaneously hear
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each other during the meeting. A director participating in a meeting by this
means is deemed to be present in person at the meeting.
ARTICLE 8
INDEMNIFICATION
(a) The Corporation shall indemnify to the fullest extent permitted by
law, any person who is made, or threatened to be made, a party to or witness
in, or is otherwise involved in, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, investigative,
or otherwise (including any action, suit or proceeding by or in the right of
the Corporation) by reason of the fact that:
(i) the person is or was a director or officer of the Corporation
or any of its subsidiaries;
(ii) the person is or was serving as a fiduciary within the
meaning of the Employee Retirement Income Security Act of 1974 with respect
to any employee benefit plan of the Corporation or any of its subsidiaries; or
(iii) the person is or was serving, at the request of the
Corporation or any of its subsidiaries, as a director or officer, or as a
fiduciary of an employee benefit plan, of another corporation, partnership,
joint venture, trust or other enterprise.
(b) The Corporation may indemnify its employees and other agents to the
fullest extent permitted by law.
(c) The expenses incurred by a director or officer or other indemnified
person in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, investigative, or
otherwise, which the director or officer is made or threatened to be made a
party to or witness in, or is otherwise involved in, shall be paid by the
Corporation in advance upon written request if the indemnified person:
(i) furnishes the Corporation a written affirmation that in good
faith the person believes that he or she is entitled to be indemnified by the
Corporation; and
(ii) furnishes the Corporation a written undertaking to repay such
advance to the extent that it is ultimately determined by a court that such
person is not entitled to be indemnified by the Corporation. Such advances
will be made without regard to the person's ability to repay such expenses
and without regard to the person's ultimate entitlement to indemnification
under this Article or otherwise.
(d) The rights of indemnification provided in this Article 8 will be in
addition to any rights to which a person may otherwise be entitled under any
articles of incorporation, bylaw, agreement, statute, policy of insurance,
vote of shareholders or Board of Directors, or otherwise; will continue as to
a person who has ceased to be a director, officer, employee or agent of the
Corporation; and will inure to the benefit of the heirs, executors and
administrators of such person.
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(e) Any repeal of this Article 8 will be prospective only and no repeal
or modification of this Article 8 will adversely affect any right or
protection that is based upon this Article 8 and pertains to an act or
omission that occurred prior to the time of such repeal or modification.
ARTICLE 9
TRANSACTIONS WITH INTERESTED DIRECTORS
Section 1. VALIDITY OF TRANSACTION
No transaction involving the Corporation will be voidable by the
Corporation solely because of a director's direct or indirect interest in the
transaction if:
(a) The material facts of the transaction and the director's interest
were disclosed or known to the Board of Directors or a committee of the Board
of Directors, and the Board of Directors or committee authorized, approved or
ratified the transaction; or
(b) The material facts of the transaction and the director's interest
were disclosed or known to the shareholders entitled to vote and a majority
of those shareholders authorized, approved or ratified the transaction; or
(c) The transaction was fair to the Corporation.
Solely for purposes of this Article 9, a director of the Corporation has
an indirect interest in a transaction if another entity in which the director
has a material financial interest or in which the director is a general
partner is a party to the transaction or the transaction is with another
entity of which the director is a director, officer or trustee and the
transaction is or should be considered by the Board of Directors.
Section 2. APPROVAL BY BOARD
For purposes of Section 1, a transaction in which a director has an
interest is authorized, approved or ratified if it receives the affirmative
vote of a majority of the directors on the Board of Directors, or on the
committee, who have no direct or indirect interest in the transaction. A
transaction may not be authorized, approved or ratified under this Article 9
by a single director. If a majority of the directors who have no direct or
indirect interest in the transaction vote to authorize, approve or ratify the
transaction, a quorum shall be deemed to be present for the purpose of taking
action under this Article 9. The presence of, or a vote cast by, a director
with a direct or indirect interest in the transaction does not affect the
validity of any action taken by the Board of Directors or a committee thereof
if the transaction is otherwise authorized, approved or ratified in any
manner as provided in Section 1.
Section 3. APPROVAL BY SHAREHOLDERS
For purposes of Section 1, a transaction in which a director has an
interest is authorized, approved or ratified if it receives the vote of a
majority of the shares entitled to be counted under
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this Article 9, voting as a single voting group. Shares owned by or voted
under the control of a director who has a direct or indirect interest in the
transaction, and shares owned by or voted under the control of any entity
affiliated with the director as described in Section 1 may be counted in a
vote of shareholders to determine whether to authorize, approve or ratify a
transaction by vote of the shareholders under this Article 9. A majority of
the shares, whether or not present, that are entitled to be counted in a vote
on the transaction under this Article 9 constitutes a quorum for the purpose
of taking action under this Article 9.
ARTICLE 10
LIMITATION OF DIRECTOR LIABILITY
To the fullest extent permitted by law, no director of the Corporation
will be personally liable to the Corporation or its shareholders for monetary
damages for conduct as a director. For example, without limiting the
generality of the foregoing, if the Oregon Revised Statutes are amended,
after this Article 10 becomes effective, to authorize corporate action
further eliminating or limiting the personal liability of directors of the
Corporation, then the liability of directors of the Corporation will be
eliminated or limited to the fullest extent permitted by the Oregon Revised
Statutes, as so amended. No amendment or repeal of this Article 10, nor the
adoption of any provision of these Bylaws inconsistent with this Article 10,
nor a change in the law, will adversely affect any right or protection that
is based upon this Article 10 and pertains to conduct that occurred prior to
the time of such amendment, repeal, adoption or change. No change in the law
will reduce or eliminate the rights and protections set forth in this Article
10 unless the change in the law specifically requires such reduction or
elimination.
The foregoing Restated Bylaws were adopted by written consent on July 9, 1998.
/s/ Kenneth J. Irinaga
----------------------------
Kenneth J. Irinaga
Secretary
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GEMSTONE SYSTEMS, INC.
Restated 1992 Employees' Stock Option Plan
1. PURPOSE.
This plan (the "Plan") is designed to encourage key employees of
GemStone Systems, Inc. (the "Company") and any parent or subsidiary corporations
to acquire or increase a proprietary interest in the Company, and thus to share
in the future success of the Company's business. The Plan is intended to
attract and retain outstanding personnel who are in a position to make important
and direct contributions to the success of the Company and to promote a closer
identity of interests between the Company's key employees and its shareholders.
Options granted under this Plan shall represent the right to purchase
shares of the Company's Common Stock, subject to the terms of this Plan and the
option certificates and related agreements executed at the time of option
grants. Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options, at the discretion of the Board and as reflected in
the terms of the written option certificate and related agreement.
2. DEFINITIONS.
The following terms when referred to in this Plan shall have the
following definitions:
(a) "Board" shall mean the Board of Directors of the Company, or the
Committee, if one has been appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean GemStone Systems, Inc..
(e) "Committee" shall mean the Committee appointed by the Board in
accordance with Section 5 of the Plan, if one is appointed.
(f) "Consultant" shall mean any person who is engaged by the Company or
any subsidiary to render services and is compensated for such
services.
(g) "Employer Corporation" means the corporation employing a person
granted an Incentive Stock Option.
<PAGE>
(h) "Incentive Stock Option" shall mean an option intended to qualify as
an incentive stock option within the meaning of Section 422A of the
Code.
(i) "Nonstatutory Stock Option" shall mean an option not intended to
qualify as an Incentive Stock Option.
(j) "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 425(e) of the Code.
(k) "Plan" shall mean this 1992 Employees' Stock Option Plan.
(l) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 425(f) of the Code.
3. SCOPE AND DURATION OF THE PLAN.
There will be reserved for sale to eligible employees upon the
exercise of options granted under the Plan a total of One Million Five Hundred
and Eighteen Thousand Nine Hundred and Twenty-One (1,518,921) shares of the
Company's authorized Common Stock, subject to adjustment as provided in Section
15 below. If an option expires or terminates for any reason without having been
fully exercised, the unpurchased shares will be available for other options
awarded under the Plan. Unless the Plan is terminated earlier pursuant to
Section 19, it shall terminate on July 30, 2002, and no option shall be granted
under the Plan after that date.
4. WHEN OPTIONS MAY BE GRANTED.
On or after the date of adoption of this Plan by the Board, the Board
may grant either Incentive Stock Options or Nonstatutory Stock Options. The
Board has the sole discretion in deciding which options, if any, shall
constitute Incentive Stock Options. For all options granted under this Plan,
the Board shall clearly identify each such option as an Incentive Stock Option
or Nonstatutory Stock Option.
5. ADMINISTRATION.
The Plan is administered by the Board or a Committee appointed by the
Board. No action may be taken by the Board involving an option granted or to be
granted to a member of the Board, unless a majority of the Board and of the
members of the Board voting on the matter are not then and have not been at any
time during the prior year eligible to receive an option under the Plan. No
director who holds or is eligible to receive an option under the Plan may vote
on any action taken by the Board involving any option granted to himself.
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The Board has the responsibility to construe and interpret the Plan
and to establish and amend such rules and regulations as it deems necessary or
desirable for the proper administration of the Plan. Any decision or action
taken or to be taken by the Board, arising out of or in connection with the
construction, interpretation and administration of the Plan, shall, to the
extent permitted by law, be within its absolute discretion, but subject to the
express provisions of the Plan. Decisions of the Board shall be conclusive and
binding upon all recipients of options and any person claiming under or through
any recipient of an option.
The Board has the authority, subject to the terms of the Plan, to
determine which persons are eligible for options and those to whom options shall
be granted, the number of shares to be covered by each option, the time or times
at which options shall be granted, the fair market value of shares under option
from time to time, and the terms and provisions of the instruments evidencing
options, including any conditions to exercise or any restrictions which may be
imposed applicable to the transfer of the shares to be acquired upon exercise of
options.
6. WHO MAY PARTICIPATE.
Options may be granted under this Plan to regular key employees,
consultants or directors of the Company and any future subsidiary corporations,
all of whom shall be referred to for purposes of this Plan as employees, who may
be identified for grants from time to time by the Board. In determining the
employees to whom options shall be granted, and the number of shares to be
issued on the exercise of an option, the Board shall take into account the
duties of the employees, their present and potential contributions to the
success of the Company, and such other factors as the Board deems relevant to
accomplish the purposes of the Plan.
An Incentive Stock Option cannot be granted to an employee who, at the
time such option is granted, owns directly or beneficially more than 10 percent
of the total combined voting power of all classes of stock of the employer
corporation or its parent or any subsidiary. This limitation shall not apply
if, at the time such Incentive Stock Option is granted, the option price is at
least 110 percent of the fair market value of the stock subject to the option
and such option by its terms is not exercisable after the expiration of five
years from the date such option is granted. No person who beneficially owns
more than 10 percent of the total combined voting power of all classes of stock
of the issuing corporation or any parent or subsidiary corporation shall receive
any option under this Plan at an exercise price less than 110 percent of the
fair market value of the stock.
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7. OPTION PRICE.
The price of the shares of Common Stock to be issued on exercise of an
option shall be determined by the Board, and in the case of an Incentive Stock
Option, shall be not less than the fair market value of the shares on the date
the option is granted. In the case of Nonstatutory Stock Options, the price
shall be not less than 85 percent of fair market value. Fair market value of
the shares under option shall be determined by the Board at the time of each
grant of stock options under the Plan.
8. TERM OF OPTIONS.
The term of each option shall be determined by the Board, but shall
not be for more than ten years from the date the option is granted and may be
subject to earlier expiration as provided in Sections 13 and 14. Each Incentive
Stock Option shall recite the date on which the exercise period expires.
9. LIMITATION ON AMOUNT OF INCENTIVE STOCK OPTIONS.
In no event shall the aggregate fair market value (determined at the
time such options are granted) of the shares with respect to which the
employee's Incentive Stock Options first become exercisable during any calendar
year under the Plan or under any other stock option plan of the employee's
employer corporation and its parent and subsidiary corporations exceed $100,000.
Should it be determined that an option granted under the Plan exceeds such
maximum for any reason other than the failure of a good faith attempt to value
the stock subject to the option, such option shall be considered a Nonstatutory
Stock Option to the extent, but only to the extent, of such excess; provided,
however, that should it be determined that an entire option does not qualify for
treatment as an Incentive Stock Option by reason of exceeding such maximum, such
option shall be considered a Nonstatutory Stock Option.
10. EXERCISE OF OPTIONS.
Subject to Section 15, options may be exercised from time to time for
the period stated in each option. The Board may, in its discretion, determine
the vesting schedule to be contained in each option agreement; provided,
however, that unless the Board otherwise determines at the date of any grant,
all options shall become 100 percent exercisable within a five-year period from
the date the option is granted, with 40 percent of the shares covered by the
grant becoming exercisable two years from the date of grant, an additional
20 percent three years from the date of grant, an additional 20 percent four
years from the date of grant, and the final 20 percent on the fifth anniversary
of the date of grant. After any prescribed waiting period, an option may be
exercised at any time or from time to time thereafter, provided that unless the
option certificate or the Board otherwise
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determines, no option may be exercised for less than all of the shares then
purchasable under the option. After becoming exercisable, if exercisable in
installments, then each installment shall remain exercisable until termination
or expiration of the option. The price of the shares shall be paid in full at
the time of exercise. Except as provided in Sections 13 and 14 below, no option
may be exercised unless the holder is then an employee of the Company or a
subsidiary corporation. An employee shall not have any of the rights of a
shareholder with respect to the shares to be issued on the exercise of an option
until the shares are paid for and the stock certificate is delivered.
The consideration to be paid for the shares to be issued upon exercise
of an option, including the method of payment, shall be determined by the Board
and may consist entirely of cash, check, promissory note, other shares of the
Common Stock having fair market value on the date of surrender equal to the
aggregate exercise price of the shares purchasable under the option, or any
combination of such methods of payment; provided, however, no optionee shall be
entitled to pay for shares to be issued upon exercise of an Incentive Stock
Option by exchanging shares of the Company which were previously acquired as
"Statutory Option Stock," as that term is defined in Section 425 of the Code,
until the applicable holding period, as prescribed by the Code, has been
satisfied. In making its determinations as to the type of consideration to
accept, the Board shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company. If no designation is made by the
Board as to the acceptable medium of payment at or before the time of exercise
of the option, payment shall be made in the form of the optionee's check.
An option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
option by the person entitled to exercise the option and full payment for the
shares has been received by the Company. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such shares,
which issuance shall be made as soon as is practicable, no right to vote or
receive dividends or any other rights as a shareholder shall exist with respect
to the optioned stock, notwithstanding the exercise of the option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued.
Exercise of an option in any manner shall result in a decrease in the
number of shares which thereafter may be available, both for purposes of the
Plan and for sale under the option, by the number of shares as to which the
option is exercised.
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11. NONTRANSFERABILITY OF NONSTATUTORY STOCK OPTIONS.
Nonstatutory Stock Options granted under the Plan are not
transferable, except by will or by the laws of descent and distribution, and may
be exercised during the employee's life only by the employee or, if
incapacitated, by his guardian or legal representative. This section does not
apply to Incentive Stock Options granted under the Plan.
12. NONTRANSFERABILITY OF INCENTIVE STOCK OPTIONS.
Incentive Stock Options granted under the Plan are not transferable by
the optionee otherwise than by will or by the laws of descent and distribution,
and are exercisable during the optionee's lifetime only by the optionee. Each
Incentive Stock Option shall recite this restriction. This section does not
apply to Nonstatutory Stock Options granted under the Plan.
13. TERMINATION OF EMPLOYMENT.
If the employment of an employee to whom an option has been granted
terminates for any reason other than death or disability, and subject to any
more restrictive provisions which may be contained in any certificate or
agreement evidencing the option, any option held by the employee may be
exercised at any time prior to its expiration date or the expiration of 30 days
after the date of such termination of employment, whichever is the shorter
period, but only if and to the extent the employee was entitled to exercise the
option on the date of such termination. Notwithstanding the foregoing, the
Board may in its discretion accelerate the vesting schedule, to such extent as
it may deem appropriate, of any option holder who is not fully vested at the
date of termination of employment and who in the judgment of the Board has
rendered extraordinary services to the Company during the period of employment,
based upon the Board's review of the circumstances surrounding the termination
of employment. Whether an authorized leave of absence, military or governmental
service, disability or temporary absence from employment for any other reason
constitutes the termination of employment for purposes of the Plan shall be
conclusively determined by the Board.
14. DEATH OF AN EMPLOYEE.
If an employee to whom an option has been granted dies or becomes
permanently disabled while employed by the Company or by a subsidiary
corporation, the option may only be exercised (to the extent that the employee
was entitled to do so on the date of his death) by his personal representative
or beneficiary within six months after the date of death or disability, except
that the Board, in its discretion, on application of the personal representative
or beneficiary, may extend this time up to one year after the date of death, and
if not so exercised, the option shall expire and be void. In addition, the
Board may, on a
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<PAGE>
discretionary basis and without consequence or effect on any other employee,
determine to permit the personal representative to exercise all or any portion
of an option which by its terms is not exercisable at the date of death. Any
such determination by the Board must be specifically evidenced in writing.
15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
Subject to any required action by the shareholders of the Company,
the number of shares of Common Stock covered by each outstanding option, and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but as to which no options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an option, as well as
the price per share of Common Stock covered by each such outstanding option,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class shall affect, and no adjustment by
reason thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the
Company, the option will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that any option shall
terminate as of a date fixed by the Board and give each optionee the right to
exercise his option as to all or any part of the optioned stock, including
shares as to which the option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
a merger or consolidation in which the Company is not the surviving corporation,
or a reverse merger in which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, then to the extent permitted by applicable law:
(i) any surviving corporation shall assume any options outstanding under the
Plan or shall substitute similar options or rights for those outstanding under
the Plan, or (ii) such options shall continue in full force and effect. In the
event any surviving corporation refuses to assume or continue such options, or
to substitute similar options or rights for those outstanding under the Plan,
then, with respect
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to outstanding options, the time during which such options may be exercised
shall be accelerated and the options terminated if not exercised prior to such
event.
16. TIME OF GRANTING OPTIONS.
Nothing contained in the Plan or in any resolution adopted or to be
adopted by the Board or shareholders of the Company shall constitute the
granting of an option. The granting of an option pursuant to the Plan shall
take place only when an instrument evidencing the option has been duly executed
on behalf of the Company and delivered to the employee to whom such option is to
be granted.
17. INSTRUMENTS EVIDENCING OPTIONS AND PLAN LOG.
The Board, in granting options hereunder, may use such instruments and
agreements to evidence such options as it may determine. In order to be valid,
the grant of any option to purchase shares of the Company which are granted
under the Plan must be evidenced by a certificate or other document signed by an
officer of the Company and an agreement signed by the employee to whom the
option is awarded, all terms of which, to the extent not inconsistent with the
terms of the Plan, shall be as determined by the Board in awarding any such
option. Any such agreement may contain restrictions on transfer, repurchase
options in favor of the Company, requirements for the granting of irrevocable
proxies, and such other provisions not expressly contrary to any provision of
the Plan as the Company shall determine. The Secretary of the Company shall
keep with the Plan an official Plan Log listing the names of all employees to
whom options have been granted, the date of the award, the number of shares
covered by the option, the purchase price, the vesting schedule, if applicable,
and the number of remaining eligible shares covered by the Plan.
18. EMPLOYMENT RIGHTS.
Nothing in the Plan or any instrument evidencing an option shall
confer upon any employee any right to continue in the employment of the Company
or any subsidiary corporation or shall be construed to interfere in any way with
the right of the Company or any subsidiary corporation to terminate his
employment at any time for any reason.
19. AMENDMENT.
The Board has the right at any time to amend, modify or discontinue
the Plan, provided that no such amendment, modification or discontinuance
adopted by the Board shall revoke or alter the terms of any valid option
previously granted in accordance with the Plan. The Plan, and the grant and
exercise of options, shall be subject to all applicable governmental laws and
regulations. Notwithstanding any provision of the Plan to the
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contrary, the Board may in its discretion make such changes in the Plan as may
be required to conform the Plan to such laws and regulations, subject to the
provisions of the first sentence of this Section 19.
20. CONDITIONS UPON ISSUANCE OF SHARES.
Shares shall not be issued pursuant to the exercise of an option
unless the exercise of such option and the issuance and delivery of such shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended, the Exchange Act,
the rules and regulations promulgated thereunder, and the requirements of any
stock exchange upon which the shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option or making such purchase to represent and
warrant at the time of any such exercise that the shares are being purchased
only for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned relevant provisions of law.
21. RESERVATION OF SHARES.
During the term of this Plan, the Company will at all times reserve
and keep available such number of shares as shall be sufficient to satisfy the
requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any options or shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue
such options or sell such shares if such requisite authority shall not have been
obtained.
22. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective only after it has been approved by the
Board and subsequently approved, within one year from the date of adoption by
the Board, at a shareholders meeting duly called for such purpose or by
requisite shareholder consent.
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This 1992 Employees' Stock Option Plan was approved by the Board of
Directors of GemStone Systems, Inc. and by the Company's sole shareholder on
June 30, 1992. The Plan was amended and restated effective on July 1, 1995 with
the approval of the Board of Directors and the Company's sole shareholder on
those dates.
----------------------------
Secretary
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FORM OF
GEMSTONE SYSTEMS, INC.
1998 EMPLOYEES STOCK OPTION PLAN
Adopted by the Board of Directors on July __, 1998.
Adopted by Shareholders on July __, 1998.
Kenneth J. Irinaga, Secretary
<PAGE>
TABLE OF CONTENTS
1. PURPOSE
2. DEFINITIONS
2.1. "1934 ACT"
2.2. "BOARD"
2.3. "CODE"
2.4. "COMMITTEE"
2.5. "COMMON STOCK"
2.6. "COMPANY"
2.7. "CONSULTANT"
2.8. "DIRECTOR"
2.9. "DISABILITY"
2.10. "EMPLOYEE"
2.11. "FAIR MARKET VALUE"
2.12. "HOLDER"
2.13. "INCENTIVE STOCK OPTION"
2.14. "NONEMPLOYEE DIRECTOR"
2.15. "NONQUALIFIED STOCK OPTION"
2.16. "OPTION"
2.17. "OPTION AGREEMENT"
2.18. "PLAN"
2.19. "RULE 16b-3"
2.20. "SUBSIDIARY"
3. EFFECTIVE DATE AND DURATION OF THE PLAN
4. ADMINISTRATION
4.1. Composition of Committee
4.2. Authority of the Committee
4.3. Liability of Committee Members
4.4. Costs of Plan
5. ELIGIBILITY
6. SHARES SUBJECT TO THE PLAN
6.1. Aggregate Number of Shares
6.2 Stock Offered
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7. OPTIONS
7.1 Option Period
7.2 Limitations on Exercise of Option
7.3 Special Limitations on Incentive Stock Options
7.4 Separate Stock Certificates
7.5 Option Agreement
7.6 Exercise Price and Payment
7.7 Termination of Employment or Service
7.8 Rights as a Shareholder
7.9 Options in Substitution for Stock Options Granted by Other
Corporations
7.10 Early Exercise
8. CHANGES IN CAPITAL STRUCTURE
9. AMENDMENT AND TERMINATION OF THE PLAN
10. MISCELLANEOUS
10.1 No Right to an Option
10.2 No Employment Rights Conferred
10.3 Other Laws; Withholding
10.4 No Restriction on Corporate Action
10.5 Restrictions on Transfer
10.6 Stock Certificates
10.7 Governing Law
10.8 Headings
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1. PURPOSE
The purpose of the Plan is to provide a means by which selected
Employees, Directors and Consultants may be given an opportunity to acquire
stock of the Company. The Company, by means of the Plan, seeks to retain the
services of persons who are currently Employees, Directors or Consultants to
secure and retain the services of new Employees, Directors and Consultants, and
to provide incentives for such persons to exert maximum efforts for the success
of the Company. Accordingly, the Plan provides for granting Incentive Stock
Options, Nonqualified Stock Options or any combination of the foregoing, as is
best suited to the circumstances of the particular person as provided herein.
2. DEFINITIONS
The following definitions shall be applicable throughout the Plan
unless specifically modified by any paragraph:
2.1 "1934 ACT" means the Securities Exchange Act of 1934, as
amended and in effect from time to time, or any successor statute.
2.2 "BOARD" means the Board of Directors of the Company.
2.3 "CODE" means the Internal Revenue Code of 1986, as amended and
in effect from time to time, or any successor statute. Reference in the Plan to
any section of the Code shall be deemed to include any amendments or successor
provisions to any such section.
2.4 "COMMITTEE" means not less than two members of the Board who
are selected by the Board as provided in Section 4.1.
2.5 "COMMON STOCK" means the shares of Common Stock of the Company,
without par value.
2.6 "COMPANY" means GemStone Systems, Inc.
2.7 "CONSULTANT" means any person engaged by the Company or a
Subsidiary to render services and who does not render such services as an
Employee or Director.
2.8 "DIRECTOR" means an individual elected to the Board by the
shareholders of the Company or by the Board under applicable corporate law who
is serving on the Board on the date the Plan is adopted by the Board or is
elected to the Board after such date.
2.9 "DISABILITY" means the condition of being permanently
"disabled" within the meaning of Section 22(e)(3) of the Code, namely being
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than 12 months.
<PAGE>
2.10 "EMPLOYEE" means any person (including a Director) in an
employment relationship with the Company or a Subsidiary.
2.11 "FAIR MARKET VALUE" means, as of any specified date:
(i) In the absence of an established market for the Common
Stock, the fair market value thereof shall be determined in good faith by the
Committee in such manner as it deems appropriate;
(ii) If the Common Stock is listed or quoted on any
established stock exchange, its fair market value shall be the closing sale
price of the Common Stock (or the average of the closing bid and asked prices,
if no sales were reported), as quoted on such exchange (or the exchange with the
greatest volume of trading in Common Stock) on the business day preceding the
date of such determination, as reported in The Wall Street Journal or such other
source as the Committee deems reliable.
2.12 "HOLDER" means an Employee, Consultant or Director who has been
granted an Option and any assignee or transferee of such person as permitted
under the Plan. For purposes of Section 7.7, if an Option has been transferred,
as permitted under the Plan, "Holder" shall refer to the Employee, Consultant or
Director who was granted the Option and shall not refer to that person's
assignee or transferor.
2.13 "INCENTIVE STOCK OPTION" means an incentive stock option within
the meaning of Section 422 of the Code.
2.14 "NONEMPLOYEE DIRECTOR" means a Nonemployee Director, as defined
in Rule 16b-3(b)(3)(i). For example, Nonemployee Director means the person (i)
is not currently an officer or Employee of the Company or Subsidiary; (ii) does
not receive more than $60,000 in compensation for consulting services for which
disclosure would be required under Item 404(a) of Regulation S-K; or (iii) is
not engaged in a business relationship with the Company (such as lawyer or
investment banker for which disclosure would be required under Item 404(b) of
Regulation S-K).
2.15 "NONQUALIFIED STOCK OPTION" means a stock option other than an
Incentive Stock Option.
2.15 "OPTION" means an grant of a Nonqualified Stock Option or
Incentive Stock Option, as described in Section 7 of the Plan.
2.17 "OPTION AGREEMENT" means a written agreement between the
Company and a Holder with respect to an Option.
2.18 "PLAN" means the 1998 Employees Stock Option Plan of GemStone
Systems, Inc., as set forth herein and as it may be hereafter amended from time
to time.
1998 Employees' Stock Option Plan - page 2
<PAGE>
2.19 "RULE 16b-3" means Rule 16b-3 promulgated by the Securities and
Exchange Commission under the 1934 Act, as such may be amended from time to
time, and any successor rule, regulation or statute fulfilling the same or
similar function.
2.20 "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code; namely, any
corporation in which the Company directly or indirectly controls 50% or more of
the total combined voting power of all classes of stock having voting power.
3. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective as of July 9, 1998, the date of its
adoption by the Board, subject to its ratification and approval by the
shareholders of the Company on or before July 8, 1999. Until the Plan has been
approved by the shareholders, any Options granted under the Plan shall be
conditioned upon such approval. No Options may be granted under the Plan after
July 8, 2008. The Plan shall continue until all matters relating to the payment
of Options and administration of the Plan have been settled.
4. ADMINISTRATION
4.1 COMPOSITION OF COMMITTEE. The Plan shall be administered by a
committee which shall (i) be appointed by the Board and (ii) consist of two or
more Nonemployee Directors. If a Committee is not appointed by the Board, the
Plan shall be administered by the Board and all references in the Plan to a
Committee shall mean and refer to the Board.
4.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the
Plan, the Committee shall have sole authority, in its discretion, to determine:
(i) which Employees, Directors and Consultants shall receive Options; (ii) the
time or times when Options shall be granted; (iii) the type or types of Options
to be granted; and (iv) the number of shares of Common Stock which may be issued
under each Option. In making such determinations, the Committee may take into
account the nature of the services rendered by the respective individuals, their
present and potential contribution to the success of the Company and such other
factors as the Committee, in its discretion, shall deem relevant. The Committee
shall also have such additional powers as are delegated to it by the Plan.
Subject to the express provisions of the Plan, the Committee is authorized to
construe the Plan and the respective agreements executed hereunder, to prescribe
such rules and regulations relating to the Plan, as it may deem advisable to
carry out the Plan, to determine the terms, restrictions and provisions of each
Option, including such terms, restrictions and provisions as shall be requisite
in the judgment of the Committee to cause designated Options to qualify as
Incentive Stock Options and to make all other determinations necessary or
advisable for administering the Plan. The Committee may correct any defect,
supply any omission or reconcile any inconsistency in any agreement relating to
an Option in the manner and to the extent it shall deem expedient to carry the
Option into effect. The determinations of the Committee on the matters referred
to in this Section 4 shall be conclusive.
1998 Employees' Stock Option plan - 3
<PAGE>
4.3 LIABILITY OF COMMITTEE MEMBERS. No member of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Option.
4.4 COSTS OF PLAN. The costs and expenses of administering the
Plan shall be borne by the Company.
5. ELIGIBILITY
Employees, Directors and Consultants are eligible to receive Options;
ONLY EMPLOYEES are eligible to receive Incentive Stock Options. Any Option may
be granted on more than one occasion to the same person and may include an
Incentive Stock Option or a Nonqualified Stock Option or any combination
thereof.
6. SHARES SUBJECT TO THE PLAN
6.1 AGGREGATE NUMBER OF SHARES. Subject to Section 8, the
aggregate number of shares of Common Stock that may be issued under the Plan
shall not exceed _______ shares. Shares shall be deemed to have been issued
under the Plan only to the extent actually issued and delivered pursuant to
an Option. To the extent that an Option lapses or the rights of its Holder
terminate, any shares of Common Stock subject to such Option shall again be
available for the grant of an Option under the Plan.
6.2 STOCK OFFERED. The stock to be offered, pursuant to the grant
of any Option, will be issued from the authorized, but unissued, Common Stock of
the Company.
7. OPTIONS
7.1 OPTION PERIOD. The term of each Option shall be as specified
by the Committee at the date of grant, except that no Incentive Stock Option
shall be exercisable after the expiration of 10 years from the date of grant of
such Incentive Stock Option.
7.2 LIMITATIONS ON EXERCISE OF OPTION. An Option shall be
exercisable in whole or in such installments and at such times as determined by
the Committee.
7.3 SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent
that the aggregate Fair Market Value (determined at the time an Incentive Stock
Option is granted) of Common Stock, with respect to which Incentive Stock
Options are exercisable for the first time by an individual during any calendar
year under all incentive stock option plans of the Company exceeds $100,000,
such Incentive Stock Options shall be treated as Nonqualified Stock Options.
The Committee shall determine, in accordance with applicable provisions of the
Code, Treasury Regulations and other administrative pronouncements, the Options
which will not constitute Incentive Stock Options because of such limitation and
shall notify the Holder of such determination as soon as practicable after such
determination. No Incentive Stock Option shall be granted to an individual if,
at the time the Option is granted, such individual owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
1998 Employees' Stock Option Plan - page 4
<PAGE>
Company unless (i) at the time such Option is granted, the exercise price is at
least 110% of the Fair Market Value of the Common Stock subject to the Option;
and (ii) such Option, by its terms, is not exercisable after the expiration of
five years from the date of grant.
7.4 SEPARATE STOCK CERTIFICATES. Separate stock certificates shall
be issued by the Company for those shares acquired pursuant to the exercise of
an Incentive Stock Option and for those shares acquired pursuant to the exercise
of a Nonqualified Stock Option.
7.5 OPTION AGREEMENT. Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Committee, from time to time, shall approve
including, without limitation, provisions to qualify an Incentive Stock Option
under Section 422 of the Code. No grant of an Option shall be binding upon the
Company in any way until the Option Agreement has been executed by the Holder.
An Option Agreement may provide for the payment of the exercise price, in whole
or in part, by the delivery of a number of shares of Common Stock (plus cash if
necessary) having a Fair Market Value (as of the exercise date of the Option)
equal to such exercise price. Moreover, an Option Agreement may provide for a
"cashless exercise" of the Option by establishing procedures whereby the Holder,
by a properly executed written notice, directs (i) an immediate market sale or
margin loan with respect to all or a part of the shares of Common Stock to which
the Holder is entitled upon exercise of the Option; (ii) the delivery of the
shares of Common Stock from the Company directly to a brokerage firm; and (iii)
the delivery of the exercise price from sale or margin loan proceeds from the
brokerage firm directly to the Company. Such Option Agreement may also include,
without limitation, provisions relating to (a) vesting of Options; (b) tax
matters (including provisions covering any applicable employee wage withholding
requirements); (c) with respect to shares purchased upon exercise of Options,
restrictions on transfer and repurchase options in favor of the Company upon any
termination of employment with the Company; and (d) any other matters not
inconsistent with the terms and provisions of this Plan that the Committee
shall, in its sole discretion, determine. The terms and conditions of the
Option Agreements need not be identical. Unless otherwise indicated in the
Option Agreement, Options awarded under the Plan will become exercisable at the
rate of 20% per year, beginning on the first anniversary of the date of grant
and continuing on each subsequent anniversary until fully exercisable.
7.6 EXERCISE PRICE AND PAYMENT. The price at which a share of
Common Stock may be purchased upon exercise of an Option shall be determined by
the Committee. If the Option is an Incentive Stock Option, the exercise price
shall not be less than the Fair Market Value of a share of Common Stock on the
date such Option is granted. The exercise price shall be subject to adjustment
as provided in Section 8. An Option or portion thereof may be exercised by
delivery of an irrevocable notice of exercise to the Company. The exercise
price of an Option or portion thereof shall be paid in full in the manner
prescribed by the Committee.
7.7 TERMINATION OF EMPLOYMENT OR SERVICE.
(a) In the event a Holder's employment by or service for
the Company terminates for any reason other than because of Disability or death,
such Holder's Option may be
1998 Employees' Stock Option Plan - page 5
<PAGE>
exercised at any time prior to the expiration date of the Option or the
expiration of three months after the date of such termination, whichever is the
shorter period, but only if and to the extent the Holder was entitled to
exercise the Option at the date of such termination.
(b) In the event a Holder's employment by or service for
the Company terminates because of Disability, such Option may be exercised at
any time prior to the expiration date of the Option or the expiration of
one year after the date of such termination, whichever is the shorter period,
but only if and to the extent the Holder was entitled to exercise the Option at
the date of such termination.
(c) In the event of the death of a Holder of an Option
while employed by or providing service to the Company, such Option may be
exercised at any time prior to the expiration date of the Option or the
expiration of one year after the date of such death, whichever is the shorter
period, but only if and to the extent the Holder was entitled to exercise the
Option on the date of death. An Incentive Stock Option may be exercised only by
the person or persons to whom such Holder's rights under the Option shall pass
by the Holder's will or by the laws of descent and distribution of the state or
country of domicile at the time of death.
(d) The Committee, at the time of grant or at any time
thereafter, may, as to any Option and in its absolute discretion, extend the
three-month and one-year post-termination exercise periods for any length of
time not later than the original expiration date of the Option and may increase
the portion of the Option that is exercisable subject to such terms and
conditions as the Committee may determine.
(e) To the extent that the Option of any deceased Holder or
of any Holder whose employment or service terminates is not exercised within the
applicable period, all further rights to purchase Common Stock pursuant to such
Option shall cease and terminate.
7.8 RIGHTS AS A SHAREHOLDER. The Holder of an Option under the
Plan shall have no rights as a shareholder with respect to the Common Stock
subject to such Option until the date of issue to the Holder of a stock
certificate for such shares. Except as otherwise expressly provided in the
Plan, no adjustment shall be made for dividends or other rights for which the
record date occurs prior to the date such stock certificate is issued.
7.9 OPTIONS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options may be granted under the Plan, from time to time, in
substitution for stock options held by individuals employed by corporations who
become Employees as a result of a merger, consolidation of the employing
corporation with the Company, the acquisition by the Company of the assets of
the employing corporation or the acquisition by the Company of stock of the
employing corporation with the result that such employing corporation becomes a
Subsidiary.
7.10 EARLY EXERCISE. Upon request received from any Holder of an
Option under the Plan, the Committee may, in its absolute discretion, permit a
Holder to purchase all or any part of the total shares purchasable under an
outstanding Option without regard to any portion of the Option that is not then
exercisable, subject to a repurchase option in favor of the Company. The
repurchase option shall be at the exercise price with respect to any portion of
the
1998 Employees' Stock Option Plan - page 6
<PAGE>
purchased shares which was by the terms of the Option not otherwise purchasable
at the date the Committee allowed the purchase to occur and will expire as to a
portion of the shares purchased as the Holder's employment with the Company
continues beyond the vesting dates applicable to the Option pursuant to which
the shares were purchased. The documentation for any such early exercise and
related rights of repurchase shall be in such form as the Company, in its
discretion, may designate in response to any request for early exercise.
8. CHANGES IN CAPITAL STRUCTURE
8.1 If the outstanding Common Stock is hereafter increased,
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company, or of another corporation by reason of any
reorganization, merger, consolidation, plan of exchange, recapitalization,
reclassification, stock split-up, combination of shares or dividend payable in
shares, appropriate adjustment shall be made by the Committee in the number and
kind of shares available for Options. In addition, the Committee shall make
appropriate adjustment in the number and kind of shares as to which outstanding
Options, or portions thereof then unexercised, shall be exercisable, the
exercise price of such outstanding Options and all other matters deemed
appropriate by the Committee. Notwithstanding the foregoing, the Committee
shall have no obligation to effect any adjustment that would or might result in
the issuance of fractional shares. Any fractional shares resulting from any
adjustment may be disregarded or provided for in any manner determined by the
Committee. Any such adjustment made by the Committee shall be conclusive. In
the event of dissolution of the Company or a merger, consolidation, plan of
exchange or similar transaction affecting the Company, in lieu of providing for
Options as provided above in this Section 8.1 or in lieu of having the Options
continue unchanged, the Committee may, in its sole discretion, provide a 30-day
period prior to such event during which Holders shall have the right to exercise
Options in whole or in part to the extent then exercisable, or to such other
extent as the Committee, in its absolute discretion, may determine without any
limitation on exercisability and upon the expiration of such 30-day period all
unexercised Options shall immediately terminate.
8.2 The existence of the Plan and the Options granted hereunder
shall not affect in any way the right or power of the Board or the shareholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of debt or
equity securities senior to or affecting Common Stock or the rights thereof, the
dissolution or liquidation of the Company, or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
8.3 Except as expressly provided above, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to Options previously granted or the exercise
price per share.
1998 Employees' Stock Option Plan - page 7
<PAGE>
9. AMENDMENT AND TERMINATION OF THE PLAN
The Board, in its discretion, may terminate the Plan at any time with
respect to any shares for which Options have not previously been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; PROVIDED, that no change in any Option previously granted may be
made which would impair the rights of the Holder without the consent of the
Holder; and PROVIDED FURTHER, each of the following actions shall also require
the approval of the holders of a majority of the outstanding shares obtained
within 12 months before or after the Board adopts a resolution authorizing such
action (a) any increase in the total number of shares of Common Stock that may
be issued under the Plan (except by adjustment pursuant to paragraph 8 which
shall not require approval by the shareholders); and (b) any extension of the
expiration date of the Plan.
10. MISCELLANEOUS
10.1 NO RIGHT TO AN OPTION. Neither the adoption of the Plan by the
Company nor any action of the Board or the Committee shall be deemed to give an
Employee, a Consultant or a Director any right to be granted an Option or any of
the rights hereunder except as may be evidenced by an Option Agreement duly
executed on behalf of the Company and then only to the extent and on the terms
and conditions expressly set forth therein.
10.2 NO EMPLOYMENT RIGHTS CONFERRED. Nothing in the Plan shall (i)
confer upon any Employee any right with respect to continuation of employment
with the Company; or (ii) interfere in any way with the right of the Company to
terminate the Employee's employment (or service as a Director or Consultant) at
any time for any reason, with or without cause.
10.3 OTHER LAWS; WITHHOLDING. The Company shall not be obligated to
issue any Common Stock pursuant to any Option granted under the Plan at any time
when the shares covered by such Option have not been registered under the
Securities Act of 1933, as amended, and such other state and federal laws, rules
or regulations as the Company or the Committee deems applicable and, in the
opinion of legal counsel for the Company, there is no exemption from the
registration requirements of such laws, rules or regulations available for the
issuance and sale of such shares. No fractional shares of Common Stock shall be
delivered nor shall any cash be paid in lieu of fractional shares. The Company
shall have the right to deduct, in connection with all Options, any taxes
required by law to be withheld and to require any payments required to enable it
to satisfy its withholding obligations. With the consent of the Committee, the
recipient of an Option may deliver shares of Common Stock to the Company to
satisfy any withholding obligation.
10.4 NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the
Plan shall be construed to prevent the Company from taking any corporate action
which is deemed by the Company to be appropriate or in its best interest,
whether or not such action would have an adverse effect on the Plan or any
Option granted under the Plan. No Employee, Consultant, Director, Holder,
beneficiary or other person shall have any claim against the Company as a result
of any such action.
1998 Employees' Stock Option Plan - page 8
<PAGE>
10.5 RESTRICTIONS ON TRANSFER.
(a) An Option shall not be transferable other than by will
or the laws of descent and distribution; PROVIDED, HOWEVER, that with the
consent of the Committee, which consent may be withheld as to any Option Holder
in its sole discretion or conditioned on such requirements as the Committee
shall deem appropriate, all or any portion of a Nonqualified Stock Option may be
assigned or transferred to the optionee's immediate family (i.e., children,
grandchildren, spouse, parents and siblings), to trusts for the benefit of the
optionee's immediate family members and pursuant to qualified domestic relations
orders. No consideration may be paid for the transfer of any Nonqualified Stock
Option and, after any permitted transfer, the Nonqualified Stock Option shall
continue to be subject to the same terms and conditions as were applicable to it
immediately prior to its transfer except that (i) subsequent transfers of
transferred options shall be prohibited except by will or the laws of descent
and distribution; (ii) for purposes of Section 7.7, the term "Holder" shall
refer to the original optionee; (iii) the events of termination of employment
specified in Section 7.7 shall continue to be applied with respect to the
original optionee, following which the Nonqualified Stock Option shall be
exercisable by the transferee only to the extent, and for the periods specified
in Section 7.7; and (iv) the original optionee shall remain subject to
withholding taxes upon exercise of the Nonqualified Stock Option by the
transferee. Before permitting any transfer, the Committee may require the
transferee to agree in writing to be bound by all other terms and conditions
applicable to the Nonqualified Stock Option prior to its transfer.
(b) Incentive Stock Options may be exercisable during the
lifetime of the optionee only by the optionee or by the optionee's guardian or
legal representative.
10.6 STOCK CERTIFICATES. The certificates representing shares
acquired under the Plan shall bear any legends required by the Committee.
10.7 GOVERNING LAW. To the extent that federal laws (such as the
Code and the federal securities laws) do not otherwise control, the Plan shall
be construed in accordance with the laws of the state of Oregon.
10.8 HEADINGS. Headings contained in the Plan are for reference
purposes and shall not affect the meaning or interpretation of the Plan.
1998 Employees' Stock Option Plan - page 9
<PAGE>
GEMSTONE SYSTEMS, INC.
Option Certificate Number: ______________
Option Holder: __________________________
GEMSTONE SYSTEMS, INC., (the "Company") grants to the above named
optionee an option to purchase shares of the Company's Common Stock under and
subject to the terms of the Company's 1992 Employees' Stock Option Plan (the
"Plan 7') as follows:
1. Number of Option Shares-. _______________
2. Date Option Granted: _______________
3. Date Option Expires: _______________
4. Option Price Per Share: _______________
The option represented by this certificate is intended to qualify as
an Incentive Stock Option as described in the Plan. This option may be
exercised as to 40 percent of the total shares optioned on the second
anniversary date of the grant, an additional 20 percent on the third anniversary
date of the grant, an additional 20 percent on the fourth anniversary date of
the grant, and the final 20 percent plus any remaining vested but unexercised
option shares on or after the fifth anniversary date of the grant, subject to
the terms (including events of termination and acceleration of exercise) of the
Plan, provided that in no event may this option or any portion thereof be
exercised at any time after the tenth anniversary date of the grant. Provided,
however, that with respect to when this option may be exercised in accordance
with the previous sentence, the optionee shall be given credit for time lapsed
from the first day of employment with the Company [in the position of
_______________,] to the date of this grant, with the effect of advancing each
of the four vesting dates set forth above by the amount of the credit so
determined.
This option may not be transferred by the optionee, other than by will
or the laws of descent and distribution, and is exercisable during the
optionee's lifetime only by the optionee. The shares purchasable under this
option will automatically be changed in number and kind as necessary to reflect
any subsequent stock split stock dividend, recapitalization or other similar
event affecting the number or classification of the outstanding shares of the
Common Stock of the Company. In such event, the board will issue a replacement
option certificate upon the request of the optionee.
The option is subject to all the terms and conditions of and may be
exercised only in accordance with the terms of the Plan, a copy of which is
attached to this certificate. The grant of this option is subject also to the
delivery to the Company of the Optionee's Agreement and Representations, duly
executed in form acceptable to the Company, and all of the terms and conditions
contained therein.
GEMSTONE SYSTEMS, INC.
By:
-----------------------------------
<PAGE>
Its:
-----------------------------------
2
<PAGE>
GEMSTONE SYSTEMS, INC.
EMPLOYEE'S AGREEMENT AND
REPRESENTATIONS REGARDING STOCK OPTION
To induce GemStone Systems, Inc. (the "Company") to award to the
undersigned (the "Employee") one or more options under the Company's 1992
Employees' Stock Option Plan to purchase shares of the Company's Common Stock,
and as a condition thereof, the undersigned agrees with and represents to the
Company:
1. So long as the undersigned is employed by the Company or any
subsidiary of the Company, the undersigned will devote 100 percent of the
Employee's working time, energy and skill to the service of the Company or any
such subsidiary, and will not perform service for compensation to any other
entity or in connection with any other enterprise without the express written
consent of the Company. If this Agreement is being executed by a consultant or
director of the Company who is not a full-time employee, the undersigned agrees
to fulfill to the best of his or her ability any engagement undertaken on behalf
of the Company.
2. Any option granted, including all rights of the undersigned
thereunder, is subject to and exercisable only in accordance with the terms of
the Company's 1992 Employees' Stock Option Plan and the Company's Option
Certificate evidencing the option, which have been delivered to the undersigned.
3. (a) In the case of any person who is an employee of the Company
at the time an option is granted, if employment with the Company or any
subsidiary terminates at any time before or after the date that shares are
acquired under any option, or in the case of any option holder who following any
exercise of all or part of the stock option makes any written demand for
information or access to records of the Company not generally made available to
all shareholders on a voluntary basis by the Company (excluding any request for
information pertaining to an employee's normal job responsibility), the Company
is hereby granted the option to repurchase all shares acquired under the option.
The purchase shall be exercisable at any time within 90 days from the date of
termination of employment, the date of purchase of the shares by Employee, or
the date of any such demand for information, whichever may be the later of such
dates. In the event of termination of employment, if termination of employment
is initiated by the Company for cause, the price per share upon exercise of the
repurchase option shall be the purchase price paid for the shares. For purposes
of this Agreement, the term "for cause" shall be limited to (i) termination by
reason of theft, embezzlement or other criminal misappropriation of funds from
the Company, (ii) termination by reason of conviction of, or entrance of a plea
of guilty or NOLO CONTENDERE to, a felony or other crime which has or may have a
material adverse effect on the reputation or business of the Company, or
(iii) termination by reason of repeated refusal to use reasonable good faith
efforts, after written notice specifying the nature of any claimed
nonperformance, to carry out his duties or to abide by Company policies. If
termination of employment occurs for any other reason, the purchase price shall
be the greater of the price per share paid upon exercise of the option or the
Fair Value per share as determined under subparagraph (c) below.
3
<PAGE>
(b) This purchase option in favor of the Company shall expire at
such time as (i) the Company shall issue shares of its Common Stock in an
underwritten public offering registered with the Securities and Exchange
Commission, or (ii) the Company shall have transferred all of its assets to one
or more third parties, or its shareholders shall have transferred substantially
all of the Company's outstanding stock, in a Sale Transaction. A Sale
Transaction for this purpose shall mean any transaction which pursuant to a
resolution adopted by the Company's Board of Directors has been designated a
sale transaction for purposes of the Company's Stock Option Plan.
(c) For purposes of this Agreement, Fair Value shall mean the
value per share of the shares owned by the Employee as mutually determined by
the Company and the Employee, which shall be initiated by the Company through
written notice to the Employee. If the Company and the Employee cannot agree
upon the Fair Value within ten days from the date of submission of the written
notice to the Employee by the Company, the Fair Value per share shall be
determined by a single appraiser to be selected by the Company. Any appraiser
so selected shall submit its appraisal in writing to the Company and the
Employee within 60 days of appointment. The cost of such appraisal shall be
split evenly by the Company and the Employee. The written determination by the
appraiser of the Fair Value per share shall be final for purposes of this
Agreement. Following the receipt of any determination of Fair Value by an
appointed appraiser, the Company shall have a period of 60 days to determine
whether to elect to exercise its repurchase option granted under this Agreement
at the Fair Value per share as so determined, or to allow its repurchase option
to lapse unexercised.
(d) Any tender of payment to the Employee by the Company of the
requisite purchase price upon exercise of the Company's repurchase right shall
fully effect the repurchase transaction, and the undersigned hereby appoints the
Company's Secretary as attorney-in-fact to effect the transfer on the stock
books of the Company.
(e) Any share certificate issued by the Company evidencing
shares acquired under any option shall bear an appropriate legend referencing
this repurchase option, and shall be retained by the Company until such time as
the repurchase option is no longer applicable.
4. Upon any exercise of all or any portion of any stock option
granted under the Stock Option Plan, the undersigned hereby commits that as a
condition to exercise the Employee will execute an irrevocable proxy, to be
prepared by the Company, in favor of any person designated by the President or
Secretary of the Company, which proxy shall remain in effect until the
occurrence of any event specified in paragraph 3(b) above which would terminate
the repurchase option.
5. The shares to be acquired upon exercise of the option will be
acquired for investment purposes only and not with a view to, or for sale or
transfer in connection with, the distribution thereof.
4
<PAGE>
6. Any dispute between the Company and the Employee with respect to
options or shares acquired pursuant to this Agreement or any rights or
obligations hereunder, other than Fair Value as determined by appraisal, may at
the Company's election be resolved via binding arbitration. The arbitration
shall be conducted in San Francisco, California, by a panel of three
arbitrators. The three arbitrators shall be selected as follows: within ten
days after demand for arbitration by a party, each party shall select an
arbitrator and shall advise the other party of such selection. The two
arbitrators thus selected shall select a third arbitrator who shall be
knowledgeable with respect to employer-employee matters. If the two arbitrators
are unable to agree within ten days upon a third arbitrator, the presiding judge
of the Multnomah County Circuit Court, upon request of either party, shall
designate a third arbitrator. If either party fails or refuses to designate its
arbitrator within the ten-day period, upon the application of either party, the
presiding judge of the Multnomah County Circuit Court shall designate such
arbitrator. The parties to the arbitration shall be entitled to such discovery
as would be available to them in the Multnomah County Circuit Court. The
arbitrators will have all of the authority of the court incidental to such
discovery, including authority to issue orders to provide documents or other
materials and orders to appear and submit to deposition, and to impose
appropriate sanctions, including awarding against a party for failure to comply
with any order. The parties may offer such evidence as they desire and shall
produce such additional evidence as the arbitrator or arbitrators may deem
necessary to an understanding and determination of the dispute. The arbitrators
shall be the judge of the admissibility of the evidence offered and conformity
to legal rules of evidence shall not be necessary. The decision of a majority
of the arbitrators shall be final and binding. The parties to the arbitration
shall pay their own attorney fees and the attorney fees and the fees of the
arbitrator designated by that party; the costs of the arbitration including the
fees of any third arbitrator shall be shared equally.
EXECUTED this ___ day of ______________, 199__.
GEMSTONE SYSTEMS, INC. EMPLOYEE
By
------------------------ ---------------------------
Bryan R. Grummon Signature of Employee
President
---------------------------
Please Print Name
5
<PAGE>
FORM OF
GEMSTONE SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I -- PURPOSE
1.01. PURPOSE
The GemStone Systems, Inc. Employee Stock Purchase Plan is intended to provide a
method whereby employees of GemStone Systems, Inc. and its subsidiary
corporations (hereinafter referred to, unless the context otherwise requires, as
the "Company") will have an opportunity to acquire a proprietary interest in the
Company through the purchase of shares of the Common Stock of the Company. It
is the intention of the Company to have the Plan qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). The provisions of the Plan shall be construed so as to
extend and limit participation in a manner consistent with the requirements of
that Section of the Code.
ARTICLE II -- DEFINITIONS
2.01. BASE PAY
"Base Pay" shall mean W-2 pay, excluding income arising from exercising stock
options.
2.02. COMMITTEE
"Committee" shall mean the individuals described in Article XI.
2.03. EMPLOYEE
"Employee" means any person who is customarily employed on a full-time or
part-time basis by the Company and is regularly scheduled to work more than 20
hours per week.
2.04. SUBSIDIARY CORPORATION
"Subsidiary Corporation" shall mean any present or future corporation which (i)
would be a "subsidiary corporation" of GemStone Systems, Inc. as that term is
defined in Section 424 of the Code and (ii) is designated as a participant in
the Plan by the Committee.
<PAGE>
ARTICLE III -- ELIGIBILITY AND PARTICIPATION
3.01. INITIAL ELIGIBILITY.
Any employee who shall have completed 90 days of employment and shall be
employed by the Company on the date his or her participation in the Plan is to
become effective shall be eligible to participate in offerings under the Plan,
which commence on or after such 90-day period has concluded.
3.02. LEAVE OF ABSENCE.
For purposes of participation in the Plan, a person on leave of absence shall be
deemed to be an employee for the first 90 days of such leave of absence, and
such employee's employment shall be deemed to have terminated at the close of
business on the 90th day of such leave of absence, unless such employee shall
have returned to regular full-time or part-time employment (as the case may be)
prior to the close of business on such 90th day. Termination by the Company of
any employee's leave of absence, other than termination of such leave of absence
on return to full-time or part-time employment, shall terminate an employee's
employment for all purposes of the Plan and shall terminate such employee's
participation in the Plan and right to exercise any option.
3.03. RESTRICTIONS ON PARTICIPATION.
Notwithstanding any provisions of the Plan to the contrary, no employee shall be
granted an option to participate in the Plan:
(a) if, immediately after the grant, such employee would own
shares, and/or hold outstanding options to purchase shares,
possessing 5% or more of the total combined voting power or
value of all classes of shares of the Company (for purposes of
this paragraph, the rules of Section 424(d) of the Code shall
apply in determining share ownership of any employee); or
(b) which permits his or her rights to purchase shares under
all employee stock purchase plans of the Company to accrue at
a rate which exceeds $25,000 in fair market value of the
shares (determined at the time such option is granted) for
each calendar year in which such option is outstanding.
3.04. COMMENCEMENT OF PARTICIPATION.
An eligible employee may become a participant by completing an authorization for
a payroll deduction on the form provided by the Company and filing it with the
Committee on or before
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the date set therefor by the Committee, which date shall be prior to the
Offering Commencement Date for the Offering (as such terms are defined below).
Payroll deductions for a participant shall commence on the applicable Offering
Commencement Date when his or her authorization for a payroll deduction becomes
effective and shall end on the Offering Termination Date of the Offering to
which such authorization is applicable unless sooner terminated by the
participant as provided in Article VIII.
ARTICLE IV -- OFFERINGS; TERM OF PLAN
4.01. QUARTERLY OFFERINGS.
The Plan will be implemented by quarterly offerings of rights to purchase shares
of the Company's Common Stock (the "Offerings") beginning on the 1st day of
January, April, July and October in each of the years 1998, 1999, 2000, 2001 and
2002, each Offering terminating on the last day of the month before the start of
the next following Offering. The maximum number of shares issued in the
respective years shall be:
For 1998: _____________ shares.
For 1999: _____________ shares plus unissued shares from the
prior Offerings, whether offered or not.
For 2000: _____________ shares plus unissued shares from the
prior Offerings, whether offered or not.
For 2001: _____________ shares plus unissued shares from the
prior Offerings, whether offered or not.
For 2002: Up to ________________ shares from any unissued
shares from the prior Offerings, whether offered or not.
As used in the Plan, "Offering Commencement Date" means the first of any
January, April, July or October, as the case may be, on which the particular
Offering begins and "Offering Termination Date" means the March 31, June 30,
September 30 or December 31, as the case may be, on which the particular
Offering terminates.
4.02. TERM OF PLAN.
Unless terminated earlier pursuant to Section 12.05, the Plan shall terminate on
January 1, 2003.
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<PAGE>
ARTICLE V -- PAYROLL DEDUCTIONS
5.01. AMOUNT OF DEDUCTION.
At the time a participant files an authorization for payroll deduction, he or
she shall elect to have deductions made from his or her pay on each payday
during the time he or she is a participant in an Offering at the rate of any
whole percentage up to 10% of his or her base pay in effect at the Offering
Commencement Date of such Offering. In the case of a part-time, hourly
employee, such employee's base pay during an Offering shall be determined by
multiplying such employee's hourly rate of pay in effect on the Offering
Commencement Date by the number of regularly scheduled hours of work for such
employee during such Offering.
5.02. PARTICIPANT'S ACCOUNT.
All payroll deductions made for a participant shall be credited to his or her
account under the Plan. A participant may not make any separate cash payment
into such account except when on leave of absence and then only as provided in
Section 5.04.
5.03. CHANGES IN PAYROLL DEDUCTIONS.
A participant may discontinue participation in the Plan as provided in Article
VIII, but no other change can be made during an Offering and, specifically, a
participant may not alter the amount of payroll deductions for that Offering.
5.04. LEAVE OF ABSENCE.
If a participant goes on a leave of absence, such participant shall have the
right to elect: (a) to withdraw the balance in his or her account pursuant to
Section 7.02; and (b) to discontinue contributions to the Plan but remain a
participant in the Plan, or remain a participant in the Plan during such leave
of absence, authorizing deductions to be made from payments by the Company to
the participant during such leave of absence and undertaking to make cash
payments to the Plan at the end of each payroll period to the extent that
amounts payable by the Company to such participant are insufficient to meet such
participant's authorized Plan deductions.
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<PAGE>
ARTICLE VI -- GRANTING OPTIONS
6.01. NUMBER OF OPTION SHARES.
On the Commencement Date of each Offering, a participating employee shall be
deemed to have been granted an option to purchase a maximum number of shares of
the Company equal to an amount determined as follows: an amount equal to (i)
that percentage of the employee's base pay which he or she has elected to have
withheld (but not in excess of 10%) multiplied by (ii) the employee's base pay
during the period of the Offering (iii) divided by the amount which the
Committee establishes as the purchase price per share for the applicable
Offering. The Committee shall establish the purchase price as a percentage (the
"Discount Percentage") of the market value of the Company's shares, determined
as provided in Section 6.02 below. An employee's base pay during the period of
an Offering shall be determined by multiplying the normal weekly rate of pay (as
in effect on the last day prior to the Commencement Date of the particular
Offering) by 13 or the hourly rate by 520; provided that, in the case of a
part-time hourly employee, the employee's base pay during the period of an
Offering shall be determined by multiplying such employee's hourly rate by the
number of regularly scheduled hours of work for such employee during such
Offering.
6.02. OPTION PRICE.
The option price of shares purchased with payroll deductions made during each
Offering shall be determined by applying a Discount Percentage to the market
value of the shares. The Discount Percentage for each Offering shall be
established by the Committee and announced to the participants prior to the
commencement of the Offering Period. The Discount Percentage shall be not less
than 85% and may be any percentage between 100% and 85%. The option price of
shares shall be the lower of:
(a) the Discount Percentage times the closing price of a
share on the Offering Commencement Date or the nearest prior
business day on which trading occurred on NASDAQ; or
(b) the Discount Percentage for the Offering times the
closing price of a share on the Offering Termination Date or
the nearest prior business day on which trading occurred on
NASDAQ.
If the Common Stock of the Company is not admitted to trading on NASDAQ on any
of the aforesaid dates for which closing prices of shares are to be determined,
then reference shall be made to the fair market value of the shares on that
date, as determined on such basis as shall be established or specified for the
purpose by the Committee.
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<PAGE>
ARTICLE VII -- EXERCISE OF OPTION
7.01. AUTOMATIC EXERCISE.
Unless a participant gives written notice to the Company as hereinafter
provided, his or her option for the purpose of purchasing shares with payroll
deductions made during any offering will be deemed to have been exercised
automatically on the Offering Termination Date applicable to such offering, for
the purchase of the number of full shares which the accumulated payroll
deductions in his or her account at that time will purchase at the applicable
option price (but not in excess of the number of shares for which options have
been granted to the employee pursuant to Section 6.01), and any excess in his or
her account at that time will be returned to the participant.
7.02. WITHDRAWAL OF ACCOUNT.
By written notice to the Committee, at any time prior to the Offering
Termination Date applicable to any Offering, a participant may elect to withdraw
all the accumulated payroll deductions in his or her account at such time.
7.03. FRACTIONAL SHARES.
Fractional shares will not be issued under the Plan, and any accumulated payroll
deductions which would have been used to purchase fractional shares will be
returned to any employee promptly following the termination of an Offering,
without interest.
7.04. TRANSFERABILITY OF OPTION.
During a participant's lifetime, options held by such participant shall be
exercisable only by that participant.
7.05. DELIVERY OF SHARES
As promptly as practicable after the Offering Termination Date of each Offering,
the Company will deliver to each participant, as appropriate, the shares
purchased upon exercise of the option.
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<PAGE>
ARTICLE VIII -- WITHDRAWAL
8.01. IN GENERAL.
As indicated in Section 7.02, a participant may withdraw payroll deductions
credited to his or her account under the Plan at any time by giving written
notice to the Committee. All of the participant's payroll deductions credited
to his or her account will be paid to the participant promptly after receipt of
the notice of withdrawal, and no further payroll deductions will be made from
such participant's pay during such Offering. The Company may, at its option,
treat any attempt to borrow by an employee on the security of accumulated
payroll deductions as an election, under Section 7.02, to withdraw such
deductions.
8.02. EFFECT ON SUBSEQUENT PARTICIPATION.
A participant's withdrawal from any Offering will not have any effect upon his
or her eligibility to participate in any succeeding Offering or in any similar
plan which may hereafter be adopted by the Company.
8.03. TERMINATION OF EMPLOYMENT.
Upon termination of the participant's employment for any reason, including
retirement (but excluding death while in the employ of the Company or
continuation of a leave of absence for a period beyond 90 days), the payroll
deductions credited to his or her account will be returned to the participant,
or, in the case of the participant's death subsequent to the termination of
employment, to the person or persons entitled thereto under Section 12.01.
8.04. TERMINATION OF EMPLOYMENT DUE TO DEATH.
Upon termination of the participant's employment because of death, the
beneficiary (as defined in Section 12.01) shall have the right to elect, by
written notice given to the Committee prior to the earlier of the Offering
Termination Date or the expiration of a period of 60 days commencing with the
date of the death of the participant, either:
(a) to withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
(b) to exercise the participant's option for the purchase of
shares on the Offering Termination Date next following the
date of the participant's death for the purchase of the number
of full shares which the accumulated payroll deductions in the
participant's
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<PAGE>
account at the date of the participant's death will purchase
at the applicable option price, and any excess in such account
will be returned to said beneficiary, without interest.
In the event that no such written notice of election shall be duly received by
the Committee, the beneficiary shall automatically be deemed to have elected,
pursuant to paragraph (a) above, to withdraw the amounts credited to the
participant's account.
8.05. LEAVE OF ABSENCE.
A participant on leave of absence shall, subject to the election made by such
participant pursuant to Section 5.04, continue to be a participant in the Plan
so long as such participant is on continuous leave of absence. A participant
who has been on leave of absence for more than 90 days, and who therefore is not
an employee for the purpose of the Plan, shall not be entitled to participate in
any offering commencing after the 90th day of such leave of absence.
Notwithstanding any other provisions of the Plan, if a participant on leave of
absence returns to regular full-time or part-time employment with the Company,
such participant may participate in the Plan at the beginning of the next
Offering Period.
ARTICLE IX -- SHARES
9.01. MAXIMUM SHARES.
The maximum number of shares which shall be issued under the Plan, subject to
adjustment upon changes in capitalization of the Company as provided in Section
12.04, shall be __________________ shares per year, plus in each Offering all
unissued shares from prior Offerings, whether offered or not, not to exceed
________________ shares for all Offerings. If the total number of shares for
which options are exercised on any Offering Termination Date in accordance with
Article VI exceeds the maximum number of shares for the applicable Offering, the
Company shall make a pro rata allocation of the shares available for delivery
and distribution in as nearly a uniform manner as shall be practicable and as it
shall determine to be equitable, and the balance of payroll deductions credited
to the account of each participant under the Plan shall be returned to the
participant as promptly as possible.
9.02. PARTICIPANT'S INTEREST IN OPTION SHARES.
The participant will have no interest in shares covered by an option until such
option has been exercised.
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<PAGE>
9.03. REGISTRATION OF SHARES.
Shares to be delivered to a participant under the Plan will be registered in the
name of the participant, or, if the participant so directs by written notice to
the Committee prior to the Offering Termination Date applicable thereto, in the
names of the participant and one such other person as may be designated by the
participant, as joint tenants with rights of survivorship, or as tenants by the
entireties, to the extent permitted by applicable law.
ARTICLE X -- RESTRICTIONS ON SHARES
10.01. RESTRICTIONS ON EXERCISE.
The Committee may, in its discretion, require as conditions to the exercise
of any option, that the shares of Common Stock reserved for issuance upon the
exercise of the option shall have been duly listed, upon official notice of
issuance, upon a stock exchange or other inter-dealer quotation system, and
that either:
(a) a Registration Statement under the Securities Act of 1933,
as amended, with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of
purchase, in form and substance satisfactory to the Company,
that it is his or her intention to purchase the shares for
investment and not for resale or distribution.
ARTICLE XI -- ADMINISTRATION
11.01. APPOINTMENT OF COMMITTEE.
The Board of Directors shall appoint a committee (the "Committee") to administer
the Plan. No member of the Committee shall be eligible to purchase shares under
the Plan.
11.02. AUTHORITY OF COMMITTEE.
Subject to the express provisions of the Plan, the Committee shall have plenary
authority in its discretion to interpret and construe any and all provisions of
the Plan, to adopt rules and regulations for administering the Plan, and to make
all other determinations deemed necessary or advisable for administering the
Plan. The Committee's determination on the foregoing matters shall be
conclusive.
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<PAGE>
11.03. RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE.
The Board of Directors may from time to time appoint members of the Committee in
substitution for, or in addition to, members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee may select one of its
members as its Chairman and shall hold its meetings at such times and places as
it shall deem advisable and may hold telephonic meetings. A majority of its
members shall constitute a quorum. All determinations of the Committee shall be
made by a majority of its members. The Committee may correct any defect or
omission, or reconcile any inconsistency in the Plan, in the manner and to the
extent it shall deem desirable. Any decision or determination reduced to writing
and signed by a majority of the members of the Committee shall be as fully
effective as if it had been made by a majority vote at a meeting duly called and
held. The Committee may appoint a secretary and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
ARTICLE XII -- MISCELLANEOUS
12.01. DESIGNATION OF BENEFICIARY.
A participant may file a written designation of a beneficiary who is to receive
any shares and/or cash. Such designation of beneficiary may be changed by the
participant at any time by written notice to the Committee. Upon the death of a
participant and upon receipt by the Company of proof of identity and existence
at the participant's death of a beneficiary validly designated by the
participant under the Plan, the Company shall deliver such shares and/or cash to
such beneficiary. In the event of the death of a participant, and in the
absence of a beneficiary validly designated under the Plan who is living at the
time of such participant's death, the Company shall deliver such shares and/or
cash to the executor or administrator of the estate of the participant, or if no
such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such shares and/or cash to
the spouse or to any one or more dependents of the participant as the Company
may designate. No beneficiary shall, prior to the death of the participant,
acquire any interest in the shares or cash credited to the participant under the
Plan
12.02. TRANSFERABILITY.
Neither payroll deductions credited to a participant's account nor any rights
with regard to the exercise of an option, or to receive shares under the Plan
may be assigned, transferred, pledged or otherwise disposed of in any way by the
participant other than by will or the laws of descent and distribution. Any such
attempted assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 7.02.
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12.03. USE OF FUNDS.
All payroll deductions received or held by the Company under this Plan may be
used by the Company for any corporate purpose, and the Company shall not be
obligated to segregate such payroll deductions.
12.04. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) If, while any options are outstanding, the outstanding
shares of Common Stock of the Company have increased,
decreased, changed into or been exchanged for a different
number or kind of shares or securities of the Company through
reorganization, merger, recapitalization, reclassification,
stock dividend, stock split, reverse stock split or similar
transaction, appropriate and proportionate adjustments may be
made by the Committee in the number and/or kind of shares
which are subject to purchase under outstanding options and on
the option exercise price or prices applicable to such
outstanding options. In addition, in any such event, the
number and/or kind of shares which may be offered in the
Offerings described in Article IV hereof shall also be
proportionately adjusted.
(b) Upon the dissolution or liquidation of the Company, or
upon a reorganization, merger or consolidation of the Company
with one or more corporations as a result of which the Company
is not the surviving corporation, or upon a sale of
substantially all of the property or shares of the Company to
another corporation, the holder of each option then
outstanding under the Plan will thereafter be entitled to
receive at the next Offering Termination Date upon the
exercise of such option for each share as to which such option
shall be exercised, as nearly as reasonably may be determined,
the cash, securities and/or property which a holder of one
share of the Common Stock was entitled to receive upon and at
the time of such transaction. The Board of Directors shall
take such steps in connection with such transactions as the
Board shall deem necessary to assure that the provisions of
this Section 12.04 shall thereafter be applicable, as nearly
as reasonably may be determined, in relation to the said cash,
securities and/or property as to which such holder of such
option might thereafter be entitled to receive.
12.05. AMENDMENT AND TERMINATION.
The Board of Directors shall have complete power and authority to terminate or
amend the Plan; provided, however, that the Board of Directors shall not,
without the approval of the shareholders of the Corporation (i) increase the
maximum number of shares which may be issued under any Offering (except pursuant
to Section 12.04); or (ii) amend the requirements as to the class of employees
eligible to purchase shares under the Plan or permit the members of the
Committee to purchase shares under the Plan. No termination, modification or
amendment of the Plan may,
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without the consent of an employee then having an option under the Plan to
purchase shares, adversely affect the rights of such employee under such option.
12.06. EFFECTIVE DATE.
The Plan shall become effective as of July __, 1998, subject to approval by
the holders of the majority of the Common Stock present and represented at a
special or annual meeting of the shareholders held on or before July __,
1999. If the Plan is not so approved, the Plan shall not become effective.
12.07. NO EMPLOYMENT RIGHTS.
The Plan does not, directly or indirectly, create any right for the benefit of
any employee or class of employees to purchase any shares under the Plan, or
create in any employee or class of employees any right with respect to
continuation of employment by the Company, and it shall not be deemed to
interfere in any way with the Company's right to terminate, or otherwise modify,
an employee's employment at any time.
12.08. EFFECT OF PLAN.
The provisions of the Plan shall, in accordance with its terms, be binding upon,
and inure to the benefit of, all successors of each employee participating in
the Plan, including, without limitation, such employee's estate and the
executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such employee.
12.09. GOVERNING LAW.
The law of the State of Oregon will govern all matters relating to this Plan
except to the extent it is superseded by the laws of the United States.
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<PAGE>
LEASE
FOR
AMBERGLEN
BUSINESS CENTER
BY AND BETWEEN
AMBERJACK, LTD.
"LANDLORD"
AND
GEMSTONE SYSTEMS, INC.
"TENANT"
<PAGE>
AMBERGLEN BUSINESS CENTER
STANDARD OFFICE/FLEX LEASE FORM
TABLE OF CONTENTS
SECTION 1. PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 2. SUMMARY OF BASIC TERMS . . . . . . . . . . . . . . . . . . . .1
SECTION 3. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3.1 Grant of Premises . . . . . . . . . . . . . . . . . . . .2
3.2 Office/Flex Building . . . . . . . . . . . . . . . . . . .2
3.3 Rentable Area . . . . . . . . . . . . . . . . . . . . . .2
3.4 Acceptance of Premises . . . . . . . . . . . . . . . . . .2
SECTION 4. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
4.1 Lease Term . . . . . . . . . . . . . . . . . . . . . . . .2
4.2 Early Possession . . . . . . . . . . . . . . . . . . . . .3
4.3 Tenant Delays . . . . . . . . . . . . . . . . . . . . . .3
SECTION 5. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
5.1 Permitted Use . . . . . . . . . . . . . . . . . . . . . .3
5.2 Restrictions on Use . . . . . . . . . . . . . . . . . . .3
5.3 Compliance with Laws . . . . . . . . . . . . . . . . . . .3
5.4 Landlord's Rules and Regulations . . . . . . . . . . . . .4
5.5 Hazardous Substances . . . . . . . . . . . . . . . . . . .4
SECTION 6. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
6.1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . .5
6.2 Security Deposit . . . . . . . . . . . . . . . . . . . . .5
6.3 Additional Rent . . . . . . . . . . . . . . . . . . . . .5
6.4 Definition of Operating Expenses . . . . . . . . . . . . .5
6.5 Collection of Actual Tenant Charges . . . . . . . . . . .7
6.6 Collection of Tenant Charges Based on Estimates . . . . .7
6.7 Reestimations . . . . . . . . . . . . . . . . . . . . . .7
6.8 Annual Adjustments . . . . . . . . . . . . . . . . . . . .7
6.9 Records . . . . . . . . . . . . . . . . . . . . . . . . .8
SECTION 7. REPAIRS AND MAINTENANCE . . . . . . . . . . . . . . . . . . .8
7.1 Landlord's Obligations . . . . . . . . . . . . . . . . . .8
7.2 Tenant's Obligations . . . . . . . . . . . . . . . . . . .8
7.3 Reimbursement of Repairs Assumed . . . . . . . . . . . . .8
7.4 Duty to Make Repairs . . . . . . . . . . . . . . . . . . .9
SECTION 8. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 9. TAXES AND ASSESSMENTS . . . . . . . . . . . . . . . . . . . .9
9.1 Payment of Proportionate Share . . . . . . . . . . . . . .9
9.2 Taxes on Rent . . . . . . . . . . . . . . . . . . . . . .9
SECTION 10. ALTERATIONS AND ADDITIONS . . . . . . . . . . . . . . . . . .9
10.1 Landlord's Consent . . . . . . . . . . . . . . . . . . .9
10.2 Ownership and Surrender of Alterations . . . . . . . . 10
10.3 Liens . . . . . . . . . . . . . . . . . . . . . . . . . 10
<PAGE>
AMBERGLEN BUSINESS CENTER
OFFICE/FLEX LEASE
1. PARTIES.
This Lease, dated for reference purposes only July 29, 1996, is made by and
between AMBERJACK, LTD., an Arizona corporation, ("Landlord") and GEMSTONE
SYSTEMS, INC., an Oregon corporation ("Tenant").
2. SUMMARY OF BASIC TERMS.
As used in this Lease, the following terms shall have the meanings set
forth below, subject to the qualifications, adjustments and exceptions set forth
elsewhere in this Lease:
(a) PREMISES: The Building described in Section 2(b) together with the
surrounding exterior improvements located on Lot 12 of AmberGlen, and located
substantial as shown on the site plan attached hereto as Exhibit "A".
(b) BUILDING: The office/flex building located at 20575 NW vonNeumann
Drive, Suite 100, Beaverton, Oregon, including all lobbies, office and
commercial space.
(c) AMBERGLEN BUSINESS CENTER COMMON AREAS: The land (developed and
undeveloped) as shown on Exhibit "B" attached.
(d) PERMITTED USE: Support staff, management, engineering, marketing,
sales, and shipping/receiving space for a computer software company.
(e) LEASE TERM: Five (5) years and Zero (0) months.
(f) SCHEDULED COMMENCEMENT DATE: February 1, 1997.
(g) EXPIRATION DATE: January 31, 2002.
(h) MONTHLY BASE RENT: Forty-seven Thousand Four Hundred Seventy-Two and
50/100ths Dollars ($47,472.50).
(i) INITIAL RENTABLE AREA OF PREMISES: 55,850 square feet.
(j) INITIAL SECURITY DEPOSIT: Four Hundred Thousand and 00/100ths Dollars
($400,000.00).
(k) TENANT'S GUARANTOR: Not Applicable.
(l) LANDLORD'S BROKER: Cushman & Wakefield of Oregon.
(m) TENANT'S BROKER: CB Commercial.
(n) LANDLORD'S ADDRESS FOR NOTICES:
Birtcher Property Services
27611 La Paz Road
Post Office Box 30009
Laguna Niguel, California 92607-0009
Attn: Director of Property Management
copy to:
Birtcher Property Services
1600 NW Compton Drive
Suite 212
Beaverton, Oregon 97006
<PAGE>
(o) TENANT'S ADDRESS FOR NOTICES:
GEMSTONE SYSTEMS, INC. SAMPOERNA GROUP
Attn: Paul Burton/Chris Moore Attn: Ken Irinaga
20575 NW vonNeumann Drive 3 Embarcadero Center
Suite 100 Suite 1133
Beaverton, OR 97006 San Francisco, CA. 94111
3. PREMISES.
3.1 GRANT OF PREMISES. Landlord hereby leases to Tenant and Tenant
leases from Landlord those certain Premises stated above situated in the
County of Washington, City of Hillsboro, State of Oregon, Beaverton, Oregon
(hereinafter referred to as the "Premises").
3.2 OFFICE/FLEX BUILDING. The Premises, together with and including
other property owned by Landlord, comprise an office/flex building
(hereinafter referred to as the "Building"). Tenant's use and occupancy of
the Premises shall include the use, in common with others, of the Common
Areas as hereinafter defined, but excepting therefrom and reserving unto
Landlord the exterior faces of all exterior walls, the roof and the right to
install, use and maintain where necessary in the Premises all pipes,
ductwork, conduits and utility lines through hung ceiling space, partitions,
beneath the floor or through other parts of the Leased Premises. Landlord
reserves the right to effect such other above-referenced tenancies in the
building as Landlord may elect in its sole business judgment.
3.3 RENTABLE AREA. With respect to each floor of the Building, the
"Rentable Area" of a floor shall mean the sum of all space on the floor which is
or may be occupied by tenants for purposes stated in each tenant's lease and
those areas of the floor which are necessary to and specifically benefit
tenant(s) of the building, including restrooms, corridors, lobbies, telephone
closets, mechanical rooms, electrical rooms, janitorial closets, flues, stacks,
pipe shafts and vertical ducts with their enclosing walls.
3.4 ACCEPTANCE OF PREMISES. The Plans ("Plans") for construction of the
tenant improvements to be performed by Landlord ("Tenant Improvements") and the
terms under which they are to be executed are attached to this Lease as Exhibit
C. Except as otherwise provided in Exhibit C, Landlord shall, at its expense,
construct Tenant Improvements in accordance with Exhibit C. The Premises shall
be accepted by the Tenant as provided in Section 4.1 of this Lease and upon such
acceptance, Tenant shall be deemed to have accepted the Premises in its then
condition and subject to all applicable recorded covenants, conditions and
restrictions and all applicable zoning, municipal, county, state and federal
laws, ordinances and regulations governing and regulating the use of Premises.
Landlord agrees that the Tenant Improvements shall comply with all codes
applicable to the Tenant Improvements and in effect on the commencement date.
Landlord may rely on and Tenant shall accept issuance of a final occupancy
permit as evidence that this Lease requirement has been met. Landlord agrees
further that on the commencement date the water, sewage, gas, electrical,(1)
mechanical, heating, ventilating and air conditioning systems of the Premises
will be in good working condition. Landlord has not made and does not make any
representations as to suitability of the Leased Premises for the conduct of
Tenant's business except as expressly set forth herein.
4. TERM.
4.1 LEASE TERM. The term of this Lease is stated above in 2(e), provided
however, if the Premises are not "Ready for Occupancy" as hereinafter defined,
on the date the term hereof is to commence, the commencement and termination
dates of the Lease shall be adjusted accordingly based on the date the Premises
are Ready for Occupancy. The deferral of Tenant's rental obligation with
respect to the Premises shall be in full satisfaction of any and all rights
which Tenant might otherwise have as a result of the delayed commencement date
of the Lease Term hereof. "Ready for Occupancy" as used herein shall mean the
date that Landlord shall have substantially completed the work to be performed
by Landlord as set forth in Exhibit C and Certificate of Occupancy has been
issued by the City of Hillsboro. If the premises are not ready for occupancy by
August 1, 1997 then Tenant may terminate this Lease except Landlord's duty to
deliver the premises by August 1, 1997 and Tenant's ability to terminate the
Lease shall be delayed on a day for day basis for any Tenant delays and the
period of time during which the Landlord is prevented or delayed in the
performance of the making of any improvements or fulfilling any obligations
under a contract due to delays caused by any strike, lockout, labor dispute,
inability to obtain labor or materials or any other reasonable substitute
therefore, fire, catastrophe, or other casualty, civil commotion, acts of God or
war, governmental prohibitions or regulations, or other causes beyond Landlord's
control shall be added to the Landlord's time for performance as specified
above. The certificate of the architect (or representative of Landlord) in
charge of supervision and
(1) After acceptance of the Premises by Tenant, a punch list shall be prepared
and administered as provided in Section 5 of the Addendum to this Lease.
<PAGE>
completion of the Premises or a certificate or other approval evidencing
completion of improvements, as required, shall control conclusively the date
upon which the Premises are Ready for Occupancy and Tenant's obligation to pay
rent begins. If the commencement of the Lease Term is delayed as aforesaid and
the commencement date would otherwise occur on a day other than the first day of
the month, such commencement date shall pay proportionate rent at the same
monthly rate set forth herein (also in advance) for such partial month. In the
event the commencement date is delayed, the expiration of the term hereof shall
also be delayed so that the Lease Term will continue for the full period set
forth above. As soon as the Lease Term commences, Landlord and Tenant shall
execute an amendment to this Lease, which may be required by either party,
setting forth the exact date on which the Lease Term commenced ("Commencement
Date") and the expiration date of the Lease Term. This Lease shall not be
terminated by Tenant, and Tenant shall in no event be entitled to an abatement
or reduction of rent except as expressly set forth in Section 12.3 or
Section 13.1. Additionally, Landlord shall not be liable to Tenant for damages
in the event Landlord cannot deliver the Premises on the inception of the Lease
Term.
4.2 EARLY POSSESSION. If, prior to commencement of the Lease Term, Tenant
uses or occupies the Premises or any part thereof with Landlord's prior written
consent, for the purpose of completing alterations to the Premises, Tenant
agrees to observe and perform all the provisions of this Lease, except those
which require payment of Rent; provided, however, if Tenant commences business
in any part of the Premises prior to commencement of the Lease Term, Tenant
shall pay Landlord an Occupation Rent for each day prior to commencement of the
term, calculated on the basis of the per diem rental and all other sums which
would be due to Landlord from Tenant if the term had then commenced, including
its percentage share of annual Common Area Expenses.
4.3 TENANT DELAYS. The commencement date shall not be delayed or
postponed due to Tenant delays arising out of the acts or omissions of Tenant,
and the Term, Tenant's obligations to pay Rent and all of Tenant's other
obligations under this Lease shall commence upon the date which would have been
the commencement date, but for Tenant delays.
5. USE.
5.1 PERMITTED USE. Tenant shall use the Premises solely for the use
stated in 1(d) and shall not use or permit the Premises to be used for any other
purpose without Landlord's prior written notice, which shall not be unreasonably
withheld. In no event will Landlord consent to a use that is inconsistent with
(i) Protective Covenants or (ii) Landlord's desired Tenant mix for the project.
5.2 RESTRICTIONS ON USE. Tenant shall not do or permit anything to be
done in or about the Premises nor bring or keep anything therein which will:
(a) increase the existing rate of, cause the cancellation of or otherwise
adversely affect any insurance for the Building or any part thereof or any of
its contents; (b) materially impair the proper and economic maintenance,
operation and repair of the Building or any portion thereof; (c) materially
obstruct or interfere with the rights of other tenants or occupants of the
Building or injure or annoy them; or (d) cause any nuisance in or about the
Premises, the Building or AmberGlen Business Center Common Areas. Tenant shall
not use or allow any part of the Premises to be used for the storage,
manufacturing or sale of food or beverages other than the provision of vending
machines, microwave ovens, and refrigeration for employee foods and beverages,
or for the manufacture, retail sale or auction of merchandise, goods or property
of any kind, or as a school or classroom, other than Tenant's on-site training
classes, which shall not exceed Tenant's overall parking allotment as described
in Section 3 of the Addendum Lease, or for any unlawful or objectionable
purpose. Tenant shall not commit or allow to be committed any waste to the
Premises, the Building or AmberGlen Business Center Common Areas.
5.3 COMPLIANCE WITH LAWS. Tenant shall not use the Premises or permit
anything to be done in or about the Premises, the Building or AmberGlen Business
Center Common Areas which will in any way conflict with any law, statute,
ordinance, code, rule, regulation, requirement, license, permit, certificate,
judgment, decree, order or direction of any governmental or quasi-governmental
authority, agency, department, board, panel or court (singularly and
collectively "Laws"). Tenant shall, at its expense, promptly comply with all
Laws which are now in effect or which may hereafter be in effect and with the
requirements of any board of fire insurance underwriters or other similar bodies
now or hereafter constituted, relating to or affecting the condition, use or
occupancy of the Premises with respect to the tenant
<PAGE>
improvements located in or about the Premises. However, Tenant shall not be
required to make structural changes to the Premises or Building common areas
unless they arise or are required because of or in connection with Tenant's
specific use of the Premises, or the type of business conducted by Tenant in
the Premises, or the tenant improvements in the Premises or Tenant's acts or
omissions. Tenant shall obtain and maintain in effect during the Lease Term
all licenses and permits required for the proper and lawful conduct of
Tenant's business in the Premises, and shall at all times comply with such
licenses and permits. The judgment of any court of competent jurisdiction or
the admission of Tenant in any action or proceeding (whether Landlord is a
party or not) that Tenant has violated any Laws shall be conclusive of that
fact as between Landlord and Tenant.
5.4 LANDLORD'S RULES AND REGULATIONS. Tenant shall observe and comply
with the Building rules and regulations which are in effect on the date thereof
(a copy of which is attached hereto as Exhibit E) and such reasonable amendments
and additions thereto as Landlord may, from time to time, promulgate. Landlord
shall not be responsible for the non-performance of said rules and regulations
of any other tenants of the Building, but shall use reasonable efforts to ensure
that all tenants within AmberGlen Business Center comply with said Rules and
Regulations.
5.5 HAZARDOUS SUBSTANCES. Tenant shall not cause or permit the release,
discharge, or disposal nor the presence, use, transportation, generation, or
storage of any Hazardous Material (as hereafter defined) in, on, under, about,
to, or from the Premises by either Tenant, Tenant's employees, agents,
contractors, or invitees (collectively the "Tenant") other than the use of such
materials in de minimus quantities reasonably necessitated by the Tenant's
regular business activities.
Tenant further agrees and covenants to Landlord, its agents, employees,
affiliates and shareholders (collectively the "Landlord") the following:
1. To comply with all Environmental Laws in effect, or that may come into
effect, applicable to the Tenant or Tenant's use and occupancy of the
Premises;
2. To immediately notify Landlord, in writing, or of any existing,
pending or threatened (a) investigation, inquiry, claim or action by
any governmental authority in connection with any Environmental Laws;
(b) third party claims; (c) regulatory actions; and/or (d)
contamination of the Premises;
3. Tenant shall, at Tenant's expense, investigate, monitor, remediate,
and/or clean up any Hazardous Material or other environmental
condition on, about, or under the Premises required as a result of
Tenant's use or occupancy of the Premises;
4. To keep the Premises free of any lien imposed pursuant to any
Environmental Laws as a result of Tenant's activities thereon;
5. To indemnify, defend, and save Landlord harmless from and against any
and all claims (including personal injury, real, or personal property
damage), actions, judgments, damages, penalties, fines, costs,
liabilities, interest, or attorney fees that arise, directly or
indirectly, from Tenant's violation of any Environmental Laws or the
presence of any Hazardous Materials on, under or about the Premises,
as a result of tenant's use or occupancy thereof; and
6. Landlord shall not cause (nor permit any person under its control to
cause) the release, discharge, or disposal nor the presence, use,
transportation, generation, or storage of any Hazardous Materials in,
on, under, about, to or from the Premises except in amounts or
concentrations as may be permitted by Law. Landlord further agrees
and covenants to the Tenant the following:
A. To comply with all Environmental Laws in effect or which may come into
effect which are applicable to the Premises resulting from Landlord's
conduct on the Premises, other than those for which Tenant has
responsibility pursuant to the above paragraph;
B. To promptly notify Tenant in writing of any known actual or threatened
(a) investigation, inquiry, claim, or action by any governmental
authority in connection with the application of any Environmental Laws
to the Premises, (b) third party claims relating to Hazardous
Materials at the Premises, and/or (c) contamination of the Premises
with Hazardous Materials. For purposes of this subsection 2, the term
"known" shall mean that which is known to any employee of Landlord at
or above the supervisory or management level; and
C. To investigate, monitor, remediate and/or clean up at Landlord's
expense any Hazardous Material on, or about, or under the Premises
caused by Landlord.
The Tenant's obligations, responsibilities, and liabilities under this Section
shall survive the expiration of the Lease.
For purposes of this Section the following definitions apply:
"Hazardous Materials" shall mean: (1) any "hazardous waste" and/or "hazardous
substance" defined pursuant to any Environmental Laws; (2) asbestos or any
substance containing asbestos; (3) polychlorinated biphenyls; (4) lead;
(5) radon; (6) pesticides; (7) petroleum or any other
<PAGE>
substance containing hydrocarbons; (8) any substance which, when on the
Premises, is prohibited by any Environmental Laws; (9) petroleum; and (10)
any other substance, material, or waste which, (i) by an Environmental Laws
requires special handling or notification of any governmental authority in
its collection, storage, treatment, or disposal or (ii) is defined or
classified as hazardous, dangerous or toxic pursuant to any legal
requirements.
"Environmental Laws" shall mean: any and all federal, state and local laws,
statutes, codes, ordinances, regulations, rules or other requirements, relating
to human health or safety or to the environment, including, but not limited to,
those applicable to the storage, treatment, disposal, handling and release of
any Hazardous Materials, all as amended or modified from time to time.
6. RENT.
6.1 RENT. Without any prior notice, demand, offset or deduction, Tenant
shall pay the Monthly Base Rent, the Additional Rent and Taxes and any other
costs or expenses as required by this Lease in accordance with the Terms of this
Lease.
Rent shall be payable without offset on or before the first day of each
calendar month to Landlord's manager's in advance at Birtcher Property Services,
27611 La Paz Road, Post Office Box 60009, Laguna Niguel, California 92607-0009
or such other place as may be designated by Landlord from time to time.
6.2 SECURITY DEPOSIT. To secure Tenant's compliance with all of the
terms and provisions of this Lease, upon execution of this Lease, Tenant has
paid Landlord the sum stated in 2(j) above as a security deposit. The deposit
shall be placed in one or more segregated interest bearing accounts with all
interest accruing to and being added to the account balance, "Accumulated
Deposit." The security deposit shall be placed in an FDIC insured account(s)
selected by Landlord in its sole discretion. So long as Tenant has had no
monetary defaults under the terms and conditions of this Lease which have not
been cured as specified in Section 17.1 of this Lease, the Accumulated Deposit
shall be reduced on each anniversary date of this Lease in an amount equal to
Eighty Thousand and 00/100ths Dollars ($80,000.00). Such amount shall be
treated as a credit against the next due monthly Base Rent installment(s). The
Accumulated Deposit shall be a debt from Landlord to Tenant, refundable within
thirty (30) days following expiration of the Term or other termination of this
Lease not caused by Tenant's default. Landlord shall have the right to offset
against the Accumulated Deposit any sums owing from Tenant to Landlord not paid
when due, any damages caused by Tenant's default, the cost of curing any default
by Tenant should Landlord elect to do so, and the cost of performing any repair
or cleanup that is Tenant's responsibility under this Lease. Offset against the
Accumulated Deposit shall not be an exclusive remedy, but may be made by
Landlord in its sole and unlimited discretion, in addition to and not exclusive
of any right or remedy provided by law or this Lease. Landlord shall give
notice to Tenant each time an offset is claimed against the Accumulated Deposit,
and, unless the Lease is terminated, Tenant shall within ten (10) calendar days
following any such notice deposit with Landlord a sum equal to the amount of the
offset so that the total Accumulated Deposit amount, net of offset and interest,
shall remain as specified above throughout the Term. If Landlord sells its
interest in the Premises, Landlord shall deliver this Accumulated Deposit to the
purchaser of Landlord's interest and thereupon be relieved of any further
liability or obligation with respect to the Security Deposit.
6.3 ADDITIONAL RENT. This Lease is a "net" lease. All Tenant Charges and
other costs, charges and expenses which Tenant is required to pay as Additional
Rent by this Lease, arising out of or in connection with this Lease or the
ownership or operation of the Premises except to the extent this Lease
explicitly places responsibility for any such cost, charge or expense on
Landlord, shall be Additional Rent.
6.4 DEFINITION OF OPERATING EXPENSES. Operating Expenses shall include
all costs for the operation, repair and maintenance of the Building and all
AmberGlen Business Center Common Areas incurred by Landlord on account of
operating and maintenance of the Building and AmberGlen Business Center Common
Areas and the real property on which it is situated, except franchise, estates,
inheritance, net income and excess profit taxes of Landlord, depreciation on the
Building, interest on and capital retirement of Landlord's mortgage loans and
costs chargeable by Landlord directly to specific Tenants. Landlord agrees to
make reasonable efforts to minimize operating costs insofar as such efforts are
not inconsistent with Landlord's
<PAGE>
intent to operate and maintain the Building and AmberGlen Common Area in a
first-class manner. Operating expenses may include, but shall not be limited
to:
6.4.1 All taxes, assessments, purchases, water and sewer rents,
and other governmental impositions and charges whatsoever which may create a
statutory lien upon the Premises, the Building or AmberGlen Business Center
Common Areas, which are assessed, levied or imposed during the term of this
Lease, surcharges levied upon or assessed against parking space or areas, any
tax, levy or license fee measured by the rent payable to Tenant under this Lease
which may be in lieu of or in addition to current taxes (except Landlord's net
income taxes) or any obligation to any governmental entity assessed upon
Landlord as a result of its ownership or operation and all reasonable costs and
expenses incurred by Landlord in contesting or negotiating the same with
governmental authority if Landlord, in its reasonable discretion, elects to
contest or negotiate the same.
6.4.2 All costs and expenses to Landlord in maintaining fire and
extended coverage insurance including all risk endorsement on the property,
public liability, rent loss insurance, difference in conditions and any other
insurance maintained by Landlord covering the use and operation of the Building
and AmberGlen Business Center Common Areas, the part of any claim required to be
paid under the deductible portion of any insurance policies carried by Landlord
in connection with the Building (all such insurance shall be in such amounts as
Landlord may reasonably determine).
6.4.3 All costs and expenses of repairing, replacing, operating
and maintaining the heating, ventilating and air conditioning systems for the
Building, including maintenance contracts therefor and the cost of all utilities
required in the operating of all such systems, except those required to be paid
directly by a tenant of the Building.
6.4.4 All costs and expenses to Landlord in providing standard
services and utilities to tenants of the Building, including common area
janitorial services, window washing and utilities not separately metered;
together with the costs of replacement of electric light bulbs and florescent
tubes and ballasts, which Landlord shall have the exclusive right to provide and
install at Tenant's sole cost and expense.
6.4.5 Reasonable costs incurred by accountants and experts or
other consultants to assist the accountants in making the computations required
hereunder.
6.4.6 All costs and expenses incurred by Landlord in operating,
managing (including administrative costs), maintaining and repairing the
Building and AmberGlen Business Center Common Areas, including all sums expended
in connection with the common areas for general maintenance and repairs,
resurfacing, painting, restriping, cleaning, sweeping and janitorial services,
window washing, maintenance and repair of elevators, stairways, sidewalks, curbs
and Building signs, sprinkler systems and any other utility systems; cost of all
supplies and personnel to implement such services and to police the Building and
AmberGlen Business Center Common Areas; rental and/or depreciation of machinery
and equipment used in such maintenance and services; security and fire
protection services; trash removal services; all costs and expenses pertaining
to snow and ice removal, alarm systems, patrol service, utilities, premiums and
other costs for worker's compensation insurance, wages, withholding taxes,
social security taxes, personal property taxes, fees for required licenses and
permits, supplies and charges for management of the Building and AmberGlen
Business Center Common Areas and an overhead cost equal to five (5%) percent of
the total Operating Costs. Costs and expenses incurred by Landlord in
operating, managing and maintaining the Building and AmberGlen Business Center
Common Areas which are incurred exclusively for the benefit of specific terms of
the Building will be billed accordingly and will not be included within the
Operating Expenses. Landlord, however, may cause any or all of said services to
be provided by an independent contractor(s).
<PAGE>
6.4.7 Cost of capital improvements, structural repairs or
replacements made to the Building in order to conform to changes subsequent to
the date of this Lease in any applicable laws, ordinances, rules, regulations,
or orders of any governmental or quasi-governmental authority having
jurisdiction over the Building or AmberGlen Common Area or any such capital
improvements, structural repairs or replacements designed primarily to reduce
Operating Expenses. Expenditures for the foregoing shall be amortized at market
rate of return over the useful life of such capital improvement or structural
repair or replacement as determined by Landlord's accountants; provided that the
amortized amount of any cost-saving improvement shall be limited in any year to
the reduction in Operating expenses realized as a result thereof.
6.5 COLLECTION OF ACTUAL TENANT CHARGES. Unless Landlord exercises the
option contained in Section 6.6 below for a particular calendar year, Tenant
shall pay actual Tenant charges for each month of such calendar year within
fifteen (15) days of receipt of invoice from Landlord for such monthly Tenant
Charges.
6.6 COLLECTION OF TENANT CHARGES BASED ON ESTIMATES. For each calendar
year of the Lease Term, Landlord shall, at its option, reasonably estimate
the total Operating Expenses for the following calendar year. Tenant shall
pay its proportionate share of the Operating Expenses. In the event the
Building and/or AmberGlen Business Center occupancy is not one hundred
percent (100%), said Operating Expenses shall be adjusted to equal what the
total Operating Expenses would be if the occupancy was one hundred percent
(100%). Tenant's initial percentage or proportionate share of Operating
Expenses for the Building and Building Common Areas is one hundred percent
(100%); and Tenant's percentage share of Operating Expenses for the AmberGlen
Business Center Common Areas is one hundred percent (100%) of such Operating
Expenses charged to the Building. The percentage of AmberGlen Business Center
Common Areas expenses charged to the Building is three and 15/100ths percent
(3.15%). For each year of the Lease Term, Tenant shall pay to Landlord in
advance on or before the first day of each month, without demand or notice,
one-twelfth (1/12th) of Tenant's share of the estimated annual Operating
Expenses. If the term of this Lease commences on a day other than the first
day of a calendar month, Tenant shall pay to Landlord on the first day of the
term, a sum determined by multiplying one three-hundred-sixty-fifth (1/365th)
of the Tenant's share of the estimated Operating Expenses by the number of
days remaining in the first calendar month of the term. Any change in the
Tenant's percentage or proportionate share of the Operating Expenses for the
Building Common Area or the AmberGlen Common Area resulting from changes in
(i) the Tenant's floor area, (ii) Building floor area, or (iii) total
AmberGlen Business Center Common Area, shall be effective as of the first day
of the month following the change.
6.7 REESTIMATIONS. At any time from time to time during the term hereof,
Landlord may furnish Tenant with written notice of a reestimation of the annual
Operating Expenses to reflect more accurately, in Landlord's reasonable opinion,
the current Operating Expenses. Commencing with the first day of the calendar
quarter next succeeding delivery of such notice to Tenant, and continuing on the
first day of each calendar month during the term (until subsequently
reestimated), Tenant shall pay to Landlord one-twelfth (1/12th) of the Tenant's
share of the estimated Operating Expenses, as reestimated.
6.8 ANNUAL ADJUSTMENTS. Within a reasonable time following the end of
each calendar year during the Term of this Lease, Landlord shall furnish to
Tenant an itemized statement certified as correct by Landlord, setting forth
the total Operating Expenses for the preceding calendar year, the amount of
Tenant's share of such Operating Expenses and the payments made by Tenant
with respect to such calendar year. If Tenant's share of the actual
Operating Expenses for such year exceeds the payment so made by Tenant, based
on the Landlord's estimate, Tenant shall pay Landlord the deficiency within
thirty (30) days after receipt of said statement. If said payments by
Tenant, based on Landlord's estimate, exceed Tenant's share of the actual
Operating Expenses, Landlord will credit the amount of such overpayment
against Tenant's next Operating Expense payment due. Until Tenant receives a
statement setting forth the new amounts of Tenant's estimated share of
Operating Expenses for the new calendar year, Tenant shall continue to pay at
the rate being paid for the year just
<PAGE>
Operating Expenses on the basis of said statement beginning on the first day
of the month following the month in which said statement is received.
6.9 RECORDS. Landlord agrees to maintain accurate records of the cost of
items with respect to which Tenant is required to pay as Additional Rent and to
make these records available for inspection by Tenant or its representatives at
any time during regular business hours after reasonable notice from Tenant.
7. REPAIRS AND MAINTENANCE.
7.1 LANDLORD'S OBLIGATION. The following are the obligation of the
Landlord:
(a) Repair, maintenance and replacement of the roof, gutters,
exterior walls (including painting), bearing walls, structural members and
foundations of the Building.
(b) Repair and maintenance of sidewalks, driveways, curbs, parking
areas and areas used in common by Tenant and Landlord or tenants of other parts
of the Building and removal of snow and ice therefrom.
(c) Repair and maintenance of water, sewage, gas, electrical and
mechanical systems.
(d) Repair and maintenance of heating, ventilation and air
conditioning (HVAC) systems which service the Premises as well as other parts of
the Building.
(e) Maintenance and replacement of landscaping for the land on which
the Building is situated and AmberGlen Business Center Common Area.
(f) Janitorial service for Building common areas of the Building.
Although performance of the foregoing are the obligation of Landlord, the
costs of all of the foregoing shall be a Tenant Charge shared on proportionate
basis by Tenant as set forth in Section 6. Except as set forth in and subject
to the terms of section 7.1, Landlord shall not otherwise be required to repair
or maintain the Premises or perform any other duties with respect to the
Premises.
7.2 TENANT'S OBLIGATION. The following are the obligation of Tenant:
(a) Repair and maintenance of the interior of the Premises, including
without limitation keeping the interior of the Premises in a clean and sanitary
condition free of debris; licensed and bonded janitorial service for the
Premises which will be arranged for by Tenant; repair and maintenance of all
plumbing within the Premises and repair of any damage resulting from water
leaks; and replacement of all glass in windows or doors of the Premises which
become chipped, cracked or broken.
(b) Any repair necessitated by the use, misuse, abuse, wrongful act,
negligence or breach of or default under this Lease of or by Tenant, its agents,
employees or invitees. Tenant shall not allow the Premises to deteriorate or
fall out of repair.
(c) Any repairs or alterations required in order for Tenant to comply
with Rules and Regulations as set forth in Exhibit E.
(d) All repairs to and maintenance of the Premises other than repairs
and maintenance which are the obligation of Landlord as stated in Section 7.1.
7.3 REIMBURSEMENT FOR REPAIRS ASSUMED. If Tenant fails or refuses to make
repairs which are required to be made by Tenant by this Section 7, Landlord will
provide Tenant with a written notice stating repairs to be made. Tenant shall
have ten (10) calendar days in which to commence said repairs and diligently
pursue their completion. In the event Tenant again fails to complete repairs
following receipt
<PAGE>
of Notice, Landlord may make the repairs and charge the costs of such repairs
to Tenant. Such expenditures by Landlord shall be reimbursed by Tenant on
demand together with interest as set in Section 25.16 from the date of
expenditure by Landlord until repayment in full.
7.4 DUTY TO MAKE REPAIRS. The duty of the Landlord to make repairs shall
not mature until Landlord has received notice in writing from Tenant of the
repairs that are required. Landlord shall commence repairs within ten (10) days
after receipt of such notice and shall diligently pursue such repairs to
completion.
8. UTILITIES. Tenant shall pay all utility charges with respect to the
Premises, including but not limited to water, sewer, gas, electricity (including
utilities servicing all central HVAC systems servicing the Premises), telephone,
and garbage removal ("Utilities"). Electricity, except to common areas and
central HVAC systems, shall be separately metered. If the Utilities are not
separately metered and Landlord is billed directly and pays for any of these
charges, Tenant shall pay its proportionate share of such charges as set forth
in Section 6.6.
9. TAXES AND ASSESSMENTS.
9.1 PAYMENT OF PROPORTIONATE SHARE. Tenant shall be liable for payment of
its proportionate share of all current assessments, real estate taxes, taxes,
fees, levies and other similar charges as provided in Section 6.6 (all of the
foregoing herein called "Taxes") imposed by any governmental jurisdiction
against the Premises, the Building or AmberGlen Business Center Common Areas,
either directly or indirectly.
Tenant's proportionate share of any Taxes shall be based only on that
portion of the Taxes which is allocable to the Premises during the Term, unless
specifically amortized by the taxing authority. For these purposes, an
assessment related to a local improvement district shall be deemed to have a
useful life of ten (10) years and Tenant's proportionate share shall be equal to
a fraction the numerator of which is the remainder of the Term and the
denominator of which is ten (10) years. Tenant shall pay all taxes levied on or
with respect to Tenant's personal property located on the Premises.
9.2 TAXES ON RENT. If, at any time during the Term of this Lease under
the laws of the United States Government, the State of Oregon, or any political
subdivision thereof in which the Premises are located, a tax or excise on rent,
or any other tax however described, is levied or assessed by any such political
body against Landlord on account of rent payable to Landlord hereunder, such tax
or excise shall be considered for the purposes of this Lease a real property tax
payable by Tenant. If real estate taxes are withdrawn in whole or in part and
any substitute tax is made therefor, such tax shall in any event for the purpose
of this Lease be considered a real property tax, a proportionate share of which
shall be paid by Tenant, regardless of the source from which it is collected.
Nothing in this Section 9 is intended to require Tenant to pay any income,
franchise, or excess profits tax of Landlord.
10. ALTERATIONS AND ADDITIONS.
10.1 LANDLORD'S CONSENT.
(a) Tenant shall not make or permit to be made any alterations, additions
or improvements (singularly and collectively "Alterations") to or of the
Building or the Premises or any part thereof without the prior written consent
of Landlord in each instance. However, Landlord's consent shall not be required
for (i) minor decorations of the Premises such as wall coverings and wall
hangings, built-in cabinetry, and movable partitions, (ii) installation of
furnishings, and (iii) non-structural alterations which do not require a
building permit and the total hard costs of which are less than $25,000.00
("Non-Structural Alterations"). If the value of any Non-Structural Alterations
exceeds $1,000.00 Tenant shall, upon Landlord's request, deliver copies of any
plans thereof to Landlord. For all Non-Structural Alterations and Permit
Alterations, Tenant shall give Landlord prior notice of the work and deliver to
Landlord plans and specifications (if any), therefor.
(b) Landlord will not unreasonably withhold its consent to any Alterations
provided and upon the condition that all of the following conditions shall be
satisfied: (i) the Alterations do not affect the outside appearance of the
Building; (ii) the Alterations are nonstructural and do not impair the strength
of the Building or any part thereof; (iii) the alterations are to the interior
of the Premises and do not affect any part of the Building outside of the
Premises; (iv) the Alterations do not affect the proper functioning of the
heating, ventilating and air conditioning
<PAGE>
("HVAC"), mechanical, electrical, sanitary or other utilities, systems and
services of the Building, or increase the usage therefor by Tenant; (v)
Landlord shall have approved the final plans and specifications for the
Alterations and all contractors who will perform the alterations; (vi) Tenant
pays to Landlord (A) a fee for Landlord's indirect costs, field supervision
or coordination in connection with the Alterations equal to five percent (5%)
of the estimated cost of the Alterations, and (B) the reasonable costs and
expenses actually incurred by Landlord in reviewing Tenant's plans and
specifications and inspecting the Alterations to determine whether they are
performed in accordance with the approved plans and specifications and in
compliance with laws, including, without limitation, the fees of any
architect or engineer employed by Landlord for such purpose; (vii) before
proceeding with any Alteration which will cost more than $25,000.00
(exclusive of Section 10.2), Tenant obtains and delivers to Landlord, at
Landlord's option, either: (A) a performance bond and a labor and materials
payments bond for the benefit of Landlord, issued by a corporate surety
licensed to do business in Oregon each in an amount equal to one hundred
twenty five percent (125%) of the estimated cost of the Alterations and in a
form satisfactory to Landlord, or (B) such other security as shall be
reasonably satisfactory to Landlord. Unless all of the foregoing conditions
are satisfied, landlord shall have the right to withhold its consent to the
Alterations in Landlord's sole and absolute discretion.
(c) All Alterations must comply with all Laws which are then in effect,
the other terms of this Lease, and the final plans and specifications approved
by Landlord (when such approval is required), and Tenant shall fully and
promptly comply with and observe the rules and regulations of Landlord then in
force with respect to the making of Alterations. Landlord's review and approval
of Tenant's plans and specifications are solely for Landlord's benefit.
Landlord shall have no duty toward Tenant, nor shall Landlord be deemed to have
made any representation or warranty to Tenant, with respect to the safety,
adequacy, correctness, efficiency or compliance with Laws of the design of the
Alterations, the plans and specifications therefor, or any other matter
regarding the Alterations. Tenant shall deliver to Landlord a complete set of
"as built" plans and specifications for each Alteration.
10.2 OWNERSHIP AND SURRENDER OF ALTERATIONS.
(a) Alterations. Upon their installations, all Alterations, including,
but not limited to, wall covering, paneling and built-in cabinetry, but
excluding movable furniture, trade fixtures, including without limitation,
modular system panels, projection screens, and white boards, and office
equipment ("Tenant's Property"), shall become a part of the realty and belong to
Landlord and shall be surrendered with the Premises. However, upon the
expiration or sooner termination of the Lease Term, Tenant shall, upon written
demand by Landlord, at Tenant's expense, immediately remove any Alterations made
by Tenant which are designated by Landlord to be removed at the time of granting
its consent to such Alterations, repair any damage to the Premises or the
Building caused by such removal, and restore the Premises to its original
condition and configuration.
10.3 LIENS. Tenant shall pay when due all claims for labor, materials and
services furnished by or at the request of Tenant or Tenant's Affiliates.
Tenant shall keep the Premises, the Building and Common Areas free from all
liens, security interests and encumbrances (including, without limitation, all
mechanic's liens and stop notices) created as a result of or arising in
connection with the Alterations or any other labor, services or materials
provided for or at the request of Tenant or Tenant's Affiliates, or any other
act or omission of Tenant or Tenant's Affiliates, or persons claiming through or
under them. (Such liens, security interests and encumbrances singularly and
collectively are herein called "Liens.") Tenant shall not use materials in
connection with the Alterations that are subject to any Liens. Tenant shall
indemnify Landlord and Landlord Affiliates for, and hold Landlord and Landlord's
Affiliates harmless from and against: (a) all Liens; (b) the removal of all
Liens and any actions or proceedings related thereto; and (c) all Liabilities
incurred by Landlord or Landlord's Affiliates in connection with the foregoing.
If Tenant fails to keep the Premises, the Building and Common Areas free from
Liens, then, in addition to any other rights and remedies available to Landlord,
Landlord may take any action necessary to discharge such Liens, including, but
not limited to, payment to the claimant on whose behalf the Lien was filed.
Tenant shall indemnify Landlord for, and hold Landlord harmless from and
against, all Liabilities so incurred by Landlord, without regard to any defense
or offset that Tenant may have had against the claimant.
<PAGE>
Neither Landlord's curative action nor the reimbursement of Landlord by
Tenant shall cure Tenant's default in failing to keep the Premises, the
Building and the Common Areas free from Liens.
10.4 ADDITIONAL REQUIREMENTS. Tenant, at its expense, shall obtain all
necessary permits and certificates for the commencement and performance of
Alterations and for final approval thereof upon completion, and shall cause the
Alterations to be performed in compliance therewith and with all applicable
insurance requirements, and in a good, first-class and workmanlike manner.
Tenant, at its expense, shall diligently cause the cancellation or discharge of
all notices of violation arising from or otherwise connected with Alterations,
or any other work, labor, services, or materials done for or supplied to Tenant
or Tenant's Affiliates, or by any person claiming through or under Tenant or
Tenant's Affiliates. Alterations shall be performed so as not to interfere with
any other tenant in the Building, cause labor disharmony therein, or delay or
impose any additional expense on Landlord in the construction, maintenance,
repair or operations of the Building. Throughout the performance of the
Alterations, Tenant, at its expense, shall carry, or cause to be carried, in
addition to the insurance described in this Lease, Workers' Compensation
insurance in statutory limits and such other insurance as Landlord may
reasonably require, with insurers reasonably satisfactory to Landlord. Tenant
shall furnish Landlord with satisfactory evidence that such insurance is in
effect at or before the commencement of the Alterations and, upon request, at
reasonable intervals thereafter until completion of the Alterations.
11. INSURANCE.
11.1 LIABILITY, PROPERTY DAMAGE AND WORKERS' COMPENSATION. Tenant shall,
at all times during the Lease Term or any extension thereof, and at its own cost
and expense, procure and maintain in force workers' compensation insurance,
bodily injury liability and property damage liability insurance adequate to
protect Landlord and naming Landlord, Landlord's Manager, any persons, firms or
corporation designated by Landlord, any mortgagee of the Building of whose
identity Tenant is notified, as an additional insured, against liability for
injury or death of any person in connection with the use, operation or condition
of the Premises. Such property damage and bodily injury liability insurance
shall at all times be in a combined limit of no less than $1,000,000.00 on an
occurrence basis. The limits or such insurance shall not limit the liability of
Tenant.
11.2 PROPERTY INSURANCE. Landlord shall maintain insurance on an all risk
basis on the Building in the amount of the full insurable replacement cost of
the Building. Landlord shall have the right to place on the Building any other
insurance as Landlord shall deem reasonably necessary. Tenant shall bear the
expense of any insurance insuring the property of Tenant and Tenant Improvements
on the Premises agnst such risks. As Additional Rent for the Premises, Tenant
shall reimburse Landlord for Tenant's proportionate share of the cost of all
insurance maintained by Landlord with respect to the Building as set forth in
Section 6.4.2.
11.3 WAIVER OF SUBROGATION. Tenant and Landlord each waives any and all
right of recovery against the other, or against the officers, partners,
employees, agents and representatives of the other, for loss of or damage to
such waiving party or its property or the property of others under its control,
if and to the extent that such loss or damage is insured against under any
insurance policy in force at the time of such loss or damage, or required to be
in force by the terms of this Lease, Tenant and Landlord shall make best efforts
to obtain policies authorizing such waiver.
12. DAMAGE AND DESTRUCTION.
12.1 PARTIAL DAMAGE. If the Premises are partly damaged and Section 12.2
does not apply, the Premises shall be repaired by Landlord provided, however,
Landlord shall not be required to repair or restore any tenant improvements or
additions other than the Initial Tenant Improvements (as defined in Exhibit C);
and provided further, Landlord shall be required to make repairs or restoration
only to the extent it receives insurance proceeds from either Landlord or
Tenant's insurance company sufficient to pay the cost of such repairs and
restoration. In the event Landlord elects not to make repairs (which election
and notification to Tenant must occur within sixty (60) days of said casualty),
Tenant may elect to make repairs or terminate the Lease.
<PAGE>
12.2 DESTRUCTION. If the Premises are destroyed or damaged such that the
cost of repair exceeds seventy-five percent (75%) of the value of the Building
before the damage as reasonably determined by Landlord, either party may elect
to terminate this Lease as of the date of the damage or destruction by giving
written notice to the other party not later than forty-five (45) calendar days
following the date of damage, provided however Tenant may not elect to terminate
if the damage or destruction was caused by the wrongful act or negligence of
Tenant or by the failure by Tenant to comply with any of the provisions of this
Lease. In the event the Lease is terminated, all rights and obligations of the
parties shall cease as of the date of termination, and tenant shall be entitled
to the reimbursement of any prepaid amounts paid by Tenant and attributable to
the anticipated Term. If neither party elects to terminate, Landlord shall
proceed to restore the premises to substantially the same form as prior to the
damage or destruction provided, however, Landlord shall not be required to
repair or restore any tenant improvements or additions other than the Initial
Tenant Improvements (as defined in Exhibit C); and, provided further, Landlord
shall be required to make repairs or restoration only to the extent it receives
insurance proceeds sufficient to pay the cost of such repairs or restoration.
12.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage
in proportion to the extent the Premises are untenantable, except that there
shall be no rent abatement where the damage occurred as the result of the
wrongful act, negligence or failure to comply with any provisions of this Lease
of or by Tenant, and the loss of rent would not be covered by Landlord's
insurance (this provision shall not be interpreted to require Landlord to obtain
rent loss insurance).
13. EMINENT DOMAIN.
13.1 PARTIAL TAKING. If a portion of the Premises is condemned and
Section 13.2 below does not apply, this Lease shall continue on the following
terms:
(a) Landlord shall be entitled to all of the proceeds of
condemnation, and Tenant shall have no claim against Landlord as a result of the
condemnation, however, Tenant shall have the right to pursue a separate claim
against the condemning authority for any damages to Tenant's trade fixtures,
movable personal property, Tenant's relocation damages, if any, and the
unamortized portion of any Tenant-paid Interior Improvements.
(b) Landlord shall proceed as soon as reasonably possible to make
such repairs and alterations to the Premises as are necessary to restore the
remaining Premises to a condition as comparable as reasonably practicable to
that existing at the time of the condemnation.
(c) After the date o which title vests in the condemning authority or
an earlier date on which alterations or repairs are commenced by Landlord to
restore the balance of the Premises in anticipation of taking, the rent shall be
reduced in proportion to the reduction in proportion to percent of the Premises
taken. If the parties are unable to agree upon the amount of the reduction of
rent, the amount shall be determined by an acceptable arbitrator on reference by
either party. The determination of the arbitrator shall be final and binding on
the parties.
(d) If a portion of Landlord's property not included in the Premises
is taken and severance damages are awarded on account of the Premises, or an
award is made for detriment to the Premises as a result of activity by a public
body not involving a physical taking of any portion of the Premises, this shall
be regarded as a partial condemnation to which Section 13.1(a) and Section
13.1(c) apply, and the rent shall be reduced in proportion to percent of the
Premises taken.
13.2 TOTAL TAKING. If a condemning authority takes all of the Premises or
a portion sufficient to render the remaining Premises reasonably unsuitable for
the use which Tenant was then making of the Premises, this Lease shall terminate
as of the date the title vests in the condemning authorities. Landlord shall be
entitled to all of the proceeds of condemnation, and Tenant shall have no claim
against Landlord as a result of the condemnation.
13.3 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the Premises to
a purchaser with the power of eminent domain in the face of a threat or
probability of the exercise of the power shall be treated for the purposes of
this Section 13 as a taking by condemnation.
<PAGE>
14. LIENS AND INDEMNIFICATION.
14.1 LIENS.
(a) Except with respect to activities for which Landlord is
responsible, Tenant shall pay when due all claims for work done on and for
services rendered or material furnished to the Premises and shall keep the
Premises, the Building and AmberGlen Business Center Common Areas free from any
liens. If Tenant fails to pay any such claims or to discharge any lien,
Landlord may do so and collect the cost as Additional Rent. Any amount so added
shall bear interest as set forth in Section 25.16 from the date expended by
Landlord until payment in full and shall be payable on demand. Such action by
Landlord shall not constitute a waiver of any right or remedy which Landlord may
have on account of Tenant's default.
(b) Tenant may withhold payment of any claim in connection with a
good faith dispute over the obligation to pay so long as Landlord's property
interests are not jeopardized and the amount claimed is contested in good faith
by appropriate proceedings. If a lien is filed as a result of nonpayment,
Tenant shall, within ten (10) calendar days after Tenant learns of the filing,
secure the discharge of the lien or deposit with Landlord cash or sufficient
corporate surety bond or other surety satisfactory to Landlord in an amount
sufficient to discharge the line, plus any costs, attorney fees, and other
charges that could accrue as a result of a foreclosure or sale under the lien.
14.2 INDEMNIFICATION. Tenant shall indemnify and hold harmless Landlord
from and against any claim, loss, or liability arising out of or related to any
activity of Tenant on the Premises or any condition of the Premises in the
possession or under the control of Tenant unless such condition is caused by
Landlord under this Lease. Landlord shall have no liability to Tenant for any
loss or damage caused by third parties or by any condition of the Premises
unless such condition is caused by Landlord under this Lease.
15. QUIET ENJOYMENT. So long as Tenant pays all rent and performs all of its
other obligation as required hereunder, Tenant shall quietly enjoy the Premises
without hindrance or molestation by Landlord, or those claiming through
Landlord, subject to the terms of this Lease and the terms of any Superior
Leases and Mortgages, and all other agreements or matters of record or to which
this Lease is subordinate. As used in this Lease, the term "Superior Lease and
Mortgages" means all present and future ground leases, underlying leases,
mortgages, deeds of trust or other encumbrances, and all renewals,
modifications, consolidations, replacements or extensions thereof or advances
made thereunder, affecting all or any portion of the Premises, the Building or
the Common Areas.
16. ASSIGNMENT AND SUBLETTING.
16.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or by
operation of law or otherwise, assign, transfer, mortgage, sublet or otherwise
transfer or encumber all or any part of Tenant's interest in this Lease or in
the Premises without Landlord's prior written consent, which Landlord shall not
unreasonably withhold. Any attempted assignment, transfer, mortgage,
encumbrance or subletting by Tenant without such consent shall be void and shall
constitute a breach of a default under this Lease.
16.2 LANDLORD'S RIGHT TO TERMINATE LEASE. If Tenant desires to assign its
interest in this Lease or to sublease all or any part of the Premises, Tenant
shall notify Landlord in writing. This notice shall be accompanied by: (a) a
statement setting forth the name and business of the proposed assignee or
subtenant; (b) an executed copy of the proposed assignment or sublease (and any
collateral agreements) setting forth all of the terms and the financial details
of the sublease or assignment (including, without limitation, the term, the rent
and any security deposit, and amounts payable for Tenant's property and the
common use of any personnel or equipment); (c) financial statements acceptable
to Landlord and other information requested by Landlord relating to the proposed
assignee or subtenant; and (d)
<PAGE>
any other information concerning the proposed assignment or sublease which
Landlord may reasonably request. If Tenant proposes to assign this Lease or
sublet twenty five percent (25%) or more of the Premises, Landlord shall have
the right, in its sole and absolute discretion, to notify Tenant of its
intent to terminate this Lease on written notice to Tenant within thirty (30)
days after receipt of Tenant's notice and the information described above or
the receipt of any additional information requested by Landlord. If Tenant
fails to withdraw the proposed assignment or sublease within five (5) days
after the date of Landlord's Notice of Intent to Terminate, if Landlord
elects to terminate this Lease, this Lease shall terminate as of the
effective date of the proposed assignment or commencement of the term of the
proposed sublease as set forth in Tenant's notice, and Landlord shall have
the right (but no obligation to enter into a direct lease with the proposed
assignee or subtenant). Tenant may withdraw its request for Landlord's
consent at any time prior to, but not after, Landlord delivers a written
notice of termination.
16.3 NO RELEASE OF TENANT. Regardless of Landlord's consent, no subletting
or assignment shall release Tenant of its obligations hereunder to pay the rent
and perform all other obligations to be performed by Tenant hereunder. The
provisions of this Lease shall be binding upon any assignee, transferee,
mortgagee, sublessee or holder of any encumbrance on or with respect to this
Lease. The acceptance of rent by Landlord from any other person shall not be
deemed to be a waiver by Landlord of any provision hereof. Consent to one
assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting.
16.4 CORPORATE AND PARTNERSHIP TRANSACTION. If Tenant is a corporation, a
dissolution of the corporation or a transfer (by one or more transactions) of a
majority of the voting stock of Tenant shall be deemed to be an assignment of
this Lease subject to the provisions of this Article. However, if Tenant is a
publicly traded corporation, then these provisions shall not apply to
transactions with a corporation into or with which Tenant is merged or
consolidated or to which substantially all of Tenant's stock or assets are
transferred or which controls, is controlled by, or is under common control
with, Tenant, if a principal purpose of the merger or transfer is not the
assignment of this Lease and Tenant's successor has a net worth not less than
the net worth of Tenant on the execution of this Lease and successor assumes all
responsibilities under this Lease. Tenant shall cause reasonably satisfactory
proof of such net worth to be delivered at least thirty (30) days prior to the
effective date of the transaction. If Tenant is a partnership, a dissolution of
the partnership (including a "technical" dissolution) or a transfer of the
controlling interest in the Partnership (including the admission of new partners
or the withdrawal of existing partners having a controlling interest) shall be
deemed an assignment of this Lease subject to the provisions of this Article,
regardless of whether the transfer is made by one or more transaction, or
whether on or more persons hold the controlling interest prior to or after the
transfer.
16.5 DOCUMENTATION. All documents utilized by Tenant as evidence of any
subletting or assignment to which Landlord has consented shall be subject to
prior written approval by Landlord or its counsel. Tenant shall pay, as
Additional Rent, all Landlord's costs and expenses, including reasonable
attorneys' fees, incurred in determining whether or not to consent to any
requested subletting or assignment and in reviewing and approving such
documentation.
17. DEFAULT. The following shall be defaults under and breaches of this Lease:
17.1 DEFAULT IN RENT. Failure of Tenant to pay any Monthly Base Rent,
Additional Rent, Taxes or other charges within seven (7) calendar days after it
is due, and such failure continues for seven (7) days after Landlord gives
written notice of default in the manner provided in Section 25.13 of this
Leases; provided, however, in no event shall Landlord be required to give
written notice of default in payment more than twice in any calendar year.
17.2 VIOLATION OF SECTION 16. Any attempted assignment, transfer,
mortgage, encumbrance or subletting in violation of Section 16.
17.3 DEFAULT IN OTHER COVENANTS. Failure to comply with any term or
condition or fulfill any obligation of this Lease (other than the payment of
Rent or other charges and compliance with Section 16) within thirty (30)
calendar days after written notice by Landlord specifying the nature of the
default with reasonable particularity. If the default is of such a nature that
it cannot be completely remedied within the thirty (30) calendar day period,
this provision shall be complied with if Tenant begins correction of the default
within the twenty
<PAGE>
(20) calendar day period and thereafter proceeds with reasonable diligence
and in good faith to effect the remedy as soon as practicable to prosecute
the same to completion.
17.4 BANKRUPTCY, ETC. An assignment by Tenant for the benefit of
creditors; the filing by Tenant of a voluntary petition in bankruptcy; an
adjudication that Tenant is bankrupt or the appointment of a receiver of the
properties of Tenant; the filing of any involuntary petition of bankruptcy and
failure of Tenant to secure a dismissal of the petition within thirty (30)
calendar days after filing; attachment of or the levying of execution on the
leasehold interest of Tenant in the Premises and failure of Tenant to secure
discharge of the attachment or release of the levy of execution within ten (10)
days after the making thereof. If Tenant consists of two or more individuals or
business entities, the events of default specified in this Section 17.4 shall
apply to each individual and each business entity.
17.5 ABANDONMENT. Failure of Tenant for ninety (90) calendar days or more
to occupy the Premises for one or more of the purposes permitted under this
Lease unless such failure is excused under other provisions of this Lease, which
failure constitute an abandonment of the Premises.
18. REMEDIES ON DEFAULT.
18.1 TERMINATION. In the event of a default, this Lease may be terminated
at the option of Landlord by Landlord giving written notice to Tenant. If the
Lease is not terminated by election of Landlord or otherwise, Landlord shall be
entitled to recover damages from Tenant for the default. If the Lease is
terminated, Tenant's liability to Landlord for damages shall survive such
termination, and Landlord may re-enter, take possession of the Premises, and
remove any persons or property by legal action or by self-help with the use of
reasonable force and without liability for damages to Tenant, its property, any
other persons, and/or their property.
18.2 RELETTING. Following reentry or abandonment, Landlord may relet the
Premises and in that connection may make any suitable alterations or refurbish
the Premises, or both, or change the character or use of the Premises, but
Landlord shall not be required to relet for any use or purpose other than that
specified in the Lease or which Landlord may reasonably consider objectionable.
Landlord may relet all or part of the Premises, alone or in conjunction with
other properties, for a term longer or shorter than the term of this Lease, upon
any reasonable terms and conditions, including the granting of some rent-free
occupancy or other rent concessions.
18.3 DAMAGES. In the event of termination on default, Landlord shall be
entitled to recover immediately, without waiting the due date of any future rent
or until the date fixed for expiration of the Term, the following amounts as
damages:
(a) The loss of reasonable rental value from the date of default
until a new tenant has been, or with the exercise of reasonable efforts could
have been, secured.
(b) The reasonable costs of reentry and reletting including, without
limitation, the cost of any clean up, refurbishing, removal of Tenant's property
and fixtures, or any other expense occasioned by Tenant's failure to quit the
Premises upon termination and to leave them in the required condition, any
remodeling costs, attorney fees, court costs, broker commissions, and
advertising costs.
(c) Any excess of the value of the rent and all of Tenant's other
obligations under this Lease over the reasonable expected return from the
Premises for the period commencing on the earlier of the date of trial or the
date the Premises are relet and continuing through the end of the Term. The
present value of future amounts will be computed using a discount rate equal to
the prime commercial loan rate of United States National Bank of Oregon in
effect on the date of trial.
<PAGE>
18.4 RIGHT TO SUE MORE THAN ONCE. Landlord may sue periodically to recover
damages during the period corresponding to the remainder of the Term, and no
action for damages shall bar a later action for damages subsequently accruing.
18.5 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to landlord under this Lease or
applicable law.
19. DEFAULT OF LANDLORD. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within thirty (30) calendar
days after written notice by Tenant to Landlord specifying wherein Landlord has
failed to perform such obligations; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) calendar days are
required for performance, then Landlord shall not be in default if Landlord
commences performance within such thirty (30) calendar day period and thereafter
diligently prosecutes the same to completion.
20. SUBORDINATION. This Lease, at Landlord's option, shall be subordinate to
any ground lease, mortgage, deed of trust or any other hypothecation for
security now or hereafter placed upon the Premises, the Building and/or
AmberGlen Business Center Common Areas, and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Tenant's right to quiet possession of the Premises shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay the rent and observe
and perform all of the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground lessor
shall elect to have this Lease subordinate to the lien of this mortgage, deed of
trust or ground lease, and shall given written notice thereof to Tenant, this
Lease shall be deemed subordinate to such mortgage, deed of trust, or ground
lease whether this Lease is dated prior or subsequent to the date of such
mortgage, deed of trust or ground lease on the date of recording thereof,
provided that such mortgagee, trustee, or ground lessor agrees in writing not to
disturb Tenant so long as Tenant is not in default.
Tenant agrees to execute, acknowledge and deliver any documents reasonably
requested by Landlord including, but not limited to any documents necessary to
effectuate such subordination or to make this Lease subordinate to the lien of
any mortgage, deed of trust or ground lease, as the case may be, and, failing to
do so, within fifteen (15) calendar days after written demand from Landlord,
does hereby make, constitute and irrevocably appoint Landlord as Tenant's
attorney in fact and in Tenant's name and stead to do so.
If any proceedings are brought for foreclosure, or in the event of the
exercise of a power of sale under any mortgage or deed of trust made by Landlord
covering the Premises, Tenant shall attorn to the purchaser upon any such
foreclosure or sale, or to the mortgagee or trustee and shall recognize such
purchaser, mortgagee or trustee as Landlord under this Lease.
21. SIGNS AND DIRECTORIES.
21.1 TENANT'S SIGNS. Tenant shall no install or keep any signs on or about
the Premises without the prior written consent of Landlord, which Landlord in
its sole discretion may give or withhold. Tenant shall pay all costs of signs
and all costs and expenses of installation of signs. If there is any sign on or
about the Premises or building without the consent of Landlord, Landlord shall
be free to remove any such signs and Tenant shall pay Landlord the cost of
removal together with interest as set forth in Section 25.16 from date of
expenditure until payment is made in full. Tenant shall pay promptly after
Landlord invoices Tenant for such costs. If Landlord consents to such signs,
Tenant shall repair any damage which alteration or renovation of its signs may
cause during or at the expiration of the Term. At the request of Landlord,
Tenant at is expenses shall remove its signs from the Premises at the
termination of this Lease.
21.2 DIRECTORIES. After the Commencement Date of this Lease, Landlord will
provide Tenant with signage indicating Tenant's location in the AmberGlen
Business Center and in the Building. The location of the Premises shall be
designated through a series of identification signs and directories placed at
points deemed appropriate throughout AmberGlen Business Center
<PAGE>
and in or near the Building. All such identification signs and directories
shall be designed and installed at the sole discretion of Landlord. Tenant
shall bear the expense of this inclusion and maintenance of Tenant's name and
location on such signs and such expense shall be treated as a Tenant Charge.
22. SURRENDER AT TERMINATION.
22.1 CONDITION OF PREMISES. Upon expiration of the Term or earlier
termination on account of default, Tenant shall deliver all keys to Landlord and
surrender the Premises in good condition, normal wear excepted, and with the
floors cleaned and waxed and carpets professionally cleaned. Alterations and
improvements constructed by Tenant with permission of Landlord shall not be
removed or restored to the original condition unless the terms of such approval
is so stated to allow for or requires such removal.
22.2 FIXTURES.
(a) All fixtures placed upon the Premises during the Term, other than
Tenant's trade fixtures, including, without limitation, modular system panels,
projection screens, and white boards, shall, at Landlord's option, become the
property of Landlord. If Landlord elects, Tenant shall remove any or all
fixtures which would otherwise remain the property of Landlord, and shall repair
any physical damage resulting from the removal. If Tenant fails to remove such
fixtures, Landlord may do so and charge the cost to Tenant with interest as set
forth in Section 25.16 from the date of expenditure until repayment in full.
(b) Prior to expiration or termination of the Term, Tenant shall
remove all furnishings, furniture, and trade fixtures which remain its property.
If Tenant fails to do so, the failure to do so shall be an abandonment of the
property, and Landlord may retain the property and all rights of Tenant with
respect t it shall cease or, by giving written notice to Tenant within twenty
(20) days after removal was required, Landlord may elect to hold Tenant to its
obligation of removal. If Landlord elects to require Tenant to remove, Landlord
may effect a removal and place the property in public storage for Tenant's
account and expenses. Tenant shall be liable to Landlord for the cost of
removal, transportation to storage, and storage, with interest as set forth in
Section 25.16 on all such expenses from the date of expenditure by Landlord
until repayment in full.
22.3 HOLDOVER.
(a) Excepting the case where Tenant is required to hold over as a
result of exercising its expansion rights as provided in Section 4 of the
Addendum to this Lease, if Tenant does not vacate the Premises at the time
required, Landlord shall have the option to treat Tenant as a tenant from month
to month, subject to all of the provisions of this Lease except the provisions
for term and renewal and at a rental rate equal to one hundred percent (100%) of
the rent last paid during the term of the first holdover month, and equal to one
hundred fifty percent (150%) of the rent last paid by Tenant during the Term
thereafter. Failure of Tenant to remove fixtures, furniture, furnishings, or
trade fixtures which Tenant is required to remove under this Lease shall
constitute a failure to vacate to which this Section 22.3(a) shall apply if the
property not removed will substantially interfere with occupancy of the Premises
by another tenant or with occupancy by Landlord for any purpose, including
preparation for a new tenant.
(b) If a month to month tenancy results from a holdover by Tenant
under this Section 22.3, the tenancy shall be terminable at the end of any
monthly rental period on written notice from landlord given at least ten (10)
calendar days prior to the termination date which shall be specified in the
notice. Tenant waives any notice which would otherwise be provided by law with
respect to a month to month tenancy.
23. NO BROKER. Landlord and Tenant represent, warrant, and covenant no broker
was instrumental in bringing about or consummating this Lease (except as stated
in 2(l) and 2(m) above) and that they had no conversations, negotiations or
agreements with any broker concerning the leasing of the Premises. Tenant
agrees to indemnify and hold harmless Landlord and Landlord agrees to indemnify
and hold harmless Tenant, except for Tenant's separate commission agreement with
CB Commercial, which is outside the terms of this Lease and Landlord's Standard
Commission Agreement from and against any claims for any brokerage commissions
and all costs, expenses and liabilities in connection therewith, including,
without limitation, attorney fees and expenses, arising out of any
conversations, negotiations or agreements of the other with any broker.
<PAGE>
24. MISCELLANEOUS.
24.1 MEMORANDUM OF LEASE. Tenant shall not record this Lease, if requested
by Landlord, simultaneously with execution and delivery hereof or at any later
time designated by Landlord, Tenant shall execute, acknowledge and deliver to
Landlord a Memorandum of Lease suitable for recording which memorandum shall
include a reference to Tenant's rights under Paragraph 4 of the Addendum
attached hereto. If, during the Term, Landlord shall construction a building on
any two of AmberGlen Lots 8, 10, or 15 (as shown on Exhibit B to this Lease),
then upon Tenant's request, Landlord shall record a memorandum of this Lease,
which memorandum shall include a reference to Tenant's rights under Paragraph 4
of the Addendum to this Lease. Otherwise in its sole and unlimited discretion,
Landlord may record or not record such Memorandum of Lease. Such Memorandum of
Lease shall not be deemed to change or otherwise affect any of the provisions of
this Lease.
24.2 ESTOPPEL CERTIFICATE.
(a) Tenant shall at any time, upon at least twelve (12) calendar days
written notice from Landlord, execute, acknowledge and deliver to Landlord a
statement in writing in form and substance satisfactory to Landlord (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) and the date to which the
rent, security deposit and other charges are paid in advance, if any, and (ii)
acknowledging that there are not , to Tenant's knowledge, any uncured defaults
on the part of Landlord hereunder, or specifying such defaults, if any, which
are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises. If requested by
Landlord, Tenant shall also furnish Landlord with a certificate of Tenant's
secretary as to corporate resolutions in a form satisfactory to Landlord.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more than two (2)
Months' rent has been paid in advance.
(c) If Landlord desires to finance, refinance, sell or otherwise
transfer the Premises the Building or the land described on Exhibit A, or any
part thereof, Tenant hereby
<PAGE>
agrees to deliver to Landlord, any lender, buyer or other party participating
in a transfer designated by Landlord such financial statements of Tenant as
may be reasonably required by Landlord or such lender or other transferee;
provided, however, that (i) such financial statements are prepared in the
ordinary course of Tenant's business, (ii) any party reviewing such
statements executes a non-disclosure agreement in the form reasonably
acceptable to Tenant, and (iii) any party reviewing such statements cannot
reasonably be deemed a competitor or potential competitor of Tenant's market
niche in the computer software industry. Such statements shall include the
past three (3) years' financial statements of Tenant. All such financial
statements shall be received by Landlord in confidence and shall be used only
for the purposes herein set forth, and shall be returned after review.
24.3 LANDLORD'S INTEREST. "Landlord" as used herein shall mean only the
owner or owners at the time in question of the Landlord's interest in the
Premises. In the event of any transfer of title to the Premises, Landlord
herein named (and, in case of any subsequent transfers, the then grantor) shall
be relieved from and after the date of such transfer of all liability as
respects Landlord's obligations thereafter to be performed, provided that any
funds in the hands of Landlord or the then grantor at the time of such transfer,
in which Tenant has an interest, shall be delivered to the grantee. The
obligations contained in this Lease to be performed by Landlord shall be binding
on Landlord's successors and assigns only during their respective periods of
ownership.
24.4 SEVERABILITY. If any term or provision of this Lease shall, to any
extent, be invalid or unenforceable, the remainder of this Lease shall not be
affected thereby, and each term and provisions of this Lease shall be valid and
enforced to the fullest extent permitted by law.
24.5 HEADINGS. The headings in this Lease are for the purpose of
referenced only, and shall not limit or otherwise affect any of the terms or
provisions hereof.
24.6 INCORPORATION OF PRIOR AGREEMENTS: AMENDMENTS. This Lease contains
all agreements of the parties with respect to the subject matter hereof. No
prior agreement or understanding with respect thereof shall be effective. This
Lease may be modified only by a writing, signed by the parties in interest at
the time of the modification.
24.7 WAIVERS. No waiver by Landlord or Tenant of any provisions hereof
shall be deemed a waiver of any other provision hereof or of any subsequent
breach by Landlord/Tenant of the same or any other provision. Landlord's
consent to or approval of any act shall not be deemed to render unnecessary the
obtaining of Landlord's consent to or approval of any subsequent act by Tenant.
The acceptance of rent hereunder by Landlord shall not be a waiver of any
preceding breach of default by Tenant of any provision hereof, other than the
failure of Tenant to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach or default at the time of
acceptance of such rent.
24.8 COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Landlord or Tenant shall be deemed both a covenant and a condition.
24.9 MERGER. The voluntary or other surrender of this Lease by Tenant, or
a mutual cancellation thereof, shall not work a merger, and shall, at the option
of Landlord, terminate all or any existing subtenancies or may, at the option of
Landlord, operate as an assignment to Landlord of any and/or all of such
subtenancies.
24.10 TENANT LIABILITY. If more than one party has executed this Lease
as Tenant, the obligations of Tenant under this Lease shall be the joint and
several obligations of each of such parties.
24.11 AUTHORITY TO ENTER INTO LEASE. If Tenant is a corporation, each
individual executing this Lease on behalf of the corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on behalf
of the corporation, in accordance with a duly adopted resolution of the board of
directors of said corporation or in accordance with the by-laws of said
corporation, and that this Lease is binding on the corporation in accordance
with its terms. If Tenant is a partnership, each individual executing this
Lease on behalf of the partnership represents and warrants that he is duly
authorized to execute and deliver this Lease
<PAGE>
on behalf of the partnership, in accordance with the partnership agreement
and any statements of partnership or certificates of limited partnership of
the partnership, and that this Lease is binding on the partnership in
accordance with its terms. Tenant shall, within sixty (60) days of the
execution of this Lease, deliver to Landlord: (a) if Tenant is a
corporation, a certified copy of a resolution of the board of directors of
the corporation; or (b) if Tenant is a partnership, a copy of the Statement
of Partnership or Certificate of Limited Partnership of Tenant; and (c) other
evidence reasonably satisfactory to Landlord authorizing or ratifying the
execution of this Lease.
24.12 ATTORNEY FEES. If suit or action is instituted in connection
with any controversy arising out of this Lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees whether on trial or appeal.
24.13 NOTICES. Any notice or communication required or permitted under
this Lease shall be deemed given and made when actually delivered or on the date
of deposit in the United States mail (certified or registered), return receipt
requested, postage prepaid, addressed to the party to whom such notice is being
given at the address indicated in 2(n) for Landlord and 2(o) for Tenant or to
such other address as may be specified from time to time by either of the
parties in writing.
24.14 SUCCESSION. This Lease shall be binding upon and inure to the
benefit of the parties, their respective permitted successors and assigns.
24.15 ENTRY FOR INSPECTION.
(a) Upon 24 hour notice and adherence to Tenant's security procedures
(sign in and accompaniment by Tenant employee or agent), Landlord shall have the
right to enter upon the Premises during business hours, or at other times by
prior arrangement, to determine Tenant's compliance with this Lease, to
determine the necessity of repair or maintenance, to make necessary repairs to
the Building or to the Premises, or to show the Premises to any prospective
tenant or purchaser, and in addition shall have the right during business hours,
or at other times by prior arrangement, during the last two months of the Term
of this Lease, to place and maintain upon the building or the Premises notices
for leasing or selling of the Building or the Premises.
(b) Landlord shall have the right to enter upon the Premises at any
time in the event of an emergency.
24.16 INTEREST ON RENT AND OTHER CHARGES OR EXPENDITURES. Any rent or
other payment required to be made by Tenant by this Lease shall, if not paid
when due, bear interest at a variable rate equal to the United States National
Bank of Oregon's prime commercial rate as adopted from time to time plus two
percent (2%) (but in no event greater than the maximum interest rate allowed
under applicable law).
24.17 AMENDMENTS TO STATUTES, ETC. Reference in this Lease to any
particular law, statute, ordinance, rule, regulation or administrative order
includes reference to any successors or amendments thereto.
24.18 GOVERNING LAW. This Lease shall be governed as to validity and
interpretation by the laws of the State of Oregon.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and
year first hereinabove written.
TENANT LANDLORD
GEMSTONE SYSTEMS, INC.,
an Oregon corporation AmberJack, Ltd., an Arizona Corporation
By: /s/ Bryan Gummor By: /s/ Neil O. Brown
Its: President Its: President
Date: 9/12/96 Date: 10/1/96
By: By: /s/ Earle B. Johnson, Jr.
Its: Its: Vice President
Date: Date: 10/1/96
<PAGE>
ADDENDUM TO LEASE
This Addendum is to that certain lease ("Lease") entered into as of the
date herein between AmberJack, Ltd., an Arizona corporation, as "Landlord" and
Gemstone Systems, Inc., an Oregon corporation, as "Tenant."
1. SIGNAGE/GRAPHICS: Tenant, subject to Landlord's approval, will be allowed
a single building sign that complies with the project sign plan, all
covenants, conditions, and restrictions (CC&Rs), and city regulations. The
cost of the signage is included as an improvement under Exhibit C of this
Lease.
2. OPTION TO RENEW: Provided Tenant is not in default under the terms and
conditions of the Lease, Tenant, but not an assignee or sub-tenant, will
have the option to extend the Lease for one (1) additional term of five (5)
years under the same terms and conditions except monthly base rent which
will be at a rate to be negotiated. This section is personal to the
original Tenant under the Lease is not assignable or transferable.
3. PARKING: The current parking allocation for the building is approximately
two hundred seventy-eight (278) vehicles. Parking is provided on a
non-exclusive basis and shall be free of charge during the initial lease
term. A minimum of eight (8) spaces shall be designated for visitor
parking.
4. EXPANSION: Tenant, but not an assignee or sub-tenant, shall have the right
upon written notice to the Landlord "Notice of Intent" to terminate this
Lease and enter into a new lease provided all of the following conditions
are met as of the date of the Notice of Intent and as of the commencement
date of the new lease.
A. Tenant is not in default under the terms and conditions of this
Lease.
B. Tenant meets the following financial parameters:
Landlord's approval of Tenant's financial condition shall be
granted at Landlord's sole discretion. Landlord and Tenant will
negotiate in good faith as it relates to
Tenant's expansion building.
C. Tenant delivers the Notice of Intent to terminate the Lease and
expand prior to the expiration of the 36th month of the
initial term.
D. Landlord and Tenant execute a new lease ("New Lease") agreement
for a premises of at least 90,000 square feet ("New
Premises") within AmberGlen Business Center.
Landlord agrees to hold one of the three following Lots: 8, 10, or
15, at Landlord's sole option during the first thirty-six (36) months
of this Lease for Tenant's expansion requirement at no cost to Tenant.
In the event Tenant provides Landlord with such Notice of Intent to
terminate and expand, then within sixty (60) days thereafter Landlord
shall deliver a conceptual site plan, base building floor plan, and
cost estimate to Tenant. Within the next forty-five (45) days,
Landlord and Tenant shall work together to prepare a preliminary
design and cost estimate. If the parties reach agreement on
preliminary plans and cost estimate, then Landlord and Tenant shall
work together to prepare and execute this New Lease agreement within
the following thirty (30) days and subject to Tenant delays and force
majeure, then Landlord agrees to deliver the expansion facility to
Tenant within twelve (12) to eighteen (18) months following mutual
execution of the New Lease. In the event the parties are unable to
agree at the end of the above process, then this initial lease shall
remain in full force and effect and Landlord shall have no further
obligation to Tenant to provide expansion facilities. Notwithstanding
anything contained herein, Tenant understands and acknowledges that
the New Lease and all aspects of any new building will be subject to
final approval by AmberJack, Ltd.'s Board of Directors and must be
consistent with AmberGlen's CC&Rs.
<PAGE>
The New Lease shall be based upon a minimum fifteen (15) year term and
shall have a base rent which provides for a ten and 5/10ths percent (10.5%)
first year return on total project costs including land at the then current
market value, plus amortizes all unamortized interior improvements and
lease commissions for the initial space (Landlord agrees that seventy-five
percent (75%) of the base interior improvements ($23.09 p.s.f.) on the
initial space shall be considered re-usable and not subject to such
recovery). In no event shall the rent per square foot under the New Lease
be less than the rent per square foot under the initial Lease. The New
Lease shall provide for cost of living adjustments every five years.
5. POST-ACCEPTANCE PUNCHLIST: Within thirty (30) days after Tenant accepts
the Premises as provided for in Section 34 of this Lease, Landlord and
Tenant shall jointly inspect the Premises and prepare and sign a punch list
("Punch List") itemizing details of construction, interior improvements,
and minor mechanical adjustments still to be completed. Landlord or its
contractor shall make best efforts to complete Punch List items within
fourteen (14) days of the date the Punch List is signed by both Landlord
and Tenant and if any one or more of such items cannot be completed within
such time, to commence work on the Punch List items by such date and
diligently pursue the work to completion. Any delay in completion of Punch
List items shall not affect or delay the acceptance of the Premises under
Section 3.4 or the Commencement Date under Section 4.1 of this Lease.
6. CONSTRUCTION PROGRESS REPORT: During the period that Landlord is
constructing the Building, its surrounding site improvements, and the
Tenant Improvements, Landlord will (i) deliver to Tenant a copy of written
construction progress reports on the regular basis such reports are
prepared by Landlord's developer and property manager, and (ii) make best
efforts to provide Tenant with prompt written notice of any anticipated
delay in the Scheduled Commence Date set forth in Section 2(f) of the
Lease. Landlord's failure to comply with the above shall not constitute a
default under this Lease.
7. REMOVAL OF TENANT-PAID IMPROVEMENTS TO NEW PREMISES: Tenant shall be
entitled to remove Tenant-paid Tenant Improvements specified on the
attached Exhibit F from the Premises upon termination of this Lease only
if: (i) this Lease is terminated as a result of Tenant's exercise of its
expansion rights under Section 4 of this Addendum to Lease, (ii) the New
Lease has been executed by Landlord and Tenant, and (iii) the removed
Tenant Improvements are reinstalled in the New Premises. Exhibit F shall
be prepared by mutual agreement of Landlord and Tenant on the Commencement
Date of this Lease. Upon removal of the Exhibit F Tenant Improvements,
Tenant shall restore the Premises to a re-leasable condition reasonably
acceptable to Landlord.
TENANT LANDLORD
Gemstone Systems, Inc., AmberJack, Ltd., an Arizona
an Oregon Corporation Corporation
By: /s/ Bryan Gummson By: /s/ Neil O. Brown
----------------------- ---------------------
Its: President Its: President
----------------------- ---------------------
Date: 9/12/96 Date: 10/1/96
----------------------- ---------------------
By: By: /s/ Earle B. Johnson, Jr.
----------------------- ---------------------
Its: Its: Vice President
----------------------- ---------------------
Date: Date: 10/1/96
----------------------- ---------------------
<PAGE>
FIRST AMENDMENT TO LEASE
1. PARTIES
This First Amendment to Lease (the "First Amendment") is executed this 14th
day of February, 1997, and is by and between AMBERJACK, LTD., an Arizona
corporation (hereinafter referred to as "Landlord") and GEMSTONE SYSTEMS, INC.,
an Oregon corporation (hereinafter referred to as "Tenant").
2. RECITALS
Landlord and Tenant entered into that certain Lease dated July 29, 1996
(the "Lease") for those certain premises described in the Lease (the
"Premises"). The purpose of this First Amendment is to set forth the Lease
Commencement and Termination Dates and to provide for Tenant's acceptance of the
Premises.
1. DATES
In accordance with the terms of the Lease, Landlord and Tenant agree that
the Term of the Lease has commenced and shall terminate on the following dates:
Lease Commencement Date: March 7, 1997
Lease Termination Date: March 31, 2002
4. ACCEPTANCE OF PREMISES
Except with respect to those items listed on the punch list, if any, timely
submitted by Tenant to Landlord pursuant to the terms of the Lease, Tenant
accepts the Premises in the condition existing as of the Lease Commencement Date
and acknowledges and agrees that all work required to be performed by Landlord
pursuant to the Lease has been completed by Landlord in full compliance with the
Lease and to the satisfaction of Tenant.
5. MISCELLANEOUS
Except to the extent this Lease has been modified by this First Amendment,
the remaining terms and conditions of the Lease shall remain unmodified and in
full force and effect.
6. EXECUTION
This First Amendment shall be deemed effective as of the date first written
above.
"TENANT" "LANDLORD"
GEMSTONE SYSTEMS, INC., an AMBERJACK, LTD., an Arizona
Oregon Corporation Corporation
By: Birtcher Property Services
Its: Manager
By: /s/ Bryan Gummson By: /s/ Les
----------------------- ---------------------
Its: President Its: Asst. Secretary
----------------------- ---------------------
Date: 3/14/97 Date: 4/21/97
----------------------- ---------------------
By: /s/ Earle B. Johnson, Jr.
---------------------
Its: Vice President
---------------------
Date: 4/15/97
---------------------
<PAGE>
DEVELOPMENT, DEPLOYMENT AND RESELLER'S AGREEMENT
This Agreement, effective June 1, 1998, is between Systems & Computer
Technology Corporation ("SCT"), for and on behalf of itself and all its
majority-owned subsidiaries, and GemStone Systems, Inc. ("GemStone").
1. DEFINITIONS
1.1 "CONCURRENT USER" means an individual who is authorized to use
the SCT Application Programs concurrently with other authorized users as part
of a group of users which shall not exceed the number of users for which
payment has been made.
1.2 "CUSTOMER" means any end user to whom SCT or its Distributor
sublicenses or otherwise grants a right to use all or part of the GemStone
Programs.
1.3 "DISTRIBUTORS" means any third-party distributor appointed by SCT
to distribute the GemStone Programs as part of and/or use with the SCT
Application Programs. SCT will notify GemStone in writing of the appointment
of each Distributor. A list of Distributors, current as of the date first
set forth in this Agreement, is attached as Exhibit A.
1.4 "GEMSTONE PROGRAMS" means the GemStone/J Object Server ,
including all commercially released upgrades, updates, bug fixes, defect
corrections, improvements and enhancements, whether two or more products are
bundled or unbundled in future releases or enhancements. GemStone Programs
refers to the object code and written user manuals and supplemental user
manual material furnished by GemStone in conjunction with the object code and
updates. Subject to the parties' agreement as to the additional fees payable
to Gemstone in connection therewith, the parties will amend this Agreement
from time to time to provide SCT with the right to offer a right of use for
all other Gemstone-proprietary computer software programs that are listed in
GemStone's then-current price list during the term of this Agreement.
1.5 "SCT APPLICATION PROGRAMS" means those value-added software
products generally identified by SCT as component systems of any
SCT-proprietary product series, a listing of which, current as of the date
first set forth in this Agreement, is contained in attached Exhibit B, that
SCT markets to third party end-users, which SCT Application Programs
incorporate and/or otherwise utilize all or part of the GemStone Programs.
Exhibit B will be deemed updated automatically, without further action by
either party, in each instance that SCT informs GemStone in writing of the
addition of newly-created/acquired SCT-proprietary products into which SCT
incorporates and/or otherwise utilizes all or part of the GemStone Programs.
1.6 "SUBLICENSE AGREEMENT" means a contract between SCT and a
Customer whereby the Customer is granted the right to use the
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Gemstone Programs. Such Sublicense Agreement may be incorporated as part of
the license agreement under which SCT grants a third party end-user that is
also a Customer a right of use for any of the SCT Application Programs,
provided that the terms of such SCT license agreement do not conflict with or
otherwise negate any of the terms that Gemstone requires be included as part
of any Sublicense Agreement.
1.7 "TERM" means the period between the effective date set forth
above and May 31, 2001, unless this Agreement is sooner terminated as
provided hereunder.
1.8 "TERRITORY" means the entire world.
2. LICENSE GRANTS
2.1 SCT DEVELOPMENT AND USE LICENSES. Subject to payment of the
applicable fees, and pursuant to the terms and conditions of the GemStone
standard Software License Agreement (to the extent it does not conflict with
the terms and conditions of this Agreement, in which such instances the terms
and conditions of this Agreement will be superseding and controlling)
attached to this Agreement as Exhibit C, GemStone grants SCT a non-exclusive,
non-transferable, perpetual license to copy and use the GemStone Programs for:
a. INTERNAL. Development (including prototyping) and deployment
of applications internal to SCT.
b. SCT APPLICATION PROGRAMS. Incorporation into or for use with
the SCT Application Programs, including the incorporation of necessary
portions of the GemStone Programs' user manuals into SCT Application
Programs' user manuals.
c. ADMINISTRATIVE USE. For reasonable limited administrative use
by non-developers (i.e., an SCT site license) to provide technical support
and training to Customers, as well as to provide other support activities
including documentation, testing and specification of SCT Application
Programs. This use will be not be subject to any licensing fees.
d. BACK-UPS. Making a reasonable number of backup and archival
copies.
e. EVALUATIONS. Conducting no-charge, 45-day trial evaluations
of potential GemStone Programs not commercially available as of the effective
date of this Agreement.
f. BETA AND EARLY ACCESS PROGRAMS. GemStone will include SCT, on
a "no fee" basis, in its beta and early access programs, which the parties
agree will be governed by the terms and conditions of each particular program.
2.2 SCT RIGHTS TO SUBLICENSE GEMSTONE PROGRAMS. Subject to payment
of the applicable sublicense fees, GemStone grants SCT the right during the
Term and in the Territory to sublicense the GemStone Programs as follows:
a. APPLICATION SPECIFIC. For deployment use by Customers with or
as part of the SCT Application Programs;
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b. LIMITED ENTERPRISE. For deployment use on a limited
enterprise basis of the GemStone Programs as part of the SCT Application
Programs by the specific list of legacy Customers (that is, all SCT
Application Software licensees as of September 30, 1998, inclusive,
hereinafter the "Legacy Customers") to be set forth on attached Exhibit D, by
the application and at the levels to be set forth on Exhibit D.
(1) The Legacy Customers listed on Exhibit D will be those
who are existing SCT customers as of September 30, 1998. The attached
version of such Exhibit D is substantially accurate as of May 31, 1998. The
parties agree that, by not later than October 7, 1998, SCT will provide
Gemstone with a listing of all Legacy Customers identified as otherwise
provided for in this Section 2.2(b), and that upon SCT's delivery of such
listing to Gemstone, such listing will be deemed incorporated into this
Agreement as Exhibit D without further action by either party.
(2) The number of Concurrent Users licensed will be equal to
either the "concurrent user" level of the Customer in Oracle or, where no
Oracle license exists or a legacy site license was granted, a Concurrent User
level calculated in accordance with the formula set forth in Exhibit E, which
approximates the number of users for organizations of similar size and type
who use Oracle. Additional Concurrent User must be purchased by these
Customers at the rates otherwise provided for in this Agreement should they
increase their Concurrent User population.
c. FULL USE. For full development and/or deployment of the
GemStone Programs for internal application development and use by Customers,
whether related to SCT Application Programs or not (that is, for use with
and/or the development of software applications other than the SCT
Application Programs), pursuant to the terms and conditions of GemStone's
standard Software License Agreement, attached as Exhibit C.
d. SERVICE BUREAU. For use by a Customer of a service bureau,
which may be operated by SCT or an SCT customer (which will be considered a
Distributor for the purposes of this use). A service bureau Customer's use
of GemStone Programs will be extended each time it contracts with any entity
for services and the number of users licensed will be whatever would have
been required if the Customer were licensing the SCT Application Program
individually.
e. EVALUATIONS. To provide Customers a no-charge 45-day trial
period license.
f. DEMONSTRATIONS. To demonstrate to Customers both the GemStone
Programs and the SCT Application Programs.
2.3 ADDITIONAL SUBLICENSING MATTERS.
a. LICENSE UPGRADES. During the term of this Agreement, and for
a period of one (1) year following the expiration or earlier termination of
this Agreement, Customers may upgrade their sublicense to a Full Use license
by paying the
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difference between the then-current list price for the Full Use license and
the amount the Customer paid for the sublicense they are upgrading.
b. INCREASED USERS. Customers may increase their number of
Concurrent User licenses by paying the applicable fees. Concurrent User
licensing will be measured either by the number of concurrent Oracle users
licensed (excluding multi-plexor effects) or, where no Oracle license is
present or a legacy site license was granted, by the formula set forth in
Exhibit E.
c. PLATFORM TRANSFERS. During the Term and thereafter at any
time, Customers may transfer their sublicenses to any GemStone supported
platform at no charge.
d. MASTERING. SCT may copy the GemStone Programs for the purpose
of providing Customers with the software which the Customer has sublicensed.
e. SUBLICENSE PRE-PAYS. SCT will pre-pay GemStone for certain
sublicenses, pursuant to Exhibit F, and hold those sublicenses in inventory
for distribution to Customers. All pre-pays will be non-contingent,
non-refundable and will be held in inventory until the SCT Application
Programs for which they were purchased are deployed. Nothing contained in
this subsection will act to limit SCT's ability to recover from Gemstone
SCT's direct damages in connection with any breach by Gemstone of the terms
and conditions of this Agreement.
f. SUBLICENSE REQUIREMENTS. SCT will secure the same protection
to the GemStone Programs in the Sublicense Agreements as it secures for
itself and include all licensing requirements imposed on GemStone by its
licensors. A copy of the terms and conditions that Gemstone and its
licensors require be included in each Sublicense Agreement is attached and
marked as Exhibit G.
3. MAINTENANCE AND TECHNICAL SUPPORT
3.1 MAINTENANCE. Subject to payment of the applicable fees, GemStone
will provide SCT all commercially released upgrades, updates, bug fixes,
defect corrections, improvements and enhancements to and for the GemStone
Programs, for incorporation by SCT into all internal SCT applications, all
SCT Application Programs and for distribution to all Customers.
3.2 TYPES OF TECHNICAL SUPPORT. Subject to payment of the applicable
fees, GemStone will provide SCT and its Customers the following support for
the then current GemStone Programs version and one version back:
a. TECHNICAL SUPPORT OF SCT. GemStone will provide SCT first
line technical support for SCT's internal application development, SCT
Application Programs development, and for internally deployed applications.
SCT will appoint a primary and a secondary support personnel for each SCT
established line of business [SCT maintaining the right from time to time to
designate replacement primary and/or secondary support personnel upon
notifying Gemstone of such replacement(s)] who will serve as
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the conduit through which these support requests will be made to GemStone.
The support will include telephonic and electronic support (including access
to GemStone's technical support Web site), staffed by Gemstone during the
hours of 8:00 a.m. to 6:00 p.m. Pacific time, unlimited incident reporting,
problem escalation, fixes and workarounds.
b. TECHNICAL SUPPORT OF CUSTOMERS. GemStone will provide second
line technical support to SCT for assistance with its Customers with respect
to GemStone Programs . SCT will appoint a primary and a secondary support
personnel for each established line of business [SCT maintaining the right from
time to time to designate replacement primary and/or secondary support
personnel upon notifying Gemstone of such replacement(s)] who will serve as
the conduit through which these support requests will be made to GemStone.
GemStone will provide first line technical support to Full Use customers if
so elected by the Customer, which support will be contracted for directly
with GemStone. The support will include telephonic and electronic support
(including access to GemStone's technical support Web site), staffed by
Gemstone during the hours of 8:00 a.m. to 6:00 p.m. Pacific time, incident
reporting, problem escalation, fixes and workarounds.
c. EMERGENCY PRODUCTION DOWN SUPPORT OF SCT AND ITS CUSTOMERS.
GemStone will provide SCT first line and second line emergency, production
down technical support, as applicable, to work with SCT to re-establish
production. This support is available only on a 7x24, 365-day per year basis
and includes the following process:
(1) DEFINITIONS RELATING TO EMERGENCY TECHNICAL SUPPORT:
(a) "Emergency Service Request" means a communication
from the SCT appointed primary or secondary support personnel to GemStone
via GemStone's 24x7 emergency support telephone number (which GemStone will
provide SCT) about a Critical Software Error. This request will include
specific information about the Critical Software Error reasonably necessary
to enable GemStone to assemble a response team.
(b) "Critical Software Error" means an error which
causes, or may be about to cause, data corruption or work stoppage in a
production system environment in which the production system does not operate
until the error is fixed.
(2) GemStone will acknowledge the Emergency Service Request
within approximately 15 minutes by contacting the primary or secondary
support personnel who placed the request.
(3) A collaborative determination will be made regarding the
criticality and severity of the situation leading to the request.
(4) If the parties determine that a Critical Software Error
in fact exists, GemStone will assemble the appropriate response team.
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(5) The response team, through the responsible GemStone
support engineer, will continue working with SCT until production status is
restored, following reasonable escalation procedures as needed to assist in
the restoration.
(6) GemStone will participate with SCT in a post-emergency
review, to determine whether the Critical Software Error resulted from a
problem in the GemStone Programs, the SCT Application Programs or otherwise.
(7) If the Critical Software Error occurred as the result of
a problem in the GemStone Programs, GemStone will follow up with a reasonable
action plan for final resolution.
d. DESIGNATED SUPPORT PERSONNEL. SCT may elect, by paying the
applicable fee, to have a designated GemStone support person. This person
will act as the primary technical support liaison between GemStone and SCT.
The designated person will gather, submit, monitor, assist and report back to
SCT on all technical support and maintenance matters. SCT may elect to
initiate this service by sending a letter stating which type of Designated
Support Personnel it wishes to enlist along with a purchase order for the
amount of the election.
3.3 PERIODS OF TECHNICAL SUPPORT. SCT may purchase the following
support packages:
a. 5x10. First and second line technical support to SCT during
its normal business hours of 8:00 a.m. to 6:00 p.m. Pacific time.
b. 5x16. First and second line technical support to SCT during
non-holiday weekdays during the hours of 6:00 a.m. to 10:00 p.m. Pacific time.
c. 7x24. First and second line technical support to SCT on a 7
day per week, 24 hour per day basis for emergency, production down situations.
3.4 NOTICE OF DISCONTINUATION OF SUPPORT: For any support provided
other than for the then current version and one version back of the GemStone
Programs, GemStone will provide SCT with reasonable prior written notice of
GemStone's discontinuation of such support as soon as such decision is made.
4. TRAINING AND CONSULTING
4.1 FOR SCT. SCT will, at SCT's election to obtain the same,
purchase GemStone training, consulting and appropriate toolkits at GemStone's
then-current rates.
4.2 FOR CUSTOMERS. SCT may, at its option, license GemStone's
training material packages for use in instructing Customers. Each package
will consist of an Instructor Kit (quantity = one per class) and Student Kits
(quantity = one per student per class). SCT will pay GemStone the amounts
set forth on Exhibit F for the kits. SCT will also use instructors certified
by a mutually agreeable process (which is intended to be repeatable by SCT
internally).
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5. FEES
5.1 CALCULATION OF FEES. SCT will pay GemStone the applicable
license, sublicense, maintenance and support fees as calculated using Exhibit
F.
5.2 REPORTING AND PAYMENT OF FEES. Payment terms for all amounts due
are net 30 days from the date the amount becomes due.
a. AT CLOSING. By not later than 5:00 PM Pacific time on June 5,
1998, SCT will pay GemStone, via wire transfer, the amounts set for in the
Fee at Closing column of Exhibit F; provided, in addition, that the Fee at
Closing for the Limited Enterprise Deployment licenses will be for the legacy
Concurrent Users for Customers identified on the May 31,1998 Exhibit Dlist,
and an additional payment will be made to GemStone for any increase in the
Customers on that list or Concurrent User levels of the Customers on that
list when SCT delivers the updated list to GemStone reflecting the same
information as of September 30, 1998. The updated Exhibit D list will be
delivered to GemStone by October 7, 1998 and payment will be made by the same
date, via wire transfer, for the additional Customers identified in the
updated Exhibit D list. (GemStone's wire transfer instructions are: XXXX
b. SUBSEQUENT LICENSES, SUBLICENSES AND MAINTENANCE AND SUPPORT
FEES. Within 30 days of the end of each calendar month, SCT will deliver a
report to GemStone setting forth, for each new Customer and/or increase in
concurrent user levels for an existing Customer added in the preceding
calendar month:
(1) The name and location of the Customer.
(2) The number and type of licenses (if SCT internal) or
sublicenses (if Customers) issued during the month, and a calculation of the
applicable license fees due.
(3) A calculation of the applicable maintenance and support
fees due and payable for such licenses and sublicenses.
(a) Annual maintenance and support fees for SCT's
internal development and deployment will be due in advance.
(b) Annual maintenance and support fees for Customers
will be due 30 days following the end of the calendar quarter in which the
Customer deploys the applicable licenses.
(4) PRE-PAY TRACKING. In its reports, SCT will track
pre-pays and the effects of monthly activity against the pre-pay balance via
a formula which states a beginning pre-pay balance, adds the pre-pays
purchased in a month, subtracts the sublicenses issued and concludes with an
ending balance. ayment of the amounts due will accompany the report.
c. CUSTOMER PROFILE REPORT. SCT will make reasonable efforts to
prepare and deliver to GemStone by June 30, 1998, a customer profile report
listing the following information: Customer name, SCT Application Programs
licensed, Customer tier, Customer type, number of licensees and a designation
of the application modules in use by the Customer
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5.3 PAY AGENT: SCT will serve as a pay agent for GemStone where it
is appropriate for a Customer to procure such product through SCT. SCT will
receive an administration fee of XXXX percent of the net software proceeds
from Full Use GemStone Programs attributable to GemStone for such service.
5.4 RECORDS AUDIT. SCT will maintain accurate records relating to
the copying, distribution, sublicensing, and servicing of the SCT Application
Programs and GemStone Programs so as to (i) establish the payments due to
GemStone, (ii) identify all Customers, and (iii) otherwise verify SCT's
compliance with the terms of this Agreement. Such books, records and
sublicense agreements will be available at their place of keeping for
inspection or copying by GemStone or an independent auditor chosen and paid
by GemStone during normal business hours, upon prior appointment and in a
manner so as not to unreasonably interfere with SCT's business, with such
audits to be conducted not more frequently than once in any calendar year nor
any sooner than six (6) months after the last such audit was conducted. SCT
will retain all sublicense agreements and records pertaining to payments due
to GemStone for a period of three years after termination of this Agreement
for the purpose of allowing GemStone to inspect such records during that
period. In the event an audit reveals that SCT has not paid all of the fees
due hereunder, SCT shall pay within 10 days the discrepancy plus interest at
9 percent per annum. If the discrepancy exceeds 5 percent of the fees due
for the period under audit, SCT shall also reimburse the cost of such
inspection, including reasonable auditor's fees.
5.5 TAXES, DUTIES, ETC. All sales, use, personal property,
withholding and other taxes, duties and fees relating to this Agreement shall
be paid by SCT unless SCT provides GemStone with valid tax exemption
certificates. SCT shall not be responsible for taxes based on GemStone's net
income, gross receipts or capital stock.
6. JOINT MARKETING AND PRODUCT DEVELOPMENT
6.1 PRODUCT REVIEWS. Twice annually the parties will meet to review
the product plans with respect to the GemStone Programs. SCT's feature set
requirements and the prioritization of those requirements will be considered
by GemStone when making final determinations with respect to its GemStone
Programs product plans.
6.2 JOINT PRESS RELEASE, ETC. The parties will issue a mutually
acceptable joint press release, in the form attached as Exhibit H, announcing
the relationship established by this Agreement promptly after execution of
this Agreement. Neither party will issue a press release (including without
limitation the press release in the form of Exhibit H) announcing this
Agreement without the prior approval of the other. The parties
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will also cooperate in an effort to secure a Wall Street Journal article
concerning this transaction.
6.3 MARKETING COLLATERAL. The parties will develop marketing and sales
collateral which describes Customers' benefits achieved from the use of the
GemStone Programs and SCT Application Programs. This material will include, but
is not limited to, sales sheets, case studies and other items mutually agreed
upon in a marketing plan to be produced by the parties.
6.4 SUMMIT MEETING, JOINT SEMINARS, C.A.B.
a. SUMMIT MEETINGS. SCT will invite GemStone to participate in
its Summit meeting. SCT will also recommend to Information Associate Users'
Group Association that GemStone be invited to attend its period conferences.
b. ADVANCED TECHNOLOGY SEMINARS. The parties will cooperate to
develop and host a targeted-city joint advanced technology seminar. The details
of this seminar series will be agreed to mutually.
c. CUSTOMER ADVISORY BOARD. GemStone will invite SCT to
participate in any of its Java-based Customer Advisory Board meetings.
7. GEMSTONE PROGRAMS SOFTWARE ESCROW
7.1 ESCROWING OF SOFTWARE. GemStone will, at SCT's expense, (1)
deposit a copy of the GemStone Programs source code (including all maintenance
releases) ("Escrow Materials") into a third-party escrow with GemStone's
software escrow agent, and (2) take all actions reasonably necessary to add SCT
as a party to GemStone's source code agreement with its escrow agent.
7.2 RELEASE FROM ESCROW. The escrow agent will be authorized to
release the Escrow Materials should GemStone file, or have filed against it, a
petition for liquidation under state or federal law or otherwise discontinues
operation as a software manufacturer.
8. RESPONSIBILITIES AND OBLIGATIONS
8.1 PRODUCT TESTING. SCT shall evaluate and test the GemStone Programs
to determine suitability for use in the creation of its products, and SCT shall
test SCT Application Programs on an appropriate computing environment before
release to Customers to determine suitability for use with GemStone Programs by
Customers.
8.2 NOTICE OF INTELLECTUAL PROPERTY VIOLATION. SCT shall promptly
notify GemStone of any actual or suspected violations of GemStone's proprietary
rights and shall cooperate with GemStone's efforts to protect and enforce such
rights.
8.3 THIRD-PARTY REPRESENTATIONS. SCT shall not make any
representations or warranties to any third parties on GemStone's behalf.
Without limiting the foregoing, however, nothing in this Agreement is intended
to precluded, and further, nothing in this Agreement will act to preclude SCT
from providing Customers with
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such warranties as this Agreement otherwise expressly provides that SCT may
make to Customers in reliance on the representations and warranties that
GemStone has extended to SCT hereunder.
9. OWNERSHIP AND NOTICES
9.1 TITLE. Title to and ownership of GemStone Programs and all related
materials, including all copies thereof, and all rights therein including trade
secrets, patents, and copyrights, shall remain with GemStone. No title or
ownership of the GemStone Programs and all related materials, or any part
thereof, is transferred to SCT or its Customers.
9.2 COPYRIGHT NOTICES. SCT shall insure that any copyright notice or
other proprietary rights notice placed in, on, or displayed by the GemStone
Programs by GemStone, whether in machine language or human-readable form,
continues to appear or exist in all copies of the SCT Application Programs that
SCT delivers to its Customers.
9.3 F.A.R. NOTICES. SCT shall insure that, where applicable, the
GemStone Programs and SCT Application Programs shall be marked with an
appropriate legend under the Federal Acquisition Regulations or other similar
regulations.
9.4 USE OF TRADEMARKS. SCT shall not use the name "GemStone" or any
other trademark or trade name used by GemStone in any manner without GemStone's
express written consent, such consent which Gemstone agrees it will not
unreasonably withhold, delay or condition. SCT shall not acquire any ownership
rights in any GemStone trademark or trade name.
10. INDEMNITY
10.1 OF SCT. GemStone agrees to indemnify SCT with respect to any suit,
claim or proceeding brought against SCT alleging that the GemStone Programs
infringe on any valid copyright, patent, trade secret and/or other proprietary
right enforceable within the Territory ("IP Right"). GemStone agrees to defend
SCT against any such claims and to pay litigation costs, reasonable attorney's
fees, and damages awarded by a court of competent jurisdiction if, and only if,
SCT promptly gives notice to GemStone of any such suit, claim or proceeding and
cooperates with GemStone in the defense or settlement of such suit, claim or
proceeding, and provided that GemStone shall have sole control thereof. If such
an IP Right claim or allegation is made, or in either party's judgment is likely
to arise, GemStone will:
a. first use good faith, diligent efforts to procure for SCT
the right to continue using the portion of the GemStone Programs at issue, and
failing the procurement of such right, will then;
b. use good faith, diligent efforts to replace or modify the
GemStone Programs so that SCT's use is not subject to the claim or allegation,
and failing such replacement and modification efforts, will then;
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c. Refund to SCT all Sublicense fees that SCT has paid to
Gemstone for the Gemstone Programs giving rise to such infringement, less a
charge for use assuming a useful life of five (5) years. GemStone's indemnity
obligations shall not apply to claims to the extent that they arise from any
unauthorized modification or alteration of the GemStone Programs by any party
other than GemStone, or from the use of any GemStone Programs with any
materials not provided by GemStone, excluding specifically use with any of
the SCT Application Programs, and/or any technology platform for which
GemStone supports use of the GemStone Programs.
10.2 OF GEMSTONE. SCT acknowledges that GemStone has no knowledge of,
or control over, the uses of the GemStone Programs made by SCT or its
Customers. SCT agrees to defend, indemnify and hold GemStone and its agents,
employees, successors and assigns harmless with respect to any suit, claim or
proceeding relating to the creation, sale or use of the GemStone Programs by
SCT or its Customers, whether as part of the SCT Application Programs or
otherwise, except to the extent that such claim or proceeding arises out of
any claim that the GemStone Programs in the form licensed by GemStone to SCT
independent of any modifications by SCT infringes on any IP Right.
11. WARRANTY; LIMITATION OF LIABILITY
11.1 OWNERSHIP AND AUTHORITY. GemStone warrants that it is the owner of
the GemStone Programs or has the right to sublicense the GemStone Programs and
that it has the full power and authority to enter into this Agreement. Except
as otherwise expressly provided for in this Agreement, GemStone makes no
warranty regarding the operation of the GemStone Programs as part of any SCT
Application Programs and makes no warranty of any kind to any Customer.
11.2 COMPLIANCE WITH PUBLISHED SPECIFICATIONS. GemStone warrants that
the GemStone Programs will perform reasonably in accordance with the
specifications published in the GemStone user manuals for (a) in the case of
SCT, a period of 90 days after the date the GemStone Programs are delivered to
SCT and (b) in the case of Customers, for the same period as SCT warrants the
SCTApplication Programs to Customers. GemStone does not warrant that the
GemStone Programs will meet SCT's or Customer's requirements or that its
operation will be uninterrupted or error free.
11.3 YEAR 2000 COMPLIANCE. GemStone represents and warrants that the
GemStone Programs are so-called "4-digit year 2000 compliant," (i.e., able to
accurately process date data, including, but not limited to, calculating,
comparing, and sequencing, from, into, during and between the twentieth and
twenty first centuries, including the years 1999 and 2000, and leap year
calculations),. In no case do the GemStone Programs
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use or depend on two digit strings for storage or computation of dates or
times. However, GemStone cannot guarantee that all applications developed
using the GemStone Programs are also year 2000 compliant. Any applications
which import dates from legacy applications will need to ensure that the
legacy application provides year 2000 compliant dates as input to the
GemStone Programs. Application developers must also ensure that they do not
convert dates into two digit strings and then use these two digit strings to
perform date arithmetic or conversion.
11.4 LIMITATION OF LIABILITY. THESE WARRANTIES ARE IN LIEU OF ALL
OTHER WARRANTIES AND CONDITIONS, EXPRESSED OR IMPLIED, INCLUDING BUT NOT
LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR
PURPOSE. GEMSTONE SHALL NOT BE RESPONSIBLE TO SCT OR FOR ANY INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER IN CONTRACT OR TORT,
DUE TO ANY FORESEEN OR UNFORESEEN CAUSE FROM SCT'S OR ANY THIRD PARTY'S USE
OR THE PERFORMANCE OF THE GEMSTONE PROGRAMS OR THE TECHNICAL DATA UNDER THIS
AGREEMENT. EXCEPTING SPECIFICALLY IN CONNECTION WITH GEMSTONE'S OBLIGATIONS
OF INFRINGEMENT INDEMNITY UNDER THIS AGREEMENT, IN NO EVENT SHALL GEMSTONE'S
LIABILITY UNDER THIS AGREEMENT FOR ANY CAUSE WHATSOEVER EXCEED THE AMOUNTS
PAID TO GEMSTONE PURSUANT TO THIS AGREEMENT.
12. CONFIDENTIALITY
12.1 MUTUAL NON-DISCLOSURE. Both parties understand and acknowledge
that they will receive confidential information from the other in connection
with this Agreement, including without limitation all technical data and
other information related to the GemStone Programs and the SCT Application
Programs, business plans and strategies and financial and product
information, well as anything marked as "confidential" by either party
including this agreement. Neither party will disclose such information to
any third party, except for its employees with a need for access to the
information, or use the information for any purpose not contemplated or
permitted under this Agreement. Each party will take reasonable steps to
insure that its employees who receive the information understand and
acknowledge the obligations of confidentiality. The obligations of
confidentiality imposed upon each party under this Agreement will survive the
termination or cancellation of this Agreement. If an employee, former
employee or any other person affiliated with a party breaches the obligations
of confidentiality provided for in this section, that party agrees to give
the other reasonable assistance in enforcing its rights against such person.
12.2 EXCEPTIONS. Notwithstanding the foregoing, neither party will have
an obligation to hold any information in confidence to the extent that it can be
shown that such information:
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a. was already known to that party at the time it is obtained
from the other, free from any obligations to hold such information in
confidence;
b. is or becomes publicly known through no wrongful act of that
party;
c. is rightfully received from a third party without
restriction and without breach of any obligation to the protected party or its
suppliers; or
d. is independently developed by that party without use of any
confidential information of the other or its suppliers.
13. TERMINATION
13.1 TERMINATION.
a. This Agreement will terminate upon the material breach by a
party, provided that the non-defaulting party has provided the defaulting party
30-days prior written notice describing the default and the defaulting party has
not cured the default within 30 days or initiated and diligently pursues cure if
cure is not possible within the 30-day period. Provided, however, that with
respect to any failure on the part of SCT to pay any amounts due and owing under
this Agreement to GemStone, such right of cure period will instead be reduced to
a ten (10) day period following SCT's receipt of any such notice of failure to
pay.
b. SCT may terminate this Agreement prior to commercial
deployment of the first SCT Application Program by providing GemStone written
notice of termination. Termination under this subsection will have no effect on
any amounts due and payable or already paid to GemStone.
13.2 EFFECT.
a. LICENSING. All licenses issued to SCT or Customers and
sublicenses issued to Customers for which payment has been received by the
termination date will continue perpetually (barring a violation of the
applicable licensing agreement), but no further licenses or sublicenses of
GemStone Programs may be granted pursuant to this Agreement.
b. MAINTENANCE AND TECHNICAL SUPPORT. Notwithstanding the
expiration of the Term and/or any earlier termination of this Agreement, SCT
may continue to receive maintenance and first and second line technical
support, as applicable, for the licenses and sublicenses issued as of the
date of termination, and to provide such maintenance and first and second
line technical support to Customers, provided that timely payment for the
maintenance and technical support is received by GemStone and the GemStone
Programs in use by SCT of a Customer are the current version or one version
back. Without limiting any other term or condition of this Agreement, for
such post-termination/expiration period, the annual maintenance and
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support for Customers listed on Exhibit D will be $XXXX per Customer, per
year.
c. SURVIVAL. Termination of this Agreement will not affect the
payment obligations of SCT or the indemnity or confidentiality obligations of
the parties under this Agreement.
14. COMPLIANCE WITH LAW
14.1 FEDERAL REGULATIONS. SCT shall comply with all applicable laws,
rules, regulations, orders, decrees, judgments and other governmental acts of
the United States and other government authorities having jurisdiction over SCT
or this Agreement. Without limiting the foregoing, SCT agrees to comply with
the provisions of the Foreign Corrupt Practices Act, 15 USC Section 78dd-2 and
the anti-boycott provisions of the Export Administration Act, 50 USC Sections
2401-2420, as amended. Notwithstanding any provision in this Agreement to the
contrary, this Agreement shall be construed and implemented in compliance with
the Export Administration Act, and with the rules and regulations promulgated
from time to time thereunder. SCT acknowledges that the Export Administration
Act, among other things, restricts exports and re-exports of diskettes and other
computer media on which software is recorded, technical data and direct products
of technical data. SCT certifies that neither the SCT Application Programs nor
any other technical data or products thereof, derived under or in connection
with this Agreement is intended to be used for any purpose prohibited by the
Export Administration Act or regulations promulgated thereunder, including,
without limitation, nuclear proliferation, or is intended to be shipped or
exported, either directly or indirectly, to any destination prohibited by the
Export Administration Act or regulations or its similar.
15. GENERAL
15.1 ENTIRE AGREEMENT. The terms and conditions appearing in this
Agreement set forth the entire agreement between the parties, and supersede all
proposals, oral or written, and all other communications between them relating
to the subject matter of this Agreement. This Agreement may be amended only by
a mutually signed writing. Any terms set forth on any purchase order or other
document generated by either party which conflicts with the terms of this
Agreement will not be binding upon the parties and will not be a part of this
Agreement.
15.2 WAIVER. Failure by either party at any time to require performance
by the other party or to claim a breach of any term or condition of this
Agreement will not be construed as affecting any subsequent breach or the right
to require performance with respect thereto or to claim a breach with respect
thereto.
15.3 ASSIGNMENT. This Agreement may be assigned by either party;
provided however, that written consent will be required
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for a merger or acquisition of either party by a competitor of the other
party.
15.4 SEVERABILITY. If any provision in this Agreement may be held to be
invalid or unenforceable in any jurisdiction in which this Agreement is being
performed, the meaning of such provision will be construed so as to render it
enforceable to the extent feasible. If no feasible interpretation would save
such provision, it will be severed from this Agreement and the remainder will
remain in full force and effect. However, in the event such provision is
considered an essential element of this Agreement, the parties will promptly
negotiate alternative, reasonably equivalent, enforceable terms.
15.5 CAPTIONS. Section headings are inserted for convenience only and
will not be used in any way to construe the terms of this Agreement.
15.6 INDEPENDENT CONTRACTOR. Each party is acting as an independent
contractor and not as an agent, partner, or joint venturer with the other party
for any purpose. Except as provided in this Agreement, neither party will have
any right, power, or authority to act or to create any obligation, express or
implied, on behalf of the other.
15.7 NOTICES. All notices permitted or required by this Agreement will
be delivered in a manner in which a receipt is obtained, including confirmed
facsimile, or via email to the parties at their respective addresses below.
By their respective signatures below, the parties agree to the terms and
conditions of this Agreement.
SCT GEMSTONE
/s/ Michael Chamberlain /s/ Bryan Grummon
- ----------------------------- -----------------------------
Authorized Signature Authorized Signature
Michael Chamberlain Bryan Grummon
- ----------------------------- -----------------------------
Printed Name Printed Name
President, SCT Software Group President/CEO
- ----------------------------- -----------------------------
Title Title
Address: 4 Country View Road Address: 20575 NW von Neumann Dr.
Malvern, PA 19355 Beaverton, Oregon 97006
Fax: (610) 578-7564 Fax: (503) 629-8556
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EXHIBIT A
SCT DISTRIBUTORS
<TABLE>
<CAPTION>
MARKET DISTRIBUTOR TERRITORY
- ------ ----------- ---------
<S> <C> <C>
Education NetU Cyprus
Compin Arabic Speaking Countries
Government None
Manufacturing None
Utilities West Coast Energy Canada
Alliance Data Service bureau only in
Services the US
Teldata Worldwide except Canada,
Australia & Pacific Rim
Mits Limited Australia and Pacific Rim
</TABLE>
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EXHIBIT B
SCT APPLICATION PROGRAMS
<TABLE>
<CAPTION>
ORACLE-BASED LICENSES NON-ORACLE-BASED LICENSES
- --------------------- -------------------------
<S> <C>
Banner2000
Alumni and Donor Development Plus2000
Finance ADS (Alumni and Donor Development)
Financial Aid FAM (Financial Aid)
Human Resources FRS (Finance)
Student HRS (Human Resources)
Imaging LMS (Loan Management)
Voice Response SIS(Student and Financial Aid)
Web for Students Imaging
Web for Employees VR (Voice Response)
Web for Faculty and Advisors Web for Students
Web for Alumni Web for Employees
Web for Executives Web for Faculty and Advisors
Kiosk Gateway Web for Alumni (scheduled for release 12/98)
Distance Education Web for Executives (scheduled for release 2/99)
EDI.Smart Kiosk Gateway
Strategic Enrollment Management
Adage
</TABLE>
SCT Aspire (Distance Education for non-credit programs)
Banner CMS
Electronic Work Queue
Customer Contact
Customer Information System
Web for CIS
Banner Supply Chain
Fuels Management
Materials Management
Work Management
Banner Property Management
Banner Business Tax and Licensing
Banner Cashiering
Banner Records Indexing
Banner Remote Access
Imaging for Records Indexing
Banner Courts
Civil Courts
Criminal Courts
Traffic Courts
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EXHIBIT C
GEMSTONE'S STANDARD SOFTWARE LICENSE AGREEMENT
1. DEFINITIONS
As used herein, the terms set forth below shall have the following respective
meanings:
1.1 "GemStone" shall mean GemStone Systems, Inc., an Oregon corporation.
1.2 "Licensee" shall mean SCT as defined in the Development and Reseller's
Agreement between GemStone and SCT.
1.3 "GemStone Distributor" shall mean any representative designated by
GemStone as a distributor of GemStone products. During any period when no
Distributor is appointed in Licensee's territory, "GemStone Distributor" will
mean "GemStone" or its other designee.
1.4 "Software Products" shall mean the GemStone Programs as defined in the
Development and Reseller's Agreement.
1.5 "Technical Data" shall mean the published user manuals included with the
Software Products, and any other materials provided to Licensee by GemStone or
GemStone Distributor to supplement the published user manuals.
1.6 "Named User" shall mean an individual employed by Licensee who is
authorized to use the Software Products.
1.7 "Concurrent User" shall mean an individual employed or otherwise engaged
by Licensee (such individuals being hereinafter deemed "employees" of Licensee
for purposes of this Agreement) who is authorized to use the Software Products
concurrently with other employees of Licensee as part of a group of users which
shall not exceed the number of users for which payment has been made.
1.8 "Named Developer" shall mean an individual employed by Licensee who is
authorized to use and to develop the Software Products in accordance with
Section 6 of this Agreement.
1.9 "Processor" shall mean microprocessors which may execute the Software
Products in a server Computer. The number of Processor licenses for the Software
Products must equal the number of microprocessors which may execute the Software
Products contained in the server Computer. Use of the Software Products via
Processor(s) is limited to deployment only.
1.10 "Computer" shall mean a stand-alone server computer containing one or
more microprocessors. Use of the Software Products on any Computer is limited to
deployment only.
1.11 "Concurrent Device" shall mean any input devices used for accessing
Computer(s) that host the Software Products. The number of Concurrent Devices
shall be the maximum number of input devices that can access Computer(s) at any
one time. Use of the Software Products via a Concurrent Device is limited to
deployment only.
2. LICENSE GRANT
2.1 GemStone grants to Licensee, and Licensee accepts from GemStone, a
non-exclusive, perpetual license to use the Software Products and Technical Data
in accordance with the Development and Reseller's Agreement; provided, however,
that such use of the Software Products and Technical Data shall be limited to
use by the number of users or in the manner for which payment has been made.
2.2 Licensee shall not allow the unauthorized use of the Software Products
and Technical Data and will notify GemStone and pay any additional charges
pursuant to GemStone's then current price list for any additional use.
3. EVALUATION, TESTING, PARTNER AND EDUCATION LICENSE GRANTS
3.1 GemStone may grant Licensee a temporary right to use certain Software
Products for evaluation and testing purposes only and not for commercial use.
Upon completion of any evaluation period, Licensee shall immediately cease use
of the evaluation Software Products and return the evaluation Software Products
and all related evaluation materials to GemStone.
3.2 GemStone will be deemed to have granted Licensee a temporary right to
use the Software Products for non-profit, non-commercial, academic uses,
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including classroom and laboratory uses, and not including, (a)
administrative uses for the provision of services or information to third
parties for compensation for any kind, or (b) projects funded by grants
("Educational Purpose"). Each such Educational Purpose license granted to
Licensee is limited to a one year license from the date of shipment to
Licensee. One year renewal of such license occurs if and when any renewal
fee is paid by Licensee to GemStone or its GemStone Distributor.
3.3 GemStone may grant Licensee a temporary right to use the Software
Products for uses authorized pursuant to the GemSmith Partner Program
("Program") such as development of software tools, as that Program may be
modified from time to time. This Agreement will automatically terminate if
Licensee ceases to be a participant in the Program, and no other agreement is
then in place between GemStone and Licensee with respect to the use of the
Software Products.
4. OWNERSHIP
This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
5. PROPRIETARY NOTICES
This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
6. USE RESTRICTIONS
6.1 Licensee shall not modify, adapt, translate, reverse engineer,
decompile, or disassemble the Software Products. Licensee agrees not to develop
derivative works which are intended to be functionally equivalent substitutes
for the Software Products or any part thereof.
6.2 Notwithstanding the foregoing, Licensee may, through Named Developers
only, modify the Software Products to the extent necessary in connection with
Licensee's creation of applications for the Software Products, provided that
such permitted modifications shall be for the purposes set forth in the
Development and Reseller's Agreement only. Any modifications to the Software
Products themselves will be the property of GemStone, to the extent that such
modifications constitute "derivative works" of the Software Products for
purposes of United States copyright law.
6.3 Licensee acknowledges that the Software Products are not error free.
The Software Products were not designed for use with applications for which
errors, bugs or malfunctions in the Software Products could cause personal
injury or death, property or environmental damage, or economic loss, including
without limitation use in hazardous environments requiring fail-safe
performance, including without limitation the operation of nuclear facilities,
aircraft navigation or communication systems, air traffic control, direct life
support machines, or weapons systems, and Licensee will not use the Software
Products for any such applications. Licensee shall be solely responsible for
taking all precautions, such as data backup, testing and error detection
procedures, which are necessary in order to insure that errors in the Software
Products and the applications using the Software Products do not cause adverse
consequences.
7. COPY RESTRICTIONS
7.1 Licensee shall not copy Software Products or Technical Data except as
required for use of the Software Products or Technical Data as provided in this
Agreement or the Development and Reseller's Agreement, and for archival storage
to assure against loss. Licensee must reproduce and include the GemStone
copyright notice and other proprietary notices on each copy.
8. KEY FILES
8.1 Licensee acknowledges that the Software Products licensed hereunder
contain Key Files which are a form of disabling code. For the purpose of this
paragraph, "disabling code" means computer code which interferes with the normal
operation of the Software Products in order to (a) prevent unauthorized use of
the Software Products or (b) provide limited use of the Software Products if the
Software Products are issued for evaluation, testing, partner or educational
purposes. At the request of Licensee, GemStone will provide reasonable advice
and assistance to Licensee with respect to any Key File in
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order to ensure that the existence of such code does not interfere with
Licensee's authorized use of the Software Products.
9. CONFIDENTIALITY
9.1 This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
10. PAYMENT
10.1 This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
11. TERM AND TERMINATION
11.1 This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
12. SHIPMENT
12.1 GemStone shall ship Software Products or Technical Data ordered by
Licensee as soon as practical after GemStone's acceptance of Licensee's order.
All shipments of Software Products and Technical Data shall be SCT's
headquarters in Malvern, Pennsylvania. When an order is not accompanied by
shipping instructions, GemStone shall select the carrier. GemStone shall not be
liable for any damages or penalties for delivery delays due to causes beyond its
reasonable control.
12.2 If GemStone Distributor is appointed in the Territory, GemStone
Distributor shall ship Software Products to Licensee as soon as practical after
order is placed. GemStone does not assume any liability for any Software
Products shipped by GemStone Distributor.
13. SUPPORT
13.1 Maintenance and support for the Software Products must be purchased
separately from GemStone or GemStone Distributor.
14. WARRANTY; LIMITATION OF LIABILITY
This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
15. PRE-RELEASE SOFTWARE
15.1 GemStone may provide Licensee with pre-release versions of its software.
All pre-release versions provided will be considered Software Products for the
purposes of this Agreement and be subject to the terms and conditions of the
applicable GemStone Beta Program.
16. INDEMNITY BY GEMSTONE
This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
17. INDEMNITY BY LICENSEE
This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
18. YEAR 2000
This Section controlled by the equivalent section in the Development and
Reseller's Agreement.
19. GENERAL
19.1 This Agreement and the other documents referred to in this Agreement
constitute the entire agreement between the parties and supersedes all prior or
contemporaneous agreements or representations, written or oral, concerning the
subject matter of this Agreement. This Agreement may be amended only by a
written instrument stating an intention to modify this Agreement and signed by
duly authorized representatives of the parties to be bound.
19.2 Failure by either party at any time to require performance by the other
party or to claim a breach of any term or condition of this Agreement shall not
be construed as affecting any subsequent breach or the right to require
performance with respect thereto or to claim a breach with respect thereto.
19.3 This Agreement may not be assigned by Licensee without the prior written
permission of GemStone.
19.4 If any provision in this Agreement may be held to be invalid or
unenforceable in any jurisdiction in which this Agreement is being performed,
the meaning of such provision shall be construed so as to render it enforceable
to the extent feasible. If no feasible interpretation would save
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such provision, it shall be severed from this Agreement and the remainder shall
remain in full force and effect. However, in the event such provision is
considered an essential element of this Agreement, the parties shall promptly
negotiate alternative, reasonable equivalent, enforceable terms.
19.5 The rights and obligations of the parties and all interpretations and
performance of this Agreement shall be governed in all respects by the laws of
the State of Oregon without regard to rules concerning the conflict of laws.
The provisions of the 1980 UN Convention on Contracts for the International Sale
of Goods shall not apply to this Agreement.
19.6 Section headings are inserted for convenience only and shall not be used
in any way to construe the terms of this Agreement.
19.7 DELETED
19.8 Licensee warrants that it is not domiciled in, a citizen, national or
resident of, and is not under the control of the government of Cuba, Iran,
Libya, North Korea, Syria, Sudan, nor any other country or any distributee to
which the United States has prohibited export.
19.9 All notices permitted or required by this Agreement will be delivered in
a manner in which a receipt is obtained, including confirmed facsimile, to
GemStone's address stated above and to Licensee at the location to which the
Software Products were delivered.
19.10 This provision applies for any Software Products acquired directly or
indirectly on behalf of a unit or agency of the United States Government,
whether that unit or agency be civilian or part of the Department of Defense.
The Software Products
(i) have been developed exclusively at private expense, are existing
computer software and no part of them were developed with government funds;
(ii) are the commercial property and trade secret of GemStone
under copyright, patent, trade secret or other applicable state and federal
laws;
(iii) are submitted with "restricted rights" in accordance with
Commercial Software-Restricted Rights clause at 52.227-19 of the Federal
Acquisition Regulations, except that the government agency shall not have
the right to disclose the Software Products to support service Contractors
or their subcontractors without GemStone's prior written consent;
(iv) in all respects are proprietary data of GemStone; and
(v) are unpublished and all rights are reserved under the copyright
laws of the United States and applicable international conventions.
Except as otherwise specifically provided for in this Agreement, the
Software Products may not be used, reproduced or disclosed by the
Government without the prior written consent by GemStone, such consent may
be freely withheld at GemStone's own discretion. The restrictions in this
provision are in addition to, and not in lieu of, any other restrictions
contained in or incorporated by this Agreement.
20. ADDITIONAL TERMS FOR GEMSTONE'S GUIDED TOUR
20.1 In addition to the above terms and conditions, users of GemStone's Guided
Tour are also granted a license to use JavaSoft's JDK bundled with Software
Products subject to the following conditions imposed by JavaSoft:
(i) The JDK is not designed or intended for use in on-line control of
aircraft, air traffic, aircraft navigation or aircraft communications; or
in the design, construction, operation or maintenance of any nuclear
facility.
(ii) Licensee may not modify the Java Platform Interface (JPI) by
creating additional classes within the JPI or otherwise causing the
addition to or modification of the classes in the JPI. If Licensee creates
any Java-related API and distributes such API to non-related third parties
commercially for applet or application development, Licensee shall promptly
publish broadly an accurate specification for
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such API for use by all developers of Java-related software. This
requirement shall not apply to such APIs developed on behalf of Licensee by
third parties which are not distributed as specified above. Licensee may
not name any class "java" and will comply with any naming convention Sun
may reasonably require.
Licensees must obtain a license directly from JavaSoft for use of the JDK
separate from the Guided Tour.
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EXHIBIT D
LEGACY CUSTOMER LIST
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<PAGE>
Exhibit E
NON-USER BASED LICENSING FORMULA
<TABLE>
<CAPTION>
Tier Class Minimum User Level
<S> <C> <C>
1 Public XXX
1 Private XXX
1 CC XXX
2 Public XXX
2 Private XXX
2 CC XXX
3 Public XXX
3 Private XXX
3 CC XXX
4 Public XXX
4 Private XXX
4 CC XXX
5 Public XXX
5 Private XXX
5 CC XXX
6 Public XXX
6 Private XXX
6 CC XXX
</TABLE>
<TABLE>
<CAPTION>
Enrollment
<S> <C>
Tier 1 < 4,000
Tier 2 < 7,500
Tier 3 < 15,000
Tier 4 < 25,000
Tier 5 < 35,000
Tier 6 > 35,000
</TABLE>
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EXHIBIT F
CALCULATION OF FEES AND ROYALTIES
<TABLE>
<CAPTION>
DESCRIPTION OF FEE PRICING FEE AT CLOSING
<S> <C> <C>
LICENSES
XXX
SUBLICENSES
XXX
MAINTENANCE AND TECHNICAL SUPPORT
XXX
TRAINING KITS
XXX
</TABLE>
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EXHIBIT G
GEMSTONE SUBLICENSE AGREEMENT
1. ADDITIONAL DEFINITIONS. "GemStone Programs" means the software provided
to SCT by GemStone Systems, Inc. ("GemStone") for incorporation into or for
use with the SCT-provided software which is being licensed by SCT to Licensee.
2. OWNERSHIP. GemStone owns the GemStone Programs.
3. RESTRICTIONS ON USE OF GEMSTONE PROGRAMS. Licensee's use of the
GemStone Programs is subject to the following additional terms and conditions:
(a) Licensee has the right to use the GemStone Programs only in object
code form and only as part of or for use with the SCT-licensed software;
(b) Licensee is prohibited from transfer or duplicating the GemStone
Programs except and for temporary transfer in the event of equipment
malfunction and in order to make a backup and/or archival copies of the
GemStone Programs;
(c) Licensee is prohibited from assigning its license to use the
GemStone Programs in whole or in part and is prohibited from making the
GemStone Programs available in any timesharing or rental arrangement, in
whole or in part;
(d) Licensee agrees not to use the GemStone Programs for any purpose
except within the scope of the Licensed Software owned by SCT, in accordance
with the restrictions set forth in the Agreement. Licensee may use the
GemStone Programs to customize the Licensed Software owned by SCT. Licensee
shall not use the GemStone Programs to expand the Licensed Software beyond
the scope provided and supported by SCT;
(e) Licensee is prohibited from causing or permitting the reverse
engineering, disassembly or decompilation of the GemStone Programs, in whole
or in part;
(f) Licensee acknowledges that the GemStone Programs is proprietary to
GemStone and is supplied by SCT under license from GemStone. Title to the
GemStone Programs shall at all times remain vested in GemStone or its
designated successor. Except for the right of use that is expressly provided
to Licensee under the Agreement, no right, title or interest in or to the
GemStone Programs is granted to Licensee;
(g) Licensee agrees that GemStone shall not be liable for any damages,
whether direct, indirect, incidental, special, or consequential, arising from
the Licensee's use of the GemStone Programs or related materials;
(h) At the termination of the Agreement for any cause whatsoever,
Licensee shall discontinue its use of the GemStone Programs and shall deliver
the GemStone Programs, including all archival or other copies of the GemStone
Programs, to SCT in accordance with the applicable provisions of the
Agreement and shall forfeit all rights to use the GemStone Programs in any
way;
(i) Licensee is prohibited from publishing any result of any benchmark
tests which compare the GemStone Programs to other GemStone Programs programs;
(j) Licensee is prohibited from exporting or permitting the export of
all or any part of the GemStone Programs outside the United States of
America, in any manner or by any means;
(k) Licensee acknowledges and agrees that GemStone is a third party
beneficiary of this Agreement;
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(l) Licensee acknowledges and understands that the GemStone Programs is
not specifically developed or licensed for use in any nuclear, aviation, mass
transit or medical application or in any other inherently dangerous
application.
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EXHIBIT H
PRESS RELEASE
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<PAGE>
License #: 9603211
SOFTWARE LICENSE AGREEMENT
This Agreement is made by and between GemStone Systems, Inc. ("GEMSTONE"),
an Oregon corporation, and the Licensee, each being identified and having a
place of business as given on the Software Order Form.
1. DEFINITIONS
As used herein, the terms set forth below shall have the following respective
meanings:
1.1 "GEMSTONE" shall mean GemStone Systems, Inc., an Oregon corporation.
1.2 "LICENSEE" shall mean the entity identified on the Software Order Form.
1.3 "SOFTWARE PRODUCTS" shall mean the products identified in the Product
Description on the Software Order Form in the form delivered by GEMSTONE,
together with other products subsequently licensed to Licensee by GEMSTONE,
and all updates of the same provided to Licensee by GEMSTONE.
1.4 "TECHNICAL DATA" shall mean manuals, specifications and other written
materials and verbal or written communication via FAX, telephone, electronic
or other methods provided to Licensee by GEMSTONE in connection with the
Software Products.
1.5 "NAMED USER" shall mean a specific individual employed by Licensee who
is individually authorized to use the Software Products as specified on the
Software Order Form.
1.6 "CONCURRENT USER" shall mean an individual employed by Licensee who is
authorized to use the Software Products concurrently with other employees of
Licensee as part of a group of users which shall not exceed the number set
forth on the Software Order Form.
1.7 "NAMED DEVELOPER" shall mean an individual employed by Licensee who is
individually authorized to use the Software Products, and to develop the
Software Products as specified in Section 5.2 of this Agreement, as specified
on the Software Order Form.
2. LICENSE GRANT
2.1 GEMSTONE hereby grants to Licensee, and Licensee hereby accepts from
GEMSTONE, a non-exclusive license, without right to sublicense, to use the
Software Products and Technical Data; provided, however, that such use of the
Software Products shall be limited to use by the users described on the
Software Order Form, as amended from time to time by written agreement
between Licensee and GEMSTONE, and provided that Licensee is current on
payment of all license fees.
2.2 The Software Order Form includes a description of the maximum number
of individuals whom Licensee may allow to use the Software Products, either
individually in the case of Named Users or Named Developers or as part of a
group of other employees in the case of Concurrent Users. Licensee shall not
allow the use of the Software Products except on equipment owned or leased by
Licensee for Licensee's business purposes. Licensee shall not allow the use
of the Software Products by any users not authorized under this Agreement
without first notifying GEMSTONE and paying any additional charges pursuant
to GEMSTONE's then current price list.
3. OWNERSHIP
3.1 Title to and ownership of Software Products, including all copies
thereof, and all rights therein including trade secrets, patents, and
copyrights, shall remain with GEMSTONE. No title or ownership of Software
Products or any part or modification thereof is transferred to Licensee.
4. PROPRIETARY NOTICES
4.1 Licensee shall not remove or alter GEMSTONE's ownership, trademark,
copyright, or other proprietary notices on Software Products or Technical
Data.
4.2 Where applicable, the Software Products and Technical Data shall be
marked with an appropriate legend under the Federal Acquisition Regulations
(FAR) or other similar regulations.
5. USE RESTRICTIONS
5.1 Licensee shall not modify, adapt, translate, reverse engineer,
decompile, or disassemble Software Products. Licensee agrees not to develop
derivative works which are intended to be functionally equivalent substitutes
for the Software Products or any part thereof.
5.2 Notwithstanding the foregoing, Licensee may, through Named Developers
only, modify the Software Products to the extent necessary in connection with
Licensee's creation of applications for the Software Products, provided that
such permitted modifications shall be for Licensee's internal use only, and
Licensee shall not sell, distribute or otherwise provide access to such
modifications to any third party. Such permitted modifications shall be
deemed to be part of the Software Products which may be used by Licensee only
in accordance with this Agreement. GEMSTONE shall be the sole owner of any
modifications to the Software Products.
6. COPY RESTRICTIONS
6.1 Licensee shall not copy Software Products or Technical Data except as
required for use of the Software Products as provided in this Agreement, and
for archival storage to assure against loss. Licensee must reproduce and
include the GEMSTONE copyright notice and other proprietary notices on each
archival copy. In no event shall Licensee provide copies of, or access to, the
Software Products or Technical Data to any third party.
7. KEY FILES
7.1 Licensee acknowledges that the Software Products licensed hereunder
contain Key Files which are a form of disabling code. For the purpose of this
paragraph, "disabling code" means computer code which interferes with the normal
operation of the Software Products in order to prevent unauthorized use of
the Software Products. At the request of Licensee, GEMSTONE will provide
reasonable advice and assistance to Licensee with respect to any Key File in
order to ensure that the existence of such code does not interfere
with Licensee's authorized use of the Software Products.
8. CONFIDENTIALITY
8.1 Licensee understands and acknowledges that it will receive confidential
information from GEMSTONE in connection with this Agreement, including without
limitation the Technical Data and other information related to the Software
Products which is marked as "confidential" by GEMSTONE. Licensee shall not
disclose such information to any third party, except for its employees with
a need for access to the information, or use the information for any purpose
not contemplated or permitted under this Agreement, Licensee shall take
reasonable steps to insure that its employees who receive the information
understand and acknowledge the obligations of confidentiality. The
obligations of confidentiality imposed upon Licensee under this Agreement
shall survive the termination or cancellation of this Agreement. If an
employee, former employee or any other person affiliated with Licensee
breaches the obligations of confidentiality provided for in this section,
Licensee agrees to give GEMSTONE reasonable assistance in enforcing its
rights against such person.
8.2 Notwithstanding the foregoing, Licensee shall have no obligation to hold
any information in confidence to the extent that Licensee can show by
documentary evidence that such information: (a) is already known to Licensee
at the time it is obtained by Licensee from GEMSTONE, free from any
obligations to hold such information in confidence; (b) is or becomes
publicly known through no wrongful act of Licensee; (c) is rightfully
received from a third party without restriction and without breach of any
obligation to GEMSTONE or its suppliers; or (d) is independently developed by
Licensee without use of any confidential information of GEMSTONE or its
suppliers.
9. PAYMENT
9.1 Full payment is due within 30 days from the date Licensee receives
proper invoice for the Software Products or Technical Data to Licensee. All
amounts are payable in U.S. Dollars by check or money order payable to
GemStone Systems, Inc. All taxes, duties and fees, if any, are to be paid by
Licensee, except for taxes on the income or revenue of GEMSTONE. GEMSTONE
reserves the right to modify the credit terms applicable to this Agreement at
any time.
10. TERM AND TERMINATION
10.1 The term of this Agreement shall commence on the date indicated in the
Software Order Form and shall continue until terminated pursuant to this
Section 10.
10.2 Either party may, by written notice, terminate this Agreement if the
other party fails to remedy any default under this Agreement within 30 days
of receipt of written notice specifying such default.
10.3 Upon termination of this Agreement for any reason, all licenses
granted hereunder shall terminate, and Licensee shall immediately cease use
of and shall return to GEMSTONE all copies of the Software Products and
Technical Data.
11. SHIPMENT
11.1 GEMSTONE shall ship Software Products or Technical Data ordered by
Licensee as soon as practical after acceptance of Licensee's order. All
shipments of Software Products and Technical Data shall be F.O.B. Beaverton,
OR, and the risk of loss shall pass to Licensee upon delivery to the carrier.
When an order is not accompanied by shipping instructions, GEMSTONE shall
select the carrier. In no case shall GEMSTONE assume any liability in
connection with the shipment nor shall the carrier be construed as an agent
for GEMSTONE. GEMSTONE shall not be liable for any damages or penalties for
delivery delays due to causes beyond its reasonable control. All shipping,
handling, and insurance charges, if any, are to be paid by Licensee.
11.2 Each offer placed by Licensee for Software Products or Technical Data
shall be deemed to incorporate all of the terms and conditions of this
Agreement.
12. SUPPORT
12.1 Updates and support to the Software Products will be subject to a
separate Software Maintenance Agreement.
13. WARRANTY; LIMITATION OF LIABILITY
<PAGE>
13.1 GEMSTONE warrants that Software Products will perform substantially in
accordance with published specifications for a period of 30 days after the
date the Software Products have been shipped to Licensee (hereinafter
"Warranty Period"). This warranty applies only to the initial delivery of
Software Products under this Agreement. This warranty shall not apply to (a)
updates to or additional copies of the Software Products, (b) expansion of
the number of users, or (c) subsequent offerings of the Software Products
unless GEMSTONE designates a subsequent offering as a new product subject to
this warranty.
13.2 During the Warranty Period, GEMSTONE shall attempt, without charge, to
diagnose, verify and correct errors or defects in the Software Products that
are identified in writing by notice to GEMSTONE, and any corrections for
errors or defects may, at GEMSTONE's election, be corrected by the delivery
of modifications to the Software Products or Instructions on how to avoid the
error or defect.
13.3 GEMSTONE's warranty and software maintenance obligations shall not
apply with respect to problems caused by modifications to the Software
Products made by Licensee.
13.4 GEMSTONE's liability to the Licensee for all damages, costs, claims, or
demands incurred or suffered by or awarded against Licensee arising directly
or indirectly out of the performance or any breach of this license shall in no
event exceed the total amount paid to GEMSTONE under the License.
13.5 THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS,
EXPRESSED OR IMPLIED, INCLUDED BUT NOT LIMITED TO, ANY WARRANTY OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. GEMSTONE SHALL NOT BE
RESPONSIBLE TO LICENSEE OR TO ANY THIRD PARTY FOR ANY INDIRECT, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER IN CONTRACT OR TORT, DUE TO ANY
FORESEEN OR UNFORESEEN CAUSE FROM LICENSEE'S OR ANY THIRD PARTY'S USE OR THE
PERFORMANCE OF THE SOFTWARE PRODUCTS UNDER THIS AGREEMENT.
14. INDEMNITY BY GEMSTONE
14.1 GEMSTONE agrees to indemnify Licensee, as limited by this paragraph,
with respect to any suit, claim or proceeding brought against Licensee
alleging that Licensee's use of the Software Products constitutes an
infringement of any valid United States patent or copyright. GEMSTONE agrees
to defend Licensee against any such claims and to pay litigation costs,
reasonable attorney's fees, and damages awarded by a court of competent
jurisdiction: if, and only if, Licensee promptly gives notice to GEMSTONE of
any such suit, claim or proceeding and cooperates with GEMSTONE in the
defense or settlement of such suit, claim or proceeding; and provided that
GEMSTONE shall have sole control thereof.
14.2 If a claim or allegation is made, or in either party's judgment is likely
to arise, Licensee agrees that GEMSTONE may, at GEMSTONE's option, (i)
procure for Licensee the right to continue using the portion of the Software
Product enjoined from use; (ii) replace or modify the Software Product so that
Licensee's use is not subject to any such injunction: or (iii) accept return
of the Software Product to GEMSTONE, and in the event of such return, refund
the license fee paid for the Software Product. GEMSTONE shall have no further
liability or obligations arising from patents or copyrights under this
Agreement.
14.3 The indemnity obligations under this Section 14 shall not apply to
claims to the extent that they arise from any modification or alteration of a
Software Product by any party other than GEMSTONE.
14.4 The limitations in Section 13 shall not apply with respect to
GEMSTONE's indemnity obligations under this Section 14.
15. INDEMNITY BY LICENSEE
15.1 Licensee acknowledges that GEMSTONE has no knowledge of, or control
over, the applications of the Software Products made by Licensee. Licensee
agrees to defend, indemnify and hold GEMSTONE harmless with respect to any
suit, claim or proceeding brought against GEMSTONE alleging that use by, or
under authority of, Licensee of the Software Products caused personal
injury, property damages, or economic loss.
16. GENERAL
16.1 This Agreement and the other documents referred to in this Agreement
constitute the entire agreement between the parties and supersedes all prior
or contemporaneous agreements or representations, written or oral, concerning
the subject matter of this Agreement. This Agreement may be amended only by a
written instrument stating an intention to modify this Agreement and signed by
a duly authorized representative of the party to be bound.
16.2 Failure by either party at any time to require performance by the other
party or to claim a breach of any term or condition of this Agreement shall
not be construed as affecting any subsequent breach or the right to require
performance with respect thereto or to claim a breach with respect thereto.
16.3 This Agreement may not be assigned by Licensee without the prior
written permission of GEMSTONE.
16.4 If any provision in this Agreement may be held to be invalid or
unenforceable in any jurisdiction in which this Agreement is being performed,
the meaning of such provision shall be construed so as to render it
enforceable to the extent feasible. If no feasible interpretation would save
such provision, it shall be severed from this Agreement and the remainder
shall remain in full force and effect. However, in the event such provision
is considered an essential element of this Agreement, the parties shall
promptly negotiate alternative, reasonable equivalent, enforceable terms.
16.5 The rights and obligations of the parties and all interpretations and
performance of this Agreement shall be governed in all respects by the laws
of the Sate of Oregon without regard to rules concerning the conflict of
laws.
16.6 Section headings are inserted for convenience only and shall not be used
in any way to construe the terms of this Agreement.
<PAGE>
16.7 In the event that suit or other action is instituted to interpret or
enforce this Agreement, the prevailing party shall be entitled to recover its
attorney fees, including those incurred on appeal, as determined by the court.
16.8 For any Software Products acquired directly or indirectly on behalf of
a unit or agency of the United States Government, this provision applies.
A. For civilian agencies: the Software Products
(i) were developed at private expense, are existing computer
software and no part of them were developed with government funds;
(ii) are a trade secret of GEMSTONE for all purposes of the Freedom
of Information Act;
(iii) are "restricted computer software" submitted with restricted
rights in accordance with subparagraphs (a) through (d) of the
Commercial Software - Restricted Rights clause at 52.227-19 of the
Federal Acquisition Regulations ("FAR") and its successors and as
expressly stated in GEMSTONE's standard commercial agreement
incorporated into the contract or purchase order between GEMSTONE and
the government entity, except that the government agency shall not have
the right to disclose the Software Products to support service
Contractors or their subcontractors without GEMSTONE's prior written
consent;
(iv) in all respects are proprietary data of GEMSTONE; and
(v) are unpublished and all rights are reserved under the copyright
laws of the United States.
B. For units of the Department of Defense ("DoD"): The Software
Products are licensed only with "Restricted Rights" as that term
is defined in the DoD Supplement to the FAR, clause
52.227-7013(c)(1)(ii), Rights in Technical Data and Computer
Software and its successors, and use, duplication or disclosure is
subject to the restrictions set forth therein, with the exception
that the government agency shall not have the right to disclose
the Software Products to subcontractors or agents of the
government without GEMSTONE's written consent.
By executing this Agreement, the undersigned authorized representative of
Licensee acknowledges that he or she has read and understands all these terms
and conditions, and that he or she has the authority to enter into this
Agreement on behalf of the Licensee.
LICENSEE:
/s/ Mary E. Drew
- ---------------------------
Authorized Signature
Mary E. Drew
- ---------------------------
Print Name
Negotiator
- ---------------------------
Title
8/1/96
- ---------------------------
Date
GEMSTONE:
/s/ Dan J. Ware
- ---------------------------
Authorized Signature
Dan J. Ware
- ---------------------------
Print Name
Sr. VP Worldwide Operations
- ---------------------------
Title
<PAGE>
8/29/96
- ---------------------------
Date
<PAGE>
Exhibit 10.9
GEMSTONE SYSTEMS, INC.
INDEMNITY AGREEMENT
This Agreement is made as of July 9, 1998, by and between GEMSTONE
SYSTEMS, INC., an Oregon corporation (the "Corporation"), and _________________
(the "Indemnitee"), a director of the Corporation.
WHEREAS, it is essential to the Corporation to retain and attract as
directors of the Corporation the most capable persons available and persons who
have significant experience in business, corporate and financial matters; and
WHEREAS, the Corporation has identified the Indemnitee as a person
possessing the requisite background and abilities and desires him to continue to
serve as a member of its Board of Directors; and
WHEREAS, the substantial increase in corporate litigation may, from
time to time, subject directors to burdensome litigation, the risks of which
frequently far outweigh the advantages of serving in such capacity; and
WHEREAS, in recent times the cost of directors' and officers'
liability insurance has increased and the continued availability of such
insurance cannot be assured; and
WHEREAS, the Corporation and the Indemnitee recognize that serving as
a director of a corporation at times calls for subjective evaluations and
judgments upon which reasonable persons may differ and that, in that context, it
is anticipated and expected that directors of corporations will and do from time
to time commit actual or alleged errors or omissions in the good faith exercise
of their corporate duties and responsibilities; and
WHEREAS, it is now and has always been the express policy of the
Corporation to indemnify its directors and officers to the fullest extent
permitted by law; and
WHEREAS, the Restated Articles of Incorporation, as amended (the
"Articles") and the Bylaws of the Corporation require indemnification of the
directors and officers of the Corporation to the fullest extent permitted by the
Oregon Business Corporation Act (the "Act"); the Articles, the Bylaws and the
Act expressly provide that the indemnification provisions set forth in the
Articles, the Bylaws and in the Act, respectively, are not exclusive, and
thereby contemplate that contracts may be entered into between the Corporation
and directors and/or officers of the Corporation with respect to indemnification
of directors and/or officers; and
WHEREAS, the Corporation and the Indemnitee desire to articulate
clearly in contractual form their respective rights and obligations with regard
to the Indemnitee's service on behalf of the Corporation and with regard to
claims for loss, liability, expense or damage which, directly or indirectly, may
arise out of or relate to such service.
<PAGE>
NOW THEREFORE, the Corporation and the Indemnitee agree as follows:
1. AGREEMENT TO SERVE.
The Indemnitee shall serve as a director of the Corporation for so
long as the Indemnitee is duly elected or appointed or until such time as the
Indemnitee tenders a resignation in writing.
2. DEFINITIONS.
As used in this Agreement:
(a) The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether brought in the right of the
Corporation or otherwise and whether of a civil, criminal, administrative or
investigative nature, in which the Indemnitee may be or may have been involved
as a party, witness or otherwise, by reason of the fact that the Indemnitee is
or was a director and/or officer of or advisor to the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, whether or not serving in such capacity at the time any liability or
expense is incurred for which exculpation, indemnification or reimbursement can
be provided under this Agreement.
(b) The term "Expenses" includes, without limitation, expense of
investigations, judicial or administrative proceedings or appeals, amounts paid
in settlement by the Indemnitee, attorney, accountant and other professional
fees and disbursements and any expenses of establishing a right to
indemnification under Section 8 of this Agreement, but shall not include the
amount of judgments or fines against the Indemnitee.
(c) References to "other enterprise" shall include, without
limitation, employee benefit plans; references to "fines" shall include any
excise tax assessed with respect to any employee benefit plan; references to
"serving at the request of the Corporation" shall include any service as a
director, officer, employee or agent of the Corporation which imposes duties on,
or involves services by, such director, advisor, officer, employee or agent with
respect to an employee benefit plan, its participants, or its beneficiaries; and
a person who acted in good faith and in a manner reasonably believed to be in
the interest of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Agreement.
3. LIMITATION OF LIABILITY.
(a) To the fullest extent permitted by law, the Indemnitee shall not
be subjected to loss, liability, expense or damage of any kind or nature
whatsoever in respect of the Indemnitee's errors or omissions (or alleged errors
or omissions) in serving the Corporation or its stockholders so long as (i) the
Indemnitee shall act in good faith and in a manner which he reasonably believes
not
2
<PAGE>
to be opposed to the best interests of the Corporation and (ii) such errors
or omissions, if any, are not shown by clear and convincing evidence to have
involved:
(i) a breach of the Indemnitee's duty of loyalty;
(ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(iii) any act from which the Indemnitee derives improper personal
benefit; or
(iv) the unlawful payment of dividends or the unlawful
repurchase of stock.
(b) Without limiting the generality of (a) above and to the fullest
extent permitted by law, the Indemnitee shall have no personal liability to the
Corporation, its stockholders or any other person claiming derivatively through
the Corporation, regardless of the theory or principle under which such
liability may be asserted, for:
(i) punitive, exemplary or consequential damages;
(ii) treble or other damages computed based upon any multiple
of damages actually and directly proved to have been
sustained;
(iii) fees of attorneys, accountants, expert witnesses or
professional consultants; or
(iv) civil fines or penalties of any kind or nature whatsoever.
4. INDEMNITY IN THIRD-PARTY PROCEEDINGS.
The Corporation shall indemnify the Indemnitee in accordance with the
provisions of this Section 4 if the Indemnitee is a party to or threatened to be
made a party to any Proceeding (other than a Proceeding by or in the right of
the Corporation to procure a judgment in its favor), against all Expenses,
judgments and fines actually and reasonably incurred by the Indemnitee in
connection with such Proceeding, if the Indemnitee acted in good faith and in a
manner which the Indemnitee reasonably believed to be in or not opposed to the
best interests of the Corporation and, in the case of a criminal proceeding, in
addition, had no reasonable cause to believe that the Indemnitee's conduct was
unlawful. The termination of any such Proceeding by judgment, order of court,
settlement, conviction or upon a plea of nolo contendere, or its equivalent,
shall not, of itself, create a presumption that the Indemnitee did not act in
good faith and in a manner which the Indemnitee reasonably believed to be in the
best interests of the Corporation, and with respect to any criminal proceeding,
that the Indemnitee had reasonable cause to believe that the Indemnitee's
conduct was unlawful.
3
<PAGE>
5. INDEMNITY IN PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall indemnify the Indemnitee in accordance with the
provisions of this Section 5 if the Indemnitee is a party to or threatened to be
made a party to any Proceeding by or in the right of the Corporation to procure
a judgment in its favor, against all Expenses actually and reasonably incurred
by the Indemnitee in connection with the defense or settlement of such
Proceeding, if the Indemnitee acted in good faith and in a manner which the
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Corporation. However, no indemnification shall be made under this Section 5
in respect of any claim, issue or matter as to which such person shall have been
finally adjudged by a court to be liable for negligence or misconduct in the
performance of the Indemnitee's duty to the Corporation, unless and only to the
extent that any court in which such Proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the Indemnitee is fairly and reasonably entitled to
indemnity.
6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding any other provisions of this Agreement, to the extent
that the Indemnitee has been successful on the merits or otherwise, in defense
of any Proceeding or in defense of any claim, issue or matter therein, including
the dismissal of an action without prejudice, the Indemnitee shall be
indemnified against all Expenses incurred in connection therewith.
7. ADVANCES OF EXPENSES.
The Expenses incurred by the Indemnitee pursuant to Sections 4, 5 and
9 in any Proceeding shall be paid by the Corporation in advance of the final
disposition of the Proceeding at the written request of the Indemnitee, if the
Indemnitee shall undertake to repay such amount to the extent that it is
ultimately determined by a court that the Indemnitee is not entitled to
indemnification. Such advances shall be made without regard to the Indemnitee's
ability to repay such Expenses. The Corporation is expressly authorized to
establish a trust, escrow account or other secured funding source for the
payment of advances made and to be made pursuant to this Section 7 or of
Expenses incurred by the Indemnitee pursuant to Sections 4, 5 and 9 in any
Proceeding.
8. RIGHT OF THE INDEMNITEE TO INDEMNIFICATION UPON APPLICATION.
Any indemnification or advance under Sections 4, 5, 7 or 9 shall be
made no later than 45 days after receipt of the written request of the
Indemnitee, unless a determination is made within such 45-day period by (a) the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to the applicable Proceeding, or (b) independent legal counsel
in a written opinion (which counsel shall be appointed if such a quorum is not
obtainable), that the Indemnitee has not met the relevant standards for
indemnification set forth in Sections 4, 5 or 9 or that an exclusion set forth
in Section 10 is applicable.
4
<PAGE>
The right to indemnification or advances as provided by this Agreement
shall be enforceable by the Indemnitee in any court of competent jurisdiction.
The burden of proving by clear and convincing evidence that indemnification or
advances are not appropriate shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors or independent legal
counsel) to have made a determination prior to the commencement of such action
that indemnification or advances are proper in the circumstances because the
Indemnitee has met the applicable standard of conduct nor an actual
determination by the Corporation (including its Board of Directors or
independent legal counsel) that the Indemnitee has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the Indemnitee has not met the applicable standard of conduct. The
Indemnitee's expenses incurred in connection with successfully establishing the
Indemnitee's right to indemnification or advances, in whole or in part, in any
Proceeding shall also be indemnified by the Corporation.
9. ADDITIONAL INDEMNIFICATION.
(a) Notwithstanding any limitation in Sections 4 or 5, the
Corporation shall indemnify the Indemnitee to the fullest extent permitted by
law in accordance with the provisions of this Section 9(a) if the Indemnitee is
a party to or threatened to be made a party to any Proceeding (including a
Proceeding by or in the right of the Corporation to procure a judgment in its
favor) involving a claim against the Indemnitee for breach of fiduciary duty by
the Indemnitee, against any judgments and all Expenses actually and reasonably
incurred by the Indemnitee in connection with such Proceeding, except that the
Corporation shall not make any indemnity under this Section 9(a):
(i) on account of the Indemnitee's conduct that constitutes a
breach of the Indemnitee's duty of loyalty to the
Corporation or its stockholders;
(ii) on account of the Indemnitee's acts or omissions not in
good faith, intentional misconduct, knowing violations of
law, fraud or deliberately dishonest conduct; or
(iii) if a final decision by a court having jurisdiction in the
matter determines that such indemnification is unlawful.
(b) Notwithstanding any limitation in Sections 4, 5 or 9(a), the
Corporation will indemnify the Indemnitee with respect to any Proceeding against
Expenses, judgments and fines to the fullest extent permitted by the Act,
including the nonexclusivity provision of ORS 60.414 and including any
amendments to the Act adopted after the date hereof that may increase the extent
to which a corporation may indemnify its officers and directors.
(c) The indemnification provided by this Agreement shall not be
deemed exclusive of any other rights to which the Indemnitee may be entitled
under the Articles, the Bylaws, any other agreement, any vote of shareholders or
directors, the Act, or otherwise, both as to action in the Indemnitee's official
capacity and as to action in another capacity while holding such
5
<PAGE>
office. The indemnification under this Agreement shall continue as to the
Indemnitee even though the Indemnitee may have ceased to be a director or
advisor and shall inure to the benefit of the heirs, executors,
administrators, and personal representatives of the Indemnitee.
10. INDEMNITY EXCLUSIONS.
Notwithstanding any provision in this Agreement other than Section 6,
the Corporation shall not be obligated under this Agreement to make any
indemnification or advances in connection with any claim made against the
Indemnitee:
(a) for which payment is required to be made to or on behalf of the
Indemnitee under any insurance policy, except with respect to any excess amount
to which the Indemnitee is entitled under this Agreement beyond the amount of
payment under such insurance policy; or
(b) with respect to a transaction in which the Indemnitee received an
improper personal benefit; or
(c) for an accounting of profits made from the purchase and sale by
the Indemnitee of securities of the Corporation within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provision of any state statutory law or common law.
11. PARTIAL INDEMNIFICATION.
If the Indemnitee is entitled under any provisions of this Agreement
to indemnification by the Corporation for some or a portion of the Expenses,
judgments and fines actually and reasonably incurred by the Indemnitee in the
investigation, defense, appeal or settlement of any Proceeding, but not,
however, for the total amount thereof, the Corporation shall nevertheless
indemnify the Indemnitee for the portion of such Expenses, judgments or fines to
which the Indemnitee is entitled.
12. SEVERABILITY.
If this Agreement or any portion thereof shall be invalidated on any
ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify the Indemnitee as to Expenses, judgments and fines with
respect to any Proceeding to the full extent permitted by any applicable portion
of this Agreement that shall not have been invalidated or by any other
applicable law.
13. NOTICE.
The Indemnitee shall, as a condition precedent to the Indemnitee's
right to be indemnified under this Agreement, give to the Corporation notice in
writing as soon as practicable of any claim made against the Indemnitee for
which indemnity will or could be sought under this Agreement. Notice to the
Corporation shall be directed to the Corporation at its principal business
6
<PAGE>
office or such other address as the Corporation shall designate in writing to
the Indemnitee. Notice shall be deemed received three days after the date
postmarked if sent by prepaid mail, properly addressed. In addition, the
Indemnitee shall give the Corporation such information and cooperation as it may
reasonably require and as shall be within the Indemnitee's power.
14. APPLICABLE LAW.
This Agreement shall be governed by and construed in accordance with
the internal laws of the state of Oregon without regard to the principles of
conflict of laws.
15. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon the Corporation and its
successors and assigns.
IN WITNESS WHEREOF, the parties hereby have caused this Agreement to
be duly executed and signed as of the day and year first above written.
GEMSTONE SYSTEMS, INC.
By ___________________________
Name__________________________
Title_________________________
[Name of Indemnitee]
7
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF GEMSTONE SYSTEMS, INC.
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY % OWNED
--------------------- ---------
<S> <C>
GemStone Systems (Europe) Limited, a private limited 100%
company organized under the laws of England and Wales
GemStone Systems (France) SARL, a limited liability 100%
company organized under the laws of France
GemStone Systems (Deutschland) GmbH, a limited company 100%
organized under the laws of Germany
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT AND REPORT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 23, 1998, except for Note 7, as to which the date
is July 21, 1998, in the Registration Statement (Form S-1 No. 333- ) and
related Prospectus of GemStone Systems, Inc. for the registration of 2,875,000
shares of its common stock.
Our audits also included the financial statement schedule of GemStone System,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Walnut Creek, California
July 22, 1998
- --------------------------------------------------------------------------------
The foregoing consent and opinion is in the form that will be signed upon
the completion of the 0.55-for-one reverse stock split as described in Note 7 to
the consolidated financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
July 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 0 117 1,447
<SECURITIES> 0 0 0
<RECEIVABLES> 0 3,887 4,179
<ALLOWANCES> 0 130 161
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 3,990 5,724
<PP&E> 0 2,707 3,751
<DEPRECIATION> 0 1,011 1,564
<TOTAL-ASSETS> 0 6,397 8,267
<CURRENT-LIABILITIES> 0 13,440 6,351
<BONDS> 0 178 297
0 0 0
0 20,879 37,972
<COMMON> 0 5,304 5,354
<OTHER-SE> 0 0 (26)
<TOTAL-LIABILITY-AND-EQUITY> 0 6,397 8,267
<SALES> 0 0 0
<TOTAL-REVENUES> 6,893 13,715 18,708
<CGS> 0 0 0
<TOTAL-COSTS> 2,091 3,322 7,046
<OTHER-EXPENSES> 12,298 17,030 19,927
<LOSS-PROVISION> 62 90 202
<INTEREST-EXPENSE> 16 268 36
<INCOME-PRETAX> (7,293) (6,791) (8,185)
<INCOME-TAX> 0 0 92
<INCOME-CONTINUING> (7,293) (6,791) (8,277)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (7,293) (6,791) (8,277)
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